Governance in Industry Associations
Over the last few years, I’ve found myself grappling with governance structures in industry associations (‘IAs’ hereinafter).
IAs, not infrequently, have this interesting problem: what to do with paying corporate members? For a long time, the answer has been ‘if they pay enough, give them a board seat’. Doing this, however, creates challenging and unhelpful tensions. I’ll focus here on the specifics for IAs, but there are a lot of similarities with commercially funded startups if (as is common) a VC or other investor requires a board seat in return for their funding.
What is the board’s job?
Let’s start with a reminder of what the board is and is not responsible for. Most IAs are set up as not-for-profit entities, and whilst there are operational specifics particular to a given jurisdiction, the general principles are the same. The US-based National Council of Nonprofits offers the following useful description of the role of the board:
Board members are the fiduciaries who steer the organization towards a sustainable future by adopting sound, ethical, and legal governance and financial management policies, as well as by making sure the nonprofit has adequate resources to advance its mission.
Something the board shouldn’t be doing, though, is ‘running the organisation’, which the same article makes clear:
One of the most important responsibilities for many boards is to hire…a talented CEO/executive director to run the day-to-day management activities of the organization…
It’s true that smaller or nascent associations may not have an executive director or paid staff: but whilst this may impact specific individuals on the board, it shouldn’t affect the overall responsibilities of the board as an entity, as we’ll see.
One final point to bear in mind is that the board’s responsibility is to the organisation itself, and they should make decisions that are “in the best interests of the nonprofit corporation” (taken from the same source). This isn’t specific to IAs, or even to non-profits: it’s how any director should operate.
The problem with ‘paid board seats’
Having paid board seats is a natural answer to the question “how do we offer sufficient value to paying members?”, especially in the spin-up phase of an IA. But it introduces some problems which can have very serious repercussions.
- Biased input and decision-making
- Loss of control over board composition
- Growth constraints
The Biased Board
A board member who is understood to be representing their company at the board is naturally and unavoidably biased. Even if they try not to, they will have their companies’ interests at heart and what’s more, their board colleagues will expect them to have that interest. In the most extreme cases, the board member may be put under pressure by the employer to make particular representations in board meetings—and the board member will find it very hard to refuse if their job is potentially at risk. Under such circumstances, the board member cannot be said to be making decisions “in the best interests of the nonprofit corporation”. At best, then, you have the ingredients for poor decision-making. At worst, intractable conflict at the board level can leads to decision-making paralysis which may ultimately doom the organisation.
The Unbalanced Board
If board members are simply appointed by the paying member, then the Chair of the board has no control over the skills and behaviours composition of the collective. They may end up with individuals who don’t have the experience to operate on a board; or who don’t have the skills necessary to hold the executive properly to account whilst remaining constructive in their approach. What’s more, the Chair’s ability to make any change to the board is essentially non-existent. The most they can do is approach the paying corporation at a more senior level and hope that they can persuade them to make a adjustment… but the chances of success are small.
The Constrained Org
There’s plenty of opinion about the optimum size of a board (such as this, and there’s a good corpus of academic research as well (of which this is one example). A board that is too large rapidly becomes sufficiently unwieldy as to be ineffective. Individual board members are unable to contribute consistently, consensus is hard—sometimes impossible—to reach, and decision-making is unacceptably slow. The UK’s Charity Governance Code recommends (∫5.6) that “A board of at least five but no more than twelve trustees is typically considered good practice.”
There’s a good case to be made, in my view, for smaller boards; personally, I’ve found 7-9 people to be a sweet spot (and an uneven number is always helpful to avoid the Chair having to exercise a casting vote!) . Nonetheless, if we take 12 as a reasonable upper limit then, for an IA that ties board seats to membership tiers, that IA is putting a self-imposed limit on growth. Either the org keeps adding members, and watches as the board becomes increasingly ineffectual; or the org simply stops growing at 12 top-tier members, and has to focus future growth efforts on smaller membership tiers—thus limiting the potential income stream, particularly from larger prospective donors.
So what’s to be done
With all of this said, it’s still very reasonable for top-tier corporate members to want to have a say in the direction of the IA—in fact, you want their input and you need them to be engaged. It’s also not unreasonable for them to want to have some input into the composition of the board. Equally, good corporate members presumably want the IA to be successful in its mission, and so they will want the board to be enabled in the best possible way. There are two useful constructs that can help satisfy all these requirements: an advisory council and a nominating committee.
An advisory council is a body, separate from the board but which provides (in the case of an IA) input to the board about the industry and the market and so on. It’s a great way for the members to have their voice heard and to be able to contribute meaningfully to the direction of the IA, and for the board to make sure it receives a good diversity of input. It’s also not the only source of information for the board. The specifics of how you grant access to the advisory council, how you govern it, even what you call it will be specific to your particular IA—but to make this work, you must provide a regular and routine mechanism for the council to meet and provide input to the board, and you must demonstrate that their opinions are being taken into consideration. That doesn’t mean you need to show that you’re doing what they say: it means you have to have show that you considered what they said seriously before either accepting it, rejecting it, or allowing it to demonstrably influence a related decision.
A nominating committee is either a body entirely separate from the board, or a subcommittee of the board, which provides a slate of nominations for board seats when they become vacant. Again, the specifics will vary by circumstance—and there are lots of interesting options here (probably enough for another article at some point in the future!), but the principle is straightforward. Provide your top-tier paying members access to the nominating committee; through this, they can influence the slate for nominations by proposing candidates, but it is ultimately up to the board (who should in most cases have the final say on selection) to decide which individuals to elect.
What about when you don’t have staff?
I mentioned earlier that smaller or newly forming IAs might not (yet) have an executive director or any paid staff. Under these circumstances, it’s true that individuals on the board need also to be acting in an executive capacity. “Also” is the key word here. Let’s take an example: it’s quite common for the CEO or CFO of a commercial (for-profit) entity to be on the board. In the UK (and some other countries) these roles are distinguished as ’executive board members’, in contrast to ’non-executive’ (or ‘independent’) board members. It’s important to have a good balance of non-executive to executive members on the board, to ensure unbiased decision-making. Crucially, though, executive and non-executive board members alike should act in accordance with general good governance principles. So for smaller IAs where one individual is both (say) the Executive Director and a member of the board, that individual is carrying out two distinct functions—and as best they can, they need to their ’executive’ considerations and responsibilities to one side when acting in their ‘board’ capacity. This isn’t easy, and it’s consequently important to strive for a good balance of board members who have no executive function at all so that the board as an entity can operate optimally.
A Better Outcome
The structures described here are best implemented at the formative stage of an industry association. Setting the tone of ‘good governance’ from the outset sends a strong and positive message to prospective members. It’s absolutely possible, though, to update and improve the governance of extant organisations. It takes some effort to get existing members aligned, and care needs to be taken with redrafting existing governance and policy documents to mitigate or avoid any unintended consequences; but in my experience, the benefits significantly justify the hard work. A streamlined, agile board, able to act unencumbered in the best interests of the entire organisation and the industry which it serves; unfettered access to the right mix of skills and experience on the board to help constructively challenge the executive; strong, meaningful representation from key members which is appropriate balanced by the broader view; and no constraints on future growth. In other words: a board that can actually do what it’s meant to do. And that’s something worth working towards.