Lessons from For-Profit Boards

The conversation usually goes like this: “Hello Skip, I need your help. I have these very well meaning trustees on my board, but they are from the corporate world and they don’t understand the difference between running a business and running a school. Can you spend some time with my board and help me out?” 

This has happened so many times that I decided to put together a presentation for an institutional leadership conference on the topic — and this article, based on that presentation. There is much that independent school boards can, in fact, learn from for-profit boards. But there are also significant differences between the two, and, thus, it’s important for independent school board members to understand when their professional experience is an asset and when it can be a liability.

Semantics Matter

When it comes to for-profit¹ and nonprofit boards and governance, language and semantics matter — particularly the difference between stakeholders and shareholders, and between boards of trustees and boards of directors. 

Shareholder vs. stakeholder

All boards are accountable, but to whom? For-profit boards are accountable to shareholders, nonprofits to stakeholders. 

Shareholders are owners. They made a choice to invest money in their company. Because of this financial investment in this company, the board has an obligation to recognize the financial expectations of shareholders. This is why the phrase “increasing shareholder value” is the absolute basic mantra of the job of for-profit boards.

Stakeholders are the constituents of a nonprofit. In the case of independent schools, the most common stakeholder groups are parents, students, faculty and staff, and alumni and donors — those who are most directly connected to the school. But, in the final analysis, the stakeholder to whom independent school boards are ultimately accountable is the community the school serves, for the simple reason that each school has a mission determined in response to a perceived community need. 

It is important to remember that stakeholders are not owners. While families have made a purchase when they enroll their children in the school, they are customers, not owners. In a nonprofit school, there are no “owners” in a legal sense. If schools do a good job, many stakeholders will have a sense of ownership of the school; but, for trustees, accountability to stakeholders is different from accountability to owners. Because there are multiple stakeholders, the job of a nonprofit trustee is much less clear-cut than the job of a for-profit director. Unlike the primacy of “increasing shareholder value” incumbent on for-profit boards, the job of a nonprofit board is one of understanding the expectations of each of the multiple constituencies, and then guiding the school to a balance of serving the interests of all stakeholders. This is a much more nuanced and complex job. 

Boards of directors vs. boards of trustees

When very experienced and successful businesspeople get sideways in the nonprofit world, it is often because they don’t understand this distinction between directors and trustees.

Not surprisingly, directors direct. Their job, as the representatives of the owners of the business, is to direct management to operate the business in a way that meets the expectations of the owners. Boards of directors hire the chief executive and establish policies and measures of accountability for management in order to ensure that expectations are being met. But this is not their only obligation. They are also obliged to make sure that their respective business creates fair and rewarding employment for the employees, that the company is an upright and contributing corporate citizen, and that the product or service the company offers is what it says it is — in quality, features, and benefits, etc. — so that customers will return for more.²

Trustees, on the other hand, hold the school in trust for the multiple stakeholders they serve. Rather than direct management, schools employ the shared governance model in which trustees work in concert with management to advance the school. While a director will establish financial goals and direct management to achieve them, a trustee’s responsibility is to: (1) determine if the mission of the school is appropriate, (2) work with the administration to develop policies and parameters (financial and otherwise), and (3) monitor the progress of the school in achieving its mission. By definition, it is difficult to establish metrics for achievement of a mission that is often subjective in nature. And while school boards do hire the head of school, the shared governance model is much more collaborative than hierarchical. 

One key characteristic that distinguishes the nonprofit board from the for-profit board is the election of the board itself. In the for-profit world, the board is elected by the shareholders to serve as their representatives in overseeing the business. In schools, boards are self-perpetuating, hired by no particular constituency. Yes, many boards will have representation from groups such as alumni or parents, but, in the best governance practice, those people are trustees of the entire institution first, and representatives of their own constituency second. 

The reason these distinctions — between shareholder and stakeholder, director and trustee — are so important is that, in the broadest sense, the accountability of the board in a nonprofit is different from that of a for-profit board. Yes, many of the disciplines and skill sets are similar, but, in its simplest form, there is a fundamental difference. The most important jobs of a for-profit board are to hire the CEO and approve the budget. The most important jobs of a nonprofit board are to define the mission, hire the CEO, provide guidance, and monitor the success of the organization in achieving its mission. The for-profit board exercises control through the approval of the budget. The nonprofit board oversees the budget as a tool in the operation of the enterprise as it pursues the mission. Many of the problems that occur in nonprofit boards are the result of well-intended business people who join a school board and don’t understand these basic differences. 

Cultural Differences Between Nonprofit and For-Profit Boards

Beyond board structure, it is important to understand the cultural differences between schools and the corporate world. The traditional structure of businesses is Egyptian — that is, hierarchical, tiered, pyramidal. Schools, inspired by the Greeks, are collaborative, humanistic organizations. A college president I know once described his job to me this way: “I am the shuttle diplomat who tries to hold together a confederation of fiercely independent fiefdoms that absolutely want to do their own thing, but occasionally come to me for money.” Independent schools, thankfully, are typically more cohesive wholes than that description. But there is no question that the traditions of academia include a great deal of freedom and autonomy. One of the great attractions of teaching in independent schools is the independence. At the same time, a great deal of work goes into creating not only a thoughtful sequence within a subject area, but a coordinated student experience across and between subject areas. The result is a culture in schools that involves collaborative decision making surrounding the most central functions of schools: teaching and learning. And, because of the centrality of that collaborative atmosphere surrounding the core activity, the culture of collaborative and collegial decision-making extends to all aspects of school operations. 

A second aspect of culture in schools is deliberateness of decision-making and implementation timetables. The for-profit world has a bias for action that is often missing in schools. That bias for action comes from the pressures of competition, the importance of being first to market. It comes from the fact that time is money. Schools, by contrast, have certain cycles. And because most of what we do is teach, change is what happens in our spare time when we aren’t doing what we are really here to do. It takes a long time to make decisions in schools, not because people spend more time doing it, but because people spend lots of time doing other things between periods of decision-making. Oftentimes, businesspeople come to schools and are terribly impatient at how long it takes to get things done in a school. I believe that schools can and must move faster; but, even so, trustees need to understand the reasons behind the pace of schools, and not just be frustrated by them. 

The Pitfalls of the Corporate Model in Schools

So, given these distinctions — between shareholders and stakeholders, between boards of directors and boards of trustees, and between the unique culture of schools and corporate cultures — what are some of the potential pitfalls? Here are the top five dangers of applying corporate concepts to schools.

Bottom-line orientation

It is easy for someone coming from the corporate world to focus on the bottom line. So it is only natural that we often put our trustees most experienced in business on the finance committee. Yet, while the bottom line is crucial in terms of the sustainability of the school, it is only one of many measures of success for a school. Schools have long been focused on the “triple bottom line” — often described as People, Planet, Profit, though, in schools, it translates into a strong focus on an excellent program and well supported faculty and staff, social responsibility and community relations, and overall financial health. Trustees must focus on all aspects of school success, not just the financial success. 

Top down, hierarchical decision making and implementation

Do you remember that business book about the nanosecond nineties? Ah, the good old days when business moved that slowly. Today, business truly does move at the speed of light, and it operates 24/7, 365 days of the year. So, coming from that world, trustees often are understandably impatient with the pace of decision-making and change in schools. In particular, when the board and management team know that there is only one course of action, business people want to just get to it. Unfortunately, in the collegial, distributed decision-making culture of schools, if you take that approach and don’t get buy-in, the organization, at best, will not accept the decision, and, at worst, actively work to fight it. Strangely, this may not be because the decision was wrong, but just because the process was not inclusive. Yes, some schools are too process-oriented and ought to move more quickly toward change, but it is always a mistake to assume one can just impose change upon a school community the way one can in the business world. 

Money talks

Employee motivation is an essential job of top management in any organization. The care and feeding of your people entails understanding them, helping them understand the goals of the organization, and helping them feel that they are positive contributors and appreciated. Sometimes trustees from the corporate world forget that, if faculties, staff, and administrators were in it for the money, they never would have picked education as a career. One of the toughest jobs for those trustees is to understand the importance of psychic income as well as monetary income. But understand it they must, or they will be out of touch with the essential character of schools. The link between employee motivation and satisfaction and monetary compensation is much less clear in schools than in business. Incentive compensation, in particular, has been a spectacular failure in many school settings. 

Everything can be measured.

In the past several years, there has been a somewhat alarming trend regarding the measurement of school outcomes. Some of it is fallout from the No Child Left Behind Act. While NCLB doesn’t apply to independent schools, the measurement and accountability concepts behind NCLB, along with the increasing search for metrics in the business world, naturally spill over into schools. There are many dangers here. First of all, because each school has its own mission, focus, and culture, external measurements such as standardized testing can be considered as only one of many indicators of success. One of the most distinguishing elements of independent schools is their determination to recognize the uniqueness of each student, and to help each student reach his or her potential. How do you come up with metrics that will measure the growth and development of a young painter or cellist? How do you measure success in helping a reticent child become more comfortable speaking up in class and more confident in expressing himself or herself? They are difficult to measure. And, yet, they are absolutely central to what we would call “success” in schools. Metrics-happy business people need to adjust to the reality that some subjective outcomes defy measurement. 

Teachers have it easy.

The notion of a 40-hour workweek is a joke for many successful businesspeople, especially the kind of successful ones we hope to attract to our boards. Fifty-, 60-, or 70-hour weeks are commonplace. Too often, I have heard people say that “teachers only work from eight until three, and only nine months a year.” The danger here is that the concept of productivity underlies the discussion. The notion is that, somehow, if we made teachers more productive, we could have fewer teachers and the budget would look better. In some respects, this is right. Schools can no longer afford the luxury of having a faculty member drawing full-pay teaching for only a couple of sections a day, or less than a full complement of students. But this is very different from the productivity conversation that assumes that teachers are only “working” when they are in class or on campus. If your school has a trustee who doesn’t get this, let that trustee walk a mile in a teacher’s shoes. Take the time to explain what a teacher’s week looks like — in addition to the time in class, the time spent outside of class meeting with students, grading homework and papers and tests, reading to keep up with the latest in their fields, prepping for the next class, meeting with members of their departments, maybe coaching a sport or advising a club. 

What We Can Learn from the Corporate Model

Here are my top seven things that independent schools might well learn from our for-profit counterparts. 

Working on it and talking about it are not the same as doing something about it and moving forward.

One of the pitfalls of collegial organizations and distributed decision making is that there can be a tendency to take way too long to address important issues. The use of deadlines is a tool from which schools can benefit greatly if decision-making is too slow. It is remarkable how the same amount of work and the same process can be compressed into much less time if someone simply sets a deadline. 

You needn’t have consensus in order to make a decision (except in a Quaker school!). 

In a school culture, leadership can be faulted for not consulting everyone and getting input from everyone. But once everyone has been heard from, it is OK to say, “We’ve listened to everyone. Thank you for helping us to see all sides of the issue. There are genuine disagreements on some points and we have considered those. Now, this is what we are going to do. I hope that those of you who may not agree will support this because it is truly in the best interests of the entire school, even if it means some folks have to change or adapt what they do.” Smart business people understand the importance of getting input and buy in; however, employees also understand that management makes decisions that everyone has to go along with. In schools, management will need to explain to dissenters why it believes that a decision is correct; but that is far better than letting the minority stall the process for lack of complete consensus. As long as the process is inclusive and everyone feels that he or she has been heard, it’s not only OK, but also necessary for leadership to say, “We don’t have consensus, but this is what we’re going to do.”

Families and students are customers.

In 1994, I served on a task force to draft a new mission statement for an independent school. In the course of those conversations, I used the word “customer” to refer to families and students in the school. BIG MISTAKE. It was as though I had driven a dagger through the hearts of the teachers in the room. Well, that was then and this is now. Today, schools that don’t view their families as customers do so at their own peril. Why? Because the families themselves view themselves as customers. They shopped around, they studied the various products available to them, they paid their money, and they bought the service, just as they would any of a number of other products or services they buy. And, living their lives as consumers, they certainly don’t check those consumer expectations at the door to the schoolhouse. They are conditioned to think that they deserve attention.

I am not suggesting that schools buy into the concept that the customer is always right. But schools do have an obligation to explain as best they can what they are, what they do, and what parents can and can’t expect from the school. Schools have an obligation to communicate clearly and often to parents. It is much better for the school to put out accurate and complete information than for the various members of the school community to fill in the blanks for themselves, often incorrectly. And I will say this categorically: If your school does not have a policy that requires all teachers and/or administrators to answer all parent communication within 24 hours, you should put one in place. The only thing that consumers hate more than a bad product is to feel that they are ignored. The customer is not always right. But he or she has every right to expect that he or she will be responded to and treated with respect and courtesy. 

A dashboard is a great tool.

Some schools, because of the stuff that legitimately cannot be measured, fall short of measuring what they can. Pat Bassett, president of the National Association of Independent Schools, is fond of saying “In God we trust; all others bring data.” His point is that, too often, schools make decisions based on gut or anecdote when real data do exist. To the extent that data do exist, data-driven decisions are usually better than subjective ones. So the trick is to determine what should be the gauges on the dashboard. It is good for a school to determine the vital few measurements that matter. Obviously, regular financial statements are a no-brainer. But other things might be the number of applications, number of families leaving the school, student-faculty ratio, faculty compensation compared to the local public schools, percentages of students and faculty of color, percentage of students on financial aid, tuition rates at peer schools, net profit or loss of your food service program, or a list of the schools that your students come from and go to when they leave you. Businesses have found that a snapshot of numbers at any one time may not be informative. But if you look at the same numbers over time, trends and patterns emerge that can help you understand what is really going on, and make better decisions. Basing decision-making on anecdotes is dangerous. Good boards develop the mindset that whenever a decision has to be made, the boards ask, “What data can we get to help us make the right choice?”

Conduct ongoing environmental scanning.

Environmental scanning is not something to save for the strategic-planning process. It should be an ongoing function that asks, “What is going on in the world outside our school, and what are the implications for us?” Our schools exist in the complex social web. We have neighbors who care about what the school does. We have policy makers who care about what the school does. As we are all acutely aware, our school and our constituents exist within a local, regional, national, and global economy. Schools should be aware that, while the Sarbanes-Oxley Act applies only to public, for-profit companies, the spirit of accountability, expectations of transparency, and guilty-until-proven-innocent mode that pervades Sarbanes-Oxley is spilling over into the nonprofit world. It is essential that schools not be blind to this. In addition to scanning, you can influence your external environment by being proactive with public policy makers, elected officials representing your jurisdiction. You are one of their constituents, so introduce them to your school. Impress them with your own high standards and your rigorous accreditation process. Absent first-hand knowledge, it is easy for policy makers to assume that our schools are only the privileged, elite institutions that they were decades ago. Our schools serve a very public purpose, and elected officials who represent you need to know and understand that. 

Think about an audit committee.

Recently, I saw a survey done by an association of corporate directors. Only 35 percent of respondent public companies have finance committees on their boards. In the for-profit world, finance is largely a management function, not a board function. In the nonprofit world, primarily because trustees often have a lot of experience in finance and budgets, most schools have an active finance committee. On the other hand, 100 percent of public for-profits have an audit committee. An audit committee’s job is different from that of a finance committee. In business, it has the responsibility to be sure that the numbers accurately reflect what is happening in the business. Larger nonprofits, in particular, might be very wise to have an audit committee, separate and distinct from the finance committee. The audit committee’s job is to be satisfied that the processes and procedures of the school are adequate to make sure that the reported numbers are accurate. Often an audit committee will work closely with external CPAs. When financial problems come to light in the nonprofit world, the first question people ask is, “Where was the board?” 

Litigation is not your friend.

The business world is litigious. The independent school world is becoming more so. You hope to avoid litigation, but you need to be prepared for it. Nobody likes to spend money on lawyers, but risk-management is something boards cannot ignore. I am not an attorney and I urge you to consult with your own school’s legal counsel about areas of concern. When it comes to litigation, what you have said is not nearly as helpful as what you have in writing. 

There is no question that nonprofit independent school governance and for-profit corporate governance are different animals. It is incumbent upon businesspeople who serve on school boards to know and understand the differences. At the same time, the ivy that covers our walls no longer insulates our schools from the expectations of our constituents, nor the realities of modern society. We are well advised to learn what we can from the business world and take advantage of those attributes that can make our schools better. 

Notes