Pangea Governance & Leadership

Governance of Nonprofit Organizations

VIC MURRAY

T

he term "governance" is defined to mean the strategic leadership of nonprofit or- ganizations. It is therefore important to

understand how this use of the term differs from the way it is used in the context of traditional public administration. In the latter context gov- ernance usually refers to the process of govern- ment policy making, which is intimately related to the political activities of elected officials.

Outside the realm of government, the concept of governance refers to an aspect of the manage- ment of a given organization. Indeed, in most dictionaries, the synonyms of governance are words such as management and administration. In current parlance, the term has taken on a more specific meaning as a process for making certain types of management decisions. These are commonly referred to as strategic decisions, which have to do with such matters as setting the organization's mission, establishing the values it wishes to embody, deciding the broad strategy for achieving the mission, and evaluating its ef- fectiveness in meeting its goals.

This concept of governance is rooted in the positivist tradition of social science, which as- sumes that individuals can rationally choose among alternative actions based on information that is consciously gathered and assessed. These

decisions are believed to then determine actual behavior, and the outcomes of such behavior, are thought to modify the subsequent decisions (Burrell and Morgan 1979). As we shall see, so- called postmodern critical theory takes issue with this concept of governance as an intend- edly rational process, preferring instead to see the behavior of organizational members emerg- ing from a much more complex, less-determin- istic process.

This brief explication of the governance of nonprofit organizations focuses on problematic issues in the process of making governance deci- sions and their relationship to organizational effectiveness.

Problematic Issues in Nonprofit Governance

Considering governance as a decisionmaking process, there are two dominant issues of con- cern to scholars. One issue is who plays, or should play, which roles in the process, or, in practical terms, who is in charge of the organi- zation and to whom is it accountable? The other issue is how governance decisions are, or should be, made.

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Who Governs?

The literature on the question of roles in gover- nance decisionmaking tends to be of two dis- tinct types: normative and analytic.

The Normative Approach The normative literature takes the position that the final authority on governance decisions ought to be the nonprofit organization's board of directors, governors, or trustees (e.g., Carver 1990; Houle 1989). It is the body to whom the rest of the organization is accountable and that, in turn, is accountable for the organization to the community, for which it acts as "trustee." It fol- lows that the board must be both legally and morally responsible for establishing the organiza- tion's mission and ensuring that it is carried out.

The most common theme in this literature is to suggest that there are too many organizations in which the boards fail to govern properly. They are perceived as committing one of two cardinal sins. On one hand are those boards that allow the organization's paid top executives to make the governance decisions, which they then "rub- ber-stamp." On the other hand are those that do not have a clear understanding of how gover- nance issues differ from detailed operational issues and, hence, get too involved in the day- to-day micromanagement of the organization, leaving no one to focus on the big picture of set- ting the strategic direction.

At this point, the normative literature launches into prescriptive recommendations on how the nonprofit board should be reformed so as to ensure that it effectively plays its gover- nance role (and only this role). A brief summary of some of the most common recommendations is as follows:

Since the role of the board is to act as trustee for the "owners" of the organization, it there- fore ought to represent such owners and be fully aware of what the owners want from the organization. The problem, unfortunately, is that, except for nonprofit organizations created only to serve members who pay a membership

fee, it is rarely clear who a nonprofit's owners actually are. The same dilemma arises when the term "community" is used in place of owners. This point is discussed further. The board must be the primary body to define the organization's mission and to articulate the values for which it stands. The board must obtain independent informa- tion on the threats and opportunities facing the organization and the organization's inter- nal strengths and weaknesses in confronting its changing environment. To have this informa- tion selected and interpreted solely by the top management is to run the risk of becoming a rubber-stamp board. Board members must be carefully selected and thoroughly trained in how to make governance decisions, otherwise they can be lured into be- coming either "rubber-stampers" or meddling micromanagers. Furthermore, this selection and training should not be the responsibility of the paid chief executive officer but of the orga- nization's "owners" and the board itself.

Many other general recommendations are also offered on how to create better boards, in- volving such matters as optimal size, number and type of committees, meeting leadership techniques, and so forth. These are not discussed here, however, since they do not explicitly relate to the governance function per se.

In sum, the normative position on the gover- nance of nonprofit organizations is quite clear and remarkably homogenous across a large number of writers on the subject: It ought to be the sole purview of the board of directors, and it ought to follow the classic principles of rational strategic planning.

The Analytic Approach The alternative approach to nonprofit gover- nance is to be found in the rather small body of literature that is concerned primarily with de- scribing how governance decisions are actually made and with trying to discover why they emerge as they do. A subset of this literature takes on an implicitly normative cast in that it looks for what connections exist between the processes followed in making strategic decisions

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Governance of Nonprofit Organizations 1 1

and the effectiveness of the organization. (See, for example, Herman and Heimovics 1990; Mid- dleton 1987; Bradshaw, Murray, and Wolpin 1992, for surveys of this literature).

One of the primary concerns of the analytic approach to governance is who actually plays what role in governance decisionmaking. To ad- dress this question, a taxonomy of roles must be identified and the concept of the stakeholder must be evoked. As Jay Galbraith (1983), among others, has pointed out, there are three distinct roles in administrative decisionmaking. There are those who make the decisions de facto; there are those that influence those decisionmakers by providing information or recommendation; and there are those that ratify decisions. The latter ole involves having little involvement in the

choice of a preferred course of action but, in the last stage, having the authority to accept it or veto it. For example, in many nonprofit organi- zations, the chief executive officers (CEOs) are the primary decisionmakers, but some of their decisions are put to the board for ratification. The great majority of the time, the board rou- tinely approves these motions, though occasion- ally one may be vetoed and returned to the CEO to be reconsidered.

The concept of stakeholder refers to any party that sees its interests being affected by the ac- tions of a given organization. The potential stakeholders involved in governance decision for most nonprofits include some combination of the board as a whole, individual board mem- bers, board committees, the chief executive offi- cer, other senior management staff, other paid staff and volunteers, users of the organization's services, members, funders, and government regulators.

Empirical studies of actual governance deci- sions in nonprofit organizations reveal several patterns to be quite common (e.g., Middleton- Stone 1991; Herman and Heimovics 1990; Brad- shaw, Murray, and Wolpin 1992). The most common design in larger, more-established nonprofits is the "CEO-dominant" pattern, in which the CEO gathers information and advice from many stakeholders, formulates a decision, and has it ratified (rubber-stamped) by the board as a whole.

The next most common pattern is the "board- dominant pattern," often found in smaller, younger, more volunteer-driven nonprofit orga- nizations, in which a small core group in the board plays a very influential role in recom- mending a course of action on governance is- sues. These are then debated and decided upon by the whole board. The CEO role in this situa- tion is primarily one of several providers of in- formation and advice.

Another common pattern is that of the "staff- dominant" situation, often found in "profes- sional bureaucracies" such as universities and hospitals. As described by Henry Mintzberg (1979), these are organizations in which a core of senior professional staff (such as doctors or faculty members) have the power to make strategic decisions, which both the CEO and the board usually feel constrained to ratify.

Finally, there is the "collective governance" pat- tern, which operates according to an ideology of consensus among all key stakeholder groups. This design often turns out to be an active coalition of board members, staff of all levels, volunteers, and service users. Every effort is made to avoid giving any one of them more power than another. This pattern is commonly found in nonprofits with strong self-help or advocacy missions.

The Relationship Between Patterns of Governance and Outcomes When one looks at the very limited research at- tempting to examine the link between gover- nance decisionmaking processes and the actual performance of the nonprofit organization in achieving its mission, the picture is indistinct at best. The available evidence suggests that, con- trary to the assertions of the writers of the nor- mative literature on nonprofit governance, there is no one pattern of decisionmaking that is more effective than the others. Thus, even though it may be legally and morally desirable for the board of directors to play the dominant role in setting the strategic direction and assess- ing the effectiveness of the organization, there is no guarantee that, if they do so, the organization will be better off than one dominated by its CEO

1 2 1 / Vic Murray

or a group of professional staff or an all-stake- holder collective. It would seem that the decision pattern for governance issues that is most effec- tive depends on the unique configuration of his- tory, organization culture, key personalities, and contextual conditions in which the organization finds itself at any given point in time.

How Governance Decisions Are Made

As noted, nonprofit governance refers to the strategic leadership of the organization. The two most important aspects of this leadership are setting the strategic direction for the organiza- tion and assessing its past performance. Like the question of who governs, the literature on how these decisions are made divides into normative and analytic schools.

The Normative Approach to Strategic Planning

There is a vast body of literature on how orga- nizational strategies ought to be arrived at (e.g., Bryson 1988; Nutt and Backoff 1992; Byers 1984). Although it is not possible to go into any detail here, it is fair to say that all processes for deriving these strategies share certain common characteristics. For example,

It is a rational process, which involves setting clear objectives and priorities based on careful analysis of the organization's present, and likely future, its environment, and its internal strengths and weaknesses. It is based on the fullest and best possible in- formation gathered and synthesized specifi- cally for strategy-setting purposes. This infor- mation not only considers present conditions but also attempts to forecast likely futures. The process culminates in a planning docu- ment (the strategic plan), which is to be used as the basis for all subsequent policy decisions for a given period of time (though most suggest that the plan be reviewed at least annually and changed as needed if the environmental condi- tions have changed significantly).

The Normative Approach to Evaluating Effectiveness The process of assessing how well an organiza- tion is performing in its efforts to reach its goals is similarly viewed as a rational process (e.g., Wholey et al., 1994; Love 1991; Murray and Tassie 1994). Though normative writers admit that it is difficult to reach in practice, most have in mind an ideal evaluation process to which evaluators should at least aspire. It involves ( I) having clear objectives and criteria to be applied in judging the degree of success in attaining them; and (2) devising objective measures of progress that yield results that can be compared to the criteria, thereby producing an accurate evaluation.

The Analytic Approach to Strategic Planning Perhaps the best, and most recent, work summa- rizing the empirical literature on what actually goes on when organizations develop strategies is that of Henry Mintzberg (1994). Several key points are made in this work and in others.

Most documents that emerge labeled "strategic plan" have little influence on the strategic (board direction-setting) decisions actually made after the planning document is created. Organizations could be said to have "strategies" in the form of general guiding ideas that influ- ence how problems are perceived and solved, but they "emerge" rather than appear as formal plans from a special planning group or process. Various stakeholders have varying amounts and kinds of power, and those with the greatest influence shape a strategy from a number of specific decisions. Major changes in strategy can and do occur but do so at disjointed intervals rather than evolv- ing gradually over time; that is, the organiza- tion adheres to a given strategic position with- out changing it until eventually a "revolution" occurs that brings about a new strategy, which similarly lasts unchanged for a period, until the next revolution (Miller and Friesen 1984). The activity of engaging in a formal strategic planning process may, however, prove to be

1 / Vic Murray Governance of Nonprofit Organizations 13

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beneficial for reasons other than the limited value of the planning document it creates. It is valuable insofar as the process involves con- sulting with various external and internal stakeholders who do not have a regular influ- ence on decisionmaking and requires gathering information on the organization's environ- ment. Such activity can have the effect of im- proving the support of the external groups consulted, enhancing staff commitment to the mission, and resolving intraorganizational conflicts (Bradshaw, Murray, and Wolpin 1992).

The Analytic Approach to Evaluating Effectiveness

Despite the vociferous rhetoric from all sides calling for more and better evaluation of organi- zational performance, rigorous evaluation is not common in the nonprofit sector. Furthermore, what is done deviates substantially from the "ideal" model (Osborne, 1992; Murray and Tassie 1994). Other key points from the empiri- cal literature are as follows:

Evaluation tends to be carried out primarily at the program level, rather than at the organiza- tional level. This means that comparisons of the relative costs and benefits of the range of programs are rare. The focus of evaluations tends to be on pro- cesses and inputs rather than on outcomes. Process-based evaluation checks the policies, practices, and procedures followed by organi- zations, under the assumption that certain ac- tions will lead to certain outcomes; for exam- ple, that "participative decisionmaking" will eventually result in a reduction in substance abuse by low-income youth in an agency set up for that purpose; or that an increase in dona- tions (inputs) will produce a corresponding in- crease improving the environment in an envi- ronmental protection agency. The "ideal" methods of evaluation are rarely followed because goals are unclear, criteria are not defined or prioritized, and measurement instruments yield ambiguous results. In addi- tion, behind the formal evaluation procedures there are often nonformal methods at work.

These methods may involve making judgments of effectiveness based on the organization's un- official reputation in the eyes of key stakehold- ers (called "isomorphism" by Di Maggio and Powell 1983). Judgments are also based on the degree to which those in the organization be- ing evaluated appear to hold values and beliefs that are congruent with unspoken values and beliefs held by the evaluator (Tassie and Mur- ray 1995). When all is said and done, many evaluations only marginally affect major policy decisions, such as funding allocations or downsizing plans; this is because of the strength of other variables such as pressures from other, more powerful, stakeholders.

Conclusion

The study of the process of nonprofit gover- nance is of great importance but suffers at pre- sent from the wishful thinking of normative writers and the general lack of knowledge about what really goes on. The possibility of improving governance depends on acquiring a better un- derstanding of the actual processes and the fac- tors that influence them. Until that time, the field will remain dominated by successive fads offering "the answer" to the problems of governance.

References

Bradshaw, Pat, Vic Murray, and Jacob Wolpin, 1992. "Do Nonprofit Boards Make a Difference?" Non- profit and V oluntary Sector Quarterly, vol., 21, no. 3 (Fall): 227-250.

Bryson, John, 1988. Strategic Planning for Public and Nonprofit Organizations. San Francisco: Jossey- Bass.

Burrell, Gibson, and Gareth Morgan, 1979. Sociologi- cal Paradigms of Organizational A nalysis. London: Heinemann.

Byers, Lloyd, 1984. Strategic Management. New York: Harper & Row.

Carver, John, 1990. Boards That Make a Difference. San Francisco: Jossey-Bass.

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Di Maggio, P. J., and W. W. Powell, 1983. "The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields," A merican Sociological Review 48: 147- 160.

Galbraith, Jay, 1983. Designing Complex Organiza- tions. Reading, MA: Addison-Wesley.

Hardy, Cynthia, ed., 1994. Managing Strategic A ction. London: Sage.

Herman, R. D., and R. D. Heimovics, 1990. An In- vestigation of Leadership Skills in Chief Execu- tives of Nonprofit Organizations," A merican Review of Public A dministration, vol. 20, no. 2: 107-124. 1991. Executive Leadership in Nonprofit Or-

ganizations. San Francisco: Jossey-Bass. Houle, Cyril, 1989. Governing Boards. San Francisco:

Jossey-Bass. Knauft, E. B., R. A. Berger, and S. T. Gray, 1991. Pro-

files of Excellence: A chieving Success in the Non- profit Sector. San Francisco: Jossey-Bass.

Love, Arnold, 1991. Internal Evaluation: Building Organizations from W ithin. Newbury Park, CA: Sage.

Middleton, M., 1987. "Nonprofit Boards of Direc- tors: Beyond the Governance Function." In W. W. Powell, ed., The Nonprofit Sector: A Research Handbook. New Haven, CT: Yale University Press.

Middleton-Stone, M. 1991. "The Propensity of Gov- erning Boards to Plan," Nonprofit Management and Leadership, vol. 1, no. 3 (Spring): 203-216.

Miller, D., and P. H. Friesen, 1984. Organizations: A Quantum V iew. Englewood Cliffs, NJ: Prentice- Hall.

Mintzberg, Henry, 1979. The Structuring of Organi- zations. Englewood Cliffs, NJ: Prentice-Hall, , 1994. The Rise and Fall of Strategic Planning.

New York: Free Press. Murray, Vic, and Bill Tassie, 1994." Eval uating the Ef-

fectiveness of Nonprofit Organizations." In R. D. Herman, ed., The fossey-Bass Handbook of Non- profit Leadership and Management, San Francisco: Jossey-Bass.

Nutt, Paul, and Robert Rackoff, 1992. Strategic Man- agement of Public and Third Sector Organizations. San Francisco: Jossey-Bass.

Osborne, David, 1992. Reinventing Government. Reading, MA: Addison-Wesley.

Tassie, William, and Vic Murray, forthcoming. "Ra- tionality and Politics: What Really Goes on When Flinders Evaluate the Performance of Fundees." Nonprofit and V oluntary Sector Quarterly.

Wholely, Joseph, H. P. Hatry, and K. E. Newcomer, eds., 1994. Handbook of Practical Program Evalua- tion. San Francisco: Jossey-Bass.