The Case of Nonprofits

Abstract

This article investigates the relationship between nonprofit board composition and orga-nizational efficiency. Overall, we find a significant statistical association between the presence of major donors on the board and indicators of organizational efficiency. Although causality cannot be demonstrated, our findings are consistent with the Fama and Jensen (1983) conjecture that major donors monitor nonprofit organizations at least in part through their board membership. The multivariate analysis shows that the ratio of total expenses to program expenses is significantly and negatively associated with higher donor representation. Decomposing the total expense ratio into its two components, we find that different factors affect the administrative and fundraising expense ratios. The percentage of major donors on the finance committee, a key committee overseeing budgets and administrative expenses, is negatively related to the organization's administrative expenses ratio. The presence of major donors on other board committees is not signifi-cantly statistically associated with nonprofit efficiency. This study tests empirically the hypothesis that efficiency of the nonprofit organization is related to the existence and composition of its board of trustees and board committees. 1 Specifically, we concentrate our analysis on the role of major donors on boards and board committees in promoting organizational efficiency. Although a great deal of empirical work has been done trying to