Chapter Summary: Scholars In Various Disciplines Develop

Chapter Summary 3scholars In Various Disciplines Have Developed Theori

Scholars in various disciplines have developed theories to explain the nonprofit sector as a whole and the behavior of individual nonprofit organizations. Theories drawn from economics center on concepts such as public goods, private goods, externalities, and free riders, framing nonprofits as gap fillers that compensate for failures in market and government mechanisms. Other theoretical perspectives focus on the supply side, emphasizing social entrepreneurship, contributions to freedom, pluralism, joint action, and motivations rooted in altruism and giving. Lohmann's interdisciplinary theory of the commons offers a view of nonprofits as providers of common goods, positioning them as a third category alongside private and public goods.

The definitions of what constitutes private, public, or common goods are dynamic, reflecting prevailing philosophical and political trends. According to Salamon (2012a), nonprofit organizations can be characterized by five essential features: (1) they are organized entities, (2) they are private, (3) they do not distribute profits, (4) they govern themselves, and (5) their activities are noncompulsory. A potential sixth characteristic is that nonprofits provide a public benefit, although this can be contested since some nonprofits advocate positions that might seem contradictory. Nonetheless, fostering debate can be viewed as serving the public interest within a democratic society.

These defining traits influence nonprofit behavior as organizations. Their purposes are articulated in mission statements, with the organizations being described as mission-driven. Organizational theorists view nonprofits as open systems that respond to environmental pressures and constraints. Their behaviors are often influenced by resource dependence, where over-reliance on limited support sources threatens their autonomy and risks goal displacement. To manage resource dependence, nonprofits aim to diversify funding sources while remaining aligned with their missions.

The concept of isomorphism describes how organizations within the same sector tend to become similar over time. This convergence can result from external pressures, organizational imitation, or shared professional norms among staff. The structure of a nonprofit organization often aligns with its task environment, and organizational culture—comprising the informal rules about "how things are done"—has gained importance in management thought over recent decades. Although some scholars note distinct nonprofit cultures, increasing sector blurring may be diminishing cultural differences, especially between nonprofits and for-profit firms.

Governance of nonprofits largely resides with the governing board, which bears ultimate responsibility for the entity's oversight. Boards vary in form: some are elected by members, others are self-perpetuating, appointed, or hybrid. Each type presents advantages and risks. Fiduciary duties of the board include care, loyalty, and obedience, mandated by law. Since legislative and regulatory reforms like the 1996 intermediate sanctions and the 2002 Sarbanes-Oxley Act, oversight and accountability have heightened. These regulations have led to the adoption of new conflict-of-interest policies and disclosure requirements, mirroring corporate governance standards to varying degrees.

Many nonprofit organizations have voluntarily implemented Sarbanes-Oxley's provisions, and some state-level standards and accreditation programs support good governance practices. The IRS's 2009 revision of Form 990 further emphasizes accountability, incorporating principles similar to Sarbanes-Oxley. The duties of the board include appointing, supporting, and evaluating the CEO; defining the mission and aligning programs accordingly; ensuring effective management and financial stability; and establishing performance metrics. Some stakeholders consider board participation in fundraising and personal financial contributions as part of their fiduciary obligations, although practices vary.

The relationship between the board and the CEO is crucial and well-studied. Different models propose varying levels of collaboration: Carver's (2006) policy governance model emphasizes a clear role separation based on policies, while Chait et al. (2005) promote shared leadership through governance-as-leadership, encouraging joint focus on critical issues. Herman and Heimovics (2005) found that CEOs view themselves as primarily responsible for organizational success, a phenomenon called "executive psychological centrality," advocating for board-supported leadership without usurping the board’s responsibilities.

Many scholars recognize that effective governance depends on contextual factors, suggesting that no single governance approach suits all organizations. Responsibility for board effectiveness primarily rests with the chair and board members, supported increasingly by dedicated governance committees and professional staff. Larger nonprofits often employ specialized personnel to support governance functions, although authority ultimately remains with the full board and its oversight. Recent research indicates that while most nonprofit CEOs are relatively satisfied with their boards, ongoing debates persist about balancing governance rigor and active fundraising, reflecting the complex, competing demands faced by nonprofit boards today.

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The governance and organizational dynamics of nonprofit organizations are complex and multifaceted, shaped by various theoretical frameworks, regulatory environments, and strategic considerations. Understanding these dimensions is crucial for effective nonprofit management, accountability, and sustainability in a challenging external environment.

At the core of nonprofit theory lies a plurality of perspectives from economics, political science, and interdisciplinary fields. Economic theories, for instance, highlight the role of nonprofits as providers of public, private, and common goods, demonstrating their importance in addressing market failures and externalities. Public goods, characterized by non-excludability and non-rivalry, often necessitate nonprofit intervention, especially considering free rider problems where individuals benefit without contributing to the resource’s provision. Lohmann’s interdisciplinary theory adds nuance by positioning nonprofits as providers of common goods—resources that are shared among communities but require stewardship and management, adding a third dimension to the classic private-public dichotomy (Lohmann, 1992).

The definition of nonprofit organizations includes several critical attributes. Salamon (2012a) identifies five core characteristics: organizational form, private ownership, non-distribution of profits, independence from government, and voluntary participation. These traits shape not only the legal status and operational goals of nonprofits but also influence their internal behaviors and external relationships. The mission-driven nature of nonprofits emphasizes a focus on the public benefit, which can sometimes generate tensions when organizational objectives conflict with advocacy or ideological positions. Nonetheless, fostering dialogue contributes to democratic debate and societal progress.

Organizational behavior in nonprofits is heavily influenced by environmental factors and resource dependencies. Nonprofits are open systems that respond adaptively to external pressures, and their strategies—such as diversifying funding sources—are designed to safeguard autonomy while fulfilling missions. Isomorphism demonstrates how organizations tend to imitate peers or adhere to professional norms, leading to homogenization amid sector-wide challenges (DiMaggio & Powell, 1983). Additionally, organizational culture, encompassing shared assumptions and informal rules, shapes day-to-day decision-making and staff behaviors, while sector blurring with private firms might diminish traditional cultural distinctions (Salamon & Anheier, 1997).

Governance of nonprofits is anchored in the board's responsibilities and composition. The board’s fiduciary duties—care, loyalty, and obedience—are legally mandated and are central to accountability. Reforms such as the Sarbanes-Oxley Act embed principles of transparency and accountability in nonprofit governance, leading organizations to adopt policies that mitigate conflicts of interest and enhance oversight. The revised IRS Form 990 underscores this shift, requiring detailed disclosures and reinforcing organizational responsibility and integrity (IRS, 2009). Effective governance entails strategic oversight, including mission definition, program alignment, financial management, and performance evaluation.

The relationship between the board and the chief executive officer (CEO) is pivotal. Various models advocate different interaction paradigms: Carver’s policy governance emphasizes role clarity through policy directives; Chait et al.’s governance-as-leadership underscores shared responsibility and generative thinking; and Herman and Heimovics’ research indicates a natural tendency for CEOs to view themselves as organizational focal points, necessitating balanced collaboration (Carver, 2006; Chait et al., 2005; Herman & Heimovics, 2005). Maintaining a partnership that leverages the strengths of both the board and the CEO is essential for strategic effectiveness.

Modern nonprofit governance also involves structures supporting board development and accountability. Governance committees are increasingly common, tasked with recruiting, orientation, and evaluations. Larger nonprofits often employ professional staff dedicated to governance functions, although authority ultimately resides with the full board. The importance of continuous improvement is reflected in the adoption of best practices, although research suggests that there is no universal formula for effective governance; instead, approaches must be tailored to organizational contexts (Renz & Herman, 2016). The ongoing challenge is balancing governance oversight with active fundraising roles, as the dual expectations can strain resources and organizational focus (BoardSource, 2017).

In sum, the effective management of nonprofit organizations hinges on understanding complex theories of sector function, robust governance structures, and adaptive organizational cultures. These elements collectively influence how nonprofits fulfill their missions, maintain accountability, and adapt to evolving societal needs, ensuring their long-term sustainability and relevance.

References

• DiMaggio, P. J., & Powell, W. W. (1983). The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review, 48(2), 147-160.
• Herman, R., & Heimovics, R. (2005). Boards that make a difference: A new design for leadership in nonprofit organizations. Jossey-Bass.
• IRS. (2009). Form 990: Return of Organization Exempt From Income Tax. Internal Revenue Service.
• Lohmann, S. (1992). The dynamics of voluntary cooperation: An interdisciplinary approach to the commons dilemma. Policy Studies Journal, 20(3), 471-486.
• Renz, D. O., & Herman, R. (2016). The typical nonprofit board: In search of best practices. Nonprofit Management & Leadership, 26(3), 343–359.
• Salamon, L. M. (1999). The nonprofit sector at a crossroads: The case for crossing sectoral boundaries. Nonprofit and voluntary sector quarterly, 28(4), 4-22.
• Salamon, L. M. (2012a). The state of nonprofit America. Brookings Institution Press.
• Salamon, L. M., & Anheier, H. K. (1997). Managing to the mission: Governance and performance in nonprofit organizations. Baltimore: Johns Hopkins University Press.