Performance Management in Nonprofit Organizations

Global Perspectives

Zahirul Hoque, Lee Parker, Zahirul Hoque, Lee Parker

• Publisher: Routledge
• Year: 2014
• eBook ISBN: 9781317658412
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

With increased competition for external funding, technological advancement, and public expectations for transparency, not-for-profit and non-governmental organizations are facing new challenges and pressures. While research has explored the roles of accounting, accountability, and performance management in nonprofit organizations, we still lack evidence on the best practices these organizations implement in the areas of accountability and performance management. This book collects and presents that evidence for the first time, offering insights to help nonprofits face these new challenges head-on.

Performance Management in Nonprofit Organizations focuses on both conventional and contemporary issues facing nonprofits, presenting evidence-based insights from leading scholars in the field. Chapters examine the design, implementation, and working of accounting, accountability, governance, and performance management measures, providing both retrospective and contemporary views, as well as critical commentaries on accounting and performance related issues in nonprofit organizations The book's contributors also offer critical commentaries on the changing role of accounting and performance management in this sector.

This research-based collection is an interesting and useful read for academics, practitioners, students, and consultants in nonprofit organizations, and is highly accessible to accounting and non-accounting audiences alike.

Part I
Introduction and Context

1
Accountability, Governance and Performance Management in Nonprofit Organizations

An Overview

Zahirul Hoque and Lee Parker

Introduction

Nonprofit organizations represent a longstanding sector in many national economies and today have been generally growing in size, reach, scope and societal impact. They are to be found operating in education, welfare, sports, the arts, health and many other areas of national and international life in both developed and developing economies. Yet in the accounting and management research literatures, they have arguably been subject to a variety of misconceptions ranging from mistaken role definitions, to incorrectly assumed best practices, to inappropriate strategies and management tools imported from the private sector, to neglect of their unique characteristics and associated needs. These challenges are brought into sharp relief when the questions of nonprofit organization accountability, governance and performance management are put under the spotlight.

The purpose of this chapter is to open this book’s examination of accountability, governance and performance management processes within nonprofit organizations. In doing so it presents a general overview of the nonprofit sector’s societal positioning and role and goes on to consider the challenges to be managed by these organizations in dealing with their complex and dynamic national and international environments. The chapter draws upon the editors’ experiences as researchers in this field, along with relevant research observations published in recent years and the contributions of the researchers who have authored the chapters appearing in this volume. The chapter is organized in the following manner. The next section highlights the importance of the nonprofit sector in a society. Section three presents a discussion about the challenges facing today’s nonprofit organizations. Section four introduces the contributions to this book made by a group of experienced and emerging scholars in the field. The final section of the book offers conclusions and directs for future research in the nonprofit sector.

Importance of the Nonprofit Sector in a Society

Research shows that the nonprofit sector performs important social, economic and political functions in a society (O’Dwyer & Unerman, 2008, 2010; Unerman & O’Dwyer, 2006, 2010, 2012; Gray, Bebbington, & Collison, 2006). Nonprofit sector organizations include those that are distinct from government, self-governing, with ownership that is often vested in their members but does not distribute profits to them, and encompassing voluntary membership and service (Lyons, 1999; DCITA, 2005; Parker, 2007). Apart from being prevalent and significant in western, industrialized, developed countries, nonprofits have also gained popularity in less developed or emerging economies, including Asia and eastern European countries. They have become major providers of quasi-public goods and services (Smillie & Hailey, 2001; Lewis, 2004; Unerman & O’Dwyer, 2006, 2010, 2012; Gray et al., 2006). Salamon and Anheier (1996) see the nonprofit sector as a major economic force in a country and their study of nonprofits in seven developed countries (U.S., UK, France, Germany, Italy, Hungary and Japan) shows that at the time of their study the sector employed 11.8 million workers and in those countries overall, exceeded the combined employment of the largest private company in each country (General Motors, Hitachi, Alcatel-Alsthom, Daimler-Benz, Fiat and Unilever) by a factor of 6 to 1.

Further, Salamon and Anheier’s (1996) study showed the sector making use of volunteer labour that is equivalent to another 4.7 million full-time workers. The operating expenditure of the nonprofits in their seven countries totalled $604.3 billion and represents 4.5% of the gross domestic product and 4 times the gross sales of General Motors, the world’s largest private corporation. In France, Germany and the U.S. the nonprofit sector accounted for 13% of the new jobs added between 1980 and 1990. The U.S. nonprofit sector has the largest employment at 6.9% of total employment. France, Germany and the UK have a sizable nonprofit sector accounting for 3–4% of all jobs and 9–10% of employment in the service sector (Salamon & Anheier, 1996). Hungary has seen an unprecedented growth in the nonprofit sector with over 20,000 organizations registered across a period of five years accounting for 3.2% of all service jobs. The Japanese nonprofit sector employs more than its counterparts in the UK, Germany and France. In Australia, this sector employs people in the following proportions (Purdie, 2003): social services (26%), education and research (24%), culture and recreation (21%), health (15%), business, professional associations and unions (2.5%) and other (11.5%).

Salamon and Anheier also studied the nonprofit sector in five developing countries (Brazil, Ghana, Egypt, Thailand and India) and their findings revealed that at the time of their study, there were nearly 20,000 nonprofit organizations in Egypt, close to 200,000 in Brazil and over 15,000 registered organizations in Thailand. Another contrast is the predominant area of work by the nonprofit organizations. In Japan and UK the dominant field is education, whereas in Germany and U.S. it is health, in France and Italy it is social services, in Hungary it is culture and recreation and in developing countries it is work relating to development.

In understanding the nonprofit sector it is worth determining the underlying pressure for this extraordinary growth in the sector. Salamon (1994) suggests that the most basic force for the nonprofit sector is its ordinary people taking matters into their own hands and organizing to improve their conditions or seeking basic rights, as seen in the unprecedented growth of nonprofits in the Soviet Union and eastern Europe and South America, Asia and Africa.

A unique feature of the nonprofit sector is the way in which the sector is self-regulated with a marked difference in the motivation for self-regulation between the well-established developed countries and the emerging developing countries. Research centred around the specific national cases (Bies, 2010) reveals that in western Europe (Germany, Switzerland, the Netherlands and Austria) and the UK, where the nonprofit sector is long established and public regulation of the sector is weak, the nonprofit sector has a self-regulation design that builds on long-established self-regulation systems (Guet, 2002). Such activity serves variously to stimulate the nonprofit economy, to substitute or complement regulation by the state or to institutionalize nonprofit practices and enhance nonprofit legitimacy. In contrast, self-regulation efforts in Asia and Africa, where self-regulation is characteristically more recent and often the product of collective action, such nonprofit action is adversarial in nature and frequently motivated to defend organizations and communities against heavy-handed or repressive government intervention.

In understanding the importance of the nonprofit sector it is imperative to note the current challenges the sector is facing that may determine the future status of the sector. In the United States, some of the factors identified are: (1) public policy, particularly welfare reform and the devolution of increased responsibility to the states; (2) commercialism, competition and collaboration among sectors; (3) increased potential for giving and volunteering; and (4) new forms of philanthropy (Hodgkinson & Nelson, 2001). Collectively they have brought about major changes in the functioning of the nonprofit sector. The study by Hodgkinson and Nelson (2001) predicts that in coming decades part of the sector will be highly professionalized and indistinguishable from the corporate sector whereas the rest of the sector will try to maintain its mission of service and continue to build civil society.

The nonprofit sector in the developing world is commonly comprised of non-government organizations (NGOs) and has a different structure compared to the traditional nonprofit organizations (for details, see Ahmed & Hopper, this volume). Whatever their origins, the nonprofit sector and the NGOs of the developing world share the ideology to advance public purposes and address collective needs. They are identified in a distinctive social sphere and as a particular type of social institution even though their specific purposes may differ (Anheier & Salamon, 1998). Key features of the five developing countries studied by Anheier and Salamon included the contribution to the economy of the country. In Brazil, the organizations are small with a budget of less than $30 million engaged in education and health care. In Egypt 30% of the work carried out is in the rural areas. In Thailand traditional cremation societies form a large proportion of the NGOs and India has the most complex structure with over 2 million organizations, the largest proportion of which are engaged in education, development and environmental issues.

The nonprofit sector in developing countries, although large in absolute numbers, is relatively smaller than nonprofits in developed countries, where they form 4–5% of the work force. In developing countries they employ less than 2% of the work force. As mentioned before, these nonprofit organizations in developing countries collectively address ‘developmental’ activities and concentrate heavily on advocacy activities. Further, the nonprofit sector in developing countries attracts significant international funding and is less reliant on government funding than counterparts in the developed world (Anheier & Salamon, 1998). The emergence of the nonprofit institutions in the developing world has been a ‘top-down’ approach where the nonprofit is a direct product of the state-centred development policies and takes the role of agents in stimulating local development. More recently international aid has played a major role in the economy of the nonprofit sector with the nonprofit agenda being driven by broad ‘developmental’ activities in contrast to state-driven policies. Another factor that has contributed to the rapid growth of the nonprofit sector in developing countries is the unprecedented growth of the urban middle class. In comparison to the developed world that saw the growth of the urban commercial and professional middle class much earlier in time, developing countries have experienced rapid growth in the middle class in recent decades (Anheier & Salamon, 1998).

So there are marked differences between the nonprofit sector in the developed world and the developing countries. Accordingly we have highlighted some of the differences, drawing upon major studies by Anheier and Salamon into seven developed countries and five developing countries. Despite the differences, conceptually both nonprofit sectors work towards the betterment of society in general and are run by passionate people behind the cause.

Challenges in the Nonprofit Sector

To be able to fully understand the concepts of performance management, accountability and governance in the nonprofit sector, it is essential to briefly explain the trust placed by the public in the nonprofit sector, as well as its associated reputation. The perception of the public with regard to accountability and governance of the nonprofit sector is closely linked to the ethos of the nonprofit sector, which sets out to demonstrate that there are no incentives for opportunistic behaviour because there is no distribution of profits and hence no claim to any financial surplus that might motivate them to misrepresent their activities to stakeholders (Hansmann, 1980). If this non-distribution constraint is legitimate, accountability and governance in the nonprofit sector should be of the highest order because there is no incentive to erode accountability or governance due to a profit motive. Hence the principal-agent relationship will be one of compatibility rather than a watchdog over management that wants to maximize profits. However, will this prevent agents from behaving in their self-interest should there be performance-based remuneration? In the absence of profits, what drives the performance of the nonprofit sector and is there still an incentive for senior managers to act in their own self-interest (Ben-Ner & Gui, 2003)?

These questions can be addressed by examining the current status of the performance management, accountability and governance arrangements of the nonprofit sector. If financial surplus is not sought for distribution to members or shareholders, they can be consumed by the board, managers and other employees (e.g., in the form of perks). Some self-serving members can erode governance by misdirecting funds available for a specific purpose. This can result in substandard services being offered by the nonprofit organizations. Performance management in nonprofit organizations is invariably focused on its services provided rather than on improving profit performance. Research suggests that the employees in the nonprofit sector are generally paid less than their counterparts in the for-profit sector (Bacchiega & Borzaga, 2003). If this is the case what are the incentives for employees in the nonprofit sector to meet their performance management criteria? The answer lies in the way performance incentives are structured in this sector. It becomes the responsibility of the employees, senior managers and co-workers alike to deliver the public goods and services for which donations, grants or sponsorships were received. In any nonprofit organization there are volunteers who significantly contribute to the work force. It becomes the responsibility of the paid workers to oversee the work done by the volunteers and to be accountable for their own performance and report to the board members. They have to do a balancing act between delivering quality services and utilizing funds wisely to deliver the services. The question remains as to whether performance targets help.

A 2005 study (Ostrower, 2007) of over 5,100 nonprofit organizations carried out in the US revealed that board performance management and accountability is particularly concerned with exercising financial oversight. Approximately 52% of the respondents said their boards were active in performance management and accountability in areas of financial oversight and organizational policy. This leads to the next question of governance (for details, see Ostrower, 2007). Further, only a minority of the respondents said their boards are active in monitoring their own board performance, im...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• List of Figures
• List of Tables
• Acknowledgments
• Foreword
• Preface
• PART I Introduction and Context
• PART II Issues in Financial Reporting and Regulation
• PART III Issues in Accountability Processes and Governance
• PART IV Issues in Performance Management and Risk
• Review Process
• Editors
• Contributors
• Index