Corporate Governance Without Shareholders: A Cautionary Lesson From Non-Profit Organizations
16 Pages Posted: 28 Jun 2013 Last revised: 1 Mar 2015
Date Written: June 1, 2013
For over 80 years, debate over corporate governance has centered on the balance of authority between the board and shareholders. One side in this debate advocates “shareholder primacy”, so that directors would actually be chosen by and accountable to the stockholders. The other side touts “director primacy” and keeping shareholders weak. This side claims that directors who are free of shareholder control would strive to maximize long-term firm value, and have the wisdom and independence to pursue this goal intelligently and conscientiously.
The boards of non-profit organizations (“NPOs”) are self-perpetuating: They are not answerable to shareholders because they have no shareholders. If director primacists are right, NPO boards should function as director primacists wish corporate boards would. The reality is quite the contrary. Commentators agree that NPO boards are generally worse than corporate boards. This brief article describes the functioning of NPO boards, discusses why they are so dysfunctional, and what lessons their example holds for corporate governance.
Keywords: corporate governance, non-profit organizations, director primacy, shareholder primacy, boards of directors, NPO governance
JEL Classification: K22
Suggested Citation: Suggested Citation