Does governance ease the overhead squeeze experienced by nonprofits?

Abstract

Nonprofits' performance is often evaluated based, in part, on their program spending ratio (PSR). Yet, ranking nonprofits based on PSR has been criticized because it is an imprecise index of a nonprofit's actual social impact. Further, too much emphasis on PSR creates an incentive for nonprofits to increase their program spending at the expense of investing in overhead, regardless of the social value it generates. In extreme cases, excessive focus on PSR can create incentives to manipulate or even misreport financial statements. Communicating information regarding governance can potentially counterbalance the pressures created by this focus on PSR. In 2008, the U.S. Internal Revenue Service implemented significant changes in the type of information that nonprofits are required to disclose, which helps them to better display their governance quality. Studying the tax forms of 38,226 nonprofits active in social services and relief operations during 2010–2017, we find that governance quality is now an important factor in driving public donations to nonprofits, although PSR still remains a key driver. Moreover, our findings show that better governance is associated with a lower likelihood of misreporting, consistent with the argument that better governance reduces the pressure to report a high PSR. Overall, our results suggest that nonprofits should consider improving their governance quality in their strategies for securing donation income, even though that may lead to lower PSR levels.

Operations of cost-effective charities: a qualitative study

“…To assure their financial viability and sustain their interventions, charities need to maintain public trust by enhancing the transparency of their operations and incorporating accountability measures (Moxham, 2009; Moxham and Boaden, 2007). This is crucial because the amount of donations they receive is often linked to their disclosed spending ratio, which presents their efficiency, as well as the extent and quality of their governance practices, including oversight committees and audits (Parsa et al ., 2022; Zhuang et al ., 2014). These governance practices also help improve efficiency in charity operations, especially when donations are contingent upon evidence of charity effectiveness (Privett and Erhun, 2011).…”

“…disclosed spending ratio, which presents their efficiency, as well as the extent and quality of their governance practices, including oversight committees and audits (Parsa et al, 2022;Zhuang et al, 2014). These governance practices also help improve efficiency in charity operations, especially when donations are contingent upon evidence of charity effectiveness (Privett and Erhun, 2011).…”

Sustainable humanitarian operations: An integrated perspective

“…Overcoming these barriers requires discussion with the communities, the HOs, the local governments, international donors, and other stakeholders. Investing in better coordination between HOs, locally and globally, takes time and effort, and therefore money, but such investments in coordination are typically categorized as overhead and hence frowned upon by potential donors (Parsa et al., 2022). Furthermore, coordination with other HOs risks diluting the media attention and hence future donations that an individual HO might receive, providing a further disincentive (Eftekhar et al., 2017).…”

“…Parsa et al. (2022) suggest that improved governance can mitigate that counterproductive aversion to investments in infrastructure and systems.…”

“…However, donations specifically meant for preparedness and capacity building are scarce and investments in those areas are an overhead cost; donors sometimes rely too narrowly on metrics published by watchdog organizations like Charity Navigator such as the ratio of spending that goes directly to relief. Parsa et al (2022) suggest that improved governance can mitigate that counterproductive aversion to investments in infrastructure and systems.…”