Interactions between non-profit finance, governance and investment style

Thumbnail Image
Journal Title
Journal ISSN
Volume Title
School of Business | D4 Julkaistu kehittämis- tai tutkimusraportti tai -selvitys
Degree programme
Aalto University publication series BUSINESS + ECONOMY, 2/2016
This book studies the economic and investment behavior of foundations, as well as the general environment of non-profit governance and of equity investments by non-profit foundations. The book is structured as follows. The Introduction presents the rationale for non-profits, some basic characteristics of non-profits and especially of foundations, and compares the economic motivation of non-profit foundations with that of for-profit companies. Essay 1 examines the root causes of governance choices in foundations, and the consequences of such governance choices. Essay 2 empirically investigates the equity portfolios of foundation investors and confirms typical characteristics of foundations as investors. The governance in foundations, a wealth-endowed subset of nonprofits, differs fundamentally from the governance principles of for-profit corporates on three dimensions: (1) foundations do not have legal owners who could exert external control over the foundation; (2) without universal measures, such as profitability or stock market valuation, the efficient economic behavior of foundations is difficult to assess; and (3) most foundations are established to exist in perpetuity and are not subjected to any market for control. Thus, Essay 1 focuses on the following questions. Firstly, (1) which foundation-specific characteristics explain the accumulation of power at the board level in the governance of foundations? A sample of 891 foundations in Finland is empirically investigated using data on the foundations’ detailed rules, financials, and other characteristics. A new index measure for the concentration of control in foundations is constructed. Secondly, (2), the first Essay examines whether governance choices may have any consequences on foundations’ grant-making or other charitable spending. One of the possible drivers for governance choices include a foundation’s financiers. In absence of owners, the regular financiers such as donors, customers or the public sector may exert power over how the foundation is administered. In order to investigate the effect of financing, Essay 1 classifies sample foundations into four categories, based on their main source of finance. The empirical results suggest that a foundation’s source of finance is associated with the concentration of decision powers. Foundations that have to regularly approach outside sources of finance–donors, public sector or customers– show less concentration of power on the board level than foundations that can finance their missions with capital income from an endowment. We also find that foundations with a less concentrated governance model spend more on charitable operations than foundations with concentrated governance. However, in grantmaking foundations this association does not emerge: governance is not related to the level of grantmaking. In our second Essay, we argue for the need to understand the investment behaviour of various investor types, and present empirical evidence of non-profits’ equity investment style, based on data on portfolios of listed equity owned by 530 foundations during the years 2000-2013. Overall, foundations are active risk-takers: they can carry concentrated equity risk by not diversifying their portfolios towards the industry breakdown of the general market index. Foundations are shown to be infrequent traders, with relatively low equity portfolio turnover. If they decide to own a stock for longer than one year, they remain owner for 3.6 years on average (in the 13-year sample period). In addition, the majority of their single shareholdings stay intact from year to year. Foundations do not adjust their positions frequently. Foundation age and size are related to the equity allocation of foundations’ portfolios: older and larger foundations diversify more along the lines of the market index breakdown. We also find that older foundations trade less frequently than younger ones. Essays in this book present new insights into non-profit economic behavior. Concerning governance, Essay 1 suggests a measure (Foundation Governance Index) and a determinant (the source of finance of a foundation) for governance in non-profits. Concerning investments, Essay 2 confirms empirically that non-profits have a distinct equity investment style.
non-profit, foundation, charity, governance, foundation governance index, investment style, investor activity, allocation, diversification, trading, long-term ownership
Other note
  • [Essay 1]: What determines a non-profit governance model – and does it matter? Unpublished essay. The full text of the essay is included in the pdf-file of the publication.
  • [Essay 2]: Are non-profits active equity investors? Unpublished essay. The full text of the essay is included in the pdf-file of the publication.