Financial Action Task Force

Can Lead Directors Help Improve Not-for-Profit Board Performance?

The International Journal
of Not-for-Profit Law

Volume 14, Issue 1-2, April 2012

Eugene H. Fram1

Not-for-profit (NFP) boards didn’t receive very high grades in 2010, according to a comprehensive study by Board Source, a national membership organization serving more than 5,000 nonprofit board members and executives. According to the study’s findings, “Chief executives give their boards a C+ and board members give themselves a B.”2 The boards, according to the chief executives, did very poorly (C grade or worse) in fundraising, community relations, recruitment, and strategy development. My board observations indicate these low grades can be due to overcommitted board chairs that change yearly or biennially, inadequate organizational evaluations, modest communications between directors, poorly functioning board committees, and occasional crises. These challenges might be more easily addressed if nonprofit boards were to employ a Lead Director (LD) to help focus on these types of problems.

The 2002 Sarbanes-Oxley Act was an impetus for the New York Stock Exchange to require that “listed companies have a ‘presiding’ (or lead)3 director to oversee (at least) a once yearly meeting of the independent directors without the presence of management.” In contrast, “Nasdaq mandated that listed companies must have executive sessions of independent directors, but did not impose requirements with respect to who should preside at that those sessions.”4 Utilizing an LD assumes that the board chair is not an independent director, i.e., is considered a member of management.
Today, in addition to chairing meetings of independent directors, LDs “add value … by improving the [board’s] performance … helping to strengthen the directors’ relationship with the CEO and stabilizing the performance of the company in periods of crisis or transition.” 5 Might these benefits accrue to NFP boards if they appoint as a lead director to help solve some of the longstanding challenges commonly encountered with nonprofit governance?

The Nonprofit Board Difference

Except in states that allow the management CEO to be a board member, managers of NFPs do not hold board positions. The vast majority of NFP directors are unpaid volunteers who contribute their time, expertise, and financial support to the nonprofit. In contrast to the public company, if the NFP does not achieve its financial objectives, the board members do not have any financial risks, except if they are involved with fraud or some level of negligence. In addition, the Board Source study shows that about 50 percent of nonprofit board chairs rotate each year and another 33 percent rotate every two years. This is not a common procedure in the for-profit sector. Because of this board leadership turnover, an LD might be more valuable in the NFP environment than it is in the for-profit environment.

The LD on a Nonprofit Board

NFPs traditionally seek more board time commitments than the volunteer board persons are able to give. This certainly extends to the board chair, who agrees to commit extra time for the chair’s term. But experience shows that volunteers often miscalculate the board time required, certainly when transitions or crises arise. (This also is often the situation when the chair has major responsibilities for a university or a large business organization.) Consequently, it seems logical to have another volunteer director empowered to formally fulfill some of the coordinating responsibilities expected of a board chair. In this sense, the LD can be considered to be an “honest broker” or facilitator for the board in dealing with the chairperson, fellow board members, the CEO, and stakeholders, but not with the staff.

Listed below are some common duties of an LD on a public company board. The items on the list can easily be applied to the challenges facing nonprofit boards.

Lead Director Directors’ Duties6

  • Structuring board meetings (ensuring that all board members are heard)
  • Recommending matters for board consideration (especially strategic matters in the case of NFP boards)
  • Coordinating independent director actions (communicating with board members who only meet occasionally)
  • Setting board meeting agendas with the CEO and board chair
  • Facilitating communications among the chairperson, CEO, and board members
  • Serving as an independent liaison to stakeholders in the NFP environment
  • Assigning tasks to board committees
  • Providing leadership in crisis situations
  • Coordinating the performance evaluation of the CEO by the chairperson
  • Overseeing the annual evaluation of the board and its committees

Projected Tasks of an LD on an NFP Board

Since the LD position has not yet become a part of any NFP board structure, following are projections of how these common LD tasks might develop for an NFP board. As usual, the devil is in the details of each board’s operating style and culture.

  • Preparation of Meeting Agendas. Working with the board chair and the CEO as a team, the LD needs to be involved with the development of meeting agendas. However, the LD also needs to verify that all directors have needed information, and more importantly that they really understand what is presented in the board book. In this role, the LD is responsible for making sure that meetings are productive.7
  • Speeding the consensus process. Reaching timely consensus is a substantial concern in the NFP board environment. Often, board processes read like complex legislative bylaws, such as requiring several discussions over time before a proposal can be voted upon. Consequently, the LD can be an advocate for processes that enable the group to reach actionable consensus in a timely fashion.
  • Making strategy, not operations, a focus for discussions and decisions. Minutiae agenda items seem to be endemic to the agendas of NFP board meetings. As a result, it is not unusual to have strategy issues frequently postponed. (Only about half the boards in the Board Source study received top grades for this significant responsibility.) Consequently, an LD, as a facilitator, can be empowered to improve NFP board productivity by making certain that strategic decisions are the focus of timely and directed discussions.
  • Monitoring the quality and quantity of management information flowing to the board. In current times, board members of commercial and NFP organizations are encouraged to directly interface with senior management personnel to ask questions and to seek added insights.8 How directors make these contacts needs to be prescribed by board policy, and the board chair and the CEO need to be well informed about potential opportunities and concerns arising from the meetings. The LD can be a nexus for monitoring these communications. The policies need to be developed in a thoughtful manner, and the visits should not become distracting events.
  • Interceding with difficult or nonperforming directors. Dealing with these types of directors is a perennial problem for both NFP board chairs and CEOs. Some examples: the committee chair who never calls a meeting, the one who calls too many meeting without any problem resolutions, or the devil’s advocate who has lengthy statements at every meeting about every issue. The LD, as a board facilitator, can be available to assist the board chair and the CEO in attempting to moderate the impact of difficult directors. It is often difficult to remove a director before the annual election. Even then, the process in NFP board situations can be extremely touchy, if the director doesn’t perceive that he or she isn’t making a reasonable contribution.
  • Monitoring and coordinating committee activity. In the NFP environment, the LD would be an ideal candidate to lead strategic planning committees or special committees of strategic importance, since this is a board function that often does not receive the proper attention. The LD also needs to have detailed knowledge about emergency plans for a temporary CEO succession, about acquisition/merger issues, and about crisis management planning. While routine ad hoc committees do not need the LD’s attention, he/she should be familiar with the outcomes of those committees that can have material impact on the organization.
  • Rehabilitating dysfunctional boards. NFPs often select their directors from a variety of constituencies. In addition, NFP boards often can be quite large with 25 to more than 50 directors; some directors may be located in different parts of the country. Occasionally, these structural issues can result in problems related to obtaining a quorum and to strongly divided opinions on budgets, strategies, and leadership personalities. Again, the LD as a board facilitator can assist the board chair with communications, with resolving contentious issues, and with bringing a greater personal touch and civil discourse to board operations.
  • Building strong relationships with the CEO and the board chair. The LD in an NFP environment must be a management catalyst to improve interpersonal relationships and must not disturb the relationship between the chair and the CEO. Consequently, the LD needs to advise when requested and interject his or her views when he or she perceives perilous actions are being taken. All must understand that the chair and CEO, not the LD, have final decision responsibilities, except those reserved for the entire board. Of course, the key to achieving this coordination is having trust among the three people. To select an LD, the board chair, in consultation with the CEO and other directors, can make the appointment, unless the board calls for a formal position election. These processes, unless carefully structured, can easily lead to internal board conflict.
  • Advising, mentoring, and challenging the CEO. The LD can add value to the CEO function by providing counter-opinions, by supporting the CEO and the board chair when the board chair has little management and/or board experience,9 and by providing feedback on material board related information. However, the LD has to be certain that these actions do not position the CEO in conflict with the board chair, to whom the CEO needs to provide allegiance.
  • Become involved with the CEO’s evaluation at an early stage. Working with the board chair, the LD can add value by helping to establish an evaluation process and by gathering formal detailed feedback from board members on CEO performance outcomes. In addition, if appropriate, the LD can also be invited to the CEO’s performance interview to help the chair further explain and validate the review outcomes.
  • Monitor Compliance. The LD needs to be in a strong leadership position when material moral or ethical issues arise, e.g., how best to terminate employees. In addition, although the person may not be legally educated, he should have some acquaintance with state and federal laws affecting NFP organizations and be a leader in urging the board to seek legal counsel when he thinks it necessary. For example, I have noted that many board members are not aware of the Intermediate Sanctions Act (Section 4958 of the Internal Revenue Code).10 Violation of this act can have serious personal financial consequences for board members, an organization’s management, and possibly even an occasional person volunteering for the organization.11

Lead Director Selection

Since no NFP organizations on record have experimented with development of an LD, the following experience demonstrates the issues reviewed by the business community in the selection process. The author has modified the following description to reflect the environment of an NFP board. (The statement might be of value, as a guideline, to those willing to consider electing or appointing an LD.)

Ultimately, the choice of who should serve as the lead director may hinge upon an assessment of … personal attributes, as well as political realities of the boardroom. It will be important to select a director who understands why the lead director is needed and what they are expecting from his or her performance of the role…. [T]he NFP directors will need to … consider whether or not the director is viewed as having a (personal) agenda or seeking [radical] changes in strategy or management, whether he or she works well with the CEO or may be more likely to [positively] challenge the current management team and whether he or she will command respect among other constituencies, such as community leaders, funders, and the membership and/or staff.12 In addition, the LD should have a good understanding of the history and culture of the organization.

When a Lead Director Can Be Productive – A Summary

  • The board chair typically is overcommitted to his/her full-time position.
  • Strategic planning is often postponed and a designated strategic planning advocate is needed.
  • The board has a large membership, more than about 25 directors.
  • The board chair has had little management and/or board experiences.
  • The organization is strategically growing or experiencing budgetary problems.
  • Board committees are not functioning effectively and efficiently.
  • The board is operating dysfunctionally or hampered by dysfunctional directors.
  • Organizational outcomes are not reasonably defined.
  • The chair requests assistance in the CEO evaluation process.
  • Chairpersons change frequently. A very common practice in the NFP environment.

Field Comments on the LD Proposal

As might be expected, reactions to the proposal varied greatly. The most hostile came from an academic who felt it morally wrong to borrow board processes from any commercial organizations. After all, he concluded, the boards of Enron, Tyco, and others were responsible for the Great Recession.

Others concluded that governance committees could be given the responsibility to focus on the concerns that an LD might handle. However, committee action can often be quite slow and many actions need to be and can be made by the chair, CEO, and LD. For example, if the chair becomes overcommitted, the LD can act as an immediate aide.

Still another projected that the “approach will ultimately disempower other board members, and potentially the CEO as well.”13

Another variation would be to name a volunteer titled “Lead Advisor” to the board without having director status, because the person wouldn’t have term limits. However, without having a director title, others on the board might not relate to his or her recommendations as having the same level of authority.

Once Again! Should NFP Boards Have Lead Directors?

At first glance, adding an LD to the structure of nonprofit board seems like formalizing a position that might impede the relationship between the chair, the CEO, and other directors. (This has not happened in the business sector, according to the references cited in this article.) However, NFP boards certainly should be open to adding an LD for three reasons.

First, the chair usually serves on a part-time basis, and his or her major focus must be a full-time occupation. Being a part-time board officer, a chair can find that board time commitments are more than expected. An LD can assist the chair in leading the board in a more robust (without micromanaging) day-to-day manner and assist in rehabilitating a dysfunctional board. This is especially important when the chair has little management and/or board experience. Even professionals (e.g., doctors, accountants, programmers) can lack these experiences.

Second, the LD can help the CEO work more effectively and efficiently with board committees, especially in driving the work of the strategic planning groups. In this process, the LD can also make certain that there are appropriate contacts between board committee members and management staff. This can be a highly positive step in building morale in the NFP setting.

Third, the LD can be an additional consultant or mentor to the CEO when requested, especially when the board chair is frequently unavailable.

The use of an LD for public company boards is a relatively new process in the for-profit governance system, the position stemming from public concerns with the business debacles experienced early in the 21st century. The position seems to be maturing as the first generation of LDs defines a variety of roles in a large number of companies.14 NFP governance can also be a fertile field in which to experiment with the use of lead directors to improve board productivity.

1 Eugene H. Fram is Professor Emeritus, E. Philip Saunders College of Business, Rochester Institute of Technology, Rochester, New York, He is the author or coauthor of more than 125 published articles and seven books, most recently the nonprofit governance book, Policy vs. Paper Clips (3rd ed. 2011).  Some of the material in this article appeared in “Designating a ‘Lead Trustee’ Can Help Boards Improve Their Operations,” Journal of Philanthropy, June 2, 2011, p. 34.

2 “Board Source Nonprofit Governance Index, 2010, pp. 7-8.

3 Also can be titled “Non-Executive Chairman” if the person chairing the board is an independent director. “An Independent Voice on the Board,” Cahill Attorneys, November 17, 2008.

4 Jeffrey Stein & Parth Munshi, “The Changing Role of the Lead Director,” Corporate Governance Advisor, November/December 2008, p. 3.

5 “The role and value of the lead director,” Lead Director Network View Point, issue #1, King & Spaulding, Tapestry Networks, July 30, 2008, p. 3.

6 “An Independent Voice on the Board,” op. cit.

7 “Enhancing Board Performance,” Lead Director Network View Points, issue #9, King & Spaulding, Tapestry Network, December 1, 2010, p.7.

8 Sarbanes-Oxley encourages such interactions.

9 Not unusual occurrences in NFP organizations when major donors, without management or board experience, are elected to the chair or few directors are willing to accept chair responsibilities.

10 Eugene Fram & Elaine Spaull, “Expectations For Nonprofit Boards Are Changing,” Nonprofit World, May-June 2001, pp. 14-17.

11 For example, one close friend with decades of NFP director experience recently told me he had never heard of the Intermediate Sanctions Act.

12 Stein & Munshi, op.cit, pp. 6-7.

13 Jonathan D. Schick, “A ‘Lead Director’ May Destabilize Boards,” Journal of Philanthropy, July 25, 2011, p. 34.

14 Joann Lubin, “Lead Directors Gain Clout to Counterbalance Strong CEOs,” Wall Street Journal, September 13, 2010.