The “non residual claim problem” in non-profit organizations.
The case of NGODs in Spain
Gabriel de la Fuente Herrero
Natalia Martín Cruz
Elena Romero Merino
Departamento de Economía y Administración de Empresas
Universidad de Valladolid
ABSTRACT
The theory of the agency allows to a description of the nonprofits performance even in the
case of not residual claims explaining donors’ behavior and managers’ strategies. Other than
residual claims, donors try to protect the positive externalities created through non-profit
activities. The aim of this paper is to analyze the role of external and internal control
mechanisms in nonprofits. Then, we observe the extent of the relationship between the
control mechanisms and managerial behavior within those firms. Finally, we assess the
efficiency of those mechanisms of control and those strategies to create value for the
nonprofits. For our purposes, we use data of 92 Non Governmental Organizations for
Development Aid (NGODA) federated into the Coordination Unit of NGODA for the period
from 1995 to 1999. The results show that diversification creates value and the board could be
a control mechanism for NGDOs. Finally, the federal government as institutional investor is
an active controller for the ‘unit cost’.
1
1. INTRODUCTION
During the last years we have witnessed a remarkable growth of the non-profit organizations,
their economic role in the western societies should not be taken amiss. During the last
eighties there were about a million of nonprofits on active service which generated a 25 per
cent of the GNP –gross national product- and created a fourth of the employment in the
United States (Anthony and Young, 1988; Hay, 1990; Guerras, 1995). In Spain, as well as in
other countries, non-profit organizations had been paid relatively little attention –academic,
political, legislative, or otherwise- before the last decade but they have returned to the center
of debates since the intensification of their development.
In many instances, this enhanced interest was rooted in an attempt to search for cures against
economic and political crises, most notably the unemployment urgent situation and the crisis
of the public sector (Heitzmann, 2000). On the one hand, non-profit organizations were
offering new jobs as they became in charge of providing social services and long-term care –
both fields in expansion-. On the other hand, non-profit organizational form allowed the
society to overcome market failures –due to an inability of the public sector to cover some
increasingly specialized needs of the population- and enhance output of certain goods and
services without augmenting direct government provision or subsidies to for-profit firms
(Heitzmann, 2000). In addition, to achieve greater social welfare, nonprofits are provided taxexemptions and the right to offer tax-deductions to contributors for their charitable gifts while
nonprofits consent to certain corporate governance requirements and external oversight
(Frumkin and Keating, 2001).
The evolution of the non-profit sector in different countries is significantly affected by the
“favorability” or “unfavorability” of the legal framework within which non-profit
2
organizations operate. While non-profit organizations are, to a significant extent, informal
organizations, they nevertheless interact with the formal mechanisms of the law in a variety
of ways, from the establishment of legal personality and its resultant protection of members
and officers from personal legal liability for the organization’s actions, to provisions in the
tax law which encourage or discourage philanthropic contributions to such organizations
(Salamon and Toepler, 2000).
Indeed, the trend of nonprofits’ growth is related, at present, with social development and a
culture of altruism standing versus the market sector’s culture of contract and the public
sector’s culture of law and the public interest. Thus, economic and political crises as well as
social development provide a trigger for the progress of nonprofits (Salamon and Toepler,
2000).
The existence of nonprofits itself raises an array of questions which will constitute the
mainstay of numerous studies from then on: Which role are nonprofits going to play within
these developments? Will they be able to provide new jobs and satisfy the population new
needs of services? Why do nonprofits coexist with public sectors and even compete with forprofits? Would nonprofits, in fact, cease to exist if tax incentives were eliminated? Since it is
almost impossible to answer these questions ex ante, economists have developed a rich array
of theories to explain the role and behavior of non-profit organizations (Weisbrod, 1977;
Ben-Ner, 1986; Easley and O’Hara, 1986; Krashinsky, 1986, 1997; Young, 1986; Hansmann,
1987; James, 1990; Salamon, 1995; Rose-Ackerman, 1996, 1997; Badelt, 1997).
One of the most pervasive informal theories about the existence of nonprofits is that
nonprofits provide “unprofitable” services. Because nonprofits often rely on donations or
government support, the conclusion is drawn that a for-profit firm would be unable to provide
services provided by nonprofits (Kuan, 1998). Some of the more scholarly theories have
3
attempted to debunk the popular view. In the early models, the behavior of non-profit firms
was hypothesized as maximizing the quality or quantity of the service they produce
(Newhouse, 1970). After this initial attempt to explain the role of nonprofits, we can find two
primary theories in the recent years: nonprofits arise as a response to the inability of
government to establish Lindahl prices for collective goods (Weisbrod, 1975) –the
“government failure theory”-, and/or nonprofits provide needed and desired alternatives to
the private for-profit sector (Hansmann, 1980, 1986) –the “market failure theory” or “contract
failure theory”-.
The “government failure theory” sets non-profit organizations as a response to societies with
heterogeneous consumer demands (Weisbrod, 1975, 1988). A public provision of services is
designed to satisfy the quality demands of median voter, but even this demand niche is not
always fully supplied by the public agency. As a consequence, a governmental provision of
public goods1 leaves some citizens under-satisfied –in quantity or quality- (Meyer 1992) and
willing to pay more, at the margin, for additional output or further quality. Thus, nonprofits
can be seen as organizations serving collective-good demands neglected by government and
relying on voluntary donations of money and time, government grants, or profit from sale of
secondary goods (Weisbrod, 1998b, especially chap. 3). In this case, the two forms of
organization occupy distinct but complementary market niches.
A parallel stream of research –“market failure theory” or “contract failure theory”- has many
commonalities with the previous. Scholars understand non-profit formation as a response to
market failures and argue that for-profit firms have a clear incentive to meet consumer
demands at minimal cost. Although this ensures efficiency, it also provides an incentive to
sacrifice quality when the quality or output is hard to measure or when the potential for
4
“contract failure” exists (Hansmann, 1986). “Contract failure” occurs when buyers cannot
control suppliers, creating an incentive for suppliers to cheat. As it is impossible to build
complete contracts, the internal agents of a for-profit organization can easily expropriate the
resources by reducing this hard-to-measure quality of the service; by organizing as
nonprofits, firms signal to donors that donations will be applied to the proper purpose thanks
to the non distribution constraint –nonprofits may not by definition distribute profits-, and so
they are viewed as more trustworthy in providing goods in which quality is not readily
apparent.
The government and market failure theories described above are essentially ‘demand-side’
models, suggesting that nonprofits are created due to consumer demand. Opposite to them,
Rose-Ackerman (1986) argues that ‘supply-side’ forces offer another category of
explanation, which is the case of motivated non-profit entrepreneurs –who create new
organizations and can transfer their personal values and motivations to them-. This kind of
people is sometimes better reflected in a non-profit rather than a for-profit structure (Young,
1986). Nonprofits may also face lower labor supply prices, including greater access to
volunteer labor insofar as people prefer working for, or volunteering to, a non-profit
organization.
However, social scientists have not generated satisfactory explanations for why non-profit
organizations exist and why they seem to dominate some activities like education and
religion and not others like manufacturing (Jensen, 1983). Even more, despite the extensive
theoretical analysis of the role and the behavior of non-profit organizations, there has been
very little empirical testing of the plausibility of these theories (Kuan, 1997, 1998; Heizmann,
2000). Most empirical studies have only attempted to examine which divergences exist
1
The public sector’s primary role is generally perceived as a supplier of public goods, defined as goods which
are fully accessible to all and in which one person’s consumption does not diminish the amount available for
5
between organizations with different ownership forms using single organizations as a basis
(Weisbrod and Schlesinger, 1986, Hansmann, 1987; Badelt and Weiss, 1990; Kapur and
Weisbrod, 2000; Chou, 2001), country comparisons of third sectors (Salamon and Anheier,
1997) and other kind of studies such as those which attempts successfully to test the
relationship between legal factors and the development of non-profit organizations (Salamon
and Toepler, 2000).
More recently, another stream of research have appeared trying to give an answer to diverse
kind of questions related to nonprofits’ funding (e.g. Okten and Weisbrod, 2000), to
nonprofits’ operational efficiency (Marcuello and Salas, 2000; Frumkin and Kim, 2000) and
to nonprofits’ management control (Guerras Martín, 1995; Herman and Renz, 1999; Preyra
and Pink, 2001; Frumkin and Keating, 2001). Let’s consider them seriatim:
First, there is a broad collection of papers in the search of the reasons guiding a person to
support a non-profit organization. In order to explain those motivations, it is necessary to
understand the way nonprofits raise funds. They can capture funds through two principal
means: (1) fees for the delivery of services or the creation of commercial ventures designed
to generate a stream of earned income and (2) donations and grants. In fact, as Weisbrod and
Dominguez (1986)2 state, nonprofits compete for private donations and public subsidies,
needing to finance their activities in the provision of collective goods, so competition will be
a disciplinary device for non-profit organizations as it is for lucrative ones3.
Researchers establish two principal causes which lead to support a non-profit
organization, philanthropy and self-interest. First, some non-profit firms may exist
others (Tietenberg, T. 1992. Environmental and natural resource economics. HarperCollins. New York. USA).
2
They explain the free-rider behavior relative to the constituency who does not pay for the public goods.
3
A way of competing is through creating “prestige”. Prestige could be valuable to individuals because it directly
enters their utility, or because being known as a donor increases income or business opportunities. Giving could
do this by serving as a signal of wealth or reliability (self-interest behavior).
6
because of altruistic or philanthropic motives, in economic jargon their founders may
have utility functions that depend on the happiness or purely internal satisfaction gained
from their acts of charity –private or warm glow- or sometimes their utility comes from
having the amount of a donation publicly known –reputation or public prestige- (Shaw,
1896; Rose-Ackerman, 1996; Harbaugh, 1998). However, this search of status, from our
point of view, should not be considered either as clean philanthropy or as pure selfinterest. Second, some other times, the donor is consumer as well, and so he is being selfinterested when donating. This last reasoning is called the ‘donor-control argument’ and
considers that “stakeholder participation” signals to buyers a lack of incentive to cheat, so
this could be a reason why nonprofits exist and a motive for potential consumers to donor
at once. Using this reasoning, we can understand why many social services are supplied
by non-profit organizations, by emphasizing the public-serving nature of their work.
Many “donative” non-profit service providers are able to elicit a stream of contributions
that provides critical working capital for their operations, and in the same way the donors
can have a stimulating tax benefit too.
The second group of research is related to nonprofits efficiency, and particularly, with the
factors that drive private contributions to non-profit organizations. Beyond a need to build
legitimacy and donor confidence that may underlie the “new bottom-line” movement in the
non-profit sector, there has been much talk about the growing sophistication of philanthropy,
evidenced in the expectation of donors that their contributions be well spent (Frumkin and
Kim, 2000). Because nonprofits have received a great deal of advice on how to manage their
operations efficiently, the authors are interested in the issue of whether strategic positioning
around efficiency, defined as the reporting of a below average administrative to total expense
ratio, increases the contributed income that a non-profit organization is able to raise over time
(Frumkin and Keating, 2001). However, there is a need to study in depth those measures of
7
nonprofits’ efficiency due to the lack of significance of those calculi that do not take into
account the intangible results of non-profit organizations.
Finally, a brief review about board practices in nonprofits shows us the importance of nonprofit’s management. Once we have illustrated the increasingly development of non-profit
organizations, and particularly after a sequence of financial scandals4, non-profit management
have undergone a period of self-examination aimed at bringing greater controls and
improving the funds’ appliance. New systems of management come up, these systems are
usually based in notions coming from the successful for-profit organizations to raise
operational effectiveness and reduce costs (Bryson, 1995; Kearns, 1996; Pappas, 1995; Letts,
Ryan and Grossman, 1999; Antos and Brimson, 1994; Dropkin and LaTouche, 1998;
Drucker, 1992; Eadies and Schrader, 1997; Firstenberg, 1996; Pynes and Schrader, 1997;
Wolf, 1990). The push toward efficiency and performance has been fuelled by the rapid
professionalization of large parts of the non-profit sector over the past three decades
(Frumkin 1998).
In connection with this stream of research, there is some work related to manager’s
compensation contracts. Those studies (Bjork, 1990; Holmstrom and Milgrom, 1991;
Weisbrod and Eros, 2001; Glaeser, 2001) approach the best way to incentive managers in an
attempt to align their incentives with those of the donors. In the absence of perfect
4
Over the past decade a number of major financial scandals have rocked the non-profit world, including the
conviction and imprisonment of the president of the United Way of American for embezzlement, the jailing of
the head of Foundation for New Era Philanthropy for perpetrating an enormous investment fraud that turned out
to a massive ponzi scheme designed to separate donors and institutions from their money, and prosecution of
leaders of the Episcopal and Baptist churches for outright theft. If crimes were not enough, ethical lapses have
also hurt the credibility of the sector and some its largest institutions. The ouster of the head of the National
Association for the Advancement of Colored People over the improper transfer of funds to the president’s
former mistress and the forced resignation of the president of Adelphi University following revelations of high
living made possible by an extraordinarily generous compensation package did nothing but further tarnish the
image of the sector (Frumkin and Keating 2001, Frumking and Kim 2000). Spain is not out of those situations.
One of the most recent scandals is the case of “Gestora pro amnistia para los presos vascos”, an organization
which collected money for relatives of the Vacs convicts and help them economically so as the family could
visit them in prisons out of the Vacs Country. This organization was probed to be diverting part of their funds to
support the terrorist group ETA.
8
monitoring, the second best solution is a contract which links executive compensation to the
fortunes of the firm. Without stock ownership as an instrument to align incentives, the
managers of nonprofits could tend to engage in activities that enhanced their own welfare at
the expense of the organization. Then, an absence of market discipline would allow managers
to consistently supply suboptimal levels of effort while expanding their pecuniary and nonpecuniary benefits (Preyra and Pink, 2001; Fama and Jensen, 1983a, 1983b; Hansmann,
1980; Clarkson, 1972).
Our interest in this paper is mainly related to these two last ideas –efficiency and managerial
behavior of non-profit organizations- due to the up-to-date observation of uncontrolled spread
of nonprofits and the substantial amount of managers’ discretion. Assuming that donors make
efficient choices5 and they care about the use of their resources we speculate about how those
individuals can monitor managers as the ones who finally decide the final destination of their
funds with an almost unparalleled degree of autonomy in the economy. Nowadays we can not
assume as Brennan (1994) did, that altruism is not included in the non-self interest behavior,
the reality –as Jensen (1994) argues- confirms that the motivation to offer not just the own
money but the own time for other’s welfare, does not implies that a person is a perfect agent.
The goal of this paper is to understand the unusual relationship between donors and
volunteers –as owners- and non-profit managers –as agents- and how the interactions of these
actors influence the performance of non-profit firms. Based in the seminal work of Jensen
and Meckling (1976) and other articles of Fama and Jensen (1983a. 1983b, 1985) - we will
bring up three questions whose answers are the core of this paper. First, we analyze the
potential manager’s free rider behavior in these non-profit firms where sometimes, as we
have mentioned earlier, even managers act as volunteers. Second, we explore donor’s
9
behavior as a monitor for the allocation of his funds in the non-profit firm, and finally, we
look at the avoidance of the likely donor resources’ expropriation from the manager.
In order to study those issues in the following sections, first, -in the second section- we
explain the main relationships between non-profit’s players viewed from an agency
framework to conclude with our hypothesis in the third section; in the fourth section, we
describe the sample in which we will verify our hypothesis and introduce the variables and
the empirical model; next, we present the results and finally, we conclude with some
implications for future analysis.
2. NON-PROFIT FIRMS GOVERNANCE FROM THE AGENCY THEORY
Since the seminal work by Spence and Zeckhauser (1971) and Ross (1974), substantial
attention has been given to the development of the theory of agency within for-profit-firms.
The agency problem is an essential element of the so-called contractual view of the firm,
developed by Coase (1937), Jensen and Meckling (1976), and Fama and Jensen (1983a,
1983b). The core of the agency problem –the separation of ownership and control- holds for
non-profit firms and Fama and Jensen (1983b) explain the survival of these specific firms as
an efficient solution to the special agency problem posed by private donations.
The agency problem in non-profit firms is related to the relationship between contributors
and managers. Contributors of nonprofits provide money –donors and Government subsidiesand labor –volunteers-; they all can be seen as shareholders in a for-profit firm albeit those
actors do not have clearly defined residual claims. Essentially, they are owners who bear the
5
Following Weisbrod and Dominguez (1986) and later others such as Posnett and Sandler (1989), Khanna,
Posnett and Sandler (1995) and Callen (1994) nonprofits are subject to market competition, so donors are
efficient in their ex-ante selections.
10
risk associated to each business and managers act as decision-makers. Thus, a non-profit’s
decision system has the same general features that a for-profit’s system, that means, the
separation of decision management –initiation and implementation- from residual risk
bearing and then, from control –ratification and monitoring- of important decisions.
The agency problem in this context refers to the difficulties donors have in assuring that their
funds are not expropriated or wasted on unattractive projects (Shleifer and Vishny, 1997)6.
The clashes of interest between owners and managers presented in 1976 by Jensen and
Meckling seemed to be quite clear, however it is fairly atypical this relationship in a nonprofit
organization even though we have already defined the actual owners and managers and the
possible divergence of interests. Fama and Jensen (1983a) argue that for nonprofits, the
survival value of the decision system itself provides an assurance for donations to be
effectively used and not easily expropriated. However, there is every reason to believe that,
as in all other sectors of the economy, management does not inherently maximize the
objectives of either donors or society as a whole (Glaeser, 2001:3). Even though the manager
himself could be a volunteer, the agency problem sprung from the separation of owners and
decision-makers is persistent, because altruism –the concern for the welfare of others- does
not make an individual a perfect agent who performs some service on the behalf of the
principal. That means that the agency problems cannot be solved by instilling greater altruism
in people (Jensen and Meckling 1994, Jensen 1994). In fact, as trustees have no pecuniary
incentive to monitor the effectiveness of managers, the administrators might be expected to
have considerable discretionary power being able to divert resources for their own benefit
(Ricketts, 1994). For instance, series of financial scandals founded in US nonprofits have
generated calls for more accountability and oversight (Frumkin & Keating 2001).
6
They just studied for-profit firms however their agency relationships can be compared with those of nonprofits.
11
Then, we speculate if donors and volunteers do really care about how their resources are
allocated. The starting point to clarify this issue can be Fama and Jensen (1983b) explanation
of the dominance of nonprofit form in some areas. They hold that donations ‘per se’ do not
mean this supremacy because when those are applied directly to specific units of output, a
for-profit company will perceive them as a decrease in variable costs or as an enlarge output
as a result. In contrast, when some donors support the organization with general and
unrestricted donations, they will cause agency problems for any organization with residual
claimants –that is to say when activities are financed partly through donations and partly
through capital calling for returns-. In this kind of organization no contract defining the share
of residual claimants in net cash flows will guarantee donors that their resources are protected
form expropriation by residual claimants.
The solution Fama and Jensen (1983b) propose is to have no alienable residual claims and to
contract with donors to apply all net cash flows to output. In this way, the absence of residual
claims avoids the donor-residual claimant agency problem and at the same time it explains
the dominance of nonprofits in donor-financed activities. However, this solution motivate
other kind of questions as the likelihood that donors do not care about their funds once those
are in the non-profit, neither regarding their own economic rights over the output nor
concerning the exercise of the control rights in the decision-making process. In case of forprofit firms, control ends up in the managers but residual claimants try to protect their rights
to net cash flows using mechanisms of corporate control.
What happens in nonprofits where the owners do not have rights to net cash flows? We could
argue that managers have a good chance to take advance of their empowered position and
customers will be damaged given that they don’t have any influence to control managerial
behavior –in our study consumers will be those assisted by NGODs who, of course, do not
12
have a chance to give an opinion about the service provided-. However, the question related
to the potential managers’ opportunism and the potential donors’ control have to be analyzed
considering two important features of donor and consumers:
First, as Fama & Jensen (1983b) recognize that the absence of alienable residual claims in
nonprofits does not mean that residual risk –defined as the risk of the difference between
stochastic inflows of resources and promised payments to agents- is not borne. When net cash
flows are used to expand outputs or to lower the prices of outputs, part of the risk of net cash
flows is borne by consumers –the individuals helped by NGODs without a chance to chooseand part by the factors –resources given by donors either money or time- used to produce the
outputs. Thus, even though customers do not seem to be able to monitor their service
providers, factor suppliers –donors- bear the residual risk of their resources allocation. It is
profitable for them supporting an efficient nonprofit because its output will reduce future
necessary investments to develop a project –meaning a save for the donors (see the criteria
for optimal investment decisions in nonprofits, Fama and Jensen 1985). This is one clue for
us to think that donors will actually worry about the final destination of their contributions.
Second, we have another reason to believe on donors and volunteers’ concerns about control.
Managerial opportunism –in the form of expropriation of investors or misallocation of
company funds- reduces the amount of resources that investors are willing to put up ex-ante
to finance a for-profit firm (Williamson, 1985; Grossman & Hart, 1986). Much of the subject
of corporate governance deals with constraints that investors put on managers to reduce the
ex-post misallocation and thus to induce investors to provide more funds ex ante. In parallel
to the for-profit firms, non-profit organizations survive by competing successfully for
customers and donations meaning the development of internal control mechanisms to assure
donors that the resources they provide are not easily expropriated by internal agents (Fama
13
and Jensen 1985). The process of ex-ante selection of the non-profit that the donor will fund
implies a concern regarding the use of his donation. Many previous researches have been
focused on the explanation of the donors’ preferences and the results show that donors have a
maximizing behavior when choosing which nonprofit they will support (Rose-Ackerman,
1996; Harbaugh, 1998; Marcuello and Salas, 2000; Okten and Weisbrod, 2000).
Therefore, we speculate on the subject of what are the mechanisms of control –formerly set
up in the for-profit field- which can be applied to the non-profit organizations and how
effective those mechanisms are.
3. MODEL AND HYPOTHESIS
Most of the previous work done related to this issue (Herman and Renz, 1999; Frumkin &
Keating 2001; O’Regan and Oster 2001; Preyra and Pink, 2001) establishes a direct
relationship between the performance of control mechanisms and the efficiency of the firm,
they all internally assume that the reason of this relationship to occur is that control
mechanisms avoid the opportunistic managerial behavior which usually leads to a destruction
of value. This paper is an attempt to give new light to the literature on this subject. We
propose a model in which non-profit efficiency is dependent both, on managerial behavior of
the managers and the control mechanisms used by donors. We include the relationship
between control mechanisms and managerial behavior as well (see figure 1).
ABOUT HERE FIGURE 1
14
3.1. Managerial Behavior
The free rider problem has been described in different contexts and with diverse
consequences in firm performance (Hoskisson, Hitt, Wan and Yiu, 1999). The managerial
objectives of strategy formulation are to direct resources to those business units that will
enhance future values (Bogue III and Buffa, 1986:11). Certainly the focal point of strategy is
to enhance economic value for the firm–to take the assets we have and increase their value
over and above what we paid for them. However, this main objective is not always driving
manager’s behaviors (Bogue III and Buffa, 1986:7).
This is the case when managers develop strategies trying to avoid excessive specialization
and thus, diversifying in activities that do not create value for the firm. We will focus our
study only on this concrete strategy as a clear example of the opportunistic strategies. Seen
through the eyes of agency theory, diversification results from the pursuit of managerial selfinterest at the expense of stockholders. Managers may follow diversification strategies
because their specific investments in human capital are not diversifiable. They may have the
incentive to pursue firm diversification, especially unrelated diversification, in order to
diversify their employment risk, so long as firm profitability does not suffer too excessively
(Hoskisson and Turk, 1990). They try to assure their positions with the firm by making
investments that require their particular skills via manager-specific investments (Shleifer and
Vishny, 1990a,b). Because firm size and executive compensation are highly correlated (Tosi
and Gomez-Mejia, 1990), managers also have an additional incentive to increase the size of
the firm by diversification to obtain higher levels of personal compensation (Hoskisson, Hitt,
Wan and Yiu, 1999). Other than unrelated diversification, R&D investments that create
higher levels of risk for managers and provoke reluctance from this last group to engage in
15
innovative activities, which, in turn, results in loss of competitiveness and lower performance
(Hoskisson, Hitt and Hill, 1993; Kochhar and David, 1996).
Even in non-profit firms, we know that their activities usually occur in areas highly correlated
with externalities, uncertainty, information asymmetries, adverse selection and consumer
trust (Frumkin and Keating, 2001:4). Those characteristics provoke that the managers select
those activities in which for-profit do not have interest to enter and participate and those that
are foreground for donors and contributors. Thus, there is possible to observe a confrontation
between managers’ strategies and philanthropist reputation of the firm. Moreover, taking into
account that salaries of managers in nonprofits are lower than for-profit firms the potential for
diversification strategies of managers are likely in order to signal their value as manager to
other sectors. Then, we specify this free rider behavior as follows:
H1. Managerial’ behavior of non-profit firms could turn their decisions to non valuable
diversification leading to a decrease in the organizations’ efficiency.
3.2. Donors’ Control Mechanisms
We have argued above that donors and volunteers –the owners of a non-profit organizationdo actually care about the purpose of their contributions and so they will need some
mechanisms of control to maintain the managers’ behavior between the limits of the logical
discretionary which can not be avoided.
Following Jensen (1993) there are only four control forces operating on the corporation to
resolve the problems caused by a divergence between managers’ decisions and those that are
optimal from society’s standpoint. These control mechanisms are on the one hand: external
16
control systems –capital markets, legal/political/regulatory system, product and factor
markets-, and, on the other: internal control system headed by the board of directors.
The external control systems for a for-profit organization can be extended to the non-profit
ones. The first external control mechanism –capital markets- provides one mechanism for
accomplishing change before losses in the product markets generate a crisis. Capital markets
analyze the economic and financial position of a firm whenever it comes to solicit resources
to back its investments. Prices assessing shares in a capital market can be considered the most
refined control system, they include inside them the management quality and the company
performance considering the contractual implicit and explicit relationships of the corporation
whenever it goes to a capital market to search for funds. The existence of an effective market
allows the unsatisfied investors to sell the shares and abandon the position in a firm. From a
theoretical point of view if capital markets worked efficiently any agency problem enclosed
in a contractual relationship between the participants could be neutralized, but in practice
there are many obstacles impeding their perfect running and reducing their efficiency to
control.7 When we refer to non-profit firms, the capital market is represented by the donor
market for donations. We assume donors’ efficiency, and what we are questioning now is the
efficiency of the market for donations, its freedom and transparency. We argue that donors
are free to give their money to the nonprofit they choose, however we can not conclude when
we refer to transparency due to the role that information asymmetry plays in the market for
charitable contributions (Akerlof 1970). Nonprofits are actively engaged in courting
supporters by pressing the importance of their mission, this positioning is a critical part of the
7
In connection with the weakness of capital markets is the conflict between shareholders and managers over the
payout of free cash flow –that is, cash flow in excess of that required to fund all investment projects with
positive net present values when discounted at the relevant cost of capital-. For a firm to operate efficiently and
maximize value, free cash flow must be distributed to shareholders rather than retained. However, this is
infrequent due to senior management who has few incentives to distribute the funds, and there exist few
mechanisms to compel distribution. Managers have incentives to retain cash in part because cash reserves
increase their autonomy vis-à-vis the capital markets. Large cash balances (and independence from the capital
markets) can serve a competitive purpose, but they often lead to waste and inefficiency (Jensen 1989).
17
giving process since it determines what information reaches donors as they make their
decisions on where to direct their funds. What kind of transparency can we expect if the ones
who ask for money are the same ones who provide information to the potential donors? We
can not trust on this mechanism as an efficient control.
Before going on with the rest of the external mechanisms we have to mention another system
that Jensen (1993) relates to the capital markets, the market for corporate control. Whenever
the previous executive board performance is not satisfactory there is a chance for a new
managerial board to overthrow the previous and get the control over the company, this
mechanism is a useful way to discipline the actual CEOs but the presence of indemnities –
golden parachutes- diminishes their effectiveness. Nonetheless takeovers can be appreciated
by the participants because they estimate that new board of managers will make better use of
the resources. Takeovers and buyouts both create new value and unlock value destroyed by
management through misguided policies (Jensen 1989). While the corporate control activity
of the 1980s has been widely criticized as counterproductive to American industry, few have
recognized that many of these transactions were necessary to accomplish exit over the
objections of current managers and other constituencies of the firm such as employees and
communities. Capital market and corporate control transactions such as the repurchase of
stock (or purchase of another company) for cash or debt creates exit of resources in a very
direct way (Jensen 1993). However, in the case of nonprofit firms, takeovers do not exist
(Ricketts, 1994; Glaeser, 2002), so neither can we can count on them to protect shareholders
from expropriation.
The legal/political/regulatory system is far too blunt an instrument to handle the problems of
wasteful managerial behavior effectively. Persistently the Government institutes a special
legislation to control fraudulences or a lavish use of resources, although the array of potential
18
opportunistic deeds is so wide that the laws are usually too universal and they need specific
handling in the Courts.
The competence in the product and factor markets is used to appraise the resources
administration of a business. The effectiveness of these markets depends greatly on the
competitive pressure they exert and their scope. The product and factor markets are slow to
act as a control force, but their discipline is inevitable –firms that do not supply the product
that customers desire at a competitive price cannot survive. Due to this tardiness, when
product and market disciplines take effect it can often be too late to save much of the
enterprise. Nevertheless, as it is hard to understand this market as an efficient control system
in for-profit firms, we can not take it as an effective mechanism of control in the case of
nonprofits because the final customer has no decision power at all to select those
organizations that better cover their needs.
The labor market is a specific type of factor market which has gain significance recently. The
labor market puts pressure directly on the company so as to force it to categorize and reward
its managers due to their competence. These markets where human capital is evaluated play
an important role in the monitoring and control task, especially the CEOs market. The CEOs
market promotes competition between them and allows the hiring of new managers to
discipline the old ones, this way it mitigates the latent agreements between previous
managers aimed at expropriating the owners. In practice the labor market is not as wellorganized as we would desire. In Spain this market does not exist for managers of for-profit
firms, we can not expect it works for non-profit organizations either.
We can conclude, as Jensen did in 1993, that with the shutdown of the capital markets and
the inefficiency of the other external systems as en effective mechanism for motivating
19
change, renewal, and exit, we are left to depend on the internal control systems to act to
preserve organizational assets (Jensen 1993).
The internal control systems include those that assure, from the inside of the firm, a correct
behavior of the participants in the contractual relationships. This mechanisms rule the clashes
of interest minimizing the contractual costs and watching for a competent assignation and use
of the available resources. Jensen (1993) only referred to the board of directors as the main
internal mechanism of control, however we will consider other internal systems.
The voting right belonging to the shareholders is the basic internal control tool, the annual
general meetings of shareholders –though the disperse proprietorship makes them poorly
effective- could become a helpful mechanism in case that some shareholders own a
substantial fraction of the capital. Directly related to this question emerges what Jensen calls
“active investors” –investors who hold large equity or debt positions, sit on boards of
directors, monitor and sometimes dismiss management, are involved with the long-term
strategic direction of the companies they invest in, and sometimes manage the companies
themselves. They arouse to recapture the lost value due to the absence of effective
monitoring. These investors overcome the costs of outdated legal restraints by purchasing
entire companies –and using debt and high equity ownership to force effective selfmonitoring- (Jensen 1989). Active investors are important to a well-functioning governance
system because they have the financial interest and independence to view firm management
and policies in an unbiased way. We can find some empirical studies about this issue in forprofit firms (Shleifer & Vishny 1986, McConnell & Servaes 1990, Shleifer & Vishny 1997),
but there are not pragmatic results for nonprofit organizations verifying that the existence of
an important private donor brings about a better monitoring. Then, we hypothesize:
20
H2: The presence of active investors in nonprofits can avoid potential managers’ free rider
behaviors.
As Jensen (1989) argues: “Institutional investors are remarkably powerless because they
have few options to express dissatisfaction with management other than to sell their shares
and vote with their feet”. However we can find other evidence supporting their power as an
effective internal mechanism of control because they have experience in monitoring the
managers with a low cost in for-profit firms (McCornell and Servaes, 1990; Andrés, 1995)
and non-profit organizations (Guerras, 1995; Okten and Weisbrod, 2000; Herman and Renz
1999; Frumkin and Kim, 2000). Pound (1988) proposes three hypothesis about the
corporative value and the percentage of participation of the institutional investors, the first –
hypothesis of control-efficiency- alluded to their experience to monitor managers at a low
cost, but the second –hypothesis of interest clashes- and the third –hypothesis of strategic
alignment- forecasted a negative relationship between institutional ownership and control due
to the cooperation between managers and institutional investors against the other
shareholders and the existence of other contractual relationships more important than the
fiduciary interests. The empirical analysis are contradicting in for-profit firms, but in nonprofit organizations the studies mentioned above seem to use this kind of investors as a way
to better police managers. Thus, we hold:
H3: The presence of institutional investors in nonprofits can avoid potential managers’ free
rider behaviors.
The board, at the apex of the internal control systems, has the final responsibility for the
functioning of the firm. It sets the rules of the game for the CEO; its job consists of hiring,
firing, and compensating the CEO, and providing high-level counsel. The problems with
corporate internal control systems start with the board of directors. Few boards in the past
21
decades have done this job well in the absence of external crises. This is particularly
unfortunate given that the purpose of the internal control mechanisms is to provide an early
warning system to put the organization back on track before difficulties reach a crisis stage
(Jensen, 1993). The reasons for the failure of the board are not completely understood but we
could cite some of them mentioned by Jensen (1993) such as: 1) board culture; 2) information
problems –the board of directors has access to the information through the CEO-, legal
liability; 3) lack of management and board member equity holdings –directors owning a part
of the equity in order to force them to care about their own interests not only on behalf of the
external shareholders-; 4) oversized boards –more than eight members is counterproductive-;
5) attempts to model the process after political democracy; 6) the CEO as chairman of the
board –how can the board of directors monitor the CEO if the chairman of the first coincide
with the CEO?. In nonprofit organizations there also exists a board of directors generally
named “board of trustees” and the analysis of its efficiency as a control system sets up the
central core of many specific nonprofit research (Ricketts, 1994; Herman and Renz, 1999;
O’Regan and Oster, 2001; Glaeser, 2001). Specifically we will focus on the size (Eisenberg
et al. 1998; Jensen, 1993; Yermack, 1996; Andrés, Azofra and López, 2001) and the
composition and independence of its members (Baysinger and Butler, 1985; Bhagat and
Black, 2000, Hermalin and Weisbach, 1988, 1991; Rosenstein and Wyatt, 1990, 1997;
Weisbach, 1998; Andrés, Azofra and López, 2001) following other authors who care about
the efficiency of the boards of directors in for-profit companies. All those arguments allow to
set the following hypothesis:
H4: The board of trustees is used in nonprofits to avoid potential managers’ free rider
behaviors.
22
Finally, we will include one more internal mechanism such as the legal nature –foundation or
association- of the organization because there comes out a clear difference between the way
each of them works not only in the tax field but in the way decision rights are defined
(Guerras 1995; Marcuello and Salas 1999; Salamon and Toepler 2000; Frumkin and Keating
2001). We hypothesize:
H5: The foundations opposite to associations avoid potential managers’ free rider behaviors.
3.3. Non-Profit Efficiency
The final hypothesis we presented in the model directly connects the performances of these
mechanisms on the organization’s efficiency and thus, on the value creation in non-profits. At
first sight this relationship can appear duplicating the previous two basic hypotheses because
origin and consequence are coincident. Nevertheless, we have decided to include it because
we are aware of its potential aggregated effects and our inability to compile all the possible
opportunistic strategies –we only take diversification as a common example in the literatureleading to a decrease in the efficiency. This argument allows us to hypothesize about the
relationship between internal control mechanisms and the efficiency:
H6: The presence of active investors allows to increases of non-profit efficiency.
H7: The presence of institutional investors allows to increases of non-profit efficiency.
H8: The board of trustees allows to increases of non-profit efficiency.
H9: The foundations opposite to associations allow to increases of non-profit efficiency.
23
There still remains a hidden complex question to solve, what to measure as non-profit
efficiency? Obviously, there is a problem linked to the valuation of non-profit results. The
absence of a revenue-maximizing’ objective difficult the choice of a good measure of value
creation. The interpretation of those results coincides with the one argued by P. Frumkin and
E. Keating (2001:25-26). They consider that the non-profit’ efficiency must be measured by
other indicators than costs as social welfare (Schwartz and Giba, 1999), health improvement
(Maier, 1999), invisibles costs of diseases (Durán, 1999). Those measures would allow, first,
to combine two concepts –managers’ effort and philanthropic reputation- and, second, to
evaluate nonprofits managers’ activities in the labor market.
However, as P. Frumkin and E. Keating (2001:25) argue this valuation is difficult to obtain
due to the complexity and long-term social benefits associated to the managers’ output.
Other, is hard to establish a causality between nonprofits’ programmes and the effects on
consumers-clients. It seems that the managers’ strategies have to be related to the search of
activities that created a competitive advantage above competence (Frumkin and Kim,
2000:18). We will use some of the measures introduced by the previous literature about the
question (Marcuello and Salas, 2000; Frumkin and Kim, 2000; Frumkin and Keating, 2001).
The most common one is the operational or administrative efficiency, as an example of its
weight we find the article of Frumkin and Kim (2000) questioning while efficiency is
recognized and rewarded by the private founders or, in contrast, they subsidize according to
the marketing campaigns which potency organizational missions –fundraising expenditures.
From this analysis, they suggest that economizing may not always be the best strategy in the
nonprofit sector. The second efficiency we use, the assignative one is not so well-known but
it is aimed to show the amount of donations assigned directly to the projects, if the first
measure was a sign of the unproductive effects of the administrative expenses, this is the
opposite side of the mirror, the productive results. And finally, we have handled the unit costs
24
for the donors of obtaining one unit of output (Marcuello and Salas, 2000). The origin of this
measure is the match of the supply and demand sides. While the other two measures only
take into account money donations, this one includes time donations –volunteers- too.
Likewise, when detracting the operational costs they allow for the volunteers in the office. In
their model the donations received by one organization are increasing with quality –positively
related to fundraising expenditures- and decreasing with the calculated price –negatively
related to fundraising expenditures as they implies less resources available for the provision
of the public good.
4. EMPIRICAL ANALYSIS
4.1. Sample
For our purposes, we select a sample of non-profit firms, which have some specific
characteristics, basically are Spanish non-profit organizations that provide aid to less
developed countries. Those firms are the most dynamic group among the non-profit Spanish
organizations with a total income that exceed 88,000 million pesetas (close to 500 million of
dollar). There is few empirical analysis of this kind in Spain (Marcuello and Salas, 2000) and
the present study tries to provide new microeconomic evidence on governance structure and
performance of a group of organizations in a country with social institutions quite different
from the Anglo-Saxon countries.
The model presented above will be tested with data from Spanish Non Governmental
Organizations for Development Aid (NGODA) for the period from 1995 to 1999. There are
over 100 organizations, most of them born in the past 10 years, whose main purpose is
summarized as follows: ‘To channel public and private resources in order to carry out
25
autonomous development projects in non-developed countries, complementing those carried
out by governments and international organizations. They also take actions in order to
inform and educate Spanish people about social and economics situation of third world
countries, and they act as lobby groups to influence government and political bodies in their
decisions about development aid’ (Zavala Matulic, 1994:215). The Spanish Law of
International Cooperation for Development expresses in the same manner the requirements
for an organization to be considered a NGDO (section 32 of the International Cooperation
Law 23/1998).
In 1992, 82 of the total NGODA were federated into a Coordination Unit and data on
activities and performance of such organizations started to be collected. From these data we
were able to obtain complete information for 92 federated organizations corresponding to
1999.
4.2. Variables
For each of the selected organizations we have information on all the variables listed and
characterized in Table 1 and Table 2. As we can see they are divided into three blocks –
managerial behavior, internal control mechanisms and efficiency- according to the model
introduced before, and one more group including the control variables used by the previous
literature.
The first set of variables -those related to diversification- incorporate three different measures
of this particular strategy, the number of countries, activities and population areas the
organization where the organization is involved. We have sum up all of them into one we
have called diversification (DIVERS). This variable has been calculated as a mean of the
three standardized variables using the total number of countries (60), activities (12) and
population areas (7) to homogenize them.
26
The internal control mechanisms –the second block- are settled using the variables: legal
condition of the NGDO, the scope of the board of directors, the implication of the board into
the managerial areas and the relevance of institutional investors. By legal condition (LEGAL)
we understand the distinctiveness of an organization when it is a foundation –with a strict
legislative body- and we appraise it by a dummy as it is presented in the table 1. To asses the
performance of the board of trustees we use two different measures as other authors have
done before (Andrés, Azofra and López 2001). First, we quantify the scope of the board of
directors (BOARD) accounting for the number of members of the board of trustees in each
organization, and second, we measure the coincidence (COINC) between members of the
board and managers which is considered by Jensen (1993) as harmful for the organization
procedure. The last two internal control mechanisms are related to those considered by the
owners of the organization and they try to gather the effects of a important owner’ concerns
about the destination of its donations. These two variables are measured as logarithms of the
total amount of donations in the case of the institutional donations (LnSECIPI for the federal
government, LnCCAA for the regional government, LnEU for the European Union) and the
logarithm of the total sum of private donations divided into the total members of the
organizations in the case of private founders (LnPRIV).
The last group of variables crowds together the three measures –operative efficiency,
assignative efficiency and ‘unit cost’- that we have for the efficiency which have been
described before as ratios, they are named EFIC1, EFIC2 and EFIC3 respectively. The first
and the last ones illustrate a better performance as their value decrease, while the second one
shows an improvement of the results whenever its value increases.
27
Finally, we use age (AGE) as control variable, that is, the number of years since the
organization constitution as a characteristic considered to influence the board activities
(O’Regan and Oster 2001).
ABOUT HERE TABLE 1
According to the descriptive data of Table 2, during this period, in Spain, the NGDOs could
be established as foundations or associations. The most part of them are included in the
second category even though the Spanish government approved public benefits for the
foundations. The differences between them are enough reason to consider their belonging as a
good indicator of the level of internal control to managers. The age of those organizations is
almost 15 years on average. The board is composed by ten members on average and one of
them is usually part of the team of managers –in the most part of the NGDOs he is the CEO-.
Four managers on average are charged of one of the managerial areas and they work with 135
paid people and 264 volunteer people. The most part of the NGDOs operates in five
countries, four levels of the population and account for five activities.
The founding comes from private and public donations equally, that is about a fifty percent
comes from regional government (CC.AA.), federal government (SECIPI) and European
Union (EU) and about other fifty percent from companies and individuals. Among those
private donations, we find that NGDOs get money from ten thousand five hundred
memberships on average. The thirty two percent of those donations goes to projects and the
rest is distributed among operating costs as administration, publications, training and
fundraising, among other.
28
ABOUT HERE TABLE 2
4.3. Empirical Model and Methodology
The empirical model is formulated taking into account the behavioral process described in the
theoretical subsection. For each organization in the sample we have data on the variables
described in table 1. Therefore, we obtain the following functions,
EFICit = α+β1 MANAG it +β2 INTERNAL it +β3 AGE it +µ it
[1]
MANAG it = α+β1 INTERNAL it +β2 CONTROLit + µ it
[2]
where EFICit is a measure of the organization’ efficiency; MANAG it is the vector of managerial discretion
indicators of organization i; INTERNAL it is the vector of internal control mechanisms indicators of organization
i; AGE is the year of NGDO’ foundation variable ; and µ it is the error term.
We use panel methodology for the reasons that Arellano and Bover (1990) argue. First, using
the panel makes it possible to take into account the constant unobservable heterogeneity or, in
other words, the specific characteristics of each company –management style and quality,
market perception, business strategy, etc. –which distinguish them from other companies and
which are sustained over time. Second, the dynamism of the panel makes it possible to
examine –according to function [1]- response processes over time and to observe how the
presence of active investors or institutional ones (SECIPI, European Union and Autonomic
Communities), the legal form (foundation or association) and the characteristics of the board
of trustees (size and coincidence of directors with managers) affects firm efficiency and to be
able to test contemporaneous and lagged relationships among these variables. When we refer
29
to function [2] what we test is how the existence of internal controls have an effect on the
managerial behavior.
Panel data methodology shows the dichotomy between the use of fixed effects and random
effects models. The first makes it possible to avoid the adverse information of the latent fixed
effects correlated with the variables included in the model by transforming them and
guarantees consistent estimates. The second, more appropriate in the absence of correlation
between the fixed effects and the variables of the model, makes it possible to obtain more
efficient estimators by means of a breakdown of the different components of the residual
variance, yet assumes that the variables are random and that they are not correlated with the
explanatory variables (Andrés, Azofra and López, 2001).
5. RESULTS
The first equation to be estimated is [1], where managerial behavior variables include
diversification and internal control mechanisms variables include legal form, scope and
implication of the board and active and institutional investors. The dependent variable will
change according to the measure of efficiency and we take logs for the variables PRIV,
SECIPI, CCAA and EU.
The Table 4 shows the results of estimating the model when the dependent variable is EFIC1,
EFIC2 and EFIC3. The first three columns of the table show the parameters estimated when
EFIC1 is the dependent variable and including sequentially the institutional investors
SECIPI, CCAA and EU. Then, we present the estimation with EFIC2 in the following three
columns and finally, we introduce the estimation for the ‘unit cost’ (EFIC3). The goodness of
fit of the model is higher when we use as measure for the efficiency EFIC3 and the variables
30
explaining the NGDO’ efficiency differ slightly from the other two measures of the
efficiency.
ABOUT HERE TABLE 4
For the dependent variable EFIC1, the coefficient of DIVERS is positive and significative
which indicates that the strategy of diversification creates value for the NGDO. We have to
recognize that this result represents a contradiction from the observed relationship for the forprofit organizations. However, there are other theories that predict this positive relationship
between some kind of diversification and value creation. Thus, is necessary to go beyond the
diversification strategies for the non-profit organizations. The sign and significance
coefficient holds when we introduce the other two variables LnCCAA and LnEU. The
variable AGE is also related with EFIC1 and the relationship implies that NGDO efficiency
diminishes as time elapses. This coefficient is not significative when we include the variable
LnCCAA and instead the variable BOARD explains that an important number of members in
the board reduces the NGDOs efficiency, this result is also opposite to our predictions from
the agency theory. The result can be explained as the creation of enormous costs with an
excessive number of members on the board.
When EFIC2 is regressed using the same variables, the coefficient of DIVERS is positive and
significative. Other than managerial behavior, the variable BOARD still represents a
significative internal control mechanism and the relationship with the assignative measure of
efficiency coincides with the previous panel analysis. Finally, for the EFIC3, the coefficient
of LnSECIPI is negative and significative, which indicates that the federal government
31
controls for the ‘unit cost’ when donate to the NGDOs. This coefficient does not hold for
LnCCAA and LnEU. However, the coefficient of the variable BOARD changes its sign, that
means it explains that an important number of members in the board increases the NGDOs
efficiency.
The second equation to be estimated is [2], where the dependent variable the managerial
behavior variables including diversification and the internal control mechanisms variables
include legal form, scope and implication of the board and active and institutional investors..
ABOUT HERE TABLE 5
The Table 5 shows the results of estimating the model when the dependent variable is
MANAG. These results do not show any relationship between the internal control
mechanisms applied by donors and the diversification strategy developed by the NGDO. We
observe that the only significative coefficient is the one related with AGE.
6. CONCLUSIONS
M. Jensen and W. Meckling in their seminal work of 1976 introduce the agency theory as a
framework for the study of corporate governance in for-profit organizations. Latter, in 1983,
E. Fama and M. Jensen expand the agency model to the nonprofits in order to give an
alternative explanation to the question: why do non-profit organizations exist?’. The ideas
developed in their articles not only answered the issue of non-profit survival but also
32
illustrated its internal structure. However, the postulates of the agency theory have hardly
ever been used in the research of non-profit governance.
In this paper, we make an attempt to extend the results of M. Jensen and W. Meckling (1976)
model to the non-profit organization’s governance. Essentially, we develop a model in which
internal control mechanisms are used by donors to avoid managerial expropriation of their
resources leading to increases in non-profit efficiency. The results show that the predicted
hypothesis do not completely verify. In fact, the NGDO diversification strategies do not seem
to harmful for their performance, as opposite, those strategies are positively related with
NGDO efficiency. Other, the effect of the board on the NGDO efficiency fluctuates
depending on the measures. On the one hand, increases in the number of members of the
board drive to improvements in the technical and assignative efficiency. On the other hand,
increases in the number of members of the board drive to higher ‘unit costs’. Finally, the
institutional investors control moderately NGDO performance.
Those ambiguous results motivate to move forward in the agency theory to explain
nonprofits’ governance. First, we consider necessary to introduce endogeneity into the
relationship between efficiency and internal control mechanisms, as the agency researchers in
the for-profits have been exploring recently. Second, we want to explore in depth the
differences between foundations and associations as an internal control mechanism taking
into account the lack of significancy of this variable on the efficiency. Third, we can account
for the optimum level of the members in the board to achieve the ‘best’ level of performance
using a non linear relationship between the size of the board and the performance. Finally, we
would like to achieve a better measure of efficiency which compile a wider set of NGDO’
strategic factors other than the financial ones.
33
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45
FIGURES AND TABLES
FIGURE 1. Model and hypothesis
CONTROL MECHANISMS
EXTERNAL
H2, H3, H4, H5
MANAGERIAL
BEHAVIOR
INTERNAL
H6, H7, H8, H9
H1
EFFICIENCY
46
TABLE 1. Variables
VARIABLES
DEFINITION
Mean (number of countries, number of activities, number of
Diversification
population areas) (*) (DIVERS)
Legal condition
1: foundation, 0:association and other institutions (LEGAL)
Scope of the board
Number of members in the board of directors (BOARD)
Number of members in the board of directors that are also
Implication of the board
part of the managerial team (COINC)
Internal Control
Active
investors
Mechanisms
Total private donations / number of members (LnPRIV)
Total SECIPI donations (LnSECIPI)
Institutional investors
Total CC.AA. donations (LnCCAA)
Total European Union donations (LnEU)
Technical efficiency
Operating costs / total costs (EFIC1)
Assignative
efficiency
Costs of projects / total income (EFIC2)
Efficiency
Total income (**) / (total income-operating costsUnit cost
volunteers in office (***))(EFIC3)
Control
Age
[Yeari]-Year of foundation (AGE)
variables
(*) The mean is calculated using the standardized variables of the raw variables –number of countries, number
of activities and number of population area- using the total amount of countries (60), activities (12) and
population areas (7).
Managerial
behavior
(**) Total income is obtained as the sum of monetary donations, public subsidies and the monetarized value
of time donations
(***) Each volunteers/year it is assumed that works 960 hours (part-time job) with an estimate cost per hour of
3264 pesetas in 1995 and is accounted for the IPC (consumption price index) in the following periods. These
values are representative of working time and labor costs in Spain during this period.
47
TABLE 2. Descriptive statistics of variables
Mean
Std Dev
Minimum
Maximum
Sum
Variance
Skewness
Kurtosis
EFIC1
0.13672
0.15793
0
1
32.94847
0.024941
2.68704
8.51926
EFIC2
0.84007
0.21082
0
1.68535
202.45695
0.044447
-0.84432
3.78121
EFIC3
2.7102
7.19025
1
96.27239
653.15735
51.69964
10.78844
130.03373
LNUE
5.33244
7.85236
0
21.39116
1285.117
61.65961
0.88463
-1.13302
LNCCAA
15.39891
5.71944
0
19.89659
3711.1362
32.71202
-2.10371
2.85277
LNSECIPI
12.05892
8.46139
0
19.99346
2906.1999
71.59515
-0.66408
-1.49761
LNPRIVUN
11.00586
2.47588
0
19.45169
2652.4126
6.12997
-0.86181
6.31582
BOARD
10.10996
6.27838
3
52
2436.5
39.41807
2.43522
9.39457
COINC
0.37892
0.35798
0
1
91.31888
0.12815
0.5925
-0.98819
DIVERS
0.39632
0.16985
0.022222
0.86905
95.5127
0.02885
0.27592
-0.26309
AGE
12.60166
8.42955
1
42
3037
71.05733
1.87485
3.55725
LEGAL
0.099585
0.30007
0
1
24
0.090041
2.69115
5.28609
48
TABLE 3. Correlation of variables
EFIC1
EFIC2
EFIC3
EFIC1
1
EFIC2
-0.6879
1
EFIC3
0.10274
0.14213
LNUE
LNUE
LNCCAA
LNSECIPI
LNPRIV
BOARD
COINC
0.0228 -0.031845 -0.031107
LEGAL
1
-0.22465
0.1042
-0.26084
0.0040787
1
LNSECIPI
-0.050671
0.029521
-0.17315
0.30306
0.14998
1
LNPRIV
0.00058861
0.17602 -0.014847
0.089111
1
BOARD
0.10301
0.07088
-0.089657
-0.21697
1
-0.2488 -0.047082
-0.27169
-0.13336
0.10029
0.031659 -0.074748
-0.16722 -0.072954 -0.0051045
-0.010552 -0.015005
AGE
1
LNCCAA
COINC
DIVERS
0.11829
DIVERS
-0.33099
0.21118
-0.11413
0.21436
0.25067
0.10557
0.15859
AGE
0.11266
-0.07279
0.01438
0.15264
-0.43611
0.014442
0.080681
LEGAL
0.029383
-0.03532 -0.060661
0.016263
0.047325
0.12169
1
0.12422 -0.21786
1
0.035944 -0.11227 0.062881
0.042755 0.0030101 -0.22022
1
0.09887 -0.025433
1
49
TABLE 4. Parameters estimation of equation [1]
Dependent variable
C
EFIC1
EFIC2
EFIC3
0.171619
(2.86478)**
0.154275
(2.69145)**
0.193026
(2.999590) **
0.832510
(9.634450) **
0.832016
(10.035900) **
0.794403
(8.510560)**
8.662530
(3.696280) **
6.459950
(2.865900)**
-
-0.360238
(-5.351090)**
-0.36938
(-5.46259)**
-0.336683
(-4.836510)**
0.343964
(3.690780)**
0.351484
(3.752720)**
0.319279
(3.296210)**
-2.068860
(-0.725876)
-1.594080
(-0.551767)
1.398360
(0.311547)
PRIV
0.005823
(1.456640)
0.005479
(1.369380)
0.005812
(1.457480)
-0.004064
(-0.686396)
-0.003711
(-0.625330)
-0.004031
(-0.682560)
-0.201488
(-1.462590)
-0.189628
(-1.360600)
-0.133984
(-0.869451)
LnSECIPI
-0.001246
(-0.992662)
-
0.000006
(0.003214)
-
-
-0.147380
(-3.057960)**
-
-
LnCC.AA.
-
-
-
-
0.002559
(0.888156)
-
-
-0.000836
(-0.009089)
LnEU
-
0.001580
(1.191970)
-
-0.001224
(-0.635563)
-
-
-0.017436
(-0.355325)
-
BOARD
0.003462
(1.937080)
0.003382
(1.892380)
0.003705
(2.084030)*
-0.005725
(-2.316570)*
-0.005664
(-2.297790)*
-0.005918
(-2.399480)*
-0.175500
(-2.178450)*
-0.178199
(-2.181670)*
-0.230760
(-1.822970)
COINC
-0.021015
(-0.672555)
-0.010122
(-0.323832)
-0.016919
(-0.550957)
0.003861
(0.086929)
-0.001384
(-0.031222)
0.005566
(0.127816)
2.092060
(1.755020)
2.353480
(1.945060)
2.182210
(1.572960)
LEGAL
0.029242
(0.803101)
0.028092
(0.774749)
0.026322
(0.731806)
-0.038945
(-0.777159)
-0.040380
(-0.809498)
-0.038788
(-0.779476)
-0.271351
(-0.155197)
-0.692599
(-0.392677)
0.586703
(0.135178)
AGE
0.003103
(2.128160)*
0.002942
(2.01056)*
0.002324
(1.485210)
-0.002531
(-1.327140)
-0.002388
(-1.248950)
-0.001739
(-0.832756)
0.039441
(0.496993)
0.051435
(0.640421)
0.108015
(0.367702)
241
241
241
242
242
242
243
243
243
-
-
-
-
-
-
-
-
0.834651
0.399350
(0.0000)
(0.1035)
0.400161
(0.0000)
(0.1015)
0.395160
(0.0000)
(0.0549)
0.230458
(0.0057)
(0.4101)
0.230314
(0.0063)
(0.2854)
0.526033
(0.0067)
(0.3744)
0.647927
(0.0000)
(0.6938)
0.637452
(0.0000)
(0.6701)
(0.0000)
(0.0145)
DIVERS
n
Within (fixed effects) estimates:
R-squared
Variance components (random
effects) estimates:
R-squared
F test of A,B=Ai, B (p-value)
Hausman test (p-value)
-0.002623
(-1.277220)
Note: t-values in brackets. **, *, indicate significantly different from zero (two tails test) at 1% and 5% respectively.
50
TABLE 5. Parameters estimation of equation [2]
Dependent variable
PRIV
LnSECIPI
LnCC.AA.
LnEU
BOARD
COINC
LEGAL
AGE
n
Within (fixed effects) estimates:
R-squared
Variance components (random effects)
estimates:
R-squared
F test of A,B=Ai, B (p-value)
Hausman test
DIVERS
0.00214
(0.760586)
0.00167
(0.159817)
-
0.00217
(0.773714)
-
0.00188
(0.672972)
-
-
-2.05E-04
(-0.089064)
-0.012818
(-0.506352)
0.010319
(0.129731)
0.038886
(8.76529)**
8.96E-04
(0.904352)
-3.12E-04
(-0.135803)
-0.011412
(-0.451198)
0.010733
(0.135334)
0.038791
(8.9547)**
0.00247
(1.48571)
-6.06E-04
(-0.263088)
-0.015987
(-0.634338)
0.011102
(0.140629)
0.038656
(8.96446)**
243
243
243
-
-
-
0.900859
(0.0000)
(0.0000)
0.901380
(0.0000)
(0.0000)
0.902280
(0.0000)
(0.0000)
Note: t-values in brackets. **, indicate significantly different from zero
(two tails test) at 1%.
51