AMPLIFY  VOL. 37, NO. 1
  

The boards of directors of nonprofit organizations (NPOs) are required to fulfill a fiduciary duty of care. This requirement has meant that boards — and board members — are expected to possess instrumental skills like financial literacy and strategic planning. Although these skills are critically important, this article argues that, given the board’s role in protecting an NPO’s mission, demonstrating leader character should be an equally important expectation of NPO directors.

NPO Board Expectations

In Canada and the US, every incorporated NPO must have a board of directors to “manage or supervise the management of the activities and affairs of a corporation.”¹ Although there are few specifics about the behaviors directors must demonstrate in this function, what guidance there is generally focuses on duty of care. For example, the Canada Not-for-Profit Corporations Act states that: 

Every director and officer of a corporation in exercising their powers and discharging their duties shall:

(a) act honestly and in good faith with a view to the best interests of the corporation; and

(b) exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances.²

Given the statutory and regulatory NPO governance requirements of most North American jurisdictions, meeting duty-of-care expectations means NPO boards are required to perform many important governance functions, including:³

• Participating in the strategic planning process and approving the strategic plan

• Partaking in the budgeting process and approving the budget

• Causing an audit of the organization’s financial statements to occur and then approving it

• Hiring and (in some cases) dismissing the executive director

• Evaluating the executive director’s performance and setting their compensation

• Approving and participating in fundraising plans and overseeing the investment or management of funds raised

These governance functions mirror those of for-profit organizations (FPOs), but the purposes of governance for each type of organization are very different. The FPO governance function and structure emerged as an attempt to provide a solution to the “agency” problem of professional managers working to serve their own best interests (as opposed to those who hired them and own the business [i.e., shareholders]), where the notion of “interest” essentially means maximizing profits for the firm’s owners.⁴ NPOs, not having owners, do not have the same agency problem, so the NPO governance functions focus on protecting the organization’s mission.

Despite the lack of an agency problem in the NPO context, the FPO governance model and mindset have been applied to NPOs. Because of this application, formal institutional legitimacy expectations for what constitute governance best practices have led to the notion that the criteria for board membership must prioritize the possession of instrumental skills relating to the corporate aspect of governance (e.g., strategic planning, financial literacy, executive performance evaluation).⁵ 

What Constitutes Good NPO Governance?

Focusing on instrumental skills as criteria for NPO board membership ignores an obvious (but sometimes forgotten) difference between NPOs and FPOs: NPOs are created to fill a need in society not being filled by any other means, not to turn a profit.⁶ The need to be filled is articulated through the NPO’s mission, which is essentially a social contract with the community it serves (and from which it receives support). That mission becomes the guide for everything the NPO does. As trustees acting on behalf of the community, an NPO board’s main role is determining whether the activities the NPO undertakes adhere to its mission, known as “protecting the mission.”⁷

There are many perspectives on what constitutes “good” NPO governance. Some point to the Carver model as a template for NPO governance that is widely applicable; others argue that the process and function are much more contextual.^8,9 Even so, most agree that, given the behavioral expectations faced by NPO board members, strong judgment (informed by the dimensions of leader character) must combine with instrumental skills to underpin all decisions made by the board.^10,11

A study published in 2018 suggests that “a deeper understanding of how character affects individual behaviors and subsequent board processes is an important step in understanding how boards add value and contribute to organizational performance.”¹² The study’s authors proposed that leader character was key to helping board members assert independent judgment while contributing to the team aspect of corporate boards in their governance role, which until the recent past had been focused on maximizing shareholder wealth. The study focused on how leader character among corporate board members could drive improved organizational performance, but insights on how leader character applies to governance of NPOs can also be gleaned.

Most people consider an NPO’s mission equally important as the pursuit of profit (some might say more important). Thus, if leader character is important to ensure an FPO board member is doing his or her job,¹³ then leader character is central to an NPO board and the ability of each board member to properly fulfill his or her role.

The mission-driven nature of NPOs means their board members’ behavior is held to a different standard than that of FPO directors. The notions of caring for the vulnerable and community service underpin the fiduciary duty and duty of care NPO board members must uphold.

Public trust in NPOs is difficult to earn and easy to lose. Board members play an important role in both, so it is critical that their behavior (and thus their judgment) be beyond reproach. 

Challenges Faced by NPO Boards

If the main job of an NPO board is to protect the mission, it must decide whether every proposal put forward by management fits that mission. Research by Mary Crossan and colleagues demonstrates that the central aspect of leader character is judgment since “how an individual’s character influences their actual behavior in a particular context depends upon their judgment.”¹⁴ The ability to possess and use proper judgment at the NPO board level is challenging.

Unlike FPOs, NPOs often have stakeholders with disparate and potentially conflicting interests.¹⁵ For example, government funders may have political aims they wish to advance, while donors often have more personal goals. Volunteers may have a sense of ownership that creates views about the NPO’s objectives that differ from the community or even the individuals the NPO serves. Stakeholders’ emotional connections are often stronger toward NPOs than FPOs, so the behavioral expectations they place on NPO boards may be unclear. NPOs risk mission drift as they chase funding or try to please multiple stakeholders. They may end up either straying from their mission or amending it to the point where it provides little or no guidance. 

Although there tend to be good intentions from those who serve on NPO boards, sometimes basic skills are lacking in some members, creating deficits that make it hard for the board to effectively complete its essential functions.

Sometimes, people who think they want to be NPO board members actually want to be either volunteers for, or employees of, the NPO. Not understanding the role and process of NPO governance, they want to do what the organization does, rather than to govern it. These are two very different things, and good governance involves knowing the difference. Further, although there are organizations that provide NPO governance training, most NPO board members receive little formal NPO board member training/orientation and are left to their own devices to figure out how to do the job.

NPO board members are often pushed and pulled in multiple directions in terms of the perspectives they must consider when exercising judgment. The demands of instrumental compliance governance functions, combined with the need for vigilance in protecting the mission, can make an NPO board member’s job seem overwhelming.

How Does Leader Character Help NPOs Protect the Mission?

The need for strong leader character at the board level is clear, and it is up to the board to examine whether its governance policies, structure, and functions demonstrate leader character. Fortunately, the Ivey Leader Character Framework (explored in detail in the previous issue of Amplify) provides self-reflective NPO boards with a “checklist” to gauge the extent to which they are demonstrating leader character behaviors. Below are examples of how leader character can manifest in NPO board behaviors:¹⁶

• Courage. Decisions are made following a formal structure in which dissent and discussion are encouraged and directors (1) speak up if they feel an activity is counter to the organization’s mission; and (2) stand up to stakeholders who try to coerce them to stray from that mission.

• Drive. Directors believe in the organization’s mission and are willing to do what it takes to support the NPO in its work. The directors do the work they are supposed to do for the sake of the mission. Board members fully leverage their skills, expertise, and experience in the pursuit of the board’s work.

• Collaboration. Individual directors work as a team on the various committees of the NPO board. The skills of the individuals are leveraged and complement others to create a synergy to produce better, carefully thought-out recommendations and decisions.

• Integrity. Members understand what constitutes “the right thing to do” in their roles as individual directors and for the board as a whole. Real and perceived conflicts of interest are disclosed. Pecuniary interests are avoided. Directors trust each other, allowing the work of the board to be effectively delegated.

• Temperance. Although board members trust each other, they provide proper oversight of each other and the executive director. The board addresses board issues (as opposed to operational issues), and all proposals are vetted to see whether they fit the NPO’s mission.

• Accountability. All directors are well informed about board responsibilities, activities, and deadlines. They have access to necessary information for thorough analysis and discussion, presented in suitable formats and content. Additionally, the board chair monitors committee progress according to each committee’s mandate and the annual work plan.

• Justice. Decisions and activities are made with consideration for fairness to the stakeholders within the community to whom the NPO has made a commitment.

• Humility. The directors believe in continuous improvement of their individual capabilities, overall board governance capabilities, and capabilities of the organization. Boards engage in effective board evaluation and communicate the results, which are then used as the basis for governance training.

• Humanity. Directors empathize with those the organization was designed to serve and strive to ensure that the NPO’s operations function with a respect for, and appreciation of, their rights and needs.

• Transcendence. The board has a grand mission that looks for the betterment of some important element of society in which all directors believe.

• Judgment. Directors are free of personal agendas and use both logic and emotion to do their work; they make decisions always in the best interest of the organization and those it serves.

These examples beg an important question: what are the implications for NPO performance if the board is not demonstrating leader character? Insight can be drawn from research on FPO boards suggesting that “without judgment, decisions are not just ineffective, but often disastrous.”¹⁷ In the nonprofit sector, where mission-driven NPOs potentially face conflicting or bias-motivated agendas, serve community stakeholders, deal with performance outcomes difficult to predict and measure, and regularly find their funding is precarious, it is easy to see that decisions made without judgment informed by leader character can pose existential threats. Boards must ensure that they demonstrate leader character when they undertake their duty of care as a matter of organizational survival.

In contrast, NPO boards that demonstrate leader character tend to be self-reinforcing in using good judgment since directors that exhibit leader character can bring it out in their fellow directors in a synergistic munificent cycle.¹⁸ A board culture based on leader character facilitates governance behaviors that NPO boards need to follow to protect their missions.

Furthermore, leader character can be developed and taught, so if an NPO board believes some of these characteristics are lacking, it can do something about it.¹⁹ Here again, board members can work together to discuss what behaviors demonstrate leader character in their own context and seek help from the literature or consultants. NPO boards that want to do better, can.

Conclusion

In their role as fiduciaries, it is incumbent on NPO boards to ensure that they possess the right mix of instrumental skills. It is equally important that they possess and demonstrate leader character. Research has shown that character can be developed,²⁰ so although it is a resource that current board members should seek when engaging in board-succession planning, it is good practice to nurture character as part of a board’s professional development. Boards can and should measure the extent to which character is being displayed in their actions and decisions as part of their regular board-performance evaluations.

Protecting an NPO’s mission requires board members to make decisions supported by good judgment. Quite often, given the multifaceted nature of what constitutes mission protection in the nonprofit sector, the decisions that boards face cannot be distilled into a clear outcome. Judgment supported by leader character allows NPO boards to make decisions based on nuances that may go beyond what their instrumental skills may tell them, helping them better focus on protecting their mission. Protecting the mission is the singular purpose of NPO boards, a job in which leader character is essential, rather than nice to have.

References

¹ ”Canada Not-for-profit Corporations Act (SC 2009, c. 23).” Government of Canada, 27 November 2023.

² Government of Canada (see 1).

³ Howe, Fisher. “Philanthropy Is Not Business: Advice to New Nonprofit Board Members.” Nonprofit World, Vol. 13, No. 5, 1995.

⁴ Bavly, Dan. “What Is the Board of Directors Good For?” Long Range Planning, Vol. 19, No. 3, June 1986.

⁵ Claeye, Frederik, and Terence Jackson. “The Iron Cage Re-Revisited: Institutional Isomorphism in Non-Profit Organisations in South Africa.” Journal of International Development, Vol. 24, No. 5, September 2012.

⁶ Kotler, Philip, and Michael Murray. “Third Sector Management — The Role of Marketing.” Public Administration Review, Vol. 35, No. 5, September–October 1975.

⁷ McDonald, Robert E. “An Investigation of Innovation in Nonprofit Organizations: The Role of Organizational Mission.” Nonprofit and Voluntary Sector Quarterly, Vol. 36, No. 2, June 2007.

⁸ Carver, John, and Miriam Carver. “Carver’s Policy Governance Model in Nonprofit Organizations.” Gouvernance: Revue Internationale, Vol. 2, No. 1, Winter 2001.

⁹ Herman, Robert D., David O. Renz, and Richard D. Heimovics. “Board Practices and Board Effectiveness in Local Nonprofit Organizations.” Nonprofit Management & Leadership, Vol. 7, No. 4, Summer 1996.

¹⁰ Crossan, Mary, Gerard Seijts, and Jeffrey Gandz. Developing Leadership Character. Routledge, 2015.

¹¹ Crossan, Mary M., et al. “Toward a Framework of Leader Character in Organizations.” Journal of Management Studies, Vol. 54, No. 7, December 2016.

¹² Seijts, Gerard, et al. “Leader Character in Board Governance.” Journal of Management and Governance, Vol. 23, July 2018.

¹³ Seijts et al. (see 12).

¹⁴ Crossan et al. (see 10).

¹⁵ Herman et al. (see 9).

¹⁶ Crossan et al. (see 11).

¹⁷ Seijts et al. (see 12).

¹⁸ Seijts et al. (see 12).

¹⁹ Crossan, Mary, et al. “Developing Leadership Character in Business Programs.” Academy of Management Learning and Education, Vol. 12, No. 2, June 2013.

²⁰ Crossan et al. (see 19).