Non-profit organizations are established to serve a range of functions in our communities, from providing services, representing special interests, or facilitating recreational endeavors, among many others. Despite their ubiquity, many non-profit organizations suffer from the same common governance mistakes. In this article, we'll delve into the ten most common non-profit governance mistakes and discuss strategies to avoid them.
1. Lack of Strategic Planning
One of the foundational mistakes non-profit organizations make is neglecting strategic planning. Without a well-defined purpose, mission, and values—and an associated strategic plan to serve as a roadmap—boards fail to provide their organization effective direction. Strategic plans provide clear short, medium, and long-term objectives and serve as a guide for decisions about an organization's activities and its allocation of resources.
Boards must prioritize strategic planning. It is good practice for a board to engage in focused strategic planning annually and periodically review strategic plans to adjust where warranted. The strategic plan should be communicated to all stakeholders to foster a shared understanding and commitment to common goals. In addition, boards should regularly assess the organization for alignment with and performance against the strategic plan.
2. Failing to Understand Fiduciary Duties and Legal Obligations
Many individuals agree to serve on a board of a non-profit organization without appreciating the fiduciary duties and legal obligations associated with the role. Directors and officers of any organization, whether for-profit or not, volunteer or not, are subject to a duty of loyalty and duty of care (commonly referred to as "fiduciary duties"). A duty of loyalty requires a director to act honestly and in good faith with a view to the best interest of the organization. A duty of care requires a director to exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances. Failure to act in accordance with fiduciary duties can expose directors to personal liability.
It is a good practice to conduct a formal onboarding process that ensures new directors are educated on their fiduciary duties and legal obligations when they join a board, and to conduct periodic refresher sessions for all directors. In addition, an organization should maintain adequate Directors & Officers (D&O) insurance to protect directors in the event of any claims against the organization.
3. Confusing Oversight with Operations
A common pitfall for many directors is misunderstanding the proper role of a board, which is to oversee the business and affairs of an organization. Boards must recognize the distinction between overseeing the organization and delving into day-to-day operations, which is the function of management. A common descriptor of the role of the board to capture this distinction is "noses in; fingers out." In overseeing the business and affairs of an organization, the board sets the strategic plan and provides operational guidance, but appoints a management team to execute the day to day operations.
It is a good practice for a board to adopt a Board Mandate to define its roles and responsibilities. This document provides clarity both for those serving on the board and those serving in management roles. Similarly, a position description for an Executive Director or Chief Executive Officer and a Delegation of Authority Policy can provide clarity on the board's expectations of the roles and responsibilities of management. Clarity on the delegation and limits of authority for management can empower a management team by avoiding the need for the board approve or be consulted for every operational decision.
Having said that, many non-profit organizations do not have the resources for full staffing, and directors might end up performing some management tasks themselves. While necessary, this can create issues, including extra exposure to liability. Boards like this, which incorporate volunteer management duties, still require good practices, and extra care should be devoted to constantly evaluating and perhaps restricting the different roles a director might face.
4. "Rubber-Stamping" and Deference: Failing to Ask Hard Questions
Boards sometimes fall into the trap of unquestioningly accepting proposals from management without appropriate scrutiny. This is commonly an issue when directors are inexperienced, unsure of their proper role and expectations, and don't want to appear difficult or inept, preferring to "go along to get along". However, failing to ask challenging questions and making decisions without sufficient information can lead to poor decisions, missed opportunities, increased risk, or result in financial missteps.
Boards must ensure they have the necessary information on which to base decisions and foster a culture of constructive inquiry to ensure robust decision-making. Governance training for directors can also help, so the board knows their roles and limitations.
5. Failure to Implement Robust Risk Management
Most non-profit organizations operate in a dynamic environment where a multitude of risks are inherent. Failing to implement a robust risk management framework can expose the organization to unforeseen challenges and liabilities.
To provide effective oversight, Boards need to have appropriate foresight. Accordingly, it is a good practice for boards to adopt a formal process to actively identify risks to which the organization is exposed, assess likelihood and severity of each risk, and develop strategies and controls to manage the risks and mitigate potential negative impacts.
6. Failing to Adopt, Maintain, or Follow Policies and Procedures
It is not uncommon for boards to operate without appropriate policies and procedures, lack understanding or awareness of the policies and procedures they have adopted, or have inconsistent practices that fail to properly reflect their policies and procedures. Some boards have archaic policies in place but never review them to ensure they continue to reflect the needs of the board and good governance practices.
It's a good practice to have a clear set of policies and procedures to govern how decisions will be made, clarify responsibilities, and establish procedural requirements. These documents can help ensure compliance with legal requirements, alignment with good governance practices, and support better and more transparent board functions. Every board has foundational rules governing its operations in its constating documents (Articles and Bylaws), but it is a good practice to adopt additional policies to govern matters such as committee functions, leader role mandates and director role expectations, conflicts of interest, professional development, performance assessment processes, and (if applicable) director remuneration. Once adopted, it is a good practice to conduct training with the board to ensure directors understand the policies in place, review and update policies every 1-2 years, and take steps to ensure the board operates in accordance with its policies.
Incidentally, it is difficult to develop and maintain good policies without a clear picture of the organization's strategy. This is another reason why point number 1 above is so important.
7. Failing to Maintain Appropriate Minutes and Records to Document Actions and Decisions
Some boards fail to maintain appropriate minutes and other records to document its actions and decisions. Accurate documentation is essential for transparency, accountability, and compliance. Not only are minutes a legal compliance requirement, but also they provide a mechanism to protect directors from liability, serving as the primary evidence of directors having fulfilled their fiduciary duties.
At minimum, proper minutes should include evidence of compliance with all procedural requirements (date and location, attendance and quorum, notice, declared conflicts of interest, comings and goings of participants) and all decisions taken by the board. To bolster the evidence of the board fulfilling its duties, it can be beneficial to also include information regarding the deliberations of the board, including references to briefing materials distributed and reviewed in advance, information provided from management and advisors, a summary of key information presented and considered during the meeting, and an indication of any actions taken by the board short of a decision (e.g. discussed, approved, advised, reviewed, deferred, noted receipt of, etc.). However, a balance of detail is required, as minutes are not intended to provide a verbatim account of the meeting—including too much detail can actually increase risks, particularly if not drafted with appropriate care and attention.
8. Failing to Account for Competencies and Board Needs in Director Recruitment and Succession Planning
Successful governance requires a competent board with the capacity to provide oversight to the business and affairs of the organization. It can be common for non-profit boards, particularly those with volunteer positions, to fail to account for required competencies and perspectives the board needs to effectively discharge its duties. To be sure, not every director must possess the full set of skills required to give effective oversight to the organization, but the board as a whole should collectively cover off all or the most relevant competencies.
It is a good practice for boards to establish and adopt a Competency Matrix that identifies the specific skill sets required to oversee the organization. Common skills include financial acumen, business experience, and legal and governance expertise, but the Matrix should also include any industry-specific competencies relevant to the organization and consider the need for diversity of perspective. The Competency Matrix should then be used to assess the make-up of the current board and identify gaps to be addressed in succession planning and recruitment. It is also a good practice to disclose the skills possessed by each individual director candidate in annual member elections so that members can make informed decisions.
9. Neglecting Board Training and Development and Failure to Engage Appropriate Advice and Resources
Despite competency assessments, succession planning, and director recruitment efforts, it is rarely possible to comprise a board with the exact set of required skills, knowledge, background, and experience. Accordingly, it is essential that a board engage in regular training and development. This should occur both collectively as a board and on an individual basis for each director. A professional development policy can be useful to establish expectations, reimbursement requirements, and provide criteria to inform decisions on the allocation of development resources. Collectively board training should address matters that are material to the organizational strategy and for which the board as a whole requires development.
Similarly, many boards may still find themselves facing decisions involving complex or specialized matters which the board is not equipped to oversee. In these cases, the board can and should engage specialized outside advice and resources to help. In fact, under corporate law, directors are entitled to rely on information and advice of professional advisors in the discharge of their duty of care. Failure to seek such advice and rendering a decision without appropriate expertise can be seen as a failure to satisfy the board's fiduciary duties and expose directors to liability.
10. Neglecting Regular Evaluation and Continuous Improvement
Regular evaluation and continuous improvement are keys to success in a world of constant change and can unleash the ability for a board and the organization it oversees to adapt, evolve, and mature. While consistency can provide stability, it can also lead to a board that operates in a stagnant manner. This approach is unlikely to generate high performance among the board or set the necessary tone from the top to model and motivate a high-performance organization. Boards should establish a culture of continuous improvement by regularly assessing their own performance, policies, and strategies—and then do the hard work of adopting and implementing better practices.
Conclusion
Non-profit governance is dynamic and challenging. By addressing these ten common mistakes head-on, boards can build a strong foundation for organizational success, fostering transparency, accountability, and building high performing boards and organizations.
Do you recognize any of these common missteps in the organizations or boards you are engaged with? Contact our governance group today to discuss steps you can take to mature your board's governance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
