What is board governance? The ultimate guide
Board governance refers to a dedicated governing board’s decision-making process and oversight. Organizations typically hand-select board members to hold the organization accountable for carrying out its mission and ensuring the right strategic direction. It provides a framework for organizations to stay on top of their sector’s latest trends and initiatives. This often includes environmental, social, and corporate governance (ESG) initiatives, which are increasingly important to the public.
In this guide, we’ll explore board governance, how it works in nonprofit and for-profit organizations, its different structures, best practices, and the challenges it can present.
What is the difference between nonprofit vs. for-profit governance?
In a nonprofit organization, governing board initiatives primarily focus on serving the public or a specific cause. Their goal is usually to make a positive social impact rather than to generate financial profits. In contrast, for-profit organizations’ governing boards prioritize maximizing financial returns for shareholders and stakeholders, often through profit generation and growth strategies.
For-profit organizations also tend to have smaller, more specialized boards of directors of around 10 to 15 members. On the other hand, nonprofit boards typically involve a broader range of stakeholders, including community representatives, field experts, and people directly impacted by the organization’s work. For this reason, nonprofit boards can be up to five times larger than for-profit boards.
What are the different board structures available?
A governing board’s structure should depend on its goals, legal requirements, and stakeholder expectations. Here are the main types of board structures an organization might use.
1. Governing board
A governing board is the highest decision-making authority within an organization, comprising a small group of directors who establish policies and provide strategic guidance to steer the organization’s operations. The board commonly includes key personnel, such as the chief executive officer, board chair, chief financial officer, and other senior executives.
2. Working board
In a working board governance structure, board members are part of an organization’s day-to-day operations. This blurs the line between board and staff since board members often work for the organization as volunteers or employees. This approach is often seen in smaller nonprofit organizations or startups with limited resources, making it necessary for board members to work directly to achieve organizational objectives.
3. Advisory board
As its name suggests, an advisory board provides guidance and expertise to an organization. Advisory board members have no authority to make decisions or set policy; instead, they offer expertise in finance, marketing, technology, and other fields relevant to the organization’s success.
4. Policy Board
A policy board develops, reviews, and enforces policies to ensure compliance, consistency, and alignment with the organization’s objectives. It’s typically composed of senior executives, legal experts, and other stakeholders who are knowledgeable about the organization’s mission and operations.
5. Fundraising board
Fundraising boards secure donations and other forms of financial support. They’re found in both for-profit and nonprofit organizations and often include experts in finance, marketing, and other areas that help with fundraising efforts. A fundraising board’s primary focus is to develop fundraising strategies, cultivate relationships with potential donors, organize fundraising events, and ensure the organization’s financial sustainability.
6. Executive board
Also referred to as a management board, this type of governing board oversees and makes decisions related to an organization’s day-to-day operations and management. This might include hiring and firing senior management, monitoring financial performance, setting operational strategies, and evaluating the organization’s overall effectiveness. An executive board often reports to a main governing board and implements its policies and directives.
What are some board best practices?
Ensure your governing board functions efficiently and effectively by considering the following guidelines for creating and maintaining a good board:
- Clear roles and responsibilities: Establishing well-defined roles and responsibilities is a fundamental aspect of an effective board. Regular board meetings, whether in-person or online, let members discuss and clarify their respective duties on an ongoing basis. This fosters a culture of accountability and makes each member fully aware of how they can actively contribute to the board’s collective success.
- Diverse board composition: A board comprising individuals from diverse backgrounds enhances decision-making by incorporating a wide range of perspectives and experiences. When recruiting board members, seeking candidates with expertise that aligns with the organization’s mission is crucial. You’ll also want members with relevant industry knowledge, financial acumen, and other areas of expertise that can make a useful contribution.
- Regular board evaluations: These ensure a board works as effectively as possible by identifying strengths and weaknesses and allowing board members to adjust their processes and strategies accordingly. For example, a governing board might have an audit committee review financial statements and advise on improving performance.
Evaluations can also identify areas of expertise requiring improvement, such as marketing or strategic planning, so the board can consider adding new members or expanding its knowledge base in those areas.
- Strategic planning: Strategic planning is the process of setting goals and objectives for your organization. Ensure board members understand their organization’s strategy, can make informed decisions, and know how each decision impacts the organization as a whole. Board committees should regularly review and update the organization’s strategic plan to ensure relevancy.
- Risk management: Identifying and mitigating potential risks to an organization is an essential part of board management. This can include setting policies and bylaws to ensure the board adheres to legal and ethical standards. Other examples of risk management efforts include developing a strategic plan to address potential risks, creating a risk register outlining the identified risks and mitigation strategies, conducting regular reviews of the organization’s financial records and internal controls, and establishing a process for reporting any potential risks or issues.
4 board governance challenges
Running an effective board is no easy task. Boards can face a number of challenges, from a lack of engagement to a lack of resources. Here are some of the most common board governance issues.
1. Conflicts of interest
A conflict of interest occurs when a board member directly or indirectly benefits from the board’s decisions. Conflicts of interest can lead to unethical behavior and require appropriate management to maintain trust and transparency.
One example is when a board member has a financial stake in an organization or company the board is considering investing in. In this case, it would be important to disclose the potential conflict of interest and take steps to avoid any bias or influence in the decision-making process.
2. Regulatory compliance
Organizations must comply with various regulations imposed by federal and local governments, industry standards, or other governing organizations. For example, a board of directors for a public company must ensure the company meets all of the requirements set forth by the Securities and Exchange Commission (SEC). Problems arise when boards are unaware of the regulations that apply to them or fail to ensure that the organization complies.
3. Lack of diversity
Board members may be subject to groupthink, discrimination, and bias when the board’s composition does not reflect the diversity of the organization or its stakeholders. This can lead to decisions that may not align with the organization’s best interests.
Consciously consider board diversity during the member recruitment process and deliberately represent diverse and relevant voices and perspectives. Intentionally including diverse viewpoints can enhance board performance and foster comprehensive decision-making.
4. Member recruitment and succession
Recruiting new board members can be difficult due to a limited pool of qualified candidates with the necessary expertise and ability to commit to the required time and responsibilities. Succession can also become a challenge when board members leave due to personal or professional commitments. This is why organizations are often advised to create a succession plan to help them recruit new board members in a timely manner.
One solution is to establish a nominating committee. This group consists of board members with diverse backgrounds and areas of expertise that allow them to recruit the right members for a well-rounded board.
How can you master board governance for sustainable growth in your company?
Board governance is essential for organizational success and sustainable growth. Organizations that understand how to navigate the various challenges of board governance can align decisions with their fiduciary duties, regulatory requirements, and overall mission. With the right policies and procedures in place, an organization can create a culture of good governance that will lead to positive outcomes.
Improve your board’s performance and achieve sustainable growth for your organization with our Mastering Board Governance program. Weekly immersive board simulations offer hands-on experience, help current and aspiring board members develop skills in effective decision-making and group dynamics, and empower them to make immediate and meaningful impacts in the boardroom and beyond.