Research Findings

Nonprofit interlocks on corporate boards: Corporate board members on the boards of nonprofit organizations

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June 13, 2019

No one likes to be told what to do, but it happens all the time—even to some of the most powerful people. When powerful people have to comply, what does that mean for the organizations they influence?

We all know what it feels like to be coerced into doing something that makes us uncomfortable. As you consider examples of this, you may go to the extreme and think of a scenario where someone puts a gun to your head and tells you to do something that you never would do otherwise. While a gun to the head is, luckily, very unlikely, there are many settings where we might see forced compliance in our day to day world – including both business and philanthropic settings.

We see this, for example, when watchdog groups or other outside stakeholders (for example, regulatory agencies) mandate certain rules and actions even when the organizational members themselves consider the mandate to be detrimental to their stakeholders. Our motivation for this study was in exploring the performance impact of forced compliance on boardroom actions in corporate and non-profit settings.

The theoretical root of our arguments stems from work done by institutional theorists, who have argued that organizations gain legitimacy as they become more similar. Being alike justifies and confers status to organizations. Loosely defined, this process of organizations becoming similar to others has been termed ‘isomorphism’ by institutional theorists. In particular, coercive isomorphism is a special condition of copying behavior that occurs when an organization gets pressure both from other organizations and also from cultural expectations.

Plenty of research has shown that coercive pressures lead organizations to look alike. However, we wondered whether such coercive pressures impacted organizational leaders in such a way that those leaders internalized the pressure and carried it with them to other organizations. In particular, many people sit on the boards of directors at multiple organizations, a phenomenon known as ‘board interlocks.’ What happens if a board succumbs to coercive pressures and its members sit on boards of organizations not exposed to the same pressures? Will those organizations not exposed to coercion nevertheless start to exhibit the same characteristics?

Our theory was built on the idea that humans are not always rational in our information search and processing. In particular, when we are pressured to act in a certain way or communicate an opinion that is perhaps not quite our own, we tend to make sense of our mismatched behavior by internalizing that behavior or opinion as our own. In other words, we begin to believe what we’ve been forced to do or say. This is a well-documented psychological phenomenon known as the ‘forced compliance effect.’ Our research team wondered if having to comply with coercive pressures on one board would lead directors to exhibit the same behavior on other boards, absent the same coercive pressures.

To answer this question, we looked at interlocks between for-profit and nonprofit organizations, as these experience different types of coercive pressures. Many directors sit on the boards of both for-profit and nonprofit organizations. For example, we found directors of large Fortune 500 companies that had simultaneous board responsibilities at their alma mater, their local performing arts center, and/or nationally recognized non-profit organizations such as Goodwill and United Way. We wondered whether these multiple board memberships across disparate organizations would serve as a different kind of conduit of isomorphism, which might result in a “ripple effect” of coercive isomorphism across vastly different organizational groups.

To narrow down our range of potentially coerced activities, we decided to examine a phenomenon known as ‘overhead aversion,’ which has proliferated in nonprofit circles – sadly, often with negative consequences. Nonprofit organizations have been strongly pressured over the last few decades, usually by watchdog agencies, into minimizing their overhead expenses (for example, administrative and fundraising costs). As a result, overhead minimization has become one of the most widely used metrics of nonprofit organizational effectiveness. Unfortunately, the nonprofit world has undergone what some call a ‘starvation cycle,’ wherein nonprofits have cut overhead so severely, they are unable to grow or to prosper as organizations.

If the corporate board members serving on philanthropic boards must comply with the coercive demands of overhead minimization, the forced compliance effect suggests that we should see a similar decline in overhead and a possible ‘starvation cycle’ in the corresponding corporations for these interlocked board members. To test our theory, we collected data on overhead expenditures and performance from the 225 largest publicly traded firms from 2010 to 2014.

Upon analysis, our results were clear – coercion in the nonprofit realm rippled into the significantly different for-profit realm through board interlocks, and the corporations were the worse for it. Based on the results we found, we suspect that corporate board members who also volunteered on philanthropic boards were likely pressured into minimizing overhead, and, although likely unintentionally, brought these same unwise practices to their corporate boards – resulting in a reduction in intangible asset investments by those corporations.

These decisions had negative consequences on the company’s long term health. The likely mechanism for this behavior is that those being coerced ultimately justified their behavior by shifting their beliefs in the ability of overhead aversion to be effective. Not surprisingly then, we found that the effect was even stronger if the board connections were held by more powerful leaders – those who held the CEO or Board Chair, or lead director roles or held 1% or greater stock in the company.

Why does this matter? It is important to understand that the people leading major organizations are not immune to the forced compliance effect. Because we are human, we tend to justify our behavior to make sense of it, even sometimes without recognition that this has occurred – and often the result is a not-so-wise decision. For organizations that rely on the decision making skills of their board members – in other words, practically all of them – the ripple effect across organizational fields that we found in our study is extremely disconcerting.

What can be done about it? Recognition of the potential ripple effect is at least a step in the right direction. If board members know what to look for, this can help them focus their strategies on making the best decisions for both nonprofit and corporate organizations. Until we’ve figured out how to eliminate human biases in decision making, our best approach is admission and transparency to our possible faults.

Read more

Ryan Krause, Zhiyan Wu, Garry D. Bruton, and Suzanne M. Carter, “The coercive isomorphism ripple effect: An investigation of nonprofit interlocks on corporate boards.” Academy of Management Journal 2019.

Image: reynermedia via Flickr (CC BY 2.0)

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