Accountability and nonprofit organizations: An economic perspective

Abstract

A popular concern is whether the managers of nonprofit enterprise are accountable. This article considers accountability in the context of three questions. First, how do groups establish a basis on which to hold managers acountable? Second, to whom should a manager be accountable? Third, can a person or group make it important to a manager to act in the best interests of the person or group? These three questions are addressed by the fields of public choice theory, social choice theory, and principal‐agent theory, respectively. A cynical way of summarizing the seminal findings in these areas of research is that public choice theory proves that groups will be unable to form, social choice theory proves that once a group forms, it will be unable to make good decisions, and principal‐agent theory proves that a decision, once reached, is impossible to implement. A more optimistic view is that the problems identified by these research findings contain the seeds of their own solution, and that thereby valuable lessons for nonprofit managers can be adduced.

Making sense of accountability: Conceptual perspectives for northern and southern nonprofits

“…The discussion here focuses primarily on principal-agent theory, although it should be noted that public choice theory has extensively examined how and why interest groups form, the processes through which they communicate and enforce their desires, and how they deal with free riders (see, for example, Mueller, 1989;Olson, 1965). Relatedly, social choice theory has investigated people's interactions in the political arena, detailing, for example, the inherent complexities of making collective decisions (Arrow, 1963;Bogart, 1995).…”

“…While business organizations are accountable primarily to shareholders, nonprofits are expected to respond to the interests of their donors, boards, clients, and contracting agencies (Bogart, 1995). Najam (1996) has observed that NGOs are accountable to multiple actors: to patrons, clients, and themselves.…”

“…First, a problem arises when the interests of the agent are not congruent with the interests of the Hewitt and Brown, 2000). Where incongruence is recognized, however, the problem is typically addressed through two solutions: (1) performance-based compensation, such that the agent is rewarded for adequately serving the interests of the principal (for example, through payment, promotion, or recognition), and (2) monitoring the activities of the agent, such as through quarterly or annual reports and disclosure requirements (Bogart, 1995). These solutions, however, involve extra costs to the principal in terms of monitoring, and they do not guarantee that the agent will not find alternate ways of satisfying self-interests while also giving the appearance of satisfying those of the principal.…”

Board Accountability: Lessons from the Field

“…Applying economic theory to nonprofits, Bogart (1995) suggested that accountability implies identifying constituencies or groups to whom the organization owes compliance, specifying the interests of those groups, and communicating information about how well the organization is serving those interests. Lawry (1995) presented an ethical framework for nonprofit accountability that emphasized similar issues: identifying to whom accountability is due, understanding and reconciling expectations that may be both legitimate and divergent, setting reasonable standards, providing accessible information by which to assess compliance, and modeling or demonstrating integrity in decisions and actions.…”

“…"We try to avoid even the appearance of self-dealing in our work and to remain impartial and objective in our decision making, so we can sustain others' trust and confidence in us" As Bogart (1995) recommended, a few boards sent out periodic reports to staff, sponsors, and other stakeholders, telling them of the board' s goals and inviting their feedback on its work. "We send out progress reports every year.…”