Age Publications

158

Administration & Society Volume 41 Number 2

April 2009 158-184 © 2009 S Age Publications

10.1177/0095399709332298 http://aas.sagepub.com

hosted at http://online.sagepub.com

Author’s Note: Please address correspondence to Kelly LeRoux, Department of Public Administration, University of Kansas, 1541 Lilac Lane, 323 Blake Hill, Lawrence, KS 66045; e-mail: kleroux@ku.edu.

Managing Stakeholder Demands Balancing Responsiveness to Clients and Funding Agents in Nonprofit Social Service Organizations Kelly LeRoux University of Kansas, Lawrence

Nonprofit social service organizations face unique challenges in attending to the needs of their various stakeholders. This article uses data from a sample of nonprofit organizations in Michigan to examine how well nonprofits man- age multiple stakeholder demands. Findings indicate that nonprofits gener- ally balance organizational time and attention to the needs of both clients and funding agencies. However, a small percentage of nonprofits devote dispro- portionate time to funding agencies at the expense of client-related activities. Factors that increase this likelihood include financial dependence on for- profit corporations, a racial mismatch between the board and agency clien- tele, and board dominance by economic elites.

Keywords: nonprofit governance; accountability; responsiveness; non- profit stakeholders; resource dependence

As nonprofits theorists have frequently observed, third sector orga-nizations occupy a precarious place in the American political and economic landscape, situated somewhere in the middle of the market and the state (Salamon, 2002 ; Weisbrod, 1988). Their public service missions cause nonprofits to share a likeness with governmental organizations, and this likeness has become more pronounced in recent years as nonprofits have adopted increased accountability requirements to fulfill their roles as contract partners of the state (Dicke & Ott, 1999; Kramer, 1994; Romzek & Johnston, 1999). Yet, nonprofits are private enterprises and they display unmistakable business sector tendencies in their quest to sustain themselves

LeRoux / Managing Stakeholder Demands 159

financially. Many have noted that nonprofits are becoming more business- like, particularly in their revenue-generating strategies as earned income continues to rise as a share of nonprofit funding (Independent Sector, 2002; Ott, 2001; Weisbrod, 1998).

This tension between the inherent public service motives and market- like survival impulses of nonprofits is particularly prominent within (and problematic for) social service organizations. Although social service organizations depend heavily on government,1 they also rely on philanthropic foundations, individual donors, for-profit corporations and increasingly, on client service fees as sources of income. These funders constitute critical groups of nonprofit stakeholders. Nonprofits are challenged to fulfill the demands of these different stakeholder groups, as well as those of the clients they serve. Although the need to demonstrate responsiveness to multiple stakeholder interests is not unique to nonprofit organizations, it can create an incentive for organizations to devote more time and attention to some stakeholders than others. Although fulfilling the requirements of their funding agents and serving the interests of their clients are generally not incompatible organizational objectives for nonprofits, a potential dilemma for responsiveness to client interests arises when catering to current and prospective funders consumes a disproportionate share of time and attention in the governance agenda. Nonprofit organizations in particular are confronted by hard choices in time allocation because they typically operate with fewer staff and smaller staff-to-workload ratios than public and for-profit organizations (Light, 2002).

This article draws on the theory of stakeholder management and on findings from the corporate governance literature to examine the stakeholder orientations of nonprofit social service organizations. Two models of stakeholder orientation are recognized in this literature: (a) the normatively oriented, intrinsic stakeholder commitment model and (b) the instrumentally motivated, strategic stakeholder management model (Berman, Wicks, Kotha, & Jones, 1999). The former model projects governance relationships with stakeholders to be based on “normative, moral commitments rather than a desire to use stakeholders solely to maximize profits” (Berman et al., 1999, p. 492). This model has until recently, functioned as the dominant paradigm in stakeholder management research. The latter model is grounded in rational choice logic and suggests that organizations adopt an instrumental stance toward stakeholders in an attempt to maximize financial gains and suggests they serve other stakeholder interests only as a means of achieving that end.

As private enterprises with public serving missions, nonprofits are widely assumed to conform to the intrinsic commitment model, but it raises

160 Administration & Society

an interesting and timely set of empirical questions about the extent to which this assumption is true. To what extent has an instrumental stakeholder orientation manifested among nonprofit social service organizations? What factors help explain the adoption of an instrumental orientation by nonprofits? Instrumental orientation is examined in this analysis through a measure constructed from a series of survey questions in which nonprofits report the amount of organizational time spent on activities associated with fund development as excessively high and simultaneously report the frequency of time spent on client activities as excessively low. In light of public organizations’ roles as major stakeholders of nonprofits, a critical question arises as to whether government revenues have had the unintended effect of promoting an instrumental orientation within nonprofits.

These questions have important implications for nonprofit accountability, for government–nonprofit contracting, and for the responsiveness of third party agents to client interests. Clients of nonprofit social service organizations are often vulnerable citizens who lack the information, ability, or luxury of the “voice” option or “voting with their feet” in the same way customers in the for-profit service market might (Weisbrod, 1988). Nonprofits are generally thought to make preferable contract partners for government because they are less opportunistic and more trustworthy than for-profit firms (Hansmann, 1980), and there is some evidence suggesting this may the case (Marvel & Marvel, 2007; Weisbrod & Schlesinger, 1986). However, the documented growth in entrepreneurial practices adopted by nonprofits, increased prevalence of nonprofit executives trained in business management, and increased need for nonprofits to compete in the marketplace with for-profit firms (Ott, 2001) calls for a closer look at the issue of how nonprofits orient themselves toward their key stakeholder groups.

Stakeholder Theory and Nonprofits

Stakeholder theory is largely a normative organizational theory suggesting that managerial attention to all stakeholder interests is critical to the firm’s success (Freeman, 1984). As Jones and Wicks (1999) describe stakeholder theory “the interests of all stakeholders have intrinsic value, and no set of interests is assumed to dominate the others” (p. 207). essentially, stakeholder theory implies a need for organizations to expand the domain of corporate governance to be both sensitive and responsive to all stakeholder interests and not simply those of shareholders. This normative approach to stakeholder

LeRoux / Managing Stakeholder Demands 161

theory inspired by Freeman has clearly served as the prevailing analytical framework upon which most stakeholder studies have been based (Berman et al., 1999; Clarkson, 1995; Donaldson & Preston, 1995; evan & Freeman, 1993; Freeman & evan, 1990; Jones & Wicks, 1999).

given that nonprofits do not have shareholders who stand to profit from the organization’s activities, stakeholder theory has been scarcely applied to nonprofit organizations and only in a descriptive sense (Abzug & Webb, 1999; Keating & Frumkin, 2003). This lack of scholarly attention to how nonprofit organizations manage their stakeholders may be attributed to the fact that nonprofits do not have shareholders who own a personal financial stake in the organization. If nonprofits do not have shareholders, then who are the stakeholders of nonprofit organizations? Institutions and individuals that finance the work of nonprofits, such as government, private charitable foundations, corporations, clients, and individual citizens who donate, comprise key groups of nonprofit stakeholders. These actors finance the work of the organization, and may therefore play a critical role in shaping nonprofits’ stakeholder management practices. As a condition of both receiving and maintaining contracts, grants, and other forms of financial support, nonprofits are required to demonstrate their accountability through financial audits and various forms of performance reporting. Some organizations have embraced highly sophisticated performance measurement programs and use the results as a marketing tool in promoting their services to prospective funders (Ott, 2001). However, organizations vary in the amount of time they allocate to these and other activities related to interactions with funders.

In addition to funders, clients who function as the organization’s “customer” base represent another key stakeholder group to which the organization must allocate time, both in the form of direct services and in indirect governance activities that support client interests, such as advocacy, client education, and linkages to community institutions. Although they provide the justification for organizations’ existence, clients are far less powerful than funders as a stakeholder interest. On the whole, clients are likely to be less influential in shaping organizational resource allocation decisions, particularly if they do not pay for the services they receive.

Like for-profit firms, private nonprofit organizations are governed by boards of directors that are fundamental to organizational governance. Boards are the policy-making and oversight body of nonprofit organizations, and their influence on organizational priorities and resource allocation

162 Administration & Society

decisions is often substantial (green & griesinger, 1996). Board members may play a particularly salient role in shaping nonprofits’ stakeholder orientation, because they are uniquely positioned at the nexus of internal and external demands made on the organization. Board members do not influence the organization’s resource allocation decisions from outside of the organization as funders do, or from “below” the organizational governance level as clients do, but rather they help shape organizational management through their authoritative role in internal decision making. each of these groups—funders, clients, and boards will be examined in greater depth below along with hypotheses about the predicted effect of each on organizations’ stakeholder orientation.

Models of Stakeholder Orientation

Stakeholder orientation refers to how organizations manage their stakeholders through resource allocation decisions (Berman et al., 1999). Time is a critical resource that must be allocated among a number of organizational activities in order to accomplish the organization’s objectives. Organizational time allocation decisions have consequences for stakeholders. Two divergent views exist in the corporate governance literature about the ways organizations allocate time and attention to stakeholder groups. These divergent views form the basis for the two models of stakeholder orientation: the normative model (intrinsic stakeholder commitment) and the instrumental model (strategic stakeholder management; Berman et al., 1999).

As suggested in the preceding discussion of the theory, the normative approach that originated with Freeman’s (1984) work has served as the prevailing theoretical model in stakeholder management research. The intrinsic stakeholder commitment model is grounded in the corporate ethics literature and views values and ethics as being inextricably linked to strategy and organizational behavior. This model speaks to the frequently cited argument made by Freeman and gilbert (1988) that an organization must ask “what do we stand for?” when making organizational decisions (p. 70). The intrinsic commitment model suggests that organizations give equal attention to all stakeholder interests, or as Clarkson (1995) states, “the economic and social purpose of the organization is to create and distribute increased value to all its primary stakeholder groups without favoring any one group at the expense of others” (p. 112). This predominant model is thus a normative theory proposing the way that organizations should act, but proponents of this model also claim it to have descriptive utility (Donaldson & Preston, 1995; Jones & Wicks, 1999).

LeRoux / Managing Stakeholder Demands 163

However, a second view challenges the normative model as an inaccurate reflection of organizational behavior (gioia, 1999; Jawahar & McLaughlin, 2001). This alternative perspective draws on the resource dependence view of organizational behavior (Pfeffer & Salancik, 1978) which suggests that organizations seek to defend against environmental uncertainty through conscious attempts to manage their external dependencies. This forms the basis for a competing model of stakeholder management in which organizations can and do strategically place some stakeholder interests over others because financial performance (revenue growth) is contingent upon such a strategy. For example, Jawahar and McLaughlin (2001) argue that “organizations are likely to favor certain stakeholders depending on the extent to which they are dependent on those stakeholders for resources critical to the organization’s survival.” (p. 397). The instrumental model acknowledges that stakeholder management presents opportunity costs; devoting time to stakeholder interests that provide opportunities for financial gain may require trading off some time and attention to other stakeholder interests. Thus, organizations with an instrumental stakeholder orientation will systematically invest more time in activities that offer the potential for yielding financial gains for the organization.

The Budget-Maximizing Nonprofit Executive?

Can nonprofit leaders be motivated by financial gain, when the organizations they govern are, by definition, not-for-profit? The motivations of both public and nonprofit executives for financial gain are thought to be held in check by what Weisbrod (1977) termed the “non-distribution constraint,” referring the legal prohibition on public and tax-exempt organizations from distributing their profits to employees or board members. However, nonprofit organizations can and do, generate profits. Surplus revenues, interest and dividends on assets, and “unrelated business income” are legally permissible under the tax-exempt regulations, with the caveat that such forms of surplus income are reinvested into organizational programs and activities, broadly defined.

The nondistribution constraint suggests that nonprofit leaders would have no interest or incentive for attempts to procure more revenues for their agency because they cannot personally reap the rewards of financial gain. Yet in the same way Niskanen (1971) argued that program budget size functions as a proxy for bureaucratic utility, budget growth would serve the same utility function for nonprofit leaders. Niskanen suggested that public managers have personal goals that might be attained through maximizing

164 Administration & Society

discretionary budgets, and the same logic can be applied to nonprofit leaders. Whether in public or nonprofit organizations, larger budgets typically bring the benefits of power, prestige, enhanced reputation, productivity, additional staff, and ease of management (Niskanen, 1971). Frequently, it also brings the reward of increased salary for staff and organizational leaders. Indeed, in the case of nonprofit organizations, there is direct correlation between size of the organization and executive directors’ compensation (National Council of Nonprofit Associations, 2007). Therefore, larger nonprofits may be more likely to adopt an instrumental orientation than smaller and medium sized organization.

Predicting Orientation: Budgets, Boards, and Clients

Nonprofits are generally viewed as displaying an intrinsic commitment to all stakeholders, balancing organizational time commitments between current and prospective funders, and serving their “customers.” However, certain factors may enhance the likelihood that nonprofits will adopt an instrumental orientation, whereby the organization displays a severe imbalance in time commitments between funders and clients, favoring the former. Specifically, who governs the organization, and which mix of sources it relies on most for funding may have significant consequences for how organizations orient themselves toward stakeholders. The issue of nonprofit financing is examined first.

Nonprofit social service organizations rely on a variety of sources for their income, but their largest sources of funding are government, independent foundations, private for-profit corporations, client fees and other forms of earned income, and charitable contributions from individual donors (Independent Sector, 2002). Nonprofits vary widely, however, in their extent of reliance on this range of sources. Some social service organizations are solely dependent on government, whereas others rely entirely on client fees. Still others depend on a variable mix of revenues. Funds from government, private foundations, and corporations shape nonprofit behavior in distinctive ways because they represent institutional forms of support. As such, they have the power to embed their own desired values in the organizational practices of nonprofits they fund. However, the values transmitted to nonprofits by corporations will produce different organizational behavior than the values extended by government and independent foundations.

LeRoux / Managing Stakeholder Demands 165

Corporations

Corporations are a set of economic institutions defined by capitalist values of profit-seeking and market-based competition. Corporations serve as an important source of financial support for many nonprofit social service organizations. Corporate donations may be made directly, or channeled through a corporate foundation. In addition to cash gifts, corporations are frequent sponsors of special events, annual fundraisers, and provide several forms of in-kind support. grønbjerg (2001) has argued that nonprofit executives forge strategic alliances with corporations that serve the mutual economic interest of both parties. Nonprofits benefit from the wealth corporations have to offer, and corporations benefit from the large tax deductions they can claim for their contributions. Based on her research of child welfare and community development organizations, grønbjerg (2001) demonstrated how nonprofit executives formalize their alliance with corporations by appointing corporate leaders to serve on their boards of directors. In turn, this alliance serves strategic purposes for corporate executives. She suggests that “for corporate leaders, financial support of nonprofit organizations and membership on nonprofit boards are indirect opportunities to promote corporate interests and extend their sphere of influence” (grønbjerg, 2001, p. 222).

To the extent that nonprofits are reliant on corporate sponsorship, they may have an increased likelihood of becoming market-like in their own governance practices. Corporate funding may have the effect of transmitting capitalist values and business sector practices to nonprofits, especially among organizations that have forged strong alliances with corporate sponsors. Indeed, Lenkowsky (2002) has observed that some corporations have suffered public scrutiny for tying their nonprofit support too close to business objectives. Thus, the more heavily nonprofits rely on corporations for their financing, the more likely they are to adopt an instrumental stakeholder orientation.

Government

government represents the largest single source of support for nonprofits, accounting for approximately half of all revenues in the social services sector (Independent Sector, 2002). Like corporations, government also represents an institutional form of support to nonprofits. However, rather than the capitalist oriented values that corporations may impart, the values that get transmitted to nonprofits through government funding are public

166 Administration & Society

values. These values favor democratic participation, responsive service delivery, and equitable distribution of resources. Lester Salamon (1995) has argued that nonprofits, in their original voluntary state, suffer from inherent weaknesses of financial insufficiency, amateurism, paternalism, and particularism—tendencies to favor serving some clients and not others. Salamon’s partnership theory of government–nonprofit relations suggests that government sponsorship corrects for these inherent weaknesses by imposing rules and obligations on the part of nonprofits that accept government funding. government funding institutionalizes values of equity and responsiveness, promotes professionalism, and increases nonprofit accountability. Therefore, nonprofits more heavily funded by government are likely to demonstrate a greater balance in managing their stakeholder interests. Nonprofits will be less likely to adopt an instrumental orientation when they rely heavily on government, because public funding mediates instrumental tendencies in favor of a broader, more inclusive stakeholder management approach.

Foundations

Institutional philanthropy, embodied in independent and community foundations, (Lenkowsky, 2002) is another major source of revenue to nonprofit social service organizations. Foundations are private organizations, but unlike corporations, they are not-for-profit, and exist primarily to make grants to other nonprofits performing work that aligns with the foundation’s own mission or purpose. Thus, while they are private organizations, they are a part of the “public-serving” nonprofit sector (Salamon, 2002), which exists to promote the public interest rather than narrow, individualistic interests. Serving as financial intermediaries, foundations help to bridge the gap between private resources and public needs. Their role is to generate private funding, to manage wealth once it is accumulated, and distribute monies to other organizations in the sector. While they do not provide the largest source of revenue to social service organizations, foundations have been hailed as a very important source of financing for nonprofits because this form of revenue helps to ensure the independence and autonomy that the distinguish the nonprofit sector (Salamon, 2001). Indeed, many government grants made to nonprofit social service organizations are designed to fulfill specific programmatic objectives, whereas foundation grants typically carry fewer restrictions and less extensive requirements. Therefore, nonprofit social service organizations that rely heavily on foundation funds may be less

LeRoux / Managing Stakeholder Demands 167

likely to adopt an instrumental orientation. Foundation funding reinforces the public-serving disposition of social service organizations and affords agency leaders the time to devote attention to their full range of stakeholder interests, including those that fulfill client interests.

Individual Donors

In contrast to the way government, foundations, and corporate funding shapes nonprofit behavior by embedding specific values into organizational practices, direct contributions from individual donors take the shape of diffuse values and expectations. Yet, heavy reliance on individual donors may increase the likelihood of nonprofits adopting an instrumental orientation. Direct contributions from individuals represent a shrinking form of support for the sector, and have steadily declined as a share of social service organizations’ revenues over the last two decades (Independent Sector, 2002). As such, organizations that rely heavily on this form of support have become more market-like in their competition for donors. Individual donors are fickle in their choices about where to donate and how much they contribute, and thus their support is much less predictable as a source of income for nonprofits. As a result, nonprofits that rely heavily on private donations for their survival must invest a great deal of time and organizational resources attempting to sustain, and perhaps grow that base. To this end, nonprofit leaders engage in targeted appeals directed at individuals or small groups of wealthy citizens in the community who might become consistent, reliable supporters of the organization. When nonprofit leaders identify such individuals, they often attempt to formalize reliable donors’ commitment to the organization by inviting these individuals to serve on the board. In this way, nonprofits can bind well-off influential community elites to the organization, providing them with a voice in agency governance in exchange for their patronage.

Referring to one of the major pitfalls of reliance on individual charitable contributions, Salamon (1995) argued,

So long as private charity is the only support for the voluntary sector, those in control of the charitable resources can determine what the sector does and whom it serves . . . Not only is this situation undemocratic, but it can create a self-defeating sense of dependency on the part of the poor since it gives them no say over the resources that are spent on their behalf. (p. 47)

168 Administration & Society