Numbers

My lawyerly reponse to the question of how many directors a nonprofit corporation should have is "it depends."  The Panel on the Nonprofit Sector, in its Final Report to Congress and the Nonprofit Sector (2005), states that "[t]he ideal size of a board depends on many factors, such as the age of the organization, the nature and geographic scope of its mission and activities, and its funding needs."  I would add that the ideal size may also be influenced by the size of the organization, its tax-exempt classification (e.g., public charity, private foundation), its life cycle stage, its culture, its staffing, its ability to recruit directors who are willing and prepared to meet their fiduciary responsibilities, the board's expected duties and functions, the importance of diversity (in identity, values, and perspectives), and the desired committee structures and activities.  Clearly, one size does not fit all.

A 2004 discussion draft of nonprofit reforms prepared by the Staff of the Senate Finance Committee proposed that "Board[s] shall be comprised of no less than three members and no greater than fifteen."  While this proposal was met with wide and deserved criticism, and it would be completely inappropriate as a universal requirement, it may provide helpful guidance to a great majority of nonprofits and a starting point for a discussion about an appropriate minimum and maximum number of directors of a particular organization.

Minimum number of directors.  State laws may prescribe a minimum number of directors.  The Revised Model Nonprofit Corporation Act (1987), adopted in whole or in modified form by 23 states, sets the minimum number at three.  Some states, including California, require only one director.  However, the IRS may reject an application for exemption under Section 501(c)(3) if an organization sets forth that it has only one director (or only two directors, who are related to each other) based on a private benefit argument.  See, for e.g., PLR 200736037.

The Panel on the Nonprofit Sector recommends a statutory minimum of three directors for charity boards, stating that "[t]hree members allow for deliberation of governance matters and more diversity of thinking on such matters as possible conflicts of interest and self-dealing."  The BBB Wise Giving Alliance, in its Standards for Charity Accountability, recommends a minimum of five directors.

I agree with the Panel's recommendation of a change in federal law to condition the ability to receive deductible charitable contributions on having a minimum of three directors (subject to certain very limited exceptions).  I also think that five directors is generally better than three, all other things being equal.  But adding two poor performing directors to a board of three strong performing directors would be ill-advised.  Given that it is a substantial challenge for many nonprofits to recruit suitable directors, it is not surprising that there is little desire to raise the minimum number of directors required under law to more than three.

Maximum number of directors.  Setting a maximum number of directors is a trickier issue and one not appropriate for legislation.  If all of your directors are each meeting their fiduciary duties and providing value to the organization, there may be no need to reduce their number based on some arbitrary best practice maximum.  On the other hand, from a practical perspective, if an organization has so many directors that individual directors reasonably believe that they do not have the opportunity to meaningfully participate in discussions, deliberations, and decision-making, the organization has too many directors.

The Panel on the Nonprofit Sector notes that "[a]lthough a larger board may ensure a wide range of perspectives and expertise, a very large board may become unwieldy and end up delegating too much responsibility to an executive committee or permitting a small group of board members to exercise substantial control."  Inactive directors, more interested in affiliation than governance, may get a free ride from the active participation of a core group, but this is not an ideal situation. Note that very large boards played a major part in the recent high profile governance problems of organizations like the American Red Cross, United Way, and Nature Conservancy.

All board members should be attending a great majority of the board meetings and should have an opportunity to have their voices heard on each and every key issue before a vote.  Inactive board members should be removed.  Because it is politically and personally so difficult to remove individuals from boards, I tend to favor an automatic removal process for a predetermined number of consecutive missed meetings, subject to provisions for excused absences and a savings clause (i.e., a provision allowing the board to save an absentee director from automatic removal).

A report from the Council on Foundations, At Issue: What is the Best Size for Your Board? (January 2006), details some of the advantages and disadvantages of large boards.

Advantages:

  • Large numbers allow for more opportunities for diversity and inclusiveness.
  • More seats allow for for inclusion of legal and financial advisors, community leaders and funding area experts.
  • Work can be shared among the group; more people are available to serve on committees.
  • Fundraising may be easier because there are more people on the board with more connections.
  • More board members helps maintain institutional memory in times of leadership change.

Disadvantages:

  • Members may feel less individual responsibility and less ownership of the work.
  • Large groups may hinder communication and interactive discussion.
  • Cliques or core groups may form, deteriorating board cohesion.
  • Some voices may not be heard.
  • Bigger boards may not be able to engage all members, which can lead to apathy and loss of interest.
  • Meetings are more difficult to schedule; more staff time is needed to coordinate board functions.

Odd number of directors.  Many nonprofits opt to have an odd number of directors in order to avoid deadlock caused by a tie vote.

Governance.  The board's duty is to govern the organization.  If organization seek additional individuals to assist in fundraising and/or other other tasks, it may create advisory boards, emeritus boards, honorary boards, and special (non-board) committees or task forces.  While it may be true that major donors will be less engaged and less likely to give or leverage substantial donations if not elected as directors, organizations should find other ways to acknowledge their contributions.  Such individuals may be given impressive titles and certain limited powers subject to board oversight.  If they have no intention to actively participate in the governance of the organization, which should be spelled out in a written job description, they should not be directors.  Period.

Comments

  1. canon copiers says:

    A not-for-profit corporation would be able to operate with a minimum of one director. If the corporation issues debt obligations for public distribution, however, it would be required to have at least three directors on its board. The by-laws of the corporation would be required to define the period during which a director can hold office.

  2. Gene Takagi says:

    Not uniformly accurate, cc. But good point that board size may be affected by public financing and governmental contracts.