Nonprofit Governance for Financial Stability: A Study of Publicly-Funded Social Service Providers

• In Event: Governance

Abstract

The financial stability of nonprofit organizations is in the interest of all stakeholders. This includes government funders who rely on nonprofits to provide social services. While it seems intuitive that strengthening organizational governance could help nonprofits improve their financial stability, research on the connection between nonprofit governance and financial stability remains sparse and inconclusive (Garcia‐Rodriguez et al., 2021; Hodge & Piccolo, 2005; Hodge & Piccolo, 2011). We therefore ask this research question: Which aspects of organizational governance improve the financial stability of publicly-funded nonprofit social service providers?
The concept of financial stability is the opposite of financial vulnerability, i.e., the organization being at risk of financial distress (Trussel, 2023). Financial distress manifests itself in organizations becoming insolvent (Keating et al., 2005), having to reduce programs (Tuckman & Chang, 1991) or ceasing operations (Hager, 2001). Previous research has examined various indicators of nonprofits' financial vulnerability (e.g., de Andres-Alonso et al., 2016; Gordon et al., 2013; Greenlee & Trussel, 2000; Tuckman & Chang, 1991), working with additive indices or single indicators. We will advance operationalization by proposing a combinatorial approach.
Research on the link between nonprofit governance and financial stability is limited (Garcia‐Rodriguez et al., 2021; Hodge & Piccolo, 2005; Hodge & Piccolo, 2011), but there is more research on links with other facets of nonprofit financial performance (e.g., Crucke & Knockaert, 2021; Teixeira et al., 2021; Yang & Babiak, 2023). Previous studies have examined financial effects of board diversity, larger board size, representation of different stakeholder groups, good board practices (e.g., annual retreats), and managerial rationalization and professionalism (e.g., formalization, paid executive directors). Findings vary, showing some governance aspects to drive financial performance in some studies but not in others. To summarize, these drivers are not always relevant for financial stability, but at least they do not seem to be detrimental.
We will focus on factors that public funders could contractually demand from their nonprofit partners, that would be perceived as legitimate by the public. These are factors already encapsulated in governance codices or auditing norms. Specifically, we hypothesize that key factors include formal management qualifications of board members and executive directors, adequate tools for monitoring financial metrics, board independence in overseeing top management, representation of diverse stakeholders, and transparency toward the public. We also consider the role of organizational size.
For empirical analysis, we collaborate with a government funding agency in Austria and 76 of its contracted nonprofit service providers. Our analysis will be based on three types of data: nonprofits’ annual financial reports (to assess financial stability and organizational size), online desk research (to assess transparency toward the public), and a brief online survey of the organizations (for the remaining causal conditions). We will use fuzzy set qualitative comparative analysis (QCA) to analyze the data. Our research is ongoing, with data collection and model calibration in progress. We anticipate presenting comprehensive results at the ISTR conference. Based on our empirical results, we provide recommendations on how to enhance financial stability by improving the governance of nonprofits.

References

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Authors

• Florentine Maier, WU Vienna University of Economics and Business

• Josef Baumüller, University of Vienna

• Christian Grünhaus, WU Vienna University of Economics and Business

• Michael Meyer, WU Vienna University of Economics and Business

• Franka Walde, WU Vienna University of Economics and Business