3 Differences Between Nonprofit and For-Profit Boards

Nonprofit organizations, including colleges, universities, and schools, seek financially-successful, influential, and generous individuals to serve as governing board members.  In seeking individuals who fit this profile, nonprofits will regularly pull from a pool of successful for-profit leaders.  Not only do many leaders in the for-profit world have access to significant financial resources, they also can develop important spheres of influence, and, as a perceived added benefit, many come to their nonprofit board service with significant for-profit governance experience.

And while for-profit governance experience might first appear to be an unqualified bonus in volunteering as a nonprofit governing board member (governance is governance, right?), it is helpful to be reminded that the two organizational types are, in fact, different.

There are many similarities between for-profit and nonprofit governance.  But, there are also a number of important distinctions.  Distinctions, that, if not well-understood and embraced, can cause unneeded confusion and tension around roles and responsibilities.  In addition, attempting to treat nonprofit governance as a facsimile of for-profit governance models can lead to significant problems in achieving the organization’s mission.  Here, then, are 3 important differences between nonprofit and for-profit governing boards.

1.  Board Size – For-profit governing boards can be small, sometimes very small.  Some corporate boards seek to stay around 5 members and the average size of governing boards for publicly traded companies tends to be between 8 and 11 members.  Meanwhile, nonprofit governing boards can be much larger – perhaps 25-30 individuals.  Some organizations have unique governing structures that include boards with over 100 individuals.  New nonprofit governing board members with experience in for-profit governance may openly question the need for so many people.  “There are too many people here to get anything done!” can be the refrain.  However, the larger size of the nonprofit governing board serves two very important purposes.

First, the nonprofit mission is focused on meeting and serving a public need that is neither fully addressed by government nor business.  Therefore, nonprofit governing boards tend to want members of their constituencies involved in the governance process.  A variety of voices need to be at the governing table so that the decisions made are sensitive and responsive to the needs of those who are being served. Second, the nonprofit governing board has a unique duty that does not fall to the for-profit governing board – namely, the duty of fundraising.  All things being equal, the fundraising prowess of a 30-person board will far outdistance the capacity of a 5-person board

2.  Mission – while both nonprofit and for-profit organizations should have mission statements, mission takes on a central and commanding role in the work of a nonprofit.  Regardless of whatever product or service it might produce, it can be said that the mission for every for-profit organization is to earn an appropriate return on invested capital for shareholders.  That is not the case in the nonprofit world.  Simply put, services that lose cash, are, in many instances, the key components of the nonprofit’s mission.  So, while for-profits may “mission-morph” from one product, service, or an entire business to others over time in an effort to chase a greater return on invested capital, the nonprofit mission will stay relatively stable – feed and clothe the poor, educate the next generation, care for the sick, etc.

What this means is that everyday operations and decision-making in the nonprofit world are focused on the achievement of mission in the longer-term.  It can even be argued that some nonprofit decision-making does not make logical financial sense.  For instance, what kind of education would a school provide if the only disciplines offered where those that were financially-profitable?  No more arts, no more philosophy, no more history.  So, while one can argue that keeping a money-losing history department is not financially-sound, cutting the department would injure the school’s ability to achieve its mission of providing a well-rounded education for the next generation.  Conversely, for-profit decision-making can and does happen much more quickly and with a much simpler benchmark for success.  If money is not being made, it is time to change!

3.  Leadership – In the nonprofit arena, there is typically a paid CEO that serves at the pleasure of an all-volunteer governing board led by a non-executive chair.  In the for-profit arena, it is not uncommon to have combined board chair/CEO.  This distinction is what causes much of the confusion around nonprofit governance vs. nonprofit management.

It can difficult for individuals with significant for-profit board experience to fully appreciate the nonprofit governance model.  However, when nonprofit volunteer board members confuse their role and attempt to manage the enterprise, there are any number of problems that will arise.  As examples, because nonprofit boards are significantly larger than for-profit boards and because the concept of “mission” is so central to decision-making in the nonprofit setting, having volunteer nonprofit board members attempt to make operational decisions for the organization is not only unhelpful, it is unfair to the board members.  The most helpful ways that nonprofit board members can impact the day-to-day work of the nonprofit is to leverage existing personal and professional relationships to gather needed resources for achieving the mission and fulfilling a compelling vision.

In the nonprofit world of governance, there is a phrase that characterizes individuals who serve ably as volunteer board members.  These are the folks who “get it.”  Part of “getting it,” is being financially-capable and generous.  But another part of “getting it,” is understanding that one model of governance doesn’t fit all purposes.

 

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