Some Implications of the Agency-Cost Theory of the Nonprofit Firm

Social enterprises are business enterprises that seek to pursue social goals. In order to do that, they need to be able to make binding commitments to a variety of stakeholders that they will indeed pursue such goals. At least since Henry Hansmann wrote his seminal works on nonprofit organizations in the early nineteen eighties, it has been widely understood that a significant value of the nonprofit organizational structure is the ability of the nondistribution constraint to serve as just such a commitment mechanism. In the case of for-profit social enterprises, where the nondistribution constraint does not apply, what mechanisms might we expect to be useful or necessary for the organization to make commitments to stakeholders?This chapter applies some insights from Hansmann\u27s agency theory to the for-profit social enterprise context. It observes that very different commitment mechanisms are useful depending on which stakeholders the organization wants to commit to. It also distinguishes between negative and positive commitments and why the distinction between the two is so important to the likely success of any commitments mechanism.https://digitalcommons.wcl.american.edu/facsch_bk_contributions/1243/thumbnail.jp