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Chapter 3. Governance and Financial Sustainability

This chapter discusses the legal and organizational roles of the board of directors and special committees in the governance and financial sustainability of a nonprofit organization. The chapter explores conceptual and theoretical frameworks that explain governance in nonprofit organizations in the context of financial sustainability.

WHAT IS GOVERNANCE?

The word "governance" comes from the Latin, governare, which means "rule over, be responsible for." As Figure 3.1 indicates, governance is a process that grants power to a legitimate body inside a system (e.g., organization, institution, community, or society) to make decisions (e.g., strategic, managerial, administrative) through consensual structures (e.g., board, committee, department, unit) and principles in order to carry out the operations and activities that meet the expectations (e.g., goal, objectives) of constituencies (e.g., members, clients, communities).

As Figure 3.1 illustrates, governance does not exist without a structure in place. In the context of nonprofit organizations, the structures tend to be the assembly of members, the board of directors, or committees. Power is granted to such a structure on behalf of the collective. There are expectations that such a structure will exert the granted power in the best interests of the organization. The exercise of power occurs mainly in the form of decisions that can positively or negatively affect a group of people who are basically the constituents of an organization. The constituents can be internal, in the case of members of an organization. The constituents can be external, in the case of clients or potential beneficiaries of a nonprofit organization.

It is important to differentiate between governance and government. A government is a body that exerts power and authority over a geopolitical unit (e.g., town, municipality, state, country, or nation-state). On the other hand, governance is the process through which power is granted, authority is exercised, decisions are made, and performance is monitored and sanctioned; for example, the governance of a country with respect to its adequacy (good governance) will include:

- Electoral systems, structures, and process to select representatives, so that they may govern legitimately

- The rules, regulations, or principles that are in place for the effective and efficient management of social and economic resources for the well-being of all constituencies

- The ability of government entities to formulate fair policies that guarantee equal rights and protection for everyone

- The ability of constituencies to hold representatives accountable and to carry out decisions sanctioning performance

- The existence of fair and sustainable legal frameworks used to solve conflicts peacefully among individuals or groups

Governance exists in any form of organized group. However, adequate or good governance requires participation and legitimacy. In other words, the constituencies concerned with governance process and structures must be part of and accept the rules of governance.

Governance

FIGURE 3.1 Governance.

CORPORATE GOVERNANCE

The governance of a corporate entity is slightly different from that of a geopolitical entity. For example, instead of a government, governance is carried out by a board of directors. In this context, governance involves rules and principles, processes, customs, policies, and laws that influence the interactions among internal and external stakeholders as well as the administration and control of a corporation. Various definitions have been provided about the term "governance." Box 3.1 provides a sample of definitions as illustration.

To sum up, the concept of corporate governance is used to signify the reality that various actors are involved in the administration and control of a corporate entity. Corporate governance explains the rights and responsibilities of stakeholders, as well as procedures for making decisions. The corporate entity can be for profit or nonprofit. This chapter focuses mainly on nonprofit corporate governance.

BOX 3.1 SAMPLE DEFINITIONS OF CORPORATE GOVERNANCE

Definition

Source

Corporate governance is the process carried out by the board of directors, and its related committees, on behalf of and for the benefit of the company's stakeholders, to provide direction, authority, and oversights to management.

Sobel, P. J. (2007). Auditor's risk management guide: Integrating auditing and ERM. Chicago, IL: CCH.

Corporate governance involves a set of relationships among a company's management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.

Organization for Economic Co-Operation and Development. (2004). OECD principles of corporate governance. Paris: Author.

A system of law and sound approaches by which corporations are directed and controlled focusing on the internal and external corporate structures with the intention of monitoring the actions of management and directors and thereby mitigating agency risks that may stem from the misdeeds of corporate officers.

Sifuna, A. P. (2012). Disclose or abstain: The prohibition of iTrading on trial. Journal of International Banking Law and Regulation, 27(9), 340-353.

Corporate governance is the system by which companies are directed and managed. It influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimized. Good corporate governance structures encourage companies to create value (through entrepreneurism, innovation, development, and exploration) and provide accountability and control systems commensurate with the risks involved.

ASX Corporate Governance Council. (2003). ASX principles of good corporate governance and best practices recommendations. Sydney, Australia: Author.

 
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