A New York Times article last year reported that public company directors are coming under scrutiny this proxy season based on what they are not doing. Based on my experiences with dozens of nonprofit organizations, the litany of complaints cited in the Times article, can easily apply to nonprofits, whether they are professional organizations, trade associations, educational institutions or charitable organizations.
Monitoring Risk Management – Many conservative nonprofits don’t seem to recognize the need for risk management reviews at the board level. Having physical facilities to protect, clients who can sue, and operations that are subject to closure during freak weather conditions (e.g., hurricane Sandy) are reasons enough for nonprofit directors to have serious risk discussions. Based on reviews of systems and insurance coverage, the board has to be in a position to take leadership to maintain some types of continuing operations.
Chief Executive Succession Planning – First when a new CEO is engaged, plans should be in place to name an interim CEO, should the CEO have a serious personal crisis. Second the board needs to be thoroughly briefed on potential internal successors should the CEO resign abruptly. It has been reported that hiring external talent is three to five times as costly as naming an internal candidate to the top position. Since financial issues are usually key items for nonprofits, perhaps promoting an internal candidate can be the more expedient decision. When it comes to making succession decisions, boards typically can be penny-wise and pound-foolish.
Assessing CEO and Organizational Performance – Most nonprofit chief executives and their organizations are evaluated on an annual basis, using financial and other internal metrics such as employee turnover and membership retention. Since nonprofit organizations are mission driven, qualitative information needs to be added to the mix. (http://bit.ly/OvF4ri) These can range from data on community impact to valuing partnership outcomes with other nonprofits. The metrics should be mutually negotiated between the board and CEO, while some metrics need to be evaluated over longer performance periods. A few business firms use a four year or five years performance period when establishing CEO compensation.
Summary – Most nonprofit directors are not compensated for serving on boards. In addition, their board terms are relatively short (three to six years) when compared with those serving on business boards. Consequently, they often don’t do what is needed in terms of monitoring risk management, succession planning and robustly evaluating the CEO and organizational performance. Like commercial board directors, nonprofit board members need to become aware of the possible deficits in the three areas.