MaRS Library Keys to good governance for entrepreneurs and their boards
For-profit corporations and NPOs are composed of shareholders or members. They elect directors who appoint officers. The members also appoint the auditors. The directors govern the organization.
Board Directors owe a fiduciary duty to their venture. They must act honestly, in good faith and in the best interests of the venture. But good governance by a board of directors is much more than governance. Often-stated references to good governance include the following:
- Vision: envisioning the future and developing the mission
- Direction: setting goals and policies
- Transparency: maintaining open processes, shared information, effective communication standards, and regular and meaningful reports
- Guidance: providing advice and direction
- Due diligence: getting inside the metrics and judging the risks involved
- Commitment: being engaged emotionally and intellectually to the venture’s course of action
Much has been written on the subject of good governance. Essentially, a board provides good governance when it is able and willing to ask the right questions at the right time and to provide good advice while demonstrating confidence in the venture.
Good governance in a non-profit organization requires “double-duty”
A cynic may define for-profit organizations as self-centred and non-profit organizations as other-centred. It isn’t this simple. Non-profit governance is more complex given its need to assist the organization to better use its resources in managing its focus.
In his book, Managing the Non-Profit Organization, Peter Drucker suggests that the“bottom line” of an NPO is the community and that the board’s job is to define this bottom line.
Others have suggested that NPOs have a“double bottom line.” Drucker states that while NPOs are not businesses, they must act “business-like.” As well as financial self-sufficiency, they must work toward outcomes such as “the betterment of…”, “the enhancement of…” and the “growth and achievement of…”
What is due diligence?
The exercise of due diligence is one of the keys to good governance. The exercise of due diligence requires that Directors understand and be familiar with:
- the organization’s or corporation’s governing documents
- the organization’s current and expected financial situation
- the guiding legislation and appropriate regulations surrounding the activity of the venture
Due diligence also involves risk assessment and risk management. The organization’s actions and decisions need to be judged with regards to the possible risks involved. As part of their planning role, directors have the responsibility to “raise a red flag” if in their judgment the organization is taking action that might lead to trouble—or worse, financial or legal problems.
Good governance begins with good management
Entrepreneurs who have a dream or a bright idea create their venture with the confidence that their goals are realizable. They gather around them a team to assist them in building their organization to serve the market they have chosen and to provide the goods and services they intend to offer.
The board of directors becomes a management group and a team of peers; they share expertise, their relevant background of experience, and their insights, support, criticism and energy.
Their business leader, in contrast, stands alone. He or she has no peers. So the smart entrepreneurs, as soon as it is feasible, create some sort of advisory group or board of directors to provide guidance and knowledge to oversee growth of the new venture and to judge its performance against its plan and goals.
As long as boards stay out of the day-to-day running of the venture, they can see the bigger picture and better sort out priorities. A board provides a confidential forum for dealing with key issues of leadership and the management of the business. It offers the venture’s leader the opportunity to go to a supportive group for confidential advice and consultation.
So, why bother with a board? Because “it’s lonely at the top!”
Drucker, P. (1990). Managing Non-Profit Organizations. New York: Harper Collins.
- Ontario’s Social Innovation Policy Paper.
- Legal considerations—For-profit Social Enterprises (including B Corporations).
- Customer needs: Kotler on marketing.
- Financing Social Enterprises: Government grants, corporate funders, foundations, bootstrapping or funders and investors?.
- Different board governance models for different ventures.