How Your Board is Elected Can Matter
There are as many ways to configure a board as there are boards. So in Alaska, we may have as many as 7,000 variations of how a governing body – also known as a board of directors, a board of trustees, a board of governors, or just a board – could be structured. However, for the purpose of this article we will put all of these alternatives into four categories.
The Elected Board is where an organization with members allows those members to elect the board. We see this structure most often with associations. So most 501(c)(6) nonprofits, as well as electrical co-ops, credit unions, labor unions, and tribes, use this model. However, unique to Alaska, a large number of charitable nonprofits or 501(c)(3)’s also have member-elected boards. It seems that 20-30 years ago local attorneys advocated for all nonprofits to become little democracies. With elected boards, members with a desire to serve declare their candidacy and “run” for a seat. Therefore, these boards get people who think they have the time, commitment, and skills to serve – even if they don’t.
The Appointed Board is also common in Alaska, but much less so outside our state. These boards have members who are appointed by another institution. For instance, most of the regional Native nonprofit boards are appointed. With most of those organizations, a tribe appoints or elects an individual to serve on its regional nonprofit board. However, this model is not just seen in Native organizations. Many of the regional economic development organizations have appointed boards, as do other business associations. The Denali Commission has an appointed board. Advisory boards and commissions are almost always appointed. These members are individuals who are members of, or represent an institution in which the board or commission has an interest. Problems arise here when the interest of the board or commission may conflict with that of the institution the board member represents. Which organization will the board member be loyal to – the original institution to which the board member belongs, or the board or commission to which he or she was appointed because of that original membership?
The third model is the Prescribed Board. Some funders, especially the government, will mandate what kind of person can be elected to serve. We see this primarily with nonprofits who serve the poor or those with disabilities. Nonprofits such as mental health organizations, community health centers and housing organizations have requirements for a certain percentage of board members to be consumers of services. While the board may self-select which consumer they ask, they can only ask someone who meets the criteria of the funder. (It’s possible to see how we can have so many variations on such a simple theme.)
The final model is what is often referred to as the Self-selected Board. This model is most common with charitable nonprofits. Self-selected boards (or self-perpetuating boards) are nominated and elected by the current board. Some organizations using this model may ask for nominations or confirmation from constituents, but the norm is that the board, through a nominating process, has identified individuals they think would be the best to serve. If they include constituents in the process, they will strongly suggest a slate of nominees they expect to be endorsed. Most often, the board just nominates and elects with no participation from others.
The purpose of this article is to discuss the advantages or disadvantages of each of these models. Does one best model exist? Like all advice from any consultant, we say: “it depends.”
First, not having a board is not an option. How that board is selected is outlined in the organization’s bylaws.
It is always good to remind people of the primary legal responsibilities for anyone who chooses to serve on a board – either nonprofit or for-profit. The law states: “A director shall perform the duties of a director- in good faith, in a manner such director believes to be in the best interests of the corporation and with such care including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.”
Simply stated this means that when you agree to serve on a board, you should be a reasonable, prudent person with a dedication to making decisions that are in the best interest of the organization. This language also reminds board members that they are to engage in “reasonable inquiry” before making decisions. We assume “reasonable” means that one should research issues and ask for other’s opinions before deciding what is in the best interest of the organization.
The law also outlines the Duty of Care and the Duty of Loyalty as two clarifying guidelines for board service. The Duty of Care states that members should monitor and seek to be reasonably informed on the mission, programs, and finances of the organization. The Duty of Loyalty is adhered to when board members understand their authority. In addition, it expresses that when speaking on behalf of the organization a director should use “one voice,” which is the consensus of the board. It also addresses a concern that many Alaskans share – the need to avoid conflicts of interest.
What the law intends is that board members serve the purpose and the priorities of shareholders of the corporation. In the nonprofit world, that would mean the constituents, communities, and funders. When a board is asked to be fiduciary, it means that board members should act in trust for a third party – their “shareholders.”
One more issue affecting the benefits of any board model is funding. In the spring 2009 Stanford Social Innovation Review, William Landes Foster, Peter Kim, and Barbara Christiansen provide details for anyone who wants to understand various funding strategies in their excellent article “Ten Nonprofit Funding Models.” However, to keep things less complex for this article, we will use two basic funding models – one where the nonprofit’s income is primarily philanthropic/charitable, and the other where a majority of income is earned.
While anything is possible, we have not identified a nonprofit that has 50% earned revenue and 50% charitable income. We typically see nonprofits with a dominance of either charitable or dominance of earned revenue.
Charitable support comes from corporations, foundations, and individuals. For 501(c)(3)’s this can be a predictable and sustainable revenue stream. While there is no exact formula, we suggest that a majority of donations should be from individuals, with corporate and foundation support used to supplement an individual donor emphasis. It is important for all board members of such institutions to understand that when nonprofits ask anyone else for money, board members should be the first to give.
Nationally, earned revenue comprises over 65% of charitable nonprofit income. Nonprofits earn revenue when they provide a service or product of value to a customer. Memberships are earned revenue. Fees for service are earned revenue. Girl Scout cookies generate earned revenue, as does thrift store sales, ticket sales for an arts performance, and insurance for health care. Customers for nonprofits can include corporations, individuals, and even governments. Of these, individual customers are usually the most loyal and predictable, especially since the federal government is re-examining how and where it spends money.
With these funding concepts in mind, we are ready to examine how each model responds to the realities of the law and of funding.
The Elected Board – When it comes to legal requirements, elected members are often in conflict. Board members have to “campaign” to get elected. Like elected officials, they make promises about what they intend to do if elected. The fact is, however, that their only power once they win is their vote and their ability to persuade other members to see reality their way. No member of any governing body can make things happen without the consent of the majority. Therefore, members who elect a board, in the best case, should find individuals with diverse experience and viewpoints because such diversity leads to better governance. However, they also should judge the candidate’s ability to persuade and compromise. Governing bodies without compromise fail their constituents. Think about Congress during the past months.
An elected board can also have difficulty with revenue generation. If their dominant strategy is charitable giving, elected members must be aware of their need to be philanthropic in order to do their duty. Often I find that they are willing to serve, but in their heads that means giving their time, not money.
In addition, since many nonprofits with member-elected boards have dues as one of their primary strategies for earned revenue, board members can experience conflict of interest. As a member, when considering dues or rate increases they are raising rates for themselves, which many times they are unwilling to do. If that conflict prevails, an organization could be crippled in its ability to generate sufficient funding. This is one of the major dilemmas with nonprofit associations and national organizations with local affiliates.
Therefore, elected boards, in our opinion, are not always a good fit for nonprofit organizations – especially charitable nonprofits. We could discuss the merits of democracy. In theory people have a say in their governance. Nevertheless, with nonprofits, democracy may not be the best approach. It may be better to have a republic where the best members to serve the interest of the corporation are identified and asked to serve. If your board is elected, pay attention to conflicts of interest and ensure the board speaks with one voice. When the right members are elected, this model can work.
*At the end of this article we will provide tips that can increase the effectiveness of whichever model you use.
The Appointed Board – Appointed members have many of the same liabilities as elected members. However, they have an additional challenge with conflicts of interest because of “dual loyalty.” These members may serve on the board of the entity that appoints them to the board of another organization. The law states members should make decisions in the best interest of the “corporation.” So the question becomes, which corporation are they loyal to – the appointing or the appointed?
The appointed board has the same conflicts when it comes to revenue generation, either charitable or earned. If someone serves on two or more boards, their ability to support each at an adequate level could be diminished. In addition, if one is appointed to serve, what about the basic requirement of all good board members – education and passion for the mission?
As with elected boards, appointed boards exist that have overcome these conflicts by learning how to maintain their focus.
The Prescribed Board – When consumers serve on a board, they have an inherent conflict of interest. One example is when a member of a housing authority board is also a resident. Since the board will have the need, from time to time, to adjust rental rates, those board members will have to overcome their own self-interests for the sake of the organization. When any person is on a fixed income, this decision is not easy. As a result, the organization may have difficulty with its primary revenue stream, which for most housing organizations is earned revenue.
Like the appointed and elected boards, prescribed boards will have issues relating to personal donations, if their funding is primarily philanthropic.
The Self-selected Board – Most charitable nonprofits use this model. After expressing our concern about both the legal and financial conflicts that can occur with the other models, some may think that a self-selecting board is the way to go. It is probably the model that reduces the risks we mention with the other models, but good governance is hard to achieve even in the best circumstance. Self-selected boards can also have conflicts of interest or can have members who are unwilling to do what’s necessary to secure financial resources.
Most nonprofit boards that prioritize earned revenue don’t make a profit. Without generating more revenue than expense, nonprofits can’t be sustainable. We have seen many board members who are astute in business, but become “business stupid” when they serve on a nonprofit board. They refuse to make the hard decisions needed to ensure that an earned revenue model makes a profit to further the mission. “Nonprofit” is not a business strategy.
Also, if the primary income is charitable, too many board members think that raising money is a staff function. While staff plays a role in raising money, all fundraising must be volunteer centered and led until the infrastructure for sustainable fund development is in place. Such infrastructure can take years to develop. Until then, board members and their friends must be willing to roll up their sleeves and ask others for support if they want the organization to become sustainable on charitable giving.
The tips we offer below for minimizing these negative variables are the same regardless of the model. They are the points we have advocated for years.
Every nonprofit needs a board development process.
Boards need to become strategic in recruiting and building the capacity of their members. A board development process includes:
- A written job description for members – A board job description should outline the requirements for service, the responsibilities assumed by members, and their accountability. It should make sure that each member takes his or her board responsibilities seriously. We suggest the description be formatted as a personal contract between the member and the nonprofit and that members sign the contract every year to affirm their willingness to comply. Such contracts can also accommodate some of the new 990 requirements to confirm that board members have read and understand important policies, like the conflict of interest policy.
- A strategic board recruitment process – Like fundraising, the worst time to ask for someone’s time, (or money), is at the last minute. People need time to adjust to personal engagement. The first step is for the board to identify the characteristics of individuals who would best serve the interest of the nonprofit. Even appointed, elected, and prescribed boards can suggest that someone with certain characteristics run or be assigned to a seat. The next step is to create a board recruitment matrix that outlines those characteristics, terms, and other data that could be useful when thinking about potential members. Finally, once identified, the board should have a strategy for how it will cultivate prospects over time – to increase the likelihood that when asked, a prospect accepts.
- Ongoing orientation and training process – All board members, even those who have served on multiple boards for years, should receive information on their roles and responsibilities. Our experience at Foraker is that people who have served on boards the longest time are the most appreciative of such sessions. All new members should participate in an initial orientation where they review the mission, programs, finances, and policies in depth. Experienced members can be used as guides for new members until the new members feel “in the loop.”
- Board evaluation process – Boards should take seriously their role as their CEO’s partner. One of those responsibilities is to provide at least an annual review of what that CEO has done well, and opportunities for better service. At that time, the board should ask for equally candid feedback from their CEO about their performance. This could include specific information about individual members the CEO may have had difficulty with or more general information about the board’s support. In addition to this 360 approach, the board should engage in ongoing, at least annual, self-assessment. The board job description is a good tool to use to begin this process.
Becoming a high performing board is not a destination, but a journey. As soon as we hear a board proclaim: “We are doing ‘it’ all right,” we expect a stumble or two. A board development process helps. Understanding good governance based on how your board is elected can also help. The bottom line is that we support, at a minimum, getting the board to function, as the law requires, and then striving toward a vision of becoming a high performing board.
Finally, research is conclusive – an effective board continues to be the best indicator of organizational resilience.