boards / corporate governance / non-profit

Another Charity Scandal – why does it keep happening?

The recent reports of misappropriation of funds by the founder and management of Console, a suicide prevention charity, are distressing for the workers, volunteers, service users, supporters and general public[1].  The impact may be felt by the entire charitable sector, as happened following the CRC revelations in 2014, where charitable donations declined overall[2].

Managers of charities are not exposed to the for-profit external control measures, such as hostile takeovers, concentrated shareholders, or equity-based compensation plans.  There is some evidence that charities and non-profits are subject to agency risk, such as excessive CEO pay, where the CEOs are voting members of their board (Brickley & Van Horn 2002).  The boards of charities thus should not assume that management are engaging a stewardship approach, that is, that the goals of management are aligned with those of donors, funders and the board and need to ensure that there are effective monitoring procedures in place(Davis et al. 1997).  They should also consider excluding executive directors, including the CEO, from the Board as they may undermine board leadership (Brickley et al. 2003; Ostrower 2014).

A lack of role clarity can also be a cause of difficulties in charities.  Role ambiguity impacts the board role but also the CEO as the boards in non-profits may from necessity be more involved in operational matters, for example, non-profits are reliant on volunteers to generate and support fundraising efforts. The importance of role clarity was highlighted in empirical research which found that by adopting a model of governance that focussed the board to clarify roles, CEO job satisfaction improved  (Nobbie & Brudney 2003).  Executive director control is also associated with a number of positive performance features, however, there is evidence that a strong executive will push the board to focus on fundraising and away from monitoring (O’Regan & Oster 2005).  Boards should thus also ensure a lower level of management service and prestige to allow the board more influence, allowing the board to address or prevent agency or managerial hegemony issues.

The lack of professionalism has impacted many, but it has especially impacted the users of Consoles suicide prevention services.

Perhaps the questions we all should be asking ourselves are: how best to balance passion and professional from our charities? And what is best for the vulnerable service beneficiaries?

[1] Cullen, P (2016, July 6) Console controversy: Criminal investigation opens into charity. The Irish Times. Retrieved July 10 2016 from http//irishtimes.com

[2] O’Sullivan, C (2014, Jan 25) Charity donations down 40% after CRC scandal. The Examiner. Retrieved July 28 2014 from   http://www.irishexaminer.com

Brickley, J.A. et al., 2003. Board Structure and Executive Compensation in Nonprofit,

Brickley, J.A. & Van Horn, R.L., 2002. Managerial Incentives in Nonprofit Organizations: Evidence from Hospitals*. The Journal of Law and Economics, 45(1), pp.227–249.

Davis, J.H., Schoorman, F.D. & Donaldson, L., 1997. Toward a stewardship theory of management. Academy of Management Review, 22(1), pp.20–47.

Nobbie, P.D. & Brudney, J.L., 2003. Testing the Implementation, Board Performance, and Organizational Effectiveness of the Policy Governance Model in Nonprofit Boards of Directors. Nonprofit and Voluntary Sector Quarterly, 32(4), pp.571–595.

O’Regan, K. & Oster, S.., 2005. Does the Structure and Composition of the Board Matter? The Case of Nonprofit Organizations. Journal of Law, Economics, and Organization, 21(1), pp.205–227.

Ostrower, F., 2014. Boards as an Accountability Mechanism. University of Texas at Austin, (May), pp.1–26.

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