What Can For-Profit and Nonprofit Boards Learn from Each Other About Improving Governance?

Abstract

For-profit and nonprofit organizations exist for different reasons: for-profits to generate a return on investment for shareholders and nonprofits to pursue charitable and social activities unrelated to commerce. The obligations of the boards of directors of both entities, however, are the same: to oversee the organization and to hire, advise, evaluate, and when necessary remove the CEO.

We examine the attributes and processes both for-profit and nonprofit boards, and identify opportunities to learn from one another.

We ask:

• Why is there not greater sharing of practices between the two entities?
• Why are both unsuccessful developing reliable nonfinancial metrics to measure organizational progress?
• Why are for-profit CEOs paid so much more for their services? Do they create commensurately more value?

The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance and executive leadership. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the books Corporate Governance Matters and A Real Look at Real World Corporate Governance.

Keywords: nonprofit boards, nonprofit organizations, nonprofit perfvormance measurement ,nonfinancial metrics, for profit firms

JEL Classification: G30, G32, G34