The Effects of Expense Disclosure Transparency and Donor Evaluation Focus on Director Monitoring of Not-for-Profit Organizations

Abstract

Prior studies found that to solicit donations, management of not-for-profit (NFP) organizations tends to misallocate expenses to boost the ratio of program spending to total spending. This paper examines in the context of such management expense misallocations whether the director oversight is influenced by the transparency of the organization’s expense disclosures and the donor’s evaluation focus. The results from an experiment with 189 NFP directors indicate that the enhanced transparency of expense disclosures increases the director monitoring intensity by reducing their tendency to endorse management expense misallocations. However, directors decrease their monitoring when donors evaluate both financial and nonfinancial performance metrics to make the donation decision, compared to when donors focus only on evaluating financial metrics to decide donations. The effect of donor evaluation focus occurs when directors anticipate donors will not donate, but it does not occur when directors anticipate donors will donate. This paper contributes to a richer understanding of the monitoring role of board directors in NFP organization expense misallocations.