Who sits at the boardroom table? A look inside nonprofit boards 2 Executive Summary From arts and culture to social justice, nonprofit organizations are diverse in their mission. However, one commonality unites nonprofits and even their commercial counterparts: Each is governed by a board of non- executive directors. These boards differ, though, as a function of the sector and of the type of organization within. Moreover, nonprofit boards pose different mandates than their commercial counterparts, with nonprofit board members providing governance oversight as well as facilitating financial and technical support for their organizations. Our analysis of the board structure and composition of leading U.S.-based nonprofit organizations revealed the following key findings: KEY FINDINGS CONSIDERATIONS How do Nonprofit boards average 30 members and skew Re-examine board size (ranging from 12 nonprofit larger than their Fortune 500 peers, which have an to 68 members) considering the tradeoff boards operate average board size of 11 members. Only one-third between effectiveness/agility and diversity of nonprofit boards include the organization’s CEO, of skill set and funding sources; reassess who seldom has voting rights. policies regarding CEO participation as a way to inform decision making while ensuring board independence. Also review how well-structured board committees can focus directors’ interests and contributions and make full board meetings more effective and efficient. Who’s at the A third of nonprofit board members are female, Ensure diversity across all parameters, boardroom which is significantly more than for Fortune 500 contextualize diversity efforts and pursue table companies, where only a fifth of board members are an approach to succession planning for female. However, racial diversity of nonprofit boards directors that recognizes organizational is comparatively low vs. that of commercial boards, needs, represents the community with an average of 13% of board seats taken by non- the organization serves and holds the white members as compared with 14% on Fortune organization accountable to getting there. 500 boards. What experience The overwhelming majority of nonprofit board Balance individual skill set needs with the do board members are professionally employed, mostly pursuit of a well-rounded board in terms of members bring within the private sector (65% of board members). both industry and functional diversity. However, previous nonprofit experience is key: Eighty-four percent of board members have spent at least some of their career in the nonprofit sector. Financial services and academia account for the majority of employment in the private and nonprofit sectors, respectively. A third of board members have CEO experience, but few have CFO experience. How engaged Members’ motivations for joining a nonprofit board When recruiting new board members, are board are predominantly altruistic—i.e., to serve the consider that—even if altruistic—board members organization and contribute to its success—but half members’ motivations to participate and of committee chairs are unsatisfied with member availability to do so don’t always pass the engagement. Nearly three-fourths of nonprofit test of time. Re-examine mandates for board members sit on at least one additional board, and assessments of active participation. with an average of four other board seats. Be vigilant to be sure that the board and board meetings are structured to produce efficient discussions and tangible, useful outcomes. 3 Introduction Nonprofits play an essential role in the world’s social, political and financial landscape: They control more than $1.5 trillion in assets1 and are increasingly called upon to prompt social change. With their growing importance for society and the “spillover” of the governance debate from the private sector, nonprofit governance has become a topic of significant interest. However, not much data exists showing how board structure and composition vary among different types of nonprofit organizations. We at Russell Reynolds Associates often receive requests from nonprofit organizations to help them better understand the range of approaches others take and to advise them on best practices. Our goal for this study is to provide data about current practices—broken down by type of nonprofit organization—rather than examine which practices are more or less effective. However, to provide some general guidance for nonprofits that are currently in a state of change, we have included recommendations based on our extensive experience and the governance practices of public boards. While nonprofits and for-profit entities have very different missions and objectives, director obligations share some overlaps; understanding where and when these occur (but also don’t occur) is important to take advantage of opportunities to share best practices. We hope this report provides transparency, raises questions and informs a discussion about the range of choices nonprofit boards can make. Understanding the choices of others can offer a window into the range of possibilities. Methodology: The findings presented in this publication are based on an analysis of the board of 84 leading2 U.S.-based nonprofit organizations, covering 2,302 board members in total (refer to Appendix 1 for additional information on our sample). To develop a comprehensive picture of the current status of nonprofit board governance, the assessment covered various types of U.S. nonprofit organizations, including private foundations, community foundations, domestic non-governmental organizations (dNGOs), international NGOs (iNGOs), museums and performing arts institutions. The mapping results are based on publicly available data. 1 “The dynamic nonprofit board,” McKinsey & Company, May 2004. 2 Data based on revenue size: Organizations have a median revenue of $231 million. 4 Board structure Nonprofit boards vary significantly in size and structure. While the board size of organizations with stronger ties to the for-profit sector, such as private foundations, is similar to that of public companies (around 12 members), the board of institutions with a strong focus on fundraising tends to be large and complex, which could compromise efficiency. Most nonprofit boards also function without the organization’s executive director and the accompanying on-the-ground perspective. On average (and with significant variance), nonprofit boards consist of 30 members, Nonprofit boards which is significantly larger than the 11-member average of Fortune 500 boards skew larger than (Exhibit 1). While private foundations have the smallest boards (12 members on their for-profit peers average), performing arts institutions have the largest (68 members on average). The larger board size for performing arts institutions can be explained, at least partially, by fundraising requirements and a legacy of including experts from the art field (such as artists or performers). Functionally, larger boards can mean more committees beyond the most common executive, finance/audit3, governance and development committees. EXHIBIT 1: ELEMENTS OF BOARD STRUCTURE Range Standing CEO on Average board size (Minimum and committees board (Number of board maximum number of (Number of (% boards) members) board members) committees) 25% of private foundation Private 12 boards include at least 4-22 5 16% foundations one member related to the founding family Community 15 9-22 4 20% foundations iNGOs 19 8-36 5 45% dNGOs 33 13-78 6 23% Museums 33 5-68 10 30% Performing 68 9-149 13 45% arts Fortune Nonprofit 500 Average: Average: 30 11 3 Depending on an organization’s size, the audit and finance committees are sometimes combined. 5 While it is common practice among U.S. public companies that the CEO holds Few nonprofit CEOs the chair position (more than 50% of S&P 500 CEOs hold the chair role), nonprofit actively participate executive directors normally do not hold the chair position,4 let alone sit on on their boards the board of their organization. Indeed, only 30% of boards surveyed include the organization’s executive director/CEO as an ex officio board member. It also is common practice among nonprofits not to grant the CEO voting rights: Approximately 60% of executive directors sitting on boards cannot vote.5 While there is a variety of term length arrangements among nonprofit boards, the Nonprofit board most common term limit range from two to three consecutive three-year terms. In members face term comparison, public boards tend to favor age retirement policies (on average around rather than age 72 to 75 years of age) instead of term limits. Such age limits do not exist on nonprofit limits boards. BOARD STRUCTURE CONSIDERATIONS Lean and agile operations. While larger boards don’t necessarily slow down decision making processes, review your board structure and ensure that it enables the board to fulfill its responsibilities efficiently. For organizations with a larger board, consider implementing a ‘board within a board’ governance model: delegate key tasks to the executive committees and carefully allocate various fiduciary and governance functions to specific board committees chaired by members of the executive committee. Another approach is to transition some supporters from board seats to membership on leadership councils, campaign committees, and advisory councils to handle other responsibilities. Active CEO involvement. To ensure informed decision making, include the executive director as an ex officio member on