Compensating Controls and Agency Conflicts in the Absence of Owners: The Case of Nonprofit Charter Schools

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Abstract

We examine whether boards of directors in nonprofit charter schools consider reported internal control weaknesses (ICWs) when making executive compensation decisions. We use publicly reported internal control deficiencies to examine agency conflicts in the unique organizational setting provided by nonprofit charter schools. We find evidence that charter school Boards of Directors consider both current and prior year internal control weaknesses when setting executive compensation, rewarding managers who show improvements in controls. These findings will help inform the debate over internal control reporting and its efficacy as a governance mechanism for nonprofits, providing information useful to donors, taxpayers, and other constituents in making resource allocation decisions, including requirements for federal single audits.

Authors

• Jean R. Bradley, Texas State University

• Dana A Forgione, University of Texas-San Antonio