Board Effectiveness Matters

Consider two sets of leaders in vastly different contexts: boards of directors at a non-profit organization and boards of directors at a corporation. At a surface level, it seems unlikely that factors related to high performance could be similar across these two groups. After all, non-profit board members do not answer to shareholders, and their governance decisions are oriented toward achieving a social mission. Meanwhile, corporate governance actions are primarily aimed at maximizing shareholder value.

Governance for Shareholders and Other Stakeholders

Yet if we look at the research, factors which drive effective boards (corporate and otherwise) are far more complex. For instance, it is true that corporate directors must be responsive to shareholders. But the most prosperous corporations have boards that concurrently focus on the values/needs of other stakeholders. Growing numbers of corporate boards have re-conceptualized their role as both a steward of stakeholder and shareholder value.

In the wake of the pandemic this trend appears to be increasing, with many board members questioning the shareholder primacy paradigm. This is not a simple repackaging of the decades old idea of corporate social responsibility. That framework relies on the existence of “enlightened shareholders” to conclude it is in their self-interest to raise their own quality of life by improving their community.?Instead, the emerging paradigm acknowledges that shareholders are one of multiple constituencies that fall within the realm of board stewardship.

The Multiple Constituencies of Board Stewardship ?

But beyond the shareholders, what other constituencies are board members concerned with? Corporate stakeholders include an array of groups like employees, customers, vendors (including diverse small business owners!) and communities. Community is an amorphous term, of course, and it is difficult to be a steward for community stakeholders if you don’t know anything about their priorities or most urgent needs. So how does a corporate board find out what to focus on within their community? Start by talking to board members for organizations already working on community issues – local nonprofits.

Engagement between corporate and non-profit boards has benefits for both sides. Corporate boards get a better understanding of local needs, non-profit boards get the opportunity to build capacity. Community non-profit organizations, especially those that serve marginalized populations, are facing more capacity constraints than ever before. But one strategy to reverse that trend and promote economic sustainability is the use of is inter-sectoral partnerships between local nonprofits and corporations. These types of collaborations can be extremely successful, and they can also be extremely destructive. To get the former and avoid the latter, it is vital to ensure cross-organizational value alignment.

The Starting Point is Organizational Values Alignment

Failure to get alignment inevitably results in “green washing” and/or “impact washing.” So how do corporate board members (as stewards for the community) and non-profit board members (with deep knowledge of community needs) make make sure potential collaborators have matched values? ?For both groups, look to the leaders – which does not mean only the senior executives.

While executives have a large role in this, at high-performing corporations and effective non-profits the real standard bearers of culture and values are the board of directors. But how do you measure something as abstract as value alignment by just looking at the board ? One great way to start is director diversity, which functions both as a reflection of values and is an indicator of performance for both a corporation’s board and a non-profit’s board.

Why Board Effectiveness Matters

My goal with all of this is not to highlight that boards of directors are simply important – that is a truism, and we don’t need rigorous research to show that. Instead, the intention is to draw the connections between what we often think of as vastly different spheres of activity. This is one reason why I’m excited to join Deloitte Center for Board Effectiveness as the Research & Insight Manager. Because understanding the effectiveness of corporate boards, and how they interpret their roles as stewards of a firm’s shareholders and other stakeholders, is critical for sustainable community development.