Enhancing Nonprofit Governance through Better Information Flow to Directors

ABSTRACT.Improved governance is necessary if nonprofits are to meet their social missions. In this regard, one major issue is the influence that nonprofit chief executives have on providing information to nonprofit boards that are largely comprised of volunteers. To counterbalance the ability of a nonprofit's chief executive officer to control information reaching the board of directors, we recommend that a nonprofit board consider requiring leaders of the organization's various functions to provide operational reports directly to the board on at least an annual basis. Additionally, we recommend that a board discuss these reports directly with management members, preferably without the participation of the CEO. Implementing such a protocol should strengthen the board's ability to make decisions based on information from sources in addition to that of the CEO, improve the directors' ability to independently evaluate members of the management team, and increase the directors' understanding of the nonprofit's activities and performance.Keywords: nonprofit, governance, information flow, director, management1. IntroductionNonprofit boards tend to suffer from various corporate governance problems that have led some observers to propose that: "Effective governance by the board of a nonprofit organization is a rare and unnatural act" (Taylor et al. 1996, p. 36). The difficulties of achieving effective governance for nonprofits arise from the interaction of several factors. Directors may be appointed for reasons other than their governance expertise or business experience per se. The nonprofit itself may really want the directors it appoints for fund raising, their contacts, or to enhance the reputation of the nonprofit (Bowen 1994). Because most nonprofit directors are volunteers, the links normally found in the corporate sector between director accountability and compensation are nonexistent. When they are serving as unpaid volunteers, nonprofit directors generally face little personal risk for their decisions (Bishop 2008). Accordingly, individual nonprofit directors may simply disengage from nonprofit boards, particularly when they are denied adequate strategic information about the organization or are relegated to nonstrategic operational issues by the nonprofit's executive officer (Chait and Taylor 1989). Such a mindset is reinforced by "[t]he fact that individual trustees are rarely identified with troubled nonprofits, even in highly publicized situations ..." (Bowen 1994, p. 41).In addition to the traditional challenges of bringing a strategy into focus, establishing organization policy, selecting leadership, and dealing with operational results and finances, nonprofit boards face the challenge of integrating nonprofit directors from varied business and non-business backgrounds into a cohesive team that understands and is focused on the mission of the nonprofit (Bowen 1994). Nonprofit boards, which tend to be large, need to avoid the temptation to rely on a small executive committee to assume the powers of the entire board to make decisions, with the entire board serving only as a "forum for reporting the executive committee's decisions" (McFarlan 1999, p. 74). Failure to do so is an abdication of the directors' oversight responsibility as this responsibility requires each director to use his judgment to make informed decisions.Members of nonprofit boards need to understand the essential differences between nonprofit and for-profit organizations. In particular, nonprofit directors need to appreciate the fundamental importance of the nonfinancial mission and evaluation of the nonprofit's programs to meet that mission, the nature of raising funds for nonprofits, and often, the challenges faced by large boards trying to make long-term decisions (Epstein and McFarlan 2011). Nonprofit directors from the business world may fail to appreciate that non-financial results are more important than the financial results of a nonprofit. …