Take some time to read the article below to gain a deeper understanding of why good governance matters.
Any of us who have engaged in organisational life have a sense, intuitively and anecdotally, that good governance really does bring advantages. However strong objective evidence is difficult to come by. Connecting boards with organisational success is amazingly complex and subjective. There are so many nuanced assumptions and necessary conditions that we soon find ourselves buried in probabilities and possibilities rather than a clear, confident connection of visible cause and effect. The problem is that a board of directors is a very subtle and ambiguous organisational entity. In many respects, they defy normal organisational expectations we would place on other elements of structure like a management team or a functional department. They are the ultimate authority in any organisation and thus report to no one above themselves. Most boards incorporate a unique blend of both formal and informal dimensions relationally and structurally. They are a board only in a collective sense and have no hierarchical structure that allows one to know where to go for what. They meet infrequently to address the most important and strategic issues confronting the organisation.
Ultimately to assess board effectiveness one must be able to connect board efforts to overall organisational success. This proves to be a long, thin, and very convoluted connection winding through the chief executive, the leadership team, and the various elements of the larger organisation to the front lines where the enterprise engages the constituents it serves. As a result when one does look for “research” about boards in both the corporate and non-profit sectors we generally find one of two types of data.
- Firstly, information regarding board composition, structure and practices.
- Secondly information about board member attitudes, perceived skills, board/management relationships, etc. But virtually nothing regarding the actual or perceived performance of the board and its impact on overall organisational performance.
As we launched the Highly Effective Ministry Governance curriculum in 2012 we wanted to assess, to the extent possible, the correlation between governance and organisational performance. In partnership with IFES, we gathered survey data regarding governance needs and effectiveness in 160 IFES member countries. IFES Regional Directors who had meaningful insight and, for the most part, objective perspectives were asked to profile each country in their portfolio.
Because we were implementing such an assessment globally in a non-profit context, we sought to keep the survey questions few in number. We used three very broad but typical criteria as our dependent variables of organisational strength – Overall board effectiveness, ministry impact (lives touched/changed), and fundraising capacity (the ability to raise the resources needed to sustain the national ministry). As to the factors that would impact these variables, we devised several questions that would represent the governance skill/competency and willingness/commitment of the board.
Figure 1 and Figure 2 on the following pages show the evaluator’s assessment of the organisation’s ministry impact (e.g., number of students touched, lives changed, etc.) and of the organisation’s ability to generate the funding resources needed to pursue their mission respectively.
Clearly, we see a positive correlation between governance skill/willingness and ministry strength (impact and funding capacity). One might argue that if a regional director assessed a particular board to be strong, they would be predisposed to assess ministry strength to be strong as well. Such an argument has merit and must be taken into account. However, the typical region leader was assessing between 15 and 20 countries using a survey of 18 questions. In such circumstances, it would be challenging to hold to a preconceived scoring pattern, particularly with individual countries and boards that were “patchy” (strong in some areas, not so strong in others). Additionally, there would be no motive for the raters to “over score” a board, in that to do so, might cut that board off from developmental resources that would certainly help strengthen the ministry of that respective country. If one assumes a certain amount of scoring bias is inherent in the process, the strength of the positive correlations are such that even if tempered to some degree, the affirming correlation between board strength and ministry strength is still clearly evident.
Since we completed this research, others, better equipped and talented have taken on the task. Although there has long been a debate as to the degree one can apply governance principles from the for-profit sector to nonprofits, the overarching belief is yes, but with some important cautions. Publicly traded or regulated for-profit companies have strong motivations to follow good governance practices and significant sanctions if they fail to do so. Required reporting re: corporate performance and compliance, robust regulatory oversight, and tough-minded scrutiny by shareholders (owners) all combine to foster good governance practices in this sector. Typically nonprofits in virtually any country have very little in the way of formal requirements reinforcing effective oversight. As a result, there is considerably less emphasis on governance other than meeting the legal requirements required by the respective countries.
In 2022, three researchers, Dane Blevins (USA), Roberto Ragozzino (Portugal), and Rory Eckardt (USA) reported on some very insightful research that will certainly move the nonprofit governance discussion forward. The authors tested four hypotheses – Charities with independent boards, higher levels of CEO governance, stakeholder (donor) transparency, and more overall governance will contribute a higher percentage of program expenses to their mission.
To test their hypotheses the authors looked at the IRS 990 reports for 6,853 unique US charities over the course of nine years, creating a database of 30,156 observations. The dependent variable was the percentage of donated money that actually went to the mission of the charity. The independent variables were those factors represented in the hypotheses above: independent boards, CEO governance (accountability), stakeholder transparency, and more overall governance. Robust multiple regression analysis showed that there was a positive correlation between the presence of the independent variable and the overall percentage of donated dollars given to the organisation’s mission. Their conclusion: “Nonprofit organisations, and charities more especially, can benefit from having better governance practices… with increased oversight and transparency, charities can contribute more to the missions they intend to serve, and in turn, improve the potential effectiveness of each dollar contributed by donors.” It would seem that the data is clear. Good governance matters!