Governance factors affecting nonprofit organizations' financial health: the impact of board composition, policies, religiosity, and social captial

Abstract

Nonprofits have a significant impact on the world around us. They provide services for the common good and are having an increasing influence on the economy over time (Bureau of Labor Statistics, 2014; McKeever & Gatty, 2016; National Center for Charitable Statistics, 2018). There is a consensus among prior studies that effective corporate governance positively impacts the success and financial health of for-profit entities, including both internal (e.g., board size, number of independent directors) and external (e.g., institutional ownership and number of analysts following a firm) governance (Chen, Chung, Hsu, & Wu, 2010; Coles, Daniel, & Naveen, 2008; Eisenberg, Sundgren, & Wells, 1998; Guest, 2009; Moyer, Chatfield, & Sisneros, 1989). This present research shows that governance factors can also positively influence the success of nonprofits. This study analyzes the impact of internal governance such as board size, the existence of written policies, and presence of an outside audit, as well as external governance factors such as community religiosity and social capital, on a nonprofit organization's financial health. A nonprofit organization with stronger governance levels can expect to have better oversight, as the organization would garner additional attention by community professionals and other interested parties committed to making sure the organization puts its best foot forward in serving the community. Thus, I expect to find and provide evidence that these factors positively influence a nonprofit organization's financial health.