Boards That Make a Difference: A New Design for Leadership in Nonprofit and Public Organizationsby John Carver
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In this revised and updated third edition, Carver continues to debunk the entrenched beliefs and habits that hobble boards and to replace them with his innovative approach to effective governance. This proven model offers an empowering and fundamental redesign of the board role and emphasizes values, vision, empowerment of both the board and staff, and strategic ability to lead leaders. Policy Governance gives board members and staff a new approach to board job design, board-staff relationships, the role of the chief executive, performance monitoring, and virtually every aspect of the board-management relationship. This latest edition has been updated and expanded to include explanatory diagrams that have been used by thousands of Carver's seminar participants. It also contains illustrative examples of Policy Governance model policies that have been created by real-world organizations. In addition, this third edition of Boards That Make a Difference includes a new chapter on model criticisms and the challenges of governance research.
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Boards That Make a DifferenceA New Design for Leadership in Nonprofit and Public Organizations
By John Carver
John Wiley & Sons, Inc.Copyright © 1997 John Wiley & Sons, Inc.
All right reserved.
Chapter OneA New Vision for Governing Boards
It is virtually impossible to escape contact with boards. We either are on boards, work for them, or are affected by their decisions. Boards sit atop almost all corporate forms of organization-profit and nonprofit-and often over governmental agencies as well. The elected forums of our political jurisdictions are boardlike structures: Congress, state legislatures, city councils, and county commissions. In all kinds of human activity, we find formally constituted, empowered groups deciding courses of action and future conditions toward which some body of people will aspire.
This chapter claims that great opportunities exist for leadership because of the sheer number of boards and their relative ineffectiveness. First, I look at ways of classifying boards and then limit the scope of the book to governing boards. Next, I describe the peculiar market circumstances that justify grouping nonprofit and public organizations together. I then step back to view the difficulty all boards-business, nonprofit, and public boards-have in fulfilling their opportunities. I summarize the normal prescriptions for board ills along with reasons that the existing answers are insufficient. Next, I make the case that governance deserves special attention apart from other elements of management. The chapter concludes with an argument for a new model of governance and the contributions this model should make to strategic leadership by boards.
Varieties of Boards
At one end of the scale, decisions are made by individuals and by small groups such as families or associates. At the other end, decisions are made in plebiscites and elections. In between, decisions are made by empowered bodies called boards.
Houle (1989, p. 195) cites the existence of approximately 4.5 million boards in this country. This number includes nonprofit, governmental (including local legislative), and business boards. The argument in these pages for new principles of governance is not directed to every entity that calls itself a board. But it is meant for almost 1.4 million of them in the United States alone. Drucker estimated that nonprofit organizations "may now employ more people than federal, state and local government put together" (1978) and that "half the personal income of the United States (and of most other developed countries) is spent on public service institutions (including those operated by government)" (1977, p. 17). Two considerations delineate those bodies to whom my commentary directly applies: (1) the organizational position of the board and (2) the economic nature of the organization.
Boards Considered by Organizational Position
Governing board. The most important kind of board is that of ultimate corporate accountability-the governing board. The governing board is always positioned at the top of the organization. "Corporate board," "board of directors," "board of trustees," "board of regents," and similar titles denote groups that have authority exceeded only by owners and the state. The governing board is as high in the structure as one can go and still be within the organizational framework. Its total authority is matched by its total accountability for all corporate activity.
Advisory board. There are also boards whose function is to give counsel, not to govern. Advisory boards can advise the governing board, the CEO, or other staff. They can be positioned anywhere in the organization as long as they formally attach to some "proper" organizational element. Advisory boards are optional and have only as much authority as the authorizing point within the legitimate organization chooses to grant. In some fields it is common to find advisory boards that have been given extensive authority and whose advice is virtually certain to have an effect. As long as some position within the organization can, even potentially, retract the group's authority, it is not a governing board. Its authority can be curtailed only by the governing board itself, by law, or-in the case of membership organizations-by the membership.
Line board. Considerably more rare is the line board. "Line" describes a heretofore unlabeled board type. I know of no treatment of this category in the literature except the modified form discussed by Ackoff (1981). The line board is not advisory, for it wields definite authority over subordinate positions. But it is not at the top of the organization and does not, therefore, qualify as a governing board. It is merely a group inserted where a single manager might have served.
Workgroup board. Sometimes people speak of a "working board" when they simply mean a board that stays busy. Hence, a governing, advisory, or line board might be a working board rather than a figurehead. My term workgroup, however, denotes a governing board with little or no staff. It must govern and be the workforce as well.
Very small organizations, such as civic clubs, are often in this dual position. The group is incorporated, so a corporate governing board exists. Yet, absent enough funds to pay a staff, board members become the only workforce in sight. This kind of board is not a true type in the way that governing, advisory, and line boards are. It is merely a governing board with another set of responsibilities. The organizational position of a workgroup board is not only at the top, but everywhere else as well. It is most important that such boards remember that they have two different, simultaneous roles and they can best perform those roles by keeping them clearly separated.
Boards Considered by Economic Nature of the Organization
The power and responsibilities of advisory and line boards are determined by the specific organization rather than by a commanding generic principle. The foregoing discussion serves only to distinguish governing boards as the sole subject of this text. Throughout this book I deal only with governing boards.
It has long been common practice to differentiate the vast and disparate array of organizations governed by boards into three groups: profit ("business"), nonprofit, and governmental. Further characteristics distinguish subgroups of each. For example, businesses are grouped as "public" (publicly traded equity) and "private" (no public trading). Nonprofits are also divided into "public" (directly related to government) and "private" (not as related). "Governmental" includes the jurisdictional governance of cities, townships, counties, and states, but it also covers districts for water supply, schools, pollution control, and a host of other authorities. I ignore the subgroups and concentrate on the three major types: profit, nonprofit, and governmental.
1. Profit boards. Business corporations engage in trade in order to produce a return for stockholders. These companies ordinarily compete in a market that is more or less free. Governing boards in business range from the obligatory, figurehead board of an entrepreneurial business to a highly formalized, paid group representing diverse stockholders.
2. Nonprofit boards. Corporations chartered for charitable purposes have no stock ownership, though state statutes may require a formal membership as a stockholder-equivalent. Abroad, such organizations are often referred to as nongovernmental organizations (NGOs). In the United States, the term private voluntary organization (PVO) is frequently used to describe international nonprofits. NGOs and PVOs, though not terms used in this text, are included among nonprofit agencies.
Although nonprofit corporations may accumulate surpluses, their accounting systems have no place for profit. They differ from other corporations in that they are exempt from certain taxes and are unable to distribute their surpluses to holders of equity. Nonprofit corporations ordinarily receive a large proportion of their revenues from "funding" and donations rather than from sales of a product. Nonprofit governing board obligations under the law, however, are similar to those for other corporations.
3. Governmental boards. Governmental boards, elected or appointed, are more bound by legal requirements on both composition and process than are the foregoing types. They are like nonprofit boards with respect to profit and distribution of earnings. Governmental boards may be quasi-governmental (such as water systems or airport authorities) or fully governmental (such as city councils). They may or may not have taxing authority. Governmental boards, like nonprofit boards, ordinarily do not derive their revenues from sales but from taxation and user fees. Profit, nonprofit, and governmental governing boards have much in common. They are alike in that they all bear ultimate accountability for organizational activity and accomplishment. They are unlike in how they are situated in the larger context of political-economic life. They differ in how much public scrutiny they receive, a factor that produces differences in the amount of posturing involved in board dynamics. They vary in the degree to which the procedures of governance are prescribed by law. They differ greatly in the strength of the traditions that drive their methods. Many governmental boards have traditions that were established long before twentieth-century management appeared on the scene. Powerful precedents make it difficult for state legislatures and county commissioners, for example, to behave as though modern management principles were ever developed.
This book focuses specifically on governmental and nonprofit governing boards. From here on I use the word public to refer to the various types of governmental entities, because in common perception, public bridges the gray area between special-purpose governmental groups and quasi-public nonprofits. This focus is useful as we explore governance, even though there is nothing inherent in the nonprofit or public organization per se that causes governance to be different than in profit companies. Then why address public and nonprofit governance, particularly in view of the extremely disparate array of organization types included under that rubric? After all, are they not more different than they are alike? The Ford Foundation, a community arts guild, and a credit union may little appreciate membership in this mixed club. The justification for classifying them together is that the boards of most nonprofit and public organizations share a compelling factor: the peculiar nature of their markets.
Life in the Muted Market
Companies organized for profit receive money through sales. Sales revenues are the result of a free exchange between the company and consumers. Consumers judge whether the good or service is worth the exchange demanded. If it is not, they do not buy; if it is, they do.
Nonprofit and governmental organizations ordinarily receive money from sources other than from those who buy their products. Direct consumers may pay a discounted price or even nothing. The organization receives a subsidy from donors and tax sources to make up the deficit. There is no consumer judgment of the product's rightful price, because the consumer is not confronted with that choice. Consequently, although nonprofit and public organizations may be buffeted about by budget pressures and funding squeezes, there is no direct market force bearing on the relationship between product and price.
The relevant variable that separates the governance of most public and nonprofit enterprises from most profit organizations is the automatic market test of product worth. I define a market test as consumers' free decisions about whether a given product, among alternatives, is worth the cost of its production. If alternatives are unavailable because of artificially blocked competition, there is no clean market test. If the consumer does not pay the entire price, there is no clean market test. This definition focuses on the automatic consumer judgment aspect of market. The absence of this automatic judgment does not mean that the word market cannot be used in other ways. For example, public schools and family planning centers operate in some identifiable market and may fare better if their staffs do a good job of marketing. This use of market and marketing, however, is unrelated to the integrity of the market test I have described.
Without a market to summarize consumer judgment, an organization literally does not know what its product is worth. It may know what the product costs to make and what the staff thinks about product quality. It may know that consumers are raving with delight. It may even know precisely how effective the product is. But the organization still does not know what its product is worth.
From a governance perspective, then, the relevant factor that sets most nonprofit and public organizations apart from profit organizations is not in the essence of managing, for the principles of management are the same in each setting. The difference is not in distribution of earnings, for this is a matter of accounting rather than substance. What is different-with profound effects-is that most nonprofit and public organizations lack a behavioral process to aggregate the many individual evaluations of product and cost. The organization is missing the foundation that would enable it to define success and failure, to know what is worth doing, and, in the largest sense, even to recognize good performance.
So the typical public or nonprofit board is faced with a challenge business boards never have to confront. "In the nonprofit organization," observed Anthony (1977), "the objectives are difficult to define and there is no automatic danger signal comparable to the profit measure." In the absence of a market test, the board must perform that function. The board must bear this peculiar, additional burden if it is to act responsibly. It is not enough to be efficient, nor is it enough even to produce fine products. Any reasonable definition of productive excellence must relate chiefly to whether a good or service is worth the full economic cost of its production.
From this point on, I refer to public and nonprofit organizations as if they all lack a rigorous market test. That will prove sufficiently true to justify the simplification, though exceptions exist. Nonprofit hospitals, for example, operate in a harsh market environment, albeit one of great artificiality imposed by regulation and insurers. For those nonprofit and public organizations that are truly subject to an unsubsidized market judgment, the peculiarity discussed here is not true. In these cases, the board's task is easier, though the concepts and principles in the model presented here will still contribute to their governance.
Excerpted from Boards That Make a Difference by John Carver Copyright © 1997 by John Wiley & Sons, Inc.
Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
What People are Saying About This
--Larry C. Spears, CEO, The Greenleaf Center for Servant-Leadership; editor, Reflections on Leadership, Insights on Leadership, Servant Leadership, The Power of Servant Leadership; co-editor, Practicing Servant Leadership and Focus on Leadership
"It took an inspired social scientist to record and describe the fundamental principles of [the Policy Governance] model, which provides deep insight into the role of the Board in the modern corporation."
--Jeremy Booker, vice president corporate governance, British Petroleum, London
"Dr. Carver’s governance model has been the key in empowering the State Bar of California Board of Governors to focus on policy that would help our judicial system."
--Andrew J. Guilford, 1999-2000 president, State Bar of California
"An indispensable guidebook to leadership excellence."
--George Weber, executive director, Canadian Dental Association, Ottawa; former secretary general, International Federation of Red Cross and Red Crescent Societies, Geneva
"Boards That Make a Difference explicates the model, which is simple, powerful and, above all, successful."
—W. H. Hann, former executive director, Association of Independent Schools of Western Australia
"This book's sound premises regarding proper role delineation and its practical advice provide an invaluable resource."
--Dr. John R. Seffrin, CEO, American Cancer Society, Atlanta
"Dr. Carver offers a visionary yet practical approach to governance design."
--Adalberto Palma Gómez, senior partner, Aperture S.C.; former director, Institute for the Protection of Bank Savings; chairman, Center for Excellence in Corporate Governance, Mexico City
"Policy Governance gives governing bodies and CEOs a clear insight into their mutual relationship and their distinct responsibilities."
--Jacques Gerards, CEO, Dutch Association of Governors in Health Care, The Netherlands
Meet the Author
John Carver is known internationally as the creator of the breakthrough in board leadership called the Policy Governance Model. He has worked with boards in the United States and Canada as well as on four other continents for over twenty-five years. His clients have included the National Association of State Boards of Education, the National Ballet of Canada, the American Institute of Architects, the Pentagon Federal Credit Union, Lutheran World Relief and the American Cancer Society. He is author of the bi-monthly newsletter workshop Board Leadership and his books have sold over 250,000 copies around the world.
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