The board of directors (BOD) has differences in structure, mission, and functions in the profit and nonprofit organizations. In particular, unlike the profit organizations, the nonprofit institutions have a social mission. Realizing the mission, assisting the organization in completing it, and adjusting it to a changing world are the major aims of the board members in the nonprofit organization.
The purpose of this research paper is to analyze all these aspects.
Mission of the BOD in the profit organization is usually focused on certain financial issues: achieving an adequate return on the invested capital to shareholders, employment, paying taxes for supporting local community and state, among many other. On the other hand, the BOD in the nonprofit organization has to achieve service or social objectives. Moreover, the board members in nonprofit institutions do not have such category as profit and loss statement, so creating a mission and evaluating the way, in which it is performed, becomes their key nonprofit assignment (Epstein and McFarlan 31).
In general, if to compare the missions of profit and nonprofit organizations, they will have three major differences (Epstein and McFarlan 30). First, the mission is much more important for nonprofit organization than for-profit one. Second, the board members of profit organizations focus on the financial results whereas the board of the nonprofit company often applies cash-loss generator as a major service. Third, the board of for-profit companies pays less attention to nonfinancial metrics, particularly the mission execution.
Apart from accomplishing societal mission, the BOD in nonprofit organizations has functions associated with finances, HR, strategic planning, and legal issues. In particular, one of its major functions is fundraising, which is necessary for completing the social and service aims. Usually, income is received during various fundraising events and with the help of donations. To create interest for an organization and its projects, the board members should use their business and social connections (Bateman and Snell). This strategy will allow them to ask their supporters for giving donations. Besides, the board members will be able to engage new members. Another way of raising funds is growing the awareness on their initiatives by different marketing channels and inviting more people for the events.
The board members also supervise the programs related to the area of interest of the nonprofit organization. However, if staff of the organization is responsible for conducting the daily program operations, the BOD makes fiduciary observation. For instance, the board members preserve the assets of their institution by ensuring the appropriate usage (Bateman and Snell). They observe the effectiveness of projects and identify how these programs respond to the organization’s mission and goals.
Besides, the BOD has to choose the right chief executive, determine his/her responsibilities, and regularly check how these responsibilities are performed. The board members are supposed to help the chief executive in completing the tasks aimed at reaching the corporate and social objectives. Strategic planning is another function of the board (Bateman and Snell). In particular, the board members design and then regularly renovate a strategic plan in order to achieve the defined business and social objectives. While modernizing the plan, they apply historical information to identify the components, which will work efficiently and change the elements that are not appropriate.
Another function of the BOD is providing legal and ethical standards in the organization. In such a manner, the board members possess a fiduciary responsibility of making sure that their organizations keep to all the legal and ethical standards (Bateman and Snell). This function is very important and should be carefully executed by the board members because legal and ethnicity integrity helps create a positive public image of the organization. The following aspect is necessary for the efficient fundraising and attracting new sponsors. However, effective performance of functions is impossible without a deep involvement in the daily operations of the organizations. The board members of the nonprofit organization should possess a real dedication and interest for their movement because they usually need to work for many hours and without payments (Bateman and Snell). In general, the main functions of the board in the for-profit organization are representing and keeping up the interests of shareholders. The board members do not lead the company, but they oversee those who do.
In order to execute these functions appropriately, the BOD must have an effective leadership and committee structure. The BOD of the nonprofit organization usually has many committees while the for-profit board often has fewer committees (Epstein and McFarlan 34). For instance, as a rule, the BOD in the for-profit institution contains compensation, audit, and governance committees. Besides, there can be some sections that deal with public relations or technology. At the same time, the nonprofit organization of medium size can also have separate committees responsible for the development, facilities, and investments. Usually, the committees of nonprofit organizations include people that are not ready to work full time but possess valuable skills and abilities, which make them interesting for the organization. Besides, the BOD of nonprofit organizations tends to create a variety of ad hoc committees for dealing with the particular issues (Epstein and McFarlan 34). For example, there are committees for seeking CEO or conducting a certain program observation
In a public company, the board members are chosen by the shareholders. Each board has a chairman who leads it. A number of other directors can be different and usually depends on the size of the organization. There are two types of directors: inside and outside ones (Bateman and Snell). The inside directors either work as managers in the organization or belong to the major shareholders. The outside directors usually have certain experience in the industry, in which their company operates. Moreover, some of them are chief executives in other organizations. It is beneficial for the company because such directors are able to make rational decisions. On the other side, the outside directors can be the members of few boards; it is dangerous if the companies work in the same industry. In this case, the outside directors can have difficulties with making objective and fair decisions. Nevertheless, the outside directors do not have a position in the organization; therefore, they are believed to be disinterested. However, the functions of both types of directors are the same.
Another important aspect of the BOD’s structure is the relationship between CEO and the board chair. In the nonprofit organization, in most of the cases, the chairman is a volunteer; therefore, his/her relations with the chief executive are even more sensitive and weighty than in the for-profit companies (Epstein and McFarlan 34). In addition, the board chair changes more often that the CEO. Therefore, the chairperson is supposed to cooperate with the CEO in order to get information about the operational details and peculiarities of deciding on certain issues. However, sometimes, the CEO and the chairperson cannot reach agreement due to different organizational priorities.
In general, the chair and the CEO relationship can have some differences in the various nonprofit organizations but there are also common features. First, usually, the governance committee deals with performing the board governance activities. The board members evaluate and choose the CEO. They also select the board chair, which is another important position because in the case of organizational issues, this official takes leadership over the organization. For example, the organization crisis that happened at Trinity College in Connecticut in 1992 is a vivid example. In particular, the president and the dean left their positions, and operational governance over the college was passed to the chairperson. His leadership had lasted for about a month until the interim president was elected. In selecting a new chairperson, the board members should consider few requirements for this position. Therefore, the chair should possess the board’s support, efficient relationships with the CEO, and understanding of the company’s mission and operational issues. Moreover, the board members need to realize that the chief executive officer is the company’s operational leader and the figure that represents the organization. At the same time, the nonexecutive board chair is quite unnoticeable to the public. It is especially important for the nonprofit organization because they do not have profits and are supposed to interact with the public to gain new donors. According to researches, the majority of sponsors are willing to communicate with the CEO. Therefore, during the fundraising events, the CEO spends half of the time on development (Epstein and McFarlan 35).
Overall, forming the efficient board chair-CEO relationship and then managing them requires cooperation and desire from both sides. In order to avoid an organization crisis, it is reasonable to consider the case that happened with the board in the University of Hawaii. The board members of this organization had only a three-year term for the participants, and it was their major mistake. The experience of other boards demonstrates that it is possible to achieve certain stability and continuity if the members of the board have been at the post for ten years or more. As for the University of Hawaii board, they changed the chair for four times only in 18-month period. Besides, the absence of significant experience and organizational crisis led to losing millions of dollars. It happened due to improper firing of the University president by the BOD (Epstein and McFarlan 35).
In conclusion, the mission, structure, and functions of the board of directors have differences and similarities in the profit and nonprofit organization. In particular, the board of for-profit company focuses on the financial performance whereas the board of nonprofit organization pays more attention to executing social mission. On the other hand, the boards in both kinds of organizations keep the interests of their shareholders or donators. Besides, they do not lead the organizations but rather control those who conduct these leading functions. In terms of the functions of the BOD, they include different aspects. First, the board either deals with fundraising in the case of a nonprofit organization or observes the financial performance (profits, losses, taxation) if it is a for-profit business. Moreover, the board selects the CEO and the board chair. It is important to choose people that would be able to shape good working relationships on these positions because they have a significant impact on the overall performance. Another function of the board is observing the effectiveness of the projects that are made by the organization. The board members also check whether money are spent effectively or not. In addition, the board is responsible for ensuring that the legal and ethical standards are followed, as well as for updating the strategic plans. Finally, the structure of the board is more or less the same in the for-profit and nonprofit organizations because they both select the board chair and have various committees. At the same time, the nonprofit organization has more committees than the for-profit company. It often happens so because people with exclusive talents prefer joining committees rather than working full time.