Proverbs of Nonprofit Financial Management
| Author | George E. Mitchell,Thad D. Calabrese |
| Date | 01 August 2019 |
| DOI | 10.1177/0275074018770458 |
| Published date | 01 August 2019 |
| Subject Matter | Articles |
research-article2018
Article
American Review of Public Administration
2019, Vol. 49(6) 649 –661
Proverbs of Nonprofit Financial Management
© The Author(s) 2018
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https://doi.org/10.1177/0275074018770458
DOI: 10.1177/0275074018770458
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George E. Mitchell1 and Thad D. Calabrese2
Abstract
Whereas the field of public administration has benefited from periods of critical reflection and reform aimed at reexamining the
field’s traditional management paradigms, the related field of nonprofit management has generally lacked such an analogously
explicit and sustained research program to reevaluate its own conventional wisdoms. Meanwhile, accumulated findings
from the last several decades of nonprofit management research have problematized many traditional assumptions and
practices in nonprofit management, specifically regarding the soundness of nomothetic management theory, the unintended
negative consequences of certain management norms, and underlying assumptions about the nature and purpose of nonprofit
management. This article critically reexamines four well-known “proverbs” of nonprofit financial management—minimize
overhead, diversify revenues, be lean, and avoid debt—to demonstrate the need for a critical and reflective research program
that takes stock and reconsiders the field’s foundational principles and assumptions. Implications are derived for scholars and
practitioners, as well as for information intermediaries that evaluate nonprofits based on financial information.
Keywords
nonprofit financial management, overhead, diversification, reserves, debt
Public administration scholarship increasingly accepts that
important strategic objectives. A critical analysis of the prov-
meeting public needs often depends on collaborative gover-
erbs in light of contemporary nonprofit management scholar-
nance arrangements between public and nonprofit actors (L.
ship demonstrates the need for a reflective and constructive
M. Hall & Kennedy, 2008; Marwell & Calabrese, 2015;
research program that reconsiders (a) the soundness of
Mitchell, 2014). Indeed, significant levels of public services
nomothetic management theory, (b) the unintended negative
are routinely provided through public–nonprofit contracting
consequences of proverb adherence, and ultimately, (c)
(S. R. Smith & Lipsky, 2009). As the field of public adminis-
underlying assumptions about the nature of the nonprofit
tration has evolved and adopted more expansive notions of
organization and the purpose of nonprofit management.
governance (Ansell & Gash, 2007; Bingham, Nabatchi, &
This article is organized as follows: The section
O’Leary, 2005), it has also demonstrated a robust history of
“Theoretical and Empirical Context” provides an overview
critical reflection and periodic reform initiatives (e.g., Meier,
of the context in which proverbs of nonprofit financial man-
2015; Meier & O’Toole, 2008; Simon, 1946), albeit with
agement have emerged. This is followed by the section
mixed results (Williams, 2000). However, the field of non-
“Reexamining Proverbs of Nonprofit Financial Management”
profit management has generally lacked analogous and sus-
with critical reexamination of several well-known proverbs:
tained efforts at stocktaking and reform. Whereas public
(a) minimize overhead, (b) diversify revenues, (c) be lean,
administration scholars continue to critically evaluate the
and (d) avoid debt. The subsequent section “Discussion”
paradigm of “reinventing government” through “New Public
then reconsiders the theoretical context in which the prov-
Management,” for example, less concerted effort has been
erbs are nested. Finally, the section “Conclusion and
directed toward reconceptualizing and reevaluating domi-
Implications” recapitulates main insights, raises additional
nant paradigms in nonprofit management.
questions, and offers recommendations for future research.
In the spirit of analytical reflection and reform, this article
critically examines several “proverbs” representing conven-
tional wisdoms about nonprofit financial management. This
exercise identifies a historically normative approach to non-
profit financial management focused on maintaining organi-
1Marxe School of Baruch College, New York, NY, USA
zational “trustworthiness” through “appropriate” financial
2Wagner School of New York University, New York, USA
management practices. However, nonprofit management
research accumulated over the past several decades reveals
Corresponding Author:
George E. Mitchell, Marxe School of Public and International Affairs,
that many of these traditional norms and practices signifi-
Baruch College, One Bernard Baruch Way, New York, NY 10010, USA.
cantly inhibit the ability of nonprofits to achieve a variety of
Email: george.mitchell@baruch.cuny.edu
650
American Review of Public Administration 49(6)
Theoretical and Empirical Context
business techniques” and to “deliver services efficiently” to
remain competitive (p. 187). Furthermore, private contribu-
The “standard theory” of the nonprofit characterizes non-
tions and voluntary action are no longer the dominant para-
profits as specialists in the production of unobservable, and
digms for funding or staffing many nonprofits. P. D. Hall
therefore noncontractible, outcomes. According to Weisbrod,
(1999) documents the decline of traditional voluntary orga-
society delegates to public and nonprofit organizations the
nizations funded primarily through contributions and reliant
production of precisely those outcomes for which perfor-
on volunteer labor over time. In 2013, for example, about
mance information is “unobtainable or excessively costly”
22% of sector revenue came from donations, whereas almost
(Weisbrod, 1988, p. 47). Canonically, Hansmann (1980) pro-
70% of revenue was earned from program services.2
posed that nonprofits have a comparative advantage in the
At least in part, these shifts derive from the nonprofit sec-
production of such outcomes because nonprofits are subject
tor increasingly providing services that government histori-
to the “nondistribution constraint” or prohibition against pri-
cally provided. For instance, Kettl (2000) notes how welfare
vate inurement, which renders them more “trustworthy” than
reform led to the devolution of services from the federal gov-
other institutional forms, such as for-profits. Self-interested
ernment to the states, and in turn from the states to lower
managers might otherwise exploit information asymmetries
levels of government and eventually nonprofits. Millward
through shirking or graft. The risk of exploitation is espe-
and Provan (1993) observe how governments have turned
cially acute for donative nonprofits in which there is a sepa-
hospitals, mental health clinics, parks, prisons, water treat-
ration between donor and recipient, further complicating
ment facilities, and transportation systems over to private
surveillance. Weisbrod (1988; Weisbrod & Schlesinger,
entities, including nonprofits. This trend of contracting out
1986) similarly emphasized the importance of the nondistri-
public services is hardly new and has been widely docu-
bution constraint for establishing the trustworthiness of non-
mented in public administration and nonprofit management
profits under conditions of information asymmetry.
scholarship (e.g., Brudney, 1990; Marwell & Calabrese,
However, the nondistribution constraint also introduces
2015; Salamon, 1981; S. R. Smith & Lipsky, 1993; Stillman,
an efficiency problem. Fiscal surpluses cannot be retained
1990). This practice expanded significantly during the 1980s
for personal benefit due to the prohibition against private
as public services were privatized and efforts to apply busi-
inurement, and neither can compensation be tied to perfor-
ness management practices in government intensified
mance because observing outcomes is too costly or would be
throughout the 1990s (Box, 1999). In essence, nonprofits
too behaviorally distortive. Managers, therefore, have dimin-
assumed more “publicness” during this period (Bozeman &
ished incentives to manage resources efficiently. As such,
Bretschneider, 1994).
“inefficiency is inherently embedded in nonprofit services”
As a result, concerns about the effectiveness of govern-
(Y. H. Kim & Kim, 2016, p. 2942). However, this ineffi-
ments in meeting citizen demands are increasingly entangled
ciency is to be tolerated because the costs of incentivizing
with nonprofit performance. The result is that the environ-
efficient performance would (presumably) outweigh the ben-
ment of nonprofit management appears to be shifting from
efits (Weisbrod, 1988).
one emphasizing organizational trustworthiness and fiscal
The standard theory of the nonprofit rationalizes specific
propriety to an emerging context increasingly characterized
managerial imperatives to maintain organizational trustwor-
by explicit expectations for nonprofits to demonstrate their
thiness under conditions of outcome unobservability. effectiveness and efficiency.3
Trustworthiness is conventionally signaled through demon-
This also raises questions about certain axioms of the
strations of fiscal propriety, such as visible salary suppression,
standard theory of the...
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