For-profit and nonprofit organizations exist for different reasons: for-profits to generate a return on investment for shareholders and nonprofits to pursue charitable and social activities unrelated to commerce. But what they can learn from each other?
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Lessons for nonprofits:
Research suggests that nonprofit governance could benefit from greater rigor and formalization, particularly in the areas of financial reporting, performance measurement, and board evaluation.
For example, 42 percent of nonprofits do not have an audit committee. Many, particularly small ones, rely on monthly bank statements to track finances. The study also finds that while most nonprofits (80 percent) claim to formally evaluate the performance of the CEO, a significant minority (39 percent) do not establish explicit targets against which his or her performance is measured.
Over a third (36 percent) of nonprofit boards never evaluate their own performance.
Nonprofit directors could benefit from greater focus on their fiduciary roles. The Rock Center survey cited above finds that a quarter (27 percent) of nonprofit directors do not have a deep understanding of the mission and strategy of their organization.
Nonprofits might also benefit from greater expertise and stability at the board level. Two-thirds of nonprofit directors do not believe that the directors on their board are very experienced, based on the number of additional boards they sit on. Almost half (48 percent) say their fellow directors are not very engaged.
Lessons for companies:
Nonprofit boards are characterized by more power sharing than for-profit boards. The vast majority of corporate boards are led either by a chairman who is also CEO or an executive chairman; only 25 percent have a fully independent chairman. By contrast, the CEOs of nonprofit organizations have considerably less power over their boards.
Nonprofit CEOs earn considerably less total compensation than corporate CEOs. The median nonprofit CEO earns $1 30,400 inannual compensation compared to $2.9 million for the median corporate CEO.
Nonprofit boards are more balanced in terms of gender representation. A typical nonprofit board is 45 percent female and 55 percent male.14 By contrast, a typical for-profit board is 18 percent female and 82 percent male.
Lessons for both:
Nonprofits and corporations are deficient in tracking important nonfinancial key performance indicators.
For example, Deloitte (2005) finds that 90 percent of corporate directors believe that nonfinancial factors are critical to their company’s success, and yet half or fewer report that the quality of information they receive on these measures is good or excellent.
Similarly, the Rock Center finds that while almost all nonprofit directors (90 percent) say that their board reviews data to evaluate organizational performance, 46 percent have little to no confidence that the data they review fully and accurately measures the success of their organization in achieving its mission.
Research evidence suggests that nonprofits and for-profits are also deficient in succession planning. Among nonprofits, two-thirds do not have a succession plan in place for the current CEO. Three-quarters (78 percent) could not immediately name a successor if the current CEO were to leave.
On average, nonprofit directors estimate it would take 90 days to find a permanent replacement. The data among corporations is not much different. Only half (49 percent) could name a successor, and for-profit directors also estimate it would take 90 days to find a permanent replacement. ■