Stanford Research Offers 9 Tips to Improve Nonprofit Governance

(Press release, April 22, 2015) — A new survey supports a long-held hypothesis that many nonprofit boards are ineffective, say Stanford Graduate School of Business (GSB) researchers.

The survey of 924 nonprofit directors revealed a significant minority are unsure of their organization’s mission and strategy, dissatisfied with their ability to evaluate their organization’s performance, and uncertain whether their fellow board members have the experience to do their jobs well.

“Our research finds that too often board members lack the skill set, depth of knowledge, and engagement required to help their organizations succeed,” says accounting professor David F. Larcker, the lead researcher.

Larcker, with Lafayette Partners in Management lecturer William F. Meehan III, corporate governance lecturer Nicholas Donatiello, and researcher Brian Tayan, asked board members about their board’s composition, structure, and governance practices, from financial reporting to succession planning and executive evaluations. Nonprofit information sites BoardSource and GuideStar collaborated on the survey. The survey will be introduced at the Stanford GSB Nonprofit Board Governance Institute, which convenes today and where Larcker is due to deliver the keynote.

The survey found:

• 27% of board members don’t think their colleagues have a strong understanding of the mission and strategy.
• 65% don’t think their board is very experienced, and about half don’t think their colleagues are very engaged in their work.
• 46% have little or no confidence that the performance data they review accurately measures the success of their organizations.
• 32% don’t think their board can evaluate their organization’s performance.
• 42% don’t have an audit committee, and many rely on monthly bank statements to monitor financial performance.
• 57% don’t benchmark their performance against peer groups.
• 39% don’t establish performance targets for their executive directors.

Succession planning is particularly problematic, according to the survey. Two-thirds don’t have a succession plan in place, and 78% couldn’t immediately name a successor if the current executive were to leave suddenly.

Despite this, almost all directors surveyed believe the executive director understands the mission well, and 87% are satisfied with that person’s performance. Some 85% are satisfied with their organization’s overall performance.

The disconnect? “It’s human nature,” Meehan says. We don’t like to hold ourselves accountable, and we don’t want to stand out to say we don’t understand something, he says. “It’s the simple law of human nature in small groups.”

Smart nonprofits will focus on finding the right people—ones who aren’t afraid to ask the difficult questions and challenge their executive directors.

“What great nonprofit boards have is a handful of serious, committed board members who ask the right questions, spend the time, raise the money, and are intellectually engaged,” says Meehan. “You only need a handful, and you never get more than a handful. But it’s essential.”

Nonprofit boards would also benefit from creating a more rigorous goal-setting and measurement process, Larcker says.

The researchers offer nine recommendations to improve nonprofit board governance:

1. Ensure the mission is focused, and its skills and resources are well-aligned.

Too often, a nonprofit’s mission is too broad and/or unachievable, like ending world hunger. Narrow your mission’s focus to the skills and resources you actually have or might have.

2. Ensure the mission is understood by the board, management, and key stakeholders.

3. Establish explicit goals and strategies tied to achieving that mission.

One of the executive director’s primary tasks is to develop goals and strategies that will make meaningful progress toward achieving the organization’s mission. The board must ensure that the theory of change and the logic/business model to do so are sound.

4. Develop rigorous performance metrics that reflect those goals.

Meehan quotes Einstein, who wrote, “Not everything that counts can be counted; and not everything that can be counted counts.” Develop performance measures that are pragmatic and useful. The emerging standard of performance measurement is randomized controlled trials.

5. Hold the executive director accountable for meeting the performance metrics, and evaluate his or her performance with an objective process.

Some nonprofit boards are reluctant to establish an annual evaluation process for the executive director, particularly when he/she is also the founder. A rigorous process is necessary in and of itself but also as a basis for thoughtful succession planning.

6. Compose your board with individuals with skills, resources, diversity, and dedication to address the needs of the nonprofit.

Many nonprofits lack the core of a few members who are willing to devote the time, energy, and skills to ensure the board takes on its full responsibilities. Excellent board composition is not a conceptual challenge – it is about the hard work of finding and adding one more strong board member (and then another).

7. Define explicitly the roles and responsibility of board members.

Board members need to know what expectations are in terms of the basics like attendance and engagement. Most critically, they need to understand what their financial commitments will be, personally as well as in reaching out to others.

8. Establish well-defined board, committee, and ad hoc processes that reflect the nonprofit’s needs and ensure optimal handling of key decisions.

Many nonprofit boards overly worry about structure and process issues. All boards need governance, development, finance, and audit committees. Some may need other committees like programs/operations, marketing, etc. Temporary task forces for strategic planning or capital campaigns can also be very useful. For boards larger than about 20, an executive committee is likely required.

9. Regularly review and assess each board member and the board’s overall performance.

Strong boards use their governance committee to ensure regular evaluations of individual board members to ensure sustained commitment from each member. The governance committee must be vigilant to ensure that nonperforming members are not renewed, and that expectations are communicated to each renewing member. Don’t let term limits substitute for rigorous board member evaluation.