Friend or foe? Individual donor reaction to form 990's new governance disclosures.

Author:Flynn, R. Steven

    For the first time in more than two decades, the Internal Revenue Service (IRS) has dramatically transformed its Form 990, the informational return that most major nonprofit organizations (501(c)(3) entities) file annually with the governmental agency. No longer serving merely as a means to demonstrate compliance with tax-exempt restrictions, the new form now offers greater insight into the operations of nonprofit organizations (Chomicz and Wilson, 2008), providing donors with a wealth of information to help them make more informed contribution decisions. Chief among the new sections of Form 990 is Part VI Governance, Management, and Disclosure, a series of 20 required questions concerning an organization's governance policies. With the increased emphasis currently placed on corporate governance, experts expect that this section will become critical in ensuring a nonprofit organization's financial sustainability in coming years (Wilson et al., 2009).

    To provide an empirical gauge of its potential importance, this paper examines individual donor reaction to the new governance section. Using an experimental case as a basis of exploration, the study addresses the following research question: how does the disclosure of governance policy data affect donors' contribution decisions? The investigation of this question is important for a variety of reasons. First, contributions made by individual donors account for the greatest amount of financial support received annually by nonprofit organizations. These donations, totaling collectively in the hundreds of billions of dollars each year, amount to well over one percent of annual American gross domestic product (Hall, 2010; AAFRC, 2008; Tong, 2008). Second, Form 990 is widely available to donors, with free-of- charge online research services, such as, serving as repositories of most major nonprofit entities' reports. This dissemination facilitates individual donors' use of accounting information, which prior research has documented as relevant to their contribution decisions (Keating et al., 2008; Parsons, 2003; Tinkelman, 1999; Greenlee and Brown, 1999; Weisbrod and Dominguez, 1986). Third, the new governance section has generated considerable interest, controversy, and dismay among nonprofit organizations (Wilson et al., 2009; Chomicz & Wilson, 2008; Whitehouse, 2008). An empirical study of donor reaction provides practical indications of the section's potential impact, information likely relevant to nonprofit organizations and regulators alike.

    The following sections comprise the remaining portions of this paper. The next two sections summarize the background information and develop the research hypothesis. They are followed by an explanation of the research methodology and a statistical analysis of the results. The paper concludes with a discussion of its findings and limitations.


    To demonstrate their compliance with tax-exempt provisions, nonprofit organizations have been filing a version of Form 990 since the 1940s (Whitehouse, 2008). In the decades that have followed, the IRS has altered the report to meet various regulatory concerns and issues (Whitehouse, 2008). In response to the changing needs of government and its constituents, the IRS completely redesigned Form 990 in 2008 (Anonymous, 2008). In discussing the revision, the agency cited several reasons for the transformation: a wish for greater organizational transparency; a desire for increased reporting accuracy; and a need to lighten entities' filing burden (IRS, 2007). Experts have maintained that past nonprofit reporting scandals and the passage of the Sarbanes-Oxley Act (SOX) in 2002 may have also contributed to the form's redesign (Wilson et al., 2009; Whitehouse, 2008).

    Regardless of its cause, the form's transformation has resulted in a report of considerable length and breadth. At its core are 11 separate parts applicable to all organizations: Part I Summary (an overview of the organization's mission, activities, and financial results); Part II Signature Block (the signature of the organization's designated high ranking official); Part III Statement of Program Service Accomplishments; Part IV Checklist of Required Schedules; Part V Statements Regarding Other IRS Filings and Tax Compliance; Part VI Governance, Management, and Disclosure; Part VII Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors; Part VIII Statement of...

To continue reading