The High and Low Notes of Nonprofit Board Service
from Summer 1999
by Diane Harris
Help wanted:
High-level executive sought for part-time position, advising do-good institution on how to do better. Responsibilities include long-term strategic planning and overseeing management. Willingness to share professional contacts and expertise essential, deep pockets preferred. Benefits: opportunity to mix and mingle with fellow influentials; otherwise, rewards are largely psychic. Pay: absolutely none—in fact, you give us money, and we’ll expect you to gently strong-arm all your friends and colleagues to do the same.
In real life, of course, no nonprofit organization worth its tax-exempt status would so bluntly describe what’s required of the corporate denizens it invites into the boardroom. And you can understand why: With job responsibilities like these, it’s a wonder any corporate director would ever agree to take a position on a nonprofit board.
But, in fact, nonprofit board service makes a lot of sense for corporate directors and offers rewards similar to those that attract directors to for-profit boards. There’s the opportunity to make important business and social contacts, the chance to stretch professional skills, the cachet of being recognized as a leader in the community. And the prestige factor goes up exponentially if the board on which you’re asked to sit is already filled with people of influence and means.
And, oh yes, lest we forget: There’s the opportunity to do good for a cause you believe in.
One thing is for sure: If you haven’t already been asked to sit on a nonprofit board—or two or three or 20—you will be soon. Demand for directors and trustees at these institutions is at an all-time high. Board members who come from the business world are particularly appealing to nonprofits because of their experience with bottom-line measurements of success and accountability to stakeholders—both issues of growing importance in this sector, just as they are in the corporate world.
In short, in the view of many nonprofit leaders, corporate directors are folks who can get the job done.
What to expect from the nonprofit experience
Like their corporate counterparts, nonprofit board members are charged with overseeing the financial health of the institution, charting a strategic plan to achieve organizational goals, selecting top management, and pitching in with advice and practical aid during a crisis. “We don’t need or want our board members to deal with the minutiae of operations,” says Sheila Wellington, president of Catalyst, a New York City-based nonprofit research and consulting firm that deals with working women’s issues. “The role of the board is to listen, probe, accrete knowledge of our organization, and then brainstorm with us about the best ways to reach our goals.”
In both corporate and nonprofit sectors, board members ultimately are accountable to the people who have a vested interest in the organization. At for-profit companies, that means the shareholder, of course. At nonprofits, that typically means the recipients of the organization’s services—for example, hungry people who are being fed, audiences at the symphony, students at the university, or sick people whose disease the institution is trying to eradicate. The donors who make it possible to carry out the mission are also constituents.
At a nonprofit, however, success (or lack of it) is a lot harder to measure than it is at a publicly traded corporation. There are no stock prices or profit-and-loss statements. To satisfy the demand for tangible results, nonprofit directors are spending a lot more time with management these days developing what are sometimes called “dashboard indicators”—data that track a nonprofit’s progress in fulfilling its mission. Tom Ingram, president of the Association of Governing Boards of Universities and Colleges, explains: “The notion is that boards don’t have to look at everything under the hood, but they do need some gauges, just as you’d find in a car, that will alert us if we’re running out of organizational gas.”
Compared to a for-profit corporation, the nonprofit boardroom has a very different feel. This contrast makes perfect sense when you consider the differences in the composition of these boards. For starters, a nonprofit board has a lot more voices weighing in: The average nonprofit institution has 19 directors, compared with 13 at a typical corporation, and among very large national nonprofits, like United Way or the American Red Cross, boards with 30, 40, or even 50 members are not unusual. There are also few insiders to set the agenda on nonprofit boards: Only 8% of the chief executives of nonprofit organizations are voting members of their own boards. And the faces in the nonprofit crowd are more apt to be spread across gender, racial, professional, and economic lines than is typical in the corporate boardroom.
On a pragmatic level, the greater diversity of nonprofit boards, combined with a lack of business experience by just under half of those who serve, often results in an operating style that can prove frustrating to corporate types. “Issues that would be minor in a corporate setting, like reviewing a budget or working through personnel problems, are often regarded as major at a nonprofit,” says Karen Hastie Williams, a partner in the Washington, D.C. law firm of Crowell & Moring. Williams is a member of more than a dozen corporate and nonprofit boards, including Amherst College, Continental Airlines, Fannie Mae, Gannett, and the NAACP Legal Defense and Education Fund. Notes Ingram: “Business leaders often have little tolerance for how long it takes nonprofit boards to make decisions. The concern is that decisions are expected to be so collaborative that we miss opportunities or make choices that are not in the best long-term strategic interest of the institution.”
What it will cost you
But of all the differences between the worlds of for-profit and nonprofit boards, the biggest gap is around the issue of money. On a for-profit board, you get it (average annual retainer for a large-company corporate director: $40,836 in cash and/or stock, according to board recruiter Spencer Stuart); on a nonprofit board, you give it (nearly two-thirds of nonprofit board members make an annual financial contribution to the organization in which they serve, according to the National Center for Nonprofit Boards). “One doesn’t sit on boards for the money,” notes Catalyst’s Wellington. “If a nonprofit pays your cab fare to the board meeting, it’s a really big plus.”
Roughly a third of nonprofits have a formal policy requiring an annual financial gift from their board members, and among organizations with a particularly expensive mission or that rely heavily on donations for income, the percentage is even higher. (See graph below.) In addition to annual gifts, board members typically are expected to kick in funds for capital and other special projects and to bring their influence to bear on individuals and companies to contribute to the cause as well. “The ambassador role is a critical responsibility for nonprofit board members,” says Kathleen Enright, a spokesperson for the National Center for Nonprofit Boards. “Whether the organization says so explicitly in the bylaws or not, you’re expected to be a public spokesperson for the organization, asking friends and colleagues for donations and generally doing whatever you can to raise money.”
Lately, nonprofit organizations are becoming more blunt about their expectation that board members reach deep into their own pockets. In part, the new hard line on giving is the nonprofits’ pragmatic response to dwindling funds from other quarters. As the government cuts back on funding for social programs and the arts, groups that deliver these services are scrambling for replacement dollars. And full financial support from the board can be a prerequisite to getting money from other sources, such as foundation grants or large corporate gifts. “One of the first questions that institutional givers ask is whether you have 100% participation from your board on fundraising,” points out Williams. Adds Enright, “The view is, if the people who are supposedly the ones most committed to your organization won’t give you money, why should we?”
Of course, just how much money board members are expected to bring to the table differs dramatically depending on the nature of the nonprofit, the size and culture of the organization, and the directors’ own financial means. The median annual mandatory gift at institutions that require director donations is $200. The Black Students Fund, a scholarship program for low-income African-American students chaired by Williams, requires what she terms a “relatively modest” minimum annual contribution of $1,000. But the rule is, give or get; if a thousand is beyond a director’s means, he or she can get off the hook by finding an outside donor to ante up.
At the other end of the spectrum are high-end arts and cultural centers, whose wealthy patron-of-the-arts boards are expected to give generously—and then give some more. Prospective members of the board of New York City’s Carnegie Hall, for example, are rigorously vetted for their gift-giving potential and willingness to dig into their personal and corporate bank accounts, according to a Wall Street Journal report last year. Staffers screen all publicly available documents, including records on real estate, trusts, and stockholdings. Such detective work pays off: The typical Carnegie Hall board member contributes between $10,000 and $100,000 to the organization’s annual fund.
Fellow board members, along with the organization’s executive staff, can really get their dander up if a director of means doesn’t cough up the goods. Gentle haranguing from the board’s chair is typically the first response, but it may build to the point where particularly egregious offenders are kicked off the board—or worse. When Paul Oliver-Hoffmann, former chairman of the board of the Museum of Contemporary Art in Chicago, failed to honor a $5 million pledge for the construction of a new home for the museum a couple of years ago, MCA sued him to get the money. Oliver-Hoffmann, who had reneged after resigning from the board in protest over what he reportedly felt was the museum’s free-spending ways, died while the case was in litigation. His widow eventually settled with the museum by donating valuable art from the couple’s renowned personal collection in lieu of cash.
How it could go wrong
Lawsuits against individual trustees or their estates by nonprofits are rare, however. The more common source of litigation is from people served by the organization who come to feel they’ve been wronged—such as disgruntled students at a college or former hospital patients who are dissatisfied with the care they received—and who name trustees in a suit against the institution itself. Although no one has hard data, just about everyone agrees that the number of such lawsuits is rising dramatically in the nonprofit world, just as it is in corporate America.
But probably the thorniest issues with which nonprofit boards must deal these days have to do with how the chief executive is compensated and the manner in which he or she spends the nonprofit’s money. The specter of the 1994 United Way scandal, in which the business titans who headed up the board of governors failed to detect serious misappropriation of funds by William Aramony, the organization’s highly-paid president, continues to hang over the nonprofit world more than five years later. Members of United Way’s board of governors were never charged with any wrongdoing in the case, which ultimately resulted in the trial and conviction of the organization’s three top executives for conspiracy, money laundering, and filing false tax returns. But the suggestion that the board may have been “asleep at the switch,” as the president of the National Charities Information Bureau stated it at the time, put other nonprofit directors and trustees on notice.
Sometimes, of course, boards are aware of practices that ultimately are called into question but fail to take any action. In those cases, board members can be held responsible, as the trustees of New York’s Adelphi University learned two years ago. Spurred by student and faculty protests over the university president’s lavish spending at the expense of academic programs, the Regents of the University of the State of New York, the state body responsible for education, launched an investigation in 1996 that uncovered a host of questionable practices. For instance, the Regents learned that Adelphi president Peter Diamandopoulos was being paid $837,113 a year in salary and benefits, making him the second-highest-paid university president in the country, despite a 40% drop in enrollment during his tenure. He also spent more than $1 million on a luxury apartment—supposedly necessary to entertain potential donors. In the end, the regents fired all but one of Adelphi’s 19 trustees for failing in their oversight duties and for possible conflicts of interest. The new board fired Diamandopoulos.
Practically speaking, the agencies charged with overseeing the nonprofit sector—the Internal Revenue Service and offices of state attorneys general—are so badly lacking in the resources to do the job that a case must be particularly egregious, like the Adelphi debacle, for the public to become aware of it. But the IRS is about to get a new tool that should help it rein in wayward nonprofits—in particular those that overcompensate managers or permit cronyism in the awarding of contracts for goods and services. Under so-called intermediate sanction rules due to go into effect later this year, the agency will require nonprofit board members to set compensation levels at fair market value and to determine the proper price for goods and services through careful market research. If board members fail to follow through, they personally could be subject to a hefty excise tax on the excess amount paid and would have to reimburse the organization for the portions deemed excessive.
“Before these rules came into effect, the only recourse open to the IRS was to take away an organization’s tax-exempt status, which would end up hurting the people the group served more than the offenders,” says Dorothy Ridings, president and CEO of the Council on Foundations and a former director of several for-profit and nonprofit organizations. “There was no such thing as a misdemeanor or a minor felony. You either let the organization off the hook entirely or you killed it.”
What’s in it for you
At the most basic level, nonprofit board service offers a director experience in fields outside his or her normal realm. The benefits are similar to those derived when a company rotates employees among its various divisions to give them exposure to different aspects of the business. A technology expert, for instance, can hone financial skills while reviewing a nonprofit’s budget; likewise, an operations specialist can pick up some pointers on long-term strategic planning.
And the frustrating diversity of opinion and slowness of decision making on nonprofit boards can be character-building.“When you’re no longer part of a group of age fiftysomething white males—or people who act as if they are, even when they’re not—you become familiar with different ways of processing information and making decisions,” says board consultant Fred Miller, president of the Chatham Group in Boston. “In effect, you’re training for the time in the not-too-distant future when you’ll have to deal with that diversity in the corporate boardroom.”
Serving on a nonprofit board is likely to teach directors a more collegial way of reaching decisions, Miller adds. “People have a lot of angst in their profit-making life and don’t want the same sorts of battles in their nonprofit life, particularly if their fellow directors are friends, peers, and other familiar faces in their community,” Miller explains. “As a result, nonprofit boards tend to work longer at building consensus and try to find solutions that don’t produce real winners and losers.”
Of course, directors are likely to gain some business out of the experience as well—not from the nonprofit itself (that would be a potential conflict of interest) but from the relationships they forge with fellow directors and their contacts. Karen Hastie Williams, for instance, landed some plum corporate board assignments, including directorships at Fannie Mae and SunAmerica, through acquaintances initially made on nonprofit boards. She also extended her law firm’s reach in the community. “The visibility that you give to your company through nonprofit work and the business benefits that derive as a result are incalculable,” says Ridings, a former newspaper publisher whose nonprofit board service included a stint as chair of the League of Women Voters. “I know the paper got many customers through my board work, and I got to know the community a lot better too, which helped me put out a better product.”
Then, too, there’s the prestige associated with serving on nonprofit boards. Says William Richardson, president and CEO of the W.K. Kellogg Foundation and a member of several other nonprofit boards including Johns Hopkins University and the Council on Foundations, “It’s a heady feeling to serve on a major board with, say, a couple of senators, four or five CEOs of major corporations, and perhaps a Nobel laureate or two.”
Such rarefied company is the exception, however, rather than the rule. Indeed, anyone who accepts a nonprofit board position solely with an eye toward hobnobbing with the power elite and drumming up business is likely to be disappointed with the experience. Most nonprofits need a real working board, and to make such an effort truly worthwhile, directors need to believe wholeheartedly in the mission of the organization.
“Ultimately, nonprofit service appeals to the idealistic strains that are in most everyone’s nature,” says Wellington of Catalyst. “The real reward is that of advancing a cause you believe in, of doing good—and that’s a very powerful reward indeed."
