Introduction

This synthetic literature review briefly summarizes general literature on principal–agent problems, then shows how this literature has been or can be adapted to look at nonprofit governance, accountability, and performance. It concludes with discussions of differences between agency problems in the for-profit and nonprofit sectors and difficulties in developing normative theories of accountability.

Nonprofit organizations should be accountable to their legitimate stakeholders. Of course they should. This proposition seems so obvious that public regulators, watchdog agencies, major funders, and nonprofit managers use it every day, despite the vacuous nature of the statement. What does accountability mean? Who is a legitimate stakeholder? What if stakeholders disagree? The form of the statement suggests substance, lending legitimacy to thin arguments. For example, some implicitly replace “legitimate stakeholders” with a single category, privileging, say, donors. Then they assert something like “donors want fundraising costs to be as low as possible”, so that a high-cost charity lacks accountability. That argument seems sensible until one remembers that donors are not the only class of stakeholders, and that other mission-critical stakeholders (like indigent clients) might be harmed if fundraising costs (and hence revenues) are too low. Another example, familiar to many readers, is a nonprofit university. The list of arguably legitimate stakeholders here is staggeringly long: students, faculty, staff, administrators, donors, alumni, sports fans, private foundations, local tax authorities, for-profit research partners, employers, curators, politicians, advocates, and undoubtedly others.