The Elegant Clarity and Broad Misunderstanding of Nonprofit Governance

The Vermont Nonprofit sector is a major contributor to Vermont’s economy and to the well-being of Vermonters. Its 6000 organizations represent about 20% of Vermont’s overall economy and employ about 14% of its workforce.

Although often started by one person, nonprofits cannot be owned by an individual. They’re led by a president or, more typically,  an executive director (ED) chosen by and overseen by voluntary boards of trustees who are not paid for their service but may be reimbursed for expenses. Under both state and federal statutes, trustees have specific legal, financial, and reporting responsibilities with which they must stay current.

Nonprofit missions range from the dominant healthcare and education sectors to arts and culture, the environment, journalism, housing, hunger/food systems, equity, poverty and more.

As such, nonprofits have a vital role to play in the quality of life for many Vermonters. The traditional role of government in assuring the well-being of its citizens is often subcontracted to the nonprofit sector, especially in areas like alleviating hunger, homelessness, or poverty. Examples are the Champlain Housing Trust, Community College of Vermont, and Sustainable Jobs Fund.

But a worrying vulnerability in the nonprofit sector is an all-too-common misunderstanding of basic governance – the differing responsibilities of a board of trustees and the organization’s leader.

When an organization founders, blame usually falls on the leader, but they are chosen, overseen, and remunerated by the board. So when a nonprofit fails, look to the board for an explanation. It is they who are accountable.

Nonprofit governance, in fact, is remarkably elegant in its simplicity, but if trustees doesn’t understand and exercise their responsibilities, they undermine their own organization – an all too common situation that affects the whole sector.

First off, governance and management are two quite different things, often confused to an organization’s detriment.

A fundamental board responsibility is to search for, hire, remunerate, and annually review the performance of the ED (and firing them if need be). The board must also engage in pre-emptive succession planning.

Management accountability is articulated in the ED’s job description and signed off on by both parties. An accurate job description is the key document to which the ED is held accountable. Its existence reduces chances of a “wrongful discharge” claim, for one thing.

Trustees don’t manage nor do they interfere in management decisions nor do they accept direct feedback from the ED’s subordinates. This becomes critically important in journalistic and media nonprofits where the traditional “editorial firewall” protects the managing editor from trustee/publisher efforts to influence content.

The most important relationship in a nonprofit is between the chair and the ED. Each must understand the other’s responsibilities and boundaries, and be ready to discuss them openly. Trust, candor, and transparency form the basics of a fruitful relationship. Real leaders want and welcome all critical feedback.

But there’s also a built-in enigma in trustee/ED relations. Trustees are also the ED’s resource for good decision-making, available when asked to support, encourage, challenge, stimulate, and advise. The caveat is that they only do so when invited.

In general, highly compensated nonprofit employees don’t serve on the boards that oversee their operations. Two common exceptions are hospitals and universities, where the knowledge and experience of doctors, researchers, and professors may be needed to better inform institutional decision-making. These individuals, like the ED if they serve on the board, are subject to rigorous conflict oversight, especially as it relates to authority and compensation.

Strategic and operating plans should derive from the staff and be presented to the board for discussion, amendment, and approval. The plans then become the basis for the ED’s accountability and performance review.

Common plans are:

• Strategic plan (3-yrs max.),
• Current-year operating plan (goals and objectives)
• Current-year budget, balance sheet, and cash-flow analysis,
• Current-year enterprise risk-management (ERM) analysis and contingency plan.

Boards must also formulate review and publish a clear statement of board policies with regard to board makeup, constituencies, rotation or tenure (term limits), trustee self-evaluations, expectations, periodic internal and external by-law review, trustee obligation-of-loyalty, conflict-of-interest and more.

Here are guidelines for building an effective board for today’s nonprofits:

• Additive Skills(mission-related experience, educational, legal, marketing, financial, media experience, technology & data analysis etc.)
• Capacity/Connection:family giving capacity and engagement in institutional advancement as well as connections to relevant networks.
• Gender/Sexuality/Geography (LGBQT)/ Differently-abled / Ethnicity (racial and economic diversity). (Foundations and philanthropists are reviewing more carefully whether governing boards reflect the diversity of their service areas and missions.)
• Age:Organizations must also commit to onboarding the younger generation as a way of sustaining their mission and perpetuating their vision in the future.

Also important is a clear committee architecture that conforms with by-laws. And each committee must have a clear concise mission.

Standing committees usually include:

• Finance, audit, and enterprise risk-management
• Nominating and Governance – self-perpetuating (ED may suggest candidates but should not choose trustees), oversee, and amend by-laws as needed
• Institutional Advancement – help raise operating funds and endowment
• Community Relations and Outreach – the “diplomatic corps”

There may be other ad hoc committees, but none should impinge on management’s role and all should be defined in the by-laws.

In sum, the heart of a board’s responsibility is to oversee and ensure:

• Delivery on mission: by ensuring that strategic and current-year operating plans are fulfilled.
• Ethical and legal integrity: review and approve published employee guidelines especially with regard to equal opportunity, diversity, and workplace harassment issues.
• Financial integrity: monitor balance sheet trends and strength, approve annual budget, and periodically review reports of performance against budget.
• Annual 360˚performance review of ED that includes anonymous feedback from staff, trustees, stakeholders, and community. This is measured against an annual performance self-assessment submitted by the ED.

Although most nonprofit failures are traceable to bad governance, in my experience, the single most common board failure results from not having conducted a thorough and honest performance evaluation of their ED.

The vitality of our nonprofits is intrinsic to all our well-being. And it’s imperative that we have a commonly shared understanding of accountability and governance.

The single best resource on board governance is Common Good Vermont. They have long been a champion of the well-being of the nonprofit community and a vital educator about its function and value to Vermonters.

It’s imperative that together we get this right to harvest the immense good will of Vermonters working together in nonprofits to make us a stronger community.