Skip to main content
SpringerLink
Log in

How Do Board Size and Occupational Background of Directors Influence Social Performance in For-profit and Non-profit Organizations? Evidence from California Hospitals

  • Published:
Journal of Business Ethics Aims and scope Submit manuscript

Abstract

This study investigates how board size and occupational background of directors differentially influence social performance in for-profit and non-profit organizations. Using data from California hospitals, we develop a quantitative measure of social performance and provide the following empirical evidence. First, board size is negatively (positively) associated with social performance in for-profit (non-profit) hospitals. Second, the presence of government officials on the board is negatively (positively) related to social performance in for-profit (non-profit) hospitals. Third, representation of physicians on the board is positively associated with social performance in for-profit hospitals, whereas their presence is not significantly related to social performance in non-profit hospitals. Our findings highlight the different effects of governance mechanisms on social performance in for-profit and non-profit organizations.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. Grunewald and Baron (2004) develop a case on governance issues in non-profit organizations.

  2. Adams et al. (2010) offers a review of the small literature in this area.

  3. As an example of physicians’ pro bono work, in 2004 physicians provided approximately $3 billion uncompensated care (Gruber and Rodriguez 2007).

  4. Government hospitals, which are funded by tax revenues, are considered governmental agencies (Eldenburg and Krishnan 2008). They are mandated to provide services to medically indigent patients (Norton and Staiger 1994). Since these hospitals face more regulatory constraints on operations, and their mission and access to resources are fundamentally different from those of non-government hospitals (Eldenburg and Krishnan 2008; Morrisey et al. 1996), I exclude them from my study and focus only on private hospitals, namely, for-profit and non-profit hospitals.

  5. The IRS Healthcare Provider Reference Guide includes medical research as a component of charity care (Owens 2005).

  6. Scaling community benefits by hospital gross patient revenue has been used by prior literature to reduce heteroskedasticity, for example, Alexander et al. (2008) and Eldenburg et al. (2004).

  7. Cost-to-charge ratio is defined as total operating expense divided by the sum of gross patient revenue and other operating revenues.

  8. Weissman et al. (1999) find no significant difference in average income level between bad-debt patients and charity care patients.

  9. MediCal is California’s Medicaid program.

  10. Petersen (2009) explains in detail how to estimate White standard errors adjusted to account for the possible correlation within a cluster in a panel dataset (e.g., datasets containing observations over multiple time periods for the same firms or individuals). He also demonstrates that without such adjustment standard errors are usually substantially underestimated.

  11. The proportion of physicians does not appear to be associated with community benefits, suggesting that, as a group, physician directors might be inclined to have similar opinions on the extent of spending on community benefits.

  12. Gruber (1994) nevertheless acknowledges that net income is a noisy proxy.

  13. DSH program is a program operated at state level that distributes money to hospitals that have 25 % or more of their total costs attributable to Medicaid and uninsured patients.

References

  • Adams, R., Hermalin, B., & Weisbach, M. (2010). The role of boards of directors in corporate governance: A conceptual framework and survey. Journal of Economic Literature, 48(1), 58–107.

    Article  Google Scholar 

  • Aggarwal, R. K., Evans, M. E., & Nanda, D. (2011). Nonprofit boards: Size, performance and managerial incentives. Journal of Economic Literature, 48(1), 58–107.

    Google Scholar 

  • Agrawal, A., & Knoeber, C. (2001). Do some outside directors play a political role? Journal of Law and Economics, 44(1), 179–198.

    Article  Google Scholar 

  • Alexander, J., Morlock, L., & Gifford, B. (1988). The effects of corporate restructuring on hospital policymaking. Health Services Research, 23(2), 311–337.

    Google Scholar 

  • Alexander, J., Weiner, B., & Bogue, R. (2001). Changes in the structure, composition, and activity of hospital governing boards, 1989–1997: Evidence from two national surveys. The Milbank Quarterly, 79(2), 254–279.

    Article  Google Scholar 

  • Alexander, J., Young, G., Weiner, B., & Hearld, L. (2008). Governance and community benefits: Are non-profit hospitals good candidates for Sarbanes–Oxley type reforms? Journal of Health Politics, Policy and Law, 33(2), 200–224.

    Article  Google Scholar 

  • Ashby, J., Guterman, S., & Greene, T. (2000). An analysis of hospital productivity and product change. Health Affairs, 19(5), 197–205.

    Article  Google Scholar 

  • Bai, G., Coronado, F., & Krishnan, R. (2010). The role of performance measure noise in mediating the relation between task complexity and outsourcing. Journal of Management Accounting Research, 22, 75–102.

    Article  Google Scholar 

  • Baker, D. W., Stevens, C. D., & Brook, R. H. (1991). Patients who leave a public hospital emergency department without being seen by a physician. Journal of American Medical Association, 266, 1085–1090.

    Article  Google Scholar 

  • Banks, D., Paterson, M., & Wendel, J. (1997). Uncompensated hospital care: Charitable mission or-profitable business decision? Health Economics, 6, 133–143.

    Article  Google Scholar 

  • Bear, S., Rahman, N., & Post, C. (2010). The impact of board diversity and gender composition on corporate social responsibility and firm reputation. Journal of Business Ethics, 97, 207–221.

    Article  Google Scholar 

  • Beasley, M. (1986). An empirical analysis of the relation between the board of director composition and financial statement fraud. The Accounting Review, 71(4), 443–465.

    Google Scholar 

  • Bindman, A., Grumbach, K., Keane, D., Rauch, L., & Luce, J. (1991). Consequences of queuing for care at a public hospital emergency department. Journal of American Medical Association, 266, 1091–1096.

    Article  Google Scholar 

  • Bingham, J. B., Dyer, W. G., Jr, Smith, I., & Adams, G. L. (2011). A Stakeholder identity orientation approach to corporate social performance in family firms. Journal of Business Ethics, 99, 565–585.

    Article  Google Scholar 

  • Bouckaert, L., & Vandenhove, J. (1998). Business ethics and the management of non-profit institutions. Journal of Business Ethics, 17, 1073–1081.

    Article  Google Scholar 

  • Bowen, W. (1994). Inside the boardroom: Governance by directors and trustees?. New York: Wiley.

    Google Scholar 

  • Bravo, R., Matute, J., & Pina, J. M. (2012). Corporate social responsibility as a vehicle to reveal the corporate identity: A study focused on the websites of Spanish financial entities. Journal of Business Ethics, 107, 129–146.

    Article  Google Scholar 

  • Brickley, J., & Van Horn, R. L. (2002). Managerial incentives in nonprofit organizations: Evidence from hospitals. Journal of Law and Economics, 45(1), 227–249.

    Article  Google Scholar 

  • Buczko, W. (1994). Factors affecting charity care and bad debt charges in Washington hospitals. Hospital and Health Services Administration, 39, 179–191.

    Google Scholar 

  • Bushman, R., & Smith, A. (2001). Financial accounting information and corporate governance. Journal of Accounting and Economics, 32, 237–333.

    Article  Google Scholar 

  • Callen, J., Klein, A., & Tinkelman, D. (2003). Board composition, committees, and organizational efficiency: The case of non-profits. Non-profit and Voluntary Sector Quarterly, 32(4), 493–520.

    Article  Google Scholar 

  • Claxton, G., Feder, J., Shactman, D., & Altman, S. (1997). Public policy issues in non-profit conversions: An overview. Health Affairs, 16(2), 9–28.

    Article  Google Scholar 

  • Coffey, B. S., & Wang, J. (1998). Board diversity and managerial control as predictors of corporate social performance. Journal of Business Ethics, 17, 1595–1603.

    Article  Google Scholar 

  • Coyle, S. (2003). Providing care to undocumented immigrants. Retrieved from http://www.acponline.org/running_practice/ethics/case_studies/care_imm.pdf.

  • Cunningham, P., & Tu, H. (1997). A changing picture of uncompensated care. Health Affairs, 16(4), 167–175.

    Article  Google Scholar 

  • Dalton, D., Daily, C., Ellstrand, A., & Johnson, J. (1998). Meta-analytic review of board composition, leadership structure, and financial performance. Strategic Management Journal, 19, 269–290.

    Article  Google Scholar 

  • Dechow, P., Ge, W., & Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50, 344–401.

    Article  Google Scholar 

  • Dechow, P., & Skinner, D. (2000). Earnings management: Reconciling the views of accounting academics, practitioners, and regulators. Accounting Horizons, 14(2), 235–250.

    Article  Google Scholar 

  • Desai, K. R., Lukas, C. V., & Young, G. J. (2000). Public hospitals: Privatization and uncompensated care. Health Affairs, 19(2), 167–172.

    Article  Google Scholar 

  • Duggan, M. (2000). Hospital ownership and public medical spending. Quarterly Journal of Economics, 115(4), 1343–1373.

    Article  Google Scholar 

  • Eisenberg, T., Sundgren, S., & Wells, M. (1998). Larger board size and decreasing firm value in small firms. Journal of Financial Economics, 48, 35–54.

    Article  Google Scholar 

  • Eldenburg, L., Hermalin, B., Weisbach, M., & Wosinska, M. (2004). Governance, performance objectives and organizational form: Evidence from hospitals. Journal of Corporate Finance, 10, 527–548.

    Article  Google Scholar 

  • Eldenburg, L., & Krishnan, R. (2008). The influence of ownership on accounting information expenditures. Contemporary Accounting Research, 25(3), 739–772.

    Article  Google Scholar 

  • Fama, E., & Jensen, M. (1983). Separation of ownership and control. Journal of Law and Economics, 26(2), 301–325.

    Article  Google Scholar 

  • Frank, R., & Salkever, D. (1991). The supply of charity services by non-profit hospitals: Motives and market structure. Rand Journal of Economics, 22(3), 430–445.

    Article  Google Scholar 

  • Franklin, D. (2008). Just good business: A special report on corporate social responsibility. The Economist, 386, 3–6.

    Google Scholar 

  • Gray, B., & Schlesinger, M. (2009). Charitable expectations of non-profit hospitals: Lessons from Maryland. Health Affairs, 28(5), w810–w821.

    Article  Google Scholar 

  • Green, J., & Griesinger, D. (1996). Board performance and organizational effectiveness in social services organizations. Non-profit Management and Leadership, 6(4), 381–401.

    Article  Google Scholar 

  • Gruber, J. (1994). The effect of competitive pressure on charity: Hospital responses to price shopping in California. Journal of Health Economics, 13, 183–212.

    Article  Google Scholar 

  • Gruber, J., & Rodriguez, D. (2007). How much uncompensated care do doctors provide? Journal of Health Economics, 26, 1151–1169.

    Article  Google Scholar 

  • Grunewald, D., & Baron, P. (2004). Plum Valley Hospital: A critical governance matter instructor’s note. Journal of Business Ethics, 52, 303–309.

    Article  Google Scholar 

  • Healy, P., & Wahlen, J. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13(4), 365–383.

    Article  Google Scholar 

  • Hermalin, B., & Weisbach, M. (2003). Boards of directors as an endogenously determined institution: A survey of the economic literature. Federal Reserve Bank of New York Economic Policy Review, 9, 7–26.

    Google Scholar 

  • Ho, F. N., Wang, H. D., & Vitell, S. J. (2012). A global analysis of corporate social performance: The effects of cultural and geographic environments. Journal of Business Ethics, 107, 423–433.

    Article  Google Scholar 

  • Hung, H. (2011). Directors’ role in corporate social responsibility: A stakeholder perspective. Journal of Business Ethics, 103, 385–402.

    Article  Google Scholar 

  • Huse, M., Nielsen, S. T., & Hagen, I. M. (2009). Women and employee-elected board members, and their contributions to board control tasks. Journal of Business Ethics, 89, 581–597.

    Article  Google Scholar 

  • Ibrahim, N. A., Howard, D. P., & Angelidis, J. P. (2003). Board members in the service industry: An empirical examination of the relationship between corporate social responsibility orientation and directorial type. Journal of Business Ethics, 47, 393–401.

    Article  Google Scholar 

  • Jensen, M. (1993). The modern industrial revolution, exit and the failure of internal control systems. Journal of Finance, 48, 831–880.

    Article  Google Scholar 

  • Jo, H., & Harjoto, M. A. (2011). Corporate governance and firm value: The impact of corporate social responsibility. Journal of Business Ethics, 103, 351–383.

    Article  Google Scholar 

  • Kaiser Family Foundation. (2011). The uninsured: Key facts about Americans without health insurance. Retrieved from http://www.kff.org/uninsured/upload/7451-07.pdf.

  • Lee, S., Alexander, J., & Bazzoli, G. (2003). Whom do they serve? Community responsiveness among hospitals affiliated with health systems and networks. Medical Care, 41(1), 165–179.

    Article  Google Scholar 

  • Lee, S., Chen, W., & Weiner, B. (2004). Communities and hospitals: Social capital, community accountability, and service provision in U.S. community hospitals. Health Service Research, 39(5), 1487–1509.

    Article  Google Scholar 

  • Leone, A., & Van Horn, R. (2005). How do non-profit hospitals manage earnings? Journal of Health Economics, 24, 815–837.

    Article  Google Scholar 

  • Li, L., & Benton, W. C. (2003). Hospital capacity management decisions: Emphasis on cost control and quality enhancement. European Journal of Operational Research, 146(3), 596–614.

    Article  Google Scholar 

  • Liang, K. Y., & Zeger, S. L. (1986). Longitudinal data-analysis using generalized linear models. Biometrika, 73, 13–22.

    Article  Google Scholar 

  • Lindgreen, A., Swaen, V., & Johnston, W. J. (2009). Corporate social responsibility: An empirical investigation of U.S. organizations. Journal of Business Ethics, 85, 303–323.

    Article  Google Scholar 

  • Lynk, W. J. (1995). Non-profit mergers and the exercise of market power. Journal of Law and Economics, 38, 437–461.

    Article  Google Scholar 

  • Mann, J., Melnick, G., Bamezai, A., & Zwanziger, J. (1995). Uncompensated care: Hospitals’ responses to fiscal pressures. Health Affairs, 14(1), 263–270.

    Article  Google Scholar 

  • Mann, J., Melnick, G., Bamezai, A., & Zwanziger, J. (1997). A profile of uncompensated hospital care, 1983–1995. Health Affairs, 16(4), 223–232.

    Article  Google Scholar 

  • Margolin, F., Hawkins, S., Alexander, J., & Prybil, L. (2006). Hospital governance: Summary report of 2005 survey of CEOS and Board Chairs. Chicago: Health Research and Educational Trust.

    Google Scholar 

  • McGuire, J., Dow, S., & Argheyd, K. (2003). CEO incentives and corporate social performance. Journal of Business Ethics, 45, 341–359.

    Article  Google Scholar 

  • McGuire, J., Sundgren, A., & Schneeweis, T. (1988). Corporate social responsibility and firm financial performance. Academy of Management Journal, 31(4), 854–872.

    Article  Google Scholar 

  • McWilliams, A., & Siegel, D. (2000). Corporate social responsibility and financial performance: Correlation or misspecification? Strategic Management Journal, 21(5), 603–609.

    Article  Google Scholar 

  • Morrisey, M., Wedig, G., & Hassan, M. (1996). Do non-profit hospitals pay their way? Health Affairs, 15(4), 132–144.

    Article  Google Scholar 

  • Needleman, J. (2001). The role of non-profits in health care. Journal of Health Politics, Policy and Law, 26(5), 1113–1130.

    Article  Google Scholar 

  • Nicholson, S., Pauly, M., Burns, L., Baumritter, A., & Asch, D. (2000). Measuring community benefits provided by for-profit and non-profit hospitals. Health Affairs, 19(6), 168–177.

    Article  Google Scholar 

  • Norton, E. C., & Staiger, D. O. (1994). How hospital ownership affects access to care for the uninsured. RAND Journal of Economics, 25(1), 171–185.

    Article  Google Scholar 

  • O’Regan, K., & Oster, S. (2005). Does the structure and composition of the board matter? The case of non-profit organizations. Journal of Law Economics and Organization, 21(1), 205–227.

    Article  Google Scholar 

  • Oster, S. (1995). The strategic management of non-profit organizations. New York: Oxford Press.

    Google Scholar 

  • Owens, B. (2005). The plight of the not-for-profit. Journal of Healthcare Management, 50(4), 237–250.

    Google Scholar 

  • Petersen, M. A. (2009). Estimating standard errors in finance panel data sets: Comparing approaches. Review of Financial Studies, 22, 435–480.

    Article  Google Scholar 

  • Porter, M. E., & Kramer, M. R. (2006). The link between competitive advantage and corporate social responsibility. Harvard Business Review, 84(12), 78–92.

    Google Scholar 

  • Robinson, J., & Luft, H. (1985). The impact of hospital market structure on patient volume, average length of stay, and the cost of care. Journal of Economics, 4(4), 333–356.

    Google Scholar 

  • Roomkin, M., & Weisbrod, B. (1999). Managerial compensation and incentives in for-profit and non-profit hospitals. Journal of Law Economics and Organization, 15(3), 750–781.

    Article  Google Scholar 

  • Rose-Ackerman, S. (1996). Altruism, non-profits, and economic theory. Journal of Economic Literature, 34, 701–728.

    Google Scholar 

  • Salazar, J., Husted, B. W., & Biehl, M. (2012). Thoughts on the evaluation of corporate social performance through projects. Journal of Business Ethics, 105, 175–186.

    Article  Google Scholar 

  • Schwartz, M. S., Dunfee, T. W., & Kline, M. J. (2005). Tone at the top: An ethics code for directors? Journal of Business Ethics, 58, 79–100.

    Article  Google Scholar 

  • Shivdasani, A., & Zenner, M. (2004). Best practice in corporate governance: What two decades of research reveals. Journal of Applied Corporate Finance, 16, 28–42.

    Article  Google Scholar 

  • Siciliano, J. I. (1996). The relationship of board member diversity to organizational performance. Journal of Business Ethics, 15, 1313–1320.

    Article  Google Scholar 

  • Sloan, F. A. (1998). Commercialism in non-profit hospitals. Journal of Policy Analysis and Management, 12(2), 234–252.

    Article  Google Scholar 

  • Taylor, D. H., Whellan, D. J., & Sloan, F. A. (1999). Effects of admission to a teaching hospital on the cost and quality of care for Medicare beneficiaries. The New England Journal of Medicine, 340, 293–299.

    Article  Google Scholar 

  • The American Hospital Association (AHA). (2009). Uncompensated hospital care cost fact sheet. Retrieved from http://www.aha.org/aha/content/2009/pdf/09uncompensatedcare.pdf.

  • The American Hospital Association (AHA). (2011). Fast facts on U.S. hospitals. Retrieved from http://www.aha.org/research/rc/stat-studies/fast-facts.shtml.

  • The World Bank. (2011). Data by country. Retrieved from http://data.worldbank.org/country.

  • Thorpe, K. E., & Phelps, C. (1991). The social role of not-for-profit organizations: Hospital provision of charity care. Economic Inquiry, 29(3), 472–484.

    Article  Google Scholar 

  • Vladeck, B. (2006). Paying for hospitals’ community service. Health Affairs, 25(1), 34–43.

    Article  Google Scholar 

  • Weisbrod, B. (1988). The nonprofit economy. Cambridge, MA: Harvard University Press.

    Google Scholar 

  • Weissman, J., Dryfoos, P., & London, K. (1999). Income levels of bad-debt and free-care patients in Massachusetts hospitals. Health Affairs, 18(4), 156–166.

    Article  Google Scholar 

  • Weitzner, D., & Peridis, T. (2011). Corporate governance as part of the strategic process: Rethinking the role of the board. Journal of Business Ethics, 102, 33–42.

    Article  Google Scholar 

  • White, H. (1980). A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica, 48, 817–838.

    Article  Google Scholar 

  • Wooldridge, J. (2002). Econometric analysis of cross section and panel data. Cambridge, MA: MIT Press.

    Google Scholar 

  • Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of Financial Economics, 40(2), 185–212.

    Article  Google Scholar 

Download references

Acknowledgments

I appreciate helpful comments and suggestions from Henry Friedman, John Goddeeris, Ranjani Krishnan, Vanessa Magness, Dara Marshall, Kathy Petroni, K. Ramesh, Karen Sedatole, Mike Shields, workshop participants at Michigan State University, and participants at the 2011 Canadian Academic Accounting Association Annual Conference and the 2011 American Accounting Association Annual Meeting.

Author information

Authors and Affiliations

  1. Department of Accounting, Williams School of Commerce, Economics and Politics, Washington & Lee University, Lexington, VA, 24450, USA

    Ge Bai

Authors
  1. Ge Bai
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Ge Bai.

Appendix

Appendix

See Table 6.

Table 6 Examples of board director occupational background
Full size table

Rights and permissions

Reprints and permissions

About this article

Cite this article

Bai, G. How Do Board Size and Occupational Background of Directors Influence Social Performance in For-profit and Non-profit Organizations? Evidence from California Hospitals. J Bus Ethics 118, 171–187 (2013). https://doi.org/10.1007/s10551-012-1578-x

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10551-012-1578-x

Keywords

Search

Navigation