SOCW 6070 WK 9 Discussion 1: Funding through Grants
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Administration & Society Volume 41 Number 2
April 2009 158-184 © 2009 SAge Publications
10.1177/0095399709332298 http://aas.sagepub.com
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Author’s Note: Please address correspondence to Kelly LeRoux, Department of Public Administration, University of Kansas, 1541 Lilac Lane, 323 Blake Hill, Lawrence, KS 66045; e-mail: [email protected].
Managing Stakeholder Demands Balancing Responsiveness to Clients and Funding Agents in Nonprofit Social Service Organizations Kelly LeRoux University of Kansas, Lawrence
Nonprofit social service organizations face unique challenges in attending to the needs of their various stakeholders. This article uses data from a sample of nonprofit organizations in Michigan to examine how well nonprofits man- age multiple stakeholder demands. Findings indicate that nonprofits gener- ally balance organizational time and attention to the needs of both clients and funding agencies. However, a small percentage of nonprofits devote dispro- portionate time to funding agencies at the expense of client-related activities. Factors that increase this likelihood include financial dependence on for- profit corporations, a racial mismatch between the board and agency clien- tele, and board dominance by economic elites.
Keywords: nonprofit governance; accountability; responsiveness; non- profit stakeholders; resource dependence
As nonprofits theorists have frequently observed, third sector orga-nizations occupy a precarious place in the American political and economic landscape, situated somewhere in the middle of the market and the state (Salamon, 2002 ; Weisbrod, 1988). Their public service missions cause nonprofits to share a likeness with governmental organizations, and this likeness has become more pronounced in recent years as nonprofits have adopted increased accountability requirements to fulfill their roles as contract partners of the state (Dicke & Ott, 1999; Kramer, 1994; Romzek & Johnston, 1999). Yet, nonprofits are private enterprises and they display unmistakable business sector tendencies in their quest to sustain themselves
LeRoux / Managing Stakeholder Demands 159
financially. Many have noted that nonprofits are becoming more business- like, particularly in their revenue-generating strategies as earned income continues to rise as a share of nonprofit funding (Independent Sector, 2002; Ott, 2001; Weisbrod, 1998).
This tension between the inherent public service motives and market- like survival impulses of nonprofits is particularly prominent within (and problematic for) social service organizations. Although social service organizations depend heavily on government,1 they also rely on philanthropic foundations, individual donors, for-profit corporations and increasingly, on client service fees as sources of income. These funders constitute critical groups of nonprofit stakeholders. Nonprofits are challenged to fulfill the demands of these different stakeholder groups, as well as those of the clients they serve. Although the need to demonstrate responsiveness to multiple stakeholder interests is not unique to nonprofit organizations, it can create an incentive for organizations to devote more time and attention to some stakeholders than others. Although fulfilling the requirements of their funding agents and serving the interests of their clients are generally not incompatible organizational objectives for nonprofits, a potential dilemma for responsiveness to client interests arises when catering to current and prospective funders consumes a disproportionate share of time and attention in the governance agenda. Nonprofit organizations in particular are confronted by hard choices in time allocation because they typically operate with fewer staff and smaller staff-to-workload ratios than public and for-profit organizations (Light, 2002).
This article draws on the theory of stakeholder management and on findings from the corporate governance literature to examine the stakeholder orientations of nonprofit social service organizations. Two models of stakeholder orientation are recognized in this literature: (a) the normatively oriented, intrinsic stakeholder commitment model and (b) the instrumentally motivated, strategic stakeholder management model (Berman, Wicks, Kotha, & Jones, 1999). The former model projects governance relationships with stakeholders to be based on “normative, moral commitments rather than a desire to use stakeholders solely to maximize profits” (Berman et al., 1999, p. 492). This model has until recently, functioned as the dominant paradigm in stakeholder management research. The latter model is grounded in rational choice logic and suggests that organizations adopt an instrumental stance toward stakeholders in an attempt to maximize financial gains and suggests they serve other stakeholder interests only as a means of achieving that end.
As private enterprises with public serving missions, nonprofits are widely assumed to conform to the intrinsic commitment model, but it raises
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an interesting and timely set of empirical questions about the extent to which this assumption is true. To what extent has an instrumental stakeholder orientation manifested among nonprofit social service organizations? What factors help explain the adoption of an instrumental orientation by nonprofits? Instrumental orientation is examined in this analysis through a measure constructed from a series of survey questions in which nonprofits report the amount of organizational time spent on activities associated with fund development as excessively high and simultaneously report the frequency of time spent on client activities as excessively low. In light of public organizations’ roles as major stakeholders of nonprofits, a critical question arises as to whether government revenues have had the unintended effect of promoting an instrumental orientation within nonprofits.
These questions have important implications for nonprofit accountability, for government–nonprofit contracting, and for the responsiveness of third party agents to client interests. Clients of nonprofit social service organizations are often vulnerable citizens who lack the information, ability, or luxury of the “voice” option or “voting with their feet” in the same way customers in the for-profit service market might (Weisbrod, 1988). Nonprofits are generally thought to make preferable contract partners for government because they are less opportunistic and more trustworthy than for-profit firms (Hansmann, 1980), and there is some evidence suggesting this may the case (Marvel & Marvel, 2007; Weisbrod & Schlesinger, 1986). However, the documented growth in entrepreneurial practices adopted by nonprofits, increased prevalence of nonprofit executives trained in business management, and increased need for nonprofits to compete in the marketplace with for-profit firms (Ott, 2001) calls for a closer look at the issue of how nonprofits orient themselves toward their key stakeholder groups.
Stakeholder Theory and Nonprofits
Stakeholder theory is largely a normative organizational theory suggesting that managerial attention to all stakeholder interests is critical to the firm’s success (Freeman, 1984). As Jones and Wicks (1999) describe stakeholder theory “the interests of all stakeholders have intrinsic value, and no set of interests is assumed to dominate the others” (p. 207). essentially, stakeholder theory implies a need for organizations to expand the domain of corporate governance to be both sensitive and responsive to all stakeholder interests and not simply those of shareholders. This normative approach to stakeholder
LeRoux / Managing Stakeholder Demands 161
theory inspired by Freeman has clearly served as the prevailing analytical framework upon which most stakeholder studies have been based (Berman et al., 1999; Clarkson, 1995; Donaldson & Preston, 1995; evan & Freeman, 1993; Freeman & evan, 1990; Jones & Wicks, 1999).
given that nonprofits do not have shareholders who stand to profit from the organization’s activities, stakeholder theory has been scarcely applied to nonprofit organizations and only in a descriptive sense (Abzug & Webb, 1999; Keating & Frumkin, 2003). This lack of scholarly attention to how nonprofit organizations manage their stakeholders may be attributed to the fact that nonprofits do not have shareholders who own a personal financial stake in the organization. If nonprofits do not have shareholders, then who are the stakeholders of nonprofit organizations? Institutions and individuals that finance the work of nonprofits, such as government, private charitable foundations, corporations, clients, and individual citizens who donate, comprise key groups of nonprofit stakeholders. These actors finance the work of the organization, and may therefore play a critical role in shaping nonprofits’ stakeholder management practices. As a condition of both receiving and maintaining contracts, grants, and other forms of financial support, nonprofits are required to demonstrate their accountability through financial audits and various forms of performance reporting. Some organizations have embraced highly sophisticated performance measurement programs and use the results as a marketing tool in promoting their services to prospective funders (Ott, 2001). However, organizations vary in the amount of time they allocate to these and other activities related to interactions with funders.
In addition to funders, clients who function as the organization’s “customer” base represent another key stakeholder group to which the organization must allocate time, both in the form of direct services and in indirect governance activities that support client interests, such as advocacy, client education, and linkages to community institutions. Although they provide the justification for organizations’ existence, clients are far less powerful than funders as a stakeholder interest. On the whole, clients are likely to be less influential in shaping organizational resource allocation decisions, particularly if they do not pay for the services they receive.
Like for-profit firms, private nonprofit organizations are governed by boards of directors that are fundamental to organizational governance. Boards are the policy-making and oversight body of nonprofit organizations, and their influence on organizational priorities and resource allocation
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decisions is often substantial (green & griesinger, 1996). Board members may play a particularly salient role in shaping nonprofits’ stakeholder orientation, because they are uniquely positioned at the nexus of internal and external demands made on the organization. Board members do not influence the organization’s resource allocation decisions from outside of the organization as funders do, or from “below” the organizational governance level as clients do, but rather they help shape organizational management through their authoritative role in internal decision making. each of these groups—funders, clients, and boards will be examined in greater depth below along with hypotheses about the predicted effect of each on organizations’ stakeholder orientation.
Models of Stakeholder Orientation
Stakeholder orientation refers to how organizations manage their stakeholders through resource allocation decisions (Berman et al., 1999). Time is a critical resource that must be allocated among a number of organizational activities in order to accomplish the organization’s objectives. Organizational time allocation decisions have consequences for stakeholders. Two divergent views exist in the corporate governance literature about the ways organizations allocate time and attention to stakeholder groups. These divergent views form the basis for the two models of stakeholder orientation: the normative model (intrinsic stakeholder commitment) and the instrumental model (strategic stakeholder management; Berman et al., 1999).
As suggested in the preceding discussion of the theory, the normative approach that originated with Freeman’s (1984) work has served as the prevailing theoretical model in stakeholder management research. The intrinsic stakeholder commitment model is grounded in the corporate ethics literature and views values and ethics as being inextricably linked to strategy and organizational behavior. This model speaks to the frequently cited argument made by Freeman and gilbert (1988) that an organization must ask “what do we stand for?” when making organizational decisions (p. 70). The intrinsic commitment model suggests that organizations give equal attention to all stakeholder interests, or as Clarkson (1995) states, “the economic and social purpose of the organization is to create and distribute increased value to all its primary stakeholder groups without favoring any one group at the expense of others” (p. 112). This predominant model is thus a normative theory proposing the way that organizations should act, but proponents of this model also claim it to have descriptive utility (Donaldson & Preston, 1995; Jones & Wicks, 1999).
LeRoux / Managing Stakeholder Demands 163
However, a second view challenges the normative model as an inaccurate reflection of organizational behavior (gioia, 1999; Jawahar & McLaughlin, 2001). This alternative perspective draws on the resource dependence view of organizational behavior (Pfeffer & Salancik, 1978) which suggests that organizations seek to defend against environmental uncertainty through conscious attempts to manage their external dependencies. This forms the basis for a competing model of stakeholder management in which organizations can and do strategically place some stakeholder interests over others because financial performance (revenue growth) is contingent upon such a strategy. For example, Jawahar and McLaughlin (2001) argue that “organizations are likely to favor certain stakeholders depending on the extent to which they are dependent on those stakeholders for resources critical to the organization’s survival.” (p. 397). The instrumental model acknowledges that stakeholder management presents opportunity costs; devoting time to stakeholder interests that provide opportunities for financial gain may require trading off some time and attention to other stakeholder interests. Thus, organizations with an instrumental stakeholder orientation will systematically invest more time in activities that offer the potential for yielding financial gains for the organization.
The Budget-Maximizing Nonprofit Executive?
Can nonprofit leaders be motivated by financial gain, when the organizations they govern are, by definition, not-for-profit? The motivations of both public and nonprofit executives for financial gain are thought to be held in check by what Weisbrod (1977) termed the “non-distribution constraint,” referring the legal prohibition on public and tax-exempt organizations from distributing their profits to employees or board members. However, nonprofit organizations can and do, generate profits. Surplus revenues, interest and dividends on assets, and “unrelated business income” are legally permissible under the tax-exempt regulations, with the caveat that such forms of surplus income are reinvested into organizational programs and activities, broadly defined.
The nondistribution constraint suggests that nonprofit leaders would have no interest or incentive for attempts to procure more revenues for their agency because they cannot personally reap the rewards of financial gain. Yet in the same way Niskanen (1971) argued that program budget size functions as a proxy for bureaucratic utility, budget growth would serve the same utility function for nonprofit leaders. Niskanen suggested that public managers have personal goals that might be attained through maximizing
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discretionary budgets, and the same logic can be applied to nonprofit leaders. Whether in public or nonprofit organizations, larger budgets typically bring the benefits of power, prestige, enhanced reputation, productivity, additional staff, and ease of management (Niskanen, 1971). Frequently, it also brings the reward of increased salary for staff and organizational leaders. Indeed, in the case of nonprofit organizations, there is direct correlation between size of the organization and executive directors’ compensation (National Council of Nonprofit Associations, 2007). Therefore, larger nonprofits may be more likely to adopt an instrumental orientation than smaller and medium sized organization.
Predicting Orientation: Budgets, Boards, and Clients
Nonprofits are generally viewed as displaying an intrinsic commitment to all stakeholders, balancing organizational time commitments between current and prospective funders, and serving their “customers.” However, certain factors may enhance the likelihood that nonprofits will adopt an instrumental orientation, whereby the organization displays a severe imbalance in time commitments between funders and clients, favoring the former. Specifically, who governs the organization, and which mix of sources it relies on most for funding may have significant consequences for how organizations orient themselves toward stakeholders. The issue of nonprofit financing is examined first.
Nonprofit social service organizations rely on a variety of sources for their income, but their largest sources of funding are government, independent foundations, private for-profit corporations, client fees and other forms of earned income, and charitable contributions from individual donors (Independent Sector, 2002). Nonprofits vary widely, however, in their extent of reliance on this range of sources. Some social service organizations are solely dependent on government, whereas others rely entirely on client fees. Still others depend on a variable mix of revenues. Funds from government, private foundations, and corporations shape nonprofit behavior in distinctive ways because they represent institutional forms of support. As such, they have the power to embed their own desired values in the organizational practices of nonprofits they fund. However, the values transmitted to nonprofits by corporations will produce different organizational behavior than the values extended by government and independent foundations.
LeRoux / Managing Stakeholder Demands 165
Corporations
Corporations are a set of economic institutions defined by capitalist values of profit-seeking and market-based competition. Corporations serve as an important source of financial support for many nonprofit social service organizations. Corporate donations may be made directly, or channeled through a corporate foundation. In addition to cash gifts, corporations are frequent sponsors of special events, annual fundraisers, and provide several forms of in-kind support. grønbjerg (2001) has argued that nonprofit executives forge strategic alliances with corporations that serve the mutual economic interest of both parties. Nonprofits benefit from the wealth corporations have to offer, and corporations benefit from the large tax deductions they can claim for their contributions. Based on her research of child welfare and community development organizations, grønbjerg (2001) demonstrated how nonprofit executives formalize their alliance with corporations by appointing corporate leaders to serve on their boards of directors. In turn, this alliance serves strategic purposes for corporate executives. She suggests that “for corporate leaders, financial support of nonprofit organizations and membership on nonprofit boards are indirect opportunities to promote corporate interests and extend their sphere of influence” (grønbjerg, 2001, p. 222).
To the extent that nonprofits are reliant on corporate sponsorship, they may have an increased likelihood of becoming market-like in their own governance practices. Corporate funding may have the effect of transmitting capitalist values and business sector practices to nonprofits, especially among organizations that have forged strong alliances with corporate sponsors. Indeed, Lenkowsky (2002) has observed that some corporations have suffered public scrutiny for tying their nonprofit support too close to business objectives. Thus, the more heavily nonprofits rely on corporations for their financing, the more likely they are to adopt an instrumental stakeholder orientation.
Government
government represents the largest single source of support for nonprofits, accounting for approximately half of all revenues in the social services sector (Independent Sector, 2002). Like corporations, government also represents an institutional form of support to nonprofits. However, rather than the capitalist oriented values that corporations may impart, the values that get transmitted to nonprofits through government funding are public
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values. These values favor democratic participation, responsive service delivery, and equitable distribution of resources. Lester Salamon (1995) has argued that nonprofits, in their original voluntary state, suffer from inherent weaknesses of financial insufficiency, amateurism, paternalism, and particularism—tendencies to favor serving some clients and not others. Salamon’s partnership theory of government–nonprofit relations suggests that government sponsorship corrects for these inherent weaknesses by imposing rules and obligations on the part of nonprofits that accept government funding. government funding institutionalizes values of equity and responsiveness, promotes professionalism, and increases nonprofit accountability. Therefore, nonprofits more heavily funded by government are likely to demonstrate a greater balance in managing their stakeholder interests. Nonprofits will be less likely to adopt an instrumental orientation when they rely heavily on government, because public funding mediates instrumental tendencies in favor of a broader, more inclusive stakeholder management approach.
Foundations
Institutional philanthropy, embodied in independent and community foundations, (Lenkowsky, 2002) is another major source of revenue to nonprofit social service organizations. Foundations are private organizations, but unlike corporations, they are not-for-profit, and exist primarily to make grants to other nonprofits performing work that aligns with the foundation’s own mission or purpose. Thus, while they are private organizations, they are a part of the “public-serving” nonprofit sector (Salamon, 2002), which exists to promote the public interest rather than narrow, individualistic interests. Serving as financial intermediaries, foundations help to bridge the gap between private resources and public needs. Their role is to generate private funding, to manage wealth once it is accumulated, and distribute monies to other organizations in the sector. While they do not provide the largest source of revenue to social service organizations, foundations have been hailed as a very important source of financing for nonprofits because this form of revenue helps to ensure the independence and autonomy that the distinguish the nonprofit sector (Salamon, 2001). Indeed, many government grants made to nonprofit social service organizations are designed to fulfill specific programmatic objectives, whereas foundation grants typically carry fewer restrictions and less extensive requirements. Therefore, nonprofit social service organizations that rely heavily on foundation funds may be less
LeRoux / Managing Stakeholder Demands 167
likely to adopt an instrumental orientation. Foundation funding reinforces the public-serving disposition of social service organizations and affords agency leaders the time to devote attention to their full range of stakeholder interests, including those that fulfill client interests.
Individual Donors
In contrast to the way government, foundations, and corporate funding shapes nonprofit behavior by embedding specific values into organizational practices, direct contributions from individual donors take the shape of diffuse values and expectations. Yet, heavy reliance on individual donors may increase the likelihood of nonprofits adopting an instrumental orientation. Direct contributions from individuals represent a shrinking form of support for the sector, and have steadily declined as a share of social service organizations’ revenues over the last two decades (Independent Sector, 2002). As such, organizations that rely heavily on this form of support have become more market-like in their competition for donors. Individual donors are fickle in their choices about where to donate and how much they contribute, and thus their support is much less predictable as a source of income for nonprofits. As a result, nonprofits that rely heavily on private donations for their survival must invest a great deal of time and organizational resources attempting to sustain, and perhaps grow that base. To this end, nonprofit leaders engage in targeted appeals directed at individuals or small groups of wealthy citizens in the community who might become consistent, reliable supporters of the organization. When nonprofit leaders identify such individuals, they often attempt to formalize reliable donors’ commitment to the organization by inviting these individuals to serve on the board. In this way, nonprofits can bind well-off influential community elites to the organization, providing them with a voice in agency governance in exchange for their patronage.
Referring to one of the major pitfalls of reliance on individual charitable contributions, Salamon (1995) argued,
So long as private charity is the only support for the voluntary sector, those in control of the charitable resources can determine what the sector does and whom it serves . . . Not only is this situation undemocratic, but it can create a self-defeating sense of dependency on the part of the poor since it gives them no say over the resources that are spent on their behalf. (p. 47)
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Without the intermediary of a foundation to buffer them, nonprofit ser- vice agencies are more susceptible to the influences and demands of indi- vidual donors, and the potential exists for conflict between satisfying individual donors’ wishes and expectations, and adequately representing the interests of clients. Nonprofits are more likely to adopt an instrumental orientation when they rely heavily on individual donations, because this form of revenue is increasingly scarce, promoting competitive behavior among nonprofit leaders, and creating an incentive for them to satisfy indi- vidual donors’ preferences which have the potential to conflict with actual client needs.
Fees and Direct Payments
As another major source of revenue, direct payments, also represent dif- fuse values and expectations of the clients who pay the fees. However, when clients become paying customers, nonprofits have an added incen- tive to become more attentive their interests. If clients pay for their ser- vices, they are better positioned to make demands on organizational governance, particularly if they perceive problems in their level or quality of service. When clients become paying stakeholders, they comprise a more powerful contingent of organizational funders. This ensures their interests will be accorded a higher level of priority in the allocation of time and governance activities. Organizations that rely on client fees for a large proportion of their revenues are likely to become more responsive to cli- ent needs and increase their level of activity related to advancing client interests, and thus will have a decreased likelihood of adopting an instru- mental orientation. Based on this, the following testable hypotheses are proposed:
Hypothesis 1: Organizations will be more likely to adopt an instrumental orientation when they rely heavily on corporate contributions.
Hypothesis 2: Organizations will be less likely to adopt an instrumental orientation when they rely heavily on government revenues.
Hypothesis 3: Organizations will be less likely to adopt an instrumental orienta- tion when they rely heavily on foundation income.
Hypothesis 4: Organizations will be more likely to adopt an instrumental orientation when they rely heavily on direct charitable donations from individuals.
Hypothesis 5: Organizations will be less likely to adopt an instrumental orientation when they rely heavily on client fees.
LeRoux / Managing Stakeholder Demands 169
Nonprofit Boards
Boards may also play a critical role in shaping nonprofits’ stakeholder orientation. In studying the boards of several hundred for-profit organizations, Wang and Dewhirst (1992) found that board members feel a responsibility to respond to stakeholder expectations. As the policy-making and oversight body of the nonprofit organization, board members often have substantial influence in setting organizational goals and priorities, and in determining how resources will be allocated to meet those goals. However board members bring different values, disciplinary norms, functional expertise, and social connections to their board role, and thus there are likely to be differences of opinion when it comes to setting organizational priorities and making resource allocation decisions. Thus, the composition of the board may be critical to determining stakeholder management practices. Salamon (1995) describes one of the inherent weaknesses of the nonprofit sector as “philanthropic paternalism,” referring to the historical tradition of nonprofits to be governed by boards consisting of economic elites. Salamon (1995) argues that philanthropic paternalism is problematic for clients because elite-dominated boards fail to represent client interests. Salamon’s paternalism argument suggests that when a large proportion of the board consists of economic elites, such as lawyers, business entrepreneurs/executives, and financial experts, nonprofits may be more likely to adopt an instrumental orientation. Heavy representation on the board by economic elites may serve as a mechanism through which business sector values become embedded in a nonprofit organization’s values and priorities.
Moreover, research conducted by Daley and Marsiglia (2001) suggests that economic elites acting as board members prefer the status quo in their governance authority and are somewhat resistant to increasing board diversity. These authors studied five United-Way funded organizations that had boards consisting largely of White, male, business professionals and found that members were mostly resistant to the idea of increasing social diversity on the board. Study participants perceived board diversi- fication as burdensome, and were frustrated at the lack of expertise that “diverse” members bring to the tasks of policy setting and fundraising. Board members in the Daley and Marsiglia study tended to assume a lack of competence among prospective board members who met one or more of the following descriptions: low-income, clients, young, those without prior board experience, and “new” board members. Daley and Marsiglia (2001) conclude,
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These negative views about diversity appear to be based on implicit assumptions that people of color, people of lower socioeconomic status, or clients, are less capable or less able to perform at the level at which traditional board mem- bers perform. (p. 301)
However, the reverse is implied by Salamon’s paternalism argument. When clients are represented on the board, the organization is more likely to be responsiveness to client interests. This argument can be made not only by virtue of the decision to allow for client participation on the board,2 but also in the “client perspective” these persons bring to organizational gover- nance. Membership on the board affords clients access to the organizational power structure and a legitimate voice in organizational policy making. Therefore, organizations should be less likely to adopt an instrumental orientation when clients are represented on the board.
Racial diversity is another aspect of board composition that might influ- ence stakeholder orientation. The theory of representative bureaucracy, although a theory of public organizational behavior, may also be instructive for explaining nonprofit organizational behavior. empirical research on active representation has supported the notion that organizations more demographically representative of their clientele are more inclined to deliver programs and services consistent with the interests of those clients (Meier, 1993; Meier & Bohte, 2001; Sowa & Selden, 2003). To the extent that this public organization theory might also hold true for nonprofits, it can be posited that organizations may be more susceptible to adopting an instrumentation orientation when their board fails to reflect the demographics of organizational clientele. There is no empirical research systematically examining the extent to which the racial composition of nonprofit boards reflects organizational clientele, or how patterns of board/clientele matching influence organizational behavior. However, Daley and Marsiglia (2001) found that boards with greater diversity tend to have more conflicting views surrounding organizational responsibilities of fundraising and delivery of services. While this literature on the effects of nonprofit board composition is somewhat limited, it suggests the following hypotheses:
Hypothesis 6: Organizations will be more likely to adopt an instrumental orien- tation when there is a large racial representation mismatch between the board and the agency’s clientele.
Hypothesis 7: Organizations will be more likely to adopt an instrumental ori- entation when economic elites comprise a large proportion of the board.
LeRoux / Managing Stakeholder Demands 171
Hypothesis 8: Organizations will be less likely to adopt an instrumental orienta- tion when agency clients are represented on the board.
Methodology
Probit analysis was used to estimate the likelihood of nonprofits adopting an instrumentally oriented stakeholder management approach, whereby the organization disproportionately allocates more time to current and prospective funders than to client activities. Instrumental stakeholder orientation is modeled as a dichotomous variable, 1 = the organization displays an instrumental orientation, and 0 = organization does not display an instrumental orientation. Table 2 provides a detailed description of the coding and measurement for all variables, and descriptive statistics for each. The computation of the dependent variable and the model are discussed at greater length below, following a brief description of the data (Table 1).
Data
This analysis relied on survey data from a sample of 72 nonprofit social service organizations randomly selected from the Michigan Attorney general’s database of licensed charities.3 Table 1 provides a description of the types of organizations represented in this sample. The survey was
Table 1 Organizational Types
Primary Mission Percentage N
Youth services 18.1 13 Mental health 15.3 11 Domestic violence 6.9 5 Community development 8.3 6 Family planning 9.7 7 Food program 11.1 8 Housing/shelter 8.3 6 Job training 5.6 4 Senior services 9.7 7 Other 6.9 5 Total 100 72
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LeRoux / Managing Stakeholder Demands 175
administered by mail in three waves during the summer of 2004. The method for administering the survey conformed to the Total Design Method for survey research (Dillman, 2002) and yielded a total response rate of 60.4%. Thus, although the sample organizations may or may not be representative of nonprofits in other states, the sampling method combined with the response rate provide confidence that they are representative of the population of Michigan nonprofits. Because the surveys were addressed to executive directors, the nonprofit equivalent of a chief executive officer, it is assumed that these persons or a delegate in close proximity to this position completed the questionnaire. The responses are thus presumed to come from top leadership speaking to the practices and activities of the organization as a whole.
Model and Measurement
A model is tested that seeks to explain the factors influencing nonprofits’ adoption of an instrumental stakeholder orientation. Ten independent variables are included in the model: five sources of financial dependence, three board composition variables, a measure of organizational size,4 and a control variable for community diversity.5 Nonprofit social service organizations are hypothesized to have an increased likelihood of adopting an instrumental orientation when they rely heavily on foundations and corporations, when their boards are racially mismatched from organizational clientele, and when economic elites comprise a large proportion of the board.
A full description of the variable measurement is provided in Table 2 along with summary statistics for each. However, the calculation of the dependent variable warrants some discussion. The dependent variable was calculated from two separate scales measuring the amount of time organizations spend on activities associated with funders as stakeholders, and time spent on activities related to advancing client interests. executive directors report on a scale of 0 to 4, how much time the organization devotes to the following five activities: fundraising; measuring or assessing agency performance; reporting to funding sources; marketing, advertising, and public relations; and building and strengthening ties with people the agency depends on. An additive measure was created from these five variables assessing the extent to which nonprofits allocate organizational time to current and prospective funders. The reliability test for these five measures produced a Cronbach’s alpha of .747. The variable ranges from 0 to 20, and the average score is 12.8 on this measure.
176 Administration & Society
Respondents were also asked to indicate on the same scale, how much time the organization devotes to the following activities: educating clients about laws and regulations that affect them; helping clients to obtain government benefits or assistance; advocating before government for the needs of clients; linking clients to legislative offices or elected officials; educating clients about their rights. These five measures had an alpha of .889, and assess the extent of organizational time devoted to advancing client interests. The average score on this 20-point combined measure was 8.5.6 The dependent variable, instrumental orientation, was then created by selecting the cases simultaneously above a predetermined high point for the funder-related activities variable and below a low point for the client activities. These cut points were established at 15 or higher for funder-related activities, and 5 or less for client-interest activities. Thus, only those organizations scoring 15 or higher on time devoted to funding agents and 5 or less on time devoted to client interests, meet the definition for the dependent variable.
It is important to underscore the fact that nonprofits that meet the definition for this dependent variable are those that reflect extremes on both forms of activity. Raising revenue and representing clients are not mutually exclusive objectives of social service organizations. Both are legitimate activities for nonprofit social service organizations, and consistent with nonprofits’ missions of providing for the needs of society’s most vulnerable. However, in most cases nonprofits will balance the time they devote to these two stakeholder groups, consistent with the intrinsic commitment assumption about nonprofit stakeholder management. This analysis is concerned with explaining the factors that lead some nonprofits to adopt an instrumental orientation.
Findings
The first purpose of this analysis was to determine the extent to which an instrumental stakeholder orientation has manifested within the nonprofit social services sector. What proportion of nonprofit social service organizations displays an instrumental orientation? The descriptive statistics presented in Table 2 confirms that the number of instrumentally oriented nonprofits is relatively small. Approximately 17% or 12 of the 71 organizations in this sample fulfill the description for the dependent variable. This finding supports the assumption that social service organizations, for the most part, conform to the intrinsic commitment model of stakeholder management, in
LeRoux / Managing Stakeholder Demands 177
which governance time is distributed more equitably among various stakeholder interests.
Although it is a relatively small percentage of the sector, the reality that some nonprofit social service organizations demonstrate instrumental motivations in their stakeholder management practices is a curious and contradictory phenomenon that provokes further questions. What factors contribute to the adoption of an instrumental orientation by some nonprofit social service organizations? Results of the probit analysis are presented in Table 3. Although not all of the hypotheses are supported, the results suggest that reliance on particular revenue streams indeed shape nonprofits’ stakeholder orientation in predictable ways. Consistent with the hypothesis, corporate funding has a positive and statistically significant effect in shaping nonprofits stakeholder orientation. As nonprofits’ financial dependence on corporations increases, the organization has an increased likelihood of adopting an instrumental orientation. Foundation funding also has a statistically
Table 3 Probit Estimates of Instrumental Stakeholder Orientation in
Nonprofit Social Service Organizations
b SE z Score
Financial dependence government funding 0.015 0.029 0.52 Foundation support −0.143* 0.083 −1.71 Corporate funding 0.253** 0.109 2.31 Individual donations −0.057 0.063 −0.091 Fee income 0.037 0.032 1.15
Board composition Racial mismatch of board/clients 0.082** 0.039 2.07 elite representation 4.32* 2.57 1.69 Client representation −0.203 1.202 −0.17
Agency size Staff size −0.221* 0.131 −1.69
Community diversity Non-White
population 0.166* 0.089 1.86 Constant −18.73** 9.339 −2.01
Pseudo R2 = .6607 Log likelihood = −7.6867365 χ2 (df) = 29.93 (10)*** n = 71
*p < .10. **p < .05. ***p < .01.
178 Administration & Society
significant effect on nonprofits’ stakeholder management approach, decreasing nonprofits’ propensity for an instrumental orientation, as predicted. The hypothesis about government funding suggested that public revenues would also decrease the likelihood that nonprofits will adopt an instrumental orientation, but the results indicate that government funding neither increases nor decreases the likelihood of such behavior.
Financial dependence on individual donations is not a statistically significant factor, suggesting that the values and expectations of individual donors are too diffuse to shape nonprofits’ governing practices in any specific, substantial way. Client fee payments represent the second form of revenues from individual, as opposed to institutional sources. The hypothesis suggested that reliance on client fees would decrease nonprofits’ propensity to adopt an instrumental orientation. However, the findings reveal that reliance on client fees have no effect on shaping nonprofits’ stakeholder orientation.
Two of the three board governance hypotheses are supported by the findings. Among the most interesting is that the racial representation of the board has an effect on nonprofits’ stakeholder orientation. The hypothesis suggested that when boards become more racially mismatched demographically from the clients they serve, the will be more likely to adopt an instrumental orientation, and this hypothesis is supported by the findings. When a racial representation mismatch exists, nonprofits have an increased likelihood of becoming instrumentally oriented. A second governance hypothesis suggested that when nonprofits’ boards are comprised of a larger proportion of economic elites the organization will be more likely to adopt an instrumental orientation and this proposition is also supported by the data. elite representation on nonprofit boards is a positive, statistically significant predictor of an instrumental stakeholder orientation. Client representation on the board appears to make no difference in shaping nonprofits’ stakeholder orientation. Client representation was hypothesized to decrease nonprofits’ propensity for adopting an instrumental orientation, and although the sign on the coefficient is indeed negative, it is not statistically significant.
Agency size also has a statistically significant effect on nonprofits’ stakeholder orientation, but in the reverse direction than the agency size hypothesis predicted. The agency size variable was included as a proxy for the incentive of nonprofit leaders to maximize their budget. Niskanen’s logic would suggest that larger organizations would be more likely to adopt an instrumental orientation, in which nonprofit leaders devote more time to revenue-seeking activities because increased revenues bring enhanced
LeRoux / Managing Stakeholder Demands 179
legitimacy, prestige, staffing, and often salary increases. Thus, the hypothesis suggested that when organizational size increases, nonprofits will be more likely to adopt an instrumental orientation. However, the results yield no evidence to support the presence of a budget-maximization incentive among nonprofit leaders. The findings in fact indicate the contrary; as organizations become larger they have a decreased likelihood of becoming instrumentally orientated. Smith and Lipsky (1993) suggested that as social service organizations get larger, they become more professionalized. Thus, one possible explanation for the finding is that larger organizations have adequate resources to devote time to a wider range of stakeholder interests.
Finally, population heterogeneity in the external environment also shapes nonprofits’ stakeholder orientation. The nonwhite population variable is positive and statistically significant. Organizations located in communities with larger nonwhite populations are more likely to display an instrumental orientation. Taken together with the racial mismatch finding, the results suggest that organizations with boards unreflective of their clientele are more likely to become instrumentally motivated, but only when these organizations are situated in communities with large minority populations—typically urban areas. Racial heterogeneity is a classic measure of urbanization (Friedman, 1966; Vogel & Harrigan, 2007; Wirth, 1938), and is measured here as the total non-White population proportion. Thus, the results may be further interpreted in this way; organizations with boards racially mismatched from their clientele are more likely to display instrumental orientations when those organizations are situated in urban locales.7
Discussion and Implications
This analysis was designed to provide a preliminary assessment of the extent to which nonprofit social service organizations have adopted an instrumental stakeholder orientation and to test a model of factors that shape this condition within the sector. This analysis carries limitations of a small sample and is representative of organizations in only one state. Nevertheless, the results confirm a number of the hypotheses, and carry potentially important implications for nonprofit accountability and governance. At a minimum, the findings suggest a need to further examine the ways in which nonprofits manage their various stakeholder interests and point to several lines of inquiry for future studies.
180 Administration & Society
The findings suggest that a very small percentage of organizations display an instrumental stakeholder orientation. Although the literature indicates that nonprofits are becoming more business-like in their management practices (Ott, 2001; Weisbrod, 1998), these findings suggest that they do not do so at the expense of their clients. Most nonprofits successfully balance responsiveness to both client and funder interests. Ultimately, these results yield evidence to support the conventional view of nonprofits as conforming to the intrinsic commitment model of stakeholder management. This view depicts organizations as balancing their time and attention to the pursuit of all stakeholder interests, not simply those that hold the promise of financial gain, because organizational leaders presumably feel that all stakeholder interests have intrinsic worth.
However, the reality that a small proportion of nonprofits place such a heavy premium on the pursuit of additional funding that they devalue client interests in the process, is cause for concern. This has important implications for nonprofit governance and suggests a need for nonprofit leaders to examine their organizational practices and their stakeholder relationships in light of their social service missions. The findings indicate that social service organizations are more likely to adopt an instrumental orientation when they are heavily funded by corporations, when their boards are both racially mismatched from the clientele served, and dominated by economic elites, and the organization is located in a community with a large non- White population. The finding that boards unreflective of the clientele served are most susceptible to adopting an instrumental orientation, comports with both Salamon’s philanthropic paternalism argument and the public organizational theory of representative bureaucracy. When organizational governance does not reflect the clientele served, this may have consequences for organizational performance, although this is an empirical question that is beyond the scope of the present study.
Moreover, this particular constellation of factors that provoke nonprofits to adopt an instrumental orientation calls to mind the lessons yielded by urban regime studies (Stone, 1989). Urban regimes are consciously constructed coalitions of public entities and private interests that forge a strategic alliance to serve the mutual economic interests of both the civic and economic elites who establish the partnership, but in the process, discount the needs and preferences of the disadvantaged residents who depend on the city for jobs and services. These findings about the impact of corporate funding on nonprofits and elite representation on boards, in largely nonwhite jurisdictions, suggests the same type of strategic alliance may be occurring between nonprofits leaders and corporate executives. This
LeRoux / Managing Stakeholder Demands 181
type of mutually beneficial alliance between nonprofit and corporate executives reflects the same described by grønbjerg’s (2001) study of Illinois social service organizations. This analysis has taken the findings about the nonprofit–corporate alliance one step by further by demonstrating the effects this relationship has on nonprofit organizational behavior. These findings suggest a need for further research on the role of nonprofits social service organizations in urban regimes. Nonprofits may represent “new regime” participants, creating a triadic alliance with the local civic leadership and local economic elites in place of the original regime consisting of a dual partnership between business and government. Nonprofits may be particularly likely to become participants in urban regimes when they serve as vehicles for bringing federal contracts and grant funds into the city.
This analysis also provides some preliminary evidence to suggest that institutional funders have the potential to embed certain values and practices in the nonprofit organizations they fund. Two of the three sources of institutional funding examined here, foundations and corporations, elicit specific behavior by nonprofits reliant on these sources for income. However, this notion is only partially supported by these data because government funding produces no discernible change in nonprofit practices. Nevertheless, the statistical significance of two out of three institutional sources of funding suggests a need to further examine the extent to which institutional funders transmit desired values to nonprofits and shape their organizational practices.
The nonmarket, nonstate status of nonprofit organizations creates an inherent tension between the public and private roles of these organizations that is not well understood. Nonprofits have a fundamental need to generate profits if they are to adequately carry out their client-serving missions. generating funding and attending to the interests of clients are both necessary and legitimate activities for social service organizations, and consistent with nonprofits’ missions. More research is needed to better understand how the management of stakeholder interests gets prioritized in nonprofit organizational governance, and how nonprofits’ stakeholder management practices effect organizational performance. given the role of nonprofit social service organizations as the new face of the American welfare state, these questions are of fundamental importance as they carry implications for nonprofit accountability and for the disadvantaged citizens who depend on these organizations to represent their interests.
182 Administration & Society
Notes
1. government payments account for approximately 52% of total revenues in the social services nonprofit sector, making this subsector more dependent on government support than any other nonprofit subsector (Independent Sector, 2002).
2. A few government funding streams carry an explicit mandate for a client or family member to sit on the agency board, or at least that a separate client advisory board be created. examples include Project Head Start and many Medicaid-funded disability service programs.
3. The 72 organizations are all 501(c)(3) nonprofit human service organizations, which represent a large subset of the original survey dataset. A total of 119 responses were received of the 197 organizations surveyed, but 47 organizations (arts organizations, sports clubs, civic and fraternal organizations, and neighborhood associations) were excluded from the present analysis, given the focus of the research questions explored in this study.
4. Data on the total budget size were not available for all organizations, so the measure used is number of paid, full-time equivalent employees. Among service providing organiza- tions, paid staff size is typically a direct reflection of the organization’s total budget size and this correlation is well documented (Salamon, 1995).
5. A variable measuring the non-White population proportion of the community is included to control for the fact that some communities have very small minority populations. In other words, an organization would not be expected to have a racially diverse board if the number of minorities in the community were limited to begin with. However, the correlation between race and income makes minorities overrepresented among nonprofit clientele, so the effects of the representation mismatch variable might be overstated without the inclusion of the control variable.
6. It is expected that the score on this scale would be lower, given that some of the activi- ties in this category speak to advocacy and nonprofits are limited, at least in terms of direct expenditures, on the amount of money that can be spent on advocacy.
7. Nine organizations in this sample are located in the city of Detroit, where the non-White population is approximately 88%. Some other organizations in the sample are located in the cities of Flint, Lansing, and grand Rapids, which also have disproportionately large non- White populations.
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Kelly LeRoux is an assistant professor in the Department of Public Administration at the University of Kansas. Her research interests include government–nonprofit relations, service contracting, interlocal service delivery, and metropolitan governance. She is the editor of Service Contracting: A Local Government Guide, 2007 by ICMA Press.
