The trouble with nonprofit boards

I'll never create another nonprofit nor agree to serve on another board. There are just too many fundamental design flaws with nonprofit governance.

a board of directors for a nonprofit organization

Before I get into the meat of the matter, can we just take a moment to appreciate the nonsense that the AI served up when given the prompt “a board of directors for a nonprofit organization”?! It’s oddly fitting, so I’ll keep it—way too many boards of directors of nonprofit organizations of all sizes are too “pale, male and stale”, as the saying goes, and the most diverse thing in this picture is the two-tone suit that the 4th director from the left is wearing. But the absurdity that is “AI” is a topic for another day. 🙄

What’s a nonprofit organization? Contrary to popular belief, being a nonprofit company does not mean you cannot make a profit from the delivery or sale of your goods or services—it’s OK to make lots of money in a nonprofit organization, you just cannot distribute it to any outside owners or shareholders because you have none. So any profits get reinvested in the core activities of the company, and nonprofit organizations exist to serve the public interest. That’s important for the issue of board governance, and it also can be very lucrative. The nonprofit company I ran had an annual budget of more than $10 million, over 50 employees, and over $250 million in assets under management. Assets like forestland, buildings, debt facilities and other things we owned or controlled directly.

Many brands you know are nonprofits, not least among them universities like Harvard, Stanford or my alma mater, the University of California at Berkeley. These institutions are all registered nonprofits, with sizable endowments and land holdings in the Billions of dollars. Also, most major healthcare systems are nonprofits, as are churches, and the Green Bay Packers. And, of course, the “artificial intelligence” juggernaut OpenAI is still operating as a nonprofit for a bit longer, with one of its subsidiaries now valued upwards of $150 BILLION.

No matter the size of the nonprofit organization, governance matters. It’s the solemn duty of the board of directors to protect the organization’s mission and the public interest, as well as being good fiduciaries, making sure the organization adheres to legal and ethical rules, and overseeing management—notably hiring and firing the CEO / Executive Director. If it all sounds very earnest and a little boring, that’s because it is. The core functions of nonprofit boards are very unglamorous. Which is why often both boards and management of nonprofit organizations create assertional roles and responsibilities, and that’s where things can go off the rails.

One common practice is to expect boards to actively fundraise, or make donations directly—a practice succinctly summarized as “give, get or get off”. This approach actually does a huge disservice to the nonprofit organization in that major donors may not be best equipped to do the mundane work of safeguarding the organization’s mission, overseeing its financial and operational integrity, and holding the CEO / Executive Director accountable while also being a resource to them. There is also usually a good amount of wining and dining of the board, taking them to the field to witness the organization’s work firsthand, and generally create an experience for them that is likely to result in further donations. A board of major donors may not only not have some of the basic expertise needed for the bread and butter work of nonprofit governance, all the effort and expenses associated with board travel and delightful experiences diverts resources from the organization’s mission related work.

Here are some other problems with nonprofit boards that I have encountered in my 20+ years in the industry:

Founder’s friends

It’s not uncommon and completely understandable for nonprofit founders to recruit a number of their friends to the board of directors. In the early days, that might make a lot of sense: you need a lot of trust, and the shorthand that friends develop who’ve known each other through various life stages makes it easy to get things done. But then the organization grows, and the friendship dynamic doesn’t scale. Boards actually need to hold the founder / CEO accountable, and it can be very hard to do that when you started out as friends. Seems obvious, and yet: it can take organizations a long time to wean themselves off the founding board members, and the delivery of the programs, and thus the mission, suffer as a consequence. These boards made up of friends of the founder(s) are also unlikely to make sure that the founder implements a culture and operational system that ultimately allow him or her to step away, leading to a pervasive problem known as Founder Syndrome.

When business leaders check their knowledge at the door

This has been one of those things I just can’t wrap my head around. How is it that people who, by all accounts, run successful businesses just check their acumen at the door when they attend a nonprofit board meeting?! I have been on boards with people who run very successful multi-million dollar businesses, and yet failed to ask some basic common sense questions about the decisions put before them. Did it really make sense for this nonprofit to acquire a plane that only the CEO knew how to fly? Did the board of that nonprofit really understand the complex transactions put before them? Is the gift of this boat or that building more of a liability than an asset? More than anything I have been struck by the demeanor of board members in these situations: smart people who run their own businesses with a great deal of discernment and control, and yet largely rely on the word of the nonprofit CEO to approve decisions. 🤷‍♀️

Forgetting the prime directive

The most important job a nonprofit board does is to protect the public interest, and the mission of the organization. It’s really beholden to the public, that strange, nebulous collective interest because the implicit contract is that nonprofit corporations don’t have to pay taxes on their revenues precisely because they tackle social or environmental issues that are not otherwise addressed by governments or the markets. The relationship to staff is deliberately arms-length, and one of the hardest things a nonprofit board has to do is navigate its relationship with the CEO and senior leadership of the organization. Ultimately the board’s job is to hire and fire the CEO, and yet so many boards have a hard time with translating that to a daily MO. For example, I have seen boards struggle with empowering the successor to a charismatic founding CEO in ways that would help them succeed. I have also seen boards knee-capping a new CEO by reaching through into programming. The best boards are seen, not heard—in the sense that we want them to show up and support in all the ways that the CEO and staff ask them to, but not develop and agenda and voice of their own.

Falling down on basics

State and federal regulations governing nonprofit organizations are a little peculiar, what with the public interest at stake. In addition to the tax exemption, some things that make nonprofits interesting include that their books have to be open: enter the name of any nonprofit and “990” into the search engine of your choice, and you’ll find their tax return, which by law also has to include the names and salaries of their highest compensated employees and other business information that in a for-profit setting would never be shared. There are also very specific rules governing the functioning of nonprofits, and for when and how boards can take action. For example, management can’t just decide that the organization is done and should be dissolved. The board has to be notified with enough time to create a plan, and dissolution proceedings follow a tightly choreographed script. I have been on a board where the chair sided with a failing management team and aggressively pursued dissolution, blowing by all the basic rules as laid out in state regulations. I have also been on a board where we pursued dissolution in concert with the analysis provided by staff but against the recommendation of the CEO. In both cases the state rules are the ultimately guide, and it’s always been surprising to me how little facility with them board members have.

Past performance is not an indicator of future success

It’s tempting to invite very accomplished people to your board of directors. For example, a leader in microfinance might seem like a great fit for your nonprofit that’s building alternative financing models for social enterprises. Or a leader in environmental and corporate social responsibility might seem like a shoo-in for your organization creating new certification schemes. Or a venture-funded tech entrepreneur with Silicon Valley bona fides might seem like a dream candidate for your nonprofit building edtech software and programs to increase high school graduation rates. What happens frequently, however, is that these stars try to bring their domain expertise into the organization. You know the saying, “when all you have is a hammer, everything is a nail?” It can be very disruptive when board members lean too much on their past expertise and experience, rather than leaning into the unique needs and raison d’être of the nonprofit organization they joined.

So there you have it. All of these issues, and more, have led me to never wanting to be on another nonprofit board ever again! 😅

My recipe for avoiding nonprofit governance dysfunction is below the paywall. Or make an appointment for a consultation if you’d like to discuss a specific issue you are dealing with.