Paved With Good Intentions - Why Good Causes Need Governance Reform

Compared to the recent scandals in many major multinationals, not-for-profit organisations look even more like beacons of moral rectitude in comparison. But the Eli Lilly Professor of Strategy Bruce Kogut holds that many non-profits, despite perhaps having the best of intentions, "often present splendid dramas of spoiled and conflicting ambitions". He discusses the principal-agent model's role as a standard due diligence vehicle in viewing publicly traded companies' actions and maintains that this is the best overall means for measuring services being rendered to a given non-profit's clientele.

by Bruce Kogut
Last Updated: 23 Jul 2013

The recent wave of major business corruption scandals has fuelled new popular interest in good corporate governance issues. In contrast to scenes of handcuffed CEOs and apoplectic shareholders, not-for-profit organisations tend to shine as beacons of moral rectitude and altruism. But as the Eli Lilly Professor of Strategy Bruce Kogut recently elaborated in the Financial Times, non-profits, despite perhaps having the best of intentions, “often present splendid dramas of spoiled and conflicting ambitions”.

The term “non-profit” clearly covers a wide variety of organisations. These include “classic” non-profits (e.g., private education, hospitals, charities), as well as co-operatives, mutuals, NGOs and industry associations. Yet despite the stipulations of “no profit distribution” to which almost all are morally and legally obligated to adhere, the potential is still rife for governance dilemmas and conflicts of interest among various managers, board members, etc. With international donations again being so large in the wake of natural disasters in Asia and the USA, scrupulously examining non-profits’ decision-making and distributive policies has never been more crucial.

Kogut discusses the principal-agent model’s role as a standard due diligence vehicle in viewing publicly traded companies’ actions. While there are many obvious reasons why such a model would be highly contested by many for its applicability in the non-profit arena, the author holds that “follow the money” remains the starting point for analyzing the efficacy of not-for-profit operators. An effective board is critical to assuring honesty and supporting strong management. A weak board should never be tolerated by the excuse that 'we are all volunteers, after all'.

Kogut considers the fundamental conflicts that are all but inevitable when a culture of giving is forced to live by the rules of a culture of business. Non-profit volunteers and employees are typically very passionate about the causes they avow, but too often “it is the passion that generates the governance problem in this domain”.

For a sterling example of how bureaucratically convuluted even one of the most highly respected not-for-profit organisations, look no further than the International Federation of the Red Cross. Its 178 member nations labour under a hierarchical structure that makes good governance and responsiveness to its own national-level organisations an arduous challenge. This contrasts starkly to the case of Pratham, an educational trust set up by a state government in India. Its leadership, well aware that it could only succeed through the proactive participation of teachers, has decentralised decison making to local authorities – with clear success.

Kogut proposes that, in many cases, the social entities that are best situated to judge value provided by non-profits are the customers or users themselves. The Grameen Bank, a Bengali for-profit provider of microcredit loans, is an example of 'social entrepreneurship'. The banks has worked with local non-profit organisations successfully for nearly 30 years. Its model has been widely adopted by other organisations in the developing world.

But the author also cautions that relying upon local initiatives and monitoring for governance may quite often not be enough. Hybrid organisations like Grameen may tend to pose their own unique governance problems, especially if and when concerns over profits start to outweigh passions for more selfless pursuits. Kogut concludes with a brief recounting of the types of governance practices that should be standard practice amongst non-profit organisations, particuarly transparency and accountability.

Financial Times, June 2005 - Special Issue: Mastering Corporate Governance

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