0.14 Chapter eleven: the importance of governance  (Page 2/6)

The importance of nonprofit boards

None of what has been discussed thus far is unique to the nonprofit sector. Corporate boards are also accountable for the long-term stability of their organiza­tions. In addition, the cycle of decline toward bankruptcy for a for-profit corporation passes through stages quite similar to those just enumerated. What makes the nonprofit situation unusual, however, is the singularly important role played by the board in safeguarding against starting down the slippery slope.

Compared to their for-profit cousins, nonprofit institutions have fewer ex­ternal forces working to exert discipline on their activities. A nonprofit tends to pursue a wider variety of objectives, many of which are unrelated to the proverbial bottom line, and so it is more difficult to assess performance. Even if perfor­mance were measurable, and quantifiable objectives set, few outside agencies have an interest in forcing a nonprofit to meet them. There are no nonprofit depart­ments in investment banks tracking the decisions of management or publishing research reports on organizational performance. Even the Internal Revenue Service devotes far less time to scrutinizing nonprofits than for-profits, for the sim­ple reason that there is so little tax revenue to be claimed.

In addition to the lack of external market forces, many nonprofits have rela­tively few internal stakeholders who possess the leverage to challenge top man­agement and the board. In the for-profit sector, owners and shareholders provide this discipline; they monitor net income and demand a return on equity. But non-profits have no owners, although certain types of nonprofit organizations have active and critical constituencies. For example, at a college or university, the board and administration must respond to the concerns of alumni, faculty, and students, all of whom have a vested interest in the institution. These kinds of institutions are watched very closely. But for the great many nonprofit organizations that, like the Society, serve a relatively narrow constituency, there are few voices to alert the board and management when things are headed in the wrong direction. For these entities, long-term success is almost exclusively dependent on the effectiveness of their trustees.

It is easy to get into trouble

When an institution has a capital base that is at risk of being eroded to finance unsustainable deficit spending, the importance of the board's oversight role grows larger still. Unfortunately for nonprofit board members, the difficulty of this role may even exceed its importance. The very essence of what justifies an organiza­tion's nonprofit status, that is, the primacy of its mission, makes it more complex to govern for the long term. A for-profit board's first obligation to the sharehold­ers is, for the most part, quantifiable. It can evaluate the success of a project on the basis of its profitability and the return on investment. But how does the Society's board quantify the importance of cataloging the collections or con­serving a particular group of paintings? When should it pull the plug on impor­tant projects that are costing more to manage than they generate? These questions defy formulaic answers.