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Do I Need An Executive Committee?

by CCE Staff on 08/25/14

Board.Doc

Question:
Do I need an executive committee?

Discussion:

You may not have a choice!

If your bylaws specify an executive committee as a standing committee, you have no choice.  You either have an executive committee or you change the bylaws.

While an executive committee is not necessarily a core or basic board committee (audit, governance, and compensation are core committees), most enterprises have an executive committee.  The pragmatic operating question then is not one of need, but rather of use.  How should you use your executive committee?

Use an executive committee sparingly - and only when there is no alternative.

The executive committee should neither in perception nor reality appear to be or be a replacement for full board deliberations or actions.

Enterprises that have all matters - or at least all substantive matters- go through the executive committee before being presented to the full board, risk losing the interest of their non-executive committee board members.  This is the unavoidable consequence of people feeling irrelevant, because decisions are being made elsewhere, by others, and only being presented to the full board for endorsement.

Executive committees can be valuable in times of crisis or matters of urgency when governance oversight is needed, but logistically the full board cannot be gathered.  Executive committees can also be useful if the enterprise's custom is to not schedule board meetings during some months - leaving gaps in the governance calendar.  In these instances, an executive committee provides management with a useful device for keeping the board informed of the enterprise's activities, threats, and opportunities.  However, in this latter instance, it is important that:

  • These meetings only be operational – yielding only advice and counsel, not decisions, and,
  • Management inform the full board of the meeting and the substances of the discussions.

Answer:

While you may be required by your bylaws to have an executive committee, and while an executive committee can be useful, it cannot be allowed to displace the board - either in reality or perception.

 

Additional Resources to Consider:

LaPiana, David.  "Boards Should Only Have Three Committees!"  www.blueavocado.com  June 7, 2009.  http://www.blueavocado.org/node/385

Berman, Howard J.  "Chapter 7: Board Committees."  Making A Difference.  CCE Publications, 2010. 

Joyaux, Simone P.  "Destroy Your Executive Committee."  The Nonprofit Quarterly.  Summer 2011.  http://www.nonprofitquarterly.org/governancevoice/12681-how-to-revitalize-your-board-destroy-your-executive-committee.html

Did a New Survey Offer Misleading Data on the CEO Turnover 'Wave'?

by CCE Staff on 08/08/11

From the Chronicle of Philanthropy, Print Edition, Page 38, Opinion

July 28, 2011

To the Editor:

A new report on nonprofit executive leadership ("Nonprofit Leadership Still Shaky, Study Finds," June 30), jointly produced by CompassPoint Nonprofit Services and the Meyer Foundation, is receiving significant attention in the sector. Nonprofit leadership is a crucial issue, of course, and the report raises many vital questions. But I wonder whether the report's authors-as well as the trade-press coverage, including in this newspaper-have in some cases extrapolated too far from the results.

 

The Chronicle’s coverage of the study, "Daring to Lead 2011," begins:

"Despite years of warnings, nonprofit groups are unprepared to handle the wave of executive turnover about to hit them hard, according to a new survey of charity leaders. And with many organizations already shaken up by the recession, the stakes of a botched leadership changeover are high."

 

 

I feel like we have been hearing about a "wave" of impending transitions in leadership in the sector for the past decade. Perhaps that’s because we have. Previous iterations of this study, "Daring to Lead 2001" and "Daring to Lead 2006," issued similar warnings.

 

 

In fact, the proportion of leaders saying they will leave their posts in the next five years has actually declined-from 75 percent in the 2006 and 2001 "Daring to Lead" reports to 67 percent in this latest one. Of course, even 67 percent is a high number, but experience seems to suggest a significant gap between the survey results for this particular question and what actually happens.

 

 

It seems that among the most important findings of this research effort may be this one: Surveys, while good for many things, are not particularly useful for predicting behavior five years hence.

 

 

In discussing the "high rates" of projected turnover, "Daring to Lead 2011" smacks nonprofit boards hard, warning that "many boards of directors are under-prepared to select and support new leaders." The report says boards are paying insufficient attention to executive transitions, citing as evidence that "just 17 percent of organizations have a documented succession plan." But I wonder, is a “documented succession plan” necessarily a good thing to have?

 

 

Should a board be discussing succession? Absolutely.

 

Boards and CEOs should talk regularly about whether there are strong internal candidates and how they are developing. But a board may well want the flexibility to consider a transition in the context of the moment. Furthermore, if there are multiple potential internal successors, the smartest move may be for a board not to choose until it has to-with the benefit of all possible accumulated knowledge and experience (and an understanding of the particular moment in time).

 

 

The authors of the study also point to rather startling data indicating that 33 percent "of current executives followed a leader who was fired or forced to resign, indicating the frequency of mishires and unclear expectations between boards and executives across the sector."

 

 

But another interpretation of this statistic would be that nonprofit boards are holding nonprofit leaders to high standards of performance. It suggests boards are not afraid to make a change when it’s warranted. This interpretation, if plausible-and it seems just as plausible as the one offered in the report-is important because it runs counter to the common misperception that nonprofit jobs come with a lifetime guarantee.


Overall, the report mixes reporting on survey results with interpretation, extrapolation, and recommendation in a way that may not serve its audience well. Given the importance of this topic, I would hope we see more discussion about what the data might really mean in the weeks and months ahead.


Phil Buchanan

President

Center for Effective Philanthropy

Cambridge, Mass.

Most of America's 50 Richest Funds Compensate Their Board Members

by CCE Staff on 08/08/11

July 28, 2011 article in The Chronicle of Philanthropy:

Most of America's 50 Richest Funds Compensate Their Board Members:

http://philanthropy.com/article/Most-Big-Funds-Pay-Their/128337/

Nonprofits Worry About California's Effort to Create Social-Business Units

by CCE Staff on 06/15/11

Chronicle of Philanthropy, May 19, 2011 (Page 9)

by Ben Gose

 

Lawmakers in California are considering two bills that would create new corporate structures for businesses that blend profits with social and environmental goals.

But as these new structures gain momentum, the California Association of Nonprofits is asking the state legislature to slown down and consider how any changes to corporate forms might affect charities.

Some proponents of the bills say passage would help California become a leader in experimenting with new for-profit structures and could bring billions of new capital to bear on social and environmental problems.

But Kenneth M. Larsen, director of public policy at the California Association of Nonprofits, says the legislature should proceed with the same cautions required of scientists.

"If you go into an experiment, you have to take a look at the risks to the subjects, and in this case, the nonprofits are some of the subjects," Mr. Larsen says.  "You want to make sure that you do no harm."

2 Options

One bill, first introduced a year ago by state Senator Mark DeSaulnier, would allow the creation of "flexible-purpose corporations" that seek both profits and at least one broader social or environmental goal.

The structure would shield board members from claims that they have violated their fiduciary duties by pursing the social or environmental goal and is expected to appeal to companies with large numbers of shareholders, including publicly traded companies.

The second bill, introduced in February by Jared Huffman, a state assembly member,w ould allow the creation of benefit or B Corporations.  This structure would go even further than the flexible-purpose legislation and require corporate directors to pursue a broad set of social and environmental objectives in addition to profits.

The B Corporation appeals to social entrepeneurs and privately held companies that would like to be held to a higher standard, at a time when it has become trendy for corporations to boast about their socially conscious activities.

Charities Are Concerned

Already, four other states - Maryland, New Jersey, Vermont, and Virginia - have passed laws creating B Corporations.

R. Todd Johnson a lawyer in Silicon Valley who worked on the language for the flexible-purpose legislation thinks the legislature should pass both bills and let the market sort out which approach is best.

"We are in this very rare moment where we have this opportunity for experimentation," Mr. Johnson says.  "I think no one should be holding too tightly to one particular form because we're not going to know for two to four years which one is best."

Neither California bill would provide any tax advantages to corporations that also pursue social or environmental goals, but some charity leaders are concerned that such tax advantages may be sought eventually, Mr. Larsen says.

Philadelphia, for example, has already passed modest tax breaks for B Corporations.

The fear is that some wealthy Americans would take money they would otherwise have given to charity and invest it in for-profit corporations pursuing social goals.

"How can we be sure that investments in flexible-purpose corporations are not being made in lieu of charitable contributions?" Mr. Larsen wrote in a letter this month to Christine Kehoe, chair of the state's Senate Appropriations Committee.

Not Against Change

Advocates for the new corporate structures argue that charitable donations might in fact rise, since companies that explicitly pursue social or environmental goals also tend to be generous with their corporate philanthropy.

"Both pieces of legislation are creating more choices for investors in how they invest their dollars and have nothing to do with how they allocate their philanthropy," says Jay Coen Gilbert, a co-founder of B Lab, a nonprofit group based outside Philadelphia that is pushing the B Corporation legislation in California and other states.

Mr. Larsen says his association's main goal is to slow down the process and encourage lawmakers to hear from a broader swath of nonprofit leaders.

"We're not against change, but we think it needs to be change for the good and that more voices need to be heard," he says.

The federal government is also starting to explore whether a new legale structure is needed at the national level for organizations that operate in the gray zone between nonprofit group and for-profit business.

Diana Aviv, president of Independent Sector, a coalition of charities and foundations, says Congressional staff members have asked her gorup to offer recommendations on the question, motivated partly by last year's health-care overhaul, which created a new type of health-insurance entity.

These will operate as member-run nonprofits that have a social mission - cutting costs and improving the health of their customers - but will also be able to raise money from private investors.

Ms. Aviv gathered a group of legal and nonprofit experts together last month to discuss possible receommendations about the legal framework for such "hybrid" businesses, but she says they concluded it was premature to make proposals.

She says they raised a number of questions about the businesses, including whether they can be effective since they have two potentially incompatible goals - to serve the public good while also benefitting investors.  She added: "Some in the room felt very strongly that we can't serve two masters." 

Majority of Tax-Exempts Pay Gov't Anyway

by CCE Staff on 06/15/11

The Nonprofit Times, June 1, 2011 pages 1, 11

By: Samuel J Fanburg

Some 63 percent of nonprofits reported paying various types of fee and taxes to local and state governments during 2010. Of these types of assessments, 17 percent reported paying field-specific taxes, 36 percent paid "other payments," 9 percent paid PILOT (payments in lieu of taxes) and 42 percent of nonprofits paid user fees.

These are among the results of surveying by the Johns Hopkins University Center for Civil Society Studies and published in a report, "Taxing the Tax-Exempt Sector -- A Growing Danger for Nonprofit Organizations," written by Lester M. Salamon, Stephanie L. Geller and S. Wojciech Sokolowski.

The study illustrated that although nonprofits have generally enjoyed the benefits of a tax-exempt organization, for the past five years a majority of nonprofits have been paying charges accrued to local and state governments.

Salamon, director of the Baltimore, Md., located Johns Hopkins Center for Civil Society Services, described this tactic as self-defeating. "What these governments are essentially doing is driving more need to the government side, by taxing these nonprofits, programs need to be eliminated. It's really cutting off its nose to spite its face."

 

The types of fees encumbered by nonprofits have varied in their scope and application to their size. PILOTs have been generally applied to larger nonprofits. This is a type of fee that is negotiated by local governments and nonprofits. 

 

Of the responding organizations, 9 percent paid a fee like this with the largest share of payments coming from elderly housing and service organizations (26.4 percent). 

 

The average amount paid in PILOTS by survey respondents was $422,095. Again, PILOT payments are generally reserved for larger organizations thus the explanation for such a large sum of money. 

 

By surveying organizations that paid this type of fee, Salamon found some nonprofits understood the reasons for these charges. "We found that in some of the responses," said Salamon, "that nonprofits were saying that we can understand reasons for payment, but it has to be voluntary. They understood it couldn't be a free ride."

Of the respondents, 17 percent of nonprofits were paying "field specific payments." These are the types of charges associated with admission charges or bed taxes. Two-thirds of organizations that paid this type of tax indicated bed taxes or ticket taxes as the charge appropriated by the local government. 

 

Calculating other fees, the average respondent paid $8,000 in 2009. Reflecting that some respondents paid significantly more, respondents averaged $78,480 for these types of payments in 2009. The largest groups averaged payments of $142,541 compared to mid-sized and smaller groups who averaged payments of $23,208 and $7,856 respectively. 

 

User fees were another popular way for the government to receive revenue from local nonprofits. These payments include fees for services such as water, sewer or garbage collection over the past year. 42 percent of respondents indentified this type of taxing to their organization. 

 

In user fees, the media amount of respondent fees was $3,064 in 2009, with an average fee of $122,277. The largest organizations averaged payments of $258,524, mid-sized groups paid an average of $19,022 and the smallest groups averaged a $2,557. 

 

Altogether, two-thirds (63 percent) of the respondents are currently paying some type of fee or tax to local governments and noted that these payments are not new. 92 and 89 percent of nonprofits have been paying users feeds or "other" payments to state and local governments respectively for at least 5 years. 

 

Salamon said there are some avenues for reimbursement for nonprofits paying these types of fees. 

 

"There is a provision in Office of Management and Budget (OMB) circulators that local expenses can be reimbursed by the Federal government," said Salamon. "The message we've gotten from people however is that they're not really aware of that tactic. Some weren't even getting their core costs covered, expressing a dissatisfaction in government funding already."

 

These types of payments have represented a significant burden on nonprofit respondents. 40 percent of respondents paying these fees, said they would need to introduce or raise fees for programs/services because of charges by the government, 40 said they would have to appeal for donations to cover additional charges, 21 percent had to cut programs/services and 2 percent of respondents had to close altogether. 

 

To combat fiscal pressures and budget deficits felt by local governments, Salamon advocated for a retooling of the tax system for corporations. 

 

"We have so many corporations taking advantage of tax loopholes," said Salamon. "We need to cut down on special deductions as part of the solution. It's a leaky system in how many "outs" it provides to businesses." 

 

Actions nonprofits have taken to fight these new proposal mirrors the many ways nonprofits are being hurt by the government charges. 15 percent of respondents indicated they had joined with other nonprofits to fight new proposals, 13 percent encourage umbrella organizations or associations to address the issue and 11 percent had signed a correspondence to a government official. 

 

Salamon continued to discuss that this is not the right way to alleviate fiscal challenges felt by local governments.

"I think that this fundamentally a community question. There is real need for revenue to solve this problem. National revenue needs to be adjusted. Our political system hasn't faced up to the revenue side of the situation, not the cost," said Salamon. "Nonprofits have been hit hard already, and I don't think this that this is the solution."