McKinsey Quarterly

The dynamic nonprofit board

| Article

The corporate-governance debate in the United States is spreading from the for-profit to the nonprofit world. Well-publicized controversies at organizations such as The Nature Conservancy, the American Red Cross, and the James Irvine Foundation have even caused observers such as Eliot Spitzer, the attorney general of New York State, to suggest that the Sarbanes-Oxley Act should be applied to nonprofit boards.

To be sure, those boards operate under unusual constraints. Directors volunteer their time, play an important role in raising funds, and in some cases are so numerous that board meetings resemble conferences rather than deliberative assemblies. They also answer to a wide range of stakeholders who may lack a single common goal, such as increasing shareholder value. Thus it comes as no surprise that a recent McKinsey survey of executives and directors of nonprofit social-service organizations found that only 17 percent of the respondents felt that their boards were as effective as possible.1

To improve the governance of nonprofits, their boards must venture beyond the traditional focus on raising funds, selecting CEOs, and setting high-level policy. Our research indicates that the best boards also provide professional expertise, represent the interests of their nonprofits to community leaders, recruit new talent to the organization, and provide the more rigorous management and performance oversight that funders increasingly demand. These boards get their hands dirty undertaking the tasks they do best while carefully avoiding micromanagement that would demoralize full-time staff members. Good boards, well aware that they lack the time and resources to tackle all of their responsibilities at once, manage to adapt—perhaps by devoting extra energy to a single task, such as a capital campaign, before moving on to the next challenge.

Rising to this level of performance takes time. We found that many nonprofit boards struggle with basics such as recruiting the right members and running meetings effectively. The first task, then, is to nail down the fundamentals—a clear vision, appropriate board membership, and effective processes—because these elements enable directors to avoid wasting a great deal of time and energy. Getting the basics right makes it easier for a board to undertake the hard work of providing true performance and management oversight and to adjust the priorities of both the directors and the organization. Generally, the key isn’t to do more but to focus more.

Overcoming common challenges

Our research and the work we have done with many nonprofit boards have highlighted certain recurring problems: a lack of consensus about missions or goals, poorly constituted boards, and failed processes. Any one of these can hamstring a board by wasting its time, causing it to fall short of its responsibilities, or making some directors less and less engaged.

What’s the vision?

Effectiveness starts with clarity of purpose. Yet only 46 percent of the directors we surveyed thought that other directors on their boards could both summarize the mission of the organizations they serve and present a vision of where those organizations hope to be in five years’ time. In our experience, many battles over strategy are really disagreements over what organizations are trying to achieve. Of course, the absence of a commonly accepted goal (such as boosting shareholder returns) makes it harder to pin down an organization’s purpose—and an ambiguous mission or vision may be the germ of potential conflict. Boards might then fail to make decisions or become bogged down in painfully repetitive debate. They are also susceptible to “mission creep”: the pursuit of grants or contracts that seem attractive but are only loosely related to the organization’s real goals.

The best way for a board to begin resolving such confusion is to retreat to a quiet place and discuss the problem. Away from day-to-day activities, an organization can hammer out its vision and uncover fundamental differences of opinion. Simple as this step should be, only 42 percent of the directors and executives we surveyed had participated in meetings or retreats devoted to clarifying the mission of their organizations and the strategies in place to achieve it. Such discussions are often more relevant if a nonprofit’s board members have personally experienced the complexities and challenges of its mission and strategy by volunteering for or observing work on the front lines.

Investing enough time and energy to reexamine the organization’s mission or vision can have profound consequences. When the board of the International Rescue Committee, for example, conducted such an exercise, it realized that to mitigate the damage caused by crises such as earthquakes and civil wars, support must be sustained beyond the first wave of aid. The board thus chose to expand the IRC’s activities from providing mainly short-term emergency assistance to rebuilding the lives of refugees through longer-term programs to resettle them, while safeguarding them from kidnappers and other traffickers in human cargo. Conversely, many cultural institutions facing budget shortfalls have narrowed their focus in tough times by reducing the number of performances they give, focusing on cheaper exhibitions, or contracting their community outreach programs in hopes of maintaining essential activities.

Once the mission and the vision are both in hand, it is important to use them as a guide to action. The board of Scholarship America, for instance, routinely reviews individual decisions for consistency with its overall purpose: providing financial and academic support to students. In this way, boards build a set of well-understood precedents that directors can draw on when making choices.

Who’s on board?

Even a nonprofit organization with a clear mission and vision may find that certain directors no longer meet its needs: as it expands and matures, for example, it might find that its founding board members lack relevant professional or fund-raising expertise. Changes in the competitive environment can create the need for new skills in areas such as marketing (to attract new members), technology (to exploit new IT systems or the Internet), and public relations (to convey the organization’s message). And the board as a whole can become complacent.

But removing board members can be tricky. It might be difficult to find new people with the same level of passion, and the organization could be reluctant to lose the personal connections of established directors. Furthermore, managers often feel indebted to board members who over the years have given generously of their time, money, and contacts.

There are a few short-term solutions. An often overlooked one is for board members to upgrade their skills through training. (Only 38 percent of the directors we surveyed, for example, served on the boards of organizations offering instruction in fund-raising—a crucial skill for nonprofit directors.) Another possibility is simply to expand the board to bring in new blood while setting term limits for current directors.

Over the longer haul, however, nonprofit organizations have no choice but to rethink the way they replace and recruit directors. Regular evaluations can help by setting forth expectations, indicating when a change of behavior is needed, and even motivating underperforming directors to leave. Formal targets pertaining to the board’s composition may also be useful: the National Urban League, for example, seeks to ensure that a certain percentage of the members of its board are less than 30 and 40 years of age.

Another form of organization—the two-tier board—can eliminate the need to dispense with the valuable experience, relationships, and resources of departing directors. The board of Scholarship America, for example, created what it calls its Honor Roll Trustees, a special board to which exceptional retiring directors are elected by their peers. The CEO meets with the honorary board at least once a year and taps its expertise whenever necessary. These trustees also have a single, collective seat on the main board. Of the 32 high-performing institutions whose leadership we interviewed, 7 had some form of two-tier arrangement.

As for the recruitment of new directors, a standing nominating committee should have the responsibility for creating a board on which each member brings not only the all-important fund-raising capabilities but also necessary skills or relationships with community leaders, politicians, or regulators. The committee should recruit candidates from as wide a range of channels as possible and recognize that sustained cultivation may be needed to get the best possible directors.

Do meetings work?

A board might look good on paper: a strong alignment around the organization’s vision, appropriate members, a clear division of roles. But if board meetings start and finish late, members receive preparatory materials late or arrive unprepared, and there is never enough time to address important matters sufficiently, the process isn’t working. These problems might seem small, but unless they are addressed, directors may become discouraged or disengaged. The directors are, after all, unpaid volunteers serving as a labor of love. If they feel that their time isn’t well spent, they might skip meetings or tune out.

At one level, the simple solution is to fix the process. But how? Leading nonprofits find it vital to plan—by setting dates for board and committee meetings early, arranging agendas to ensure that pressing matters can be discussed fully, and giving staff members enough lead time to develop reading lists for directors well in advance of meetings. Verifying the relevance of all board committees is also crucial; their objectives and accomplishments need to be examined annually.

The executives of a nonprofit should meet frequently with the board’s leadership to discuss whether the organization is taking full advantage of the collective expertise and enthusiasm of its directors. For example, the CEO and board chair of the March of Dimes (an organization dedicated to improving the health of babies by preventing birth defects and reducing infant mortality) meet together twice a month for this purpose. Such efforts are worthwhile: effective board processes can help directors devote more time to the organization, increase their enjoyment of the work, and thus spur them to become more ardent ambassadors and fund-raisers.

Evaluating performance

Measuring results has always been a thorny issue in the nonprofit world, particularly for groups pursuing such lofty missions as ending hunger, improving education, or changing public policy. Funders increasingly urge nonprofits to prove that they are effective, however, and nonprofit boards must surely lead efforts to do so as government social spending falls and competition for funding intensifies. Yet only about 40 percent of the nonprofit executives and directors we surveyed said that their boards played an active role in this work, and some of them, fearing that board members would become distracted by day-to-day minutiae, even questioned whether they should.

In fact, however, boards can oversee performance without micromanaging operations. One way is to push management to look beyond measures of activity (dollars raised, constituents served) and of efficiency (cost per dollar raised or constituent served) and to stress instead measures of impact (how many children have been taught to read, how many people have become economically self-sufficient), which better reflect the organization’s mission.2 Character Counts! runs in-school ethics programs, for example. When its board focused on impact (measured by the number of incidents that involved fighting and cheating) rather than on activities (the number of schools visited and workshops held), it learned that its student-oriented programs helped reduce the level of violence in schools but not the level of cheating. The organization quickly offered teachers and principals workshops that focused on the reduction of cheating and soon saw changes for the better. Without the push from the board, management might not have adjusted these programs so rapidly.

To motivate individual employees to improve their performance, boards can tie personnel evaluations to the achievement of targets—a common for-profit practice that is catching on in the nonprofit sector. Scholarship America, for example, pays bonuses to employees who deliver outstanding results. A number of nonprofit boards whose members we interviewed arranged to have executives coached and CEOs mentored as a result of their disappointing performance against agreed-upon targets and feedback from stakeholders.

Boards should try to look at performance data unfiltered by management, but fewer than 40 percent of the directors we surveyed said that they actually did. The directors of the Girl Scouts of the USA are among that minority. The organization’s local chapters evaluate the performance of the national office, and the results go straight to the board, which in turn suggests ways of refining the services that chapters receive. And when an affiliate of Easter Seals (which provides disabled children and adults with physical therapy, job training, and the like) questioned its clients, it found that they needed support delivered to their homes instead of through a network of external sites. Organizations with broader sets of constituents might emulate the board of America’s Second Harvest, an antihunger group, which has formed a stakeholders’ committee explicitly charged with obtaining feedback.

Becoming a dynamic board

An important (if not obvious) reason for involving the board in such performance-management efforts is the need to focus attention on the way it should use its own time and energy—for example, fund-raising, community relations, strategic planning, or tactical matters such as improving specific programs, recruiting staff, or overseeing financial plans. A year or two later, as the organization grows and the external landscape changes, the board might have to change its priorities. Becoming a dynamic board capable of making such shifts while periodically revisiting common challenges to its effectiveness is central to weathering change and building for the future.

The desirability of a dynamic board might seem to be mere common sense, but it is uncommonly hard to become one. Deciding what to emphasize demands serious self-scrutiny, and only 35 percent of the nonprofit directors we surveyed said that their boards submit to it now. Many boards are reluctant to do so because it takes time and can yield pointed criticisms.

Yet a dynamic board is quite valuable, as the experience of a major environmental nonprofit considering a billion-dollar expansion program shows. Several directors feared that it would distract the organization from urgent advocacy priorities or founder because the board lacked members with experience running aggressive fund-raising campaigns. These concerns, rumbling beneath the surface, were crystallized by a self-assessment initiative. As a result, the board had a series of discussions with management and ultimately modified the program. Over the next two years, this board moved to improve its long-term effectiveness by increasing the directors’ fund-raising responsibilities, redesigning meetings to focus more on discussion (rather than management-led “education”), and restructuring committee roles.

How can a board begin the process of self-reflection? Directors might initiate the process themselves if they are frustrated with the way they are using their time or with their peers’ performance. Sometimes the executive director—concerned, perhaps, about whether the board has the right composition—takes the lead. Regardless of the source, the self-assessment should be an opportunity for education as well as evaluation; conversations about a “gold standard” for effective boards, for instance, can open the eyes of directors who haven’t served on strong ones elsewhere.3

Scrutiny of the board and its roles can take many forms, from facilitated workshops to one-on-one interviews and survey-based processes. Whichever approach is chosen, it should lead to the gathering of facts, to debate and consensus on priorities, and to assignments for individual board members.

The time when nonprofit boards were populated by wealthy do-gooders who just raised money, hired CEOs, and reaffirmed broad policy is over. Today, nonprofit organizations in the United States control upward of $1.5 trillion in assets and are increasingly relied upon to help address society’s ills. The good news is that nonprofit boards usually need not take on all of their new responsibilities at once. By being flexible and dynamic, embracing self-scrutiny, and acting on the findings, boards can do more and do it better.

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