(Original in Chinese by Tian Kai, PhD., School of Government, Peking University. Translated by Hong Liu of Harvard University.)

Since mid to late 1980s, board of directors system (the board system) has become an important theme in international studies on non-profit organizations (Middleton, 1987; Conforth, 2003; Ostrower & Stone, 2006). Since 1990s, the rapid growth of Chinese non-profit organizations has attracted research from domestic and foreign scholars; academia, while paying sufficient attention to external structural environment for the development of Chinese non-profit organizations, also notes many significant cases caused by some nonprofits’ deficiency in their internal structure of governance.[1] Chinese academia, government, and practitioners consider the establishment of an effective mode of governance a key issue for nonprofit organizations. This article surveys Chinese nonprofit organization’s basic framework in board of director system, and problems encountered in modes of governance; it further analyzes the problems that the current mode of governance encounters in practice, and offers some thoughts and suggestions.

1. Basic framework of Chinese nonprofit’s board of director system

Compared to the practice of international nonprofit organizations, China’s nonprofit organizations developed its board system much later; not until the late 1990s did China set up a rudimentary board system legally. Thus, development Chinese nonprofit organization’s board of director can be divided into three phases since 1949.

The first period from 1949 to 1998, when “Provisional Regulations for the Registration Administration of People-Run non-Enterprise Units” (henceforth “Non-enterprise regulation”) and “Regulation for Management of the Registration of Social Organizations” (henceforth “Social Organization Regulation” were issued, can be called the “pre-board” phase. In this phase, Chinese administrative policies did not set up norms and standards for internal governance of nonprofit organizations. In many ways, the government was more concerned about the conditions for setting up nonprofit organizations and management of their capital, etc, and paid little attention to internal structure of governance in these organizations.

The second phase lasts from the 1998 passing of Non-enterprise regulation and Social Organization Regulation to the 2004 issue of “Regulation for the Management of Foundations” and should be called initial phrase for the board system. During this phrase, government administrations have shown concern for nonprofit organization’s internal governance, and have confirmed the status of board system as the basic structure of Chinese nonprofit organizations through regulations and publishing example procedures. They have set more specified regulations for makeup, size, voting procedure of the board, the makeup and responsibility of supervisory board, etc. Although the regulations are not yet complete, they have placed the board as a clear area for mechanisms of internal governance development.

The third phrase is from the 2004 passing of Foundation Management Regulation to the present, which should be called the developmental phrase of board system. From the passing of Social Organization Regulation and Non-enterprise regulation in 1998 to the present, social environment for social organization and non-enterprise units has changed tremendously. Scholars and practitioners have made many suggestions to answer problems encountered in implementing the two regulations. Since 2006, Legislative Affairs Office of the State Council has for three consecutive years set up trial evaluative checkpoints for statues and law; Non-enterprise regulation is an important part of it. The Legislative Affair Office and the Ministry of Civil Affairs have jointly established Non-enterprise regulation evaluative team to gather information of the law’s implementation through questionnaires, interviews, and other methods. How to further improve board system will become key to future amendments of Non-enterprise regulation and Social Organization Regulation.

The 1998 Non-enterprise regulation (State Council Order No. 251), Social Organization Regulation (State Council Order No. 250) and 2004 Foundation Management Regulation (State Council Order No. 400) established Chinese nonprofit organization’s basic structure of internal governance. This is a typical policy-driven mode of governance; it bares many similarities with that of the developed countries’:

i)        Setting the Board as the Core Mechanism for Internal Governance

Non-enterprise regulation and the new Social Organization Regulation of 1998 do not directly regulate structure of governance for social organizations and non-state units; instead they set organizational structures through setting up example procedures to be followed. The 2004 Foundation Management Regulation, instead, directly states in its clauses that the board should be the governing organ of foundations. These legal structures set the board as the core mechanism for internal governance; the board possesses centralized powers of final decision on major affairs related to an organization’s development, and of major legal rights. The board has the power to determine an organization’s bylaws and its amendments, major plan of activities, annual budget, structure for internal governance, and human resource allocation, etc. The director of the board serves as the organization’s legal representative.

ii)      Division of Power Between the Board and Executives

Under the current framework of non-profit organization’s internal structure, the power of the board and the executives are divided. The board is at the center of power, and controls executives. The board is responsible for hiring, evaluating, and dismissing executives. Executives, entrusted by the board, handle the organization’s day-to-day function, are responsible to the board, and fulfill in detail the policies set by the executive board. The executive director performs his role under the leadership of the director of the board. Because there are possible crossovers between the board and the executives in some of their specific roles, and because particular situation of each organization varies, the Foundation Management Regulation allows each organization to determine the specific division of labor between the director of the board and the executive director.

iii)    democratic collective decision-making process

The purpose of a functional mechanism of internal governance is the prevention of an organization’s tendencies towards individual control. To do so, the current regulation framework confirmed collective decision-making mode to replace and prevent individual decision-making. The board is the decision-making organ of an organization; it is composed of many members of the board. The director of the board is elected by the board members. The board meetings allots each member one vote, and can only be called when meeting a quorum of given ratio;[2] decisions made by board needs to be agreed by more than half of board members.[3] The Foundation Management Regulation also employed principles to avoid conflict of interest, regulating that a member in a situation where his personal interest connected to the interest of the foundation cannot participate in the board’s decision-making on related matters.

iv)    Using Supervisory Board or Supervisor as Mechanisms of Internal Supervision

To effectively check on the power of the board, director of the board, and the executive board, regulations emphasize that organizations must create internal supervisory positions or a supervisory board to prevent abuse of power within an organization. Supervisors of a non-enterprise organization must be chosen from organizers, donors, or employees; those of a foundation are mainly sent by donors or supervisory government organs. The government registration and management agencies can send supervisors depending on the need of their work. These related regulations give supervisors or the supervisory board respective powers of supervision: for example, the supervisor can examine an organization’s financial and accounting documents, can attend board meetings, and raise question or offer advice to the board, etc.

2. Problems Encountered by Chinese Non-Profit Organization Board System in Practice

The Chinese non-profit organization’s board system has served some positive functions in regulating an organization’s management since its promulgation. But just as the new institutionalist economics and new institutionalist analysis of organizations observe, some difference exist between a system’s design and practice. Many organizations, to obtain legality, are forced to submit to the requirements of the system in name and design some formally mechanism as a result; but the actual functioning of the organization actually departs from these formal mechanisms (Meyer & Rowan, 1977; North, 1990). Non-profit organization’s board system has encountered several problems in actual practice, especially in the following areas:

i)        Dual Management System’s Influence of Board Functions

Dual management system is Chinese government’s particular method of managing non-profit organizations, and a major background element in influencing Chinese non-profit organization’s board system in practice. The dual management system refers to the responsibilities taken by both registration and management government agency and supervising government organ in managing non-profit organizations (Wu Zhongzhe, Chen Jinluo, 1996:33). Currently, the registration and management agencies are Ministry of Civil Affairs of the People’s Republic of China and various local organs of civil affairs above the county level, while supervising government organs are government agencies directly guiding and managing non-profit organization’s activities and functions.

From the global perspective, national governments play indispensible roles in supervising non-profit organizations worldwide.  Non-profit organizations have an important characteristic—its public responsibility. Because non-profit organization enjoy tax deductions, or receive public donations, they have greater responsibility towards the general public. Governments are often regarded as the defenders of public interest, and therefore often keep a firmer control over non-profit organizations than over private enterprises.

The case of China is different, though, as the government’s control over non-profit organizations has exceeded the usual range of supervision and excessive governmental intervention in some organizations has undermined the non-governmental characteristic of these NGOs. For one, overly strong influence by the government has interrupted the implementation of the board system for NGOs. Decision-making power within non-profit organizations has been controlled by exterior forces: part of the internal decision-making authority that non-profit organizations used to have has been transferred to the governmental system, which deprived non-profit organizations of their autonomy in making decisions. Although in theory, the board as the central decision-making body, should consist of Director of the Board, Deputy Director of the Board, and Secretary General, all of whom are democratically elected. However, in reality, in many NGOs strongly influenced by the government, Director of the Board, Deputy Director of the Board, and Secretary General are often directly appointed by the supervising agencies or the party agencies in charge. In addition, important decisions within these organizations are made by the government/party agencies, instead of by the board. Supervising government agencies and management agencies also have a final say on the list of candidates for trustees and supervisors. When such important decision-making power is lost, the board system cannot function properly.

For NGOs in China now, therefore, important problems remain unanswered: what role should the government play in internal management of non-profit organizations? What is the boundary between governmental supervision and autonomy of non-profit organizations? What specific position should the government assume in the system? How should government switch from the dual management system to reasonable supervising functions? Proper answers to these questions are a prerequisite for improving the non-profit organization board system in China.

ii)       The structure of the board

Who can become the members of the board? Should members of the board be chosen because of their expertise, or because of the interest groups or individuals that they represent? Should a member of the board be expected to represent and speak for a specific interest group, or to give an expert’s opinion? For these questions, different theories have different opinions.[4]The makeup of board members in Chinese NGOs is especially complicated; this is closely related to the particular administrative system of Chinese NGOs. On the whole, board members are chosen in two ways: they are either directly sent by supervising agencies to oversee the operations, or employed by the NGOs themselves as key figures who could potentially give the NGOs an edge in acquiring important resources—more often than not, they are government officials in such key fields as finance, taxation, capital, and civic administration, or chief patrons to the NGOs (entrepreneurs and individuals). The second type of board members, because of their frequent manipulation of resources, often show characteristics predicted by the resource dependency theory, as they perceive the board as a bridge that connects themselves with exterior interest groups and enables themselves to acquire more resources (Pfeffer & Salancik, 1998). Because of the scarcity of various kinds of resources available to them, Chinese NGOs have to prioritize the concern for acquiring accessibility to scarce resources when they choose board members and turn a blind eye on the scale and efficiency of the board, the expertise of the board members and the diversity of the board members’ origins. From a survey that I conducted, many non-profit organizations in China each have a board with more than 30 or even 50 members, a drastic departure from the world average of 19 members per board for each non-profit organization (National Center for Nonprofit Boards, 2000). A board for a foundation is usually even smaller, with only 11 members on average (Council on Foundations, 2002).

From the perspective of group dynamics, when the scale of the group exceeds 10 members, the group is defined as a large group, in which information sharing and communication both become more difficult (Jones, 2003：326). Chinese non-profit organizations, each with a board of such considerable scale, often run into communication problems among board members, which then translate into deadlocks in board decision-making and negatively affect the efficiency of the board. The 2004 Foundation Management Regulations and the 1998 Non-enterprise Regulation were right in limiting the size of the board to 25 members. In addition, many non-profit organizations neglect the candidates’ qualifications of expertise and skills when choosing board members and fail to include interest groups that are closely linked to the operation of the NGOs but do not directly provide the organizations with key resources—such as the recipient of the services that the NGOs provide and community representatives. These practices, in a way, undermine the functions of the board.

iii)     The board deprived of power under strong personal  control

In China, many non-profit organizations established the board system merely because they were obliged by law and regulation to do so; as a result, the board system in these organizations is only established in constitution, but not in daily operations, and the board is often without any real power. Decision-making power in such organizations still remains in the hands of a few individuals, and their control over the organizations is highly personal. Such individuals—often respected as heroes either because they were the founders of the organization themselves, or because they played eminent roles at turning points of the organization’s history such as significant crises—enjoy high status and power in the organization.

This personal heroism, more often than not, in early developmental stages of Chinese non-profit organizations, yet can potentially undermine long-term development of such organizations when viewed on a longer time-horizon. The core of the board system lies in its effective check on individual power and control on individual behaviors so as to make sure administrators act in the best interest of the relevant parties. Under the administrative pattern in which personal heroism prevails, however, individual power goes without a check, and fate of the organization is dictated by the administrative methods and decision-making accuracy of one individual, and hence the rise and fall of one individual often significantly alters the perspective of future development of the organization itself, leading to inconsistency in organizational development. Hence, this administrative pattern with strong personal heroism characteristics is at odds with such concepts that the board system champions as group decision-making and check-and-balance of power.[5]

iv)     Relations between the board and the executive branch

The relations between the board and the executive branch have been long debated by international academia and practitioners. The foci of the debate are the following: how should responsibilities be divided up between the board and the executive branch? If the board is legally responsible to the organization and serves as the decision-making branch, how can the principal-agent problem between the board and the executive branch be solved (i.e. as the board hires the executive branch to perform on the board’s behalf, yet the executive branch, not the board, possesses all information regarding the operations of the organization, how should the board effectively oversee the actions by the executive branch to ensure they are in the best interest of the organization)?

The analysis above shows that China has been trying to establish an administrative pattern in which the board and the executive branch share power and check on each other: the board, as the decision-making organ, dictates the actions of the executive branch; the executive branch, employed by the board to run daily administrative operations of the organization, is responsible to the board. However, in actual operations, the power-responsibility relations between the board and the executive branch are not yet clear: in many large organizations, the chief of the board, by the official record, is not the head of the executive branch, yet often takes up the de facto role of the latter. The chief of the board then becomes overly powerful: besides his prominent role in the board, he is entitled to make both long-term strategic plans and specific, everyday decisions about the running of the organization; in fact, he makes and executes the policies.

In the above pattern in which the chief of the board takes up the role of the head of the executive branch, the principal-agency problem no longer exists, which makes it easier to synchronize the entire organization. However, this pattern is also seriously flawed. The chief of the board has to busy himself with petty errands involved in daily administrative work, and therefore has insufficient time and energy to think about strategic issues about the organization’s development on the macro-level. The chief of the board, when taking up the de facto role of the head of the executive branch, necessarily drives the actual head of the executive branch into the role of lower-ranking executive personnel. This necessarily makes the role of the CEO much less rewarding, undermines the flexibility and adaptability of the organization, and often drives the organization into the trap of personal control.

v)       Supervisory power of the Supervisory Board

The supervisory board is an important establishment in the internal governance of non-profit organizations. The ultimate goal of having such an establishment is to effectively supervise and check on the power of the board and the executive branch. In actual operation of Chinese non-profit organizations, the effectiveness of such supervising is often in question, which poses the chief challenge to the supervisory board. In general, for the supervisory board to perform its functions properly, several prerequisites have to be met: (1) the supervisors should possess enough information about the organization’s operations to base their judgment upon; (2) the supervisors should harness sufficient specialty, expertise, and skills to perform the supervisory role; (3) the supervisors should have the autonomy in carrying out their supervisory actions independently from the board.

In many organizations, these prerequisites are not met. First of all, important interest groups such as recipients of services, patrons to the organization and representatives of staff are not included in the supervisory board, and hence cannot influence decision-making which has significant bearing on their own interests. Secondly, many supervisors lack expertise and skills in such fields as finance and law and cannot supervise on matters that require such expertise. Thirdly, in many non-profit organizations, the supervisory board is often subject to direct intervention or control by the board of the chief of the board, and hence loses its autonomy. Because of such reasons, the supervisory board system is often paralyzed. As exterior environment does not pose sufficient check on the internal governance of an NGO either, the ineffectiveness of the supervisory board leaves the board with too much power and too little check, fails to reveal problems within the organization in a timely manner, and potentially undermines future development of the organization.

3. Conclusion

The Chinese government and academia started to pay great attention collectively to internal governance of non-profit organizations in the late 1990s. For over a decade, China has been trying to institutionalize a governance pattern centered at the board system. This pattern is based on the division of power between the board and the executive branch: the board, with its central decision-making power, dictates the activities of the executive branch; the executive branch, entrusted by the board, is responsible for daily operations of the organization; the organization relies on its democratic collective decision-making system for internal decision-making and relies on the supervisory board for checking on the internal governance of the organization. This governance pattern has a lot in common with that in practice in developed countries.

Among the three kinds of non-profit organizations—foundation, NGO and social groups—foundation usually has the most well-developed board system. The most significant problems in the operation of the board system are: (1) dual management system directly affects the enforcement of the board system; (2) the prevalence of paralyzed supervisory board and personal control; (3) the power relations between the board and the executive branch is not well-coordinated; and (4) the supervisory board underperforms its supervisory role designated by the constitution.

How to improve and effectively enforce the board system is a key question to the healthy development of Chinese non-profit organizations. To solve the problem, the government needs to clearly define its role, to establish a reasonable boundary between government’s supervision and non-profit organizations’ autonomy, to transform the dual management system to reasonable supervision, and to create more amicable conditions for the effective operation of the board system for non-profit organizations. Non-profit organizations, on the other hand, can also help establish a mature and institutionalized board system by competing against each other in a reasonable scale, seeking higher efficiency, and accumulating relevant administrative experience.

Reference:

Wu Zongze and Chen Jinluo, 1996. Shetuan guanli gongzuo. Beijing: Zhongguo shehui chubanshe.

Gareth, J. Contemporary Management. Li Jianwei, et al., tr. Beijing: Renmin youdian chubanshe.

Cornforth, C., 2003. “Introduction the Changing Context of Governance-emerging Issues and Paradoxes.”In Chris Cornforth, ed. The Governance of Public and Non-profit Organisations. London: Routledge.

Council on Foundations, 2002. Foundation Management Series. Washington, DC.: Council on Foundations.

Meyer, J., and B.Rowan, 1977. “Institutionalized Organizations: Formal Structure as Myth and Ceremony.”American Journal of Sociology. 83: 340—63.

Middleton, M., 1987.“Nonprofit Boards of Directors: Beyond the Governance Function.”In W.Powell, ed. The Nonprofit Sector: A Research Handbook. New Haven: Yale University Press.

National Center for Nonprofit Boards, 2000. The Nonprofit Governance Index. Washington, DC.: National Center for Nonprofit Boards.

North, D. 1990. Institutions, Institutional Change and Economic Performance. Cambridge University Press.

Ostrower, F. and Melissa M. Stone, 2006. “Governance: Research Trends, Gaps, and Future Prospects.”In W.Powell, ed. The Nonprofit Sector: A Research Handbook（2nd Edition）. New Haven: Yale University Press.

Pfeffer, J. and G. Salancik. 1998. The External Control of Organizations: A Resource Dependence Perspective.New York: Haper & Row.

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[1] Such as the case of Hu Manli in the foster home “China Green Village”; additionally, Southern China Weekly’s headline article “Who should be the president of China Charity Federation” on 11 April 2002 discussed whether government official or top donor should lead the organization, creating relatively widespread public discussions  on the matter.

[2] Quorum for foundations and social organizations consist of two-thirds of the board; non-enterprise unit’s quorum consists of one-half of the board.

[3] Social Organization Management Regulation states that each decision must be approved by two-thirds of the board.

[4] Of which stewardship theory and democratic perspective theory are two opposing views. Stewardship theory believes that the board members should have expertise, which is beneficial in guiding the organization towards better performance; hence board members should be selected based on expertise. Democratic perspective theory believes, on the other hand, that board members are representatives of non-experts who serve the interest of their represented constituents.

[5] Wood (1992) observes that when the board of a nonprofit organization is consisted of outstanding individuals, it is easy to create a structural tension: individualist orientation of outstanding individuals and implied collective orientation of board system have different outlooks.

 (Publication with anthorization from the author. All rights reserved to the author.)