Community serving for-purpose organisations navigate complex service, regulatory, funding and political landscapes on which their sustainability and mission depend. Skilled boards and governance with intent have become central to success.
This article by Craig Fisher and Wayne Tukiri looks at some of the differences and complexities from traditional corporate governance.
Some history and context
Firstly, a disclaimer. (And that’s a great way for an accountant to start off in writing isn’t it!) What we are talking about in this article is primarily entities operating in the NFP/charity community space.
The organisational world used to be simpler. It was split neatly in two; you had “For Profit” organisations; i.e. companies and similar with a primary objective of making a profit and increasing their shareholder value. Characterised by some (especially some in the NFP sector) as those rapacious uncaring brutally efficient corporate money extracting machines. Then you had the caring side; NFP’s/charities/ community and other “For Purpose” organisations. Those organisations that exist for a higher (more noble?) purpose that are primarily concerned about mission rather than profit.
Alas this simplistic distinction (if it ever was true?) is no longer. Now we have some of the biggest multinational entities in the world espousing how much they care for their communities, the planet, and any range of other factors….while they also set out to continue to maximise profit and shareholder value. Conversely, we have some NFP organisations very focused on ways to generate and maximise income generation and profit for subsequent use on their mission/purpose to the extent that some people then question how they can be charitable in nature. And just to add a further level of complexity; we now have some other amorphous entities sitting somewhere between the two sectors labelled social enterprises, that seek to be a blend of for purpose and for profit.
Personally we are not convinced that there ever was such a clear distinction between the two sectors as noted above. However what is clear is that the boundaries appear much more blurred today, whether that be for marketing and ‘social license to operate’ purposes, or more noble reasons.
However, what is clear to us is that the two different sectors do exhibit different features and hence require some different skills to navigate the governance thereof successfully.
Some key differences to traditional corporate governance
The following are a list of characteristics and key differences between governance of a NFP compared to a For Profit entity that we have observed:
- Heart not head – Put simply; we see more emotion in NFP than in corporate. The drivers for people involved in NFP are usually more closely connected to “the why” of the organisation. i.e. they are more driven by the cause rather than the pay cheque (if there even is one!). This is a powerful motivating force but the coin also has flipside in that this same passion can occasionally cloud rational judgement. It can also make interactions somewhat more loaded. An emotional argument is much harder than one based on facts and logic.
- Fuzzy rather than binary decision making – The increased prevalence of emotion as a motivator can also result in decision making being more challenging. Decisions in a corporate environment are often quite simple when boiled down: Will this decision make us more money or less money? Hence it is primarily binary in nature. (And hopefully: Is it not illegal and will anyone get harmed from our decision will also be considerations!)
- More challenging success measures - If maximizing profit and shareholder value are your primary goals then the key success measures are generally easy to calculate and are numeric in nature. If your primary goals are to achieve a wide ranging social or environmental mission that may also be impacted by many other external factors outside of your organisation’s control, then success measures will generally be much more complicated to identify and measure and report.
- Where the funding comes from – Funding in a corporate is usually relatively straightforward – you borrow at a defined cost. In contrast, funding in a NFP often comes in a variety of forms and these can often have different strings and expectations attached. For example, donations come loaded with the differing (& occasionally irrational or unrealistic) expectations of donors as to why they support the cause and how their gift will be used. Similarly grants can be quite specific as to the range of use and expectations and limitations of these. When those grants come from local or central Government they can also carry the added complexity of ensuring actions are not politically embarrassing, lest you be perceived to bite the hand that feeds you.
- Audience diversity – For Profits are primarily concerned about their customers and shareholders as their target audience, plus occasionally a regulator, depending upon the nature of the entity. NFPs by contrast have traditionally had a much wider audience to be aware of, and to balance and juggle priorities and resource allocation amongst. The challenge with a very broad range of stakeholders is also one of having to be aware of so many, and to determine their relative importance, and then to apply different resources and actions accordingly.
- People culture – In for profit entities there is a clear trade of money for employee time and skill. This extends from staff right up to the governance table. Whereas in the NFP world there is a much greater reliance on volunteer staff and governance. In some cases, there is partial pro bono input where people trade their time and skill for some money but at much less than market rates and what they could command in the corporate world. This altruism is admirable. However, a flipside to be aware of is how the volunteer mindset can result in justification of some actions and these can sometimes seem irrational.
So what does one do with the above?
We make no judgement about any of the above identified differences. They are just that; differences. However, they can be very challenging if one tries to apply a one size fits all governance approach to them. And especially when most of the traditional approach to governance is based on a corporate model.
As we said at the outset, to be successful, community serving for-purpose organisations have to navigate complex service, regulatory, funding and political landscapes on which their sustainability and mission depend. Their boards, in order to be successful in this challenge must firstly appreciate the key differences they are likely to face so they can apply appropriate governance disciplines.
To be an effective NFP governor it certainly helps if your heart is in the cause… but your head is also needed!