Why Nonprofit Corporate Governance is Important

Do we really need corporate governance in nonprofits? I hear this question often when talking with potential clients. What they really mean is, “We are not a corporation, so we don’t need corporate governance… do we?” The question really surfaces a few misunderstandings, all of which hinge on the fact that nonprofit board governance and responsibilities are just as nuanced as those for for-profits entities.

First, nonprofits are corporations. The term nonprofit is usually used alone, but it really is only shorthand for nonprofit corporation. They are indeed a corporation and one of the two kinds of corporations (nonprofit and publicly held for-profit) that are required to have a board of directors. Their proposed purpose and work as has been deemed by the government to be worthy of being able to make tax-free purchases and to allow donors to do their work to deduct amounts that they donate from their taxable income. Which leads us to our second misunderstanding; both kinds of corporations are required to have boards of directors because they have investors. Publicly held for-profit corporations obviously have investors, but do nonprofit corporations have investors too? Of course they do, they are called donors.

The for-profit investor is looking for a monetary return on their investment. The return on investment for a nonprofit donor is a particular value or service to be created in their community, country, or world. In either case the board of directors is required to protect those investors/donors. Which leads us to our third misunderstanding. Boards of directors exist to protect the investor not the CEO, organization, or even the board itself. We do not need to look far to see the impacts of this misunderstanding. Investors can be and have been harmed when boards are not doing their job.

For-profit boards today often focus on operational issues of the organization rather than protecting investors and as a result the government has been allowed/forced to step in and provide the protection that they expected the board of directors to be providing. That is why Sarbanes-Oxley and Dodd-Frank exist today. So is there such a thing as nonprofit board responsibilities and governance? Yes and nonprofits should not be looking to for-profit corporations for how to do it correctly. If you are ready to really address nonprofit board governance appropriately in your organization, Aligned Influence is ready to help you get started. Visit us at www.alignedinfluence.com to learn more.

Two volunteers sorting cans which came as a result from effective nonprofit board governance.

Top