Nonprofit Board Accountability: A Brief Comparison with For-Profit Corporations

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What can nonprofit organizations learn about accountability from for-profit corporations?  Plenty!  Despite their differences, for-profits and nonprofit organizations can have much in common structurally and operationally.  Taking a look at the best ways for-profit corporations hold themselves accountable will yield helpful principles than can strengthen nonprofit organizations. 

For-profit and nonprofit general similarities and differences

Compare the nonprofit to a for-profit corporation.  Notably, the Illinois Not-for-Profit Corporation Act and many other state nonprofit corporation laws are structurally quite similar to state for-profit corporation laws.  Both acts provide for formation, corporate powers, limited liability due to corporate structure, directors, officers, merger, dissolution, and annual reports.  Operations and accountability of the board of directors and the executive personnel may be quite similar in both types of organizations.  In both the for-profit and nonprofit context, “the buck stops with the Board,” and the Board appoints executive personnel (CEO, COO, CFO, etc) to run the company.  Given these similarities in basic structure, it is not surprising that the nature of accountability in a nonprofit board, like that of a for-profit board, is encapsulated in the directors’ fiduciary duties.

But the interesting question when it comes to nonprofit accountability is:  “To whom?”  In the for-profit context, the board is accountable to the company’s owners or shareholders.  But in the nonprofit context, there are no shareholders.  So, to whom is the nonprofit accountable?  Generally speaking, a public charity is accountable to the “public.”  But a public charity also has stakeholders, who may be members (e.g., a church), donors, volunteers, and perhaps other organizations who engage jointly in various projects.  Much has been written about Section 501(c)(3) organizations’ legal accountability to the IRS, state Attorneys General, and other government regulators.  But like for for-profit entities, who are accountable to shareholders, public charities also have broad and deep accountability to their stakeholders. Though these stakeholders are not “owners” like shareholders in a for-profit corporation, it is advisable for nonprofit boards to understand their accountability to such stakeholders.   Such accountability is key to maximum financial and programmatic success.

Accountability tip:  good communication to stakeholders

What can nonprofit leaders do to improve lines of accountability with stakeholders?  Look again to the principles used by the best for-profit corporations: good communication is key.  Many for-profits provide shareholders with a simple end-of–year annual report or other similar informative document.  Such a report accomplishes many purposes:  It showcases the organization’s achievements.  The report makes available to shareholders the for-profit’s financial information.   The wide dissemination of such information helps shareholders hold the directors accountable for the leadership. 

Similarly, an annual report can also be of great use to the prudent nonprofit.  As in the for-profit sphere, such a report provides useful financial and programming information to the nonprofit’s stakeholders.  In so doing, the report helps stakeholders hold the board accountable.  Furthermore, such information may well inspire their supporters to give more (especially at the end of the year), to spread the news about the nonprofit’s worthy activities, and perhaps even to volunteer for the organization.  Good communication is not about making money for supporters, as that would be antithetical to a public charity’s nature.  But it should provide information that shows that the organization is well governed and well run and exercises sound stewardship of resources. 

In both for-profit and nonprofit contexts, boards should ensure that accountability and good communication remain guiding principles for their organization.  In both contexts, boards and executives must deliver for the stakeholders, albeit likely with different metrics. For private shareholders, the bottom line is necessarily always the dollar.  For public charities, the metrics can get much more complicated, and therefore it is extremely important that they be well defined.