Good governance is a crucial aspect of any organization, but it’s particularly significant for not-for-profit (NFP) organizations. These entities often rely on their Boards of Directors to ensure effective governance, which in turn impacts their reputation, integrity, and overall efficiency. The article Good Governance in Not-for-Profit Organizations: A Review of the Literature on Boards of Directors by Jonathan Kugel and Julie M. Mercado offers a comprehensive review of factors that contribute to effective NFP board governance. This blog will break down the key points from their research, explaining the importance of board effectiveness and providing practical insights for improving governance in NFP organizations.
Understanding NFP Boards of Directors
NFP organizations are established to fulfill specific missions, which can range from providing healthcare services to running educational programs. The success of these organizations is largely defined by how well they adhere to and fulfill their mission. The board of directors plays a pivotal role in this process by overseeing the organization’s activities, ensuring financial stability, and maintaining accountability to stakeholders.
However, assessing board performance is challenging due to the diversity of NFP missions and the limited availability of relevant data. Researchers often use self-reported information from organizations as a proxy for performance, but this approach has its limitations. Kugel and Mercado’s review provides valuable insights into the theoretical underpinnings of NFP board roles and responsibilities, offering a framework for evaluating board effectiveness.
Key Theories in NFP Board Governance
Several governance theories help explain the roles and responsibilities of NFP boards:
Agency Theory
Agency theory suggests that boards are necessary to monitor and align managers’ interests with stakeholders’ interests. In NFPs, the board’s role includes selecting a CEO/Executive Director (ED), overseeing financial disclosures, and ensuring that management’s actions align with the organization’s mission.
Resource Dependence Theory
Resource dependence theory posits that boards help secure essential resources for the organization by leveraging their networks and influence. This theory emphasizes the importance of board members who can bring in donations, form strategic partnerships, and enhance the organization’s visibility and reputation.
Institutional Theory
Institutional theory focuses on how boards help organizations adhere to societal norms and expectations, which is crucial for gaining legitimacy. Boards play a key role in establishing best practices and ensuring that the organization complies with legal and ethical standards.
Performance and Effectiveness of NFP Boards
The effectiveness of an NFP board can be assessed through various lenses, including financial performance, adherence to governance best practices, and fulfillment of the organization’s mission. Key factors influencing board performance include:
Board Composition and Size
Effective boards often have a diverse composition, including members with financial expertise, community influence, and a strong commitment to the organization’s mission. Research suggests that larger boards can enhance representation and access to resources but may also face challenges in coordination and decision-making.
Recruitment and Training
Recruiting committed and knowledgeable board members is crucial for governance effectiveness. Providing training and orientation for new members can significantly improve board performance. Organizations like the AICPA and state CPA societies offer NFP board member training, which can be beneficial.
Board Independence
Independent boards, where the CEO/ED does not serve as the board chair, are generally associated with better governance outcomes. Independent audit committees and regular performance reviews are also indicators of strong governance practices.
Challenges and Opportunities for Future Research
Despite the progress in understanding NFP board governance, several gaps remain. Future research could explore the impact of board diversity, the effectiveness of different training programs, and the long-term outcomes of governance reforms. Additionally, examining the role of digital transformation and emerging technologies in NFP governance could provide new insights.
Practical Implications for NFP Organizations
For NFP organizations looking to improve their governance, here are some practical steps based on Kugel and Mercado’s findings:
- Ensure Board Diversity: Strive for a diverse board in terms of skills, background, and perspectives. This diversity can enhance decision-making and resource acquisition.
- Provide Training and Orientation: Invest in training programs for new board members to ensure they understand their roles and responsibilities. This can lead to better governance and organizational performance.
- Maintain Independence: Aim to have an independent board with a clear separation between management and oversight functions. This helps prevent conflicts of interest and enhances accountability.
- Regular Performance Reviews: Conduct annual reviews of board performance and implement processes to retain effective members. This practice can help maintain high standards of governance.
- Adopt Best Practices: Stay informed about governance best practices and industry benchmarks. Implementing these practices can improve the organization’s credibility and effectiveness.
Conclusion
Good governance is essential for the success of NFP organizations, and effective boards play a crucial role in achieving this goal. By understanding the key factors that contribute to board effectiveness, NFPs can improve their governance practices, enhance their reputation, and better fulfill their mission. Kugel and Mercado’s review provides a valuable resource for researchers and practitioners alike, offering insights and practical recommendations for strengthening NFP board governance.