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Nonprofit Governance, Public Policy, and the Oxfam Scandal: An Introduction

Governance involves creating rules that facilitate actors to work together towards a common goal, ideally in effective and equitable ways. These rules, or institutions, shape incentives actors face (North 1990) and establish the normative environment in which they function. In doing so, institutions outline what behaviors are prescribed, permitted, or prohibited (Ostrom 1990). Consequently, when actors are involved in working collectively, institutions solve coordination and cooperation problems. They do so by outlining what actors are supposed to do and providing assurance that other actors will act upon the same template (March and Olsen 2010). In a nonprofit setting, this means that a well-functioning nonprofit governance system ensures that nonprofits follow specific rules about, say, how to raise or distribute funds. Consequently, stakeholders have the assurance that the nonprofit sector is functioning in the desired ways. In this ideal setting, nonprofits have both the legal and social license to operate (Gunningham, Kagan, and Thornton 2004). Why do actors not follow the rules? Some suggest that actors disobey rules not because they are acting strategically but because they are either ignorant or the rules are unclear. In this model, education and rule rationalization improve compliance. Others suggest that actors break the rules because they benefit from it. Actors are often socialized into rules compliance by their normative environment. Here actors face a moral cost and social disapproval for breaking the rules. Further, this environment also shapes their moral compass in a way that compliance becomes their default strategy. Yet, socialization pressures and moral considerations can go only so far. Rule compliance is enhanced when the benefits of rule-breaking are reduced, or the costs of doing so are increased. To accomplish this goal, governance systems incorporate monitoring and enforcement mechanisms to make rule-breaking costly, thereby incentivizing rule compliance. But here again, there are trade-offs because monitoring and enforcement themselves are expensive. Compliance costs not only take up valuable resources but also change the organization’s focus on avoiding sanctions as opposed to pursuing its goals. Thus, one of the most profound governance challenges is to figure out the right type and level of monitoring and enforcement the system should provide. While governance gaps are not desirable (Anheier, Hass, and Beller 2013), over-governance poses a problem as well. Governance systems can and do fail. Rules can be poorly defined. Crafty actors can break the rules, and governance units may fail to monitor and discipline the rule breakers (Prakash and Potoski 2016). Not surprisingly, to a varying degree, governance failure is rampant (North 1990). Governance units – whether located in the government, the for-profit, or the nonprofit sector, do not deliver as promised. To some extent, most systems function quite well with a small level of governance shortfall. But problems arise when such failures, or perceptions of failure, appear to be sizeable, leading to citizen and stakeholder backlash. The organization, or sometimes the sector itself, begins to lose its social license to operate, thereby inviting regulatory, political, and economic sanctions. The Oxfam scandal probably represented this sort of tipping point in terms of stakeholder perception of nonprofit failure.