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Noor Faris
OBHR 4300.0U1
Exam 1

The nonprofit sector has grown tremendously in both number of organizations and GDP

in the past few years alone. Despite backlash, the sector has thrived and increased faster than the

for-profit sector. The growing popularity of this sector led to many new problems that

organizations had to face, including being considered only a gap filler. This paper will discuss

this as well as many other fundamental concepts relating to this sector such as the debate of level

of interference between different types of governing boards and their CEOs, the logic model, and

the double bottom line.

The rise of the nonprofit sector led to the creation of many macro theories about it.

People were curious about the nonprofit sector and wanted information on it. The theories that

became the most popular were the failure theories, specifically market and government failure.

Market failure is the situation in which the market is not operating effectively, meaning there is

an inefficient amount of goods or services in the free market. One reason this can happen is

information asymmetry, the situation where a seller and buyer have different levels of

information on a product. This market failure leads to a gap where the missing goods and

services are supposed to be. In these situations, the government is likely to help lessen the gap,

but there can also be government failure. This occurs due to political, structural, and system

reasons that can prevent the government from filling in the gap. This is where some think the

nonprofit sector comes in. They are thought to be essentially gap fillers as they provide the goods

and services that the market and government failed to provide. Although widely supported, the

failure theories do not explain everything. There are circumstances where the sector still exists

where market and government failure do not. Nonprofit organizations do much more than just
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fill a gap. The nonprofit sector creates many unique and positive outcomes and should not be

reduced to gap fillers only. This is a sector that is bigger and more complicated now. The study

of nonprofit management as well as it being a profession has just recently appeared. Nonprofits

now need strong leaders behind their governing boards and CEOs.

Every nonprofit organization needs a governing board in order to help it run smoothly. A

governing board is a group of people responsible for making sure that an organization is

executing its mission. They also can connect the organization to its community. There are many

different types of governing boards that exist in the nonprofit sector. There is not one superior

type as each has advantages and disadvantages. The types differ in the selection of the members

as well as the interactions between the boards and the CEOs. Also, although the behaviors in

practice are different, the responsibilities for all boards are the same.

In the first type, elected boards, the members of the board are elected by the members of

the organization. Elected boards are common in organizations that are member-serving or

specialize in advocacy. Since the organization’s mission serves the members, it makes sense for

the members to have the ability to choose who they think will best achieve the organization's

needs. This ensures that the board will be responsive to the member’s needs, which is an

advantage. A disadvantage is that there will be differences among the board that come from

division of the members. Board members may not have the same skill set levels and will vary in

opinions on how to run the organization, which might cause complications. There will also be

difficulty in planning and sustaining any long-term goals or plans because of turnover due to the

elections.

The second type of governing board is a self-perpetuating one. New self-perpetuating

governing board members are elected by old members of the same board. This type of board is
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most common in charitable nonprofits. Compared to the elected boards, this is more stable.

Instead of having varying random skill sets, old self-perpetuating board members will be able to

select new members with the proper needed skills. The board will also be able to maintain a

disrupted flow of culture and priorities for goals. The disadvantage to this board is that it can

become too stable, unrepresentative of the community, and might have trouble adapting to its

changes.

The next type of board is the appointed and hybrid boards. The members of this board are

appointed from outside of the organization, which will produce accountability from the member.

This is usually seen in public organizations. Some members may also be serving as ex-officio, a

member that serves on the board as well as holding another office position. Some ex-officio

members lack full commitment to an organization. Hybrid boards can combine the different

practices in selecting the members in order to get the best qualities from each. While the

combination of the benefits of responsiveness, stability, and accountability from the multiple

practices could be an advantage, it could also lead to different interest and loyalty levels from

board members.

The last board type is advisory boards and councils. An advisory board or council does

not have the same legal responsibilities as a governing board. A council consists of experts in the

field who give professional advice to organization or board members when needed. This could

be a great resource for members, as long as the council’s responsibilities are clearly defined in

order to prevent interference with the governing board.

As well as differences in how board members are selected, there are also differences in

how invasive boards should be. The biggest question is who ultimately leads the organization

between the CEO and the board. Again, there is no correct answer and both scenarios can lead to
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negative outcomes. In some organizations, the CEO has the dominant role as leader of the

organization and the board follows. The CEO could use its power to manipulate the board and

use them in order to pass his initiatives. In other organizations, the governing board plays the

dominant role where it could micromanage and take possession of the authority of the CEO.

Because of these extreme scenarios, the nonprofit sector is split on this decision and it is a great

discussion. There are some people who think that a partnership between the CEO and board

would be the most ideal, but there are still differences in the construction and operation of the

partnership. Three authors are mainly cited when discussing this question. In the Policy

Governance Model, Carver states that there should be clearly defined responsibilities for the

board and the CEO. The CEO will implement and enforce the policies that the board creates. In

the governance as leadership model, Chait et al. discuss a leadership role for the board that does

both policy and implementation. This model is supposed to focus the organization on important

matters. Herman and Heimovics propose a different model called psychological centrality and

board-centered leadership. They describe how the CEO should lead for the governing board. The

CEOs leadership will be designed to assist the board in its governing responsibilities. Many

organizations use one of these popular models, a mix of them, or a completely different one. It

all depends on the people and purpose of the organization.

One thing that always stays the same is the responsibility. There are three main legal

responsibilities that a governing board has: care, loyalty, and obedience. These three duties are to

ensure that the board functions responsibly. The duty of care states that governing board

members should exercise due diligence when making decisions for the organization. Members

should act with common sense and not with recklessness or failure to seek advice. The duty of

loyalty refers to board members putting the organization's interests above their own. This relates
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to the concept of conflict of interest. If a conflict of interest were to happen, the members

decision should be based on the organization and should not solely benefit their own business or

financial position. The duty of obedience ensures that the organization is following laws and the

mission. All decisions should be legal as well as help the mission of the organization, assuming

that the mission is useful.

One way to assess the usefulness of an organization's mission is the logic model. The

logic model was created in order to provide an overview of how an organization should work or

function in theory. This model will show who will be served and how. It serves as a format for

the program of the organization by linking the programs objectives, activities, and expected

outcomes. This tool is necessary because it is very helpful for organizations. It allows them to

visualize their inputs and outputs as well as the relationship between their resources, activities,

and goals. It can also be used to help identify possible outcomes for different missions. Logic

models are now being used in order to validate nonprofit organizations. When trying to

fundraise, donors want to see a plan for the organization. A logic model will allow donors, in an

approximate way, to see what their money will be going towards. Something to remember,

though, is that the logic model is only a theoretical tool and will not be completely accurate in

application to the real world.

Along with measuring usefulness in an organization, success also has to be measured.

The double bottom line is a way to measure success in nonprofit organizations and is important

in this sector. While a for-profit organization’s main goal is to increase value to their business, a

nonprofit organization has to do that and more. Nonprofits have to manage the financial aspect of

their organization as well as the mission aspect, which is what the double bottom line refers to.

Achieving the mission is the most important part of an organization and that cannot happen
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without money. Therefore, it is important to take care of both bottom lines. The leaders of a

nonprofit organization have to carefully be able to manage them both. When making decisions,

they should think of the financial and social consequences that they have. If an organization is

taking care of its money and social impact successfully, then it should be a successful

organization. One problem that might occur is the vagueness in how to determine or measure

social return. As long as the organization is making a positive impact, though, it should be

acceptable.

In conclusion, the nonprofit sector has gotten bigger in recent years and is still going to

expand. Like anything, with growth comes more responsibility. People question and have

theories on whether the sector is one big gap filler or not. There is also discussion on the types of

governing boards and how limited their leadership should be in comparison to the CEO. There

are also now ways to measure usefulness, the logic model, as well as success, the double bottom

line, in this sector. This essay has discussed all of these concepts and more. The nonprofit sector

will hopefully always continue to grow and develop and provide a positive impact to this world.