Agreeing to serve on an NFP board is a serious matter. It is no longer just a matter of “making up the numbers”.
A person may be a “director” without knowing it. An organization’s constitution may not necessary use the term. The governing body could refer to “members” of the executive committee or board of management or “representative”. Be careful: this will probably be a director’s role without the use of the term. Director’s duties still apply whether or not a person is formally called a “director”
A director has four broad roles:
- They form part of the overall governing team making decisions on the organization’s future.
- A director is part of the public face of the organization speaking collectively for the organization, perhaps to explain its role, perhaps to defend it, perhaps to encourage greater support for it.
- Each person who is invited to become a director has certain skills which, if the organization had to pay for them from outside consultants, would be expensive.
- A director may be called upon to assist with fund-raising projects, such as meeting major donors or meeting government personnel. The four roles are therefore: decision-maker, ambassador, business/ industry adviser, and fund-raiser.
These are heavy responsibilities, let alone the other matters relating to compliance, such as the organization’s payment of rates and taxes, and making sure that the organization has the appropriate work health and safety procedures and training.
This chapter deals with what is required to be a director. It begins right from the beginning: an initial approach to see if a person is interested in having their name put forward for nomination. Having checked out the organization and agreed to stand, the chapter then examines what a person ideally brings to the board. It looks at the qualities, attributes and skills required of a director.
This may all seem rather daunting and so the chapter then reaffirms the pleasures and advantages to be gained personally from being a director. It concludes with some indicators of when it is time to go.
WHAT YOU NEED TO LOOK OUT FOR
In an era of increasing attention to corporate governance, a person should avoid joining a board that is not willing to follow the mainstream stream approach towards corporate governance. For example, the NFP has a domineering chair or CEO who keeps the information to themself, wants pliable people who will always agree to all the board papers, and does not tolerate questions or alternative points of view. There are at least 60,000 NFP organizations – there are many other safer ones to join.
People take their first steps towards joining a board in one of two ways: either they want to serve or someone suggests that they should serve. It is important that this person knows what they undertaking.
In the first case, the person is motivated by a desire to contribute and so may have already some inkling of what will be involved. For example, as a member the organization they can think of ways to improve it. They can approach their role with some vision of what they believe should be done.
Perhaps they decide that it is their turn to take on a board role. This sense of duty is commendable but perhaps risky: their motivation is out of a sense of obligation rather than a positive desire to contribute. Serving on a board requires more than just a grudging acceptance that it is a person’s “turn” on the board. There has to be a clear commitment and willingness to serve. At the very least, for the role to be done properly requires time, and so a grudging commitment may mean resentment that the board’s role is taking a person’s time from other activities.
Additionally Australia is trying to become a meritocracy: where people advance in society because of their merit rather than other (more automatic) qualities, such as being a white adult male or serving for a set number of years within an organization (“seniority”). People should be elected to directorships based on their acquired skills and knowledge and not because they somehow “deserve” it because of, say, the years of service to the organization.
In the second case, where a person is approached to serve, then, they need to be wary of succumbing to flattery. It may be an honour – but will it be too much of a much of burden? Why have they, in particular, been approached? The next section looks at the qualities that a person should bring to the board.
Five Matters for Consideration
Before accepting the invitation, it is necessary to find out the following five matters of general information.
- Will the person be comfortable being a director of the organization? Is the organization’s overall mission in accordance with the person’s own values? This means becoming fully acquainted with the organization’s history, mission and range of services. (They will want to avoid serving on the board of an organization that is, for example, conducting operations that run contrary to that person’s deeply held philosophical views).
Who else is on the board? Will the person feel comfortable working alongside them? It is not unknown for board members to clash on the board of one organization and continue their conflict while serving on the board of another. Staff have enough problems of their own without also having to worry about personality and other clashes on the board. Ask for the constitution and recent annual reports. If they are not easily accessible, then that should serve as a warning as to the organization’s style of governance. Internet search engines are also helpful for learning about the organization. This is now an era of transparency; a great deal of information that may once have been hidden from public view is now available on the Internet.
A person should not join an organization which has a shady reputation – unless there is a common recognition that the organization is in crisis and the person will be part of the team that will rescue the organization. The person needs to join such an organization with a clear sense of what they are entering. If the organization is rescued, then the director will receive credit for their service. But if the organization continues to decline then the director could tarnish their own reputation by being associated this failure. Organizations are not immortal; they do die eventually; perhaps this organization is in death spiral and so not worth the effort in trying to save it from its inevitable fate. (Part of the art of corporate governance is a person’s skill in being able to diagnose whether an organization could in fact be saved via some form of reorganization).
Additionally, the person could inquire as to the nature of board and its meetings. Is there tone at the top? Are the meetings efficiently run? Are directors evaluated on a regular basis? Is there a diversity of board membership? (If not. what is the board doing to correct this omission?) How skilled are the current directors? Are directors quitting their office mid-term? Are their signs of a rapid turnover among directors and senior staff?
Are there major long-running, virtually ideologically-based disputes? NFP organizations run on passion; the downside is that the passions can become toxic. Is the board divided along factional lines? A great deal can be inferred from the minutes (if they can be made available). The minutes will show what the board and CEO think are the board’s primary tasks.
There is nothing inherently wrong in joining a divided, argumentative, unproductive board; indeed that could be the reason for the invitation: the person has conflict-resolving skills. But the person should be alert to the amount of time that will need to be devoted to basic issues of handling conflict, rather than focussing on some of the larger policy and financial issues facing the organization. The person could make their acceptance conditional upon an outside conflict resolution consultant being appointed to examine the issue. It could be, for example, that the dispute in essence (once all the personality clashes are put to one side) is over the fundamental direction of the organization’s future. This makes the task a real challenge but one worth addressing. A fresh pair of eyes could help the board veterans see what the dispute is really about.
- Is the organization financially viable? If a person cannot read a financial report and understand some of the fundamentals of finance, they are not yet suitable to be a director.
Three key financial statements that must be scrutinized:
(i) profit and loss statement (surplus and deficit): a summary of the income and expenditure from the first to the last day of the reporting period (such as June 30);
(ii) the balance sheet showing liabilities and assets on a particular day (such as June 30); this shows the organization’s net worth (what it owns minus when it owes); and (iii) a statement of cash flows: a summary of the movement of money in and out of the organization from the first to the last day of the reporting period.
There should also be an estimated cash flow budget to ensure that the organization can meet its future debts as and when they become payable.
The organization must be financially solvent and not trading at a loss.
However, if the organization is solvent but financially troubled that is no automatic reason to refuse the invitation to serve. Indeed, it could be that the person is in a position to assist. But it does mean that grappling with the financial problem has to be a priority of board membership. Most organizations do not fail overnight; there are often warning signs that could have been heeded two or years beforehand. A fresh pair of eyes might detect those warning signs.
iii. Is the organization heading in a direction that seems sensible? An organization may well be currently doing wonderful work and have a healthy financial situation but these do not necessarily guarantee a smooth future. We are living in an era of rapid change and people’s needs, the economy, government policy and other key factors are all constantly changing. Some organizations have an impressive history but that is no guarantee of an equally impressive future.
If the person decides that they have no way of devising criteria to answer to this question, then this is an issue of the person’s knowledge base. Are they being invited to go into a subject area well beyond knowledge base and experience? There is nothing inherently wrong in serving on such a board but it does mean that the person should commit themselves to acquiring that knowledge.
They should avoid the risk of having routinely to attend meetings and not understand the detailed discussions underway. Never be afraid to ask what may seem to be bland questions of the persons issuing the invitation. The person could also ask whether the board has a systematic induction programme for new members to introduce newcomers to the board.
If the person decides that the gap between their own knowledge base and what would be required to make sense of the new organization’s activities is just too large, then perhaps the person (and organization) would be better off by declining the invitation. This may not be permanent refusal. It is simply that the person does not yet feel ready for the new task. There are many other NFP organizations, more within that person’s knowledge base, that may be more appropriate for that person’s skills.
iv. Does the organization have some form of strategic plan? This need not be a large detailed document (that type of strategic planning is dying out). But the organization should have some formal and continuing process for thinking about its future. The organization should not be focussed solely on internal process matters but also listening out for the faint signals of change, with changes in such matters clientele, membership, competition and technology.
If this notion of strategic planning is not part of the current organization’s cultural DNA then that is no automatic reason for not accepting the invitation to join the board. Indeed it could be the reason why the person is being invited to become a director: they will need to take charge of this task (with management). But if the organization shows no sign of wanting to create some formal strategic planning process, then the person needs to be aware that the organization could run into trouble: it is not thinking enough about its future.
v. Just how much time is to be committed? Where do the board and any other key meetings take place? How much time will be spent in travelling, preparing for board meetings, and taking on some of the committee tasks?
Time is a vital commodity for most people. A person may well be honoured to be invited to serve on a board and feel confident about the organization’s finances, subject matter and future direction. But it is pointless agreeing to serve if a person cannot provide a proper amount of time. It might also be useful for a potential director to confer with their family to ensure that there is support at home for the absences at meetings.
WHAT YOU BRING TO THE BOARD
First, a director must be willing to act honestly, in good faith, and in the best interests of the NFP organization. The director is not there to further their own interests. The director has always to think in terms of what is best for the entire organization.
“Good faith” is more than the avoidance of criminal wrongdoing. There are community expectations to be upheld – and these expectations have increased for directors over past three decades and are continuing to increase.
Second, a director must use due care and diligence in carrying out their duties. The “business judgment rule” means that directors are most likely excused personal liability by a court (that is from being fined or imprisoned) in relation to a business decision if the decision was made in good faith, they had no personal interest in the subject matter of the decision, they had informed themselves about the matter, and believed that the decision was in the organization’s best interests.
Third, a director must use their powers as a director for a proper purpose, in the best interests of the NFP organization as a whole. There can be a problem here where a director is elected by a particular constituency to “represent” that group. For example, a person may be elected by a state branch to serve on a national federal board or may be the state president serving on that national body. Such a person is still required to think in terms of the overall organization and not to vote just on that state branch’s behalf. The director may explain the branch’s point of view but when it comes to the vote the director has to think in terms of the entire organization.
Fourth, a director needs to know for whom the NFP organization operates (the immediate clients) and also the wider social and economic environment in which the organization has to operate (and so the other stakeholders that may be affected by a decision). This means getting to know the organization, the general natures of its clients (as distinct from their individual case histories, which involve confidentiality), potential new groups of clients, and the community in which the organization works.
Fifth, the director must not make improper use of the information acquired as a director. For example, a great deal of information is tabled at board meetings, but the information should not be used for personal gain, such as an organization’s impending property development and the opportunity to do a personal deal with the developer.
Sixth, the director must not take improper advantage of their position as a director. A person may be drawn to a particular organization because they have an involvement in that subject area, such as serving on a school board while their child is a student at that institution. This can be a risky situation: a director wants to look after their child’s interests but this should not be done by exploiting their board position (such as intimidating the teachers).
Seventh, a director must not allow personal interests (or the interests of a family member or friend) to conflict with the interests of the NFP organization. For example, a board member may also be the local supplier of goods and services to the organization; this is potentially fraught with complications and temptations.
Eighth, a director has an obligation to be independent in judgement and actions, and to take all reasonable steps to be satisfied as to the soundness of the board’s decisions. Every director carries equal responsibility for the board’s decisions, irrespective of the person’s time on the board, their experience and knowledge.
Ninth, a director should not engage in conduct likely to bring discredit on the organization. For example, the director might be unhappy with a decision made by the board. The director may disagree with it at the meeting but should not go public with their concerns or make disparaging remarks about their fellow directors. What happens at the board stays at the board.
Tenth, a director has an obligation to upgrade their skills and keep abreast of the latest developments affecting the organization’s work. The director should require the organization to continue to provide information to assist decision-making. Finally, there has to be commitment to really understand the organization: its history, culture, mission, wider context in which it operates, policies, procedures and business plan. Avoid drive-by governance, whereby a director has only a fleeting awareness of the organization. Just attending board meetings and reading the financial documents is not enough. Volunteers and staff soon detect whether a director has any real passion or enthusiasm for the organization. If the director wants to be taken seriously, they have to take their responsibilities seriously.
QUALITIES AND ATTRIBUTES
A person’s interest and situation may change over time (for example, they have served for too long and their enthusiasm is declining). This is understandable, which is why the chapter concludes with a section on when it is time for a director to go.
First: passion. NFP organizations run on passion. If there is not that basic commitment, then it is pointless being a director. This also means attending board meetings and other organizational events and retaining a sense of enthusiasm.
Second: honesty and integrity. Service on a board, say, dealing with social welfare issues, can expose a person to some of the seamy side of life and so there is a temptation to talk to others (if not boast) about some juicy gossip or event. This quality also means being frank and honest in their official dealings with fellow directors. Discussion should be open and clear, with no hidden agendas.
It also means holding onto confidential information, including if necessary from the “constituency” (such as a state branch) that elected or appointed the director to the national federal body. The director’s loyalty has to be that national body and not the director’s own local state branch. The state branch itself needs to recognize this and so not pressure the representative to disclose information they should not.
Third, there needs to be a genuine willingness to serve. A director has to contribute time and skills to the organization. This is not just a matter of having something impressive to put on one’s CV.
Fourth, the director needs good judgment and commonsense. This means a willingness to ask questions. No one person in today’s complex era can be expected to know everything; but they should be confident enough to ask for clarification; they should have a basic knowledge to feel intuitively that something does not sound right.
The board needs to have a mix of the following five skills. No one person will have all four skills and so care has to be taken in assembling the team to cover all the required skills.
There is a need for diversity of people: men and women, young and old, black and white etc. Meanwhile, there is a risk in trying to attract celebrities: they may add lustre to the letterhead but do they really bring skills to the board? A person may be gifted in their own area of specialization but is that speciality really important for the organization?
First, there has to be subject knowledge of the industry in which the organization operates, such as healthcare, school education, child care. Every director should have a basic knowledge so as to be able to ask questions. The only “stupid” question is the one not asked.
Second, there are the generic skills of administration: finance, human resources, law, and information technology. Every director should have a basic financial literacy. This includes ensuring that proper accounts and other records are kept. It also means that directors must make sure they have access to all the necessary information and that the CEO and management are not hoarding important information.
The other skills may be shared among all the other directors. The organization is a business; it may be in the caring profession (such as child care or aged care) but it needs to also see itself as a business and so have a business mentality. The organization has to do good and do it well.
Third, there are the skills for maintaining the right relationships: with government, key corporate and other large private donors, and other NFP organizations operating in the same subject area.
Finally, there are skills associated with assuring the organization’s future, such as fund-raising, strategic planning, marketing, and public relations. Directors should make sure that the organization is doing the right things, while management should make sure those things are being done right.
CONFLICTS OF INTEREST
Conflicts of interest arise when a director is trying to serve two masters. The director must always serve the organization and not other interests. This means that the director must not make decisions that will personally serve the director. It also means that the director cannot favour some outside interests at the expense of the general interests of the organization.
A conflict may arise, first, (“pecuniary interest”) if a director being paid by a company or other organization with which the current organization is having dealings and so the payment may be perceived (rightly or wrong) as influencing the director’s decision-making on the current board.
Second, (“non-pecuniary”), is where the director may be offered gifts (such as free or discounted club memberships or travel opportunities by another organization or individual or company). There does not have to be cash involved for there to be a conflict of interests.
Third, (“related party transactions”) is where the director may be joined in a special relationship prior to the deal (such as marriage) to a person who may benefit from an arrangement made by the organization.
Conflicts of interests are not illegal or unethical in themselves. It arises easily in the nature of modern complex society where organizations, individuals and companies overlap in their transactions. But when do they arise they need to be dealt with immediately. This includes the perception of such conflicts. All boards should have an explicit conflicts of interest policy. Incoming directors need to know their duties.
Board meetings should begin with the opportunity given to any director declaring which agenda items may represent a conflict of interests. As the meeting progresses so a director may suddenly realize that there is a conflict of interests and so this declaration needs to be made immediately. The director should avoid further involvement in the discussion and vote.
The disclosure should be recorded in the minutes.
YOUR CAREER AS A DIRECTOR
Being an NFP director is a rewarding experience. It will not be financially rewarding (and in fact will incur a cost, such as having to make donations to the organization and it will be time-consuming). Nor should it be seen as merely a stepping stone to boards in the for-profit sector; NFP boards are important in their own right.
Indeed there is a temptation to serve on too many boards at any one time. Word soon gets around the NFP sector that a particular person is a good director and so fresh invitations will arrive. A person needs to be careful stewards of their time and commitments.
However, there are many incentives to become a director of an NFP organization. First, there is a real sense of making a difference and a sense of achievement. Even the most hard-bitten business-minded directors can be moved to tears by hearing about some of the (anonymous) cases being handled by the organization. Some unfortunate people lead tough lives, and a good board can help those lives become just a little bit better.
Second, it is wonderful to be involved in a cause greater than oneself. In our narrow, self-obsessed, self-absorbed lives driven by consumerism, celebrities and trivia, serving in an NFP organization enables an individual to engage with the wider world. It is a way of showing gratitude for the comfortable lives that most Australians are able to live. To whom much is given, much is expected.
Third, while board meetings can occasionally be tense, there is an underlying sense of comradeship and purpose in meeting a common challenge. Generally speaking NFP organizations attract high-minded individuals who want to make the world a better place. It is a good place for natural networkers who want to meet other like-minded individuals.
Finally whatever subject-matter the NFP organization may be handling, all NFP organizations have some common characteristics that are constantly engaging. This may be seen in three ways.
- NFP organizations are often pioneers: they are innovators in meeting the needs of citizens that are not already being met or which government find too complicated or difficult to cater for, such as the Lifeline telephone counselling service, which has operated continuously for five decades.
- NFP organizations are providing for human needs, such as in aged care or child care. The organizations are helping vulnerable people or people in vulnerable situations and the organizations enjoy a high level of trust in the wider community.
- Some NFP organizations are prophets: they are warning society about some looming challenge and the need for urgent action, such as in environmental issues.
WHEN IT IS TIME TO GO
No one should expect to serve indefinitely on a board. This is too much to ask of any one person – and it is too much for any one person to expect of any organization.
The most difficult time comes when the organization’s own founder is no longer suitable to run it. The organization may have become too successful (too large) for that person, who may also by now have reduced energy levels for the task of being chair or CEO. The organization has become too big, too complex for that person but the person may not recognize this or be reluctant to leave. In fact this may occur for any director: conditions change and the director has not kept up with them.
Some of the nastiest meetings (official and informal) revolve around encouraging a person to stand down. This can be a daunting task, especially with a chair or CEO with a large ego, domineering personality and high public standing. “Tapping on the shoulder” is best down by an organizational outsider who will not be on the incoming board (and therefore with nothing to gain from that person’s exit), such as a former chair or a veteran member of the organization with high public standing.
Boards are often reluctant to take this step because, after all, the person in question is a volunteer, who has probably given many years of faithful service. There is an uneasiness based on sentimentality and an avoidance of ruthlessness. (Interesting some people who come from a ruthless business background are often the most reluctant to use that same ruthlessness as a director in an NFP organization).
However, sometimes a gentle form of ruthlessness is required. Some face-saving formula needs to be invented to avoid any public humiliation. Whatever happens at the board, the person needs to leave with grace. Their years of faithful service should not be tarnished with word leaking out of the grubby politicking required to remove them. At the very least, “wanting to spend more time with the family” is a standard phrase. No matter what happens within the boardroom, the public statements should be effusive and express regret at the person’s decision to go or not to stand for re-election.
Ideally the need for such a confrontation should be avoided. Here are five warnings signs, which apply to all directors. It is possible that a person in their very first year recognizes one or more of the warning signs and so decides that re-election should be avoided.
- Does the director still have the same passion for the organization? Is the person still adding value to the board? Is the person missing meetings or coming to meetings ill-prepared? Is the person still focussed on the business at hand, or appearing distracted by other matters? Does the board now have a low priority for that director?
- Is the director still able to understand the basic subject matter of the organization? In today’s era of rapid change, there is increasing complexity, even in matters that a director thinks they know well. Indeed sometimes the problem is not the new knowledge that a director lacks, but the old knowledge they cling to when in fact significant changes have taken place.
- Has the person’s overall demeanour changed? Are they now jaded with the organization? A person who has served for many years on the same board may acquire a blasé approach to meetings: “been there, done that”. They may have seen the repetition of too many events, crises, personal problems of clients and so have become bored. The boredom may even move across into an unpleasant confrontational attitude which poisons the board’s atmosphere.
- Does the person put in only the basic required level of commitment? They will not expend some additional time to meet staff or attend events outside the official board meetings. Are they now over-committed? (A risk for any talented person is that they cannot refuse an invitation to serve on just one more board or undertake just one more business venture). The spirit is willing but the flesh is weak.
- Is the person wrongly using organizational information? This could be a basic violation of their director’s duties (such as “insider” property developer and other financial deals). But it may also be due to their gossipy nature: they may be disclosing information they should not be, such as relating to clients. Is the person now using internal information to disparage fellow directors?
A good time to go is when everyone says you should stay. This means that the person is leaving on a high note and in good public standing. There are many other challenges out there to go to.
When a person leaves, they should leave. There is a risk that a person with a long record of service to the organization, may have become so attached to it that they now live in a form of exile, unable to unwilling to let go. They contact old colleagues to find out what is happening in their former organization. They regale former colleagues with stories of “how it is was done in my day”. They accidentally or deliberately undermine the efforts of their successors by complaining how it was much better when they were a director.
Ideally a person should have a good send-off, with plenty of recognition for the hard work done. They should reciprocate by staying well clear of the organization for a few years to allow their successors to put their own stamp on the organization. Only then perhaps could they renew their contacts. By all means remain a member in the ranks – but do not attempt to provide an alternative form of “directorship”. The baton has now been handed on to the successors.