Early Responders, Late Responders, and Non-responders: The Principal-Agent Problem in Board Oversight of Nonprofit CEOs

Abstract

Although scandals involving nonprofit executives occur frequently, these episodes follow different trajectories. In some cases, boards take immediate action to dismiss the executive; in others, boards delay action or attempt to rehabilitate the executive; in a final set, boards fail to act, and outside authorities and/or funders step in. In this last event, agencies close or lose their independence. Despite the prevalence of scandals and the differences in their outcomes, examinations of the factors that contribute to this variation are lacking. Here, we develop such a study, using principal agent theory to examine the way in which CEOs’ abilities to create informational asymmetries interact with characteristics of nonprofit boards to affect the outcome of these episodes. We use data obtained from case studies of nonprofit CEO malfeasance. We hypothesize that specific characteristics of the nonprofit environment and of nonprofit boards interact with one another to exacerbate the principal agent problem by allowing nonprofit CEOs to create and exploit informational asymmetries. We find that board action is delayed or absent in instances where long-term CEOs are able to develop and exploit specific patterns of informational asymmetry. We find that specific difficulties with board monitoring in the nonprofit environment exacerbate these behaviors. We present recommendations to improve board performance.