Agency Problems between Managers and Employees in Nonprofit Organizations: A Discrete Choice Experiment

• Date: 01 September 2013
• DOI: http://doi.org/10.1002/nml.21081
• Published date: 01 September 2013

Agency Problems between

Managers and Employees in

Nonprofit Organizations

A Discrete Choice Experiment

Stijn Van Puyvelde,

1

Ralf Caers,

2

Cind Du Bois,

3

Marc Jegers

1

1Vrije Universiteit Brussel, 2Hogeschool-Universiteit Brussel,

3Royal Military Academy, Brussels

Most principal–agent literature of nonprofit organizations has

focused on the relationship between board members and manag-

ers. However, in addition to the role as an agent of the board,

the manager also performs a role as principal with respect to the

nonprofit employees. By using a discrete choice experiment,

we identify the objectives of managers and employees in non-

profit organizations and assess the presence of agency problems

in this relationship. Our sample consists of 76 headmasters,

161 teachers, and 39 administrative employees in 74 secondary

nonprofit schools in Belgium. We find that the six objectives set

out in the experiment play an important role for both headmas-

ters and subordinate staff. However, the results also indicate

that some of these objectives are significantly more important

for the headmasters. In sum, our results suggest that agency

theory and stewardship theory are not necessarily in conflict

with each other but can be combined into a more general gov-

ernance framework for nonprofit organizations. Consequently,

we argue that incentive structures that incorporate different

types of objectives can facilitate the recruitment and retention of

employees in nonprofit organizations.

Keywords: principal–agent, nonprofit

Correspondence to: Stijn Van Puyvelde, Vrije Universiteit Brussel, Pleinlaan 2, Brus-

sels 1050, Belgium. E-mail: stijn.van.puyvelde@vub.ac.be

NONPROFIT MANAGEMENT & LEADERSHIP, vol. 24, no. 1, Fall 2013 © 2013 Wiley Periodicals, Inc 63

Published online in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/nml.21081

64 VAN PUYVELDE, CAERS, DU BOIS, JEGERS

Nonprofit Management & Leadership DOI: 10.1002/nml

WE USE A PRINCIPAL–AGENT framework to analyze issues of

accountability and performance in nonprofit organiza-

tions. A principal–agent relationship is present when

one party (the principal) contracts another party (the agent) to

perform some service on his or her behalf that involves delegating

some decision-making authority to the agent (Jensen and Meckling

1976). Most principal–agent literature of nonprofit organizations

has focused on the relationship between the board and managers

(Preyra and Pink 2001; Brickley and Van Horn 2002; Miller 2002;

Jobome 2006; Du Bois et al. 2009). However, acting as the board’s

agent in this principal–agent relationship, the manager may recruit

employees to assist him or her in pursuing tasks set by the board.

Consequently, in addition to the role as an agent of the board, the

manager performs a role as principal with respect to the nonprofit

employees (Caers et al. 2006; Steinberg 2010; Van Puyvelde, Caers,

Du Bois, and Jegers 2012). Although topics such as worker motiva-

tion and job satisfaction are well studied in the nonprofit context

(for example, Benz 2005; Schepers et al. 2005; Borzaga and Tortia

2006; De Cooman et al. 2011), principal–agent inspired literature

on nonmanagerial staff in nonprofit organizations is still less devel-

oped and less conclusive than the literature on managers (Jegers

2008). This article attempts to bridge this gap. Using a discrete

choice experiment (Hensher, Rose, and Greene 2005; De Bekker-

Grob, Ryan, and Gerard 2012), we investigate the objectives of

managers (principals) and employees (agents) and detect possible

agency problems in this nonprofit principal–agent relationship.

The sample of our research consists of headmasters, teachers, and

administrative staff in secondary nonprofit schools in Flanders

(Belgium).

Agency Problems in Nonprofit Organizations

Agency theory makes several assumptions about principals and

agents (Eisenhardt 1989; Pontes 1995). First, it assumes that the

principal and the agent are motivated by self-interest. Both parties

in the relationship want to maximize their own utility. Second, it

recognizes that the principal and the agent often have different

goals. The agent may not be motivated to act in the principal’s in-

terests when there is goal conflict. Third, agency theory considers

the possibility that there exists information asymmetry between the

principal and the agent, and that it may be too difficult or too ex-

pensive for the principal to determine the agent’s behavior. The

combination of these assumptions implies that when the behavior

of the agent is not controlled or restrained, the principal–agent re-

lationship will typically be characterized by agency problems such

as adverse selection and moral hazard (Eisenhardt 1989; Pontes

1995). The problem of adverse selection refers to the misrepresenta-

tion of skills and abilities by the agent. It arises because the