Does an Independent Board Improve Nonprofit Corporate Governance?
Seton Hall School of Law; Seton Hall University - Center for Health & Pharmaceutical Law & Policy
July 23, 2007
Seton Hall Public Law Research Paper No. 1002421
A variety of forces have converged to pressure nonprofit boards to follow the lead of the for-profit sector to become independent, even while empirical evidence from the business sector suggests that board independence from management is not fulfilling expectations, and may be related to weakened firm performance. This background, and the paucity of governance studies in the nonprofit sector, suggests that nonprofits are prematurely jumping onto the independent board bandwagon. There is no convincing articulation of why nonprofit boards should be independent - what is it that independent boards are supposed to be able to uniquely accomplish, how many independent directors are required to ensure board independence, what evidence exists that independent boards are effective at achieving the articulated goals, not to mention whether such goals are quantifiable and measurable.
Early results of governance reform suggest that corporate compliance supersedes preservation and pursuit of mission in many of today's nonprofit board rooms. No question exists that nonprofit directors can and do act in their self-interest, behave illegally (if often naively), or mishandle the assets entrusted to their stewardship. But a disproportionate focus on legal and financial accountability, with the attendant pressure to appoint directors qualified for performance of compliance activities, can divert attention from the more important question of what kind of board will serve as the best steward of the entity's resources as it pursues its mission and serves its constituencies.
The goals of current governance reform might just as effectively be served by encouraging nonprofit boards to become more diverse in the skill sets of their directors; closing the gaps in current nonprofit statutes that permit weak governance structures; statutorily requiring financial audits by nonprofits over a certain size; recommending the presence of monitoring directors; and legally imposing an aggressively expanded conception of transparency.
Number of Pages in PDF File: 49
Keywords: nonprofit governance, independent board, independent director, transparency, nonprofit board
JEL Classification: L3, L30, L31, L33, I18, I1, I10, K32, M14
Date posted: July 23, 2007