The Governance of Not-for-Profit Firms

Many factors including incentive-pay, powerful shareholders, and takeover threats push for-profits managers towards maximizing shareholder value. One of the most striking factors about non-profit firms is that they have no comparable governance institutions, and the only check on managers are boards that are themselves rarely responsible to anyone outside the firm. This essay discusses the implications of these weak governance institutions on non-profit behavior. A primary implication is that non-profits will often evolve into organizations that resemble workers’ cooperatives. The primary check on this tendency is the need of the organizations to compete in outside markets. After presenting a model of non-profit behavior, I look at four different sectors (hospitals, museums, universities and the church). All display significant signs of capture by elite workers, but all still perform their basic missions reasonably, probably because of market competition. * The NSF provided helpful funding. David Cutler, Martin Feldstein and Andrei Shleifer provided enormously helpful conversations. This research comes out of the NBER’s Nonprofits project and will be the introduction of a volume of governance in the non-profit sector. All of the participants in the Nonprofits project provided helpful insights into these issues.