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NONPROFIT BOARD EFFECTIVENESS, PRIVATE PHILANTHROPY, AND

FINANCIAL VULNERABILITY

Article  in  Public Administration Quarterly · January 2011

DOI: 10.2307/23209327

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NONPROFIT BOARD EFFECTIVENESS, PRIVATE
PHILANTHROPY, AND FINANCIAL
VULNERABILITY

MATHHEW M. HODGE
University of Florida

RONALD F. PICCOLO
Rollins College

ABSTRACT

Nonprofit organizations rely heavily on their governing board

of directors to provide leadership, strategic guidance, and financial
oversight. As such, the extent to which effectiveness of the board
shapes the financial health of an organization is of great interest to both
practitioners and the academic community. Drawing on 112 nonprofit
organizations in Central Florida, the current study examined
relationships among three areas of interest in the voluntary sector:
board effectiveness, private philanthropy, and financial vulnerability.
Results of the study suggest that board effectiveness is a significant
predictor of an organization‟s financial health. Consistent with our
expectations, the observed relationship between board effectiveness
and financial vulnerability was strongest in nonprofit organizations that
derived a majority of their funding from private philanthropy.
Implications for practice and future research are discussed.

In the last 15 years, demands on nonprofit

organizations for service, development, and accountability
have evolved. Many nonprofits face great competition for
public funding and continuous pressure to expand access to
service. As Kearns (1994) noted, a dramatic expansion in
the size and influence of nonprofit organizations has led to
tighter scrutiny of resource management from a broad
spectrum of stakeholders (e.g., government agencies,
PAQ WINTER 2011 521

private donors, the media, clients of the organizations, and

the public at-large). While service and accountability
standards have been elevated in recent years, so has the
overall importance of a nonprofit‟s governing board of
directors.
Board members as a whole are charged with the
public‟s trust in guiding nonprofit organizations in the
effective and efficient administration of its purpose
(Kearns, 1994). In general, boards are expected to provide
financial oversight, to counsel on the organization‟s
strategy, and to assist in the development of financial and
other resources. As such, the effectiveness of an
organization‟s board is likely to have a direct influence on
the organization‟s overall performance in terms of both
financial management and service delivery.
A number of recent studies have explored the
impact of board characteristics on fundraising success,
mission development, and service provision (e.g.,
Heimovics, Herman, & Jurkiewics, 1993; Herman & Renz,
2000; Miller-Millesen, 2003; Provan, 1980). As a set,
studies of this kind identify a link between board activity
and proxies of organizational success (e.g., service
provision). There is, however, a lack of clear research on
the relationship between board activity and bottom-line
economic stability. The question remains, therefore: does
board effectiveness have an impact on the overall financial
health of a nonprofit organization?
A recent study by Hodge and Piccolo (2005) used a
short measure of board activity to derive a link between
board behavior and financial stability. According to the
authors, existing resources drive the nature of board
involvement in day-to-day operations and in strategic
planning activities of the organization. Results of the study
by Hodge and Piccolo suggest that planning and
development activities by the board have a significant
impact on the economic stability of an organization, as
522 PAQ WINTER 2011

measured by an index of financial vulnerability (Tuckman

& Chang, 1991). The Hodge and Piccolo study used a small
sample and a rather narrow measure of board activity, so
additional research is needed to understand how and when
board behavior shapes bottom-line performance.
As such, the primary purpose of this study is to
examine the relationship between board effectiveness and
the overall fiscal health of a nonprofit organization as
measured by financial vulnerability (Tuckman & Chang,
1991). The relationship is an important one in that the role
of an organization‟s board is generally regarded as critical
for the success and survival of a nonprofit. In support of
this purpose, the current study integrates concepts in
resource dependence theory (Pfeffer & Salancik, 2003) to
examine the extent to which resource structure (e.g., private
philanthropy) serves as a boundary condition on the link
between board effectiveness and financial vulnerability.
Beyond our interest in if the board impacts financial health,
we are also interested in examining when.
In the following sections, we provide a brief
overview of the three main concepts in this study: board
effectiveness, financial vulnerability, and primary funding
source (specifically private philanthropy). We then offer
hypotheses about interrelationships among these three
variables, describe our methods of data collection and
analysis, and offer results and conclusions of this study.
Financial Vulnerability
Although the literature provides a host of qualitative
and subjective measures of organizational performance
(e.g., mission accomplishment, legitimacy, quality of
service provision), bottom-line financial results remain a
leading indicator of overall performance. In general,
financial measures are objective, quantifiable, and
standardized, so that performance metrics can be compared
across organization and across service sector. Even though
debate may exist over the validity of specific measures
PAQ WINTER 2011 523

(Brooks, 2003; Crittenden, 2000), indications of overall

financial health usually offer a reasonable picture of the
current state of a nonprofit (Callen et al., 2003) and provide
a snapshot of the organization‟s potential for continued
survival (Tassie, Murray, & Cutt, 1998).
The importance of efficient resource management in
the for-profit sector is well documented (Barney, 1991;
Rojas, 2000), but only recently has a similar focus been
pursued in the tax-exempt and nonprofit sectors
(Crittenden, 2000). Rojas (2000), for example, in his non-
empirical review of four models of organizational
effectiveness across the for- and nonprofit sectors,
considered the efficiency with which private contributions
were allocated and maintained. According to the author, an
organization‟s chances for survival were directly related to
its conscientious use of unrestricted funds. Berman (1998)
offered similar evidence, and ultimately concluded that
efficiency in the management of scarce resources is a
critical component in organizational effectiveness and
survival.
In recent years, efficiency in the nonprofit sector
has been measured with the Financial Vulnerability Index
(FVI; Tuckman & Chang, 1991), which was adapted
specifically for the tax-exempt and nonprofit sectors and
meant to serve as a proxy for organizational survival. Ten
years after its original introduction, Trussel, Greenlee, and
Brady (2002) offered an extension to the original FVI
model to capture the ability of a charity to carry out its
mission in the face of economic shock.
Hager (2001) examined the Tuckman and Chang
model (FVI) in assessing financial vulnerability and found,
to a varying degree, that the four components of the
financial vulnerability model (equity balance, revenue
concentration, administration costs, and operating margin)
explain the demise or longevity of a nonprofit organization.
As Hager (2001) noted, “In contrast to a financially
524 PAQ WINTER 2011

vulnerable nonprofit, Tuckman and Chang (1991) describe

a financially flexible nonprofit as one with access to equity
balances, many revenue sources, high administration costs,
and high operating margins” (p. 377). Tuckman and Chang
(1991) included organizational size and industry type in
their original study, Hager, however, chose to focus on only
the four financial characteristics in his study:
1. Equity balance = Liabilities - Assets
2. Revenue concentration = Proportion of funding
received from various sources of income.
3. Administration costs = Administrative costs / total
costs.
4. Operating margin = (Revenues – expenses)/ total
revenues.
Several researchers (Greenlee & Trussel, 2000;
Hager, 2001; Trussel, 2002; Tuckman & Chang, 1991)
compiled extensive data on the statistical significance of
the FVI to predict the solvency of the nonprofit
organization. Their research used the FVI not only to
reduce several financial categories into a single index, but
also to allow for benchmarking based on six distinct
nonprofit service areas (culture, education, human services,
public benefit, health, and other).
The literature provides broad support for the use of
financial measures of the organization as a means to
evaluate operational efficiency and long-term viability.
Examples of public and nonprofit evaluation measures are
present in much of the literature discussing organizational
effectiveness. Financial measures provide the researcher
with quantitative measures of key indicators of the financial
position of the organization and insight into the
organization‟s ability to operate over the long-term. The
literature warns against the reliance of single-ratio
measures of financial position, indicating a preference for
composite measures of financial performance (Brooks,
2003; Hager, 2001).
PAQ WINTER 2011 525

Although relatively new, several studies have

utilized the FVI in estimating an organization‟s overall
financial health (Tuckman & Change, 1991; Trussel,
Greenlee, & Brady, 2002). In general, favorable scores on
the FVI are driven by effective management of operating
expenses, revenues, and liabilities, such that accounting
policies and practices have the strongest impact on
assessments of financial vulnerability. A recent study by
Hodge and Piccolo (2005), however, attributed low
financial vulnerability scores to proactive involvement in
strategic planning by members of the organization‟s board.
In that vein, we next consider the importance of board
activity on organization-level measures of performance.

BOARD EFFECTIVENESS

Organizations that achieve long term success

usually enjoy the benefit of an effective board, in terms of
its members‟ participation in strategic planning and
resource development (Hodge & Piccolo, 2006; Johnson, et
al., 1996; Nobbie & Brudney, 2003). In nearly every
industry, boards seem to have a meaningful impact on
strategy formation, service provision, and resource
development (e.g., hospital administration; McDonoagh,
2006). The importance of having a strong and charismatic
CEO is well documented (Heimovics et al., 1993; Hoye,
2004; Waldman, Ramirez, House, & Puranam, 2001), but
the contribution of an organization‟s board often accounts
for the difference between financial success and failure
(Duca, 1986). In recent years, several studies have linked
board characteristics to measures of organizational
effectiveness, such as subjective assessment of
performance or objective indices of financial efficiency
(e.g., Callen et al., 2003; Crittenden, 2000; Herman &
Renz, 2000). Daily (1995), for example, examined 70 firms
that had filed for bankruptcy between 1980 and 1986, and
526 PAQ WINTER 2011

found that the proportion of outside directors on the board

was positively associated with successful reorganization,
while Judge (1994), in a sample of hospitals in the
southeastern United States, linked outsider representation
on the board with subjective measures of social
performance.
Whereas basic responsibilities for nonprofit and for-
profit boards are similar (Carver, 1997), boards at nonprofit
agencies are often called upon to develop organizational
strategies and to facilitate the acquisition of critical
resources (Heimovics, Herman, et al., 1990). As noted by
Herman and Renz (2000), “boards continue to be called on
for governance and leadership. Included among [these]
responsibilities are decisions about organizational missions,
programs, financing, and the performance of its own work”
(p.148).
That said, while board responsibilities are similar
across private and public sectors, the role of the board in
shaping organizational survival has been particularly salient
in the last decade. Amid corporate scandals among several
high profile American corporations and increased
competition for limited sources, modern nonprofit
organizations have become accountable in a much more
public way. Kearns (1994) noted that many agencies must
proactively attempt to secure and maintain scarce sources
of revenue, all while pursuing efficient and accurate
operational control. As such, while most boards contribute
to strategic and economic development, many modern
boards also focus efforts on governance issues, resource
management, and fiscal oversight, all in the interest of
protecting public interest (Goldschmid, 1998; Heracleous
& Luh, 2002; Herman & Renz, 2000). These governance
and control activities by the board are likely to encourage
fiscal responsibility and prudent management of resources
by non-profit organizations (Johnson, Daily, & Ellstrand,
1996).
PAQ WINTER 2011 527

Of pressing interest to both nonprofit practitioners

and academics, is the influence of board effectiveness on
bottom-line financial results. With recognition of the
board‟s role in developing resources, initiating the
development of influential networks, and managing fiscal
policy, a number of studies have reported direct links
between board behavior and organizational performance.
Bradshaw et al. (1992), for example, identified a significant
relationship between the accounting control activities of the
board and the organization‟s ability to manage financial
deficits. Hodge and Piccolo (2005) drew an empirical link
from the CEO‟s ability to inspire board engagement in
planning to the organization‟s financial vulnerability. These
and other studies (Crittenden, 2000; Gronbjerg, 1991;
Jackson & Holland, 1998) provide support for the notion
that effective board practices (e.g., planning, control,
resource development) have an impact on the overall
financial health of a nonprofit.
Thus, in light of both theoretical and empirical
support for the importance of board effectiveness, we
hypothesize:
Hypothesis 1: Board effectiveness is negatively
associated with financial vulnerability.

Funding Source and Private Philanthropy

While the primary purpose of this study is to
examine the influence of board effectiveness on financial
vulnerability, we are also interested in whether or not that
relationship holds based on an organization‟s primary
source of funding. In that vein, we drew on assertions
within resource dependence theory (Pfeffer & Salancik,
2003). According to the theory, an organization‟s strategy,
structure, and survival depend on the nature and
concentration of its resources, and the existence of
dependency relationships with external institutions. In
essence, activities by CEOs and board members are
528 PAQ WINTER 2011

strongly influenced by the source and stability of an

organization‟s resources. A heavy concentration of
resources from a particular source (e.g., a high revenue
generating customer) may constrain an organization‟s
flexibility and ability to adapt to environmental changes
(Heimovics et al., 1993).
The influence of specific resource structures forms
the basis for using the primary funding source as a
moderating variable in this study. Crittenden (2000) stated
that government funding, private contributions, and private
sector payments encompass the major funding structures
observed in the nonprofit sector. Consistent with tenants of
resource dependence theory, each of these structures
impose subtle and/or overt constraints on an organization‟s
operations (Brown, 2000b; Froelich, 1999; Pfeffer &
Salancik, 2003).
Per IRS reporting, revenue for nonprofit
organizations is grouped into three primary sources: 1)
private contributions, philanthropy in the form of
individual donations, corporate gifts, and foundation grants,
2) public support (government grants), and 3) private
sector payments (commercial activity) in the form of user
fees, membership fees, government contracts, and the sale
of products and service. Of the three, private philanthropy
offers important advantages over the other two, and allows
for the development of favorable relationship with external
agencies (Brooks, 2000b). Most contributions from the
private sector, for example, do not come with strict
reporting mandates and can be used at the discretion of the
CEO. In extreme cases, organizations that are funded
entirely with private philanthropy can accept donations
with few stated restrictions on how funds should be used
(Weisbrod, 1998). Further, a high share of funding from
private sources provides a measure of legitimacy for the
organization (Froelich, 1999), desirable for organizations
securing future contributions (Mizruchi, 1996).
PAQ WINTER 2011 529

While it has advantages, a large share of private

philanthropy creates the need for an active and effective
resource development program. Government grants are
regarded as the most stable source of funding for nonprofits
(Brooks, 2000a), so organizations that derive majority
funding from grants and public allocations rely more on
adequate administration of the grant application process,
and less on productive fundraising activity of its board
(Kelly, 1998). High levels of commercial activity (e.g.,
YMCA) offer an agency the ability to generate its own
revenue through the sale of service or membership fees. As
such, these organizations are less dependent on traditional
sources of funding, and less in need of effective fundraising
by board members (Gronjberg, 1991; Froelich, 1999).
Private philanthropy, on the other hand, is considerably less
stable and sensitive to fluctuations in the general economy
(Froelich, 1999). As such, survival and growth for privately
funded organizations will depend to a large extent on the
effectiveness of its board, which is often called on to
facilitate the acquisition of critical financial and other
tangible resources.
We therefore hypothesize:
Hypothesis 2: The relationship between board
effectiveness and financial vulnerability is stronger in
organizations that derive majority funding from
private philanthropy than in organizations that derive
majority funding from either government or
commercial sources.

METHOD

Sample and Procedure

Potential participants for this study were drawn
from three sources: 1) nonprofit organizations that were
affiliated with one of four regional United Way or
America‟s Charities organizations, 2) participants in a
530 PAQ WINTER 2011

nonprofit leadership seminar series held at a local College‟s

center of philanthropy, and 3) a random sample from the
State of Florida‟s database of nonprofit organizations. We
mailed survey packets to potential participants. The packets
included a cover letter which offered a general overview of
the study and a request for participation from one or more
of the organization‟s principles (e.g., Executive Director,
Chairman of the Board, member of executive committee, or
at-large member of the board). With the exception of
organization name and a respondent‟s affiliation with that
organization, responses to the survey were anonymous. The
survey material was sent to potential participants in 246
United Way affiliates, of which 54 returned with complete
and valid information for use in the final database
(response rate = 22.0%). In addition, survey packets were
distributed to 150 participants in a nonprofit seminar series,
from which 35 complete and valid surveys were returned
(response rate = 23.3%).
Our third source of potential participants came from
the State of Florida‟s comprehensive database of nonprofit
organizations. Many of the organizations in the State‟s
database include those with annual revenue less than
$25,000 per year and those associated with a religious
denomination, neither of which are required to make an
annual filing with the IRS. As such, without a valid 990
Form, many of the entries in the State‟s database were
ineligible for this study. Further, unlike the United Way,
the State does not adequately maintain current contact
information for many organizations in the database, so
despite a broad mailing to 548 potential eligible
participants, only 70 (12.8%) returned completed surveys.
Many survey packets were returned as marked as
“undeliverable”.
From the three sources, 159 packets were returned.
Of these, 47 were excluded from the final database. Forty-
three cases were removed because of incomplete survey or
PAQ WINTER 2011 531

financial information, and four cases were removed

because calculated FVI scores were more than 2 standard
deviations from the sample mean. In sum, 112
organizations had complete information and were used in
the final analyses for this study.
To test for non-response bias in our data, we took a
random sample of 75 organizations from the original
mailing to entries in the State of Florida database. Of these,
we were able to derive valid financial vulnerability index
score for 17 organizations that had filed with the IRS. We
then compared average FVI scores for nonrespondents
(m=.26, SD=.13) to those included in the main study
(m=.23, SD=.09). The difference in average FVI scores
was non-significant (t=.97, ns), suggesting that the two
groups were similar in terms of financial vulnerability.

Measures
Financial vulnerability was calculated using the
recommendations of Trussel et al., (2002). The Trussel et
al. measure is an extension of the framework originally
developed by Tuckman and Chang (1991), and provides a
vulnerability index (FVI) based on a weighted-average of
five indicators (equity balance, revenue concentration,
administrative costs, operating margin, and total assets).
Values for the FVI equation were drawn from an agency‟s
IRS Form 990, which is available for public review based
on 501(c) 3 reporting regulations. To increase reliability
and control for extraordinary circumstances in any one year
of an agency‟s financial performance, we calculated a
three-year average for financial vulnerability, a
recommendation made by the measure‟s original authors
(Tuckman & Chang, 1991). High scores on the FVI (>.20)
indicate that a firm is vulnerable to financial shock (Trussel
et al., 2002).
532 PAQ WINTER 2011

Board effectiveness. The Board Self-Assessment

Questionnaire (BSAQ; Jackson & Holland, 1998) was used
to calculate the perceived overall effectiveness of the board
of directors. The BSAQ includes 67 items which were
designed to evaluate the board‟s activity along six broad
dimensions of board function - contextual, educational,
interpersonal, analytical, political, and strategic.
Respondents used a Likert scale (1=strongly disagree,
4=strongly agree) to indicate the extent to which they
agreed with statements such as, “Orientation programs for
new members include a segment about the organization‟s
history and traditions” (contextual), “I have participated in
board discussions about what we should do differently as a
result of mistakes made by the board” (educational), “I
have had conversations with other members of this board
regarding common interests we share outside this
organization” (interpersonal), “This board takes regular
steps to keep informed about important trends in the larger
environment that might affect the organization”
(analytical), “This board communicates its decisions to all
those who are affected by them” (political), “This board
sets clear organizational priorities for the year ahead”
(strategic). The BSAQ was originally validated by Jackson
and Holland (1998), and has been used in several additional
studies of board activity (e.g., Brown, 2005; Jackson &
Holland, 1998; Kovner, Ritvo, & Holland, 1997;
McDonagh, 2006).
Funding source. To gauge the primary funding
source of each participating organization, we used
information available in each organization‟s annual filing
with the Internal Revenue Service. Part I of IRS Form 990
(Revenue, Expenses and Changes in Net Assets) reports a
filer‟s revenue across funding category including direct and
indirect public support, membership fees, and government
grants. In the current study, private funding included cash
PAQ WINTER 2011 533

and non-cash donations, corporate contributions, indirect

support, and foundation grants; commercial activity
included private-sector payments for service, rental income,
membership fees and dues, and revenue realized from
government contracts. All government funding was in the
form of contributions and grants as listed on line 1c of
Form 990. To distinguish between government grants and
government contracts in the current study, we followed the
specific guidelines laid out in the IRS Form 990. As
described on the form, values in line 1c represent
contributions and grants offered by the government. Values
in line 2 on Form 990 represent program service revenue
including government fees and contracts for service.
Funding source was operationalized by identifying the
agency‟s primary funding source and assigning a
corresponding categorical variable (1=private,
2=government, 3=commercial). In the current study,
organizations that were categorized as „private‟ received,
on average, 69% of total revenue from private funding.
Organizations categorized as „government‟ and
„commercial‟ received, on average, 64% and 78% of
revenue from their respective sources.
Control Variables. In addition to the study‟s main
variables of interest, we asked participants to list the CEO‟s
tenure, along with their organization‟s board size (number
of current members), age of organization, primary service
area (e.g., education, social service), national affiliation,
and affiliation with the United Way.

RESULTS

Means, standard deviations, and intercorrelations

among the study‟s variables are presented in Table 1.
Although not of primary interest, relationships between the
control variables and financial vulnerability are worth
534 PAQ WINTER 2011

noting. The age of an organization was positively

associated with scores on the BSAQ (r=.23, p<.05), but
only marginally associated with scores on the FVI (r=-.15,
ns). These results suggest that older organizations tend to
have more effective boards, but do not necessary maintain a
more efficient management of financial resources. Board
size, on the other hand, was significantly related to both
board effectiveness (r=.28, p<.01) and FVI (r=-.25, p<.01),
suggesting that large boards might influence the perception
of effectiveness and facilitate greater economic health for
the organization.
Hypothesis 1 suggested that board effectiveness
would be negatively related to financial vulnerability. In
support of this hypothesis, scores on the BSAQ were
negatively and significantly associated with scores on the
FVI (r=-.26, p<.01), supporting the notion that effective
board functioning reduces an organization‟s vulnerability to
economic shock. While modest, the correlation between
board effectiveness and vulnerability is consistent with
other studies that have examined group functioning and
organization-level financial performance (e.g., Brown,
2005; Gill, Flynn, & Reissing., 2005; Rojas, 2000).
PAQ WINTER 2011 535

Table 1
Intercorrelations among the Study’s Variables
Mean SD 1 2 3 4 5 6

1. Age (years) -
27.49 17.45
2. CEO tenure 11.07 8.60 -
.29**
(years)
3. Board size 18.54 11.79 .32** -
.10
4. National .44 .50 .13 .02 -
.24**
affiliation
5. United Way .70 .46 .20* -.15 .16* -
.06
affiliation
6. BSAQa .64 .11 .23** .17* .28** .00 -
-.01
7. FVIb .23 .09 -.15 -.04 -.25** -.08 -.00 -
.26**

Note. n = 112. a Board Self Assessment Questionnaire (BSAQ). b Financial

Vulnerability Index (FVI). *p < .05. ** p < .01.

To isolate the unique predictive validity of board

effectiveness, we conducted a hierarchical regression
analysis in which stable characteristics of the organization
(age, board size) were entered in step one of a regression
model and scores on the BSAQ were entered in step two.
Age represents the longevity and adaptability of a social
service organization, and indicates, in part, an
organization‟s ability to survive in a competitive, resource-
dependent environment. Board size, on the other hand,
indicates the organization‟s legitimacy and ability to attract
voluntary support for its mission. As such, age and board
size were regarded as meaningful correlates of the
organization‟s financial health. If the beta coefficient in
step two of this regression model is significant, results of
the model suggest that board effectiveness explains
variance in FVI beyond stable and important characteristics
of the organization.
536 PAQ WINTER 2011

Results of the regression analysis are presented in

Table 2. As expected, board size (=-.25, p<.05) was
significantly associated with financial vulnerability. While
age was negatively associated with FVI (=-.07, ns), the
effect was not significant. As a set, board size and age
explained 8% of the variance in vulnerability. In further
support of hypothesis 1, board effectiveness (=-.22,
p<.05) explained additional variance (R2, p<.05) in FVI
beyond age and board size.

Table 2
Incremental Variance of BSAQ in Predicting Financial
Vulnerability
Financial Vulnerability

Beta R2 R2

Step 1:  

Age of the organization -.07 .08* .08*

Board size -.25*

Step 2:

BSAQ -.22* .12* .04*

Note. * p < .05 (two-tailed).

Hypothesis 2 asserted that the relationship between

effectiveness and vulnerability would be moderated by
major funding source, such that the association between
BSAQ and FVI would be stronger in privately-funded
organizations than in organizations that derive a majority of
their funding from governmental (public) or commercial
sources. To identify an organization‟s primary funding
source, to test hypothesis 3, we split our database into three
separate groups (private, government, commercial) based
PAQ WINTER 2011 537

on an organization‟s primary source of funding – a

technique that has been used in other studies of resource
structure (e.g., Hodge & Piccolo, 2005). We then
conducted an analysis-of-variance (ANOVA) to determine
if differences in effectiveness or vulnerability across groups
were statistically significant.
As results in Table 3 reveal, the levels of board
effectiveness and vulnerability were similar across
organization-type. BSAQ scores in privately- (m=.63,
SD=.09), government- (m=.65, SD=.12), and
commercially-funded (m=.66, SD=.11) organizations were
not significantly different (F=1.37, ns), nor were calculated
scores on the FVI (.23, .23, .24, respectively). Thus, we did
not observe meaningful variance in BSAQ or FVI based
solely on funding source. That is, nonprofit organizations in
each sector report similar levels of perceived board
effectiveness, and enjoy similar levels of financial stability.

Table 3
Comparison of Agencies Based on Primary Funding
Source
Commercia
Private Government
l
(n = 51) (n = 26)
(n = 35)

Mea S Mea Me
SD SD F p
n D n an

.0
BSAQ .63 .65 .12 .66 .11 1.37 .26
9

.1
FVI .23 .23 .05 .24 .08 .12 .88
1

r BSAQ-FVI -.41* -.03 -.19

Note. * p < .05 (two-tailed).

We then calculated correlation coefficients between

BSAQ and FVI in each subgroup. As hypothesized, the
538 PAQ WINTER 2011

correlation between BSAQ and FVI was significant in the

privately funded group (r=-.41, p<.01), but non-significant
in either the government- (r=-.03) or the commercially-
funded group (r=-.19). We then followed the
recommendations of Quiñones, Ford, and Teachout (1995)
to determine if differences between these correlations were
statistically significant. Results are presented in Table 4.
The relationship between BSAQ and FVI was stronger in
privately-funded than in government-funded organizations
(Z=-3.35, p<.05), but while the difference between private
and commercial approached significance (Z=-1.43, p=.10),
differences between the two were non-significant. These
results provide support for hypothesis 2 – board
effectiveness was a meaningful correlate of financial health
in organizations that derive a majority of funding from
private philanthropy, but not so in organizations that derive
funding from government sources or commercial activity.

Table 4
Z-Score Comparison of Correlations between Funding
Source Groups
Funding source pairs

Private Govt. Private Comm. Govt. Comm.

r BSAQ-
-0.41 -0.03 -0.41 -0.19 -0.03 -0.19
FVI

SE M1/
0.15 0.09 0.15 0.13 0.09 0.13
M

p .05 .10 ns

Z -3.35* -1.43 1.15

Note. Z scores were calculated using the technique proposed by

Quiñones, Ford, & Teachout (1995), which estimates the significance
of differences between independent correlations. * p < .05 (two-tailed).
PAQ WINTER 2011 539

We then conducted a hierarchical regression

analysis for the privately funded subgroup. Results are
presented in Table 5. The pattern of results is similar to
those reported for the entire sample. BSAQ emerged as a
significant predictor of FVI (=-.40, p<.05) beyond age and
board size, providing support for the notion that board
effectiveness is particularly important for the economic
health of organizations that derive majority funding from
private philanthropy.

Table 5
Incremental Variance of BSAQ in Predicting Financial
Vulnerability in Privately Funded Groups
Financial Vulnerability

Beta R2 R2

Step 1:  

Age of the organization -.08 .10‡ .10‡

Board size -.29‡

Step 2:
BSAQ -.40* .23* .13*

Note. n = 51. * p < .05. ‡ p < .10.

DISCUSSION

The primary purpose of this study was to examine

relationships among three critical concepts in the nonprofit
and voluntary sector: board effectiveness, private
philanthropy, and financial vulnerability. As demands for
service and efficiency among nonprofits continues to
evolve, the oversight, planning, and development functions
of a voluntary board of directors become especially critical.
As such, we sought to estimate the importance of board
effectiveness on the overall financial health of an
540 PAQ WINTER 2011

organization, and to determine whether or not the board‟s

impact varied with the nature and concentration of an
organization‟s financial resources.
Although previous studies have reported mixed
results regarding the impact of board activity (e.g., Brown,
2005; Crittenden & Crittenden, 2000; Holland & Jackson,
1998), results of the current study identify a clear and
compelling link between board effectiveness and the
overall financial health of a nonprofit organization. When
boards were perceived as effective along six common
dimensions of board activity, their organizations were less
vulnerable to major interruptions in funding or to
catastrophic changes in the economic landscape. In other
words, an organization‟s financial health was directly
associated with board effectiveness – a conclusion that is
consistent with other studies that link an organization‟s
performance to the behavior and structure of its board (e.g.,
Callen et al., 2003; Crittenden, 2000; Heimovics et al.,
1993; Hodge & Piccolo, 2005; Provan, 1980).
Results of the study also support central tenets in
resource dependence theory (Stone, Hager, & Griffin,
2001; Pfeffer & Salancik, 2003, and Froelich, 1999), which
suggests that an organization‟s structure, governance, and
strategic activity depends in part on the nature and
concentration of its primary resources. Organizations that
derive a majority of funding from private sources tend to be
more dependent on the effectiveness of the board than
those that derive majority funding from government or
commercial sources. That is, board effectiveness was more
important in promoting financial stability in privately
funded organizations than in either government or
commercially-funded organization.
Unlike organizations that enjoy stable funding
patterns from private philanthropy or rely on annual
renewal of recurring government grants, privately-funded
organizations tend to employ resource diversification
PAQ WINTER 2011 541

strategies that depend heavily on philanthropy from a wide

range of sources (Froelich, 1999). As results of this study
indicate, the impact of an organization‟s board may depend
on the source of its financial resources. For privately-
funded organizations, resource development and
organizational survival depends heavily on active
engagement by members of the board. For organizations
funded by public or commercial sources, financial stability
may depend more on the organization‟s ability to secure
government grants or to attract consumers of its service,
and less on the effectiveness of its board. These results are
consistent with previous examinations of funding source,
board effectiveness, and financial measures of
organizational performance (e.g., Brooks, 1999; Froelich,
1999; Stone et al., 2001).
The major contribution of this research is the
observed association between measures of board
effectiveness and nonprofit financial performance. A
number of recent studies have offered guidance on research
related to the measurement and impact board effectiveness
(e.g., Callen et al., 2003; Crittenden, 2000; Herman &
Renz, 2000). To that end, the current study utilized the
BSAQ, which has emerged as a valid tool for assessing
board activity and performance (Brown, 2005; Jackson &
Holland, 1998). In addition, the study utilized the Financial
Vulnerability Index (Trussel et al., 2002), which provides a
reliable and objective means for assessing financial
performance among nonprofits (Callen et al., 2003; Hagar,
2001; Trussel et al., 2002).
The influence of board performance on financial
outcomes is of great interest to both the research and
applied nonprofit communities. The diverse service
demands for the modern nonprofit allows the scope of this
research topic to impact a broad array of research areas,
including but not limited to social work, healthcare,
criminal justice, and public administration. Recognizing
542 PAQ WINTER 2011

the impact that a board of directors plays in its

organization‟s financial stability should direct CEO activity
toward effective and efficient development of the process
and activities that facilitate a board‟s contribution.

Limitations
This study focused on effectiveness and efficiency
indicators for Central Florida nonprofit organizations.
Some inherent limitations may be associated with our
measures of board effectiveness and financial vulnerability.
The BSAQ, for example, was assessed with a self report
questionnaire. While this method is among the most
practical and efficient means for collecting data, assessing
effectiveness in this way leaves open the possibility that
responses reflect social desirability, leniency, or recency
bias (Gill, Flynn, & Reissing, 2005; Scissons, 2002).
To calculate FVI scores, financial data were drawn
from secondary sources (IRS 990 tax submissions), some
of which may be limited in terms of reliability and
standardization. The federal government, for example, does
not mandate that all nonprofit organizations report financial
information on an annual basis. Many religious
organizations are not required to file 990 forms with the
IRS, nor are organizations with annual revenues of $25,000
or less. It is possible, therefore, that our results do not
generalize to organizations that are not required to provide
annual account of financial activity. Of note, it was beyond
the scope of this study to assess the accuracy, validity, and
reliability of the BSAQ or the FVI; previous studies have
already done so (e.g., Brown, 2005; Jackson & Holland,
1998 Kovner, Ritvo, & Holland, 1997). Rather, the primary
purpose of this study was to consider an association
between board effectiveness and financial vulnerability.
Lastly, the small sample size (n=112) may limit the
generalizability of the study‟s results in a broad context.
While response rates from the HFUW and nonprofit series
PAQ WINTER 2011 543

populations were consistent with other studies of this kind

(Brown, 2005; McDonagh, 2006), we had a low usable
response rate from entries in the State of Florida database
of nonprofit organizations. In many cases, for example,
contact information for principles in an organization was
incomplete or incorrect. While we attempted to seek
current contact information for many of the database‟s
entries, this proved to be a generally unsuccessful effort.
Although estimated FVI scores were similar for
participants and non-respondents, all organizations in the
sample were located in Central Florida. While very
unlikely, it is possible that observed results would shift in a
broader statewide or national context.

Practical Implications
Implications for professional practice or decision
making from this study imply that the role of the board
clearly is important and has a direct impact on the financial
vulnerability of the organization. Private organizations are
more sensitive to the influences exerted by their boards and
are thus in greater need of an effective board for resource
management and long-term strategic guidance. In that vein,
CEOs of organizations funded from private philanthropy
might consider broad assessment of the effectiveness of the
board, and utilize tools that are inexpensive and relatively
easy to administer and to interpret. The BSAQ, for
example, offers assessment of six important dimensions of
board activity, which are likely to provide insight into
specific areas for board development. Further, the FVI
index and many of its components (e.g., revenue
diversification, financial reserves, and spending ratios)
offer a CEO a quick but comprehensive snapshot of the
organization‟s financial health.
The implications in terms of resource dependence
theory suggest that CEOs may call on their boards as a
response to dependency relationships that derive from the
544 PAQ WINTER 2011

nature of concentration of an organization‟s resource base.

CEOs, for example, might benefit by aligning the board‟s
structure with the organization‟s primary funding source –
a notion that is central in resource dependence theory, and
one that provides researchers and practitioners the
opportunity to further consider the role and impact of an
organization‟s board of directors.

Future Studies
Results of this study provide a platform for future
examinations of board behavior and financial performance.
The current study, for example, took a snapshot of board
effectiveness and assessed financial vulnerability by
estimating a 3-year average. Additional studies might
specifically consider organizations that implement
programs to improve the effectiveness of the board along
the BSAQ‟s six dimensions. Would direct attempts to
encourage valuable board activity lead to increases in
financial stability?
Whereas the BSAQ provides a valid measure of
board effectiveness, the survey, in its current form, does not
generally allow for examination of the individual
dimensions. An attractive characteristic of the BSAQ is the
ability to measure six critical dimensions of board
behavior. The dimensions, however, are highly correlated
(r>.70) with one another. This indicates that the concepts
are not actually distinct, or that respondents are unable to
clearly differentiate between many of the items on the
instrument. As such, very few studies consider the unique
validity of the sub-dimensions, but instead focus on a
composite score of overall effectiveness (e.g., Brown,
2005; Holland, 1998). Future studies might attempt to
examine the sub-dimensions more thoroughly so that
researchers and practitioners can understanding the specific
activities associated with board effectiveness.
PAQ WINTER 2011 545

Lastly, to broaden the applicability of these results,

future studies should attempt to capture a more diverse set
of organizational principles (e.g., board members,
stakeholders) and to obtain multiple measures of
effectiveness from members of the same board. Doing so
would contribute to the assessment of board effectiveness,
and allow for measurement of key concepts across multiple
levels of analyses.

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