The basic principles of good corporate governance apply equally to nonprofit entities as they do for public or for-profit entities. Good governance benefits both types of entities equally. Regardless of an organization’s tax status, good governance begins with a high-quality board of directors.
State laws generally allow both for-profit organizations and nonprofit organizations to outline the powers and responsibilities of their leaders in the company’s charter. Once a company’s charter is established, boards and managers must follow the governance and operational policies that they set forth.
Related to governance principles, nonprofit and for-profit organizations are far more similar than dissimilar. Unlike their for-profit counterparts, nonprofit organizations are often shrouded by unearned expectations and misperceptions.
Misperceptions About Governance and Nonprofit Organizations
Large numbers of people tend to equate nonprofit organizations only with fundraising. While fundraising is a primary activity for many nonprofits, a nonprofit’s mission determines the purpose of the organization. Fundraising helps to support the many activities of nonprofits.
Nonprofit organizations are usually happy to form public connections with celebrities and other notable people. Adding such a person to the board of directors isn’t always in the best interests of nonprofit boards. Such people may be viewed as board members who appear at the board table more for appearance’s sake than for being active and involved board members. Important individuals often find that it’s better for them to serve on an honorary board, advisory board, donor’s circle or professional council.
Another common misperception about nonprofit boards is that they tend to be highly inexperienced in board service. Some feel that board inexperience causes confusion between the roles of board members and managers, causing some board members to overstep their boundaries and try to fill the role of managers.
Unique Governance Factors Related to Nonprofit Boards
Nonprofit governance demands a unique set of expectations by governments and the public they serve.
The activities of nonprofit organizations demand that they have a larger mix of stakeholders who play various roles in helping them reach their goals.
Nonprofit organizations must work within a more complex economic model than for-profit companies because of the many different types of people and organizations they need to support them.
Perhaps the most notable difference between governance between for-profit and nonprofit organizations is who holds them accountable for their actions. For-profit organizations are highly regulated, especially in the volatile financial climate in which we’re currently operating.
By contrast, nonprofit organizations are largely self-accountable. Government regulators tend to be small and understaffed, rendering them unable to confront allegations of fraud or other illegalities taking place in the nonprofit space. Thus, nonprofit organizations tend to be reasonably self-correcting.
Differences in Governance Between Nonprofit and For-Profit Entities
There is one distinct difference in governance between nonprofit and for-profit entities, and that is their purpose. The purpose of for-profit entities is to assure the highest possible value for their shareholders.
The purpose of nonprofit entities is a charitable one that serves as the organization’s mission. Charitable causes serve populations of people within communities where there are gaps in needs and services.
Corporate Governance Structures Work Similarly in the Nonprofit Realm
The basic principles of governance work in the for-profit and nonprofit realms in vastly similar ways. In general, governance is a structure that holds corporations accountable for responsible, ethical behavior.
Nonprofit board members are responsible for the oversight and strategic planning of their organizations in a similar fashion to for-profit organizations. Nonprofit board members oversee matters that are critical to the health of the organization. Nonprofit board directors manage such fundamental matters as the viability of their organization’s business model, the integrity of internal systems and controls, and the accuracy of financial statements.
Working together as a whole, nonprofit boards have full decision-making power. They are responsible for formulating key policies about the direction and strategy of the organization in keeping with the nonprofit’s mission and stated purpose. Strategic planning accounts for short- and long-term goal setting. Board members authorize major actions and transactions in accordance with the policies the board sets.
Nonprofit board members must identify any risks that the nonprofit faces and address challenges as they arise. Nonprofit boards must follow through on good governance in word and practice, just as for-profit corporations must do.
Like for-profit board directors, nonprofit directors must abide by the Duty of Care, Duty of Loyalty and Duty of Obedience.
Nonprofit boards also have legal duties to oversee management. Overseeing means to monitor and guide them without overstepping their duties.
Nonprofit board members must make sure the organization fulfills its mission. Part of this responsibility entails being a steward of the organization’s resources. This duty incorporates reviewing monthly budgets and budget cycles, evaluating operations regularly and planning for future sustainability.
Also similar in both types of entities is the role of board directors in mentoring, guiding and advising senior management. Nonprofit board directors allocate the proper budget and resources for managers to carry out their duties and responsibilities. Both types of organizations promote clear roles between board directors and managers, with board members serving the role of oversight and managers managing the day-to-day responsibilities.
In the corporate world, much is being written and said about the value of having a majority of independent directors on the board. Having a majority of independent directors assures shareholders that the board will put their interests above all else. It’s frowned on for public corporations and other for-profit entities to have family members or close relatives serving on the same board.
In much the same way, it’s not considered good governance for nonprofit boards to have too many relatives on their boards. Some nonprofits are weighted too heavily toward the opinions and desires of the founding board members, which can result in a lack of independence and faulty governance practices.
While nonprofits elect a board of directors to govern their organizations, there is one more way that they are dissimilar to for-profit corporations. For-profit corporations may vote out board members who are underperforming or nonperforming. On the other hand, nonprofit boards must be self-correcting. The government is less likely to hold nonprofit organizations accountable because the regulating bodies are often small and under-resourced. Typically, only the nonprofits that make the largest mistakes or commit the most significant infractions will be held accountable for their actions.