Corporate Governance of Social Enterprises

WORKING DOCUMENT
TUM School of Management Ann-Kristin Achleitner Judith Mayer European Business School Andreas Heinecke Schwab Foundation for Social Entrepreneurship Mirjam Schning Abigail Noble

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Table of Contents
Foreword 1 Introduction 1.1 What is governance? Why is it important for social enterprises? 1.2 Why create a board? 2 Overview: How are boards evolving over the lifespan? 3 Creating your board 3.1 Who should be on my board? 3.3 How do I recruit the right board members? 3.4 How should I appoint board members and for what term of time? 3.6 How to choose the right governance structure? 3.7 What is the right size for my board? 4 Managing your board for optimal performance 4.1 What are the rights and duties of board members? 4.2 What is the role of the founder within governance? 4.3 What are the roles and responsibilities of the board chair? 4.4 How to create a board culture? 4.5 How should management report to the board? 4.6 How to evaluate the work of a board? 5 Appendix 5.1 Committees 5.2 Template for a quarterly update 5.3 Example of a board self-assessment questionnaire 5.4 Example of impact value chain 5.6 Corporate governance guidelines and codes of best practice 5.7 Rules of procedure for boards 6 Task Force Members of the Schwab Foundation Community 7 Sources 3 4 4 4 6 8 8 11 12 13 19 20 20 22 22 24 26 28 29 29 30 31 38 39 44 47 48

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Foreword
Social enterprises, which have as core to their strategy the goal of addressing the most pressing problems societies face, often must balance both financial responsibilities and social impact, coordinate among multiple stakeholder groups and consequentially navigate complex trade-offs. Governance of a social enterprise, if incorporated well, helps safeguard the mission of the social enterprise while allowing the management team to meet the demands of the variety of stakeholders, including investors, employees, clients or beneficiaries, as well as to comply with public policies and regulations. Furthermore, governance is a mechanism to strengthen leadership and to empower stakeholders, which increases their motivation to contribute to the development of an organization. Furthermore, incorporating stakeholders is a way to make decisions that display their interests. This ensures acceptance by key external stakeholders and thus, facilitates smooth operations and optimal impact of the social enterprise. Yet, few social enterprises use governance as a means for their social enterprise to reach its highest potential. Likewise, board members often feel that they have more to offer than the social enterprise currently engages them. The time and effort spent by management teams to create and maintain the right governance mechanisms for their social enterprise can save valuable trial and error time in building and scaling their organization, extend the organization`s fundraising capacity and expertise network most easily, and ensure that the organization does not make costly mistakes given the regulatory, legal and financial environments. This document offers social entrepreneurs an opportunity to evaluate the needs, focus and personality of their social enterprise with the goal of determining which systems, processes, mechanisms and structures of governance will help their organization to achieve its goals. It offers practical advice on how to design governing boards and committees, what can be done with existing structures once set up to ensure they best serve the social enterprise, and how to transition effectively the governance structures as the needs of the social enterprise change. The view of the authors is that no one governance mechanism fits all social enterprises; rather governance should be dynamic and adapt to the changing needs of the management team, the operating and regulatory environment, and the larger goals and vision of the social enterprise over its lifespan.

- For more information, contact: Abigail Noble (abigail.noble@weforum.org), Schwab Foundation for Social Entrepreneurship, or Judith Mayer (judith.mayer@wi.tum.de), Technical University of Munich 3

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1 Introduction
1.1 What is governance? Why is it important for social enterprises?
Governance is defined as systems and processes concerned with ensuring the overall direction, effectiveness, supervision and accountability of an organization (Cornforth, 2003). Governance mechanisms include governing boards, monitoring systems, and signaling mechanisms like reporting or codes of conduct. The field of social impact, and specifically the tools of social performance indicators and impact monitoring, is relatively young compared to financial and accounting metrics and monitoring. Thus, monitoring as well as signaling possibilities are restricted and there is only scant external oversight of social enterprises. Therefore, governing boards are highly relevant for social enterprises as they allow for dynamic interaction of management and stakeholders of an organization (Ebrahim, 2003). Furthermore, boards pursue monitoring as well as signaling functions. It is for this reason that the focus of this guidebook will be on boards. Remark to legal regulations: While some legal forms require the inclusion of a supervisory board or non-executive board members, others do not. As shown below there are several reasons to establish a board even if it is not legally obligatory. There are two types of voluntary boards: informal boards without any regulations and boards formally organized by documents like bylaws or rules of procedures. All aspects within the manual should be considered as recommendations. It is important to obtain applicable laws and make sure to comply with them.

1.2 Why create a board?

Social enterprises are often reluctant to set up a board or if they have a board, to engage their board actively in the guidance of their organization. Many social enterprises fear that boards will limit the effectiveness of the management team. However, well-designed and wellmanaged boards should by no means constitute a threat for management. If board members are chosen well and the relationship between management and board is designed correctly, boards will be facilitators in helping social enterprises to reach its full potential. The overarching goal of a board should be to complement the work of the management team and to ensure that the efforts of the management team and staff have the maximum effect in reaching the social enterprises goals. Boards provide strategic support and expertise. This can help an organization overcome a lack of in-house competencies or expertise, and does not involve the same procurement process as pro-bono consulting opportunities. 4

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Boards provide access to networks. Board members open doors to external networks that may reduce some challenges in fundraising, advocacy, and recruiting high talent to the organization. Boards signal external stakeholders (investors, lenders, prospective partner organizations or contractors) that a company is run in an appropriate and responsible manner. Thus, boards provide a license to operate (European Confederation of Directors Associations, 2010). Furthermore, governance helps to solve issues between stakeholder groups.

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2 Overview: How are boards evolving over the lifespan?

While governance is important at each stage of the development process of a social enterprise, the composition of a board as well as the tasks it takes on should evolve over the lifecycle of a social enterprise. In the pioneer/start-up stage innovativeness is high and flexibility is needed. There are mostly no or only few hierarchy levels and governance is often focused towards the founder. During the scaling stage more formal governance structures are established and outsiders are invited to serve on the board. Governance during maturity might be characterized by a participative structure. One of our interviewees described social entrepreneurs as people who found an organization based on having a dream (solving or alleviating a specific problem) and who pay no attention to governance in the early stages of company development. However, lax governance structures could put the whole model at risk, e.g. if no appropriate quality control mechanisms are in place. Other interviewees perceived support of their boards as essential to scale their organizations as board members provide senior knowledge as well as access to networks. In more mature stages, boards might help to demonstrate the system change achieved by a social enterprise. Furthermore, governance is perceived as crucial to manage organizational transitions. Box 01: Lifecycle of Social Enterprises*

* Based on Heinecke & Mayer, forthcoming

Occasions that may trigger change within governance Founder withdrawing from management Expansion of shareholder base Transition of lifecycle stage Increasing complexity of business portfolio, environment, risk profile Changes in shareholding structure Changes in legal form

Scaling does not take place just within a single organization. Instead, organizations could collaborate with others and imitators appear that further scale an approach. Replication of the approach by others is depicted in the light blue area. 6

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Start-Up
Family' Investor'

Provides'founding' experience'

Scaling
Networker' Provides' market'access'

Maturity

Government' representa<ve'

Board composition
Friend' Member'of' target'group' Provides'pro5 bono'support' Provides'management' exper<se' Strategic' Partner' Legal'expert' Academic'

!me$

Involvement'of'founder'

Adaption of governance structure? Enhancement and preservation of the culture of a social enterprise Resource provision, networking Extension of the talent pool Definition of quality control mechanisms and standards Examination of license agreements Selection of affiliates How to make it easy for others to replicate the approach? How to protect the approach against misuse? How to use profits? Succession planning of chief executive and management team (jointly with current managers) Supervision of affiliates, subsidiaries, franchisees Scaling deep Institutionalization of the approach What are further business opportunities? Has the social enterprise achieved a system change?

Adaption of governance structure?

Tasks and roles

Development of vision and mission Definition of value proposition, performance indicators, benchmarks Examination of business plan and forecasts Development of board procedures Consultation of key stakeholders to increase legitimacy and visibility Is there a clear social need? Is the model scalable? What are the risks? Open source approach vs. registration of trademark?

Questions to discuss

Table 1: Board composition and board roles over the lifecycle of social enterprises; own illustration

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3 Creating your board

This chapter discusses selection criteria for board members, different types of boards and further aspects that are important to set up a board.

3.1 Who should be on my board?

Form should follow function; the selection of board members should follow the prioritized purpose of the board. The social entrepreneurship team should consider carefully what are the priorities in the short and medium term, and design the governance structure with those priorities in mind. Overall, criteria for selecting board members refer to expertise, representation of stakeholders, networking and reputation. Those criteria can be mapped onto the purpose of the board. Box 02: Purpose of board members selection criteria
Purpose of board Sparring partner, strategic support Advocacy, legitimization Monitoring, compliance Networking, resource provision Selection criteria Expertise Reputation, representation Audit, financial, legal expertise Network

Expertise

Expertise refers to know-how and skills of board members. The below skills grid may be a useful tool for social enterprises to determine which skills and experiences are needed on their board. 1 Small organizations might as well include skills of their management team in the skills grid and match them with skills of their board. There are certain areas of expertise needed by almost all boards. Those include legal, financial and accounting expertise. Often, a board is able to make the most robust decisions on behalf of the organization when the board members provide different areas of expertise. Critical to the success of a diverse board is a culture of active listening, respect for different perspectives, productive dialogue, and the shared interest of coming to a collaborative decision (as opposed to always getting their way).

The idea of a skills grid is taken from Hudson, 2011. The skills grid presented in the manual just gives an overview of possible skills. Each organization has to define the skills it requires individually.

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Box 03: Skills grid

John Business skills Social sector experience Founding experience Finance skills Fundraising skills Legal skills Accounting/audit skills Marketing/public relations 1 2 0 0 0 0 0 1 Ann 2 0 1 2 1 1 0 2 Daniel 0 0 0 0 0 2 2 0 Susan 2 1 1 1 0 0 0 0 SUM 5 3 2 3 1 3 2 3 Minimum level 4 2 2 4 2 2 2 2

[0 = no relevant experience; 1 = some knowledge; 2 = substantial skills; Red lines: Skill gaps]

Representation of stakeholders

Stakeholders include investors, customers/beneficiaries, employees, government officials or relevant community members (e.g. people who reside in the neighborhood of the social enterprise). Multiple stakeholder boards are often perceived to have high social capital and facilitate the acceptance of the operations of a venture by serving as a license to operate in front of their groups. However, they can be more difficult to manage as stakeholders may be resolute in representing or defending particular interests rather than the interests of the whole organization (Spear et al., 2007). Role of shareholders Despite common supposition, governance is not simply about protecting shareholder rights but about safeguarding and balancing the interests of all stakeholders. Board membership of target group Including interests of the target group is especially relevant for social enterprises that are pursuing empowering approaches, like microfinance institutions. While many social entrepreneurs report that members of the target group provide valuable insights, they are rarely included as board members. One reason is that members of the target group were not perceived to possess sufficient expertise and experience for assuming board positions. An alternative is to include advocates of the interests of the target group within the board or to have an additional customer advisory council.

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Network and Reputation

Board members with esteemed reputations within the community can legitimate the actions of a social enterprise. Furthermore, well-regarded board members can not only facilitate external connections for the social enterprise but also attract similarly talented and regarded people to join the board. Dangers of including people with esteemed reputations on boards In early stages of the lifecycle of a social enterprise, board members with a high reputation might hinder organizational development, because they are reluctant to take on risks that could peril their own reputation. Furthermore, well-regarded board members might intimidate others (e.g. beneficiaries) to express their opinions.

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3.3 How do I recruit the right board members?

Social enterprises often find it hard to recruit appropriate board members and therefore compose a board out of their network of family and friends. The consequence of this is that the board does not possess relevant skills, representation, network and reputation. To attract capable board members, social enterprises can use a wide variety of referral sources, e.g. ask investors to propose members and to activate people from their networks research and identify people that are interested in the cause, e.g., people who are or were affected by the issue addressed by the social enterprise, look for companies offering pro-bono services, e.g., consultancies or legal firms, attend networking events and ask intermediaries for their support, invite people at the center of collaborative networks to expand their own network, invite a famous, reputable person to join the board in order to increase visibility. Intermediaries could offer platforms for people that are interested to serve on boards of social enterprises. The Bridgespan Group, a non-profit advisor, offers such a service. On their platform, www.bridgestar.org, they are hosting a career center for people looking for job or board positions in non-profits. Further aspects that should be considered when recruiting board members: Reflection of double bottom line: As board members have the final say in important management decisions, it is important that they feel committed to pursue the double bottom line and are not driven by other objectives or single minded for financial or social goals. Therefore, business members should, e.g., have a track record of being socially responsible to prove their commitment to social issues. Choosing the right investor: As investors often require having a board seat as a prerequisite for their investment, they have to be selected carefully concerning their goal setting. Conflicts of interest arise if their goals contradict with the goal setting of the social enterprise. Thus, cheap capital should not be the primary or single selection criterion for choosing investors. Furthermore, it is important that interests of different investors are aligned in order to avoid intractable conflicts. Dominant personalities: Management should be aware of dominant personalities on the board. There have been cases where dominant personalities got very influential in day-to-day business in order to pursue their personal goals. Thereby, they have put the whole enterprise at risk. Furthermore, powerful people could intimidate other board members.

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3.4 How should I appoint board members and for what term of time?
In membership organizations, members often maintain the right to elect board members. In organizations without members, current board members or management choose new members. Appointments are then based on skill gaps identified by the board. Sometimes, third parties appoint board members. This structure is common when an organization belongs to a larger umbrella organization (vertical board structure). When defining appointment of board members, procedures for removing a board member have to be defined as well. In order to balance expertise and representation within board membership, members of an organization as well as current board members and management should each possess the right to nominate a certain amount of board members. Once, appropriate board members have been identified, they should be interviewed in order to check their understanding of and commitment to the mission an enterprise is serving as well as the amount of time they are willing to commit. Questions to ask in an interview, include: What is your understanding of the organizational mission and vision? How do you perceive the positioning of the social enterprise on the continuum between non- and for-profit? Where do you see the organization within the next 5-10 years? How much time can you devote to attending board meetings? Which skills or other benefits (like networks) can you provide to our enterprise? Three to four years are typical terms of office of board members. Often there is a limit of two or three terms for board membership. Boards should have a rotation plan that ensures retention of valuable skills while continuously introducing persons with new ideas, expertise and perspectives.

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3.6 How to choose the right governance structure?

There is no one size that fits all governance models of social enterprises. Specific organizational factors like size, complexity or maturity of an organization influence the optimal governance structure. The following table can help social entrepreneurs to identify unique aspects of their social enterprise and to use them considerations in creating their governance structure.
How to use this chart: Social entrepreneurs should consider all statements and then combine the proposed approaches. If none of the statements below applies, social enterprises should consider Option 1 and keep it simple.

Fact

Consequence

Advice Option 2: Several boards; refer to box 04; best practice case of Lumni Option 2: Several boards; refer to box 04; best practice case of Lumni Option 3: Board committees and taskforces; refer to appendix 5.1 Option 4: Advisory council in addition to legally binding board; refer to box 05 Option 4: Advisory council in addition to legally binding board; refer to box 05 Option 5: Hybrid organizational structures; refer to box 06; best practice cases of Homeless World Cup and CIES Project

The organization operates Governance could serve as 1) across several countries or a mean to include local regions. knowledge. The work of the several boards needs to be well coordinated. The capacity of the current board is not sufficient to fulfill the tasks. People might be reluctant to join the board.

2)

Several boards exist within one organization.

3)

The board is facing a high workload or tasks within highly specialized areas. The organization cannot offer insurance against lawsuits for their board members. The target group should be represented on the board.

4)

5)

Sometimes, the target group does not have the ability to assume legal liabilities.

6)

The organization has a hybrid legal structure of non- and for-profit entities.

Governance needs to be well coordinated in order to safeguard the mission.

Table 2: Choosing the right board structure; own illustration

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Option 1: Keep it simple

The simplest structure refers to having a single governing board in addition to management. The country of origin of an organization determines the basic structure of division of management and oversight. Countries like Germany or the Netherlands have a two-tier system meaning that the management board and the supervisory board are two separate entities. In countries with a one-tier structure (like the US or the UK) all directors (executives as well as non-executives) form a single board, called the board of directors.2 Box 04: Two-Tier vs. One-Tier Structure

Option 2: Organizations with several boards

Some organizations have several boards. An organization that operates in several countries might have a board in each country. Local boards help the organization include local knowledge and support. Furthermore, several boards have the benefit that all business units are tightly controlled and promote the independence of the units. On the downside, several boards increase management overhead. There are two possibilities to structure the relations among several boards. Either all boards have equal rights (horizontal structure), or there is a hierarchical/vertical structure. While a vertical structure puts more effort in ensuring adherence to the overall mission by all business units, it restrains the independence of the business units and requires more management efforts. A horizontal structure is more democratic than a vertical one. However, there is the danger that single boards loose track of the overall mission and steer towards different directions. If there is a reputational damage within one unit, it often damages the reputation of the whole organization.

For reasons of simplification we will mainly be talking about boards and board members in the manual, referring to supervisory boards, advisory boards or non-executive board members.

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Box 05: Several boards Horizontal structure

Vertical structure: Best practice case Lumni

Lumni designs and manages social investment funds that invest in the education of diversified pools of students. In exchange, students commit to pay a fixed percentage of their income for 120 months after graduation.

Lumni has a separate board for each regional unit. A member of each regional board is represented in the board of the head office of Lumni. By having representatives on the global level, units get the possibility to exchange experiences and a positive pressure is created when performance is compared among units. Include considerations on governance within scaling strategy Additional boards are often set up during the scaling process. Often, social enterprises prioritize speed over deliberation when scaling, seizing opportunities when they seem convenient, paying only little attention to governance structures. To prevent or remedy this, social enterprises can include a plan on how governance will evolve in their scaling strategy. A strategic approach towards governance during scaling could promote the dissemination of an approach. Governance is, for instance, an effective mechanism to collaborate with local partners.

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Option 3: Board committees and taskforces

Some organizations establish committees within their board to delegate ongoing functions and to leverage each board members capabilities at best. Examples are: Audit and finance committee that is i.a. scrutinizing major capital expenditures and overseeing the accuracy of financial statements. Human resource committee concerned i.a. with nominations and compensation. Committees serve to increase board effectiveness by streamlining the work process. However, committee structures are often complex and increase management efforts. Thus, it is recommended to add committees only when they are clearly needed. Instead of standing committees, social enterprises could establish taskforces for specific topics out of their board and external experts, when necessary. Please see Appendix 5.1 for potential committees, purposes and proposed membership.

Option 4: Advisory council in addition to legally binding board

Board members of social enterprises might be held liable before the law if they have not performed their duties diligently. Some of the favored board members, e.g. members of the target group, might not possess sufficient expertise for assuming legal liabilities. Furthermore, board members are rarely insured in cases of lawsuits or other disasters. Therefore, it is often hard to recruit board members. To overcome this shortcoming, social enterprises might set up an advisory council in addition to a legally binding board.3 Box 06: Division of legally-binding and non-legally binding board members

Some organizations choose to establish an advisory board without any legal obligations or formal decision-making authority as an interim step before creating a more formal board (European Confederation of Directors Associations, 2010).

See Community Interest Companies, 2005 for Shadow Directors

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Status of serving on legally binding boards Some people might be reluctant to join an advisory council without formal decision-making power. They rather choose to assume legal liability in order to be more powerful and express a higher status. Social enterprises may want to keep in mind the importance of status and influence in this respect.

Option 5: Hybrid organizational structures

Social enterprises sometimes combine non- and for-profit legal entities within their organization. An additional legal entity is often created out of necessity, e.g. investor requirements. It is important that the governance of both entities is well coordinated and that both are steering towards the same mission. Box 07: Hybrid organizational models (1/2) Best practice case Homeless World Cup The Homeless World Cup is an international football tournament where homeless players from over 70 countries participate. Football is used as a mechanism to end homelessness. The organization provides support to partner organizations worldwide.

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Box 07: Hybrid organizational models (2/2) Best practice case CIES Project CIES delivers medical care to communities in need in Brazil by using mobile medical centers. It provides a self-sufficient business model

How to ensure that all board are steering towards the same mission? Coordinating the work of several boards is not an easy job. Means that can be implemented to facilitate coordination include the following: Creation of a uniform reporting template used by all entities Facilitation of exchange and communication among entities by introducing key people Inviting a representative of each board to a yearly meeting Comparison of performance among the entities in order to create a sense of positive pressure

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3.7 What is the right size for my board?

The optimal size of a board depends on the needs of an organization. In the context of social enterprises, large boards are defined as boards with more than 12 members. Large boards usually imply high administrative efforts due to coordination among board members. Box 08: Size of boards

While research on board effectiveness suggests that smaller boards positively influence organizational performance, social enterprises often tend to have large boards. Large boards are appropriate if primarily used for resource acquisition like fundraising or expanding the human capital pool.
Decision making in large boards: Organizations that have a large board should define a core-working-group and set the quorum for board decisions accordingly. There are some alternatives to overcome the shortcoming of insufficient experience and representation on small boards: Invite external experts to present on board meetings Set up working groups for specific topics for a specific amount of time Ask well-regarded people for testimonials on your webpage

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4 Managing your board for optimal performance

Managing a board can demand significant time and efforts. However, a well-run board can lift a significant burden off of the management team in the short-term and ensure the long-term success of the social enterprise. This chapter discusses tasks and responsibilities of board members as well as evaluation of board work and reporting procedures.

4.1 What are the rights and duties of board members?

There needs to be a clear delineation between the roles of governance and management. Governance is about ensuring and guiding, whilst management is about doing. Boards take the long-term perspective and avoid becoming involved in day-to-day operational matters. Management has to ensure that the boards decisions are implemented. There are two major categories to group board responsibilities: support and supervision. In theory, these areas are often perceived as mutually exclusive. However, they should rather be seen as complementary. Optimal board behavior refers to the upper right square in the following box. Box 09: Board roles (1/2)

[Please see Kreutzer & Jacobs, 2011 for the figure on board roles as well as a description of the types]

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Box 09: Board roles (2/2) An apathetic board fulfills neither the support nor the supervision function and thus, is highly ineffective in performing its tasks. The inspector mainly performs controlling functions like overseeing management and budgeting or reviewing the chief executive. The collaboration of management and the inspector is low. The inspector mostly determines next steps without consulting the management team. The consultant is primarily supporting or coaching an organization and its management by introducing management to their own networks, by establishing a working relationship between board and staff or by representing the organization on public events. The consultant is discussing challenges as well as solutions together with the management team. A board in the upper right square combines characteristics of inspector and consultant. Depending on the circumstances, it defines whether and inspector or a consultant is necessary.
[Please see Kreutzer & Jacobs, 2011 for the figure on board roles as well as a description of the types]

Support

Support refers to three areas. First, boards constitute sparring partners that provide strategic guidance and challenge management. Second, boards help with sourcing. They are providing access to their networks to foster business relations of the social enterprise, e.g. by helping with fundraising. Third, boards serve as ambassadors for the mission of a social enterprise and thus, provide advocacy and legitimization.

Supervision

Supervision primarily refers to safeguarding the mission of a social enterprise. Boards are monitoring performance of management against benchmarks that reflect the double bottom line. Thus, monitoring concerns social as well as financial performance. While financial indicators are easy to measure and compare, social performance is often hardly seizable. In order to avoid an inordinate focus on financial performance, social enterprises should pay attention to defining performance indicators for the social mission. Supervision also includes compliance. It is the duty of the board to ensure that management complies with its own governing document as well as with legal requirements. Ideally, boards should have a list of compliance requirements and check periodically if they are being met. Approval of management decisions

A task in between support and supervision is the approval of certain management decisions. Board approval should serve to guarantee conformance with the overall mission. Furthermore, 21

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board approval constitutes a form of legitimization to communicate certain decisions in front of the team. Topics that require board approval include the following. Annual budget Decisions on financing and changes in ownership structure Succession and remuneration of chief executive and its management team Decisions about overall strategy There should be defined levels upon which board approval is necessary in order to spare board capacities. For example, board approval is only needed for investments above a certain threshold.

4.2 What is the role of the founder within governance?

Social entrepreneurs are unique individuals. They possess the passion to pursue their mission relentlessly and without regard to resources currently at hand (Dees, 2001). This can come at a cost, sometimes to the detriment of the employees work/life balance and other times to the detriment of the well-meaning board members. Governance processes are essential, especially when the organizational structures become too complex to handle for a single person. Further along in the lifecycle of the social enterprise, governance ensures that the founder`s vision and legacy are maintained. By including and empowering others in the guidance of an organization, governance mechanisms both ensure continuity of the founders vision, and success beyond the efforts of one person.

4.3 What are the roles and responsibilities of the board chair?
The roles of chief executive and chairman are fundamentally different: While the responsibilities of the chief executive refer to running the organizations business, the board chair is responsible for running the board. Duties of the chair include determination of meeting dates, addressing conflicts among members, representation of the organization on public events as well as boundary spanning between board and management. While boards need experts for specific topics (e.g. finance experts), the chairperson should possess knowledge in several areas as well as broad experience of serving on boards. In one-tier or voluntary boards, a single person often exercises the roles of chairman and chief executive. Such a structure erodes the system of checks and balances and constrains the independence between board and management. However, a joint leadership structure provides a unified focus and communicates strong leadership to the external community, while splitting these two functions bears costs and administrative efforts. Thus, organizations have to trade off between effective monitoring (separation of the two functions) and strong leadership. 22

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While& small& enterprises& might& not& have& sufficient& resources& to& appoint& a& separate& chairman,&larger&organizations&should&split&those&roles. If a single person holds both positions, the board should appoint another board member to lead on any issue that requires separation of duties such as reviewing the compensation of the chief executive. Furthermore, if a new chief executive is appointed it is advisable to pair the new chief executive with a chairman who is more seasoned. Box-10:-Governance-vs.-Management--

--

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4.4 How to create a board culture?

In order to increase commitment of board members, induction of board members as well as active board management is crucial. Onboarding the Board

New board members should be given an introduction about the organizations work, current strategies and plans. An extensive introduction is important because board members and social entrepreneurs often have different backgrounds, which might lead to a clash of cultures if their understandings of the mission as well as the business model of the social enterprise are not aligned. During the first weeks, new members should be given a mentor that provides advice and answers to open questions. Furthermore, new board members should be introduced to the team in order to increase familiarity. An atmosphere of familiarity makes it easier for the board to voice criticism. In order to get a deeper insight into the operations of an organization, board members should actively seek to get in touch with the staff and not just with the management team. Recognize the board, and value their commitments appropriately

While board members of social enterprises are rarely incentivized by a monetary remuneration, some social enterprises recognize and reward board members emotionally for their time and commitment. Beyond sending thank you notes, some social enterprises invite board members site visits to the field or to join work outings. Compensating for expenses incurred out of pocket, depending on financial situation, may be a reasonable gesture. Box 11: Dos and Donts for working with a board*

Define success jointly with board Let boards create their own agendas Direct questions to specific members Plan annual meeting cycle Focus on shaping the future Invite external experts Frequency and use of meetings

Spend time on the trivial Short term and reactive bias Overly involve the board Overloaded meetings with details Just review the past Let executives control the board

Board meetings should be held at least four times a year to keep board members closely on track with the development of an organization and to maintain familiarity among board members as well as between board and management. Meetings can take place over the phone. However, there should be at least one face-to-face meeting per year. Once per year, there should be a skull session to discuss strategic issues and a roadmap for the next 3-5 years. 24

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Board decisions require a quorum, or minimum number of board members present for official decisions. In order to diminish administrative efforts during board meetings, voting procedures as well as required majorities should be determined previously. Box 12: Make meetings meaningful Information about past months as well as an agenda should be sent in advance of board meetings allowing board members sufficient time to add topics and prepare. If the management wants to propose substantial changes, e.g. amendments to the constitution or strategy of an organization, the proposals should as well be sent in advance.

1) Agenda
There should be a moderator in order to stay on track with the agenda. Topic Administrative issues Wrap-up of past months, short discussion of open questions Matters for approval: group to approve en bloc Discussion of strategic issues, e.g.:
Financial situation and annual budget, Human resources Scaling

Duration 5 minutes 30 minutes 30 minutes 2 hours 40 minutes 15 minutes

Development of concrete action plan Evaluation of meeting 2) Action Plan

Boards should agree upon an action plan that contains concrete milestones. Progress should be evaluated against that action plan. Action plans serve to increase the commitment to decisions made during board meetings. Aim Development of a marketing strategy Increase of number of beneficiaries to 5.000

Concrete Steps
Identify core target groups Identify and contact multipliers Increase partnerships with local organizations Promote model on fairs or exhibitions Develop best practice guide to explain the concept

Due till Nov 2012 Jan 2013 Jul 2013 Ongoing Mar 2013

Responsibility Status [Name] [Name] [Name] [Name] [Name]

3) Follow-up The minutes of a board meeting should contain place, day and time of meeting, participants, decision making process, deliberations, voting results and manner how resolutions were passed. Minutes should address the key factors that influenced major board decisions but not be a stenographic record of the meeting.

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4.5 How should management report to the board?

Reporting increases transparency and serves to legitimate the existence of an organization. Regular updates about an organizations development keep board members involved and serve to maintain trust. Management should report on a monthly basis or at least quarterly to their board members, informing them about the current situation of their organization. Reports in the course of the year should contain the following4: cash flows, comparison of budget and actual financials, social performance compared to benchmarks, management comments about important incidents, development of external factors, etc. (max 2 pages). A more detailed report containing balance sheet as well as profit and loss statement is required at the end of a year. First of all, social enterprises have to set up an appropriate reporting system. For this purpose, management and board need a clear and common understanding of the value proposition of the enterprise. The value proposition contains social as well as financial components. While the social element should always be primary, financial aims reach from earned income strategies to financial sustainability to generation of profits. Measures of financial success can be adopted from the corporate world. Social entrepreneurs that are not familiar with financial reporting should consult their board members and benefit from their expertise. A common understanding regarding distribution of profits is necessary in order to minimize the risk of conflicts e.g. with investors that have decision-making power on the board. Predefined measures of social impact are often not available and social entrepreneurs themselves are often not aware of their impact value chain. Please refer to the Social Investment Manual (Achleitner et al., 2011) and to appendix 5.4 for a description as well as an example of the impact value chain. Once social enterprises have defined their impact-value chain, performance indicators have to be determined and monitoring programs should be established.

Please refer to appendix 5.2 for a template of a quarterly update.

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Box 13: Reporting Cycle*

*own illustration

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4.6 How to evaluate the work of a board?

Board members join boards because they want support guidance of the social enterprise and want their time and effort to be helpful. Social enterprises should communicate regularly with their board members about what is working well on the board, and what is not working well. Likewise, boards should take this feedback as an opportunity to make a stronger impact: Instead of assuming that good intentions and goodwill lead to effective governance, boards should as well pay attention to evaluating their own performance.

At the end of each meeting: Review

Boards reflect on their own performance at the end of a meeting. A good question to ask themselves at the final meeting of a year is: What would have happened if we wouldnt have met last year?

Between meetings: Informal conversations

The management team should reach out to the board to surface any issues or to ask for guidance. The board members should communicate with each other about any outstanding issues or conflicts that are preventing effectiveness or affecting the culture of the board.

Every few years: Board self assessment questionnaires

Boards should evaluate their effectiveness and identify development potentials. Appendix 5.3 contains a generic questionnaire that can help with this process. Social enterprises should further tailor this questionnaire depending on their current situation. Such questionnaires require significant time and should only be conducted every couple of years. An independent person should analyze them in order to encourage board members to be open and honest. Box 14: Areas for self-evaluation (See Appendix 5.4) Board roles Policy making practices Planning practices Fiscal management practices Fund raising practices Board structure & practices Board committees Board meetings Board membership and orientation Board-executive relationship

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5 Appendix
5.1 Committees5
Task/Purpose Audit and finance committee Finance: Help with preparation of annual budget; review performance against budget; scrutinize major capital expenditures Investment: Appoint and oversee investment advisors; advise on investment strategy Audit: Oversee annual audit; review adequacy of internal control systems; oversee risk management; oversee the accuracy of financial statements and reports Compliance: Ensure compliance with agreed structures and law; deal with breaches Fundraising: Oversee fundraising strategy; contribute ideas and contacts; provide governance oversight of fundraising activities* Human resource/nomination/remuneration committee Compensation: Advise board on remuneration of CEO; advise on overall remuneration policy Nomination: Plan board and committee succession; manage search and selection process; oversee election process and induction of new board members Human resources: Oversee employment policy and procedures; hear disciplinary appeals and complaints Service and research committee Provide advice on issues regarding main services and support research and development of new concepts Members with specific knowhow and background in the organizations industry Senior board members; independent board members Independent board members Finance experts Proposed Members

Experts with investment and valuation know-how Audit experts

Legal experts Board members with a wide network and fundraising skills

Well connected board members

* It is not common to have fundraising committees in the corporate world. However, when boards should help with fundraising such a committee might be relevant. Table 3: Board committees: Purposes and membership; own illustration

If necessary, the proposed committees could as well be split up in several committees based on a division of tasks.

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5.2 Template for a quarterly update6

QUARTERLY UPDATE
Company: [] Key figures: Sales Costs Available liquidity Quarter ended [] [] [] Next quarter forecasts [] [] [] Quarter: [] Date: []

Activity development over the period: Operation: - [e.g. organizational developments, events, ] Production: [e.g. set up of new subsidiaries, development of further business opportunities, additional income streams, ] Research & Development: [e.g. impact measurement, external validation, ]

Main strengths over the period: - [e.g. cooperation, use of resources, ]

Main weaknesses over the period: - [e.g. excessive expenditures, pending payments, .]

Comments and additional information on the social impacts: - [e.g. increase in number of beneficiaries, generation of employment opportunities, ]

Key aims for the next quarter: - [e.g. opening new subsidiaries, development of best-practice guides, in house training, ]

We would like to thank Andreas Heinecke, founder of Dialogue Social Enterprise, as well as PhiTrust for the kind provision of their reporting template.

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5.3 Example of a board self-assessment questionnaire7

Nonprofit Board Self-Assessment Questionaire

(organization) (month/year)

Corporate Fund

This questionnaire will assist you and your colleagues in assessing your boards management of its role on behalf of the organization you serve. After everyones response are tallied, members will have the opportunity to discuss the outcomes and to decide on any steps that might strengthen the boards performance. It is important that you not see this questionnaire as any kind of the test, but rather as a helpful tool for increasing board effectiveness. The questionnaire is divided into 12 sections dealing with important areas of nonprofit board operations. For the statement in each section, you will be asked to choose from among the following responses: 1 = Strongly Agree with the statement. 2 = Agree with the statement. 3 = Disagree with the statement. 4 = Strongly Disagree with the statement. DK = Dont Know (just dont have enough information) NA = Not Applicable to your board or organization Please be forthright in your responses. Only straightforward answers can be of real help to your boards self-assessment. Circle the response that most closely reflects your opinion on each of the statements in this questionnaire.

Taken from: The Corporate Fund: http://www.nhnonprofits.org/boardselfassessment.cfm; we would like to thank Edward Tomey, the developer of the questionnaire, for his kind permission to include the questionnaire within the manual. The NH Center for Nonprofits oversees the online administration of the questionnaire.

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Section 1: Board-Roles
Agree Disagree Dont Know Not Applicable

1. The Roles and responsibilities of our board are clearly defined and separate from those of the staff. 2. Our board takes the primary responsibility for setting the organizations policies. 3. Board members seldom assume roles and responsibilities that belong to staff. 4. The board delegates to the organizations chief executive sufficient authority to lead the staff and carry out the organizations mission. 5. When a problem or conflict arises between board and staff, we move quickly and effectively to resolve it.

DK

NA

DK

NA

DK

NA

DK

NA

DK

NA

Section 2: Policy Making Practices

1. If a new policy is needed for the board or the organization as a whole, the issue is clearly presented to and discussed by the board. 2. The full board approves all new organizational policies before they are implemented. 3. Policies exist for key areas such as finance, personnel, safety, and ethics, and all functions unique to our organizations work. 4. Our organizations policies are effectively communicated to all board members. 1 2 3 4 DK NA

DK

NA

DK

NA

DK

NA

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Agree

Disagree

Dont Know

Not Applicable

5. The board reviews policies at least annually, and updates them as needed.

DK

NA

Section 3: Planning Practices

1. Our organizations mission and purpose are clearly understood and accepted by our board. 2. The members of the board have reached consensus on a vision that indicates where the organization will be headed over the next 3-5 years. 3. The full board collaboratively reviews and updates the organizations strategic plan at least every two years. 4. Staff develops and carries out annual plans based on our boards approved strategic plan. 5. The board is well-briefed by the staff on annual plans developed by staff. 1 2 3 4 DK NA

DK

NA

DK

NA

DK

NA

DK

NA

Section 4: Fiscal Management Practices

1. The organizations annual budget is fully discussed by the board prior to its approval. 2. The fiscal status of our organizations is regularly reviewed and needed board actions are taken thoughtfully but quickly. 3. Board leadership takes steps to ensure that fiscal reports are thoroughly understood by board members. 1 2 3 4 DK NA

DK

NA

DK

NA

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Agree

Disagree

Dont Know

Not Applicable

4. The annual report of our organizations independent auditors is reviewed and needed actions are taken in a timely way. 5. Board members are well-aware of their legal responsibilities for the organizations fiscal management.

DK

NA

DK

NA

Section 5: Fund Raising Practices

1. Our organizations fund raising needs and strategies are understood by the board. 2. The board has a clear policy on the individual board members responsibility to raise funds. 3. Board members play an active role in the organizations fund raising efforts. 4. The board periodically engages in long-range fiscal planning to ensure an adequate flow of resources to the organization over time. 5. Capital fund raising needs are reviewed regularly by our board and action is taken as necessary. 1 2 3 4 DK NA

DK

NA

DK

NA

DK

NA

DK

NA

Section 6: Board Structure & Practices

1. Our boards structure allows us to get our work done well and in a timely way. 2. The boards standing committees streamline our work process and increase board effectiveness. 1 2 3 4 DK NA

DK

NA

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Agree

Disagree

Dont Know DK DK

Not Applicable NA NA

3. Our boards size is about right. 4. Our members terms on the board are about the right length. 5. We consciously select and prepare our board officers for their leadership responsibilities. 6. Board members have a working knowledge of the organizations by-laws.

1 1

2 2

3 3

4 4

DK

NA

DK

NA

Section 7: Board Committees

1. Task and standing committees assignments generally reflect the interests and expertise if individual board members. 2. I serve on at least one standing board committee. 3. Any standing committee I serve on completes its tasks in an effective and timely way. 4. Most board members actively participate in standing committee activities. 5. Any standing committee I serve on reports to the board at least quarterly. 6. Each standing committee establishes its goals and plans at the beginning of the fiscal year. 1 2 3 4 DK NA

DK

NA

DK

NA

DK

NA

DK

NA

DK

NA

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Section 8: Board Meetings

Agree Disagree Dont Know Not Applicable

1. Our boards meeting schedule has the right number and length of meetings. 2. The agendas of our board meetings and supporting written material are usually given out in advance of meetings 3. Board leaders and standing committee members contribute items to meeting agendas. 4. Board meetings are generally wellrun and make good use of members time. 5. Our board tends to brainstorm and identify creative approaches to problems. 6. Our board thoroughly examines the pros and cons of all major decisions.

DK

NA

DK

NA

DK

NA

DK

NA

DK

NA

DK

NA

Section 9: Board: Membership & Orientation

1. The areas of expertise, skills, and other factors we need to be an effective board for this organization are adequately represented among current board members. 2. Our board successfully identifies the expertise, skills, and other contributions we need from potential new board members to maintain or increase our effectiveness. 1 2 3 4 DK NA

DK

NA

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Agree

Disagree

Dont Know

Not Applicable

3. We actively recruit new board members based on identified needs. 4. When seeking members for the board, we use a wide variety of referral sources within the communities we serve. 5. Our board and staff inform new board members about responsibilities and important organizational information through a structural new member orientation program.

DK

NA

DK

NA

DK

NA

Section 10: Board-Executive Relationship

1. Our board uses a structured and participative process to recruit and hire our organizations chief executive. 2. The board has approved a written job description that clearly spells out the chief executives responsibilities and authority. 3. The chief executives performance is formally assessed at least annually based on objectives established at the beginning of the fiscal year. 4. The chief executive receives ongoing feedback regarding job performance in addition to any formal assessments. 5. Board members provide the necessary support that allows the chief executive to carry out the role successfully. 1 2 3 4 DK NA

DK

NA

DK

NA

DK

NA

DK

NA

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5.4 Example of impact value chain8

Figure 1: Impact Value Chain taken from Mair & Sharma, forthcoming; based on Clark et al., 2004

We would like to thank Johanna Mair for the kind provision of the chart.

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5.6 Corporate governance guidelines and codes of best practice

Country/Region Code/Guideline Corporate Governance Principles and Recommendations Main content Structure and diversity of board; disclosure and risk management Mandatory for Available at http://www.asx.com.au/governance/ corporate-governance.htm

Australia

Listed entities

Austria

Austrian Code of Corporate Governance The 2009 Belgian Code on Corporate Governance Code Buysse: Corporate governance for non-listed enterprises Code of Best Practice of Corporate Governance

Transparency, disclosure, competencies and qualifications of board Governance structure; board efficiency and evaluation; committees Composition, function, appointment, evaluation and compensation of board Mission, composition, background and assessment of board; relationship with related parties Composition, independence, tasks and compensation of board Role, transparency, structure and succession of board

Listed entities

http://www.corporategovernance.at/ http://www.corporategovernanceco mmittee.be/en/2009_code/default.as px http://www.codebuysse.be/en/defau lt.aspx http://www.ibgc.org.br/CodeBestPr actices.aspx http://www.tmx.com/en/listings/tsx _issuer_resources/corporate_govern ance.html http://www.vsiisbc.org/eng/products/reports.cfm

Listed entities

Belgium

Brazil

Corporate Governance: Guide to Good Disclosure Canada Building on Strength: Improving Governance and Accountability in Canada's Voluntary Sector Recommendations on Corporate Governance

Specified disclosure requirements -

Denmark

Transparency, responsibilities, composition and remuneration of board

Listed entities

http://www.corporategovernance.dk /sw58113.asp

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Country/Region

Code/Guideline Green paper on the EU corporate governance framework Corporate Governance Guidance and Principles for Unlisted Companies in Europe Finnish Corporate Governance Code 2010

Main content Composition, evaluation and remuneration of board; risk management Composition, remuneration and efficiency of board; collaboration with management

Mandatory for -

Available at http://ec.europa.eu/internal_market/ consultations/2011/corporategovernance-framework_en.htm http://www.ecoda.org/Publications. html

Europe

Finland

Composition, appointment, charter and evaluation of board

Listed entities

http://www.cgfinland.fi/content/vie w/16/63/lang,en/ http://www.afg.asso.fr/index.php?o ption=com_content&view=article& id=98&Itemid=87&lang=en

France

Recommendations on corporate governance

Principles, independence, organization and transparency of board

Listed entities

Germany

German Corporate Governance Code

Cooperation with management; tasks, composition, compensation and transparency of board; reporting

Listed entities

http://www.corporate-governancecode.de/eng/kodex/index.html

Greece

SEV Corporate Governance Code For Listed Companies

Role, composition and evaluation of board; internal controls

Listed entities

http://www.sev.org.gr/online/index. aspx?mid=694&lang=en http://www.bse.hu/topmenu/issuers/ corporategovernance/cgr.html?page num=2&query=corporate%20gover nance

Hungary

Corporate Governance Recommendations

Role, independence, remuneration and evaluation of board; risk management

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Country/Region

Code/Guideline Corporate Governance Voluntary Guidelines ICGN: Global Corporate Governance Principles

Main content Appointment, responsibilities, independence and remuneration of board Responsibilities, independence, appointment, composition and evaluation of board; risk management; remuneration Disclosure; transparency; responsibilities of board

Mandatory for

Available at http://www.nfcgindia.org/home.htm l http://www.icgn.org/bestpractice.php http://www.oecd.org/document/49/ 0,3343,en_2649_34813_31530865_ 1_1_1_1,00.html http://www.borsaitaliana.it/borsaital iana/regolamenti/corporategovernan ce/corporategovernance.en.htm http://www.tse.or.jp/english/rules/c g/

India

International

OECD Principles of Corporate Governance

Italy

Corporate Governance Code Principles of Corporate Governance for Listed Companies The Ten Principles of Corporate Governance of the Luxembourg Stock Exchange

Role, composition, independence, committees, remuneration and appointment of board

Japan

Transparency; responsibility of board

Listed entities

Luxembourg

Duties, composition, independence, evaluation and remuneration of board

Listed entities

http://www.bourse.lu/application?_f lowId=PageStatiqueFlow&content= services/CorporateGovernance.jsp http://www.nues.no/English/The_N orwegian_Code_of_Practice_for_C orporate_Governance/

Norway

The Norwegian Code of Practice for Corporate Governance

Tasks and remuneration of board; risk management

Listed entities

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Country/Region

Code/Guideline Code of Best Practice for WSE Listed Companies

Main content Transparency; remuneration; tasks of management and supervisory board

Mandatory for

Available at http://www.corpgov.gpw.pl/assets/library/english/re gulacje/bestpractices%2019_10_20 11_en.pdf http://www.cmvm.pt/EN/Recomend acao/Recomendacoes/Documents/2 010consol.Corporate%20Governan ce%20Recommendations.2010.bbm m.pdf http://african.ipapercms.dk/IOD/KI NGIII/kingiiicode/

Poland

Portugal

CMVM Corporate Governance Code King Code of Governance for South Africa

Management and supervisory board; general meetings and transparency

Listed entities

South Africa

Responsible leadership; board responsibilities; composition and collaboration; ethical foundation; transparency; risk management Shareholder assembly; bylaw restrictions; board of directors

Listed entities

Spain

Unified Good Governance Code of Listed companies

Listed entities

http://www.cnmv.es/DocPortal/Pub licaciones/CodigoGov/Codigo_unif icado_Ing_04en.pdf http://www.corporategovernancebo ard.se/media/45322/svenskkodbola gsstyrn_2010_eng_korrigerad20110 321.pdf http://www.economiesuisse.ch/de/P DF%20Download%20Files/pospap _swiss-code_corpgovern_20080221_en.pdf http://www.commissiecorporategov ernance.nl/page/downloads/DEC_2 008_UK_Code_DEF__uk_.pdf

Sweden

Swedish Corporate Governance Code

Shareholder meetings; remuneration, tasks and composition of board

Listed entities

Switzerland

Swiss Code of Best Practice for Corporate Governance

Shareholders; function and composition of board; transparency Tasks, competencies and remuneration of management board; transparency; conflicts of interest; composition, tasks and independence of supervisory board; shareholder meetings

The Netherlands

Dutch Corporate Governance Code

Listed entities, large corporations

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Country/Region United Kingdom

Code/Guideline The UK Corporate Governance Code

Main content Leadership; effectiveness; accountability; remuneration and relation with shareholders

Mandatory for Listed entities

Available at http://www.frc.org.uk/images/uploa ded/documents/UK%20Corp%20G ov%20Code%20June%2020102.pd f

USA

NYSE Corporate Governance Rules

Independency, remuneration and tasks of directors; transparency

Listed entities

http://www.nyse.com/pdfs/finalcorp govrules.pdf

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5.7 Rules of procedure for boards9

Rules of Procedure for the Advisory Board of [Name of Social Enterprise]

1. 1.1

General The Advisory Board of the Company shall perform its duties in accordance with applicable law, the Articles of Association of the Company, these rules of procedure (Rules of Procedure) and the resolutions of the Shareholders Meeting. The Advisory Board shall cooperate closely with the other bodies of the Company, in particular with the Shareholders Meeting and the Management Board. The members of the Advisory Board are appointed and removed by the shareholders meeting. The term of the members of the Advisory Board is 5 years (the Term). The members of the Advisory Board shall not receive any remuneration for their work. They shall be reimbursed by the Company for any reasonable expenses, which they incur in connection with their service as members of the Advisory Board. Role of the Advisory Board The Advisory Board advises the Management Board of the Company upon its request. He does not have the role of a supervisory board. The Advisory Board authorizes (or refuses his authorization for) any matters which require the consent of the Advisory Board according to the Rules of Procedure for the Management Board or for which the managing directors seek the approval of the Advisory Board. The Advisory Board may also retroactively approve the implementation of any matters, which require the consent of the Advisory Board. The Advisory Board decides in particular about the approval of the annual business plan, in particular the budget plan, which the Management Board prepares for the upcoming business year. The Advisory Board shall also receive the monthly overview of the financial situation of the Company, which the Management Board prepares. The approval of the Advisory Board is not required if the respective transaction is included in the adopted annual budget. The Advisory Board may, if deemed appropriate, also grant its approval for certain matters in advance. Convocation of the Advisory Board The Chairman of the Advisory Board convenes the meetings of the Advisory Board. He determines the form of convocation (in writing, verbal, by telephone or fax) and

1.2 1.3 1.4

2. 2.1 2.2

2.3 2.4

2.5 2.6 2.7 3. 3.1

Based on Rules of Procedure for the Advisory Board of Dialogue Social Enterprise GmbH. We would like to thank Frank Thiner from Pllath and Partners for the kind provision of the contract.

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determines the agenda of the Advisory Board. The agenda shall be communicated to each member of the Advisory Board together with the convocation notice. 3.2 There must be at least one week between the receipt of the convocation notice and the meeting of the Advisory Board. The day when the convocation notice is dispatched and the day of the board meeting shall not be taken into consideration for the calculation of the convocation period. The Chairman shall appoint a keeper of the minutes at the beginning of each meeting. Each member of the Advisory Board and each shareholder shall be entitled to demand from the Chairman of the Advisory Board that he convenes the Advisory Board. The members of the Advisory Board and the shareholders shall give the purpose and the reasons for their request. If the Advisory Board is not convened within an appropriate time, the respective member or shareholder may convene the Advisory Board himself. The Advisory Board shall come together 4 (four) times every year, if possible every 3 (three) months. At least one meeting shall be in person, the other meetings may be held via telephone conference or other means of communication. Meetings of the Advisory Board may be held without fulfillment of the requirements as to form and notice for the convocation set forth in Sec. 3.1 and 3.2 if either all members of the Advisory Board participate and agree, or, if only some members participate, the other members have expressly waived their right to participate in the meeting of the Advisory Board. The Advisory Board shall have a quorum if at least two thirds of the members who are entitled to vote participate in the passing of resolutions. Unless the Chairman decides otherwise, the meetings of the Advisory Board shall take place at the registered office of the Company. Passing of Resolutions The Advisory Board decides by passing resolutions. Resolutions shall be passed with a simple majority of all votes cast unless the Articles of Association, the Rules of Procedure for the Management Board or the Rules of Procedure for the Advisory Board determine otherwise. Each member has 1 (one) vote. In case of a deadlock, the vote of the Chairman (or, if he does not participate, the vote of his alternate) shall be decisive. At the beginning of each meeting, the Chairman shall determine which members participate and if there is a quorum for the meeting. Resolutions of the meeting shall be passed by individual vote. The Chairman shall determine: - How many votes voted yes - How many votes voted no - How many votes abstained from voting. 4.4 4.5 The determinations pursuant to Section 4.2 and 4.3 shall be recorded in the minutes. The Advisory Board may pass resolutions outside of board meetings, in particular in writing, by fax, e-mail or other means of communication, if all members of the Advisory Board participate and no member objects to the way the resolutions are passed. Resolutions, which are passed outside of board meetings shall be recorded by the Chairman and shall be sent to all members of the Advisory Board without delay. Resolutions in Case of Emergency

3.3

3.4

3.5

3.6 3.7 4. 4.1

4.2 4.3

5.

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In cases where a resolution of the Advisory Board cannot wait because this would otherwise lead to material disadvantages for the Company, the Chairman of the Advisory Board may take all actions and may issue all declarations, which he in his sole discretion deems necessary or appropriate. In this case, he has to inform the other members of the Advisory Board without delay and present the reasons for the urgency of his actions. 6. 6.1 6.2 Chairman and Alternate Chairman of the Advisory Board The Chairman shall be appointed by the shareholders meeting of the Company from amongst the members of the Advisory Board. The Advisory Board elects from amongst its members and for its Term an alternate chairman. The alternate chairman takes over the role of the Chairman if the Chairman does not participate in a meeting of the Advisory Board. The election may be amended at any time by resolution of the Advisory Board. Minutes of the Board Meetings In the minutes of the Advisory Board meetings shall be recorded the place and day of the meeting, the participants, the objects of the agenda, the resolutions of the Advisory Board and the determinations of the voting pursuant to Sec. 4.2 and 4.3. In minutes, which concern resolutions, which are passed outside of meetings, the day, the manner how the resolutions were passed, the participants, the resolutions of the Advisory Board and the determinations pursuant to Section 4.2 and 4.3 shall be recorded mutatis mutandis. Objections against the correctness of the minutes shall be inadmissible unless they have been raised in writing vis--vis the Chairman before the beginning of next meeting of the Advisory Board at the latest. The Advisory Board determines by resolution with simple majority whether the objections are correct or not. The minutes of the Advisory Board meetings and of the resolutions, which are passed outside of meetings shall be kept in the files of the Chairman. Each member of the Advisory Board shall be entitled to inspect the minutes and records of the Advisory Board. Participation of Third Parties Third parties may participate in meetings of the Advisory Board if the Advisory Board admits them by resolution with simple majority. Third Parties, which participate in meetings of the Advisory Board shall be bound by confidentiality obligations. Upon the request of the Chairman, the participation of a third party shall be made subject to the execution of a written confidentiality agreement. Representation of Advisory Board Members A member of the Advisory Board may appoint another member or a member of the legal, tax or business consultancy professions, which are bound by mandatory confidentiality obligations as his attorney, and he may use the support of such persons. Each attorney has to proof his legitimacy by a written power of attorney or a public document. Miscellaneous As long as an Advisory Board has not been appointed, the shareholders meeting shall take over the function of the Advisory Board.

6.3 7. 7.1

7.2

7.3 7.4 7.5 8. 8.1 8.2

9. 9.1

9.2 10. 10.1

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6 Task Force Members of the Schwab Foundation Community

We want to thank the entire Schwab community for their support by participating in our preliminary survey and by providing insights during interviews and taskforce calls. Your ideas and contributions have been tremendously valuable for establishing the manual.

Andreas Heinecke Dialogue Social Enterprise

Ann Cotton Camfed International

Timothy Ma KamWah Senior Citizen Home Safety Association

Victoria Kisyombe Sero Lease and Finance (Selfina)

Vikram K. Akula SKS Microfinance

Shona McDonald Shonaquip

Felipe Vergara Lumni

Roberto Kikawa ProjetoCies

Mel Young Homeless World Cup

Marta Arango CINDE

Sam Goldman d.light

Sarah Mavrinac aidha

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7 Sources
The content is based on a survey of Schwab Fellows, interviews with social entrepreneurs and the following literature: Achleitner, A. K., Heinecke, A., Noble, A., Schning, M., & Spiess-Knafl, W. (2011). Social Investment Manual. Schwab Foundation, TU Mnchen, Dialogue Social Enterprise. Carver, J. (2006). Boards that make a difference: A new design for leadership in nonprofit and public organizations (Vol. 6): Jossey-Bass Inc Pub. Clark, C., Rosenzweig, W., Long, D., & Olsen, S. (2004). Double Bottom Line Project Report: Assessing Social Impact in Double Bottom Line Ventures Methods Catalogue. University of California, Center for Responsible Business, downloaded at: http://www.riseproject.org/DBL_Methods_Catalog.pdf; Berkeley. Community Interest Companies. (2005). Information and guidance notes. Department for Business Innovation & Skills, download at: http://www.bis.gov.uk/cicregulator/guidance. Cornforth, C. (2003). The governance of public and non-profit organisations: what do boards do? Oxon: Routledge Taylor & Francis Group. Dees, G. J. (2001). The Meaning of "Social Entrepreneurship". Working Paper. Duke University, Durham. Ebrahim, A. (2003). Accountability in practice: Mechanisms for NGOs. World Development, 31(5), 813-829. European Confederation of Directors Associations. (2010). Corporate Governance Guidance and Principles for Unlisted Companies in Europe. ecoDa, , Brussels. Heinecke, A., & Mayer, J. (forthcoming). Startegies for Scaling. In C. Volkmann, K. Tokarski & K. Ernst (Eds.), Social Entrepreneurship and Social Business. Wiesbaden: Gabler Verlag. Hudson, M. (2011). Managing Without Profit - Leaderhip, management and governance of third sector organisations. London: Directory of Social Change. Kreutzer, K., & Jacobs, C. (2011). Balancing Control and Coaching in CSO Governance. A Paradox Perspective on Board Behavior. Voluntas: International Journal of Voluntary and Nonprofit Organizations, 22(4), 613-638. Mair, J., & Sharma, S. (forthcoming). Performance Measurement and Social Venture in Social Entrepreneurship. In C. Volkmann, K. Tokarski & K. Ernst (Eds.), Social Entrepreneurship and Social Business. Wiesbaden: Gabler Verlag. Spear, R., Cornforth, C., & Aiken, M. (2007). For Love and Money: Governance and Social Enterprise. Social Enterprise Coalition, Governance Hub, London.

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