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Jan 28, 2010

Let’s improve board performance of nonprofit organizations by setting understandable minimum performance criteria

By: Paul Ebeltoft

Boards of directors for not-for-profit organizations are often elected, congratulated, and pushed off the end of the boardsmanship dock. The last thought of many of these hapless souls before they hit the icy water of reality is, “What am I supposed to do now?”

Even excellent nonprofits often fail to spell out in real life terms exactly what a member of their board needs to know and needs to do. Spending precious training dollars to teach the newest iteration of governance theory, many overlook the basics.

When it comes to board member training it is wise to remember that a board’s failure to elevate its governance practices from good to great is seldom grounds for legal liability. A board’s failure to know and exercise its fundamental responsibilities, on the other hand, is often the harbinger of legal disaster.

Sadly, the standard rubric used to teach the fundamental role of board members in nonprofit enterprises has not changed in some time. Board members are taught that they owe their entity the Duty of Care, the Duty of Loyalty and the Duty of Obedience. Sounding much like marriage vows, these hackneyed phrases are not particularly helpful to the modern director or trustee; implying that their duty is fulfilled by careful adherence to whatever is decided by management or by fellow board members.

I propose a new set of more effective training tools. I believe that a trustee’s or director’s minimum legal obligations be fulfilled by meeting her Duty of Preparation, her Duty of Evaluation and her Duty of Perpetuation.

Let’s look at one of these in greater detail, the Duty of Preparation. How does it fundamentally differ from the older, and I believe less helpful, Duty of Care? The duty of care describes a boilerplate legal term that, for board members in North Dakota is codified at NDCC §10-33-45. In sum, the law exhorts the director to exercise the "care that an ordinarily prudent person in like position would exercise…” What does this mean, though? What is the minimum level of performance required in the boardroom?

First, it does not mean that it is safe to do what a board member might readily do in everyday life: act like fellow board members act or rely on someone else to take care of the tougher issues. It is no defense to a lawsuit to say, “I am as careful as the next guy” if the "next guy" is not acting competently. It is no defense to a lawsuit to say “I thought that my fellow board members were watching out for that.” No. The duty to be prepared for one’s position is equal for all in similar positions. Each board member assumes the duty and each must attain the level of competence required to meet it.

I suggest that to be prepared to perform competently as a board member means more today than many board members think it does. Post Enron, post WorldCom, post Washington Mutual, post Lehman Brothers, it is likely, even for small nonprofits, that the standard is no longer a local one. It is unsafe to assume that an “ordinarily prudent person” in a “like position” no longer compares directors to each other or directors in a small, rural hospital, for example, to the performance of those in another small, rural hospital. Rather, the standard for competence of a board of a nonprofit health care organization operating in a rural setting is more likely to be that of a board responsible for multi-million dollar budgets, or a board acting as broadly as the health-care competitive market in the health care environment served.

The Duty of Preparation is, I think, more adequately descriptive of one duty owed by a director of a nonprofit organization than the Duty of Care. Preparation implies the active duty to learn and the duty to understand, not the passive obligation to watch over. A prepared board member is one who carries into the boardroom all the intellectual gear that she needs to comprehend, at a useful level, what is going on in the organization.

After a period of training provided by the organization, I propose that nonprofits use a test of competence to determine if a board member is prepared for her duties or needs more help. The test can take many forms encompassing different core aspects of the organization. One, related to fiscal strength, asks each of your board members to answer the following questions:

• To date has the organization been profitable enough to support its operations?
• If not, how much is the shortfall?
• What seasonal, periodic or systemic organizational performance metrics might account for the current fiscal situation?
• How do they compare to year-over-year data for a reasonable look-back period?
• What are the fiscal year-end projections for the organization?
• Do you think that they are achievable? Why?

While daunting from the point of view of a traditionalist, I believe today’s board member needs this type of skill-set. If the organization is unable or unwilling to provide help in achieving this level of competence, the dedicated board member can learn a great deal from self-study. The Internet offers some excellent resources. One of my favorites is www.boardsource.org