Variations in nonprofit organizations

The discussion in Chapter 7 of property rights and managerial decision making in nonprofit organizations focuses on tax exempt nonprofits, primarily the 510(c)3 and 501(c)4 nonprofits in the US, as a generic group. Within this category of nonprofit organizations, however, there is considerable variation in the types of services offered, nonprofit missions, and organizational structures. In addition, there are other cat- egories of nonprofit organizations which also have tax exempt status.

Some 501(c)3 and 501(c)4 nonprofit organizations provide social serv- ices that are primarily charitable services, for example, homeless shelters and domestic abuse counseling, while others offer commercial social services, for example, nursing homes and health insurance providers. Variations in organizational mission exist across nonprofit organizations within specific service categories. For example, in education services reli- gious and secular schools will have different missions and approaches to the materials and methods they apply even though they each must meet basic government requirements for academic content. The nature of health care services of hospitals also will vary depending on whether the hospital’s mission includes teaching services, research services, or neither of these but simply offer health care services. Across these alternative areas of service and mission there also exists variation in organizational structure. Some nonprofit organizations may be small local organizations operated primarily by its founder, for example, soup kitchens or day care centers. Other nonprofits may be large complex organizations that have state, regional, national, or even international presence. These include, for example, local hospitals, health care insurers affiliated with  the Blue Cross-Blue Shield national organization, the Boy Scouts, and the International Red Cross.

These variations suggest differences across nonprofit social service organizations in monitoring managerial decision behavior. Some mon- itoring is done by government bureaus, such as the US Internal Revenue Service and states’ Attorneys General, and other state and local regula- tory agencies such as those that regulate health care facilities, day care centers, and nursing homes. Alternatively, monitoring can be accom- plished by various stakeholders, such as investors (donors and grantors) and clients. Monitoring also can be accomplished by boards of directors that take on the role of principal on behalf of stakeholders (Hart, 1988, Bowman, 2002, and Miller, 2002).

Monitoring by donors and grantors as investors appears to be highly variable and may be affected by the aforementioned variations in non- profit organizations (Kanter and Summers, 1987, Peat and Costley, 2001, and Campbell, 2002). Established nonprofit organizations with a reputa- tion for solvency are more likely to be funded by private and public grants. This suggests that larger and older, well known nonprofit organizations are more carefully monitored by grantors/investors. However, Peat and Costley show that these grantors/investors not only do not monitor the outcomes or performance of these nonprofit organizations, but that their funding decisions are not systematically related to outcomes or perform- ance history. This suggests that the larger, older nonprofit organizations who obtain a large part of their revenue from granting institutions are sub- ject to less monitoring than smaller, newer nonprofit organizations are. This would result because the latter are put in a position of demonstrating a greater justification for obtaining funding and responsiveness to the grantor/investor’s preferences.

The effectiveness of nonprofit boards of directors as monitors of managerial decision making also has been shown to be highly variable (Middleton, 1987; Block and Rosenberg, 2002; Brown, 2002, Holland, 2002 and Miller, 2002). As with monitoring by donors and grantors, the effectiveness of board monitoring also may be affected by the variations in nonprofit organizations mentioned above. In their study Block and Rosenberg demonstrate that boards of directors of nonprofit organizations managed by founders meet less  frequently  and  have less influence (that is, less monitoring ability) than do boards of non- profit organizations that are managed by someone other than the founder. This suggests that older, larger, and more complex regional, national, or international nonprofit organizations, which are less likely to be managed by the founder, are subject to greater monitoring by the boards of directors than are newer, smaller and more local nonprofit organizations.

Brown (2002) examines inclusive governance practices, that is, the degree to which nonprofit boards reflect the interests of stakeholders and thus monitor managerial decisions more effectively. He shows that inclusiveness is not related to size of the board, but is related to the diversity of composition of the board and to their practices for recruit- ment of board members. This would suggest less separation of owner- ship and control in larger, older, well established nonprofits. Smaller nonprofits which may be controlled by the founders face less monitor- ing by board members and therefore have greater discretionary ability with respect to the allocation of organizational funds.

Research on nonprofit organizations shows considerable variation in nonprofit structure but no clear implication for the separation of own- ership and control and for monitoring of managerial decisions. In gen- eral, however, studies of nonprofit organizations indicate two things with respect to this issue: (1) that board members see their roles as sup- portive of the nonprofit manager’s decision rather than as a managerial monitor, and (2) that the nonprofit manager is most often mission ori- ented. That is, findings show that nonprofit managers self-select into nonprofit organizations whose mission most closely matches their own preferences. In this situation maximizing nonprofit managerial utility is tantamount to maximizing the return of the investor/donors whose funds are committed to fulfilling the mission of the nonprofit organiza- tion. The probability of opportunistic behavior that will divert resources away from the mission of the nonprofit organization is reduced as a result of self-selection, with a corresponding reduction in the requirement for managerial monitoring.

This may be less likely for those nonprofits which are primarily com- mercial, or which emphasize the commercial aspect of their 501(c)3 and 501(c)4 services, particularly those that are large and complex organiza- tions. Nonprofits of this type are more similar to for-profit corporations than to traditional 501(c)3 and 501(c)4 nonprofits. Managerial self- selection is less relevant here and there is thus more likelihood of managerial opportunistic  behavior  and  corresponding  inefficiency  as the managers pursue their own interests rather than the interests of the organization or its stakeholders, either  donors/investors  (if  donations are the primary revenue source) or clients (if fees are the primary rev- enue source). The example of CareFirst, a large nonprofit health insur- ance provider, where  the  managers  sought  conversion  from  nonprofit to for-profit status and were offered a significant bonus associated with the conversion, is consistent with this prediction.

Most research on nonprofit organizations has been conducted on those that provide charitable and social services and that are classified in the 501(c)3 and 501(c)4 tax exempt categories in the US tax code. One reason for this is that the other categories of nonprofit organiza- tions account for a relatively small component of reported nonprofit activity (Boris, 1999). A second reason is that data on non tax exempt nonprofits (and on small tax exempt nonprofits) are limited and in many cases unavailable. Steuerle and Hodgkinson (1999) indicate the difficulty with obtaining data on nonprofit organizations: ‘If a group of volunteers organizes and has little or no financing, it may not even establish itself as a legal organization, much less file with any adminis- trative or statistical agency’ (p. 93).

Other nonprofit organizations that are tax exempt are  termed mutual membership organizations (Boris, 1999). These include clubs, labor unions, mutual insurance organizations, credit unions, automobile clubs, and groups that promote the arts, for example. In some cases, such as with mutual insurance companies, credit unions, and automobile clubs, the organizations provide commercial services to members. In other cases, such as clubs and groups that promote interest in the arts, the nonprofits provide social services. Some nonprofit organizations, such as labor unions, may provide both commercial and social benefits for their members.

Clearly, this is a highly heterogeneous group of organizations. Conditions of managerial decision behavior in some mutual member- ship nonprofits may be similar to the situation of a consumer coopera- tive or a labor owned firm, with the important exception that members do not have legal shareholding status. Rather, the members are stake- holders with expected nonpecuniary and in some cases pecuniary returns. In those cases where members are able to observe and thus monitor managerial behavior, managers are less able to expropriate the rights of members as stakeholders. In some cases, such as with nonprofit mutual memberships that provide commercial services, monitoring costs may be high, as in corporations, thus enabling managers to exercise economic property rights. This has occurred in some cases in labor unions, for example.

There are international variations in nonprofit organizations as well. There is a tendency for nonprofits of all types to have a greater presence in more developed countries, such as in the US and Europe than in less developed countries, such as in South  and Central  America. This  is likely due to the greater provision of social services by the public sector in South and Central American societies (Salamon, 1999). This is not the case for the less developed economies in Africa, where nonprofit organizations are important and have a significant presence. Anheier (1987) points out, however, that the nonprofits in Africa are primarily created and financed by international development organizations and the United Nations to facilitate economic development of these coun- tries. Indigenous nonprofits are relatively rare in most African countries. Salamon (1999) analyzes the close relationship between government and nonprofits in the Netherlands and in Germany, where nonprofits provide a significant amount of social services. In the Netherlands, social services such as education and health care are provided almost exclusively by private sectarian nonprofit organizations. These non- profits are financed primarily by public funds. In Germany, public financial support of social service nonprofits is codified into law. Salamon states that ‘public authority and resources were expropriated for the use of private, nonprofit groups …’ (p. 342). The relationship between government and nonprofits in which there is strong financial support provided by the public increases the degree of separation of (citizen) ownership and (nonprofit managerial) control. This suggests that nonprofit managers are in a position to exercise economic property rights to increase their utility. This behavior may be mitigated by cultural and social norms which may serve to align the interests of non-profit managers and citizens.

Source: Carroll Kathleen A. (2004), Property Rights and Managerial Decisions in For-Profit, Nonprofit, and Public Organizations: Comparative Theory and Policy, Palgrave Macmillan; 2004th edition.

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