How do nonprofit board directors compare to corporate board directors?
When tallying the differences between for-profit board director responsibilities and those of nonprofit board members, there are noticeably more similarities than differences. However, where there are differences, they are significant and of great importance on both sides. Regardless of the type of board, two things stand out as being primary indicators of whether the organization is successful — getting a good quality board and striving for the best possible governance practices. The following is a breakdown of board service and what it looks like for nonprofit board members and for-profit board members.
How Nonprofit Board Directors Compare to Corporate Board Directors
Purpose
The main purpose of for-profit and nonprofit entities is starkly different, but they also share one important similarity. For-profit corporations serve their shareholders, and board directors are accountable to them. Nonprofit board members serve the members of their organization, their cause and their communities.
What unites nonprofit and for-profit organizations regarding their purpose is that they both have a clearly stated mission and core values, a desire to practice good governance, and a willingness to change and adapt as often as they need to.
Governing Documents
The governing documents for nonprofits and for-profits are essentially the same, though they may be worded a bit differently. Both entities have articles of incorporation, bylaws, and descriptions of the duties and responsibilities of the board, individual directors and committees. Governing documents list the name of the organization, how it’s governed and how to amend the bylaws. The bylaws define how boards give formal notice of meetings, including annual and special meetings. In addition, the bylaws state the necessary voting percentages and the definition of a quorum. Both types of boards develop written policies for director independence, conflicts of interest, codes of ethics, confidentiality and indemnification.
Fiduciary Duties
Board directors for all entities have basic fiduciary duties. They include Duty of Care, which means that they must act as a reasonable and prudent person would under the same circumstances. The Duty of Loyalty is another important fiduciary duty, which means that board directors must place the interests of the organization before their own. There are two other fiduciary duties that aren’t as commonly known. One of them is the Duty of Candor, which means that boards must disclose material facts in a timely manner. The other is the Duty of Confidentiality, which means that board directors shouldn’t disclose sensitive or confidential information.
Nonprofit board members have an extra fiduciary duty, which is the Duty of Obedience. This duty means that board directors must remain faithful to and supportive of the nonprofit’s mission and its organizational goals.
A breach of any of these duties may subject nonprofit board members to personal liability and/or a call for dismissal.
Board Duties
Most of the basic board duties for nonprofits and for-profits are essentially the same. Many of these duties include:
- Hiring, firing and evaluating the CEO or executive director and setting their compensation
- Establishing an operating plan
- Ensuring that financial statements are accurate and timely
- Safeguarding and allocating financial resources
- Ensuring that management’s actions are in the best interests of the stakeholders
- Ensuring that policies are in keeping with legal and ethical compliance
- Protecting the organization’s reputation, especially during times of crisis
- Communicating the corporate culture
- Serving as ambassadors of the organization
- Providing guidance to the CEO
- Overseeing the strategic plan
There is one other thing that unites nonprofit and for-profits under managing board business. It has less to do with board duties and more to do with how the board manages its duties. Most nonprofit and for-profit corporations find it helpful to use a board portal or board management software system to help them carry out their board duties. The complexity of their responsibilities makes it almost a necessity in today’s climate.
Board Composition, Tenure, Size and Compensation
All boards should continuously recruit and maintain a capable, qualified board. Best practices encourage boards to seek independent candidates who bring diversity of race, religion, ethnicity, age, gender, skills and perspectives to the board.
Best practices also suggest that boards serve their organizations best when they refresh the board from time to time. Many for-profit boards have a mandatory retirement policy between the ages of 70 and 75. Nonprofit boards usually allow board directors to serve indefinitely. Both types of boards may limit the number of terms directors may serve in succession.
For-profit boards tend to keep their numbers tightly between 10 and 15. Nonprofit boards are often larger than for-profit boards — sometimes as much as five times larger.
Board directors of for-profit boards are often retired senior executives. For-profit board directors receive compensation for their duties, which may come in the form of cash, corporate stocks, stock options or some combination of them. Nonprofit board members typically serve as volunteers, and they’re usually required to give some amount in personal giving. Nonprofit and for-profit board directors usually get reimbursed for travel and personal expenses, although in small nonprofits, board directors sometimes pay their own expenses and use them as a tax write-off.
Board Director Attendance and Frequency of Meetings
The rule of thumb for all boards is to meet as frequently as necessary to thoroughly attend to the organization’s business.
On average, for-profit boards meet about five to seven times per year, with another three or four meetings via teleconference. For-profit board directors are expected to attend all board meetings with few or no exceptions. In fact, regulations require public companies to disclose whether any of their board directors have less than 75% board meeting attendance.
By contrast, nonprofit boards may meet as frequently or infrequently as necessary to get their work done. As nonprofit board directors don’t get compensated for their time, there are no requirements for attendance and no pressure if they miss meetings.
Board Committees
There are similarities and differences in board committees for nonprofit and for-profit corporations. Both types of organizations usually form audit, compensation, nominating and governance, and executive committees. The committee charters outline the committee’s duties and responsibilities. Most of the board’s work occurs in committees.
One of the differences between nonprofits and for-profits is that for-profit boards tend to have fewer committees, whereas nonprofit boards tend to have many committees.
Board Self-Evaluations
Public companies are required to evaluate their boards annually. It’s considered best practice for boards to evaluate themselves as a matter of good governance, whether it’s required or not. Board management software systems such as Governance Cloud offer an online tool that streamlines the process for D&O board assessments.
Successful Nonprofit Boards Pave the Way for Successful Organizations
Nonprofit and for-profit boards also share some key similarities along the road to success. Successful boards practice clear communication. They regularly reinforce their board directors’ expectations and obligations. High-achieving boards foster a supportive, respectful environment and use trusting relationships as the basis for challenging management and addressing complex and difficult issues. Conscientious boards of all kinds identify and make the best use of people, processes and technology in order to comply with good governance principles and lead their organization toward progress and prosperity.
