The Monitoring Role of Board Directors in Not-for-Profit Organizations’ Expense Misallocation: Effects of Donors’ Evaluation Focus and Transparency of Expense Disclosures

Abstract

Directors in not-for-profit organizations are not only monitors who ensure that financial reports are free from misreporting but also often act as fundraisers. This paper examines the intensity of directors’ monitoring when management misallocates expenses to solicit donations; especially whether the directors’ oversight is influenced by the organization’s expense disclosure transparency and the donors’ evaluation focus. The results from two experiments indicate that directors play a monitoring role to not allow management’s expense misallocation. Further, the enhanced transparency of expense disclosures increases directors’ tendency not to endorse management’s expense misallocation. However, the donors’ adoption of a balanced evaluation process (i.e., considering both financial and nonfinancial performance metrics) reduces directors’ monitoring compared to the donors’ adoption of an expense-focused evaluation process (i.e., focusing solely on financial metrics). This effect of the donors’ adoption of a balanced evaluation process occurs when directors anticipate donors will not donate to the not-for-profit organization, but not when directors anticipate donors will donate. This paper contributes to a richer understanding of directors’ role in not-for-profit organizations’ expense misallocations. Implications for nonprofit governance are discussed.