The Hidden Cost of Trustworthiness

Abstract

The theory of the nonprofit institutional form developed by Henry Hansmann emphasizes the importance of organizational trustworthiness in a sector defined by hard-to-measure outputs. This body of theory effectually rationalizes a normative approach to nonprofit financial management focused on maintaining organizational trustworthiness through fiscal probity signaling. Such signals include measurable indicators of overhead minimization, fiscal leanness, revenue diversification, and debt avoidance, among others. Appropriate signaling behavior may increase organizational trustworthiness as intended, but the effects on mission impact are not well understood. Thus, this article assesses how adherence to common fiscal probity norms affects mission impact, using total spending as a proxy. Based on a panel of donative public charities spanning 1982 to 2019, analysis suggests that norm-adhering nonprofits sacrifice about half of their mission impact over a 10-year period compared with norm-busting nonprofits. This forgone mission impact is the hidden cost of trustworthiness.