Governance of shareholder-owned corporations has been the subject of extensive research, but nonprofits have received far less attention. The two organizational forms differ significantly: nonprofits have no shareholders and retain any profits rather than paying them to capital providers. Moreover, nonprofits often state their objectives in terms of serving a community, which can include customers and society at large. However, nonprofits and for-profits are similar in one key respect: Decisions are made by professional managers who control capital allocation. Given this similarity, both types of firms must rely on governance systems to ensure that managers allocate funds and manage firms consistently with the firm’s objectives.

Our research explores the implications of these differences by analyzing the governance structures of nonprofit hospitals and hospital systems between 2000 and 2018. Nonprofits are prevalent in the health care sector, which accounts for a growing share of the US economy, making the study of nonprofit governance increasingly relevant. Moreover, US firms have been under pressure to pay more attention to stakeholders other than shareholders, including employees and communities. By studying nonprofit hospitals, organizations with explicit stakeholder-oriented missions, our research highlights governance trade-offs faced by firms that seek to balance financial discipline with broader social objectives. Analyzing how nonprofits adapt their governance systems to accommodate these diverse interests will help us understand the governance systems of corporations that try to do the same.

First, we examined nonprofit boards and compared them with similar for-profit boards. Our research finds that the average nonprofit board is substantially larger: The average nonprofit hospital system has 19.8 directors, while the average for-profit hospital system has 9 directors. Additionally, the typical nonprofit board includes several independent directors, but it also includes insiders or other directors with potential conflicts of interest. The participation of nonexecutive employees on boards of hospital systems (mostly affiliated physicians) is common in nonprofits but nonexistent in for-profits. The makeup of nonprofit boards may reflect the complexity of their objectives and their desire for stakeholder representation, but it also reduces their agility and effectiveness in monitoring managers.

Nonprofit independent directors tend to have less professional experience in health care, hospitals, or finance compared with their for-profit counterparts, and they hold fewer board seats. The median independent director of a for-profit system earns $270,000 annually and holds $594,000 in equity in the firm. Nonprofit independent directors typically earn no pay and have no financial stakes in their firms. As a result, nonprofit directors face substantially weaker financial incentives to monitor managers.

One interpretation of these findings is that these attributes of nonprofit boards are reasonable responses to the greater demands placed on nonprofit directors (such as fundraising, pursuing more complex objectives, and overcoming obstacles in measuring performance). However, another interpretation is that nonprofit boards are inefficient because they lack external pressure from shareholders. In either case, our analysis suggests that nonprofit boards may be less effective at monitoring managers. There is a broad consensus that monitoring is more effective when boards are agile, independent, and incentivized to act on behalf of those whom they represent. Our findings show that nonprofit boards score relatively poorly on these metrics.

Next, our research examines acquisitions of nonprofits. Corporate finance research has long argued that the threat of takeovers can discipline incumbent managers, as they will face major career disruptions after being acquired. While takeover transactions among nonprofits do not involve ownership transfers, they reallocate management decision rights and can therefore serve a similar governance function.

Indeed, our findings reveal that departures of CEOs and directors increased sharply after acquisitions, suggesting that insiders have experienced career setbacks similar to those documented at for-profits. However, acquisitions were far less frequent at nonprofits, particularly when they performed poorly. Each year, 4.8 percent of the for-profit hospitals we studied were acquired by a hospital system, but this was 2.0 percentage points lower for similar nonprofits. Moreover, while poor financial performance increased the likelihood of a nonprofit being acquired (though less so than for-profits), there was no relationship between acquisitions and nonfinancial aspects of performance that stakeholders might consider, such as service quality or the provision of charitable health care.

There are at least two potential reasons why takeovers play a more modest role in the nonprofit sector. First, our analysis of nonprofit boards suggests that insiders have more power to resist changes in control, which may deter acquisitions. Second, acquisitions of nonprofits face more stringent government oversight and legal hurdles, particularly when they change the nonprofit’s mission or organizational form.

Our findings are consistent with either explanation, but our research further investigates how government oversight of nonprofits affects acquisitions. In many states, acquisitions of nonprofits require approval from the attorney general or other authorities. We collected detailed information on these statutes and analyzed their effects on nonprofit takeovers. Our findings show that stricter government oversight significantly reduced the rate of nonprofit takeovers. This effect did not depend on the hospital’s performance. Furthermore, stricter approval hurdles caused some poorly performing nonprofits to close rather than be acquired. While we cannot evaluate the overall impact of state oversight on nonprofit stakeholders, our findings suggest a potential unintended consequence: The threat of takeovers is less effective at changing the behavior of poorly performing nonprofits than that of for-profits.

We also studied the role of incentive compensation and CEO turnover in nonprofit governance. Although these tools are important, they face limitations. The objectives of nonprofits are less well-defined and harder to quantify than those of for-profits, making it harder for boards to incorporate them into formal incentive contracts. Our findings indicate that while CEO pay and turnover responded to hospital profits, there was no relationship between CEO pay and nonfinancial performance measures. These weaker incentives for managers underscore a greater need for board oversight. However, this may be difficult to achieve given the weaknesses of nonprofit boards documented by our research.

Our analysis offers insights into the challenges nonprofit firms face in translating their objectives into action. Our findings reveal that nonprofit governance systems are relatively weak, as there is less alignment between the firm’s goals and the outcomes of its decisionmakers than with for-profits. However, this does not necessarily mean that nonprofits achieve worse outcomes. In some industries, the more tenuous link between goals and outcomes and the resulting inefficiencies may be a price worth paying to avoid other distortions caused by the profit motive. Moreover, nonprofits may rely more on other means to regulate managers’ behavior. Cultural norms may discipline nonprofit managers, and those who choose to lead a nonprofit may be more motivated by its mission than by financial incentives. Nevertheless, our findings highlight the trade-offs inherent in nonprofit governance.

Note
This research brief is based on Katharina Lewellen et al., “Control Without Ownership: Governance of Nonprofit Hospitals,” National Bureau of Economic Research Working Paper no. 34132, August 2025.