Corporate Governance Without Shareholders: a Cautionary Lesson from Non-Profit Organizations

George W. Dent, Jr.

A debate about corporate governance has long raged over the allocation ofpower between shareholders and directors. Proponents of “shareholder primacy” believe that the corporate board should be chosen by and accountable to the stockholders rather than dominated by the CEO, as they believe is common now. Advocates of “director primacy” want to limit shareholder power because they believe that shareholders have conflicting objectives, are uninformed, and pressure the directors to sacrifice the long-term health of the company to short-term share price.

The governance of non-profit organizations (“NPOs”) offers an example that illuminates the corporate governance debate. Directors of NPOs suffer no pressure from shareholders because NPOs have no shareholders; NPO boards are effectively self-perpetuating. If the director primacists are correct, the governance of NPOs should be a model of wise, long-term management effected by officers who are clearly subordinate to the board

In fact, however, a remarkable consensus of experts on NPOs agrees that their governance is generally abysmal, considerably worse than that of for-profit corporations. NPO directors are mostly ill-informed,quarrelsome, clueless about their proper role, and dominated by the CEO as proponents of shareholder primacy would predict. In sum, the experience of NPO governance refutes the claims of director primacy that the absence of strong shareholders facilitates effective corporate governance.