Skip to main content

Signaling virtue: voluntary accountability programs among nonprofit organizations

Abstract

This article examines the structure of nonprofit voluntary accountability and standard-setting programs, arguing that these programs can be understood as collective action institutions designed to address information asymmetries between nonprofits and their stakeholders. Club theory and the economics of certification suggest that such programs have the potential to provide a signal of quality by setting high standards and fees and rigorously verifying compliance. Such mechanisms can signal quality because higher participation costs may allow only high-quality organizations to join. The article examines the implications of signaling theory using an original dataset on the structure of 32 nonprofit accountability programs across the globe. While many programs set high standards for compliance, the key distinction between strong and weak programs is the use of disclosure or verification mechanisms to enforce compliance. Contrary to theoretical expectations, compliance standards and verification do not appear to be substitutes in creating stronger voluntary programs.

This is a preview of subscription content, access via your institution.

Notes

  1. 1.

    In this model, the donor cannot observe whether or not the nonprofit applied for a certificate, only whether or not the organization has one. Unless the certifier provides information, therefore, rejected charities may not be easily distinguished from those that did not apply.

  2. 2.

    In traditional clubs, such as a country club, joining the club guarantees access to club amenities.

  3. 3.

    This criterion excludes some well-known programs such as the rating programs run by the BBB/Wise Giving Allowance and the American Institute for Philanthropy. Recently, however, the BBB/Wise Giving Alliance began to allow charities who have been rated to pay for a “seal of approval.” The charity seal program is included in the sample as a voluntary standard-setting program, although it differs slightly from other programs because the initial decision about entry is made by the watchdog group.

  4. 4.

    United Way organizations (of which there are about 1,300 in the United States) are also excluded from the sample, but the United Way represents an interesting accountability program that could be included in future studies. Historically, the United Way of America developed standards for participation for local United Way affiliates. Each United Way affiliate in turn established its own system of standards for participating nonprofits. In the recent years, however, this system has been in flux, with some local United Ways deciding against having specific standards for membership. Examination of the national and local standards set would be an interesting avenue for future research. I thank an anonymous referee for these points.

  5. 5.

    The cost of compliance consists of internal costs incurred to meet standards and document compliance, as well as any certification fees paid. Empirically, these fees are difficult to assess. Sometimes they are paid directly to program sponsors; in other cases, nonprofits pay certification fees directly to third-party entities approved by the program sponsor. A further complication is posed when membership associations sponsor voluntary accountability programs, as revenues and fees from this activity are often not assessed or reported separately.

  6. 6.

    The relatively small sample size and the bias of the sample toward survivor programs may serve as a constraint on the generalizability of these results.

  7. 7.

    This contrasts with some empirical analyses of voluntary environmental programs that suggest that sponsorship does not substantially affect program design (Darnall and Carmin 2005).

  8. 8.

    Programs reporting no revenue from fees also score significantly lower on certification scores and on the use of sanctions (significant at the 5% level in both cases). The disclosure score is also lower, but significant only at the 10% level. Since only five programs report no revenue from fees, however, these results may not be fully robust.

References

  1. Akerlof, G. A. (1970). The market for ‘lemons’: Quality uncertainty and the market mechanism. Quarterly Journal of Economics, 84(3), 488–500.

    Article  Google Scholar 

  2. Arumi, A. M., Wooden R., & Johnson, J. (2005). The charitable impulse. Public Agenda.

  3. Bartley, T. (2007). Institutional emergence in an era of globalization. The rise of transnational private regulation of labor and environmental conditions. American Journal of Sociology, 13(2), 297–351.

    Article  Google Scholar 

  4. Bekkers, R. (2003). Trust, accreditation and philanthropy in the Netherlands. Nonprofit and Voluntary Sector Quarterly, 32(4), 596–615.

    Article  Google Scholar 

  5. Ben-Nur, A., & Gui, B. (2003). The theory of nonprofit organizations revisited. In H. Anheier & A. Ben-Nur (Eds.), The study of nonprofit enterprise: Theories and approaches. New York: Kluwer Academic Publishers.

    Google Scholar 

  6. Bornstein, L. (2003). Management standards and development practice in the South African aid chain. Public Administration and Development, 23, 393–404.

    Article  Google Scholar 

  7. Bothwell, R. O. (2001). Trends in self-regulation and transparency of nonprofit organizations in the U.S. The International Journal of Not-for-Profit Law, 4(1).

  8. Bowman, W. (2008). Trends and patterns in accreditation clubs. Paper Presented at the Nonprofit Accountability Clubs Workshop, University of Washington.

  9. Bradley, B., Jansen, P., & Silverman, L. (2003). The nonprofit sector’s $100 billion opportunity. Harvard Business Review, May 1.

  10. Brody, E. (2002). Accountability and public trust. In L. Salamon (Ed.), The state of nonprofit America. Washington, DC: Brookings Institution and the Aspen Institute.

    Google Scholar 

  11. Buchanan, J. M. (1965). An economic theory of clubs. Economica, 32, 1–14.

    Article  Google Scholar 

  12. Christensen, J. (2004). Asking the do-gooders to prove they do good. The New York Times, January 3, 2004.

  13. Coglianese, C., & Nash, J. (2009). Applying club theory to government-sponsored voluntary programs. In A. M. Potoski & A. Prakash (Eds.), Voluntary programs: A club theory approach. Cambridge: MIT Press.

    Google Scholar 

  14. Cooley, A., & Ron, J. (2002). The NGO scramble: Organizational insecurity and the political economy of transnational action. International Security, 27(1), 5–39.

    Article  Google Scholar 

  15. Cornes, R., & Sandler, T. (1996). The theory of externalities, public goods and club goods. Cambridge: Cambridge University Press.

    Google Scholar 

  16. Dale, H. (2005). Study on models of self-regulation in the nonprofit sector. National Center on Philanthropy and the Law and Independent Sector. Retrieved April 27, 2009, from http://www3.law.nyu.edu/ncpl/library/Self-Regulation.pdf.

  17. Darnall, N., & Carmin, J. (2005). Greener and cleaner? The signaling accuracy of U.S. voluntary environmental programs. Policy Sciences, 38(7), 1–90.

    Google Scholar 

  18. Darnall, N., & Sides, S. (2008). Assessing the performance of voluntary environmental programs: Does certification matter? Policy Studies Journal, 36(1), 95–117.

    Article  Google Scholar 

  19. deLeon, P., & Rivera, J. (2007). Voluntary environmental programs: A symposium. Policy Studies Journal, 35(4), 685–688.

    Google Scholar 

  20. Delmas, M., & Keller, A. (2005). Free riding in voluntary environmental programs: The case of the U.S. EPA WasteWise program. Policy Sciences, 38(7), 91–106.

    Article  Google Scholar 

  21. DeMarzo, P., Fishman, M., & Hagerty, K. (2005). Self-regulation and government oversight. Review of Economic Studies, 72, 687–706.

    Article  Google Scholar 

  22. DiMaggio, P., & Powell, W. (Eds.). (1991). The new institutionalism in organizational analysis. Chicago: University of Chicago Press.

    Google Scholar 

  23. Ebrahim, A. (2005). NGOs and organizational change: Discourse, reporting and learning. Cambridge: Cambridge University Press.

    Google Scholar 

  24. Edelman Trust. (2007). Edelman trust barometer 2007. www.edelman.com/trust/2007/trust_final_1_31.pdf.

  25. Fox, M., & Brown, L. D. (1998). The struggle for accountability: The World Bank, NGOs, and grassroots movements. Cambridge: MIT Press.

    Google Scholar 

  26. Fremont-Smith, M., & Kosaras, A. (2003). Wrongdoing by officers and directors of charities: A survey of press reports, 1995-2002. Working paper number 20. Cambridge: Hauser Center for Nonprofit Organizations, Harvard University.

  27. Gibbelman, M., & Gelman, S. (2004). A loss of credibility: Patterns of wrongdoing among nonprofit organizations. VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations, 15(4), 355–381.

    Article  Google Scholar 

  28. Greenlee, J., Fischer, M., Gordon, T., & Keating, E. (2007). An investigation of fraud in nonprofit organizations: Occurrences and deterrents. Nonprofit and Voluntary Sector Quarterly, 36(4), 676–694.

    Article  Google Scholar 

  29. Gugerty, M. K. (2008). The effectiveness of NGO self-regulation: Theory and evidence from Africa. Public Administration and Development, 28, 105–118.

    Article  Google Scholar 

  30. Gunningham, N., & Rees, N. (1997). Industry self-regulation: An institutionalist perspective. Law and Policy, 4, 363–414.

    Article  Google Scholar 

  31. Hansmann, H. B. (1980). The role of nonprofit enterprise. Yale Law Review, 89, 835–898.

    Article  Google Scholar 

  32. Hansman, H. B. (2003). The role of trust in nonprofit enterprise. In H. Anheier & A. Ben-Nur (Eds.), The study of nonprofit enterprise: Theories and approaches. New York: Kluwer Academic Publishers.

    Google Scholar 

  33. Harbaugh, R., Maxwell, J. W., &, Rousillon, B. (2008). Uncertain standards. Resource document. Available at SSRN: http://ssrn.com/abstract=948538.

  34. Hopgood, S. (2005). Professionalization and bureaucratization of humanitarian action. Paper Prepared for the Social Sciences Research Council Initiative, The Transformation of Humanitarian Action, March 23, 2005.

  35. Independent Sector. (2005). Strengthening transparency governance accountability of charitable organizations: A final report to congress and the nonprofit sector. Resource document. Independent Sector. Retrieved November 20, 2008, from http://info.ethicspoint.com/files/PDF/resources/Panel_Final_Report.pdf.

  36. Independent Sector. (2007). Principles for good governance and ethical practice: A guide for charities and foundations. Resource document. Panel on the Nonprofit Sector, Independent Sector. Retrieved October 1, 2007, from http://www.nonprofitpanel.org/report/principles/Principles_Guide.pdf.

  37. Johnson, E., & Prakash, A. (2007). NGO research program: A collective action perspective. Policy Sciences, 40(3), 221–240.

    Article  Google Scholar 

  38. Keck, M., & Sikkink, K. (1998). Activists beyond borders: Advocacy networks in international politics. Ithaca: Cornell University Press.

    Google Scholar 

  39. King, A., & Lenox, M. (2000). Industry self-regulation without sanctions: The chemical industry’s responsible care program. Academy of Management Journal, 43(4), 698–716.

    Article  Google Scholar 

  40. Kleiner, M. (2006). Licensing occupations: Ensuring quality or restricting competition?. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research.

    Google Scholar 

  41. Kovach, H., Nelligan, C., & Burall, S. (2003). Power without accountability. One World Trust, Global Accountability Report.

  42. Kreps, D. (1990). Corporate culture and economic theory. In K. Shepsle & J. Alt (Eds.), Perspectives on positive political economy. Cambridge: Cambridge University Press.

    Google Scholar 

  43. Lenox, M. J., & Nash, J. (2003). Industry self-regulation and adverse selection: A comparison across four trade association programs. Business Strategy and the Environment, 12, 343–356.

    Article  Google Scholar 

  44. Light, P. C. (2004). Sustaining nonprofit performance. Washington, DC: Brookings Institution Press.

    Google Scholar 

  45. Lizzeri, A. (1999). Information revelation and certification intermediaries. RAND Journal of Economics, 30(2), 214–231.

    Article  Google Scholar 

  46. Lloyd, R. (2005). The role of NGO self-regulation in increasing stakeholder accountability. One World Trust.

  47. Lloyd, R., & de las Casas, L. (2005). NGO self-regulation: enforcing and balancing accountability. Alliance Extra.

  48. Maxfield, S., & Schneider, B. (1997). Business and the state in developing countries. Ithaca: Cornell University Press.

    Google Scholar 

  49. McDougle, L. M., Deitrick, L., Libby, P., & Donmoyer, R. (2008). The appreciated sector: Public confidence in San Diego county nonprofit organizations. Caser Family Center for Nonprofit Research, University of San Diego.

  50. Moore, M., Brown, L. D., & Honan, J. (2003). Strengthening the accountability of international nongovernmental organizations: An analytic framework and implementation guidelines. Cambridge: Hauser Center for Nonprofit Organizations.

    Google Scholar 

  51. Myslivecek, J. (2008). Adverse selection in imperfect competition (working paper). Prague: CERGE-EI, Charles University.

  52. Naidoo, K. (2004). The end of blind faith? Civil society and the challenges of accountability, transparency and legitimacy. AccountAbility Forum, Issue 2, 14–15.

    Google Scholar 

  53. Nunez, J. (2007). Can self-regulation work? A story of corruption, impunity and cover-up. Journal of Regulatory Economics, 31, 206–233.

    Article  Google Scholar 

  54. O’Neill, M. (2009). Public confidence in charitable nonprofits. Nonprofit and Voluntary Sector Quarterly, 38(2), 237–269.

    Article  Google Scholar 

  55. Olson, M. (1965). The logic of collective action. Cambridge: Harvard University Press.

    Google Scholar 

  56. Ortmann, A., & Schlesinger, M. (2003). Trust, repute and the role of nonprofit enterprise. In H. Anheier & A. Ben-Nur (Eds.), The study of nonprofit enterprise: Theories and approaches. New York: Kluwer Academic Publishers.

    Google Scholar 

  57. Ortmann, A., & Svitkova, K. (2007). Certification as a viable quality assurance mechanism in transition economies: Evidence, theory and open questions. Prague: Prague Economic Papers.

    Google Scholar 

  58. Ostrower, F., & Stone, M. (2006). Governance: Research trends, gaps and future prospects. In W. Powell & R. Steinberg (Eds.), The nonprofit sector research handbook. New Haven: Yale University Press.

    Google Scholar 

  59. Platteau, J.-P., & Gaspart, F. (2003). Disciplining local leaders in community-based development. Working paper. CRED, University of Namur.

  60. Potoski, M., & Prakash, A. (Eds.). (2009). Voluntary programs: A club theory approach. Cambridge: MIT Press.

  61. Prakash, A., & Potoski, M. (2006). The voluntary environmentalists. Cambridge: Cambridge University Press.

    Google Scholar 

  62. Prakash, A., & Potoski, M. (2007). Collective action through voluntary environmental programs: A club theory perspective. Policy Studies Journal, 35(4), 773–792.

    Google Scholar 

  63. Rivera, J., & de Leon, P. (2004). Is greener whiter? Voluntary environmental performance of western ski areas. Policy Studies Journal, 32(3), 417–438.

    Article  Google Scholar 

  64. Rivera, J., de Leon, P., & Koerber, C. (2006). Is greener whiter yet? The sustainable slopes program after five years. Policy Studies Journal, 34(2), 195–222.

    Article  Google Scholar 

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

    Google Scholar 

  66. Salamon, L. (2002). The resilient sector: The state of nonprofit America. In L. Salamon (Ed.), The state of nonprofit America. Washington, DC: Brookings Institute Press.

    Google Scholar 

  67. Schlesinger, M., Mitchell, S., & Gray, B. H. (2004). Restoring public legitimacy to the nonprofit sector: A survey experiment using descriptions of nonprofit ownership. Nonprofit and Voluntary Sector Quarterly, 33(4), 673–710.

    Article  Google Scholar 

  68. Scott, W. R. (1995). Institutions and organizations. Thousand Oaks, CA: Sage Publications.

    Google Scholar 

  69. Shaked, A., & Sutton, J. (1981). The self-regulating profession. Review of Economic Studies, 48(2), 217–234.

    Article  Google Scholar 

  70. Sidel, M. (2003). Trends in nonprofit self-regulation in the Asia Pacific region. Paper Presented to the Asia Pacific Philanthropy Consortium.

  71. Sidel, M. (2004). More secure, less free?: Antiterrorism policy and civil liberties after 9/11. Ann Arbor: University of Michigan Press.

    Google Scholar 

  72. Spence, M. (1973). Job market signaling. Quarterly Journal of Economics, 88, 355–374.

    Article  Google Scholar 

  73. Steinberg, R. (2006). Economic theories of nonprofit organizations. In J. Powell & R. Steinberg (Eds.), The nonprofit sector research handbook. New Haven: Yale University Press.

    Google Scholar 

  74. Steinberg, R., & Gray, B. (1993). The role of nonprofit enterprise in 1993: Hansmann revisited. Nonprofit and Voluntary Sector Quarterly, 22(4), 297–316.

    Article  Google Scholar 

  75. Strausz, R. (2005). Honest certification and the threat of capture. International Journal of Industrial Organization, 23, 45–62.

    Article  Google Scholar 

  76. Svitkova, K. (2007). Prompted to be good: The impact of certification on the quality of charities. CERGE-EI working paper 320. Prague: Charles University.

  77. Terlaak, A., & King, A. (2006). The effect of certification with the ISO 9000 quality management standard: A signaling approach. Journal of Economic Behavior & Organization, 60, 579–602.

    Article  Google Scholar 

  78. The Economist. (2003). Who guards the guardians? Resource document. The Economist. Retrieved November 20, 2008, from http://www.economist.com/science/displaystory.cfm?story_id=2077493.

  79. Tiebout, C. M. (1956). A pure theory of local public expenditures. Journal of Political Economy, 64, 416–424.

    Article  Google Scholar 

  80. Tirole, J. (1989). The theory of industrial organization. Cambridge: MIT Press.

    Google Scholar 

  81. Toffel, M. W. (2006). Resolving information asymmetries in markets: The role of certified management programs. Working paper 07-023. Cambridge: Harvard Business School.

  82. Wapner, P. (2002). Defending accountability in NGOs. Chicago Journal of International Law, 3(1), 197–205.

    Google Scholar 

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

    Google Scholar 

  84. Weisbrod, B. (1998). Institutional form and organizational behavior. In W. Powell & E. Clemens (Eds.), Private action and the public good. New Haven: Yale University Press.

    Google Scholar 

  85. Wiseman, J. 1957. The theory of public utility pricing: An empty box. Oxford Economic Papers.

  86. Young, D. (1998). Commercialism in nonprofit social service associations: Its character, significance and rationale. Journal of Policy Analysis and Management, 17(2), 278–297.

    Article  Google Scholar 

  87. Zadek, S. (2003). In defence of nonprofit accountability. Ethical Corporation Magazine, September, 34–36.

Download references

Acknowledgments

Thanks to Travis Reynolds for excellent research assistance and to Aseem Prakash, Matt Potoski, Jodi Sandfort, and Stephen B. Page for valuable comments on earlier versions of this article. In addition, I thank two anonymous referees for their very helpful feedback. All errors remain my own.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Mary Kay Gugerty.

Appendices

Appendix A

See Table 5.

Table 5 Nonprofit voluntary programs in sample

Appendix B

See Table 6.

Table 6 Explanation of voluntary program scoring

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Gugerty, M.K. Signaling virtue: voluntary accountability programs among nonprofit organizations. Policy Sci 42, 243–273 (2009). https://doi.org/10.1007/s11077-009-9085-3

Download citation

Keywords

  • Nonprofit accountability
  • Collective action
  • Voluntary programs
  • Voluntary clubs
  • Self-regulation
  • Certification