Edited by Bruce A. Seaman and Dennis R. Young
Chapter 14: Internal Organization and Governance
Vladislav Valentinov Introduction Nonprofit organizations in the USA and worldwide find themselves in an increasingly difficult environment. Governmental funding goes down, competition with for-profit firms and other nonprofits becomes more intensive, while the tasks to be performed by nonprofit organizations continue gaining societal relevance. Nonprofit organizations thus experience a sustained need for organizational adaptation. This chapter argues that understanding the processes of organizational change in the nonprofit sector can be usefully informed by re-examining the relevant literature on the theory of the (for-profit) firm. Two interrelated strands of this literature are particularly relevant: those dealing with the delineation of organizational boundaries and those studying the determination of cost-effective governance mechanisms. This chapter will explore some of this literature’s implications for the way the organizational boundaries and the governance mechanisms evolve in the nonprofit sector. Bringing the theory of the for-profit firm to bear on the economics of nonprofit organization will be enabled by the explicit consideration of the fact of nonprofit firms’ mission orientation. Nonprofit firms are thereby supposed to engage in activities that may be related or unrelated to their core missions; it is to be expected that the decisions on both organizational boundaries and governance mechanisms are made differently for these two activity types. The chapter is organized as follows. The next section discusses the way the nonprofit organizational boundaries are affected by transaction cost considerations, paying special attention to the difference between mission-related and mission-unrelated activities. The following sections explore the governance mechanisms used in nonprofit firms...
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