Sunday, December 31, 2006

Nonprofit Boards are inherently flawed in today's world

Today, the nonprofit sector spends a lot of time wondering why boards don't perform well. Many articles in academic peer reviewed journals and trade journals focus on descriptive and normative discussions that describe the phenomenon and propose solutions. Often, these solutions involve steps to improve recruitment, retention, identification, and training of Board members. Some organizations often try to offer courses to educate board members about their legal obligations, with a view to scaring them into better activity. This is just wrong-headed and it's clear that this approach has not produced the right kind of results for nonprofits. I think there are a couple of key problems (I've used Canadian terminology since this is where I'm writing from, but my thinking would work in all sorts of legal venues).
The corporate model of structuring a nonprofit organization, in Canada often called a Society, is an inherently poor way of organizing nonprofit activity. There are three specific problems:
1.The Society model inherently attracts directors who do not possess the necessary skills to govern corporate activity and who are biased towards providing less than time and effort than is required to govern an organization effectively.
2.The Society model inherently fails to provide directors with the necessary incentives to govern corporate activity effectively.
3.The Society creates an environment in which members and other interested stakeholders have insufficient incentives to monitor directors and management properly.
•There are three roots of these problems:
1.a corporate form of organizing activities that separate ownership, production, and consumption, without creating or identifying any owners;
2.extreme asymmetry of information between management (the producer of nonprofit services) and the directors and members (the notional owners of the nonprofits); and
3.the corporate form creates insufficient incentives for individual stakeholders of a nonprofit to monitor management and directors.