12 May 2011  Research & Ideas

The Difficult Transition from For-Profit to Nonprofit Boards

In the new book Joining a Nonprofit Board: What You Need to Know, authors F. Warren McFarlan and Marc J. Epstein observe that service on a nonprofit board can be a frustrating experience for executives grounded in a for-profit world. Read our excerpt.

 

Editor's note: For those of who have attended meetings of both nonprofit and for-profit boards, the differences between the two organizations couldn't be clearer. Nonprofit boards meetings tend to be longer, less tightly organized, and more sporadically attended by the board members themselves. Why this happens is one of the many subjects discussed in the new book Joining a Nonprofit Board: What You Need to Know, by authors Marc J. Epstein of Rice University and F. Warren McFarlan of Harvard Business School. In this excerpt from the introduction, Rice and McFarland highlight the major similarities and differences between the different types of boards and what newcomers to nonprofit governance can expect.

Comparing Nonprofits and For-Profits

There are a number of important similarities and differences between the operations and challenges of nonprofits and for-profits of which a new nonprofit board member must be cognizant. Some of the more important items are discussed in this section.

Similarities

There are a number of similarities between for-profits and non-profits which make people with for-profit experience particularly helpful as board members. The key similarities include:

  1. Both organizations can grow, transform, merge, or die. Success is not guaranteed for either type of organization, but requires sustained work.
  2. In both cases, cash is king. This for-profit focus is critical for a nonprofit board.
  3. In both settings, good management and leadership really matter. Delivery of service, motivating and inspiring staff, and conceiving of new directions for growth are all vitally important.
  4. Planning, budgeting, and measurement systems in are vital in both settings.
  5. Both types of organizations face the challenges of integrating subject matter specialists into a generalist framework.
  6. Both organizations add value to society. They just do it in different ways.

In short, there is much overlap between the skills needed and perspectives provided by leaders in the two types of organizations. This is a key reason why social enterprise courses have taken root in business schools and why, appropriately socialized, those with for-profit backgrounds can contribute so much to the nonprofit world.

Repeatedly we have seen new trustees and ineffective boards try to wag the mission dog with the financial tail.

Having noted all of this, the blunt question in your mind is: why do I need to read a book on nonprofit management? Isn't it just a subset of the for-profit world, with little difference in the tasks and perspectives of managers and board members? Cannot the tools, practices, and viewpoints developed throughout a career of successful for-profit work be transferred to this new realm of nonprofit? The authors answer this question with an emphatic no! Although, as noted, many aspects are the same, in important areas there are deep differences. Failure to understand these differences can cause the new board member to stumble badly and perhaps irretrievably damage her credibility and effectiveness in a nonprofit organization.

Differences

At its core the nonprofit is fundamentally different than the for-profit. At the center of the nonprofit is its social mission. Understanding the mission, helping the organization to fulfill it, and adapting it to a changing world is the very core of nonprofit governance and management. It is for this reason this book starts with a detailed discussion of mission and how it grows. Right behind this are the two major intertwined strategic themes that the nonprofit trustee must deal with.

The first theme is fulfilling the mission and whether we are doing it in a fiscally responsible fashion. Chapter Two deals with the complex multifaceted issue of mission definition and evaluation of its appropriateness. Chapter Three shows, in a series of examples, how organizations can go about measuring their performance against mission. For the new trustee, understanding these issues is the place to begin her trusteeship. The second theme is financial solvency. Chapter Four deals with the board's fiduciary responsibility and financial sustainability. Our life experience drives us to put this behind "performance measurement against mission." Repeatedly we have seen new trustees and ineffective boards try to wag the mission dog with the financial tail. It just doesn't work that way. Without mission and its accountability we have nothing.

Achieving financial sustainability is very different for the nonprofit than the for-profit in that the nonprofit cannot easily access the public equity markets but instead has philanthropy as a potential additional source of funds. Chapter Five deals with the role of philanthropy and the trustee's role in it. This may be summarized by giving often and generously and when not giving helping others to give (hence the phrase, "give, get, or get off.")

Finally, the execution of the work of the board is deeply different from that of boards in the for-profit world because of the tasks of mission performance measurement and different capital markets. As Chapter Six describes in detail, nonprofit boards are often larger, have more committees, and have a very different trustee life cycle. Further, as Chapter Seven describes, the heart of the governance process is a volunteer nonexecutive chairman and volunteer board, leading a staff of paid professionals. The dynamics of this are complex and profoundly different than the process in the for-profit world. Chapter Eight returns directly to you, the new trustee, addressing what you should consider before deciding to join a board and what you can do to make your trusteeship personally beneficial to you and the organization.

Reprinted by permission of the publisher, John Wiley & Sons, Inc., from Joining a Nonprofit Board: What You Need to Know by F. Warren McFarlan and Marc J. Epstein. Copyright (c) 2011 by John Wiley & Sons, Inc. All rights reserved.

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Comments

    • Alexandra Peters
    • President, Boards Eye View

    People grounded in the for profit world often struggle with the nonprofit world for other reasons, too: Things progress more slowly, often, in the nonprofit world, because of consensus building. And often there just isn't administrative support in the nonprofit world, so things can take a long time to happen.

    There is an illusion that things are "softer" in the nonprofit world, maybe not as demanding. But in fact, there are many more regulations and more requirements to keep up with. The board's job grows ever more complex.

    The confusion of the nonprofit board's oversight role with an underwriting role is probably the greatest factor in keeping board members away. Hence the less often attended meetings and the confusion about micromanaging. "Give get or get off", an ugly little phrase, has nothing to do with the big jobs of oversight the board must deal with, but certainly manages to denigrate their role.

    Still, I welcome a book that that compares the roles of nonprofit and for profit boards. Looking forward to reading it.

     
     
     
    • Anonymous

    Wow, I can't stress enough how critical it is to have the right board members for a nonprofit. My faith in the nonprofit model has been shaken by working with a nonprofit whose board does not understand what they are doing and management is powerless to remove board members.

    In a forprofit model, board members are accountable for the performance of the company and because they often hold equity in the company, they are also very motivated to make sure it is performing well.

    In the nonprofit world, board members may not be accountable or engaged in the success of the enterprise, and it can spell disaster.

    Any advice on how nonprofit governance can prevent this from happening?

     
     
     
    • Anonymous

    Having served on and interacted with both for-profit and nonprofit boards, the generality I would offer is that for-profit boards too often manage and strategize quarter-to-quarter (or year-to-year), while nonprofit organizations are often managed/governed with a longer view. As a nonprofit board member, I believe my job is often to bring more urgency to the organization's strategic focus. Many for-profit boards would benefit from having more of an abiding vision/direction.

     
     
     
    • Harry J. Tucci Jr.
    • Owner, Katahdin Resources

    Non profit boards are often filled with individuals who would jump in front of a bus for the "cause." Both an asset and a liability. When a non profit is formed the founder typically recruits family and friends sympathetic to the cause which is great because they bring a passion to the mission, but the down side is they bring a lack of managerial skills to the organization. For a nonprofit to succeed at fulfilling its mission it needs to bring some corporate best practices to its Board.

     
     
     
    • Gerard Bremault
    • CEO, The Centre for Child Development of the Lower Mainland

    As the CEO of a non-profit pediatric healthcare organization in Canada, I'm fortunate to have a strong board comprised of many clear thinking business professionals. They have often commented on the learning curve to become "appropriately socialized" as Professor McFarlan so aptly puts it. Thank you for stating this so clearly and also for making the fundamental point of distinction that, "At its core the nonprofit is fundamentally different than the for-profit. At the center of the nonprofit is its social mission. Understanding the mission, helping the organization to fulfill it, and adapting it to a changing world is the very core of nonprofit governance and management." I learned this early from Peter Drucker's writings and while a simple enough assertion it is absolutely fundamental to doing the right thing right in the non-profit sector.

     
     
     
    • John Girard
    • President, March Fourth Associates

    As a consultant/facilitator who works mostly with non-profits, I often find Board members who get lost trying to measure results because the persons reciving the benefit of the work of a non-profit is often not the person who pays the most to produce and deliver that benefit. Without the "bottom line profit" measurement, people struggle to know when they are successful. To overcome this confusion, I ask Board members to describe the difference between a person who they have served and a person of similar social standing who has not recieved their service. The aggregation of these differences in the community is the social good that should reflect accomplishment of the organization's mission.

     
     
     
    • Mike Rivkin
    • retired, SCM Corporation

    The differences are legion, and particularly so for the small business entrepreneur used to market disciplines and nimble decision making. I cringe every time I see a non-profit trustee ripping his/her packet open just before the meeting is called to order. This lack of preparedness - so chronic among non-profit board members - creates a rubber stamp mentality that too often allows a mediocre chief executive to stay that way. Non-profit board membership should be a fulfilling part of any professional's career. Too often, it's anything but.

     
     
     
    • Kate Putnam
    • CEO, Package Machinery Co Inc

    Some much of what is written here resonates with me. The part of lack of preparedness for meetings is pandemic in non-profits, although I believe it is changing. Passion is not a substitute for doggedness and hard work. The best boards, of any kind, put effort into board training and education, and evaluation of board members. They are upfront about expectations and supportive of board members who contribute. While CEOs in business may get this, CEOs in non-profits often think board members either already know what to do or resent the resource use of spending time and money educating board members.

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    Having never directly associated myself with a not-for-profit company the article presented some new ideas. Most welcome knowledge addition. I shall try to catch hold of the book by Epstein and McFarlan to further enrich me with the subject. To my knowledge so far most of the not-for -profit organisations (e.g. NGOs) are not corporate entities and would not have a Board of Directors like the one in a company. It may be a managing committee or some such and hence lot of legalities would not be applicable. The bottomline "cash is King" is nevertheless true for such organisations as well.

     
     
     
    • Ray Neubauer
    • Chairman of the Board, Catholic Charities of the East Bay

    With 8 years on the board of this mid size non profit, the last 5 as Ch of Board, I find that I am in total agreement with the article and the comments following the article. I do believe however that one of the most significant differences between for profit and non profit, as well as one of the major problem areas of non profits is the mind set, and experience of the non profit staff, which is almost totally mission centric, and their board members whose mind set and experience is almost totally operational and financial. The bringing together the aggregate of these 2 different mentalities to benefit the organization can be a daunting task.