Donor Governance and Financial Management in Prominent U.S. Art Museums

36 Pages Posted: 30 Mar 2015 Last revised: 13 Sep 2015

See all articles by David Yermack

David Yermack

New York University (NYU) - Stern School of Business

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Date Written: September 12, 2015

Abstract

I study “donor governance,” which occurs when contributors to non-profit firms place restrictions on their gifts to limit the discretion of managers. In a study of U.S. 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 non-profits and significantly influence their activities, but they reduce management flexibility and may contribute to lower profit margins. Rising donor governance in U.S. 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: Non profit, restricted donations, art museums, donor governance

JEL Classification: G32, G34, L31

Suggested Citation

Yermack, David, Donor Governance and Financial Management in Prominent U.S. Art Museums (September 12, 2015). Available at SSRN: https://ssrn.com/abstract=2586622 or http://dx.doi.org/10.2139/ssrn.2586622

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