The Legitimizing Role of Outsider Board Members: The Case of the U.S. Nonprofit Health Care Sector

Abstract

Establishing a Nonprofit Hospital’s (NPH’s) legitimacy is central to gaining the support of external stakeholders. Yet, institutional studies have long argued that smaller and less established organizations face a liabilities of smallness/newness problem where they lack the legitimacy of larger and more established organizations. This study develops an institutional explanation of board governance in which outside board members develop a legitimacy that overcomes these liabilities. A panel of 231 U.S. NPHs was used to examine this institutional explanation where Quantile Fixed Effect (QFE) estimations find that the proportion, tenure, and compensation of outside members offer a legitimacy that increases the performance of smaller/newer NPHs over their larger and more established counterparts. This institutional explanation offers a broadened view of board governance that addresses the legitimacy demands of NPHs.