National Assembly ELI: Dynamic Nonprofit Board

1. National Assembly ELI: Dynamic Nonprofit Board NATIONAL ASSEMBLY OF HEALTH AND HUMAN SERVICE ORGANIZATIONS Presentation document November 14, 2003

2. BACKGROUND ON BOARD GOVERNANCE MATERIALS The following materials were prepared to facilitate a session on board governance for the National Assembly’s Executive Leadership Institute. Materials were based on findings from the McKinsey & Company report: The Dynamic Nonprofit Board: Lessons from High-performing Nonprofits. In addition, the results of surveys and interviews with members of the National Assembly as well as input from McKinsey teams serving nonprofit organizations on this topic were incorporated. • These materials were intended to stimulate a discussion among National Assembly members on the topic of effective board governance. Topics covered included: • Board governance framework and perspectives • Key challenges to maximizing board contributions • Actionable ideas for improving the performance of your board • Organizations could use the materials to stimulate a conversation around current board performance and future priorities. To that end, we have also developed a board self-assessment survey to help boards assess their current performance against best practices. A copy of the report is available at www.mckinsey.com/practices/nonprofit/ourknowledge

3. CONTENTS • Board governance research and framework • Survey and interview results • Common challenges and lessons learned

4. BUILDING EFFECTIVE BOARDS OFTEN ARISES AS A KEY CLIENT CONCERN • “The motion has been made and seconded that we stick our heads in sand” • “Perhaps it would help if I go over it one more time”

5. Interviews with board members and CEOs of Worth Magazine Top 100 Nonprofits • Interviews with McKinsey nonprofit client teams • Literature review and assessment • Methodology • Report with lessons learned and example practices • Set of promising practices to jumpstart board performance • Board self-assessment tool • End products IN RESPONSE, WE LAUNCHED A RESEARCH PROJECT FOCUSED ON 3 MAJOR QUESTIONS • How important is a high-performing board? • What are the characteristics of a high-performing board? • What are the best practices in building a high-performing board? • Key questions

6. Environment Monitor external and internal environment to highlight areas for board attention Develop set of enabling practices around board composition, size structure, and processes Enablers THE DYNAMIC NONPROFIT BOARD FRAMEWORK • Shape mission and strategic direction Ensure leadership and resources Ensure quality performance across 3 key board roles • Monitor and improve performance

7. 3 KEY ROLES ENCOMPASS NINE DETAILED RESPONSIBILITIES • Select, evaluate, and develop the CEO • Ensure adequate financial resources • Provide expertise and access for organizational needs • Enhance reputation of organization • Shape the mission and vision • Engage actively in strategic decision making and policy decisions • Shape mission and strategic direction Ensure leadership and resources • Monitor and improve performance • Oversee financial management and ensure appropriate risk management • Monitor performance and ensure accountability • Improve board performance

8. ADDITIONAL LESSONS LEARNED FROM OUR RESEARCH • While effective boards perform a comprehensive set of roles, they recognize the risk of being mediocre at everything; pick your spots carefully to allot valuable time where needed • Recognize performance management as one of the board's core roles on par with strategy-setting and fundraising; take on the challenge of leading without stepping on staff toes • Invest significant time in board self-evaluation andcontinuous improvement • Sweat the little things: good meeting agendas, open communication, having fun

9. CONTENTS • Board governance research and framework • Survey and interview results • Common challenges and lessons learned

10. OVERVIEW OF SURVEY RESPONSES Who responded . . . • E-mailed electronic survey to 70 member organizations • 35 individuals responded • 29% of respondents- board members, 63% CEOs, 8 % Other managers • Average board size – 27 (minimum of 7, maximum of 71) • 86% have an Executive Committee (Average size – 9)

11. Why or why not? • “We haven’t demanded it.” • “We constantly need better definition and communication of expectations.” • “We have relied excessively on the outstanding performance of the CEO.” NATIONAL ASSEMBLY SURVEYS INDICATE MEMBERS FEEL THEY ARE NOT TAPPING BOARDS’ FULL POTENTIAL • Do you feel you are tapping board’s potential? • Yes • No

12. SUMMARY OF RESULTS HIGHLIGHT RELATIVE AREAS OF BOARD STRENGTH AND OPPORTUNITIES FOR DEVELOPMENT • Areas of strong performance • Engage actively in strategic decision making and policy decisions • Select, evaluate, and develop the CEO • Enhance reputation of organization • Provide expertise and access for organizational needs • Oversee financial management and ensure appropriate risk management • Areas in need of development • Shape the mission and vision • Ensure adequate financial resources • Monitor performance and ensure accountability • Improve board performance

13. MEMBERS REPORT THEIR BOARDS DRAW AN APPROPRIATE LINE BETWEEN STRATEGIC AND TACTICAL INVOLVEMENT • Tactical/operational • Strategic • “Our board is very operational and the staff pulls the board to operational issues because of our ‘way of work’ with committees” • “This is something we monitor closely. We are candid when we feel the line has been crossed” • “If the board has a fault in this area, it is not being as fully engaged as it could be in strategic guidance” • “The board is not likely to cross into management as it adheres quite clearly to its own policies for board/ staff interactions” • Overall 92% of members feel that their boards’ provide an appropriate level of strategic guidance without infringing on the role of management • Result potentially driven by the fact that 79% have board committees focused on strategic priorities and 58% have robust strategic plan* * Includes situation analysis, with peer review, threats, opportunities, sector overview

14. . . . leading to a set of follow-up activities . . . • . . . and led by various members of the organization • “Results are incorporated into ongoing monitoring” • “Mentoring, training as needed . . .” • “Annual progress review . . . is reflected in salary revisions” • “The executive committee is responsible for CEO reviews” • “Review done by Chairman, Chair Elect, Chair Emeritus and Chair of HR committee” • “The Executive Committees and the Executive Compensate Committee have full responsibilities in this arena” • “The board chair does the performance review” • “Done by officers and reported to board” BOARDS ALSO EFFECTIVELY ENGAGING IN CEO EVALUATION • Members use a variety of review processes . . . • “Board conducts an annual review based upon outcomes of the organization” • “The CEO writes an annual plan and meets a minimum of 4 times a year with the committees around the performance plan” • “To date, we’ve not had a formal performance review of the CEO, but are planning to institute one for next year” • 75% of members have pre-agreed written criteria • 33% of members use 360° evaluation processes

15. Areas of greatest assistance • Legal • Legislative • Human services issues • Program guidance • Media • Investment • Diversity • Networks/connections • Writing contributions for publications • Public speaking MEMBERS SUCCESSFULLY TAP INTO VARIETY OF BOARD EXPERTISE… • Methods of tapping into expertise • “We maintain a detailed list of board members’ individual expertise as well as interests” • “Through a phone call.” • “Members recruited according to expertise/influence matrix, assigned to committees / task forces accordingly” • “We tap board member expertise through [the appropriate] committee” • 83% of members have a staff point person for managing board/staff relationships • 79% use a diversity grid for mapping out areas of expertise

16. … ALTHOUGH THE TYPES OF RECOGNITION BOARD MEMBERS RECEIVE FOR THEIR CONTRIBUTIONS VARIES CONSIDERABLY • “Satisfaction through participation in a premier nonprofit organization that is leading edge” • “Personal ‘thank you’ from the CEO and Chairman” • “Not much” • “. . . an opportunity to connect with an impressive board and staff” • “Press releases in their home areas, installation at the national conference” • “Years of service, committee chairs, president’s award, humanitarian award” • “National public recognition through publications and national organization meetings”

17. 83% of members have boards that connect their organizations to public, corporate, foundations, or other actors • 83% of members have board members that represent the organization and its interests at external meetings MEMBERS HAVE ALSO BEEN LARGELY SUCCESSFUL IN LEVERAGING BOARD CONTACTS TO GAIN ACCESS • “We use certain board members with asks for grants. We ask all board members to appeal to their employers for just about anything” • “We asked our board members to connect with Congress on [an] issue and it was very successful” • “Each board member brings a network of contacts and previous involvement. We seek to discover those connections and use them” • “[We are] just beginning to take advantage of this . . .”

18. . . . and actively manage their organizations’ risk exposure • “We consider safety, brand, image” • “[We have] open discussions with General Counsel present” • “We follow advice from the CEO and board members with expertise in that field” • “Board committees continually look at these issues, including financial, legal, and public reputation risks” MEMBERS REPORT STRONG BOARD INVOLVEMENT IN RISK MANAGEMENT ROLE • Boards are confident in their understanding of potential risks . . . • 88% of boards have a list of closely watched financial metrics and ratios • 96% of boards are aware of their organization’s financial exposure • 83% of boards have a clear understanding of the nature of the organizations’ liability and reputational risks and have strategies to mitigate them

19. SUMMARY OF RESULTS HIGHLIGHT RELATIVE AREAS OF BOARD STRENGTH AND OPPORTUNITIES FOR DEVELOPMENT • Areas of strong performance • Engage actively in strategic decision making and policy decisions • Select, evaluate, and develop the CEO • Enhance reputation of organization • Provide expertise and access for organizational needs • Oversee financial management and ensure appropriate risk management • Areas in need of development • Shape the mission and vision • Ensure adequate financial resources • Monitor performance and ensure accountability • Improve board performance

20. . . . mirrors their use of tactics to connect the board to its mission . . . • . . . and leads to significant vision issues • 42% have a mechanism for board members to participate in program activities • 42% of members periodically focus meetings solely on mission • “63% explicitly discuss decisions as they pertain to mission and develop “case law” for future decisions • “Our board fails to set high expectations” • “We need the board’s help with strategic visioning” • “[Our board needs] to help ‘raise the bar’ by asking us tough questions on key issues” • “The board is reactive not proactive . . . I’m redefining everything and bringing it to the board for approval i.e., mission, vision, strategic plan, etc.” SURVEY RESULTS INDICATE POTENTIAL FOR IMPROVEMENT ON BOARD ROLE IN DRIVING MISSION AND VISION • Board performance on shared understanding of the mission . . . • “46% of members have a board where EVERY director can summarize the mission of the organization, where it hopes to be in 5 years, and why it is an effective agent of change

21. . . . and few organizations have put processes in place to encourage it . . . • . . . but most are disappointed by board fundraising performance • 21% set individual board member fundraising goals • 38% provide board with training on fundraising • “We provide every member with a document that describes board member responsibilities, including financial contribution expectations” • 77% of respondents indicated a desire to improve board’s fundraising MEMBERS REPORT DISSATISFACTION WITH BOARD FUNDRAISING PERFORMANCE • There are mixed fundraising expectations . . . • “Everyone is expected to contribute. [There is a] Formal solicitation with specific ask” • “There currently is no expectation of financial contribution . . . influenced by the reading some have of the carver model” • “No current explicit financial contribution levels are required . . . although a total board fundraising goal is set”

22. SURVEYS HIGHLIGHT ISSUE AROUND BOARD ROLE IN ENSURING ACCOUNTABILITY • “To whom is your board accountable?” . . . • “We haven’t worked out a good board accountability strategy yet” • “Good question!” • “Members” • “To the persons served, their families, and their communities” • "Unaccountable” • “We haven't done this” • Only 38% of members receive feedback directly from service recipients to the board • “We have no shareholders. It is not a membership movement” • “Our board is accountable to the organizations we serve”

23. SURVEYS INDICATE OPPORTUNITY TO IMPROVE LEVEL OF BOARD INVOLVEMENT IN PERFORMANCE MEASUREMENT ROLE . . . • 71% of boards play an active role in measuring operations performance • 42% of boards play an active role in measuring program performance • “Key areas of the strategic plan are monitored. Balanced scorecard used. Specific goals are set in finance, resource development, and HR” • “Our board’s role here is limited” • “They focus on ends rather than means – they don’t get involved in measuring individual programs” • “[We monitor] through a variety of standing committees” • “We don’t do this” • “They review the data provided by management” • “[We monitor] mostly by adherence to strategic plan goals” • “We review our success regularly with the board, but not at a huge level of detail” • “The CEO who is in charge of operations is evaluated”

24. . . . SPECIFICALLY AROUND SETTING PERFORMANCE INCENTIVES • …but most do not take specific actions to encourage performance before an issue arises • Most boards address performance issues once raised… • “Our board doesn’t hold our feet to the fire” • “The board is not really engaged in this” • “Fortunately for the organization I’ve been self-motivated and driven for the organization for over 10 years” • “This would impact incentives, taken into consideration with compensation” • “[The board] can vote to terminate a program” • “This has not yet happened, but the policies call for a corrective action plan” • “Usually staff has already prepared some recommendation for change or improvement” • “We have arranged for executive coaching”

25. SURVEYS ALSO INDICATE BOARDS SPEND LIMITED TIME ON SELF-EVALUATION • 35% of organizations evaluate individuals and overall board performance • 21% of organizations give individual board member feedback • 67% have a board development and evaluation committee • 46% use an assessment tool for evaluating board performance at a regular interval • Those organizations that do evaluate board performance use a variety of methods • “We evaluate at every meeting in writing” • “Individuals are evaluated each year by the Board Governance Committee based on engagement, level of engaged, funds raised and contributed, added value” • “Periodically the board as a whole does a self-evaluation”

26. CONTENTS • Board governance research and framework • Survey and interview results • Common challenges and lessons learned

27. “Time and expense of travel” • “Setting regular monthly committee meetings and making them accessible by phone” • “Better attendance at board meetings. Greater participation in committees” • “By publishing a calendar of meetings and events, people will make every effort to incorporate them into their schedules” • “[Achieving] diversity of voice, gender, ethnicity” • “Keep matrix of board make-up that informs selection of new board members” • “Achieving the balance between clout and local constituencies” • “Highest clout on executive committee, special constituents on board committees” • “The Board is too big” • “One solution is regular communications using multiple vehicles” • “We have mentors and mentoring to help members grow” • “Leveraging people in the right way” • “Be direct and transparent” • “The non-financial and financial expectations of new board members are shared during the nominating process and during their orientation” SEVERAL CHALLENGES WERE RAISED WITH REGARD TO ENABLING EFFECTIVE BOARD PERFORMANCE • Several boards identified challenges . . . • . . . but many had suggestions for how to improve

28. CHALLENGE OF RECRUITING HIGH-PROFILE INDIVIDUALS WAS MOST OFTEN RAISED AND ADDRESSED • “What strategies have been most effective? . . .” • “Get the organization, corporation, or individual involved in one of our programs or program events” • “Identify an easily understood issue that resonates personally or intellectually with the member rather than try to explain the overall value of the organization” • “What seems to work is to treat it very seriously. Force [potential members] to do a due diligence on the org and examine whether they are truly committed” • “Also be direct and honest on expectations. Treat it like a business deal and they will understand that” • “Who is best position to recruit successfully? . . .” • “. . . it appears to us that the best technique is to use local association leaders to identify, recommend and help recruit such persons” • “Get one or two high profile board members . . . have them recruit people they know” • “Having a CEO who attracts such persons” • “ We've been successful where Board members have personal relationships with high-profile candidates”