What the data tells us?
Each year WOB produces an analysis of the vacancies posted on its website which, among other things, shows the percentage of paid directorships for NFPs. Each year the percentage increases. The most recent report was for the 2019 year and is worth a quick review:
In 2019 the number of total board positions posted on WOB in the Charity / NFP Foundation / Trust and Sporting Body categories were comprised of:
20% paid roles (19% in 2018)
33% paying expenses (43% in 2018)
37% unpaid (38% in 2018) – some provided professional development
Interestingly, 10% of all NFP positions in 2019 offered ‘other forms of payment’, such as scholarships, contract fees for governance roles and payments that the organisation chose not to define as a director fee.’
My view is that an NFP should remunerate / compensate directors if it is running a business that has paid staff and resources. From my perspective, many NFPs pay staff at market rates when the available tax benefits are factored in. No longer is it the case that NFP staff remuneration is heavily discounted. The trend to hire staff from the for-profit sector has also forced up remuneration of key staff.
The path to payment
There is often some sensitivity about moving to remunerating or compensating Non-Executive Directors. Often a change to the constitution is needed; which boards are reluctant to take to their membership. It often requires an outgoing chair to initiate the process to remove any element of self-interest. Or it starts with compensating the chair of a committee (eg audit and finance) in the form of an honorarium for additional work.
The benefits of remunerating NFP directors
The regulator, the Australian Charities and Not for Profits Commission, notes that charities that decide to pay board members may do so for a variety of reasons:
These are all valid reasons. WOB would add that:
Charities can be large complex organisations that need board members with particular skills and experience to be effective. Offering remuneration may help a charity attract the right people for its board.
Remunerating board members may enhance the sense of accountability and responsibility from the board.
Offering a payment can increase the pool of potential board members and lead to greater diversity on boards. There are many people who cannot afford the time to serve properly as a board member, but would otherwise be great additions to a charity board.
When board members are paid for their service, charities may expect greater engagement in attendance, communication, and decision-making.
Organisations benefit when Boards have a diverse membership. If they only rely on directors who can afford to support an organization without any remuneration, they are likely missing out on qualified but unavailable people; particularly women.
Many NFPs who post with WOB are seeking highly qualified directors. The vast majority of WOB members already have an unpaid role. So, the space for another unpaid role in their repertoire is limited.
At an evening WOB event, a senior director said that in her experience unpaid directors can be viewed as ‘amateurs’ by the ‘professional’ staff of an organization; who consequently tend to downgrade their views. This can hinder good governance.
Remuneration for those NFP boards where the company is operating a business is a reasonable proposition. We fully expect the percentage of paid NFP director roles on WOB will increase again when the 2020 data is reported.
It’s part of your director remit to give back as part of a board portfolio in a role where remuneration is not sought or received. This can be done in various ways - volunteering, mentoring, serving on a board you have a passion for or making a sizable donation.
Phone a friend – the views of the WOBShare Community
When this matter was put on the online WOBShare community it elicited a large number of comments. Here is a selection.
My thoughts are that a not for profit with a business model should at least pay the chair, as part of their role is to work with paid CEO to deliver business objectives… The chair is a crucial link between the Board and the CEO and often the chair has to get involved and have a greater appreciation of the operational issues in the business; whereas the Board directors can skate above the operational issue and contribute (for free in most cases) their expertise in guiding strategy.
Based on my experience in serving on boards of small and large NFPs, my view is that board members of large NFPs should be paid. I categorize large NFPs as having 100+ staff and assets/turnover/budget in the hundreds of millions. Organisations that operate on a commercial scale need effective and good governance. I am not suggesting that all NFP boards need to be paid to achieve good governance - rather, the risks and board workload are significantly higher in large-scale NFPs and that warrants remuneration.
Even a small payment of say $1- 200 per meeting in the case of a small NFP would be an acknowledgement that board members are valued and I know I would have contributed more had this been the case. I also found that NEDs meeting attendance was much more ad hoc in the NFP which is much less the case in the FP space.
I have served on small and large NFPs and well as for profit entities. I believe that remuneration should be based on reward for the required expertise, workload and of course, risk. I agree with your starting premise that NFPs with a business model should pay fair compensation to their directors. I recall a rule of thumb I heard many years ago that the Board should be allocated the same rem as the CEO (divided amongst the directors). I have seen this work on several boards.
I have served on several large NFP's where the workload and risk are high but there is no remuneration for the board. When execs around the table are paid handsomely, it becomes a matter of respect and value for the directors’ time and expertise.
The view from the UK
The views of a board member of our sister company, WOB UK, were sought as the UK in the midst of this debate with the forthcomiong Kruger report forthcoming. In this instance read trustee as NED. The WOB UK director had this to say:
Reasons for not paying are independence, checks & balances, focusing funds on the cause, simple inability to pay, desire to ‘put back’ etc.
Reasons for paying are the risks for Trustees are ever increasing (just like NEDs, and many are also NEDs as Trustees), the requirements for professionalism becoming ever more critical and calls for diversity are growing.
Optionality: charities should have the choice of offering, and Trustees should have the option of waiving, fees. There is a risk however that Trustees taking fees are seen as greedy: uncomfortable moral pressure might be brought to bear.
Diversity: there is some evidence from the 3rd sector and the public sector that lack of pay does limit applications, although more work is needed.