Self perpetuating board members are elected by the organization's membership

Discussion 2: Topic Structures For Not-For-Profit Organizations

Chapter Summary 3

Scholars in various disciplines have developed theories to explain the nonprofit sector as a whole and the behavior of individual nonprofit organizations. Theories drawn from economics surround the concepts of public goods and private goods, externalities, and free riders, and explain nonprofits as gap fillers that compensate for the failures of the market and government. Other theories address the supply side and explain nonprofits in terms of social entrepreneurship; the contributions that nonprofits make to freedom, pluralism, and joint action; and motivations for altruism and giving.

Lohmann's interdisciplinary theory of the commons explains nonprofits as providers of common goods, a third category of goods alongside private and public. The definitions of what is private, public, or common may change over time, reflecting current philosophical and political trends.

According to Salamon (2012a), nonprofit organizations exhibit five defining characteristics: (1) They are organizations (organized entities, rather than informal groups of people), (2) they are private, (3) they are non–profit distributing, (4) they are self-governing, and (5) they are noncompulsory. A sixth characteristic may be that nonprofits provide a public benefit (Salamon, 1999). Not all may agree with the definition of that term, since some nonprofits advocate contradictory positions. But encouragement of debate may be considered generally a public benefit in a democratic society. These characteristics have implications for how nonprofits behave as organizations. Their purposes are stated in their mission statements. The mission is so central to nonprofit organizations that they are said to be mission-driven.

Organizational theorists discuss nonprofits as open systems that respond to the pressures and constraints presented by their environments. Their behavior reflects their resource dependence, and nonprofits face the risks of goal displacement and loss of autonomy if they are too dependent on one or a few sources of funding. Most attempt to manage resource dependence by diversifying the sources of support and remaining committed to their missions.

Isomorphism describes the tendency of organizations in the same field to become alike. This may result from external pressures, the inclination of organizations to adopt each other's practices, or the commonalities of professional codes practiced by the organization's staff members. The organizational structure of a nonprofit also may be determined by the task environments it faces.

An organization's culture—the informal rules about “the way things are done around here”—has received increased emphasis in management literature over the past three decades. Some authors describe an identifiable nonprofit culture, but the much-noted blurring of sectors may be reducing the cultural differences, especially between nonprofits and business firms.

Chapter Summary

The governing board holds ultimate responsibility for the nonprofit organization. There are various types of boards, including those elected by the organization's membership; self-perpetuating boards; boards appointed by some outside authority; and hybrids, which may include elected, self-perpetuating, appointed, and ex officio members. Each of these types offers advantages but also introduces risks for the organization and the board.

The governing board's fiduciary responsibilities are defined in law and include the duty of care, the duty of loyalty, and the duty of obedience. Since the passage of intermediate sanctions in 1996 and the Sarbanes-Oxley Act in 2002, there has been increased scrutiny of nonprofit boards by federal and state governments, the media, and other organizations. Under intermediate sanctions, nonprofit board members can face individual penalties for violating their fiduciary responsibilities, and many boards adopted new conflict-of-interest and disclosure policies in response to that legislation. Although Sarbanes-Oxley applies primarily to publicly traded corporations, many nonprofit organizations have voluntarily adopted some or all of its provisions, and some have been encompassed in legislation passed by states. Independent Sector's Panel on the Nonprofit Sector issued 33 principles for good governance in 2007 and a revised version was released in 2015. Some provisions reflect Sarbanes-Oxley–like requirements. Some state associations of nonprofits also have established standards for best governance practice that are used as the basis for accreditation programs. Implementation by the IRS of a revised Form 990 in 2009 further focused the nation's attention on nonprofit accountability and the responsibilities of boards. Some questions on Form 990 also reflect Sarbanes-Oxley–like principles, which will be considered further in Chapter 6 of this book.

Functional responsibilities of boards have been defined in the literature and include appointing, supporting, and evaluating the CEO; establishing a clear institutional mission and purpose; approving the organization's programs to ensure consistency with its mission and financial prudence; ensuring sound management and financial stability; and establishing standards by which the organization's performance will be evaluated. Some people view the board's responsibility to ensure the organization's financial stability and sustainability as implying an obligation on the part of board members to give from their personal resources and actively engage in fundraising. Some boards have policies requiring that members give or raise a minimum amount, but others rely on a culture that encourages members to participate as appropriate to their capacities.

The relationship between the governing board and the CEO is the subject of a substantial literature. In some organizations, especially those managed by a founder, the CEO may be a dominant figure, and the board may be largely reactive to the executive's initiatives. Most experts call for a partnership between the board and the CEO but differ on how that partnership should be designed. Three experts discussed in this chapter include John Carver (2006), whose policy governance model suggests a clear separation of roles, defined in policies established by the board related to ends, means, board–staff relationships, and governance process. Chait et al. (2005) propose a model they call “governance-as-leadership,” in which the lines between the responsibilities of the board and the CEO are broken down and both work together in focusing on the most critical issues and questions facing the organization. Leadership is shared, particularly when both engage in generative thinking. The research of Robert Herman and Dick Heimovics (2005) revealed that in reality both board members and the chief executive see the CEO as primarily responsible for the organization's success or failure, a condition they call “executive psychological centrality.” They advise CEOs to accept that reality and practice board-centered leadership, not usurping the responsibilities of the board but rather supporting and facilitating its work.

The recommendations of Carver (2006), Chait et al. (2005), and Herman and Heimovics (2005) are prescriptive, but some scholars have sought to explain why boards are configured and operate the way they do. Some have taken a contingency approach, suggesting that boards are varied according to the internal and external realities that they face.

Responsibility for managing the governing board lies primarily with the chair, working cooperatively with the CEO. In recent years, more boards have established a governance committee, which has responsibility for the overall development of the board, including the enlistment of new members, board member orientation and education, and the evaluation of the board and individual members. Some large organizations with large boards have established a senior staff position to support board activity and the role of the board professional may be an emerging new subspecialty of nonprofit management. However, it is important to remain clear that staff members report to the CEO, not to the board or its officers, and that authority lies only in the full board rather than individual members.

In today's environment, there is considerable emphasis on the effectiveness of nonprofit governance. A 2017 survey by BoardSource revealed that the majority of nonprofit CEOs were at least somewhat satisfied with their boards’ performance, although the CEOs reported that boards do better in some areas than others. BoardSource and others have identified best practices of effective boards, but research by Herman and Renz (2002, 2008), revisited in later work by the same scholars (Renz and Herman, 2016), suggests that there may be no one right way that works for every organization.

Nonprofit boards today face conflicting pressures. They are expected to do a more effective job of governing but also become more active in generating financial support for the organizations they serve. The appropriate trade-offs between the wealth and wisdom needed to meet these sometimes competing priorities are a matter of current discussion and debate in many nonprofit boardrooms.