What's the difference between serving on the board of a nonprofit and a for-profit organization? 

   The Board of Directors plays a crucial role in guiding an organization regardless of whether it's a for-profit or a nonprofit. However, the structure, roles, and objectives of these two types of boards can differ significantly.

     I grew up in New Mexico, and I remember when I moved there as the daughter of a military man, we had relationships with a lot of people who were not from that area or didn't know a lot about it. The question we were asked most about our move was, “Do you need a passport?”  It’s funny now, but we often had to explain that New Mexico was actually one of the 50 United States! Well, just because something sounds the same (like Mexico and New Mexico) doesn't mean it is the same. This is also true of boards. Board service is very different depending on whether you serve a nonprofit or a for-profit. Today, let’s identify those differences and highlight the uniqueness of each.

Purpose & Mission

     In a for-profit organization, the board is primarily focused on maximizing the shareholder's value. Their central mission is to make sure the organization is profitable, displays strategic growth, and  remains sustainable long-term. Therefore, the decisions of a for-profit organization are driven by financial outcomes and market competition. 

     On the other hand, a nonprofit board is mission-driven. Their main goal is to advance the organization's cause- the reason why they exist. And while financial oversight is still critical In a nonprofit, the emphasis is on ensuring that the organization remains aligned with its founding principles in order to carry out its mission. It’s success is measured by impact, not by profit.

Board Composition & Expertise

     In a for-profit board, individuals with extensive business or industry experience are typically recruited. They may include executives and entrepreneurs, or professionals with finance, law or technology backgrounds. The goal of the for-profit organization is to leverage the expertise of their board to give a competitive advantage to the organization. 

     In a nonprofit, however, you’ll find a more diverse range of backgrounds. In addition to lawyers, attorneys, and finance professionals, nonprofit boards typically include people who are community leaders, activists, educators or philanthropists. While some nonprofit board members may bring a financial acumen, others, contribute to the nonprofit based through their connection to the community and the cause, or the purpose that the nonprofit serves. 

Compensation Structure

     In a for-profit organization, the board members are typically compensated for their time and their expertise. This compensation may include annual retainers or meeting fees. Stock options or performance-based incentives are also common forms of board compensation. The compensation strategy of the for-profit board is to attract top talent and then reward them as the organization moves forward.

     But, in a nonprofit, board members serve on a volunteer basis, and do not receive financial compensation. The reward for a nonprofit board member is non-monetary. Instead, it’s derived from personal fulfillment for contributing to the cause that they believe in. It is worth noting though, that nonprofit board members can still receive reimbursements for some expenses, like travel or other costs that are associated with their board service. 

Board Fiduciary Duty

     A for-profit board has a fiduciary duty to the shareholders. This duty involves ensuring that the company's operations maximize the profits, strategic growth, and returns of the organization. 

      In contrast, for a nonprofit, the fiduciary duty focuses on ensuring that the resources entrusted to the organization are used effectively to manage the mission. The board has to balance the fiscal responsibility with program development and the delivery of their mission critical resources. The board ensures that donations and grants are managed effectively, and that both donor and legal expectations have been met. 

Governance & Accountability

     For-profit boards are accountable primarily to shareholders and regulatory bodies. Their governance structures focus on being efficient, profit driven, and strategic in their marketplace. 

     However, nonprofit boards are accountable to different stakeholders. These stakeholders include donors, beneficiaries, and the public. They often demonstrate transparency through annual reports and program assessments. In addition, legal compliance is equally as important to nonprofits in order to maintain their tax exempt status. 

     If you are starting a nonprofit or you're currently serving as a board member, understanding these differences can help you better understand your ideal role. Are you driven by financial success or does your passion lie in a greater mission? Make an informed decision and contribute where your talents can make the greatest impact. 

     If you're a new board member or you have a new member on your board, check out my Financial Training for Nonprofit Boards video playlist. You can also check out my website to find additional resources, including the Board Financial Literacy Assessment.