SPEA V525 – Management in the Nonprofit Sector

Fall 2009 (course number 31322)

Instructor: Michael Rushton

Office: SPEA 201A
Office hours: TR 9:30 – 11:00, or by appointment, or if my door is open.
Email: mirushto@indiana.edu
Blog: mirushto.blogspot.com

Mission

In this course we will, through the consideration of a diverse selection of research – new
and “classic” – on the nonprofit sector and organizational theory, discuss and advance our
understanding of the tools that enable us to make effective decisions as managers and
leaders in the nonprofit sector.

It is inevitable with students in this class from different degrees and concentrations that
there might be some overlap with topics from other courses. I have reviewed other course
syllabi to ensure this is minimized, and where there is a common topic I should be
providing a somewhat different perspective.

Course Content and Readings

Note there are three sorts of readings in this course: (1) Documents on the web, where
you simply follow the URL as provided; (2) readings to be posted on the OnCourse site;
and (3) Articles from journals.

All of the journal articles listed below are available online in the IU library. To find
articles, go to the IU homepage, then:
• Click “Libraries”
• Click “Resource Gateway”
• Click “Online Full-Text Journals”
• Type the “Journal Title” in the space provided, and click “Search”
• Often a few possible links are given – choose one that includes the year you are
looking for.
If you have any troubles, let me know!

Course Outline

This is the plan, although amendments are possible due to unforeseen events, interesting
topics that become especially newsworthy, new publications, etc.

Note Professor Gazley will teach this class on four days (October 6 & 8 on HR,
November 17 on Advocacy, and November 24 on Ethics) – I will be visiting her section
of V525 on those occasions.
Sept. 1 & 3: Knowledge is decentralized.

In arts administration classes we frequently invoke William Goldman’s classic line about
the movie business: “Nobody knows anything”. Well, it’s not quite true – most people
know something. What makes running an organization challenging is that (1) the
manager doesn’t know everything, and (2) everybody in (and out of) the organization
knows a different set of things, and (3) as a result of the first two points, people can be
opportunistic – they can be guarded with the private knowledge they have, and their
performance will be hard to monitor.

Here are some “classics” that consider the implications of this situation:

F. A. Hayek, “The use of knowledge in society” American Economic Review 35(4)

(September 1945): 519-30.

R. H. Coase, “The nature of the firm” Economica 4 (November 1937).

Eugene F. Fama and Michael C. Jensen, “Separation of ownership and control” Journal
of Law and Economics 26 (June 1983): 301-325.

Sept. 8 & 10 & 15: Contracts are incomplete

In a world where the manager cannot know everything and cannot perfectly observe
everything, perhaps a solution is to ensure that in all dealings she “gets it in writing”.
Unfortunately, we cannot do this – in practical terms, no contract can possibly account
for every conceivable contingency, and, more importantly, no contract can perfectly
capture every aspect of performance. In dealings with staff and with other agencies, the
manager lives in a world of incomplete contracts.

Is the nonprofit form of organization a means by which an entrepreneur can provide

assurances of quality, given that quality of service provided cannot be contracted?

Joseph P. Newhouse, “Toward a theory of nonprofit institutions: an economic model of a

hospital” American Economic Review 60(1) (March 1970): 64-74.

Henry B. Hansmann, “The role of nonprofit enterprise” Yale Law Journal 89(5) (April
1980): 835-901. [This is online in the JSTOR Arts and Sciences IV Collection].

Evelyn Brody, “Agents without principals: The economic convergence of the nonprofit
and for-profit organizational forms” New York Law School Law Review 40(3)
(1996): 457-535 [you can download the paper for free here:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=918230].

Anup Malani and Eric A. Posner, “The case for for-profit charities” Virginia Law Review
93 (2007): 2017-2067.
[http://www.virginialawreview.org/content/pdfs/93/2017.pdf].
Sept. 17: Are nonprofits really so different from commercial, for-profit firms?

The articles from the previous week theorized about whether nonprofits are
fundamentally different from for-profits. What is the evidence? We’ll focus on the health
care sector.

Myron J. Roomkin and Burton A. Weisbrod, “Managerial compensation and incentives in

for-profit and nonprofit hospitals” Journal of Law, Economics, and Organization
15(3) (October 1999): 750-781.

Jill R. Horwitz, “Does nonprofit ownership matter?” Yale Journal on Regulation 24

(Winter 2007): 141-199. [you can download the paper for free here:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=964961].

Sept. 22 & 24 & 29: Contracting with government

There is a vast literature on nonprofit-government relations, some of it covered in other

SPEA courses – we will need to be selective here.

We’ll look at this issue from both sides (now): what are the benefits and costs to the
government and to the quality and cost of service provision? When should it “contract
out”? The answer has relevance for nonprofit managers who are also often faced with
choices about what services to produce in-house and what services to purchase from
other organizations.

Contracting and incentives:

Oliver Hart, Andrei Shleifer and Robert W. Vishney, “The proper scope of government:
theory and an application to prisons” Quarterly Journal of Economics 112(4)
(November 1997): 1127-61 [don’t worry about understanding the math – it’s the
core ideas we want to discuss].

Andrei Shleifer, “State versus private ownership” Journal of Economic Perspectives

12(4) (Fall 1998): 133-150.

The contracting relationship:

David Van Slyke, “Agents or stewards: using theory to understand the government-
nonprofit social service contracting relationship” Journal of Public
Administration Research and Theory 17(2) (2007): 157-187.
The effects on nonprofit governance:

Judith R. Saidel and Sharon L. Harlan, “Contracting and patterns of nonprofit

governance” Nonprofit Management & Leadership 8(3) (Spring 1998): 243-259.

Katherine O’Regan and Sharon Oster, “Does government funding alter nonprofit
governance? Evidence from New York City nonprofit contractors” Journal of
Policy Analysis and Management 21(3) (Summer 2002): 359-380.

Chao Guo, “When government becomes the principal philanthropist: the effects of public
funding on patterns of nonprofit governance” Public Administration Review 67(3)
(May/June 2007): 458-473.

Oct. 1: Endowments

What nonprofit manager does not wish she had a substantial endowment providing a
steady stream of investment income? But does such a situation create adverse incentives
for managers?

Henry Hansmann, “Why do universities have endowments?” Journal of Legal

Studies19(1) (January 1990): 3-42.

Michael C. Jensen, “Agency costs of free cash flow, corporate finance, and takeovers”
American Economic Review 76(2) (May 1986): 323-329. [This paper is about
corporate finance, but contains an important lesson for nonprofits].

Raymond Fisman and R. Glenn Hubbard, “The role of nonprofit endowments” in Edward
L. Glaeser (ed.) The Governance of Not-for-Profit Organizations (National
Bureau of Economic Research, 2003). [http://www.nber.org/chapters/c9971.pdf].

Oct. 6 & 8: Human resource management (with Professor Gazley).

Paid personnel: Class discussion will address this question: Is NPO human resources
management the same as HRM in any sector? What are the similarities, differences with
public sector and business sector HRM? What does that mean when it comes to design of
a good HR program?

Minnesota Council of Nonprofits “Human Resources Basics” at

http://www.mncn.org/info/basic_hr.htm#Personnel%20Policies

The Nonprofit HR Center at http://www.idealist.org/hrp and Carter McNamara’s HR

resources at http://managementhelp.org/org_eval/uw_hr.htm

Herman, Robert and Associates (2004) The Jossey-Bass Handbook of Nonprofit

Leadership and Management, 2nd edition., San Francisco: Jossey-Bass:
 • Chapter 23: M. Sue Sturgeon, Employee Recruitment and Retention
• Chapter 24: Nancy Day, Total Rewards Programs (Compensation)

Bruce Hopkins. 2009. Starting & Managing a Nonprofit Organization: A Legal Guide,
5th edition. Wiley: Chapter 10. [These chapters will be posted on OnCourse].

Volunteers: How are principles of volunteer management the same as those for personnel
management generally, and how are they unique? What do we need to know about the
similarities and differences between managing and motivating paid and unpaid staff to
make sense of this vast literature?

Herman:

• Chapter 13: Jeff Brudney, Designing and Managing Volunteer Programs

• Chapter 22: Stephen McCurley, Recruiting and Retaining Volunteers

R. Herman, “Board members as volunteers.” In Brudney, J.L., Emerging Areas in

Volunteering. Indianapolis: ARNOVA (2005).

Oct. 13 & 15: Performance measurement and governance

Performance measures are a tool for dealing with the imperfect-and-decentralized-

knowledge and incomplete-contract problem: find some quantities that everyone can
observe and verify, and evaluate performance based on those quantities.

A general warning:

Steven Kerr, “On the Folly of Rewarding A, While Hoping for B” Academy of
Management Journal 18(4) (1975): 769-783.

Nonprofits:

Jeremy Kendall and Martin Knapp, “Measuring the performance of voluntary

organizations” Public Management (London) 2(1) (2000): 105-132.

Robert S. Kaplan, “Strategic performance measurement and management in nonprofit

organizations” Nonprofit Management and Leadership 11(3) (Spring 2001): 353-
370.

Gerhard Speckbacher, “The economics of performance management in nonprofit

organizations” Nonprofit Management and Leadership 13(3) (Spring 2003): 267-
281.
An application:

Jonathan W. Curtright et al, “Strategic performance management: development of a

performance measurement system at the Mayo Clinic” Journal of Healthcare
Management 45(1) (January/February 2000): 58-68.

How effective are nonprofit boards in evaluating performance?

Judith L. Miller, “The board as a monitor of organizational activity: the applicability of

agency theory to nonprofit boards” Nonprofit Management & Leadership 12(4)
(Summer 2002): 429-450.

Jeffrey L. Callen, April Klein and Daniel Tinkelman, “Board composition, committees,
and organizational efficiency: the case of nonprofits” Nonprofit and Voluntary
Sector Quarterly 32(4) (December 2003): 493-520.

Oct. 20 & 22: Accountability

In our imperfect-and-decentralized-knowledge and incomplete-contract world, how is the

nonprofit held accountable? We’ll draw our examples from the international NGO sector.

David L. Brown and Mark H. Moore, “Accountability, strategy, and international

nongovernmental organizations” Nonprofit and Voluntary Sector Quarterly 30(3)
(2001): 569-587.

Alnoor Ebrahim, “Accountability in practice: mechanisms for NGOs” World

Development 31(5) (2003): 813-829.

Alnoor Ebrahim, “Making sense of accountability: conceptual perspectives for northern

and southern nonprofits” Nonprofit Management & Leadership 14(2) (2003):
191-212.

Oct. 27 & 29 & Nov. 3: Charging for services – rules of thumb for setting prices

Let’s split this problem into two parts.

First, suppose your organization is trying to set prices to maximize its profits; perhaps
you are going to use the profits from this one activity to cross-subsidize some important
mission-driven activity. How should you do it?

MR, “Notes on Pricing” [to be posted on OnCourse].

Second, suppose the service for which you are charging a price is your primary mission-
related activity: tuition fees at a school, or tickets for a ballet, for example. How should
your pricing depart from the profit-maximizing levels?
Richard Steinberg and Burton A. Weisbrod, “Pricing and rationing by nonprofit
organizations with distributional objectives” In B. Weisbrod (ed.) To Profit or Not
to Profit (Cambridge University Press, 1998). [on OnCourse].

Dennis R. Young and Taehyun Jung, “Mission-market tensions and nonprofit pricing”
Andrew Young School of Policy Studies, Georgia State University, Working
Paper 08-03 (2008). [Free download here:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1083806].

Coda: the strange case of Under the Rainbow Child Care Center:

Stephanie Strom, “Tax exemptions of charities face new challenges” New York Times
(May 26, 2008) [http://www.nytimes.com/2008/05/26/us/26tax.html].

Under the Rainbow Child Care Center v. County of Goodhue, 741 N.W.2d 880 (Minn.
2007). [http://www.lawlibrary.state.mn.us/archive/supct/0712/OPA070468-
1206.htm].

Lucinda Jesson and Myron L. Frans, “What qualifies as a public charity? Minnesota
enters the national debate” William Mitchell Journal of Law and Practice (April
15, 2008). [you can download the paper for free here:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1300507].

Nov. 5: Mid-term exam

Nov. 10 & 12: Commerce

When does it make sense for a nonprofit organization to attempt to earn revenues through
a non-mission related activity? We begin by considering the market environment.

Michael E. Porter, “How competitive forces shape strategy” Harvard Business Review
(March/April 1979): 137-145.

If you have decided to enter a market, is it a smart idea to create a subsidiary company to
handle such business?

Howard P. Tuckman, “The strategic and economic value of hybrid nonprofit structures”
in Joseph J. Cordes and C. Eugene Steuerle (eds.) Nonprofits & Business (Urban
Institute, 2009) [on OnCourse – although we are just reading this one chapter in
this course, the book is worth having on your shelf].

Nov. 17: Advocacy (with Professor Gazley)

http://www.clpi.org/the-law/faq and
http://www.irs.gov/newsroom/article/0,,id=154712,00.html
Herman, Chapter 10: Smucker, Nonprofit Lobbying

Hopkins, Chapter 14, 15 [OnCourse].

Nov. 19: The taxation of nonprofit earnings – nonprofit decision-making

Why is the income tax treatment of nonprofit earnings the way it is, and how does it
influence nonprofit organization decision-making?

Henry B. Hansmann, “Unfair competition and the unrelated business income tax”
Virginia Law Review 75 (1989): 605-635. [In the JSTOR Arts & Sciences IV
Collection].

Michael Rushton, “Why are nonprofits exempt from the corporate income tax?”
Nonprofit and Voluntary Sector Quarterly 36(4) (December 2007): 662-675.

Nov. 24: Ethics (with Professor Gazley)

Herman, Chapter 9: Jeavons [OnCourse]

Hopkins, Chapter 25 [OnCourse]

“How Ethical is Your Nonprofit?” at http://www.guidestar.org/news/features/ethics.jsp

Independent Sector’s Model Code of Ethics at

http://www.independentsector.org/media/code_ethicspr2.html

Recommended but not required additional reading: “Ethical and Operational Standards
for Indiana Community Foundations” at
http://www.indianagrantmakers.org/pdfs/ETHICS%20FINAL%202.03.pdf .

Dec. 1: The taxation of nonprofit earnings, continued – public policy

Should there be a higher bar than we currently have for nonprofits claiming tax-exempt
earnings? We’ll look at hospitals (and remember the articles on hospitals earlier in the
semester!) and … football.

John D. Colombo, “The role of access in charitable tax exemption” Washington

University Law Quarterly 82 (2004): 343-387. [you can download the paper for
free here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=681445].

Congressional Budget Office, “Taxing the untaxed business sector.” Background paper
(July 2005). [http://www.cbo.gov/ftpdocs/65xx/doc6567/07-21-UntaxedBus.pdf].
John D. Colombo, “The NCAA, tax exemption, and college athletics” Illinois Public Law
Research Paper 08-08. [you can download the paper for free here:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1336727].

Congressional Budget Office, “Tax preferences for collegiate sports” (May 2009).
[http://www.cbo.gov/ftpdocs/100xx/doc10055/05-19-CollegiateSports.pdf].

Dec. 3 & 8: Innovation

A nonprofit organization can only be “innovative” if someone in the firm is generating

good ideas (which includes finding a “best practice” from another organization and
figuring out how to apply it), and the manager is seeing that good ideas are implemented.
What factors characterize an environment conducive to the generation of good ideas?

One very popular current school of thought is that the local, urban environment matters.

Florida, Richard (2002) “Bohemia and Economic Geography” Journal of Economic

Geography 2(1): 55-71.

Glaeser, E.L. (2005) “Review of Florida’s ‘The Rise of the Creative Class’” Regional
Science and Urban Economics 35: 593-6.

Markusen, Ann (2006) “Cultural Planning and the Creative City”

[http://www.hhh.umn.edu/projects/prie/pdf/271_planning_cultural_space.pdf].

McGranahan, David, and Timothy Wojan (2007) “Recasting the Creative Class to
Examine Growth Processes in Rural and Urban Counties” Regional Studies 41(2):
197-216.

Hoyman, Michele and Christopher Faricy (2009) “It takes a village: A test of the creative
class, social capital and human capital theories” Urban Affairs Review 44(3): 311-
333.

Inside the firm, which people come up with good ideas?

Ronald S. Burt, “Social origins of good ideas” Draft manuscript.

[http://www.analytictech.com/mb709/readings/burt_SOGI.pdf].

But people only generate good ideas if they have incentives to do so. Will they be
rewarded? Do their ideas have a reasonable chance of being implemented?

George Baker, Robert Gibbons and Kevin J. Murphy, “Informal authority in

organizations” Journal of Law, Economics, and Organization 15(1) (April 1999):
56-73. [A bit of math here, but not as complex as it first appears, and the ideas are
very important for nonprofit leadership].
Dec. 10: A Summing Up

Dec. 15 (Tuesday): Final exam 8:00 – 10:00 a.m.

Evaluation and Grading

Students will prepare three short papers on topics to be assigned later. There is a mid-
term exam on November 5 and a final (cumulative) exam December 15. The final grade
will be calculated as follows:

Papers 15 marks each

Mid-term exam 20 marks
Final exam 35 marks

The grading scale is as follows:

Letter grade Percentage

A+ 97-100
A 93-96.99
A- 90-92.99
B+ 87-89.99
B 83-86.99
B- 80-82.99
C+ 77-79.99
C 73-76.99

SPEA Academic Policies - Academic Dishonesty

SPEA faculty do not tolerate cheating, plagiarism, or any other form of academic
dishonesty. If you have not done so, you should read the IUB Code of Student Rights,
Responsibilities, and Conduct, which can be accessed at http://dsa.indiana.edu/Code/ so
you will be sure to understand what these terms mean and what penalties can be issued
for academic dishonesty. Academic dishonesty can result in a grade of F for the class (an
F for academic dishonesty cannot be removed from the transcript). Significant violations
of the Code can result in expulsion from the University.

Plagiarism is using another person's words, ideas, artistic creations, or other intellectual
property without giving proper credit. According to the Code of Student Rights,
Responsibilities, and Conduct, a student must give credit to the work of another person
when he does any of the following:

a. Quotes another person's actual words, either oral or written;

b. Paraphrases another person's words, either oral or written;
c. Uses another person's idea, opinion, or theory; or
d. Borrows facts, statistics, or other illustrative material, unless the information is
common knowledge.

AMERICANS WITH DISABLITIES ACT STATEMENT:

I will make accommodations for students registered with Adaptive Educational Services
(AES) on the Indianapolis campus (Phone: 317-274-3241 or e-mail AES@iupui.edu) or
the Disability Services for Students Office in Franklin Hall on the Bloomington campus
(Phone: 812-855-7578).