Question

How does corporate governance of a not-for-profit business vary from corporate governance of a traditional for profit business? Minimum 200 words with references

Answer 1

Our society benefits greatly from for-profit and nonprofit organizations. Their purposes are different, which means that each needs to have a different governance structure in order to grow and thrive. The strength of the governance structure, along with the quality of the leaders, is key to the success of the organization.

The differences between for-profit and nonprofit organizations become apparent when we look at -

• an organization’s mission,
• finance structure, and
• board of directors and their duties.

Differences in the Mission:

The mission is a central component to nonprofit organizations. Virtually every decision the board makes centers around the mission, vision and values of the organization. The major activity for nonprofit organizations is generating donations. Nonprofit organizations qualify as tax-free because they fill the gaps of many social services that governments aren’t able to provide given the limitations of available tax dollars.

For-profit boards consider risk management, the market climate, the wishes of the investors, historical trends, future predictions and many other metrics before making final decisions for the company. The company’s mission is an important component of the business, but financial metrics often take precedence.

Differences in Financial Structures:

The majority of funds for nonprofit organizations come from donations, grants, membership fees and philanthropic efforts. Some nonprofits also have a small operational budget for selling products or merchandise. Nonprofits utilize the talents of volunteers and donors, and some employ staff. Because nonprofit organizations channel most of their funds toward a cause, boards must place a heavy emphasis on responsible budgeting and cash flow.

In regard to for-profit entities, funds come from operations and financial capital markets. For-profit corporations rely on hired employees as their workforce and on paying customers to meet their financial needs. The financial market for for-profit companies has many ups and downs. Boards aim for steady financial growth over the long term. Setting short-term goals usually leads to sustained long-term growth. Boards of for-profit corporations pay special attention to financial metrics, profit-and-loss statements, stock prices and cash flow.

Differences in Board Structures:

Nonprofit organizations are legally required to form a board of directors. Nonprofit boards tend to be larger than boards of for-profit organizations. The committee structure for nonprofit boards also differs from that of their for-profit counterparts. Medium-size and large nonprofits typically have standing committees, such as a nominating committee, executive committee, technology committee and public relations committee. They often also have a variety of standing committees or ad hoc committees devoted to special issues.

For-profit corporations are only required to form a board of directors if they are publicly traded. These boards tend to be smaller than nonprofit boards and they get paid for their services.

Differences in Board Duties and Responsibilities:

Nonprofit board directors have a duty to further the charity’s tax-exempt purpose. They’re legally responsible for protecting assets from fraud and misuse.
In exercising their powers and meeting their duties, for-profit board directors are primarily responsible to the shareholders. In that capacity, they are essentially the fiduciaries for the shareholders.