How the Board Structures of For-Profit and Not-for-Profit Organizations Differ
Our society benefits greatly from for-profit and nonprofit organizations. Their purposes are different, which means that each needs to have a different governance structure in order to grow and thrive. The strength of the governance structure, along with the quality of the leaders, is key to the success of the organization.
The differences between for-profit and nonprofit organizations become apparent when we look at an organization’s mission, finance structure, and board of directors and their duties. The boards for both types of organizations bear much responsibility. The current economic environment places heavy scrutiny on nonprofit boards positions. For-profit and nonprofit organizations benefit from a board management software system that streamlines many of their processes, which keep them in legal compliance and help the organization grow.
Differences in the Mission
The mission is a central component to nonprofit organizations. Virtually every decision the board makes centers around the mission, vision and values of the organization. The major activity for nonprofit organizations is generating donations. Nonprofit organizations qualify as tax-free because they fill the gaps of many social services that governments aren’t able to provide given the limitations of available tax dollars.
The mission for for-profit organizations is also very important, although for-profit boards of directors base their decisions on many factors. For-profit boards consider risk management, the market climate, the wishes of the investors, historical trends, future predictions and many other metrics before making final decisions for the company. The company’s mission is an important component of the business, but financial metrics often take precedence. For-profit organizations also take nonfinancial metrics into consideration when having board discussions.
Differences in Financial Structures
The majority of funds for nonprofit organizations come from donations, grants, membership fees and philanthropic efforts. Some nonprofits also have a small operational budget for selling products or merchandise. Nonprofits utilize the talents of volunteers and donors, and some employ staff. Because nonprofit organizations channel most of their funds toward a cause, boards must place a heavy emphasis on responsible budgeting and cash flow.
In regard to for-profit entities, funds come from operations and financial capital markets. For-profit corporations rely on hired employees as their workforce and on paying customers to meet their financial needs. The financial market for for-profit companies has many ups and downs. Boards aim for steady financial growth over the long term. Setting short-term goals usually leads to sustained long-term growth. Boards of for-profit corporations pay special attention to financial metrics, profit-and-loss statements, stock prices and cash flow.
Differences in Board Structures
Nonprofit organizations are legally required to form a board of directors. Nonprofit boards tend to be larger than boards of for-profit organizations. According to a survey, the average number of nonprofit boards was 16 as of 2007. Nonprofits don’t pay volunteers for their services. The leaders of a nonprofit organization typically consist of a non-executive board chair and a CEO or executive director. The CEO or executive director is an ex-officio member of the board.
The committee structure for nonprofit boards also differs from that of their for-profit counterparts. Medium-size and large nonprofits typically have standing committees, such as a nominating committee, executive committee, technology committee and public relations committee. They often also have a variety of standing committees or ad hoc committees devoted to special issues.
For-profit corporations are only required to form a board of directors if they are publicly traded. These boards tend to be smaller than nonprofit boards and they get paid for their services. According to the Corporate Library’s study, the average board size is about nine members. Some board experts believe that the ideal number is closer to seven board directors. For-profit boards usually have a CEO who serves as board chair and as an independent lead director. The CEO/board chair has voting privileges.
For-profit boards tend to have fewer committees, including audit, compensation and governance committees. Some boards are now also forming technology committees.
Differences in Board Duties and Responsibilities
Nonprofit board directors have a duty to further the charity’s tax-exempt purpose. They’re legally responsible for protecting assets from fraud and misuse. Individual board directors may be held liable by the Attorney General or the IRS, especially in cases of egregious misconduct or those in which they personally profited from nonprofit funds.
In exercising their powers and meeting their duties, for-profit board directors are primarily responsible to the shareholders. In that capacity, they are essentially the fiduciaries for the shareholders. Board directors owe their shareholders and other stakeholders the duty of care and the corporation, their duty of loyalty. For-profit boards have many other duties and responsibilities in meeting their fiduciary duties.
For-Profit and Nonprofits Benefit From Board Management Software
Despite the many differences between the structures for for-profit and nonprofit organizations, there are similarities in the tools that they need to support good corporate governance. Both types of organizations need to spend the bulk of their board meeting time on strategic planning, risk management, financial reporting and budgeting, and cybersecurity.
Today’s boards need the assistance of board management software systems to streamline many of the basic board meeting processes, such as meeting planning, agenda planning and creating meeting minutes.
BoardEffect provides a highly secure online platform in which boards can communicate and collaborate without worry about cybercriminals breaking through electronic gateways. BoardEffect Messenger by Diligent is a communications platform that was designed with built-in security that far surpasses the security of personal or business email accounts.
BoardEffect’s products offer full governance support for board meetings, compliance and board member development. The board portal offers a feature for surveys where boards can create forms for annual board self-evaluations. The portal also offers a process for electronic document filing and storage. The storage capability is unlimited, and the cloud-based storage assured boards that their documents are maintained securely now and in the future.
Mobility is an important feature for busy board directors, especially for nonprofit board directors who serve their organizations on a volunteer basis. BoardEffect’s portal and other products give board directors the capability and convenience of managing nonprofit board business using any electronic mobile device.
BoardEffect’s board portal assists board directors to perform their duties in the most efficient, cost-effective ways. The result of their efforts channels social and economic benefits back into communities and our society exponentially.