Jack's Journal - March 2021

 

Capitalism: History’s Gift to Philanthropy

Jack Horak
Director of Nonprofit Education & Consulting
TANGO

TANGO has had a long and mutually supportive relationship with The National Association of Nonprofit Organizations and Executives (NANOE), based in Charleston, South Carolina.

We share some common fundamental principles – namely, we are both ardent supporters of both the business sector (capitalism and free enterprise) and philanthropy (the nonprofit sector).

I am writing about this because I will be delivering a presentation at NANOE’s virtual two-day conference entitled a Celebration of Heroes, to be held on April 20th and 21st. Here is a link to the NANOE website where you can register for this event if you’d like.

My presentation on the second day is entitled Capitalism: History’s Gift to Philanthropy. I am looking forward to this opportunity. The presentation will be available after the conference on NANOE’s website.

Having said this while thinking about my presentation I thought back to an article I wrote for NANOE in 2018 about my belief that the volunteer director model that the sector has followed for years no longer works in many cases – and should be replaced with a “directors” fee model. The Article is entitled NANOE asks Board Members to Take off Their Stupid Hat, and I have reprinted it below:

NANOE asks Board Members to Take off Their Stupid Hat

The National Association of Nonprofit Organizations and Executives (NANOE) is a relatively new and modest organization, but that hasn’t stopped it from challenging nonprofit sector dogma at the most fundamental level.

A case in point is its suggestion that the “volunteer governing board” model should be upgraded to a “paid board” model.

As NANOE sees it, nonprofits adopting this practice would have a line item for “directors fees” in both their budget and their fund-raising literature – and they would do this proudly to let the world know that they are so committed to the mission that they have raised the money necessary to attract and retain the best talent available to fill seats on their governing boards.

The objective is not simply to start paying current volunteers to attend board meetings, but to induce very talented people to join the board where they will be expected to do real work in return for the money. After all, nonprofits pay their management team in exchange for work, so why not follow the same protocol with board members?

This is a sweeping reversal of sector orthodoxy — which presupposes that directors donate both their time and their money to the organizations they serve.

Consequently, it’s no surprise that some of the more prominent sector voices were quick to dismiss NANOE’s message as it was rolled out. See, for example, the March 30, 2017 Chronicle of Philanthropy (New Nonprofit Puts Money over Mission and Ethics) and the April 18, 2017, Nonprofit Quarterly (NANOE’s Approach to Nonprofit Leadership: An Insult to your Intelligence).

The negative reaction is understandable to some extent. NANOE’s paradigm turns conventional wisdom on its head so criticism in defense of the status quo is expected.

However, after nearly 40 years as a legal and business advisor in the sector, I respectfully disagree with NANOE’s critics. I suggest that if they take their analysis to a deeper and broader level they will find considerable insight into NANOE’s suggestion, and perhaps conclude, as I have, that the paid professional board model may be the optimal choice for some, but not all, organizations.

Here’s why.

We start with a fundamental question — what is a board of directors – and answer it with some history. The concept (and law) of what we commonly refer to as “charity” emerged in medieval England as part of the law of trusts. A charitable trust is an organization governed by a board of trustees who hold and manage assets in their names for the benefit of a charitable purpose.

The trust form was predominant for centuries. While it still works well for organizations with activities limited to grantmaking, it is poorly suited for operating organizations that have service contracts, payrolls, real estate, borrowed money, licensure requirements, and much more. Consequently, as the sector grew and modernized in the middle of the last century, the trust form was pushed aside in favor of the corporate form because corporations have a bifurcated governance structure specifically designed for operating activities.\

Corporations have both a board of directors (our topic) and a group of officers who comprise management (such as the CEO or CFO). Corporate law vests all power and authority of the organization in the board, which then delegates power and responsibility to management to conduct operations, but with the board overseeing management’s performance. In other words, the board of directors is at the top of the chain of command. It is not there for show.

Second, operating a nonprofit has become amazingly complicated over the last fifty years. The complexity has fallen on the backs of management, which must deal daily with everything from public expectations, to the morass of state and federal regulation which touches upon everything from HR policy and plans, credentialing, licensing, financial reporting, and other challenges that are simply part of the modern turf. Management cannot take this on without board members rolling up their sleeves and doing some real work. Talented CEOs have told me how they long for a strong board to back them up -while expressing their frustration with the common fare offered by “volunteer board recruitment” efforts that don’t always deliver what is needed.

Finally, there is the “Stupid Hat Syndrome.” I first heard this expression from a successful businessman, famously generous with both his money and his volunteer board service. He coined the phrase to express his frustration after years of observing “some of the smartest and most successful business people he knew to join a nonprofit board and immediately put on their Stupid Hat.” In other words, they habitually checked their immense brainpower and experience at the door. The Stupid Hat metaphor may be hard-edged, but the phenomenon is real and all too commonplace in the sector. It’s the 800-pound gorilla in the corner, and it’s as true as the truism that in general “you get what you pay for.”

In contrast, when you pay someone, even a modest amount, you demonstrate respect for what they have to offer; and in return, you can comfortably tell them that they are expected to do real work -show up at meetings, read the circulated minutes and financial reports before the meetings, ask informed questions and offer ideas, chair important committees, have calls and meetings with management between meetings to discuss how things are going, and more as necessary. Paying someone for their service is a commercial exchange of value, not an expense. The brainpower, experience, and work of talented directors who keep their smart hats on at board meetings is worth the money.

I’ll close by saying that there is a lot more to this question than space permits, and by noting that modern nonprofit corporation law is very flexible and allows for use of committees, advisory boards, and other structures that would keep an organization tightly bound to its community while giving this alternative model a chance in appropriate cases —indeed, NANOE’s New Guidelines for Nonprofits may reveal what could be the wave of the future and we should be willing to give it a chance.

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Jack Horak
Director of Nonprofit Education & Consulting

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