In fall 2014, the Stanford Graduate School of Business, in collaboration with BoardSource and GuideStar, surveyed 924 directors of nonprofit organizations about the composition, structure, and practices of their boards.
The skills, resources, and experience of directors are not sufficient to meet the needs of most nonprofit organizations.
Board processes fall short.
Over a quarter of nonprofit directors do not have a deep understanding of the mission and strategy of their organization. Nearly a third are dissatisfied with the board’s ability to evaluate organizational performance. A majority do not believe their fellow board members are very experienced or engaged in their work.
“Many nonprofit organizations pursue worthy missions,” says David F. Larcker, James Irvin Miller Professor of Accounting at Stanford Graduate School of Business and coauthor of the study. “Our research finds that, unfortunately, too often board members lack the skill set, the depth of knowledge, and the engagement required to help their organizations succeed. Nonprofit boards would greatly benefit from a more rigorous process for setting goals and measuring performance.”
“Nonprofit organizations need to do a better job attracting board members with substantive, relevant experience who will deeply and personally embrace the mission of the organization,” adds William F. Meehan III, Lafayette Partners Lecturer for 2013-2015 in Strategic Management at Stanford Graduate School of Business and coauthor of the study. “They need individuals with the depth of knowledge to set explicit goals, develop sound strategies, and hold the executive director or CEO accountable for performance.”
“Individuals join nonprofit boards because they want to make a difference and contribute to the mission of the organization,” adds Nick Donatiello, Lecturer in Corporate Governance at Stanford Graduate School of Business. “Holding personal financial contributions aside, the biggest contribution they can make is to help their board implement sound governance practices: reliable financial reporting, concrete organizational performance targets, CEO performance evaluation, board development and succession plans, and fulfilling other basic and fundamental obligations that come with directorship.”
“This extensive survey provides highly informative empirical data which underscores what many of us have been observing based on personal experience. In order for a nonprofit to achieve great impact, it needs a great board. And most nonprofit boards fall far short,” adds Meehan.
Too Many Directors Lack a Deep Understanding of the Organization
Over a quarter (27 percent) of nonprofit directors do not believe that their fellow board members have a strong understanding of the mission and strategy of their organization. A third (32 percent) are not satisfied with the board’s ability to evaluate the performance of the organization.
While almost all (92 percent) say that their board reviews data and information to evaluate organizational performance, many are not comfortable with the quality of that data. Forty-six percent of directors have little to no confidence that the data they review fully and accurately measures the success of their organization in achieving its mission. Over half (57 percent) of nonprofit boards do not benchmark their performance against a peer group of similar organizations. “Rigorous performance measurement is the bedrock of good governance,” says Meehan. “How can the board claim to understand whether its initiatives are successful unless it is measuring their impact? Start with a mission-focused theory of change. Outline a logic model that shows a clear connection between your initiative and the desired outcome. And then rigorously measure performance.”
Most Lack Formal Governance Structure and Processes
Nonprofit boards stand to gain from the adoption of sound governance practices in areas such as financial reporting and audit, succession planning, and CEO and board evaluations. A significant minority (42 percent) do not have an audit committee. Many rely on monthly bank statements to monitor financial performance.
Two thirds (69 percent) do not have a succession plan in place for the current executive director or CEO. Three quarters (78 percent) could not immediately name a successor if the current executive director or CEO were to leave the organization tomorrow. On average, nonprofit directors estimate that it would take 90 days to find a permanent replacement.
Most (80 percent) claim to formally evaluate the performance of the executive director. However, a significant number (39 percent) do not establish explicit performance targets against which his or her performance is measured.
Over a third (36 percent) of nonprofit boards never evaluate their own performance.
Many Directors Are Not Engaged, Do Not Understand Their Obligations
Two-thirds (65 percent) do not believe that the directors on their board are very experienced, based on the number of additional boards they serve on. Almost half (48 percent) do not believe that their fellow board members are very engaged in their work, based on the time they dedicate to their organization and their reliability in fulfilling their obligations.
About half (47 percent) of nonprofit directors believe that their fellow board members understand their obligations as directors well or very well.
Fundraising Is Seen as a Central Obligation
Nonprofit directors rank fundraising very high relative to their other obligations as directors. Forty-five percent of nonprofits require directors to fundraise on behalf of the organization. Among those that do, 90 percent of directors believe that fundraising is as important or more important than their other obligations as directors.
While many nonprofit organizations (46 percent) do not require directors to donate each year, almost all directors (92 percent) personally do so.
Less than half (42 percent) of nonprofits have a “give or get” policy that requires each board member to donate a minimum amount each year or raise that amount from others. The minimum “give or get” varies by size of the organization, and averages $1,000 for small nonprofits (operating budget less than or equal to $500,000) and $5,000 for large nonprofits (operating budget greater than or equal to $5 million).
“Fundraising is an important obligation for many directors,” observes Donatiello. “However, it should not distract from other core duties, such as ensuring that the organization is well managed, the strategy sound, finances healthy, and contingency plans in place to deal with unexpected disruptions.”
Most Directors Are Satisfied with the Performance of Their Executive Director/CEO
Almost all directors (92 percent) believe that the executive director understands the mission and strategy of the organization very or extremely well. Eighty-seven percent are satisfied with his or her performance. Few believe that their executive director is overcompensated, with 51 percent stating that their executive director is appropriately paid and 42 percent stating that he or she is slightly or very underpaid.
Executive directors primarily have previous work experience in the nonprofit sector. Over half (59 percent) worked in the nonprofit industry immediately prior to becoming the head of their organization. Only 14 percent had immediate prior work experience in a for-profit organization. Twelve percent are the founder of their organization. In terms of education, almost two thirds (60 percent) have a master’s degree or higher.
… and with the Performance of Their Board and Organization
A significant majority (85 percent) of nonprofit directors are moderately or very satisfied with the performance of their organization. Satisfaction levels are also high for the quality of financial reporting (82 percent) and financial health (70 percent) of the organization.
Most directors believe their board is correctly sized (56 percent) or only slightly too large (12 percent) or slightly too small (24 percent). These results hold true across organizations of various size.
Approximately half (52 percent) say that their organization has a “board within a board” where a subset of directors has an outsized influence on board decisions. Two thirds of these (67 percent) are a formal executive committee, while one third (33 percent) reflect an informal dynamic that evolved over time. Among those organizations with a “board within a board,” 74 percent say it improves board functionality and decision making.
A quarter (28 percent) of directors report that the founder of the organization currently serves as a fellow board member. Of these, 68 percent say that the founder is very involved in management and 78 percent say the founder is very involved as a board member of the organization. The vast majority (90 percent) believe that the founder has a positive or very positive impact on the success of the organization.
Still, Most Nonprofit Boards Have Serious Challenges
Over two thirds (69 percent) of nonprofit directors say their organization has faced one or more serious governance-related problems in the past 10 years. Forty percent say they have been unable to meet fundraising targets. Twenty-nine percent have experienced serious financial difficulty. A quarter (23 percent) have asked their executive director to leave or had to respond to an unexpected resignation. Sixteen percent say they have had extreme difficulty attracting qualified new board members.
“The value of good governance shows up in results,” says Professor Larcker. “Ultimately, nonprofits will want to implement more reliable processes and procedures to ensure their organizations succeed. Good governance will almost certainly help nonprofit directors maximize their contribution to their social mission.”
To improve governance and board-level performance, the authors recommend that nonprofits incorporate the following:
- Ensure your organization’s mission is focused and its skills and resources are well-aligned with it.
- Ensure your mission is understood and embraced by the board, management, and other key stakeholders.
- Establish explicit goals and strategies directly tied to achieving your mission.
- Develop rigorous performance metrics that reflect those goals and strategies.
- Hold the executive director accountable for meeting those performance metrics and evaluate his or her performance with a sound, objective process.
- Compose your board with individuals with the skills, resources, generosity, diversity, and dedication that address the needs of the organization. This includes ensuring that there is a small group of committed and cohesive leaders.
- Define explicitly the roles and responsibilities of board members to best leverage their leadership, time, and resources.
- Establish well-defined board, committee, and ad hoc processes that reflect your organization’s needs and context and ensure optimal handling of key decisions and responsibilities.
- Regularly review and assess each board member’s leadership contributions as well as the board’s overall performance. This includes ensuring that board members view their time as well spent.