By Lisa Kaplan Gordon
Although every board of directors is charged with governing a corporation, not every board and every corporation operates in the same way. That’s why nonprofit boards and for-profit boards have similarities and differences.
First, if you’re a corporation – nonprofit or for-profit—you must have a board of directors charged with certain fiduciary and legal duties related to the purpose of the corporation.
The purpose of a for-profit corporation is to make money.
“Their job is to turn a profit, making sure they are doing their best to increase revenues and produce a product the public will keep buying,” says Andrew Davis, director of leadership initiatives and education at BoardSource.
The purpose of a non-profit is to help the community – that’s how they earn a tax exemption. Money is important to nonprofits only because it keeps the lights on and lets the group pursue its mission.
“Our investors are the public,” says Davis. “We have to make sure we are making the world a better place by serving that mission. It’s not revenue or serving the shareholder. It’s about serving the public trust.”
Boards of directors are charged with making sure each type of corporation achieves its goals, but they operate in slightly different ways. Here’s how.
Whom they serve: The stockholders, who own the corporation.
Purpose: To govern the corporation, set strategic direction, select a CEO and make sure they’re doing their job, and, ultimately, make money for the owners.
Fiduciary responsibilities: Duty of care (to act prudently and reasonably), duty of loyalty (put the corporation’s interest before their own); duty of candor (disclose information in a timely manner); and duty of confidentiality (not disclosing confidential or sensitive information).
Why members serve on the board: Usually they are paid – sometimes a lot – for their service. In 2017, for instance, Tesla’s board members received $1.7 million in compensation.
CEO/Board relationship: The board selects a CEO, who, often sits on the board and sometimes becomes president of the board.
What the board does with profits: Invests in capital improvements and expansions, rewards the staff with bonuses, and distributes the remainder to shareholders.
Whom they serve: Stakeholders, mostly the community and people needing help.
Purpose: To serve the public; make the world a better place. “Nonprofits lessen the burden on society,” Davis says. “If there was a revenue opportunity, there would be a for-profit company willing to take it on.”
Fiduciary responsibilities: In addition to duties of care, loyalty, candor, and confidentiality, nonprofit boards have the additional duty of obedience, which requires board members to remain committed to the organization’s mission and goals.
CEO/Board relationship: Nonprofit CEO’s typically do not sit on the board, which hires, supervises, and, if needed, fires the CEO.
What the board does with surpluses (if only): Pays reasonable salaries/bonuses and invests in improving the ability of the organization to fulfill its mission.
Why members serve on the board: To do good. Board members typically are volunteers, although they sometimes are reimbursed for expenses related to their board service.
Nonprofits that select board members from the for-profit sector should make sure newbies understand how their role differs from what’s expected from for-profit boards.
“There should be an on-boarding process that explains what’s expected of a nonprofit board,” Davis says. “Because, at the end of the day, the board is where the legal authority of the organization lies.”