Ouch! Non-Profit Board Structure Being Used As An Example Of What Not To Do

Tyler Cowen, the economist who write the Marginal Revolution blog linked to an interesting paper from 2014, Corporate Governance Without Shareholders: A Cautionary Lesson from Non-Profit Organizations Lesson from Non-Profit Organizations . The article basically says, as bad as some corporate board are, non-profit boards are worse.

The author, George W. Dent uses the example of non-profit boards to argue against corporate board governance models in which the board of directors is strong and the shareholder power is weak. As much as corporate boards of directors may prefer it if they weren’t beholden to shareholders, it is actually the shareholders holding the board accountable which ensures better governance.

But let me tell you, even though everything Dent says about the problems with non-profit boards has long been acknowledged, it is tough reading.

Under the theory of director primacy that pressure from short-termist shareholders wreaks havoc with long-term corporate planning, NPO boards (which are free of that pressure) should be models of prudent, far-sighted leadership. However, according to a virtually unanimous consensus of experts, this is not the case at all. NPO directors are generally uninformed and disengaged. “[B]oard members . . . are faulted for not knowing what is going on in their organizations and for not demonstrating much desire to find out.

Attendance at board meetings is often spotty and participation perfunctory.” The insignificance of the directors is even touted as a benefit of the job. “[S]ome boards actually encourage the disengagement they later lament: They promise prospective board members that there will be little work to do, in the hope that low expectations will attract more prospective board members.”

In analyzing why corporate board structure is better, Dent analyzes and discards corporate board members being paid and holding stock in the company as reasons why they perform better. He also notes that while non-profit boards fiduciary responsibility is only accountable to secretaries of state, corporate board members are very infrequently sued for improperly exercising their fiduciary responsibilities.

Ultimately, Dent settles on the fact that despite the hurdles they may face in doing so, corporate shareholders are able to exert influence over boards of directors to change policy. With non-profit organizations, the absence of shareholders means there is no possibility of doing so. He admits there are a lot of flaws with corporate forms of governance, but that the non-profit model “It does show, however, that freeing directors from shareholder control leads not to optimal governance, but to dysfunction.”

Now all this being said, I have seen bylaws for non-profits which have memberships where the members elect people to the board so there are some non-profit board structures which do have boards accountable to a larger group comparable to shareholders. I would be interested to know if anyone analyzed the effectiveness of non-profit boards elected by members vs. boards which are entirely self-perpetuating.

About Joe Patti

I have been writing Butts in the Seats (BitS) on topics of arts and cultural administration since 2004 (yikes!). Given the ever evolving concerns facing the sector, I have yet to exhaust the available subject matter. In addition to BitS, I am a founding contributor to the ArtsHacker (artshacker.com) website where I focus on topics related to boards, law, governance, policy and practice.

I am also an evangelist for the effort to Build Public Will For Arts and Culture being helmed by Arts Midwest and the Metropolitan Group. (http://www.creatingconnection.org/about/)

My most recent role was as Executive Director of the Grand Opera House in Macon, GA.

Among the things I am most proud are having produced an opera in the Hawaiian language and a dance drama about Hawaii's snow goddess Poli'ahu while working as a Theater Manager in Hawaii. Though there are many more highlights than there is space here to list.


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