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Donor governance and financial management in prominent US art museums

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David Yermack
David Yermack
David Yermack
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Abstract and Figures

I study “donor governance,” which occurs when contributors to nonprofit firms place restrictions on their gifts to limit the discretion of managers. In a study of US art museums, I find that this practice has grown significantly in recent years, and it represents the largest source of permanent capital in the industry. When donor restrictions are strong, museums shift their cost structures away from administration and toward program services, and they exhibit very high savings rates, retaining in their endowments 45 cents of each incremental dollar donated. Retention rates are near zero for cash generated from other activities. Restricted donations appear to stabilize nonprofits and significantly influence their activities, but they reduce management flexibility and may contribute to lower profit margins. Rising donor governance in US art museums may represent a reaction by contributors to the industry’s high rates of financial distress, weak boards of trustees, and large private benefits of control enjoyed by managers.
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ORIGINAL ARTICLE
Donor governance and financial management
in prominent US art museums
David Yermack
1
Received: 30 August 2016 / Accepted: 10 January 2017 / Published online: 2 February 2017
ÓSpringer Science+Business Media New York 2017
Abstract I study ‘‘donor governance,’’ which occurs when contributors to nonprofit
firms place restrictions on their gifts to limit the discretion of managers. In a study of US
art museums, I find that this practice has grown significantly in recent years, and it
represents the largest source of permanent capital in the industry. When donor restric-
tions are strong, museums shift their cost structures away from administration and
toward program services, and they exhibit very high savings rates, retaining in their
endowments 45 cents of each incremental dollar donated. Retention rates are near zero
for cash generated from other activities. Restricted donations appear to stabilize non-
profits and significantly influence their activities, but they reducemanagement flexibility
and may contribute to lower profit margins. Rising donor governance in US art museums
may represent a reaction by contributors to the industry’s high rates of financial distress,
weak boards of trustees, and large private benefits of control enjoyed by managers.
Keywords Nonprofit governance Art museums Endowment management
Restricted donations
1 Introduction
This paper studies the role of restricted donations in financing major US art museums.
Charitable gifts play a critical role in supporting museums and other nonprofit
corporations, and accumulated restricted donations represent a significant and growing
amount of the capital invested in the museum industry. When donors place restrictions
on their contributions, the funds resemble equity investments with restrictive covenants,
a source of financing unknown in the for-profit sector. Restricted donations permit
&David Yermack
dyermack@stern.nyu.edu
1
Department of Finance, NYU Stern School of Business, and National Bureau of Economic
Research, New York, NY, USA
123
J Cult Econ (2017) 41:215–235
DOI 10.1007/s10824-017-9290-4
Content courtesy of Springer Nature, terms of use apply. Rights reserved.
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... Private ownership allows museums to enjoy full budget sovereignty and major flexibility in management yet increases risk and uncertainty, since the security that public funding provides is lacking (Frey 1994;McLean 1997;Fernández-Blanco and Prieto-Rodríguez 2011). In practice, most private museums are mission-oriented non-profit organizations (Luksetich and Partridge 1997;Johnson 2003;Yermack 2017;Bertacchini, Dalle Nogare, and Scuderi 2018). ...
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