Agency conflicts between board and manager

Detecting agency problems is an important task when assessing the effectiveness of a nonprofit organization's governance. A first step is to examine the objectives of principals and agents and determine whether there is a systematic difference between them. Using a discrete choice experiment, we identify the objectives of board chairpersons (principals) and headmasters (agents) of Flemish nonprofit schools. We find systematic differences between the two groups. Of the seven possible objectives set out in the experiment, six are relevant for both headmasters and board chairpersons. For four of these, the preferences of both groups differ significantly. Whereas ideological values play an important role for both the board and the headmaster, they are significantly more important for the board. Both parties dislike having a large number of pupils, and the disutility is larger for the board. With respect to job satisfaction and pupil satisfaction, we find the opposite: while the board is prepared to give up pupil and job satisfaction in favor of the other objectives, these two objectives score very high on the priority list of the headmasters.     

Revisiting Agency and Stewardship Theories

Using principal–agent theories, this study examined differences in the perceptions of nonprofit chief executive officers (CEOs) and board chairs on key governance aspects, including board performance, leadership, satisfaction with diversity, and board meetings. Using data from the CEOs and board chairs of 474 nonprofit organizations, we found statistically significant differences in the governance perceptions of these leaders of nonprofit organizations. The findings provide support for an agency theory explanation about the differing interests of principals (board chairs) and agents (CEOs). The findings suggest that these two sets of nonprofit actors frequently operate from different perspectives, potentially affecting the governance of their organizations.     

Principal‐agent relationships on the stewardship‐agency axis

This article provides an overview of the literature on nonprofit principal‐agent relationships. It depicts the nature of agency theory and stewardship theory, analyzes the origin of their struggle within the nonprofit structure, and marks directions for a conciliatory approach. We open with an introduction to agency theory and discuss the two main components of its mathematical branch. We thereby contrast it with stewardship theory and elaborate on the arguments that can affect the position of nonprofit principal‐agent relationships on the stewardship‐agency axis. Analysis of the existing literature points to a lack of consensus as to which theory should be applied. We argue that the division of nonprofit principalagent relationships into board‐manager and manageremployee interactions may help to clarify the balance between agency theory and stewardship theory and may lead to the establishment of a strongly founded theory on nonprofit principal‐agent relationships. We close with a discussion of how this article may prove valuable to nonprofit policymakers and other empirical researchers.     

The Effects of United Way Membership on Employee Pay in Nonprofit Organizations

This research investigates the relationship between United Way membership and the compensation level of employees in nonprofit organizations. This study is based on questionnaires completed by 1,811 employees from sixty‐nine nonprofit agencies in a large metropolitan area. Managerial capitalism, agency theory, and United Way funding and governance roles were used to develop the hypotheses. We found that employees of organizations belonging to the United Way receive pay premiums, suggesting that the United Way member agencies are higher‐quality agencies that pay their employees higher wages.     

Common Agency in Nonprofit Advocacy Organizations

Most theories of nonprofit organizations and nonprofit leadership recognize the multitude of stakeholders—including board members, donors and volunteers, funders, the media, and policy makers—that organizational leaders must contend with in doing their work. For nonprofits engaged in advocacy, demands from stakeholders may be even more challenging to meet. Although stakeholder theory recognizes the effect of various groups on an organization, it does not explain how leaders manage the preferences of their often‐competing stakeholders while they make choices for the organization. This study develops a common agency framework, evaluating the roles of three groups crucial to nonprofit advocacy organizations: the organization's board of directors, elected officials, and donors/members. The common agency framework is then illustrated with interviews with leaders of nonprofit advocacy organizations in California. Findings suggest that the leaders of these groups have a significant amount of discretion in guiding their organizations’ activities and operations.     

Factors Attracting Individuals to Nonprofit Management over Public and Private Sector Management

Little research has sought to identify the distinct advantages that nonprofits offer employees, particularly managers. Drawing upon Weisbrod's theory of managerial sorting (1988), we test a series of hypotheses about the differences among nonprofit, public, and for‐profit organizations that may explain the preference of managers to work in one sector over the other. We use pooled cross‐sectional data from the General Social Survey to test managerial sorting. We find many similarities in the perceptions of managers in the nonprofit and public sectors as compared to the for‐profit sector. However, when we examine the sorting of managers into nonprofit versus public sector jobs, we find differences in work environment. Compared to those working in the public sector, managers in nonprofits report greater freedom in deciding how to carry out their job functions, more control over their work schedules, and greater opportunities for pay increases. We conclude with a discussion of the implications of these findings for the practice of nonprofit management.     

The Contextual Impact of Nonprofit Board Composition and Structure on Organizational Performance: Agency and Resource Dependence Perspectives

We study the relation between stability of the nonprofit organization’s environment and its board structure and the impact of this relation on organizational performance from the perspectives of both Agency Theory and Resource Dependence (Boundary Spanning) Theory. The impact of board characteristics on organizational performance is contextual. Specifically, we predict and show for a sample of U.S. nonprofits that board mechanisms related to monitoring are more likely to be effective for stable organizations, whereas board mechanisms related to boundary spanning are more effective for less stable organizations. We find that the two theories are complementary and address different aspects of nonprofit performance, but the results are statistically stronger and more often consistent with resource dependence than with agency theory. Overall, this study supports Miller-Millesen’s (Nonprofit and Voluntary Sector Quarterly, 32: 521–547 2003) contention that, because the nonprofit environment is often more complex and heterogeneous than the for-profit world, no one theory describes all tasks of nonprofit boards.     

Nonprofit cash holdings and spending: The missing role of government funding

Charitable nonprofit organizations have long been under scrutiny with regard to how they manage excess funds, particularly cash holdings. Given previous empirical evidence, agency problems have been treated as an effective lens to explain the consequences of cash holdings among nonprofits. That is, nonprofit managers spend cash holdings for their own interests as opposed to the social interests of the organization. This study revisits the question of how charities manage extra cash and further examines the role of government funding in nonprofits' spending decisions. The results suggest that nonprofit managers make decisions on how to manage extra cash in accordance with the level of cash holdings; therefore, agency problems do not effectively explain how nonprofits manage extra cash. Furthermore, the results illustrate two contrasting roles of government funding in nonprofits' financial behavior: government funding may be used to monitor unscrupulous behaviors among managers, but it may also restrain nonprofits from investing in human capital.     

“Corporate” governance in nonprofit organizations

The economics‐based theoretical and related empirical literature on the governance of nonprofit organizations is brought together and integrated in a way easily accessible for noneconomists. This literature is scattered in academic journals covering economics, health economics, management, and accounting, and in the more nonprofit‐geared research publications. After defining corporate governance, I present in a nontechnical way the most appropriate economic framework for studying governance problems: the principal‐agent theory. Most of the economic literature deals with the role and influence of the board and its relation to the organization's management and performance. This is reflected in the article's structure. The board's functioning, composition, and committee structure are first discussed, followed by a review of the literature on incentive‐based remuneration schemes, disclosure of financial information, and the use of debt to mitigate agency problems between the board and management. The literature dealing with donors and subsidizing authorities in governance relations is then presented. The article concludes with a number of practical implications of the scholarly obtained results to date, as well as some suggestions for further theoretical and empirical research.     

Do operating reserves stabilize spending by nonprofit organizations?

The public budgeting literature has a long and rich tradition that examines the role of budget stabilization funds as fiscal stabilizers for state and local governments during periods of declining revenues and deteriorating economic conditions. Similarly, nonprofit organizations may accumulate operating reserves that allow them to smooth out annual imbalances between revenues and expenses, especially when facing a fiscal shock. Agency theory, on the other hand, indicates that managers might use these reserves to enrich themselves at the expense of the organization. This article is a step toward addressing a gap in our knowledge by analyzing the implications of reserves on nonprofit spending in general and also on particular functions (program versus overhead spending). Using a long panel of data from 1995 to 2011 and controlling for sample selection bias, the empirical results suggest that operating reserves held by nonprofit organizations do reduce expense gaps during downturns, but the effect is small. The results also suggest that nonprofit managers value current spending more than reserving funds for the future. Further, operating reserves are not associated with agency problems as predicted by theory. The empirical results suggest that the current rule of thumb—that nonprofits ought to hold up to 6 months of operating reserves—is inadequate if these pools of savings are intended to maintain all spending at trend during poor fiscal times. If, however, reserves are intended to only offset trend deviations partially while alternative strategies are sought, then the current rule of thumb may be sufficient.     

How does a board of directors influence within‐ and cross‐sector nonprofit collaboration?

Board members play a significant, yet largely unexamined, role in nonprofit collaboration. Processes, such as finding prospective partners, creating common ground with a partner, and establishing appropriate collaborative governance implicate nonprofit board members. In contrast to the scholarship of the role of interlocking directorates as potential networks for nonprofit collaboration, this paper examines the role of board members' social and human capital on nonprofit collaboration with other nonprofits, businesses, and government agencies. Drawing on online survey data from 636 nonprofit organizations, this paper finds that board social capital—but not board human capital—is positively related to the presence and number of within‐sector and cross‐sector nonprofit collaboration. However, board human capital enhances nonprofit‐government collaboration, when board social capital is also high. The results provide a novel perspective in nonprofit collaboration and board management research.     

Do Nonprofits Treat Their Employees Differently? Incentive Pay and Health Benefits

We examine how nonprofit, public, and for‐profit establishments vary in the provision of health benefits and insurance and performance‐based incentives using the 2002 National Organization Survey of establishments in the United States. We found that in comparison to for‐profit firms, both nonprofit and public organizations are less likely to use performance‐based incentives, although they provide their employees with better health benefits and insurance. Sectoral differences in the provision of health benefits and insurance and use of performance‐based incentives persist after controlling for correlates of sector that predict these outcomes, including establishment size, independence of establishment, market competition, establishment age, and unionization. We also found trade‐offs between the provision of health benefits and insurance and use of performance‐based incentives. Our results are generally consistent with the prediction from agency theory and also consistent with a view that public and nonprofit organizations are more concerned with the well‐being of their employees.     

The governance of nonprofit organizations: Law and public policy

Who should have the right to set the objectives of nonprofit organizations, hire their managers, set compensation standards, and in general control these organizations? Current law and public policy do not provide answers to these questions. Often, nonprofit organizations are controlled by managers and members of the boards of directors or trustees (many of whom are appointed by management). The goals of these individuals may not best serve the interests of those who support the operation of nonprofit organizations. This article proposes a legal and policy framework for empowering consumers, donors, and sponsors—those who have an economic demand for the nonprofit form of organization. The framework establishes a formal status of membership, accords standing in the court of law to members, enhances direct information dissemination by nonprofit organizations, and empowers state-sponsored agencies to support and oversee nonprofit organizations.     

Missing in Action: Strategic Human Resource Management in German Nonprofits

Human resource (HR) management is important for human service nonprofits because they rely on the quality of their employees for the provision of their services. Using a typology of nonprofit HR architecture developed by Ridder and McCandless (Nonprofit Volunt Sect Q 29(1):124–141, 2010), we attempt to unpack the black box between performance and HR practices. To this end, we conducted semi-structured interviews with HR managers and young employees to investigate their perceptions of HR practices in their nonprofit organizations. Based on the findings, we extend the research on HR management in nonprofit organizations and caution that success or failure of implementing HR practices may be directly influenced by the external environment.     

The Board as a Monitor of Organizational Activity: The Applicability of Agency Theory to Nonprofit Boards

Monitoring, as an important function for boards of directors in both the private and nonprofit sectors, receives widespread attention throughout the empirical (Chait, Holland, and Taylor, 1996; Eisenhardt, 1989; Golden‐Biddle and Rao, 1997; Kosnik, 1987) and normative literature (Axelrod, 1994; Block, 1998; Carver, 1997; Houle, 1997; Ingram, 1989). Despite the consensus about the significance of this crucial board responsibility, scholars know little about the ways in which a nonprofit board actually performs its monitoring function. In this article I report on an empirical study of the monitoring behavior of twelve nonprofit boards of directors. Agency theory provides the framework for this analysis. I show that the way in which individual board members define their relationship with the chief executive and understand the scope of the monitoring function influences how, or if, they monitor agency action. The findings also show that, given ambiguous rules of accountability and unclear measures of performance, nonprofit board members tend to monitor in ways that reflect their professional or personal competencies rather than paying attention to measures that would indicate progress toward mission‐related goals and initiatives.     

Transformational leadership,organizational culture,and innovativeness in nonprofit organizations

This is an exploratory study of leadership, organizational culture, and organizational innovativeness in a sample of nonprofit human service organizations: Associations of Retarded Citizens. Although leadership has been held out as one of the most important predictors of innovation, this study found it was not correlated with organizational innovativeness. Examination of the relationships between leadership and cultural variables provided some alternative explanations for this finding. Positive relationships among transformational leadership, organizational values, and cultural consensus (degree of agreement among employees on those values) indicate that leadership practices employed in this sample created strong cultural consensus around values that may inhibit innovation. These findings suggest that examining the link between leadership and organizational culture is important for understanding how leadership and innovation are related. This article sets out practical implications, based on the results of the study, that may help nonprofit managers create workplaces supportive of innovation.     

Stability and Change in Nonprofit Organizations: The Volunteer Contribution

This paper reports on a study of the microprocesses of stability and change in a nonprofit welfare organization in Australia. We position volunteering and voluntarism as core constitutive phenomena in and of nonprofit organizations and the nonprofit sector more generally, and examine volunteer agency in action. Developing a model drawn from neoinstitutional theory and adopting an ethnographic approach, the paper illustrates theoretically and empirically how volunteers create and revise institutional orders operative within organizations in ways hitherto poorly articulated and understood.     

Role ambiguity and volunteer board member performance in nonprofit sport organizations

We explore the relationship between multidimensional role ambiguity and individual board member performance within nonprofit voluntary sport organizations. Role ambiguity accounted for 29 percent of the variance in perceived board member performance, and ambiguity about one's responsibilities was the strongest predictor. These findings extend our understanding of the drivers of individual board member performance within voluntary sport organizations and the multidimensional nature of role ambiguity. The study supports previous arguments that knowing what to do is fundamental to one's performance, and more critical than knowing how to do it, and what difference it makes.     

Implementing an employee performance management system in a nonprofit organization

Nonprofit organizations are not exempt from the imperatives of employee attraction, retention, and motivation. As competition for staff, donors, and funding increases, the need to manage employee performance will continue to be a critical human resource management issue. This article outlines a study of the introduction of a performance management system in an Australian nonprofit organization and analyzes its design and implementation. It explores how performance management can be introduced and used effectively within a nonprofit environment to benefit staff and the organization. However, the use of performance management is not without its challenges, and the research also identified initial employee resistance and a resulting initial spike in labor turnover. However, findings indicate that if nonprofit organizations are willing to undertake consultation with staff and ensure that the organization's specific context, values, and mission are reflected in the performance management system, it can be a useful tool for managers and a direct benefit to employees.     

Contracting and Patterns of Nonprofit Governance

Executive staff and board members in nonprofit organizations that operate with government grants and contracts often work together to perform important governance functions. This shared responsibility can be predicted by strong executive leadership of the board, a board with highly regarded members, and affiliation with an influential statewide or regional association. The results of our research suggest that the distribution of governance responsibility in nonprofit organizations with government revenues should command the attention of researchers and activists.