The Role of Independent Board Size on the Financial Performance of Nonprofit Organizations
Faculty Advisor Name
Dr. Nara Yoon
Department
School of Strategic Leadership Studies
Description
Nonprofit organizations operate under unique governance structures crucial to their organizational performance. They depend primarily on effective governance structures to ensure operational success and improved financial performance (Brown, 2005). The nonprofit board is typically comprised of independent and non-independent board members. Unlike independent board members, non-independent board members are actively involved in the organization's day-to-day operation.
The study's rationale is to fill the literature gap on how independent board members size oversight role affects nonprofit financial performance. Past research indicates that a "one size fits all" board model does not exist (Ostrower & Stone, 2006; Board Source, 2017). Addressing this gap is essential, as it will advance our theoretical understanding of nonprofit governance and provide practical insights for improving board effectiveness in diverse nonprofit settings.
Research Question: Is there a relationship between independent board size and nonprofit organizations' financial performance?
Hypothesis: The size of the independent board positively influences nonprofit organizations' financial performance.
Using agency theory, the researcher will explore nonprofit organizations' principal and agent relationships. According to this theory, the nonprofit board members are vital in mitigating conflicts between management and stakeholders by overseeing the organization's activities and ensuring accountability (Jensen & Meckling, 1976; Garcia-Ramos & Garcia-Olalla, 2014). However, it is not expressly clear who plays the role of the principal in nonprofit organizations (Fama & Jensen, 1983; Van Puyvelde et al., 2011). A fundamental principle of agency theory is that conflicts may arise when the interests of owners and managers differ (Dalton et al., 2007). The current study seeks to use the independent board members as principals and management as agents.
Methodological approach
The research design will use a Quantitative approach utilizing data from GuideStar. The target population is nonprofit organizations 501(C) 3 registered in the United States of America. The sample population is 120 international Nonprofit organizations in the DMV area categorized by GuideStar's Seal of Transparency levels of platinum, gold, silver, and Bronze.
Independent board size will be the independent variable, while financial performance will be the dependent variable. The researcher will control the foundation year and net assets. Organizations with longer histories may have established financial processes and resources. Furthermore, larger net assets may influence financial performance, necessitating control for this variable.
The data sources will be the IRS 990 forms and GuideStar profiles. The financial performance will be measured using the program expenses ratio, fundraising efficiency from IRS 990 forms, and GuideStar profiles. These metrics are directly aligned with nonprofits' mission-driven nature, as they assess the proportion of resources allocated to programmatic activities and fundraising efficiency and have credibility and widespread acceptance to be used in research and benchmarking purposes (Charity Navigator, 2024; Charity Watch, 2024). Secondly, the simplicity and interpretability of the current metrics make them accessible to key stakeholders, e.g., donors, making it easier for them to make informed decisions and facilitate more transparent communication of financial performance (Bryce, 2017). Data analysis will be carried out using Regression analysis using SPSS Version 29.
The Role of Independent Board Size on the Financial Performance of Nonprofit Organizations
Nonprofit organizations operate under unique governance structures crucial to their organizational performance. They depend primarily on effective governance structures to ensure operational success and improved financial performance (Brown, 2005). The nonprofit board is typically comprised of independent and non-independent board members. Unlike independent board members, non-independent board members are actively involved in the organization's day-to-day operation.
The study's rationale is to fill the literature gap on how independent board members size oversight role affects nonprofit financial performance. Past research indicates that a "one size fits all" board model does not exist (Ostrower & Stone, 2006; Board Source, 2017). Addressing this gap is essential, as it will advance our theoretical understanding of nonprofit governance and provide practical insights for improving board effectiveness in diverse nonprofit settings.
Research Question: Is there a relationship between independent board size and nonprofit organizations' financial performance?
Hypothesis: The size of the independent board positively influences nonprofit organizations' financial performance.
Using agency theory, the researcher will explore nonprofit organizations' principal and agent relationships. According to this theory, the nonprofit board members are vital in mitigating conflicts between management and stakeholders by overseeing the organization's activities and ensuring accountability (Jensen & Meckling, 1976; Garcia-Ramos & Garcia-Olalla, 2014). However, it is not expressly clear who plays the role of the principal in nonprofit organizations (Fama & Jensen, 1983; Van Puyvelde et al., 2011). A fundamental principle of agency theory is that conflicts may arise when the interests of owners and managers differ (Dalton et al., 2007). The current study seeks to use the independent board members as principals and management as agents.
Methodological approach
The research design will use a Quantitative approach utilizing data from GuideStar. The target population is nonprofit organizations 501(C) 3 registered in the United States of America. The sample population is 120 international Nonprofit organizations in the DMV area categorized by GuideStar's Seal of Transparency levels of platinum, gold, silver, and Bronze.
Independent board size will be the independent variable, while financial performance will be the dependent variable. The researcher will control the foundation year and net assets. Organizations with longer histories may have established financial processes and resources. Furthermore, larger net assets may influence financial performance, necessitating control for this variable.
The data sources will be the IRS 990 forms and GuideStar profiles. The financial performance will be measured using the program expenses ratio, fundraising efficiency from IRS 990 forms, and GuideStar profiles. These metrics are directly aligned with nonprofits' mission-driven nature, as they assess the proportion of resources allocated to programmatic activities and fundraising efficiency and have credibility and widespread acceptance to be used in research and benchmarking purposes (Charity Navigator, 2024; Charity Watch, 2024). Secondly, the simplicity and interpretability of the current metrics make them accessible to key stakeholders, e.g., donors, making it easier for them to make informed decisions and facilitate more transparent communication of financial performance (Bryce, 2017). Data analysis will be carried out using Regression analysis using SPSS Version 29.
