Governance and Financial Performance of Charitable Foundations

Purpose: Charitable foundations in China are subject to a lax regulatory and legal environment, and their internal and external governance are weak. Several notorious scandals with subsequent huge drops in donations to associated foundations have indicated ineffective governance and its negative impact on foundation performance. This study examines the impact of governance on the financial performance of charitable foundations. Design/methodology/approach: A sample of 3,289 charitable foundations in China from 2010 to 2015 was selected. The authors obtained data on Chinese charitable foundations for 2010–2015 from the Research Infrastructure of Chinese Foundation (RICF) database and further manually collect information from the official websites and the China Foundation Centre platform.Findings: The findings indicate that internal governance, external donor governance, and the external governance environment are significantly positively associated with the financial performance of charitable foundations. Substitutional relationships among these three governance mechanisms influence financial performance. Furthermore, the results show that financial reporting quality is a major channel through which governance influences financial performance. Moreover, the authors find that small or non-education-focused foundations, with little public and media supervision, may rely more on existing internal governance mechanisms. Accordingly, the positive association between governance and financial performance is more pronounced for small foundations than for large ones and for foundations focused on non-education areas than those with an education focus. Finally, the additional findings show that internal governance, external donor governance, and the external governance environment can decrease fraud risk.Theoretical contributions: This study adds to the literature on nonprofit governance by providing new evidence for emerging economies. This study contributes to understanding the effects of multiple governance mechanisms on the financial performance of nonprofit organizations and provides the first evidence that the governance mechanisms have a substitutional relationship. The findings extend the literature by considering the underlying channels through which governance affects financial performance.Practical implications: This research also provides insights for stakeholders of charitable foundations, including policymakers, donors, and nonprofit professionals (e.g., staff, managers, and directors)