Understanding the Nonprofit Board of Directors
The board of directors of a for-profit corporation is quite similar to a nonprofit
board, but there are a few important distinctions. In general, the fact that both
types of businesses are organized as corporations make them fundamentally similar.
Board members of each have the same fiduciary duties and they must attend to similar
governance and operational tasks. Corporate boards are also responsible for complying
with state and federal regulations of corporations, such as employment laws and the
appropriate IRS filings.
The differences between for-profit and nonprofit boards stem primarily from the obvious
differences between for-profit and nonprofit businesses -- their purpose for existing.
For-profit corporations exist to make a profit. They can alter or modify the direction
of the company at will, because anything they do to improve profitability meets the
stated purpose, to make money. Nonprofits, however, must serve a public-service purpose,
such as provide education, address the ill-effects of poverty, or serve some other
charitable purpose. Nonprofits are accountable to the public, work for the public,
and must use all income over the set expenses to meet their stated purpose. To that
end, there are some variances in the way a nonprofit board is developed and run that
keep the venture in line with its purpose.
Board of Directors Compensation
First, the board members of nonprofits are not generally paid for their service,
whereas for-profit board members typically are. The volunteer capacity of a nonprofit
board member does not reduce their responsibility or increase their liability protections.
In fact, because the nonprofit board members essentially work for the public, their
actions can be scrutinized even more carefully than for-profit board actions. Those
who volunteer to serve on nonprofit boards tend to have a personal connection to
the efforts of the organization. They are willing to put in the hours to contribute
to solving the problem at hand, with no payoff except the satisfaction of charitable
work. For-profit board members are also stockholder, or owners of the business, who
are driven by maximizing the profit for their own gain.
Board of Directors is Hands-On
Generally, for-profit board members set the standards for the company (profitability
goals, etc.) and leave the actual sales efforts to the appointed CEO and his staff.
Nonprofit board members are expected to be far more hands-on in developing the funding
strategies of the organization. They should solicit funds from their own contacts
as well as be involved in major fundraising events. For many nonprofits, the efforts
of the board members provide the bulk of capital on which the organization operates.
Nonprofit Executive Director
In for-profit corporations, the CEO generally sits on the board of directors. Because
all board positions are paid, there is less conflict in regards to the board handling
the CEO's salary and job performance. In addition, the CEO and board members all
directly benefit from the corporation's profitability. In a nonprofit corporation,
the executive director is usually the highest-ranking member of the organization
who is actually paid. They are also hired and managed by the board, but since the
purpose of a nonprofit does not directly benefit the executive director or board,
it makes sense that the executive director not be a member of the board. That is,
the unpaid board members are better able to make the best decisions for the organization
without the inclusion of the only participant with a personal stake -- such as the
executive director and their salary.
Maintaining Nonprofit Status
The other obvious difference between for-profit and nonprofits are the tax exemption
and charitable status available to nonprofits. The board of a nonprofit is responsible
for establishing and maintaining each status. One important issue is to monitor the
members' self-interest in the activities of the organization. That is, a board member
can contract to do work for (and be paid by) the organization, but only within reason
and only if the organization can show it did its due diligence before agreeing to
the contract. For example, if a board member is hired to design and manage the organization's
website, there must be evidence that the board member was selected after careful
consideration, and that hiring the board member is the best option for the nonprofit.
Because of the fundamental differences between for-profit and nonprofit corporations'
purposes, there are a few distinctive differences in the way these boards are run.
Overall, however, the board members retain very similar responsibilities and tasks...after
all, business is business no matter where the profits go!
About the Author
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