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How Can We Improve Nonprofit Governance?

The inimitable Vu Le has written another thought-provoking blog post at Nonprofit AF. The post is called “The default nonprofit board model is archaic and toxic; let’s try some new models.”

In it, Vu posits that 1/3 of nonprofit boards are helpful, 1/3 are useless, and 1/3 are harmful. That’s a lot of bad nonprofit boards. Vu suggests this isn’t necessarily about individuals who serve on boards; it’s more about the structure of nonprofit boards.

He says, “But how could boards not be crappy? We are talking about a structure where groups of volunteers who barely know one another, see one percent of the work, often don’t reflect the communities we serve, and who may have little to no experience running nonprofits, being given vast power to supervise leadership and determine values, policies, and practices. Why did we think this weird structure would work?”

Good point.

Having served with and on nonprofit boards in different capacities, experiencing both great boards and not-so-great boards, I’ve been considering Vu’s thoughts about trying something new in terms of nonprofit governance.

It has been my observation that when a person or small group of individuals wish to create an organization for the public good, typically based on a personal mission that seems to deserve wider support, they band together to start an informal organization. The local writers group I was a part of was just such a group. Because it was not a formal nonprofit in the legal sense, if there was anything we wanted to do as a group that required funds or other resources, we pitched in as group members to supply what was needed.

An informal group formed around a mission or hobby main remain an informal group, but if this group has bigger plans, like applying for a grant for a specific project or taking on a project that requires significant contributions, this informal group may decide it is worthwhile to go through the process of becoming a nonprofit organization. There are two main legal requirements for getting started – filing with the Internal Revenue Service for your nonprofit status and tax exemption and filing with your state. The Minnesota Council of Nonprofits has a page on its website devoted to explaining how to start a nonprofit in Minnesota, along with a link to alternatives to starting a nonprofit.

Because nonprofits tend to begin as start-ups with very little money and no paid staff, the volunteer board members handle all of the work of the nonprofit, from the bookkeeping to the marketing and programming to answering the phone and emails to fundraising, along with the typical work of board oversight.

As the organization grows in size and resources, there will come a time when the board hires its first paid staff. This is the point at which board members start losing a day-to-day connection to the inner workings of the nonprofit. So long as the staff stays small, say under 5 people, and the board is required to be engaged and connected to the daily work in order for the nonprofit to survive, the need for a traditional nonprofit board remains. (Though these boards can also turn out to be useless or harmful. Being small in size does not insulate a nonprofit from bad practices on the board and can even encourage such boards to cut corners on legal or ethical requirements due to the feeling that they fly under the regulatory radar, so to speak.)

Once a critical mass of staff is hired to handle all of the major tasks of the nonprofit, including arranging for filing tax forms like the IRS 990 and audits, taking board minutes, creating procedures and drafting organizational policy, arranging the annual meeting, and hiring staff, the need for a board becomes less apparent. Board members are relegated to high level oversight functions, which is difficult to do because, as Vu points out in the quote above, they “see one percent of the work.” If you are not paying the daily bills or seeing donations and other revenue come in the door, it can be difficult to figure out what the monthly income and expense report is telling you. You also don’t see the daily challenges in delivering the mission that may lead to specific staff procedures.

The History of Nonprofits

Quite a few people on Twitter responded in the affirmative to Vu’s call to rework nonprofit boards.

I’m not opposed to rethinking nonprofit boards, but, ever the pragmatic historian, I thought I should start by looking up the history of nonprofits. How did these organizations arise with this particular structure of what amounts to an oversight board? Was there a specific reason for the structure that continues to be active in society and must be considered before fiddling with this structure? Or have circumstances changed so much that a complete reworking of the structure (aside from minor adjustments) is needed?

What I found was very interesting, indeed.

An article from Ohio University, “6 Important Moments in the History of the Nonprofit Sector,” indicates that “the first modern significant independent foundation” to be formed was The Peabody Education Foundation in 1867. “Its main purpose was to integrate both poor whites and ex-slaves into southern state society, foster both intellectual and industrial education, and “foster regional reconciliation.”

Considering that one of the main charges against today’s nonprofit boards is that they are not diverse, inclusive or equitable enough, discovering that the roots of the foundation world were anchored in equity shows that today’s foundations have lost track of that history. It can, however, be rediscovered, reaffirmed and renewed.

The other thing to note about The Peabody Education Foundation is that it was a way for funders to pool their resources for charitable causes. Many of the other important events within the history of the formation of nonprofits have to do with managing resources. The 1844 Supreme Court case of John F. Girard (called the “Dead Hand of the Donor” at Learning to Give) allowed for a donor to give their estate to charitable causes.

The pooling and distribution of resources are important factors in the nonprofit sector, driving the formation of boards to oversee how those shared resources are used. Without the oversight of a number of unrelated people, it would be incredibly easy for someone to abscond with those resources. (Raise your hand if you have been asked by an accountant whether you suspect any fraud has occurred within your organization during an audit. I have been asked because this is a standard audit question.)

The IRS recognizes the temptation that accumulated resources can be and includes the following statement in its guide to nonprofit governance: “If a governing board tolerates a climate of secrecy or neglect, we are concerned that charitable assets are more likely to be diverted to benefit the private interests of insiders at the expense of public and charitable interests.”

It does not seem to provide a specific number of required board members, saying the following regarding board size in its guide:

“Attention should also be paid to the size of the board ensuring that it is the appropriate size to effectively make sure that the organization obeys tax laws, safeguards its charitable assets, and furthers its charitable purposes. Very small or very large governing boards may not adequately serve the needs of the organization. Small boards run the risk of not representing a sufficiently broad public interest and of lacking the required skills and other resources required to effectively govern the organization.

“On the other hand, very large boards may have a more difficult time getting down to business and making decisions. If an organization’s governing board is large, the organization may want to establish an executive committee with delegated responsibilities or advisory committees.” 

The IRS seems to take a Goldilocks view of a nonprofit board of directors … not too big, not too small.

States, however, may dictate a minimum number of board members for nonprofit operations. The State of Minnesota requires at least 3 board members.

If a nonprofit only needs a minimum number of board members, once there are paid staff handling most of the daily work, why not drop the governing board to this bare minimum and allow the staff to take on governance duties?

The IRS actually has something to say about this too: “Irrespective of size, a governing board should include independent members and should not be dominated by employees or others who are not, by their very nature, independent individuals because of family or business relationships.”

Paid employees are not considered to be sufficiently free of conflict of interest to operate a board in comparison to voluntary board members. (I realize there are some boards that are paid for their work and I’d like to know how they manage this conflict.)

What Is the Governance Structure of Nonprofits in Other Countries?

Between the 1800s and today, there have been many other key decisions that have shaped nonprofits in the United States. Alexis de Toqueville observed Americans’ propensity to start voluntary organizations to get things done, whereas aristocrats were in charge of such things in Europe.

This leads to a few questions: How do other countries handle nonprofits? How are they formed? For the purposes of this discussion, how are nonprofits governed in other countries?

I know nothing about nonprofits in other countries except I’ve observed that certain organizations set up as nonprofits here in the U.S., like museums, have more government support in other countries. Think healthcare. If your country has nationalized healthcare, what use do you have for nonprofit health insurance companies or other health-associated nonprofits?

America is very good at pawning off government functions, services we ought to be offering collectively, to corporations, whether nonprofit, which have at least some public oversight, or for-profit through government contracts. Neither are a great way to offer all necessary public services.

In the case of nonprofits, we are too dependent on the generosity of voluntary funders for necessary services, which leads to continually cash-starved organizations with poorly-paid staff who are expected to do their work for the love of it. Because the source of funding for most nonprofits is so tenuous, they often spend more time then they’d like on seeking funding rather than meeting their missions.

In the case of relying on for-profits to deliver too many government services (the capitalistic model of governance is my term for it), you wind up with the mess we have today in the U.S., with rule by business interests and oligarchs at the expense of everyone else, where price-gouging, cronyism, corruption, and shoddy work are the rule of the day because these companies have to maximize profits.

Rather than allowing our government (and it is OUR government) to shove its responsibility to provide a social safety net (education, healthcare, etc.) and collective cultural and public services onto nonprofits, ever at the mercy of private funding (and therefore subject to the whims of donors), we need to demand that the government provide these services and we need to be willing to pay for them through higher taxes.

Stop thinking of “taxes” as a dirty word, please! By paying taxes, that allows all of us a say in how these services are provided and, ideally, we get more transparency because these services become public functions instead of public services provided by private nonprofits, or worse, private for-profits.

Where Does That Leave Us in Reconfiguring Nonprofit Boards?

Before we can tackle reconfiguring the governance of nonprofits, giving more governance to paid staff, because they are the ones closest to the daily operations, we have to consider the problems of self-interest and traditional staff hierarchy. How do we handle conflicts of interest and avoid the misappropriation of nonprofit resources for personal gain? If a nonprofit has a traditional staff structure of executive director in charge of hiring, firing, and managing staff, how do we manage the structure of less powerful staff sitting on a board with the ED? Or would the ED be kept off the board, in which case what happens to the power dynamics there? You can see it’s very easy to get into the weeds when trying to dismantle the current structure of nonprofits. That doesn’t mean we shouldn’t try. In examining the issue closely, we may come up with more elegant solutions than we have now.

For inspiration, I would examine how cooperative businesses work. There have to be some lessons in collective governance there that mitigate power issues, conflicts of interest, and misappropriation of resources for private gain. I’d also look to how nonprofits are run in other parts of the world.

By using our big wrinkly brains and examining the history of nonprofit developments, whch tend to be responses to problems that arise, we may be able to create a new way to govern nonprofits that responds to their current shortcomings.

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