Not-for-profit Enterprise Introduction - Corporate Governance and Business Ethics

Governance failures in the private sector have received significant attention in recent years. The banking crisis has highlighted the lack of controls on institutional risk-taking which has echoes in earlier cases such as Enron where creditors and shareholders alike were misled (Clarke 2005). Those involved in the governance function in the for-profit sector now effectively find themselves guilty until proven innocent. In contrast, the not-for-profit sector retains a superior reputation despite enduring its own problems with financial mismanagement. This behavior tends to be analyzed as almost accidental rather than willfully unethical (Dunn and Riley 2004). Therefore, although deficit in board ability does feature in the not-for-profit.

Literature (Abzug and Galaskiewicz 2001; Brown 2002), there is little in the way of a presumption of unethical behaviors being prevalent within the sector. This divergence in assessing and analyzing governance in the for-profit and not for- profit sectors is echoed in academe. The literature on organizational governance suggests that organizations in each sector exist in parallel worlds. Corporate governance journals tend to have few articles focusing on not-for-profit governance (e.g., Bart and Deal 2006; Turnbull 007). Most research is published in dedicated not-for-profit journals such as “Nonprofit Management and Leadership”. Therefore, as a consequence of this separation, papers seeking to compare governance in these different sectors are “virtually non existent” (Bart and Deal 2006,). The analysis of governance in each sector is driven by two distinct theoretical approaches. They can be broadly identified as shareholding and stockholding (Letza et al. 2004). For-profits tend to receive an analysis that has a shareholding framework at its foundation. This is guided by the assumption that shareholder interest is the primary aim of a firm’s existence (Child and Rodrigues 2004). The stakeholder model of governance, by contrast, views the organization as a means to serve the interests of numerous parties (ecovich 2005). This in turn requires the board to focus on “co-ordination with a fairly broad array of constituents” compared to private sector boards which preoccupy themselves with “securing access to capital and enhancing co-ordination” (Miller-Millesen 2003). Although some scholars believe that the stakeholder model applies equally to for-profits and not for- profits (Bouckaert and Vandenhove 1998), it would appear that the continued critique of how for-profits act would raise a question over this (Hutton 1995; Klein 2008). Following these observations, this paper aims to explore the potential for overlaps between governance in the two sectors, guided by the following question:

Do the for-profit and not-for-profit sectors share governance challenges, including the threat of unethical behaviors? The paper begins by mapping the principal challenges of governance in each sector.

This combination of perspectives is then used to analyze a case study of governance failure within a not-for-profit organization. The final section discusses the implications of the findings from this study when examining governance within the not-for-profit sector. Conclusions are drawn for further research and theory building.


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