Board Composition , Committees and Organizational Efficiency : The Case of Nonprofits by Jeffrey

This paper investigates the relationship between nonprofit board composition and organizational efficiency. We test the hypothesis advanced by Fama and Jensen (1983) that the presence of major donors on the board and on key monitoring committees is associated with greater organizational efficiency due to donor monitoring activities. The multivariate analysis shows that the ratio of total expenses to program expenses is significantly and negatively related to higher donor representation. Decomposing the total expenses ratio into its two components, it is found that the factors affecting the administrative expenses ratio are different from those affecting the fund-raising expenses ratio. As far as board committees are concerned, the multivariate tests provide evidence that the percentage of major donors on the finance committee, a key committee overseeing budgets and administrative expenses, is negatively related to the organization's administrative expenses ratio. Otherwise, the presence of major donors on board committees is unrelated to nonprofit efficiency. Overall, these findings demonstrate that the presence of major donors on the board and indicators of organizational efficiency are related, consistent with Fama and Jensen conjecture that major donors on the board effectively monitor the organization. This study also implies that, with the exception of the finance committee, it is the presence of major donors on the board that matters and not their presence on committees. " What is the biggest difference between [nonprofit and for-profit boards]? The nonprofit sector has an absence of a clear and generally accepted measure of accomplishment-in the corporate world you have the bottom line.