In this age of information overload, nonprofits need to continually scrutinize the quality and source of the material received in preparation for major decisions. Since directors often come without broad enough experience in the nonprofit’s mission arena, they may not be prepared to properly assess its progress in moving forward–and not equipped to make relevant comparisons with similar nonprofits. In addition, naive or unscrupulous CEOs and highly influential directors may inundate their boards with information and data as a distraction tactic to keep them busy in the “weeds,” reviewing what has been presented. Board members need to avoid donning “rose-colored glasses” when assessing proposals from these sources.
I once encountered a nonprofit whose board was about to acquire a for-profit organization, headed by its founder. Pushing for the “deal” were the nonprofit’s CEO and an influential board member who were not, it turned out, capable of the due diligence needed for a project of this complexity. But the board approved the acquisition without sufficient review. When the acquisition was consummated, the founding CEO of the subsidiary refused to take directions from the CEO of the nonprofit. In addition, the normal financial settlement of the project requires that a portion of the price be withheld, in escrow, pending adequate performance. In this instance, the nonprofit paid cash for the acquisition. Based on a lack of performance, the operation was finally closed with a substantial loss.
Other errors occur when board members “make the mistake of holding their beliefs … without sufficiently considering whether the available information justified their depth of that conviction. Nonprofit directors in the 21st century need a significant self-awareness of their primary knowledge, (experienced first-hand) and what academics call “meta-knowledge.” This involves information limitations, biases, or outright non-truths. * As a result, they need to be alert to all evidence that challenges the nonprofit’s status quo norms relating to the mission.
Nonprofit boards continually need to be alert to potentials from three types of organizational crises, and problem-finding systems that give advanced warnings. **
Collapse of Competence: This occurs when boards take on tasks that they can’t competently overview and/motivate management to implement. For example;
- A strategic plan that is long in detail but can’t be implemented with the human resources that are available to management.
- A capital campaign among a group of stakeholders with modest financial resources.
- A CEO who can address the current needs of the organization but ignores the need for expansive growth.
Shortcomings in Self-governance: Acting against the rational interests of the organizations… “They include (board members or CEOs) narcissism, hubris, denial, defensiveness, bounded rationality, risk biases, stress, exhaustion, and the fact that persisting without help feeds the need for power and achievements.”**
Inadequate Corporate Governance: Any or all of the following:
- Negative information does not flow from the CEO to the board.
- The CEO, with a “rubber stamp” agreement of the board chair, assumes all responsibility for meeting agendas.
- The board lacks abilities to interpret financial and other reports.
- The board really doesn’t understand the nonprofit’s business plan.
- The board provides unrealistic deference to the CEO, Board Chair, CFO or powerful board members.
Solution: Practices That Facilitate Developing Problem-Finding Governance **
- Develop a solid agreement between management and the board as to what constitutes board decisions and CEO decisions for operations.
- Embed a problem-finding system for all board efforts.
- Support some “risky” ventures but keep an “eagle eye’ on them as they progress.
- Many problem-finding opportunities will emanate from staff below management. Establish a system for individual board members to meet with these staff members, keeping the CEO informed of the outcomes of these meetings.
- Be wary of CEOs who insist that ALL information flows to staff be routed through his/her office. Remember that staffs in many nonprofits are only one or two organizational levels from the board.
- Keep questioning the norms of the organization.
* http://knowledge.insead.edu/blog/insead-blog/intelligent-boards-know-their-limits-5321
** https://hbr.org/2017/01/the-3-company-crises-boards-should-watch-for
