Non-profit institutions have undergone spectacular growth in recent times, in order to fill a vacuum that the marketplace, other companies and other organizations were unable to fill when it comes to providing services. Like other organizations that involve a range of participants, and which need to allocate resources to several activities, NGOs must be governed efficiently and with total transparency.
The governing bodies of Spain’s most important non-profit institutions – the NGOs involved in development-related activities – urgently need to be reformed, according to a study, “Governing Those without Government.” The research was done by University of Valladolid researchers Pablo de Andrés Alonso, Natalia Martín Cruz and Elena Romero Merino. Valladolid is in the northern section of Spain. The study was published in Universia-Business Review.
The authors note widespread growing concern in recent years about the governance of Spain’s non-profit institutions, both in the public and private sectors. Regarding the private sector, the study emphasizes research undertaken by two foundations — the Luis Vives Foundation and the Lealtad Foundation — which found that NGOs need to do a more efficient job of managing their resources. Lealtad set off alarm bells when it created its second guide for transparency and best practices for Spain’s 68 NGOs. In the study, Lealtad warned about “the repeated failure of organizations when it comes to fulfilling principles related to the regulation of governance organs and the majority of financing sources.”
In the public sector, as well, many efforts have been made to enhance the efficiency of non-profit organizations’ governance bodies through legal reforms aimed at stimulating private initiative and public-sector disinvestment in areas of public interest. In addition to these laws, other, privately funded research has helped define the key characteristics of effective governance bodies. However, none of these studies explains the impact of these characteristics on the efficiency of those organizations. “They do not evaluate the capacity of governance bodies to act as a mechanism for controlling organizations and their managers,” the authors write.
Government and the Efficiency of the NGO
In an effort to fill that void, the University of Valladolid professors undertook their study, which involved 42 Spanish NGOs. Their goal was to evaluate the influence of governance bodies and institutional donors on the NGO’s effectiveness. The study cast light on the unique character of these governance bodies, in which 77% of all board members do not have any contractual relationship with the NGO. Most board members are professionals who are active in other sectors, and dedicate a part of their time to the NGO. “Only one-third of the organizations have an Executive Commission that can provide greater flexibility and agility to the governance body,” the study notes. “In 72.5% of the organizations, the foundation plays that role. The latest governance practices are more skillfully employed by the foundations than by the [non-profit] associations.”
In an effort to analyze the impact of these organs of governance on the effectiveness of the NGOs, the authors developed “an indicator of efficiency that is simple, homogenous, objective, and comparable for all NGOs.” More specifically, they explained, “We are focusing on economic efficiency in two of the most traditional areas – cost-effectiveness and operational efficiency.”
Generally speaking, for an institution to realize its goals, its administrative expenses should not exceed 8% of its total cost requirements, the study found. Moreover, 80% of the donations raised by the institution should be directly dedicated to its projects [as opposed to its expenses.] What really surprised researchers: There was no evidence of any influence between the characteristics of NGO’s governance bodies and the actual efficiency of the institutions. “This contrasts strongly with the perception, repeatedly stressed by theorists, that correct supervision and control on the part of governance bodies should translate into greater efficiency within the organization,” notes the study. In the case of Spain, “the activity of governance bodies does not necessarily lead to more efficient functioning of the NGO,” adds the study.
The information supplied by NGOs’ planning departments shed additional light on this data. Apart from the fact that they maintain their independence from the NGOs, associations and board members don’t have the relevant knowledge they need in order to expand their functions within these institutions. “Their functions are reduced to annually approving the financial results and budgets.” In many cases, consultants have the experience needed to help the organization achieve their goals, either through raising funds or controlling how funds are allocated. However, in practice, they [consultants] have little free time to devote to the NGO because most consultants work full-time in the private sector.”
If the boards Don’t Govern, Who Does?
Because the boards lack efficiency and effectiveness, donors take on a major role in the efficient management of resources. In the case of Spain, the authors note that the NGOs depend too much on public-sector donors to raise funds. In addition, although this dependence conflicts with the principle of majority financing, it is clear that no one is better than they are at guaranteeing that the funds that they raise are allocated efficiently. Two-thirds of the funds that Spanish NGOs receive depend on such public-sector institutions as the European Union, Spain’s “autonomous communities,” and the AECI, Spain’s international agency for developmental aid.
According to the study, the greater the percentage of funding provided by the AECI [to an NGO], the less the NGO spends on administrative costs and the more the NGO allocates to specific projects. As a result, public subsidies are not only the main source of funding for many Spanish NGOs; they also help improve the NGOs’ economic efficiency. The key should be strong oversight by the AECI over the NGOs that it finances, via compulsory consultations and detailed reports about how the funds it provides are used.
When it comes to public financing, not everything that glitters is gold. The authors note that institutions such as the Lealtad foundation are concerned about NGOs’ excessive dependence on a single donor. The state agency [AECI] will have to do a better job of supervising how NGOs allocate their resources. The authors warn, “It could happen that the goals of the public-sector institution do not coincide with those of the organization.” In such a case, “Excessive dependence on public-sector funding – and on the political marketplace in which they are allocated – could imply that the organizational mission will be sacrificed to assure the [NGO’s] survival. The sword of Damocles hangs over these organizations.”
Nevertheless, the authors believe that the restructuring of governance bodies should have a higher priority than the goal of trying to achieve diversification in their sources of income. That’s because undiversified funding is currently the only efficient guarantee that Spain’s NGOs will be supervised. The elimination of this supervision would be “counter-productive.”
“The fact that boards don’t have influence on the efficiency of the [NGO] organization,” the study stresses, “should be a warning sign that the management councils and boards of directors of Spain’s NGOs need to be restructured.” Most of all, “when you consider the active role of management boards and councils in such areas as strategic planning, the social relationships that are involved in raising funds and carrying out the organization’s mission become the keys to achieving the efficient allocation of resources.”
The authors warn that the restructuring of boards “has become more imperative. We don’t want a high concentration of donations in the hands of a single institutional donor to become a clear indicator that the institution has lost its identity as well as its values.”