Nonprofit Governance

Innovative Perspectives and Approaches

Chris Cornforth, William A. Brown, Chris Cornforth, William A. Brown

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781135022181
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

The current fashion for rolling back the state has seen the nonprofit or third sector playing an increasing role in what were previously the heartlands of the public sphere. The growing significance of the sector and its increasing reliance on public funds mean it has also attracted increased scrutiny. From outside the sector concerns have been raised about the accountability and performance of nonprofit organizations. From within the sector there has been considerable debate about whether the increased reliance on government contracts is in danger of undermining the sector's independence. As a result the spotlight has fallen on governance arrangements and whether they are adequate to ensure that nonprofit organizations are effective and accountable for their actions, and able to retain their independence.

This collection offers a comprehensive assessment of research on the governance of nonprofit organizations. Nonprofit governance research has been dominated by the study of boards of unitary organizations and has paid insufficient attention to the multi-level nature of governance, governance relationships and dynamics, and the contribution of actors other than board members, to governance processes.

Drawing on the research of leading scholars in the US, UK, Canada and Australia, this book presents new perspectives on non-profit governance, which help to overcome these weaknesses. Written in an accessible manner the book will be of value to scholars, researchers, students, reflective practitioners and governance consultants and advisers.

1

NONPROFIT GOVERNANCE RESEARCH

The need for new perspectives and approaches

Chris Cornforth

Until the global financial crisis in 2008 the nonprofit or third sector in many Western countries experienced a period of almost continuous growth over the preceding three decades. At the same time the sector's relationship with government evolved and changed dramatically (Phillips and Smith 2011). While there are important differences between countries related to their own history and culture, there do appear to be a number of common trends in the Anglophone countries that have shaped the growth and development the sector. The first has been the increased involvement of third sector or nonprofit organizations in the delivery of public services as governments have moved to contract out services. The second has been the increasing involvement of nonprofit organizations in cross-sector partnerships in response to a recognition that the resolution of complex social problems requires ‘joined up’ action and cannot be tackled by government or other organizations alone. The third has been a desire by governments to encourage active citizenship and the formation of social capital in response to pressing social problems, such as the breakdown of communities and increases in anti-social behaviour.

In response to the growing significance of the sector and its increasing reliance on public funds it has also attracted increased scrutiny. From outside the sector concerns have been raised about both the accountability and performance of nonprofit organizations. From within the sector there has been considerable debate about whether the increased reliance on resources from government is in danger of undermining the sector's independence (Independence Panel 2012). Paralleling developments in the private and public sectors, the spotlight has fallen on governance arrangements and whether they are adequate to ensure that nonprofit organizations retain their independence and are effective, responsible and accountable for their actions. This has stimulated a good deal of interest among practitioners about how to improve the quality of governance, and a small industry has grown up to provide advice, training and support for nonprofit boards.

The increased attention on how nonprofit organizations are governed has also stimulated a growing research literature. At an organizational level an organization's governing body or board has the legal responsibility to ensure that governance functions are carried out. Perhaps as a result the main focus of research has been on boards. In a review of the North American literature on nonprofit governance in the areas of human services and health, which has tended to dominate the field, Ostrower and Stone (2006) conclude that the main topics for research during the previous two decades have been: the composition of boards, the relationship between boards and managers or staff, board roles and responsibilities, board effectiveness and the link between board effectiveness and organizational effectiveness. In a later review Cornforth (2012) notes a continuation of these earlier themes, but with some broadening of the research focus to include topics such as accountability and the relationship with stakeholders, governance structures, and tools for assessing the competences of board members and board performance.

While this research tradition has made an important contribution to understanding the characteristics of boards and their behaviour it has important limitations (Cornforth 2012). As will be discussed in more detail later in this chapter the research has been dominated by the study of top-level boards of organizations, and has paid insufficient attention to the multi-level nature of governance, governance processes and change, and the contribution of actors other than board members to carrying out governance functions. In addition it has tended to draw upon a relatively limited range of theoretical perspectives.

The main aim of this book is to present some new theoretical perspectives and empirical research on nonprofit governance, drawing on the research of leading governance scholars in the US, UK, Canada and Australia that begins to address some of these weaknesses. In particular this book includes research that:

• Gets ‘inside the boardroom’ to develop a deeper understanding of board processes and behaviour

• Applies a range of informative theories, including many that have been largely ignored previously

• Pays greater attention to how governance structures and relationships change over time and are influenced by contextual factors

• Goes beyond the study of single boards to examine the operation of multilevel, multi-actor governance structures

• Helps set a new ‘agenda’ for nonprofit governance research.

The purpose of this chapter is to set the scene for the rest of the book. The next section sets out in more detail what we mean by the voluntary, third or nonprofit sector, and nonprofit governance. The subsequent section briefly outlines some of the main contextual changes that have affected nonprofit organizations and their governance. Following this the rationale for the book is set out in more detail. The final section describes how the book is organized and introduces the various chapters.

Defining terms

Defining the voluntary, nonprofit or third sector is challenging not only because of its diverse nature and the fact that the boundaries between sectors change over time, but also because the nature of the sector is contested: researchers, practitioners and policy-makers often have different aims when constructing their definitions (Anheier 2005: 53). Alcock (2010) has argued that definitions of the third sector in the UK are socially constructed through different discourses. He distinguishes between exogenous discourses that come from outside the sector, most commonly from politicians and policy-makers who wish to ‘use’ the sector to pursue their policies (Carmel and Harlock 2008), and endogenous approaches that seek to define core characteristics or values of the sector.

What this means in practice is that how the sector is popularly labelled and defined tends to vary between different countries and contexts, and over time depending on which discourses become dominant. In the UK, Kendall traces how the terms used to describe the sector changed from voluntary sector, to voluntary and community sector, to third sector in the two to three decades up to 2009 (Kendall 2003 and 2009). At each stage the scope and scale of the sector was ‘expanded’ in response to new policy initiatives, including the establishment of the Office for the Third Sector (OTS) by the New Labour government in 2006. In 2010 the new coalition government changed the name of the OTS to the Office for Civil Society, signalling again a somewhat different discourse.

In Australia, despite some efforts to promote the use of the term third sector, the most common terms in use to describe the sector are nonprofit or not-forprofit, and the latter term will be entrenched in the legislation for the Australian Charities and Not-for-profits Commission. In the US and Canada the most common label is nonprofit sector, although other terms have been used such as independent sector, emphasising the sector's independence from government and private business.

For economic and comparative research it is important to have definitions that can be operationalized either within a country or internationally. Here different endogenous approaches have attempted to define core characteristics of the sector. One of the most influential is that developed by the Johns Hopkins Nonprofit Comparative Project (Salamon and Anheier 1997: 33–4) which identified five defining features of nonprofit organizations, namely that they are:

• Organized (it has some institutional reality, such as regular meetings, officers and procedures)

• Private (it is separate from government)

• Self-governing (the organization must be in a position to control its own activities to a significant extent)

• Nonprofit-distributing (any profits or surplus each year must be kept within the organization to serve its mission and not be distributed to others such as members or shareholders)

• Voluntary (involve a meaningful degree of voluntary participation in the running or operations of the organization).

The UN has adopted a simplified version of this typology which suggests that the nonprofit sector consists of self-governing organizations that are not-forprofit and nonprofit-distributing, institutionally separate from government and non-compulsory, which is the equivalent of voluntary in the previous definition (Anheier 2005: 54). This is the broad definition adopted in this book, while recognizing that different legal, political and cultural traditions in different countries will shape national definitions and debates. It also needs to be recognized that the boundaries between sectors are not clear cut and there are a growing number of hybrid organizations that have the characteristics of more than one sector such as social enterprises, which are businesses established to pursue social or environmental goals (Billis 2010).

The concept of governance is equally challenging to define. Ostrower and Stone (2006) note that it is seldom explicitly defined in the literature on the governance of nonprofit organizations. However, the dominant focus of research has been at the organizational level on boards and their behaviour. This literature has largely ignored the fact that governance has become an important concept in a variety of different disciplinary and practice arenas including management, economics, social policy, public administration and politics (e.g. Rhodes 1996, Keasey et al. 1997, Kooiman 1999, Hodges 2005, Klijn 2008, Osborne 2010).

The word governance has its roots in a Latin word meaning to steer or give direction. However, the term is used in a number of different ways both within and between different disciplines, which can lead to confusion (Kooiman 1999, Klijn 2008). Kooiman (1999) suggests one useful way of distinguishing between different usages is in terms of the level of analysis to which the concept is being applied. The main focus of this book is on the organizational level and how organizations are governed (although it does also examine the governance of inter-organizational collaborations involving both public and third sector organizations). The term corporate or organizational governance is often used to refer to governance at this level. Again there is no agreed definition of corporate governance, but there is some degree of consensus that it concerns the direction and control of an enterprise and ensuring reasonable expectations of external accountability (Hodges et al. 1996: 7). The influential Cadbury report on the corporate governance of listed companies in the UK defined it as ‘the system by which companies are directed and controlled’ (Cadbury 1992: 15). However, this definition does not explicitly mention the need for organizations to meet requirements for external accountability to shareholders or members, and other external stakeholders, such as funders or donors, or the public. For the purpose of this book organizational governance is defined as the ‘systems and processes concerned with ensuring the overall direction, control and accountability of an organization’ (Cornforth 2004a, 2012).

It is important to distinguish organizational governance from governance at the societal level of analysis, where it is often used to refer to new patterns of government and governing (Hodges 2005, Osborne 2010). In particular, there has been a shift away from a unitary, hierarchical state to a more fragmented and arm's-length system of government, where a network of nongovernmental bodies participate in policy formulation and the delivery of public services (Rhodes 1994, Kickert et al. 1997). In this perspective network governance is seen as a mechanism for governing society that contrasts with market mechanisms and the hierarchical state (Powell 1990). As was mentioned earlier these new, more network-like patterns of public governance and public service delivery are an important part of the context in which many nonprofit organizations operate. This is reflected in the contracting out of public services to nonprofits and their increasing involvement in cross-sector ‘partnerships’ with other public and private sector organizations.

At the organizational level the body with the main responsibility for ensuring governance functions are carried out is the organization's board or governing body. However, the corporate or organizational governance system is wider than this and includes the ‘framework’ of responsibilities, requirements and account-abilities within which organizations operate, including regulatory, audit and reporting requirements and relations with key stakeholders. It is also important to recognize that other actors within organizations, such as managers, members and advisory groups may contribute to carrying out governance functions. As Demb and Neubauer (1992: 16) observed in their book on corporate governance in the private sector: ‘to equate corporate governance with the role of the board is to miss the point. It is much too narrow.’

A broader conceptualization of nonprofit governance opens up new questions for research. For example, what is the relationship between different parts of the governance system? How do regulation, audit, inspection and funding regimes influence governance structures and practices at the organizational level? What contribution do other actors such as managers, staff and members make to the carrying out governance functions? Some of these important questions are examined later in the book.

The changing context

The delivery of public services in the UK and US (and many other Western countries) has changed dramatically in recent decades, which has had important consequences for nonprofit organizations and their governance. During the 1980s and 1990s a series of government reforms to introduce private sector management practices into the public sector, which became known in the academic literature as new public management (NPM) (Hood 1991), began to change the relationship between the public and nonprofit sectors. Three interrelated reforms were particularly important in underlying these changes. First was the disaggregation of parts of the public sector by government through devolving certain powers and creating quasi-autonomous organizations, such as executive ...