Nonprofit Organization’s Governance
A Nonprofit organization’s governance relates to a broader range from perception, structure, legal context, accountability, quality, effectiveness, social capital and ethics. The role of governance in a nonprofit organization’s performance is inevitable. Funders and donors usually evaluate organization’s governance and its correlation to accountability, trust, social impact and performance prior committing or allocating money to the organization. Making policies, enforcing compliances, and implementing quality assurance are part of the board of directors’ duties to establish proper governance within the organization. Additionally, fiscal policies and financial reporting as per laws and regulations require knowledge and strict compliance framework to warrant nonprofit organization’s mission efficacy and accountability. A few governance factors will be reviewed in this study, followed by integrative general recommendations for a nonprofit organization to better understand and apply governance across the organization.
The first step in nonprofit organization’s governance analysis is to understand what exactly governance is. Seel (2018) defines governance as an act of nonprofit board of directors who are legally responsible to ensure the organization is achieving its mission, and its operations are financially and legally bound. Additionally, nonprofit organization’s governance includes a set of internal and external mechanisms designed to ensure employees are working to fulfill the organization’s mission, fiduciary responsibilities and misuses of nonprofit assets (Harris, Petrovits, & Yetman, 2015). Cornforth (2012) defines governance as the “systems and processes concerned with ensuring the overall direction, control, and accountability of the organization.” Governance practices, therefore, are those essential duties, functions, and competencies related to this direction, control and accountability (Fredette & Bradshaw, 2010). Consequently, good governance, that starts with the board of directors, is about decision-making processes to advance nonprofit organization’s mission and provide strategic leadership to the organization. In summary, governance is an integrated process to plan, control and monitor, comply, and execute the organization’s mission.
Governance starts with board of directors. “The board’s role and legal obligation is to oversee the administration (management) of the organization and to ensure that the organization fulfills its mission.” (Rosenthal, 2012). The board of a well-governed nonprofit organization will perform the following (Rosenthal, 2012):
- Formulate key organization policies and strategic goals, focusing both on near-term and longer-term challenges and opportunities.
- Oversee matters critical to the health of the organization.
- Authorize major transactions or other actions.
- Long term resources planning considering investments in light of future evolution and planning for future capital needs.
- Evaluate and assist to mitigate risks.
- Mentor senior management, provide resources, advice and introductions to help facilitate operations.
Nonprofit governance is not only perceived instrumental ingredient in the organization’s effectiveness but is also highly dependent to the board of directors. Herman and Renz (2008) state nonprofit organization’s effectiveness is directly correlated to the efficacy of the board of directors. Green and Griesinger (1996) found most nonprofit organizations lacked commitment to board member training and development. Furthermore, nonprofit board members are not typically financially compensated. They are volunteers who often do not have extensive experience in organizational governance (Seel, 2018). The lack of time available for volunteers, combined with little board member development, contribute to a sector administered by individuals who have minimal relevant knowledge (Aulgur, 2016). As the majority of nonprofit organizations have no direct governance guidance other than the paradigm established by the organizations’ boards of directors, board members development seem a requirement to increase capacity and establish a working board that potentially leads to a better organization governance.
Governance and Accountability:
Accountability is simply about trust and is well perceived as more accountability is better for an organization. Nonprofits’ organizations are expected to be accountable to various actors. Ebrahim (2010) defines accountability as being held to account by external actors and standards, as well as about taking internal responsibility for actions. Nonprofit organizations face multiple and sometimes competing accountability demands from funders, clients, internal resources and mission for purposes such as finances, governance, performance, and mission (Ebrahim, 2010).
Ebrahim and Weisband (2007) identify four core components of accountability:
- Transparency, which is about collecting information and making it available and accessible to public.
- Justification, which requires providing clear reasoning for actions and decision.
- Compliance, executed through monitoring and evaluation of procedures and outcomes.
- Enforcement, for shortfalls in compliance, justification, or transparency.
Consequently, board of directors sets policies, develops procedures and applies mechanisms to enforce the organization’s accountability and prioritizes its demands as part of organization’s governance. Ebrahim (2010) suggests the following mechanism to address nonprofit organizations accountability:
- Disclosure statements and reports; mainly required by law, it enables some degree of accountability to stakeholders.
- Performance evaluation; measures the organization’s effectiveness and assesses its impact.
- Self-regulation; develops and enforces a code of behaviour and performance.
- Participation; involves with public and communities outreach.
- Adaptive learning; regular reflections to progress towards achieving mission.
A good board enables the organization’s executives and senior leadership to adhere to the accountability mechanisms. Then, it takes supervisory role to perform audits to ensure compliance and evaluate effectiveness.
Nonprofit organization’s performance and effectiveness have been the subject of studies and researches. Scholars reported the correlation of organization efficacy with its governance quality. Knowing governance quality attributes can lead the boards towards increasing performances both at board’s and organization’s levels. Willems et al. (2012) find external stakeholder involvement, consistent planning, structures and procedures, continuous improvement and leadership team dynamics are subdimensions of governance quality. Board members can construct expertise in these areas to increase quality of organization’s governance.
Governance quality impacts funders and donors attitudes and decisions. Harris, Petrovits and Yetman (2015) find donations and government grants are positively associated with governance quality including formal written policies, independent audits and audit committees, executive compensation, board independence, management attributes and accessible financial reports. The interesting finding in the research is compensation policies examination that can help to assure donors that their donations are not being used to fund excessive salaries (Harris, Petrovits, & Yetman, 2015).
In addition to the board members’ knowledge and experience, which are impacting organization’s governance, the size and diversity of the board influence good governance. Larger boards are more likely to diversify knowledge and necessary expertise that may be led to a better governance. However, very large boards incur disengagement risk and foreseen less effective in performing duties. Consequently, there is an optimal number of board members to warrant good governance for the organization (Harris, Petrovits, & Yetman, 2015). Board diversity not only from policies, practices, inclusion behaviours perspectives, but also from age, gender, and ethnic backgrounds angles will improve nonprofit organization’s governance (Buse, Bernstein, & Bilimonia , 2016). Inclusive behaviours are the actions of board members that empower members from minority and marginalized communities to feel respected and engaged in the organization’s governance (Fredette & Bradshaw, 2012). Such behaviors include “the intra-group communication, influence and power interactions that the dominant members of small groups engage in consciously or unconsciously which signal the authentic inclusion of diversity.” (Bernstein & Bilimoria, 2013).
Governance Effectiveness and Social Capital:
Social capital is defined by OECD as “networks together with shared norms, values and understandings that facilitate co-operation within or among groups.” (n.d., 2014). Nonprofit organizations are formed by groups of individuals who share the same vision to impact the society by reaching out to communities to resolve problems and uplift the quality of lives. In other words, the organization’s impact is to increase social capital based on perceived mission within the organization and in the communities.
Fredette and Bradshaw (2012) state social capital “captures aspects of context-specific trust, competence, and collective awareness that provide social infrastructure needed to share and apply information, mobilize human capital and expertise, and maintain a sense of collective togetherness, solidarity, and relational closeness.” Social capital, therefore, is becoming a critical resource for the board of directors that face political challenges, high stakes problem and voluntary participation. Three facets of social capital: trust, shared vision and information sharing impact on board’s capacity to provide effective oversight, strategic planning, and leadership, which ultimately result in governance effectiveness (Fredette & Bradshaw, 2012).
Governance and Ethics:
Nonprofit organizations demand continual enhancement of ethics and governance to perform the organization’s mission and prevent any fraudulent or unethical activities or behaviours. Ethical principles of nonprofit governance offer additional insights and perspectives to nurture a trustworthy and progressive environment that employees and volunteers deliver impact as per mission. Fiduciary duties, mission and financial accountability comprise an ethical framework for managerial decision-making. (Blodgett, Eonas , Melconian, & Peterson , 2014). Adopting a set of ethical principles, named “code of ethics”, to guide nonprofit organization’s activities, decision-making process, and employees behaviours safeguard the organization from any unethical behaviours or decisions. Board of directors can create such an ethical framework to govern the entire organization. This ethical framework promotes accountability as honesty, integrity, transparency and equity are values perceived in nonprofit organizations (n.d., 2020).
Nonprofit organization’s governance influences the entire organization’s activities and performance. The organization’s effectiveness and accountability originate from proper governance that board of directors establish. The board of directors knowledge, expertise, and diversity influence the quality of board performance and subsequently impact the organization’s governance. The following recommendations are made to nonprofit organizations as a result of the governance analysis conducted in this study:
- Increase diversity and capacity of board members:
Nonprofit organizations benefit from board members knowledge, diversity and leadership qualities. Diversity from gender, age, ethnic, expertise, and experience perspectives increases the boards capacities. Leadership trainings for the boards and employees add more values to the organization’s efficacy as demonstrated in this study: more qualities among the board members lead to better governance and better governance leads to more revenue stream, accountability and efficiency. It is imperative to utilize the services of qualified consultants in the areas that the board does not have knowledge or experience.
- Develop accountability mechanism:
A dynamic accountability framework and mechanism are developed by the board of directors to meet the internal and external stakeholders requirements. Audit processes and audit committee must oversee the entire accountability framework and mechanism to identify, feedback and resolve issues and non-compliances. The consequences of any non-conformances should be evaluated and reported to the right stakeholder to prevent or minimize the impacts.
- Advocate the organization’s robust governance:
Any governance advocacy and presentation will leverage the organization’s social impact. It will assure the funders and donors that proper processes and scrutiny are in place to achieve the organization’s mission and their funds and donations will be spent on the cause with process driven effectiveness.
- Self-regulation as code of ethics upgrade:
Review and improve the code of ethics regularly to ensure it meets the organization ethics needs. A continuous communication channel to be set to share the ethics code updates with the employees. The board and senior leadership must start adhering to the code of ethics as role models for the employees.
- Governance risk registry:
Setting up a governance risk register to identify associated risks. The board needs to review the risks regularly and come up with appropriate mitigation plan. By applying this proactive approach, the board adds more fluidity to the organization’s governance and improves organization’s resilience to turn the risks to potential opportunities.
Governance is the means of running a nonprofit organization to perform per its mission. It influences the organization’s performance, effectiveness, and mission fulfillment. It can turn an organization to a high impact nonprofit entity, or it can cause the organization to fail if it does not play its governing role well. Board of directors are legally responsible for the organization’s governance to meet the internal and external stakeholders requirements. There are certain qualities and processes analyzed in this study that will improve the board of directors’ performance and ultimately the organization’s governance. Diversity, transparency, justification, compliance, enforcement, evaluation, self-regulation, participation, adaptive-learning, social capital and ethics are the most prominent factors that build up governance foundation in a nonprofit organization.
Aulgur, J. J. (2016). Governance and Board Member Identity in an Emerging Nonprofit Organization. Administrative Issues Journal, 6(1), 6-21.
Bernstein, R., & Bilimoria, D. (2013). Diversity perspectives and minority nonprofit board member inclusion. Equality, Diversity and Inclusion: An International Journal, 32(7), 636-653
Blodgett, M. S., Eonas , A. G., Melconian, L. J., & Peterson , J. H. (2014). Enhancing Business Ethics or Governance Curriculum: Teaching Nonprofit Organization Ethics. Journal of Academy of Business Education, 18-37.
Buse, K., Bernstein, R. S., & Bilimonia , D. (2016). The Influence of Board Diversity, Board Diversity Policies and Practices, and Board Inclusion Behaviours on Nonprofit Governance Practices. Journal of Business Ethics, 133, 179-191.
Cornforth, C. (2012). Challenges and Future Direction for Nonprofit Governance Research. Nonprofit and Voluntary Sector Quarterly, 41(6), 1117-1136.
Ebrahim, A. (2010). The Many Faces of Nonprofit Accountability. Harvard Business School, 1-33.
Ebrahim, A., & Weisband, E. (2007). Global Accountabilities Participation, Pluralism and Public Ethics. Cambridge: Cambridge University Press.
Fredette, C., & Bradshaw, P. (2010). From Diversity to Inclusion: A Multi-method Examination of Diverse Governing Groups. Annual Conference of the Association for Research on Nonprofit Organizations and Voluntary Action. Washington, DC.
Fredette, C., & Bradshaw, P. (2012). Social Capital and Nonprofit Governance Effectiveness. Nonprofit Management and Leadership, 22(4), 391-409.
Green, J., & Griesinger, D. (1996). Board performance and organizational effectiveness in nonprofit social service organiation. Nonprofit Management & Leadership, 6, 381-402.
Harris, E., Petrovits, C. M., & Yetman, M. H. (2015). The Effect of Nonprofit Governance on Donations: Evidence From Form 990. The Accounting Review, 90(2), 579-610.
Herman, R., & Renz, D. (2008). Advancing nonprofit organizational effectiveness research and theory. Nonprofit Management & Leadership, 18(4), 399-415.
n.d. (2014, March 14). Social Capital. Retrieved from OECD: https://stats.oecd.org/glossary/detail.asp?ID=3560
n.d. (2020). Code of ethics for nonprofits – Why your nonprofit may want to adopt a statement of values. Retrieved from National Council of Nonprofits: https://www.councilofnonprofits.org/tools-resources/code-of-ethics-nonprofits-why-your-nonprofit-may-want-adopt-statement-of-values
Rosenthal, L. (2012, April 15). Nonprofit Corporate Governance: The Board’s Role. Retrieved from Harvard Law Schoold Forum on Corporate Governance: https://corpgov.law.harvard.edu/2012/04/15/nonprofit-corporate-governance-the-boards-role/
Seel, k. (2018). Management of Nonprofit and Charitable Organizations in Canada. Toronto: LexisNexis.
Willems, J., Huybrechts, G., Jegers, M., Weijters, B., Vantilborgh, T., Bidee, J., & Pepermans, R. (2012). Nonprofit Governance Quality: Concept and Measurement. Journal of Social Services Research, 38, 561-578.