This is the Resolution, BoardOutlook's premier podcast, where we delve into the vital matters shaping the decisions of boards and executive teams. From navigating governance challenges to optimising board performance, we uncover the strategies and data-driven approaches driving success in the boardroom. Join us as we explore the critical issues facing today's leaders and chart the course towards informed decision-making and impactful resolutions.
In this episode of the Resolution podcast, BoardOutlook CEO Steve Pell, Client Partner Louise Pocock, Managing Director (UK & Ireland) Tania Cabrera, and Senior Advisor Tessa Bamford explore the unique challenges and opportunities faced by not-for-profit (NFP) boards. They highlight the significant differences in board culture between NFPs and for-profit organisations, which are primarily driven by tighter budgets, volunteer board members, and less frequent meetings. The conversation underscores how financial constraints in NFPs lead to increased stress and pressure on board members, negatively impacting morale and board culture. Furthermore, the passion and commitment of directors to their cause, while beneficial, can sometimes result in friction and a lack of structured processes.
The episode then delves into the importance of formal processes and regular meetings, emphasising that the absence of these can hinder strategic growth regardless of the organisation's size. It also points out that under-contribution by directors is a more significant issue in NFPs, stressing the need for active engagement and robust debate among board members. The composition of the board is crucial, with diverse skills and experiences necessary for effective performance. However, NFPs often fill board vacancies through informal networks, leading to potential groupthink. The discussion also addresses the particular challenges faced by smaller NFPs, such as the sunk cost fallacy, where organisations may continue to invest in failing projects due to the difficulty in raising funds. Effective onboarding and induction practices are less common in NFPs, which further complicates their governance. Despite these challenges, the hosts emphasise that improvements in governance do not necessarily require high costs and highlight the importance of having a first-class Chair to manage the board and foster positive relations with executives. The episode concludes by celebrating the dedication of NFP boards, acknowledging their ability to achieve success despite limited resources.
Listen to the episode here or on Spotify, Apple Podcasts or Google Podcasts.
You can also read the full transcript below.
Access to the data referenced in the episode can be found here.
Podcast Transcription: Season 1, Episode 2
Steve Pell: Hello, I’m Steve Pell, CEO at BoardOutlook. I’m joined here today for a discussion about the changing state of board culture in not-for-profits by Louise Pocock, a Client Partner with BoardOutlook in Sydney, Tessa Bamford, a Senior Advisor to BoardOutlook and a director on UK FTSE100 boards, and Tania Cabrera, our UK and Ireland Managing Director. Really excited to jump into this discussion, thank you all for joining us today.
Steve: Just to run quickly through the data, and I would encourage anyone who is joining us on an audio platform to jump into the show notes, have a look at the visuals here that we’re looking at, and I’ll provide a quick description. What we’re looking at is data that’s come out of the BoardOutlook platform for the many boards that ran board evaluations over the 2022-2023 period. We can see a real divergence between the answers around questions on whether the board has a healthy culture consistent with its expectations for management, and we can see a gap emerging between our for-profit boards and our not-for-profit boards. In 2022, both organisation types answered the question relatively consistently. About 45% of both types agreed with that statement. However, moving into 2023, we saw all of the for-profit businesses improve quite substantially, up to about 55%, so a 10 percentage point increase over the course of the year, whereas the not-for-profit entities moved down to about 40%, so a 5 percentage point loss. This took the two entity types who were looking relatively similar in 2022 to having a 15 percentage point gap between whether the board has a healthy culture consistent with its expectations for management or not. Louise, what do you make of this data?
Louise: Yeah, absolutely, Steve. Look, what we’re seeing is that the culture in not-for-profits is a little less healthy than we’re seeing in the for-profit space. This is potentially for a variety of reasons. First, not-for-profits face tighter budgets and resource constraints, which leads to increased stress and pressure on board members. That financial uncertainty can negatively impact morale and board culture. Secondly, directors of not-for-profit boards are passionate with a strong commitment to the cause. That can be fantastic, but if not managed well, it can sometimes lead to friction over the best path forward, damaging board culture potentially. Having said that, sometimes, particularly in smaller not-for-profits, you actually see the opposite, where board members are volunteers who come from a similar circle or a common background. In this situation, there may not be enough scrutiny of views or competition of ideas, and some directors may contribute less, which can also be damaging to board culture. Finally, not-for-profits often have fewer resources to invest in board development initiatives and structured evaluations, which can be really helpful in creating that more cohesive and positive board culture.
Steve: Yeah, fascinating Louise, it does tie to this idea that we've seen a lot that sometimes you can get directors who are sitting on the board of a very large listed company who will care as much about the board evaluation process of their passionate not-for-profit that they’re really involved in and have been a founder of, or have a deep personal connection there – this has always been something that we’ve seen across the market.
Tania Cabrera: That’s really interesting. I was talking to a not-for-profit in the APAC region recently, and they were so passionate about the cause, and because they were so passionate about it and they had some fantastic intellectual and academic people on their board. However, they weren’t very good at having formal processes around performance to your point Steve. And as a result of that they were having challenges in supporting the strategic growth of the organisation. It’s fascinating, to all effect, once you get to a certain size and scale, whether you are for-profit or not-for-profit, you need that rigour in the boardroom to support the direction of the business.
Tessa: I think one of the other things we should bear in mind is that often not-for-profit boards don’t meet that regularly, maybe four times a year. For-profit boards, quoted company boards, tend to meet twice as many times. They also have committees where specific areas like audit, nominations, or health and safety are discussed. They have a lot more engagement with the business. If you’re only meeting quarterly for a couple of hours as opposed to a day and a half for a big for-profit organisation, there’s much less opportunity for real alignment and respect between board members.
Steve: It really is interesting and ties into this data we’re seeing that starting from similar positions in 2022, the data has diverged for large for-profit boards versus NFPs. Perhaps there’s an explanation around the expectations increasing on both, but one having more resources than the other in line with what we’ve been talking about there. One place we might take the conversation is this difference in director contribution. When you look at where people see risk factors in culture, some directors under-contributing is a significant issue, especially in not-for-profit boards compared to for-profit boards. Anyone else pick up on that?
Louise: Yeah, absolutely, Steve. For there to be a healthy board culture, there needs to be a contest of ideas among board members. And where directors aren’t contributing, it does negatively impact on board culture. It’s crucial that all participants are actively engaged and that the Chair can steer the conversation in the direction it needs to go to make effective decisions. And where that’s not happening, where that robust debate isn’t happening, is what can really detract from a healthy board culture.
Tania: Going back to Tessa’s point earlier, there’s dynamics at play here that make things more challenging. Not-for-profit board members are typically volunteers who don’t get paid for their time. They might meet quarterly and may not fully understand the business or have the time to delve into core areas of strategy and performance to be able to challenge effectively. Often, they have lean teams, and the quality of information might not necessarily be sufficient to support a productive board meeting. There’s lots of factors at platy that really make the cultural piece interesting and challenging.
Tessa: One of the other things I was going to add and I think this is equally true for not-for-profit organisations as it is for larger caps, is board composition. I think large cap organisations take board composition incredibly seriously, much moreso than they did say 10-15 years ago, and therefore you’re looking at the right mix of people around the boardroom who understand both the cause and the commercial realities. Often not-for-profit organisations, the board composition is a bit more ad hoc. And if you just get a mismatch, you might get too many people who understand all about the cause but don't understand about the commercial imperatives. And therefore you do get a lack of contribution from some people if they don't really appreciate all the aspects on the agenda, because in reality, the agenda of a meeting for both a large cap organisation and a not for profit is probably going to be broadly similar and quite broad. And if you don't get the right mix of people, you're not going to get the right level of debate, the right level of outcomes. And therefore that can often be to the detriment of the culture, but importantly of the success of the organisation.
Steve: I do think that when this all comes back to this idea of divergent capabilities sitting across not-for-profit boards, and when you have some really talented, high capability individuals who are passionate about these causes and others who might not have had those levels of experience or exposure, the risks around under contribution on those boards, and the cultural risks that come from that are really high.
Tessa: I think there might be another point worth making is that a lot of people like to sit on not-for-profit boards because it looks good on their CV or it looks like they're giving something back, or equally, they might actually be an incredibly generous benefactor financially. But that doesn't necessarily mean they have to be on the board. So I think you have to pick quite carefully. You don't just want people on the board for the sake of being on the writing paper. You need people who are really going to help that organisation be successful in whatever field we're talking about.
Tania: I think that’s a really interesting point as I've spoken to quite a few aspiring non-executive directors who see not-for-profit boards as an entry point to build experience for a portfolio career. That doesn’t necessarily mean they might not have the right mix of skills or passion for the cause, which is again a contributing factor to a less positive board culture.
Steve: We should run a future podcast: to run the correlation between board culture risks and the boards we see who use a skills matrix for composition. I suspect what we’d see is those using a skills matrix might be less likely to face these risks around divergent contribution because they’ve gone through the exercise to think through the skills needed to be successful.
Tessa: That’s a valid point, Steve. One thing I would say is not-for-profits don’t have deep pockets often, so they often prefer to invest their money in the cause rather than governance. They might not use headhunters and instead fill board vacancies through their website or word of mouth, which means you’re much more likely to get similar people or experience groupthink.
Louise: Much of this also comes down to the size of the not-for-profit, and similarly in the for-profit space. Smaller organisations, be it for-profit or not-for-profit, may not have as mature governance practices as larger ones, and that’s where you start seeing that difference as well.
Steve: Something that really captured me when going through this data was the difference in the value of a dollar and the size of organisations: which ties into sunk cost fallacy – the idea that you’re chasing good money after bad. The data shows this risk is much higher for NFPs under $10 million compared to larger ones. Any thoughts on why this might be?
Tessa: I think it might come back to the composition of the board. If you don't have a very good board composition with divergent skills and experience you are more likely to get things skewed one way or the other. And you won't have the rounded debate around the table, which is important before a board in an organisation makes any important decisions.
Tania:
I think that's a really good point. And one of the insights of the data was around focus for board improvement shifting from directors needing to be prepared for meetings and for discussion to directors holding management to account. And I think to that point, Tessa, around board composition, as a board you need, in order to discharge your duties, effectively hold management to account and ask the challenging questions. So if good money is being proposed to be put into an area that really doesn't necessarily make sense or is not right, those hard conversations need to be had. So I think to that point, the trend that the data is showing stands up. Holding management to account is really, really important.
Tessa: Also, I think that my experience is that onboarding and induction for not for not-for-profits tends to be less thorough than in for-profit organisations. Nobody is good at everything, but everyone is good at a few things. But when you join any organisation, whether it's for-profit or not-for-profit, it's really important to get a deep understanding of the organisation, its strategy, its motivation, its people, the challenges, the opportunities. And I think for-profit companies tend to have well-structured induction programs and I think not-for-profits, maybe again because of lack of resources, are not so thorough in that area.
Steve: On sunk cost, my hypothesis is that it’s so hard to raise money if you’re a small NFPs, so there’s a real perception within the organisation that any money that has been spent needs to see a return and it’s more likely for people to chase after that. But regardless of how hard it is to raise the money, I think what does really stick out to me in this data is the necessity that a wasted dollar is still a wasted dollar. It doesn't matter how hard it was to raise it in the first instant. So one I think for us to communicate back to all of those smaller NFP that we're working with.
Steve: Just as we wrap up the session today, some really interesting data here. Louise, did you have any reflections?
Louise: Yeah, look, I think that a lot of it is about the size of the organisation rather than about the divide between not-for-profit and for-profit organisations. And it's about that maturing governance structure. And in that maturing governance structure with bigger organisations, that's where you are getting all those things that are critical to a healthy board culture. So things like robust debate and careful examination of facts and fact-based decision making and investing board development, and things that really do lead to a healthier board culture. So, in my view culture might come down more to organisation size as opposed to the not-for-profit versus for-profit divide.
Tania: I think a key takeaway of mine from this data is that really very little is driven by self-interest from board members in this space. And that says a lot. So hopefully, yes, more can be done to improve performance, making boards more effective, but also being cognizant of the fact that typically this is people giving their time to do something that's really positive and very good for the cause and for society.
Tessa: I completely agree with everything everybody has said. I think that notwithstanding all the comments we made about improving governance and induction and things like that, a lot of these things can be done at low cost and it very much depends on the people involved. So it doesn't necessarily need to cost anything. And at the end of the day, as with for-profit organisations, I think one of the most important factors in having a terrific culture in any organisation, including not-for-profits, is having a first class Chair who really manages the board, has great relations with the executives and therefore the whole is working together for the good of the organisation. And so much of it comes down to the quality of the Chair.
Steve: Great points. I was struck just as we went through this discussion, we're definitely pulling at the edges on where things are different, but there's so much here when you're looking at this that is similar, where we actually should celebrate that there's organisations who are under-resourced in many cases – relative to the scale of company secretarial teams and paid boards, etc – are doing so many things so well, and I think that is something that we need to really acknowledge and celebrate.
Tessa: Completely agree.
Steve: Well, thank you so much. It's been a delight as always. Looking forward to what we jump into next time.