Symptoms

Boards of nonprofit organizations are required to exert due diligence in ensuring that the organizations they govern are achieving their missions effectively and efficiently. Quite aside from legal requirements, most boards feel an obligation to hold those who run the organization accountable for achieving results in carrying out the responsibilities delegated to them. They also wish to be able to identify and recognize what is being done well in the organization. In turn, boards are morally and legally accountable to those for whom they act as trustees. To fulfill all these accountability responsibilities requires that the board receive reliable and valid information on how things are going. The areas in which due diligence assessments need to be carried out are:

• The performance of the organization as a whole. This includes:
• Attainment of strategic plan objectives.
• Assurance of the organization’s financial and legal soundness.
• Assurance that the organization is aware of serious potential risks it may face and is mitigating them as well as possible.
• Assurance that all members of the organization (including board members themselves) are behaving ethically and in accord with the espoused values of the organization, e.g. avoiding conflicts of interest, mistreatment of clients or staff, etc.
• The performance of the organization’s CEO (paid or unpaid top management person).
• Assurance that the CEO is meeting the performance expectations of the position.
• The performance of the board itself.
• Assurance that the board is governing effectively and is meeting its own accountability objectives.

Indications that the board is experiencing challenges in this area of their responsibilities arise when a significant numbers of board members or others related to the board, such as the CEO, management team and other key stakeholders report high levels of agreement with the following statements:

• The board does not do a satisfactory job of assessing how well the organization is achieving its mission.
• The board does not get enough of the right kind of information to give it a clear picture of how well the organization is doing.
• The board does not ensure that an analysis is done of serious risks that the organization might face.
• The board does not do a very good job of ensuring that the organization’s finances are being managed soundly.
• The board does not regularly and systematically carry out assessments of the CEO’s performance (e.g. Executive Director, President, etc.).

Diagnosis

The main reasons for difficulties that boards may have in carrying out their duties in the critical area of performance assessment are as follows:

• There is lack of clarity about the amount and kind of assessments the board should undertake. Either the management and board have differing ideas about this, or the board itself is unsure what its role in performance assessment is.
• The board may wish to assess performance but it does not get sufficient information to enable it to carry it out. This could be because there are inadequate systems for gathering and reporting it (including metrics and frameworks to organize it) or because it is intentionally or unintentionally withheld from the board by the management team.
• The board does not create suitable internal structures and processes for carrying out its assessment duties, i.e. there are no board officers or committees with responsibility for gathering the needed performance data, analyzing it and bringing assessment results to the full board for proper consideration.
• The board is not adequately trained in performance management, or does not have enough members with knowledge of how to analyze and interpret performance data.
• The board has evolved an informal culture in which it believes that it does not have to take one or more of its performance assessment responsibilities seriously. For example, it may feel uncomfortable monitoring and evaluating the performance of the CEO or raising questions about the validity or amount of information it is given about the organization’s finances or reputation in the community.

Treatment

Some of the general approaches to improving the board’s ability to carry out its performance assessment responsibilities are as follows.

• The most important requirement is to develop a supportive culture for evaluation not only within the board but also in the whole organization. There must be an atmosphere of collaboration, trust and respect between the board, the top management team and, indeed, all those who control information on how well the organization is doing. If there is a feeling that information is going to be used by the board to ‘blame’ or punish somebody for doing a bad job, the process of assessment will turn into one of political game playing between the evaluators and those under evaluation. This is why boards must be willing and able to communicate positive evaluation results as much, or even more, than those that suggest problems.
• The next question, of course, is: How do you change a board’s culture when most people are not even aware such a thing exists? This is where the leadership of the board chair and the organization’s CEO becomes important. Boards are more likely to face the need to change aspects of their culture when those they respect lead them in examining their heretofore taken-for-granted assumptions about how they do things like performance assessment.
• It is also vital that board members receive training and development in performance management, including how to obtain and interpret the information provided in each of the key areas of assessment: strategic plan objectives, financial soundness, risk mitigation, CEO performance and the board’s own performance.
• Finally, it is necessary to create structures within the board that facilitate carrying out its performance assessment responsibilities. This usually means creating committees or officer positions in which the duties include gathering, analyzing and making recommendations about performance in each of the areas identified above. Leaving such matters to the board as a whole, or delegating them to the CEO and management team, will usually result in less than effective oversight.

What follows is a discussion of resources that will help boards in each of the specific areas of performance assessment identified above.

Assessing the Performance of the Organization as a Whole

As mentioned above, the major problems with evaluation of organizational performance lie in the areas of choosing suitable effectiveness criteria, developing a framework to organize criteria, and choosing the best methods of measurement and analysis.

• For information on what constitutes nonprofit organizational effectiveness see Herman and Renz (2008). Herman and Renz advance “Nine theses” to explain nonprofit organizational effectiveness. For a discussion of the subjectivity inherent in assessing effectiveness and how to deal with it, see Murray (2010).
• For a conceptual framework for understanding organizational effectiveness criteria, see The Competing Values Framework (CVF) Quinn and Rohrbaugh (1981; 1983). The CVF depicts means and ends effectiveness criteria in two dimensions (structure and focus) drawn from the four schools of organizational thought (rational goal, internal process, human relations, and open systems). It has been useful as a diagnostic and leadership development tool at the individual and group levels (see Quinn, Faerman, Thompson, McGrath, & St. Clair (2010).
• For yet another framework to help boards conceptualize, organize, and measure performance, see Robert Kaplan and David Norton’s (1996) Balanced Score Card. The BSC organizes measurements along different organizational perspectives (e.g. financial, internal operations, client/customer and learning and innovation). In a 2013 study titled Board Member Self-Perception of Organizational Governance and the Role of the Balanced Score Card, Aulgur found support for use of the BSC to help boards become clear about their role as well as overcome problems from social construction of organizational performance (i.e. what matters most). Others have found that it does not work as well in some types of nonprofit organizations (e.g. social service).

The Board’s Role in Financial Management

As stewards of nonprofit organizations, one of the board’s responsibilities is to ensure there are enough financial resources to advance the mission and work of the organization and that these resources are being spent wisely. Effective oversight in this area involves tracking the following aspects of financial management:

• Audits of past financial expenditures;
• Oversight of the adequacy of incoming financial resources and reserves (e.g. ensuring there is enough money to cover planned and unexpected expenditures); and
• Monitoring the annual budget.

Most boards are highly conscious of their responsibility for ensuring that their organization is managed in a financially responsible manner. But this is easier said than done, especially when many board members have little or no expertise in understanding financial statements, auditor’s reports, budget documents and the concepts behind financial strategies. Nevertheless, it is possible for boards to improve their competency in this vital area by:

• Conducting regular reviews of board competency in understanding the financial condition of the organization and providing training in overcoming areas in need of improvement.
• Insisting that CEOs provide all relevant financial information needed to adequately understand the organization’s finances.
• Obtaining independently generated reports on the organizations financial management, e.g. from auditors, industry associations, consultants, etc.

For research on the relationship between board effectiveness and nonprofit financial health see Hodge and Piccolo (2011). For guidance on financial management, Miller (2008) answers important financial questions, including the relationship between revenue sources and profitability. This article provides helpful information for boards considering financial decisions such as diversification of revenue streams as well as whether to fund new programs or not.

Risk Management

The concept of risk management in nonprofit organizations refers to becoming aware of actions or events which have the potential to harm the organization’s reputation in the community, its financial stability, or cause it to incur legal liabilities. Examples include risks to client or employee health and safety, high-risk investments, actions that could be construed as negative by the public, etc. The aim of risk management is to balance the possible benefits derived from taking risks against their possible negative effects.

• Good advice and a sample conflict of interest policy can be found in Gill (2005).
• Jackson (2006) contains specific guidance along with useful tools and resources.

Assessing the Performance of the CEO

One of the most important decisions a board makes concerns the selection of the CEO. Much time and energy goes into preparing the job description, recruiting and selecting the right candidate, and orienting them to the top job. Equally important, however, is the need to assess how well CEOs are working out once they are in office. For more specific guidance on the topic of performance assessment, check out the websites in Table 3.