The corporate-governance debate in the United States is spreading from the for-profit to the nonprofit world. Well-publicized controversies at organizations such as The Nature Conservancy, the American Red Cross, and the James Irvine Foundation have even caused observers such as Eliot Spitzer, the attorney general of New York State, to suggest that the Sarbanes-Oxley Act should be applied to nonprofit boards.
To be sure, those boards operate under unusual constraints. Directors volunteer their time, play an important role in raising funds, and in some cases are so numerous that board meetings resemble conferences rather than deliberative assemblies. They also answer to a wide range of stakeholders who may lack a single common goal, such as increasing shareholder value. Thus it comes as no surprise that a recent McKinsey survey of executives and directors of nonprofit social-service organizations found that only 17 percent of the respondents felt that their boards were as effective as possible.1
To improve the governance of nonprofits, their boards must venture beyond the traditional focus on raising funds, selecting CEOs, and setting high-level policy. Our research indicates that the best boards also provide professional expertise, represent the interests of their nonprofits to community leaders, recruit...