Academy of Healing Governance in Profit and Nonprofit Entities Discussion no plagiarize, spell check, and check your grammar. Please use the references bel

Academy of Healing Governance in Profit and Nonprofit Entities Discussion no plagiarize, spell check, and check your grammar. Please use the references below.

in 250-, present a case that argues for whether or not there is a difference between a nonprofit and a for-profit organization. Support your case with one source.

Reference

Speckbacher, G. (2008). Nonprofit versus corporate governance: An economic approach. Nonprofit Management & Leadership, 18(3), 295. nml183_04_295-320.qxd
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Nonprofit Versus Corporate
Governance: An Economic
Approach
Gerhard Speckbacher
This article proposes a new theoretical concept of nonprofit
governance using transaction cost economics and the economic
theory of contracts. After a short review of economic approaches
to corporate governance, I clarify the specific nature of the governance problem in nonprofit organizations. Based on this
analysis, I derive criteria for selecting an organization’s relevant
stakeholders. If stakeholders provide valuable specific resources
without the protection of a comprehensive contract that details
exactly how the organization is to use these resources, then such
stakeholders seek decision and control rights in order to direct
the use of the resources they have provided. I argue that the core
problem of governance is how to enhance valuable specific contributions of the relevant stakeholders while keeping the costs
of bargaining between stakeholders and the costs of collective
decision making low. The theory developed is then applied in a
discussion of practically relevant governance mechanisms, and
the concept of governance is used to contribute to the discussion
on the strengths and weaknesses of the nonprofit character of
organizations from a governance perspective.
W
governance has been one of the hottest
topics for a number of years in both management practice
and theory, the research-based analysis of governance
mechanisms in nonprofit organizations is relatively underdeveloped
(Middleton, 1987; Herman and Van Til, 1989; Ostrower and Stone,
2005). However, examples of ineffective governance show the need
for a theory of governance that addresses the specificities of
nonprofits (see, for example, Chisolm, 1995; Ben-Ner and Van
Hoomissen, 1994).
To date, most of the literature on nonprofit governance has focused
on describing board governance. There is a lack of theoretical
HILE CORPORATE
Note: I thank the editor, Roger Lohmann, and the three anonymous referees for
their extremely helpful comments and suggestions.
NONPROFIT MANAGEMENT & LEADERSHIP, vol. 18, no. 3, Spring 2008
© 2008 Wiley Periodicals, Inc.
Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/nml.187
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SPECKBACHER
Economic
approaches have
been widely used
to explain the
existence and
functioning of
nonprofit
organizations.
approaches that go beyond this description and help to explain the
mechanisms of nonprofit governance (see Ostrower and Stone, 2005;
Miller-Millesen, 2003). Analytical models of nonprofit governance
can be developed from different theoretical perspectives. For analyzing the governance of profit-seeking corporations, the economic
approach seems to be the leading perspective (see, for example,
Shleifer and Vishny, 1997). However, although the economic
approach has proved successful in analyzing the governance mechanisms of profit-seeking corporations, “next to nothing has
been said about the governance of nonprofits” in economicsbased literature (Eldenburg, Hermalin, Weisbach, and Wosinska,
2001, p. 4).
It has been argued that this is because “existing economic theory
is not well suited to study the governance of organizations that appear
to have multiple objectives versus a single objective” (Eldenburg,
Hermalin, Weisbach, and Wosinska, 2001, p. 4). In fact, most economic theories of corporate governance assume a single objective
(profit maximization), and corporate governance theory is reduced
to an analysis of the mechanisms that translate this objective into
managers’ actions (see Shleifer and Vishny, 1997). Nonetheless, the
multitude of objectives in nonprofit organizations as such does not
exclude the application of economic approaches. On the contrary,
economic approaches have been widely used to explain the existence
and functioning of nonprofit organizations (see Hansmann, 1987;
Ben-Ner and Van Hoomissen, 1991; Steinberg, 2005; Weisbrod
1988), and it would therefore seem obvious that these approaches
could also be used to analyze their governance. One would even
expect a close link between economic theories that explain the existence and functioning of nonprofits and those that explain the mechanisms of nonprofit governance. As far as profit-seeking firms are
concerned, such a link between economic theories of the firm
(theories of the existence and nature of firms) and economic theories of corporate governance is quite obvious.
The goal of this article is not to offer either a typology or a critique of existing theories of nonprofit governance (see, for example, Murray, 1998; Brown, 2000, 2002; Cornforth, 2001, 2003,
2004; Ostrower and Stone, 2005). Each theory has its own merits
and limitations and contributes to a better understanding of nonprofit governance. In particular, I will not evaluate noneconomic
theories of nonprofit governance (such as institutional theories).
Instead, I focus on contributing to the development of an economic theory of nonprofit governance. I analyze why traditional
economic theories of corporate governance cannot contribute significantly to the theory of nonprofit governance and present a
recent stream of economics literature that can be fruitfully
applied to the economic analysis of corporate as well as nonprofit
governance.
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Governance from the Economic Point
of View: A First Sketch
Governance is synonymous with the exercise of authority, direction,
and control. From the (transaction cost) economic point of view, a
governance system is the set of rules, principles, and institutions that
frame a transaction (see, for example, Williamson, 1985; Zingales
1998). The most basic transaction that economists have studied is
the exchange of goods. The exchange of goods is facilitated by a set
of rules and institutions (for example, legal regulations, “good custom,” and courts that decide in case of disagreements), known as
contractual governance. From an economic point of view, the main
goal of contractual governance is to facilitate the exchange of goods
and keep the associated transaction costs low, that is, to make the
exchange of goods more efficient.
There are, of course, more complex kinds of transactions.
Business is often done on the basis of long-term relationships, and
people cooperate within relatively complex organizations. Besides
exchange contracts (“market contracting”), business firms are the
natural object that economists study. There has been an extensive
discussion among economists on the fundamental differences
between contractual governance and corporate governance. One view
is that corporate governance applies only to the shareholders. It is
argued that all other stakeholders (employees, customers, suppliers,
and so on) act on the basis of ordinary contracts, and hence the
rights and duties of these stakeholders are covered by ordinary contractual governance (contract law, for example). Only the shareholders of the corporation are in a quite specific position, which calls
for specific corporate governance mechanisms (see Alchian and Demsetz, 1972; Jensen and Meckling, 1976). In this view, the investments
of the shareholders are the ultimate source of value creation in a firm,
and hence these investments have to be protected by the mechanisms
of corporate governance.
Modern economic theory has challenged this view because of its
limited focus. It has been argued that other stakeholders may also provide (typically immaterial) investments that cannot be protected effectively by contractual governance. Hence, the claims and duties of
these stakeholders are not exclusively a matter of contractual governance but a matter of organizational (corporate) governance as well.
Corporate governance then becomes a multistakeholder issue. When
people cooperate within a business firm, they provide material and
immaterial resources in order to create valuable goods and services.
Corporate governance covers the rules and institutions that shape the
value creation processes in a firm, as well as the bargaining processes
among the relevant stakeholders. From an economic point of view,
the objective of a corporate governance system is to facilitate cooperation among stakeholders, that is, to make it more efficient.
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SPECKBACHER
In nonprofit
organizations,
various
stakeholders
contribute
resources in order
to achieve a
common purpose.
Just the same, nonprofit governance is about value creation and
cooperation among stakeholders within nonprofit organizations. In
nonprofit organizations, various stakeholders contribute resources
in order to achieve a common purpose. An economic theory of nonprofit governance tries to carve out systematic reasons that such a
cooperative relationship can be inefficient or even collapse. If we
know more about these reasons, we can discuss which governance
mechanisms help to facilitate cooperation and make the involved parties better off.
Obviously such an economic approach focuses on the efficiency
issues in governance. There are many facets of nonprofit governance
that cannot be adequately addressed from an efficiency perspective. This
article, however, intends to demonstrate that such a perspective can
contribute significantly to a better understanding of the nature and the
mechanisms of nonprofit governance.
In short, my approach to nonprofit governance is the following.
I assume that there are people who wish to contribute their time,
assets, and idealism in order to achieve an objective in cooperation
with other people (the exact nature of the objective is not an essential point in this approach). From an economic point of view, the purpose of a governance system is to make the cooperation efficient.
Efficiency here means that the incentives for making valuable
contributions are maximized, while destructive struggles among contributors (power-seeking activities, strategic distortion of relevant
information) are minimized. In particular, I analyze why it can happen that people do not contribute to a common purpose (economically speaking, they have incentives to underinvest) although they
are actually willing to do so, and why destructive struggles among
contributors can occur. The purpose of nonprofit governance
then is to provide a set of rules and institutions that avoid such
inefficiencies.
Hence, I start not with an analysis of governance mechanisms or
institutions such as boards, but one step before. I want to shed light
on the economic problems that are to be solved by nonprofit governance and then discuss rules or institutions that may solve these
problems. In particular, this approach gives an economic answer to
the following questions:
• Who is a stakeholder of the organization and why?
• What is nonprofit governance about?
• What are the objectives of nonprofit governance? What is good
governance?
The Economics of Corporate Governance
The traditional (and still prevailing) view of corporate governance,
which traces back to Berle and Means (1932), is grounded in financial economics. This view holds that corporate governance deals with
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the mechanisms that give investors control over their (physical)
assets invested in the firm (classic papers are Alchian and Demsetz,
1972, and Jensen and Meckling, 1976; for a survey, see Shleifer and
Vishny, 1997). The key argument for prioritizing owners’ interests is
that the owners bear the full risk of the business, while any claims of
employees (including managers and ordinary workers), customers,
or suppliers are effectively protected by contracts and law. The owners’ residual claim requires protection through decision rights,
whereby priority is given to owners’ interests. This implies the
primacy of shareholder value (see Tirole, 2001). The financial view
of corporate governance has been fruitfully applied in the analysis of
the relationship between owners and managers in corporations. However, it reduces the governance problem to the agency conflict
between owners and managers, which is in itself a somewhat
simplistic view of corporate governance.
In recent years, a new stream of economic governance theories
has been developed that stresses the importance of incomplete contracts. The idea of the importance of contractual incompleteness goes
back to Williamson (1985), and its concrete formulation and application in a model of the firm is attributed to Grossman and Hart
(1986) and Hart and Moore (1990). In the real world, contractual
relationships between different constituencies (within a firm) are usually incomplete in the sense that a contract does not include all important eventualities for the contracting parties in an enforceable way;
that is, the contract does not specify each party’s obligations for every
conceivable eventuality. (For an overview of the theory of incomplete
contracts, see Hart, 1995; Schwartz, 1998; or Tirole, 1999). Grossman
and Hart (1986) define ownership (of the firm) as the right to make
decisions in all contingencies that are not specified by contracts
among the cooperating parties (and not regulated by law).
However, since Grossman, Hart, and Moore view the firm as a
collection of physical assets and focus on only the allocation of the
ownership of these physical assets, their approach is hardly applicable to nonprofits. Zingales (1998) notes that this approach by definition excludes “any stakeholder other than the owner of physical
assets from being important to our understanding of the firm”
(p. 498). Very recently, less restrictive economic theories of the firm
have been developed, and broader definitions of corporate governance that include multiple stakeholder relationships have been discussed. Building on Grossman, Hart, and Moore’s incomplete
contract approach, Rajan and Zingales (1998) see a firm as a combination of mutually specialized assets and people. Hence, a firm is a
cooperation framework for different people who all invest something
(money, time, and so on) into the relationship and expect to get
something in return for their investment. However, contracts are
incomplete in the sense that the return for each party (money, satisfaction, and so forth) is not specified in advance. Investments are,
at least in part, specific: they have a much higher value inside the
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A new stream of
economic
governance
theories has been
developed that
stresses the
importance of
incomplete
contracts.
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SPECKBACHER
The willingness of
each party to
provide specific
investments that
contribute to a
firm’s success
depends on the
party’s
expectations of
the return from
these
investments.
contractual relationship than they do outside it (in their next best
use). The difference between the value of the specific investment
inside the relationship and its next best use outside it (if the cooperation fails) was referred to as “quasi-rent” by Klein, Crawford, and
Alchian (1978). If the implicit claims of one party are not fulfilled
and the associated quasi-rent is appropriated by other parties, this is
known as a “holdup.”
The importance of specific investments as a source of corporate
success has already been pointed out by Williamson (1985), Alchian
and Woodward (1988), and others. Combined with the fact that
many contractual relationships in a firm are incomplete, the problem
of governing specific investments becomes obvious. Clearly it is not
only the owners of physical capital who make considerable specific
investments without a comprehensive contract as a safeguard against
a holdup. Employment contracts are another good example of
incomplete contracts where specific investments also play an important role. Employment contracts regulate basic wages or working
hours, but are incomplete with respect to conditions for layoff, promotion, or wage increases. A worker who acquires company-specific
know-how or works overtime without additional payment is making
company-specific investments—that is, investments that have value
for the “investor” (the worker) inside the firm but lose most of their
value outside it. The value inside the relationship is that the investor
can expect some kind of return, such as promotion, future wage
increases, appreciation, or greater job satisfaction. However, there is
no written and enforceable contract that specifies this return on the
investment. The same holds true for customers who pay a higher
price for the product in the expectation of better service or continued product support after its production ceases. Conversely, firms
invest in employee training in the hope of better performance and in
customer relations in the hope of customer loyalty. Typically there
will be some form of implicit agreement between the parties on such
matters. While explicit claims (such as basic wages for workers,
working hours, the price and delivery of goods) are protected by law,
implicit claims offer room for ex post bargaining (that is, after the
parties have begun their cooperation).
Obviously the willingness of each party to provide specific
investments that contribute to a firm’s success depends on the party’s
expectations of the return from these investments (which remain
unclear since contracts are incomplete). It is not only the owners of
physical capital, but also the owners of human capital, customers,
and suppliers who all contribute to generating rent for a firm when
they make their specific investments.
Building on earlier work by Williamson (1985), Zingales (1998)
argues that the issue at the core of corporate governance is the exercise of authority, direction, control, or power in the ex post bargaining over the rents that arise from the cooperation. He goes on to
define a governance system as “the complex set of constraints that
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shape the ex post bargaining over the quasi-rents generated in the
course of a relationship” (p. 497).
According to Zingales (1998), a corporate governance system has
three objectives: (1) maximizing the incentives for value-enhancing
specific investments, (2) minimizing inefficient ex post bargaining,
and (3) optimally allocating risks among all involved parties.
Stakeholders and Organizational Governance:
An Economic Approach
The concept of corporate governance as a set of mechanisms to
protect specific investments has its roots in Williamson’s work
(1985), as well as in the models proposed by Grossman and Hart
(1986) and Hart and Moore (1990) and later elaborated by Rajan and
Zingales (1998) and Zingales (1998). However, as Zingales notes,
this concept applies to any economic relationship or organization,
and “corporate governance is simply the governance of a particular
organizational form—a corporation” (p. 498). In this section, I outline the basic idea behind this general concept of governance of an
economic relationship.
As long as people cooperate on a simple quid pro quo basis
(often referred to as market contracting or market exchange), no substantial governance problem arises. The terms of exchange are specified by a contract and prevailing contract law, and should problems
arise, these can be settled in court. The rules and institutions (for
example, legal regulations, courts) that govern the exchange of goods
are known as…
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