Feb 24, 2010

Defining a nonprofit board member's Duty of Perpetuation

By: Paul Ebeltoft

Last month, I postulated that members of nonprofit boards of directors are often unprepared for their duties. I opined that the standard rubric used to teach the fundamental duties of board members to nonprofit enterprises is old and unhelpful. Last month, I proposed recasting the duties of a trustee or director into a more helpful framework – the Duty of Preparation, the Duty of Perpetuation and the Duty of Evaluation. I proposed that understandable, minimum performance criteria be set for each and, for the Duty of Preparation, gave an example involving one core aspect of any organization – its financial health. This month, I will explain some of the basics of my proposed Duty of Perpetuation.

A trustee’s or director’s fundamental obligation to her nonprofit enterprise, I believe, is to assure that it continues successfully. The careful selection of a CEO is pivotal to performance of that duty. Nonprofit boards of directors jealously guard their selection prerogative. Sadly, they are often not aware of the minimum requirements of a good selection process.

I believe that in fulfilling its Duty of Perpetuation a minimum, understandable performance criterion for the board is to assure that it follows sound principles of human resource management in its advertising, screening, interviewing, data collection, and offer and post offer procedures.

If the organization has an HR department, the board’s minimum obligation includes inquiring of the department head to determine her depth of experience and competence in hiring at this level. A PHR or SPHR certification by the Society for Human Resource Management (SHRM) is one solid indicator of competence. SHRM’s excellent website www.shrm.org can provide valuable help to the inquisitive board member. More in-depth resources are accessible to SHRM members only. If inquiry satisfies the board that its own HR professionals can help conduct a fair and legal search, the board should bring a designated HR person to the table. Negotiate and sign clearly stated search duties for her. Include in the stated duties parameters for her consultation, at her own discretion, with corporate and outside counsel.

If the nonprofit is large enough, its board may hire a headhunting firm. It is not safe to assume that the firm’s consultant assigned to your organization’s search is “HR savvy” or that the headhunting firm itself has solid procedures to assure compliance with all legal requirements of an open and competitive search. It is not safe for the board of directors to exclude the company’s own HR department in favor of the headhunting firm. Instead, before hiring the consulting firm, the board must examine whether the firm has written HR policies and procedures in place that will guide the assigned consultant on each step of the search. The board must determine how the consultant will interface with inside or outside counsel and the organization’s HR department. If the board cannot clearly determine these policies and these relationships, it should look for a new firm.

The board member only partially meets her duty of perpetuation by competently creating the process to select an excellent CEO. I suggest that the duty of perpetuation also includes the duty to recruit competent new board members. Again, many nonprofit boards have processes that do not meet minimum standards. These processes are often unexamined (“The process has to be good – we got you on the board didn’t we?”), often created in by-laws that poorly articulate how the process works (“The by-laws require a nominating committee. No, there are no criteria for selection to the committee. We just ask around.”), and in most instances are anachronisms, created for a simpler day. In far too many instances, there is no process at all.

I believe, at minimum, the process for board member selection must be one that is complete in itself, that all of the organization’s stakeholders know and understand and that legitimizes the board by seeking those who have the skills to provide for governance.

To the extent that the board member selection process fails these minimum criteria, does the principal of negligent entrustment apply? I think that it might. One doesn’t entrust one’s car to someone impaired by alcohol with impunity. Should one entrust a nonprofit hospital, for example, to a director or trustee without the intellectual horsepower to do the job? One doesn’t entrust one’s car to a person who has never driven. Should one entrust a nonprofit hospital to a director or trustee who is left to learn on their own and on-the-job?

The Duty of Perpetuation, therefore, ties directly to the Duty of Preparation. As I stated last month, “[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 board selection process, therefore, should provide, at minimum, orientation and training in core functions of the nonprofit organization and periodic means to determine whether the training has worked.