Private and nonprofit boards of directors face many of the same challenges of refreshing their boards as publicly traded companies. Many other issues drive the unique challenges of board refreshment that non-public entities face on an ongoing basis. The type of entity, industry, economy, geographical talent, culture and many other issues affect private and nonprofit boards’ ability to attract and maintain high-performing talent on their boards. Boards that pay attention to the issues that lead to the loss of board members, know what the organization’s needs are, and have a standardized plan for board refreshment will find that it’s easier to keep high-quality talent on the board in spite of the challenges they face.
What Issues Signal Changes in Board Composition?
Any number of situations, expected or unexpected, may cause a board director to leave their position on the board. Retirement, stakeholder activism and poor fit top the list of reasons for board director departure.
One of the most common reasons board directors leave is retirement. Often, a board director’s retirement is known and expected, but sometimes personal or professional reasons cause a sudden and unexpected need for the director to leave their board duties behind.
Stakeholders like shareholders, investors and donors often influence the inner workings of companies and organizations. Activism among stakeholders may be the first indication to boards that one or more directors have philosophies that are counterproductive to the organization’s mission or that directors aren’t being as productive and engaged as they need to be.
The needs of private companies and nonprofits change from time to time. A shift in an organization’s strategic direction often changes the skill sets that board directors need. Qualified, insightful board directors may cease to be a good fit over time when the needs and challenges of the organization become mismatched.
Mutually Rewarding Relationship Between Boards of Directors and Management
A high-performing board of directors is a huge asset for all types of organizations regardless of their structure. Boards rely on their management teams to execute their plans to move the entity forward. The relationship between board directors and managers is mutually rewarding. Top-performing boards provide feedback to CEOs, executive directors and employees to help them improve their performance. For private companies, the hard work and diligence of the employees comes back to them in the form of financial rewards. For nonprofits, volunteers receive the satisfaction that they are making a significant contribution to a cause about which they care deeply.
Nonprofit Boards Face Challenge of Board Director Turnover
Private corporations compete with public corporations for top board and managerial talent. Nonprofit organizations typically have volunteer boards, so they have an even more difficult challenge in identifying and recruiting top board talent.
A 2014 survey conducted by the Stanford Graduate School of Business queried 924 nonprofit board directors about the composition, structure and practices of their boards. The study yielded some interesting results.
By and large, nonprofit board directors acknowledged having trouble finding board directors that had the necessary skills, resources and experience to meet the needs of their organizations. The overarching result of having low-performing boards is lack of overall good governance. The survey indicated that about 25% of the respondents stated that their boards didn’t have a good understanding of their organization’s mission and strategy. The study also revealed that over a third of the directors surveyed were dissatisfied with their boards’ ability to evaluate their own organizations’ performance. Most directors didn’t believe that their directors had enough experience, or that they were well-engaged in the organization. Ironically, 92% of those surveyed said that they reviewed data and information to evaluate the organization’s performance, but 32% said that they didn’t have faith in the quality of the data. About 57% of nonprofit board directors also acknowledged that they don’t compare their data against peer groups of similar organizations.
A heavy emphasis on fundraising creates particular challenges for nonprofit boards. Many nonprofit boards experience continual financial difficulty and a constant struggle with meeting fundraising targets. Lack of board leadership and experience often contributes to these challenges.
Unique Challenges in Refreshing Private and Nonprofit Boards
Family members or close partnerships are typically the start of private companies. Friendships and people who share a similar passion for a cause usually form nonprofit organizations or their affiliates. Family ties and close friendships often create uncomfortable situations when boards are not functioning to their best capabilities.
Nonprofit organizations face the challenge of replacing board directors who are qualified and yet willing to serve without pay. Boards of private organizations are often unwilling to have tough conversations with their peers about poor fit or underperformance. In both realms, boards sometimes make a decision to replace a board member, but take too long to carry it out. For example, they allow a board director to ride out a few more years until the director retires voluntarily. Such actions are detrimental to board directors, stakeholders, employees and managers. Without established procedures for board refreshment, many boards keep directors around the table for the long term, even when they aren’t sufficiently engaged in the business or mission of the organization.
Taking Steps Toward Board Refreshment
Just as boards need designated processes for board recruitment and nominations, they also need a designated process for board refreshment. Boards that take steps to form policies for board refreshment will take some of the awkwardness out of replacing and updating board directorships, usually without damaging relationships. Board refreshment policies place all board directors on a level playing field, and standard policies for refreshment let them know what to expect.
Board evaluation policies need to be routine and reliable and include procedures for rigorous assessments of board director qualifications. Board director self-evaluation and peer review assessments are useful tools to analyze each director’s skill set as it pertains to the current needs of the organization. Regular assessments, along with regularly rotating committee and board leadership, draws out insights into the effectiveness of individual director performance. Annual self-evaluations also often set a course for directors to recognize their own inefficiencies and maybe even prompt a voluntary resignation.
A Few Final Thoughts About Board Refreshment
Conversations about board refreshment are a good time to consider factors like cultural fit and board director relationships with the CEO or executive director. Third-party evaluators are often instrumental in helping boards identify board nominees who are willing to probe challenging issues without severely clashing with the culture of the current board. Independent evaluators can help build a bridge between CEOs and executive directors and the board by allowing managers to have input without taking control over board nominations. Managers who share the board’s strategic vision appreciate the value that their boards bring to the organization’s mission. Third-party evaluators also have the necessary distance and objectivity to assess how outsiders compare their organization to the competition.