Board Capture in the Nonprofit Sector? An Exploration of a Possible Cause and Solution

Abstract

Responsibilities of nonprofit boards of directors include financial oversight and supervision of the CEO. Lack of expertise and the nature of supervision may contribute to board capture, characterized by longer executive tenure despite poor financial performance. We explore whether nonprofit boards are as responsive as for-profit boards to poor CEO financial performance. Our analyses indicate that the boards of the largest nonprofits do not definitively respond to changes in revenues, expenses, savings, or profit in CEO tenure decisions. This contrasts sharply with our for-profit results. However, changes in net assets as a fraction of total assets provoke nonprofit board responses comparable to those of for-profit boards. These findings are consistent with a pattern wherein nonprofit boards provide relatively lax financial oversight most of the time, but act when financial results threaten long-term solvency. Nonprofit boards might consider compensating board members to improve supervision of CEOs.

Keywords

nonprofit governance nonprofit board performance nonprofit board capture

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