AN ANALYSIS OF THE GOVERNANCE PRACTICES OF THE SELECTED NON GOVERNMENT ORGANIZATIONS IN SRI LANKA

 Sample of Proposal

 AN ANALYSIS OF THE GOVERNANCE PRACTICES OF THE SELECTED NON GOVERNMENT ORGANIZATIONS IN SRI LANKA

 1.                 Introduction

 1.1              Introduction to the study

Non government organizations[NGO] worldwide strive for finding lasting solutions to poverty, injustice and uplifting peoples’ life. They continue a humanitarian mission seeking to influence those in power to ensure that the poor people can improve their lives and livelihood and raise their voice in decisions that affect them when they need most. The doubt of the public on widespread looting of endowments has affected the non-profit organizations over the years. Stakeholders continuously alleged that governance of Non government organizations was doubtful and this situation has damage their image. In Sri Lanka also after the funds came to the country through NGOs after the Tsunami disaster, ineffective utilization of those funds got the public attention. Inability to disclose the information to the public made them vulnerable for public criticism. The increasing realization for good governance not only in the public and private sectors, but also in the NGO sector has influenced this research.

 Good governance has become a topical issue on the development debate forum at national, regional and international levels. It is informed by the belief that the quality of an organization's governance system determines its ability to pursue its vision, mission and goals. NGOs excel in advocating transparency and accountability to gain more legitimacy, credibility and confidence in championing the good governance cause. Non government organizations are non-profit organizations and aim for the wellbeing of the society thus their organization structure and governing principles differ from profit oriented corporate companies. Though for companies the practicing corporate governance principles and  disclosure of them are guided by the regulations there are no such regulations on the governance and disclosures for NGOs. But they should  have  the disclose of their governance mechanisms in place and their financial information as they bear the responsibility to allow the public to know their operations and effectiveness in carrying out their designated organizational objectives.

According to the Voluntary service organizations (registration and supervision ) act no 31 of 1980, non government organizations/ not- for-profit organizations are defined as follows,

“Voluntary service organization” means any organization formed by a group of persons on a voluntary basis and is of a non – governmental nature, is dependent on public contributions, charities, grants payable by the government donations local or foreign, in carrying out its functions;has as its main objectives, the provision of such relief and services as necessary for the mentally retarded or physically disabled, poor, the sick, the orphans and the destitute, and the provision of relief to the needy in time of disaster

NGOs are initially started after the second world war to uplift the lives of the people. The main characteristics of an NGO include: independence, non partisan and not for profit, for the good of the public and voluntary. If an organization is meant for making profit, it would be registered under the Companies Act, whose objective is profit. It is not clear whether an NGO can make profits and plough them back into the organization to further its objectives listed. There seems to be nothing wrong or contrary to the Act as long as making profit is not an objective that stands alone.

In the case of a non-profit organization, governance relates to consistent management, cohesive policies, guidance, processes and decision-rights for a given area of responsibility. For example, managing at a corporate level might involve evolving policies on privacy, on internal investment, and on the use of data. Non-profit governance focuses primarily on the fiduciary responsibility that a board of trustees (sometimes called directors—the terms are interchangeable) has with respect to the exercise of authority over the explicit public trust that is understood to exist between the mission of an organization and those whom the organization serves.

 Even the most fervent enthusiasts of the NGO sector recognize that good governance is essential for the sector to retain its credibility. NGOs serve their philanthropic purpose typically by collecting funds from the public or from donors. Their capacity to do so depends crucially on a reputation of integrity and efficiency.

 Disclosure and trust, which constitute the integral parts of corporate governance, provide pressure for better financial performance. Good governance is evident by good financial performance. So this research will evaluate the relationship between financial performance and governance.

An important function of accounting and financial reporting is to assist in the analysis and evaluation of organizations. In the commercial sector, financial statement users look at accounting ratios, such as measures of profitability and leverage, to make judgments about a firm’s performance. In the nonprofit sector, there is not a similar profit motive or an ability to reward equity stakeholders. The factors that measure their performance  are the efficiency of the organization in allocating resources to its programs, the financial stability of the organization, the information available to donors, and the reputation of the organization.

  Recent  chain of continuous corporate collapses had finally led to a global recession, threatening Sri Lankan companies to strive for their survival. Absence of proper corporate governance has being a main reason behind those collapses. Same will apply for the non government organizations if they continue without transparency and good governance. This study attends to provide a better understanding of the governance practices in non government organizations and aims to provide additional insights into the relationship between governance mechanisms and firm financial performance in

1.2  Problem Statement

What are the existing corporate governance practices among the non government organizations in Sri Lanka

 1.3  Problem Justification

The public trust on non government organization has being reduced over the last few years due to the lack of transparency. Disclosure and trust are integral parts of corporate governance. Donors and the public have the right to know the operations and effectiveness in carrying out their designated organizational objectives. This provoked this study on the governance practices among the non government organizations

 This paper aims at establishing the relationship between the core principles of corporate governance and financial performance in non government organizations.

  1.4  Objectives

§  To find out the existing governance practices in Sri Lanka.

§  To find out the relationship between governance practices and financial performance of non government organization.

§  To find out the gap to further strength the governance practices.

 2.     literature review

 governance of non government organizations

 Barr (2005) Using original survey data, we document the activities, resources, and governance structure of NGOs operating in Uganda. The NGO sector is funded primarily by international non-governmental organizations and bilateral donors. They find large differences in size and funding across NGOs, with only a few NGOs attracting most of the funding. Most NGOs are small and underfunded and focus on raising awareness and advocacy. Few NGOs are faith based. Most screening and monitoring is done by grant agencies. Some monitoring is also done internally by members and trustees. Little monitoring is done by government. NGOs do not file income tax returns, and few respondents are able to provide coherent financial accounts.It is usually assumed that two main characteristics distinguish NGOs from other organizations: They are not motivated by profits, and they have a charitable or philanthropic purpose. These two characteristics are what enables NGOs to seek funding from the public and international donors. In developed countries, these two principles also form the basis for NGO monitoring by governments. The situation in Uganda is quite different, with less monitoring by the government and more by donors. This is largely a reflection of what the sector does and how it finances its activities. Our survey  results suggest that the Uganda NGO sector is populated by a large number of small organizations headed by highly educated Ugandans. The sector as a whole acts as a relay for international governmental and non-governmental agencies, and the activities of Ugandan NGOs largely reflect the agenda and concerns of these international actors.

What makes not-for-profit organizations different from their for-profit alternatives? Nonprofit organizations have tax privileges: Donations to them are tax deductible, and nonprofit organizations are themselves free from many tax burdens. These tax advantages are at the heart of nonprofit status, and the nonprofit sector owes its strength, in part, to tax deductibility. A second difference between nonprofits and for-profits is the non distribution constraint. Nonprofit organizations cannot disburse profits to owners or employees. This constraint affects the nature of nonprofits in important ways, and may enable nonprofits to commit not to cheat customers or workers (see Hansmann 1996; Weisbrod 1988; Glaeser and Shleifer 2001). As striking as these differences between nonprofits and for-profits may be, a third difference is as important in explaining the behavior of nonprofit organizations: Nonprofit organizations do not have owners. The people who fund nonprofits, through donations, do not explicitly gain control rights over the firm. Nonprofit organizations do have boards, which do have control rights, and these boards are often partially composed of donors and their representatives. But nonprofit boards are self-perpetuating and not accountable to share- holders. They are rarely subject to elections or never to takeovers.1 Board members cannot sell or transfer their control rights, so they do not own an asset the value of which is tied to the organization’s success. There is certainly no legal rule requiring boards to act as custodians of the interests of past investors or donors. The law constrains itself to generally vaguely worded requirements about the nonprofit’s mission. Moreover, given the murky missions of many nonprofits, their managers are inherently harder to incentivize. A for-profit manager’s income can be tied to the stock price of his firm, but no similar benchmarks exist for most nonprofits. Indeed, many forms of incentive pay are illegal for nonprofit organizations.

The result of these factors is that the managers of nonprofit organizations— the chief executive officer (CEO) and the board—have an almost unmatched degree of autonomy. Donors often recognize that they have little influence on the institutions that they endow and they make their donations accepting that the only effects of their gifts will be to increase the budget of the recipient nonprofit. Furthermore, while nonprofit managers do not inherently maximize the objectives of either investors/donors or society as a whole, it is less clear what these managers do maximize or what ultimately drives the decisions of nonprofit organizations. This book represents an attempt to shed some new light on the objectives that govern nonprofit organizations. Indeed, given the weak nature of corporate control in nonprofits, the most surprising thing to me about these organizations is that they function as well as they do. Widespread looting of endowments is almost unheard of. Nonprofit universities and hospitals generally do a credible job of educating students and curing the sick. While he will argue that workers do tend to subvert the mission of nonprofits, he also think that this subversion is ultimately modest and in some cases creates its own social benefits. Indeed, suspect that, as the model suggests, competition in the market for customers and donors ultimately disciplines nonprofit organizations in a way that keeps them reasonably honest. If this suspicion is correct then it suggests that understanding the ability of competition to solve agency problems deserves much more research. Though the non -profit organizations are not profit oriented to earn the public trust and for their survival good governance practices are important.

 financial performance of non government organizations

stability

Stability is measured by adequacy of equity (net assets/total revenue), First, the ratio of net assets to total revenue can be calculated to determine the adequacy of ‘‘equity’’. This ratio provides a measure of the number of periods of revenue a nonprofit currently has on hand. In the event of a temporary decline in revenues, a firm with greater access to funds faces a lower risk of collapse. An organization with a larger measure of net assets to total revenue is more likely to be able to (a) liquidate existing assets or (b) obtain credit in order to meet future needs. Without an adequate reserve of funds, a nonprofit firm will be unable to continue to operate normally when faced with a reduction in revenues. Trussel and Greenlee (2004) find the adequacy of equity measure is a positive and significant predictor of financial stability. However, Parsons and Trussel (2008) and Marudas (2004) observe that donations are negatively related to equity, implying that donors punish organizations that do not spend donations on programs. Revenue concentration [S(revenue source/total revenue)²] Second, a firm with a greater number of revenue sources is expected to be less susceptible to financial shocks. A firm that is dependent on one or a few revenue providers is vulnerable to declines in the economic health or changes in the donation preferences of those providers. To capture the extent of revenue dispersion, Tuckman and Chang recommend computing an index of revenue concentration similar to the Herfindahl Index used by economists to measure market concentration. Specifically, Tuckman and Chang define the revenue concentration index as the summation of the squared percentage share that each revenue source represents of total revenue. If a single source of revenue exists, the index equals one. A firm with many sources of revenue has an index closer to zero. Greenlee and Trussel (2000) demonstrate that revenue concentration is a significant predictor of financial vulnerability. Parsons and Trussel (2008) show that nonprofits with greater financial stability (lower revenue concentration) generate more contributions on average. operating margin [(total revenue-total expenses)/total revenue], Third, Tuckman and Chang suggest a measure analogous to the gross margin ratio used in a business setting. This ratio, called operating margin, is revenues less expenditures, divided by revenues. A higher operating margin is indicative of a greater potential surplus on which to draw in the event of unexpected financial difficulties. Greenlee and Trussel (2000) show that nonprofits with higher operating margins are less susceptible to financial vulnerability. Parsons and Trussel (2008) find that more financially stable nonprofits, defined as those with a higher operating margin, raise more donations than those with a lower operating margin. administration cost ratio (administration expenses/total expenses)

Parsons (2003) defines financial stability as a nonprofit’s ability to continue operations if faced with a decrease in resources. In addition to knowing that a nonprofit organization works efficiently, donors want to know whether the organization can continue to operate in the future (analogous to a measure of the ability to continue as a going concern). anthony (1983) asserts that, just like business entities, nonprofits must maintain positive net equity, with assets in excess of obligations, in order to operate.Mautz (1988) and Pallot (1990) contend that donors are interested in nonprofits’ future cash commitments and the ability to fulfill their obligations. The Better Business Bureau’s Wise Giving Alliance, the American Institute of Philanthropy, and Charity Navigator advise donors to examine nonprofit reserves and operating margins and offer guidelines of acceptable performance.

 Efficiency

Efficiency is measured by price of output (total expenses/programe expenses), programe expense ratio (programe expenses/total expenses), This ratio, defined as the percentage of total expenses spent on programs  and Administration cost ratio which is calculated  as (administration expenses/total expenses) The administrative ratio is administrative expense as a percentage of total expenses. This is used to measure efficiency and find no significant relationship with contributions. However, Greenlee and Brown (1999) use a measure similar to this (excluding fundraising costs from total expenses) to examine the relationship between organizational efficiency and donations. Their findings support studies that use this to measure efficiency with evidence that efficient organizations generate greater contributions.

 Information

Information is measured by fund raising expenses, fund raising efficiency ratio (fund raising expenses/total contribution), remuneration of directors.

Fundraising Efficiency Ratio

The fundraising efficiency ratio is fundraising expense as a percentage of direct contributions. This ratio provides an indication of the cost of generating current contributions, thus addressing the efficiency and effectiveness of fundraising instead of the efficiency or effectiveness of operations. Watchdog agencies, such as the Better Business Bureau’s Wise Giving Alliance, focus on this ratio when setting performance guidelines for nonprofits. To date, accounting studies have not examined the relationship of this particular fundraising ratio with donations.(Trusel 2008)

 

Accountability

In governance Accountability In leadership roles, accountability is the acknowledgment and assumption of responsibility for actions, products, decisions, and policies including the administration, governance, and implementation within the scope of the role or employment position and encompassing the obligation to report, explain and be answerable for resulting consequences.

 Transparency

Transparency is integral to corporate governance, higher transparency reduces the information asymmetry between a firm’s management and financial stakeholder’s, this mitigate the agency problem in corporate governance.

 Disclosure

Disclose the financial information and the governance structure to the stakeholders.

(Trusel 2008) identifies conceptual factors that have been consistently used in previous nonprofit accounting studies. However, the factors she discusses have been operationalized using a variety of measures in prior research. This study establishes a framework that identifies the constructs represented by the variables used in previous accounting studies. Our framework demonstrates that accounting measures and other information from nonprofit financial reports can be categorized into four major constructs, each of which is an important determinant of donations. Based on the variety of measures commonly used in prior studies, we hypothesize that there are four factors that affect donations – efficiency, stability, information, and reputation. We measure 12 independent variables used or suggested in previous studies to model donations on a sample of 4,727 nonprofit organizations. Using factor analysis, we find support for our hypothesis that the 12 variables load on the four conceptual factor scores. Using OLS regression with these four factors as predictor variables, we find that donations are a function of efficiency, financial stability, the amount of information provided by the organization and the reputation of the organization. By identifying the relationship among financial ratios and other information available in financial reports, the framework developed and tested in this study can provide guidance to researchers studying the usefulness of nonprofit accounting and financial reports. Additionally, it assists donors, grantors, and other financial statement users with evaluation of nonprofit reports. Finally, standard setters, regulators, and watchdog groups can use the framework to better determine the benefit of accounting and financial reports to contributors.

 

 3.     Research Methodology

3.1 Conceptual Framework

 This empirical study is constructed upon the variables identified in  the previous section of the literature review. The hypothesis development is fundamentally based on the financial performance which evident the good governance of the organization. Based on the literature following variables have showed a cause and effect relationship.

Independent Variables

Stability Efficiency information

 3.2 Population

Population of the study is the non government organizations registered in the National secretariat for  Non government organizations register.

 3.3 Sample

Sample will be selected using stratified sampling method considering the origin. Both international and local non government organizations were selected from each strata. Total sample will be 35 including both international and local non government organizations.

3.4 Hypothesis

H₀₁ – There is no relationship between stability and the governance of the organization

H_a1- There is a relationship between stability and the governance of the organization

H₀₂ - There is no relationship between efficiency and the governance of the organization

H_a2 - There is a relationship between efficiency and the governance of the organization

H_{03 -} There is no relationship between information and the governance with     

        stakeholders of the organization

H_{a3 -} There is no relationship between information and the governance with     

        stakeholders of the organization

 3.5 Proposed Statistical Method

 Hypothesis testing will be used together with Analysis of Variance (ANOVA) to infer the results.

 3.6 Data Collection and Analysis

 The study is fundamentally based on the primary data collected via self administrated questionnaire. Level of the governance practices are measured through a questionnaire which include liken scale questions. Financial performance of the non government organizations are measured by the secondary data which will be collected through the perusal of financial statements and audit reports of the organization. Further for this purpose, checklists will be prepared to capture the essential information.

 At the stage of data analysis inferential statistics will be used through the help of Statistical Package for Social Sciences (SPSS).

 4.     Conclusion

Regarding the lump sum foreign aid and donations flew to the country at the tsunami disaster through non government organizations and the effectiveness of the of the utilization of those public had a doubt there onwards even before that the credibility of non government organization was questioned by the public. The main reason for this can be the perception they have about the non government organizations was negative. Lack of transparency and the poor governance were the causes behind this paradigm. The good governance practices always lead to the trust and good performance. From this research the governance practices of the non government practices were analyzed and the relationship between the financial performance and the governance practices will be evaluated . The corner stone of this study is primarily based on the analyzing the governance practices of the non government organizations. Therefore the study attempts to identify the existence of any association between the financial performance and the governance practices. For the purpose of evaluating the relationship between the variables regression analysis. Even though many researchers have deploy this model to assess the relationship between corporate governance and the financial performance of companies, in Sri Lankan context the concept was not used as a tool of measuring relationship between the financial performance and the corporate governance of non government organizations. Hypothesis will be constructed based on the above variables and tested using the data collected through the self administrated questionnaire and perusal of secondary data. Finally conclusions will be drawn based on the hypothesis test. Selection of the sample is based on the origin of the  registered National secretariat of non government organizations. Data analysis will be on the hypothesis testing through the Analysis of Variance (ANOVA).

References

Truse, J. and Parson, L. M., 2008.Financial performance factors affecting donations to charitable   organizations. Advance Accounting, 23, pp.263-285.

Mershard ,R. and Strom, R. O., 2009. Performance and Governance in micro finance institutions. Journal of Banking and Finance, 33, pp.662-669

Glaeser, E. L.,2003. The Governance of not for profit organizations[ E-Book ], University of Chicago, Available from: http://www.nber.org/books/glae03-01 [Accessed 18th April 2012]

Anthony, R. N. (1983). Tell it like it was: A conceptual framework for financial accounting. Homewood, IL: Richard D. Irwin, Inc.

 

Parsons, L. M. (2003). Is accounting information from nonprofit organizations useful to donors?  A review of charitable giving and value-relevance. Journal of Accounting Literature, 22, 104–129.

Abigail, B. et al (2005).The Governance of Non-Governmental Organizations in Uganda. World development 33(4), pp.657-679