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Funding Source, Board Involvement Techniques, and Financial Vulnerability in

Nonprofit Organizations: A Test of Resource Dependence

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DOI: 10.1002/nml.99

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 Funding Source,
Board Involvement
Techniques, and Financial
Vulnerability in Nonprofit
Organizations
A Test of Resource Dependence
Matthew M. Hodge, Ronald F. Piccolo
The study examined here tested a resource dependence view
of the organization on a sample of nonprofit social service agen-
cies. Results indicated that CEOs of privately funded nonprofit
agencies were more likely to use board involvement techniques
than CEOs of government-funded or commercially supported
organizations. In addition, privately funded agencies were less
vulnerable to economic shock than government or commercially
funded agencies, and funding source explained incremental vari-
ance in board involvement and vulnerability beyond character-
istics of the organization and board. These results provide
support for assertions of resource dependence theory and sug-
gest that a CEO’s strategic engagement with an organization’s
board depends in part on the nature and concentration of the
organization’s resources.

D ESPITE NOTABLE DIFFERENCES between for-profit and nonprofit

organizations, both use comprehensive measures of effec-
tiveness, including customer, employee, and financial stan-
dards (Kaplan, 2001). The markets served by for- and nonprofit
agencies tend to overlap (Rojas, 2000), and like their for-profit coun-
terparts, limited resources and increased competition in service pro-
vision have forced nonprofit organizations to improve efficiency
without compromising effectiveness (Callen, Klein, and Tinkelman,
2003; Speckbacher, 2003). Nonprofit agencies now face high expec-
tations for service and accountability and must rely increasingly on
active board members to support their mission (Carver, 1997;
Holland, 2002).
Just as consumer and industrial trends shift revenue opportu-
nities for private businesses and tax structures for public agencies

NONPROFIT MANAGEMENT & LEADERSHIP, vol. 16, no. 2, Winter 2005 © Wiley Periodicals, Inc.
171
172 HODGE, PICCOLO

continue to fluctuate, traditional funding sources for nonprofit

agencies are subject to changes in the economy. Private contribu-
tions to nonprofits, for example, have generally been declining as a
percentage of total revenue since 1964 (Weisbrod, 1998), and
government allocation of funding tends to fluctuate with changes
in political leadership and public policy (Froelich, 1999). As busi-
ness development and survival strategies within for-profit organi-
zations are dependent on the nature and uniqueness of a firm’s
resources (Pfeffer and Salancik, 1978), strategic decisions by non-
profit CEOs depend on the stability and nature of the organization’s
funding (Gronbjerg, 1991).
In the past twenty-five years, resource dependence theory
(Pfeffer and Salancik, 1978) has often been the platform for exam-
ination of how nonprofit organizations survive and perform
(Miller-Millesen, 2003). However, whereas several studies have
considered the relationship between funding and strategy, results
are relatively inconclusive. Hardina (1990), for example, surveyed
fifty-three social welfare agencies to determine if funding sources
influenced customer-inclusive strategies, but no differences based
on funding source were reported. In contrast, Stone, Hager, and
The role of Griffin (2001) outlined organizational differences in a sample of
resources in United Way–supported organizations and attributed differences in
board size and structure to the organization’s primary funding
shaping source. Thus, the role of resources in shaping organization strategy
organization among nonprofits remains unclear.
strategy among Drawing on resource dependence theory (Pfeffer and Salancik,
1978; Heimovics, Herman, and Jurkiewicz, 1993) and on similari-
nonprofits ties in strategy and board structure among for- and nonprofit orga-
remains unclear nizations, the purpose of the current study is to examine
relationships between funding source, CEO strategic activity, and
financial vulnerability in a sample of nonprofit social service agen-
cies. We propose that the use of board involvement techniques,
such as an annual board retreat, defined expectations for fundrais-
ing activity, and participation in long-term planning, constitutes a
strategic decision on the part of the CEO and depends in part on
the nature of the organization’s resources. We further suggest that
financial performance, as measured by vulnerability, depends on
the nature of an organization’s resources and the strategic activity
of the CEO. A summary of the study’s predicted relationships are
summarized in Figure 1.

Resource Dependence Theory

Resource dependence theory was introduced by Pfeffer and Salancik
(1978) to explain how an organization’s strategy, structure, and sur-
vival depend on its resources and dependency relationships with
external institutions. As Pfeffer and Salancik succinctly noted, “The
key to organizational survival is the ability to acquire and maintain
 F U N D I N G , I N V O LV E M E N T, AND VULNERABILITY 173

Figure 1. A Model of Expected Relationships Among Funding

Structure, Board Involvement, and Financial Performance

Board Involvement

Funding Source
Private Contributions Financial Performance
Government Grants Vulnerability
Commercial Activity

National Affiliation
Board Size

resources” (p. 2). The theory stresses the impact of external forces
on how organizations operate and proposes two broad tenets: (1)
organizations are constrained by, and depend on, other organizations
that control critical resources, and (2) to maintain autonomy, orga-
nizations attempt to manage their dependencies on external groups
(Greening and Gray, 1994). The degree of dependence experienced
by an organization, according to a resource dependence view, is deter-
mined by the importance and concentration of its resources
(Froelich, 1999).
Among the most important tenets of resource dependence the-
ory is the role played by managers in strategic decision making to
address external constraints (Pfeffer and Salancik, 1978). As Herman
and Heimovics (1990) noted, “Resource dependence theory, though
emphasizing that much organizational action is determined by envi-
ronmental conditions, does encompass [intentional] adaptation
through management actions” (p. 109). Greening and Gray (1994),
in a similar vein, suggested that resource dependence theory has been
explicit “about managers’ exercise of strategic choices within the con-
text of constraints” (p. 468). These ideas highlight the assertion that
CEOs adjust strategy based in part on existing and anticipated
resource dependencies. Among the possible strategic actions avail-
able to the CEO is the active engagement of board members in sup-
port of the organization’s mission.
The notion that resources affect strategy development and imple-
mentation has been reported across several industries (Campling and
Michelson, 1998; Mehra, 1996; Song and Dyer, 1995), but while the
strategy literature has broadly defined resources to include everything
from industry-specific knowledge (Conner and Prahalad, 1996) to
capital equipment (Schroeder, Bates, and Juntilla, 2002), studies of
organizations in the social service sector have used funding as the
174 HODGE, PICCOLO

primary resource of interest (Bigelow and Stone, 1995; Grant, 1991).

Financial sources of support are critical determinants of a nonprofit
agency’s activity (Weisbrod, 1998), and thus resource dependence
theory provides an adequate framework for the analysis of funding,
board involvement techniques, and performance.
Funding Source and Board Involvement
The primary sources of revenue for nonprofit agencies are (1) private
contributions, in the form of individual donations, corporate gifts,
and foundation grants; (2) public support (government grants); and
(3) private sector payments (commercial activity) in the form of user
fees, membership fees, government contracts, and the sale of prod-
ucts and service. Consistent with assertions of resource dependence
theory, each revenue source offers a different set of advantages and
disadvantages, and each creates a different level of dependency on
external agencies (Brooks, 2000). Private contributions, for example,
can generally be used at the CEO’s discretion and do not require strict
reporting mandates or strict resource distribution. In the extreme
case, organizations that are entirely dependent on private contribu-
tions can accept donations with few stated restrictions on how funds
Financial sources should be used (Weisbrod, 1998). Furthermore, a high share of fund-
ing from private sources provides a measure of legitimacy for the
of support organization (Froelich, 1999), a prerequisite for securing future con-
are critical tributions (Mizruchi, 1996).
determinants of On the downside, fundraising activities for private contributions
require time and administrative overhead. The fundraising effort to
a nonprofit generate private revenue demands a high level of professionalism by
agency’s activity the administrative staff, and even then, individual contributions can
fluctuate dramatically year-to-year. In a study of nonprofit revenue
strategies, for example, Gronbjerg (1982) reported that annual
changes of over 50 percent in contributions received were common.
Thus, organizations that rely on private donations as a primary
source of revenue may have strategic flexibility, but will need
support from board members to navigate the source’s inherent
uncertainty.
Government funding, which is earned by successful grant appli-
cation rather than extensive fundraising effort, is generally portrayed
as the most stable revenue source for nonprofits (Froelich, 1999). In
many cases, government grants are renewed without contest, pro-
vided the organization has adequately met application requirements
(Kelly, 1998). That said, while government grants provide stability
for a nonprofit agency, this advantage tends to be offset by the
bureaucratic demands associated with grant administration. Beyond
the bureaucracy associated with managing public funds, Brooks
(2000) warned that nonprofit organizations receiving a large portion
of their funding from government sources often find themselves
caught in a “subsidy trap,” which occurs when an organization struc-
tures itself to support the demands of public funding. In doing so, an
 F U N D I N G , I N V O LV E M E N T, AND VULNERABILITY 175

organization limits its potential to diversify and may have difficulty

in obtaining private contributions. That is, CEOs of organizations
funded by the government tend to structure administrative activities
to fulfill the obligations of grant renewal rather than to facilitate
fundraising through the board (Brooks, 2000; Heimovics, Herman,
and Jurkiewicz, 1993; Stone, Hager, and Griffin, 2001).
The third major source of funding for nonprofits comes in the
form of commercial activity. Agencies that have the ability to gener-
ate their own revenue through the sale of service or membership fees
are generally less dependent on traditional sources of funding. How-
ever, while these organizations are free from specific allocation
demands associated with government or foundation grants, it has
been argued that commercial activity compromises the independence
and strategic integrity of the agency. Gronbjerg (1991), for example,
reported that agencies drawing significant commercial income were
more likely to raise concerns regarding mission or goal displacement,
and as Froelich (1999) argued, “. . . nonprofit organizations that uti-
lize commercial activity gradually take on the processes, techniques,
and marketing strategies of their for-profit counterparts” (p. 258). CEOs of
Thus, as each nonprofit funding source bears a different level of
risk and requires a different level of administrative maintenance, organizations
there is reason to believe that CEOs will adjust strategies to best use funded by the
existing assets, meet the demands of external contingencies, and off- government tend
set risk (Pfeffer and Salancik, 1978). One such strategy is the use of
activities that engage members of the organization’s board. CEOs who to structure
rely on unstable sources of revenue such as private donations will be administrative
more likely to include board members in the planning and execution activities to fulfill
of fundraising activity, while CEOs of government or commercially
funded organizations will rely less on board members for resource the obligations of
development. Indeed, board structure (Siciliano, 1997) and previous grant renewal
financial performance (Bryson, 1981) have been associated with
board involvement, but as Bradshaw, Murray, and Wolpin (1992) sug-
gested, board process characteristics, such as strategic planning
efforts and how board meetings are conducted, are affected by the
source of an organization’s funding. We therefore offer the following
hypothesis:

HYPOTHESIS 1. Funding source will be related to board involvement such

that CEOs of privately funded agencies will use more board involve-
ment techniques than CEOs of government or commercially funded
agencies.
Funding Source and Financial Vulnerability
For many nonprofit organizations, both large and small, influential
donors demand some measure of financial performance. The United
Way, for instance, requires all organizations that receive indirect
funding to report on and meet specific financial, administrative, and
service delivery benchmarks (Stone, Hager, and Griffin, 2001).
176 HODGE, PICCOLO

Traditional views of nonprofit organizations did not demand strict

financial reporting, but a changing economic landscape has created
the need for attention to good fiscal discipline (Kearns, 1994).
One measure of performance for nonprofit agencies, and a proxy
for survival, is the financial vulnerability index (FVI), developed by
Tuckman and Chang (1992). The index was developed for the tax-
exempt sector and allowed nonprofit organizations to gauge opera-
tional efficiency and resource management effectiveness. A decade
One measure of later, Trussel, Greenlee, and Brady (2002) offered an extension to the
performance for FVI model to focus specifically on the ability of a charity to carry out
nonprofit its mission in the face of a financial shock. (A detailed description of
the measure is provided in the appendix.)
agencies, and a The FVI has been used in a number of recent studies (Greenlee
proxy for and Trussel, 2000; Trussel, 2002), and in each case, characteristics
survival, is the of the organization are proposed to influence the organization’s like-
lihood for survival. Organization size, for example, is negatively asso-
financial ciated with vulnerability in that agencies with generous assets are less
vulnerability likely to file for liquidation. In addition, nonprofit agencies that draw
index (FVI) funding from multiple sources and have control over how assets are
allocated are less vulnerable to financial shock (Greenlee and Trussel,
2000). As resource dependence theory emphasizes an organization’s
adaptation to its own resource dependencies in order to improve
In the study of chances for survival (Scott, 1981), we hypothesize:
both for- and HYPOTHESIS 2. Funding source will be related to financial vulnerability
nonprofit such that privately funded agencies will be less financially vulnerable
agencies, than government or commercially funded agencies.
empirical In the study of both for- and nonprofit agencies, empirical evi-
evidence has dence has provided support for the effect of organization size,
provided support national affiliation, and board composition on strategy and perfor-
mance (Crittenden and Crittenden, 2000; Dalton, Daily, Ellstrand,
for the effect and Johnson, 1998). Board composition, for example, has been
of organization related to the use of diversification strategies (Tihanyi, Johnson,
size, national Hoskisson, and Hitt, 2003), performance after bankruptcy reorgani-
zation (Daily, 1995), financial performance (Judge, 1994), and the
affiliation, initiation of strategic change (Goodstein, Gautam, and Boeker, 1994),
and board while organization size is related to financial performance and sur-
composition on vival (Judge, 1994; Paulson, 1980). In addition, national affiliation
for nonprofit organizations has been linked to specific performance
strategy and mandates and structure (Callen, Klein, and Tinkelman, 2003; Cordes,
performance Henig, Twombly, and Saunders, 1999; Siciliano, 1997).
Most of the research on organization characteristics and size has
been grounded in resource dependence theory (Barney, 1986). An
interesting question, then, is whether funding source explains vari-
ance in the use of board involvement techniques and vulnerability
beyond organization size, board size, and national affiliation. That is,
does the nature of an organization’s funding explain variance in
 F U N D I N G , I N V O LV E M E N T, AND VULNERABILITY 177

strategy (involvement techniques) and performance (financial vul-

nerability) beyond other stable characteristics of the organization?
While the literature on the impact of business-level and corporate-
level strategy is mixed (Bowman and Helfat, 2001; Hoskisson and
Hitt, 1990; Zahra and Pearce, 1989), resources consistently account
for variance in organization performance (Wernerfelt, 1995). We
therefore hypothesize:

HYPOTHESIS 3. Funding source will explain incremental variance in board

involvement beyond organization size, board size, and national affili-
ation and incremental variance in financial vulnerability beyond board
size and national affiliation.

Board Involvement and Financial Vulnerability

Successful organizations, whether in social service, arts, education,
or corporate America, have influential and productive board mem-
bers working closely with the organization’s CEO. The importance
of having a strong and charismatic CEO is well documented
(Heimovics, Herman, and Jurkiewicz, 1993; Hoye, 2004;
Waldman, Ramirez, House, and Puranam, 2001), but the contri-
bution of an organization’s board often accounts for the differ-
ence between financial success and failure (Duca, 1986). While the
board’s responsibilities for nonprofit and for-profit organizations
are often based on similar practices and policies (Carver, 1997),
the board at nonprofit agencies is called on to participate in the
maintenance and acquisition of income (Herman and Heimovics,
1990). Of the three roles played by boards of directors—control,
service, and resource dependence—the resource dependence role
(that is, maintenance and acquisition) is the most critical for agen-
cies in which access to resources is problematic ( Johnson, Daily,
and Ellstrand, 1996).
The importance of board involvement in organizational perfor-
mance was described by Bradshaw, Murray, and Wolpin (1992), and
several studies have provided empirical support (Crittenden, 1982;
Judge and Zeithaml, 1992; Provan, 1980). Siciliano (1990), for exam-
ple, studied the board’s involvement in strategic planning at
240 YMCAs and found a positive relationship with subjective mea-
sures of performance. In a study of 307 agencies during the early
1990s, Vafeas (1999) linked board meeting frequency to corporate
governance and found that operating performance improved during
the years following abnormally high board activity. Thus, in consid-
eration of the empirical evidence on board involvement and perfor-
mance, we hypothesize:

HYPOTHESIS 4. Agencies using a high level of board involvement tech-

niques will be less financially vulnerable than agencies using a low
level of board involvement techniques.
178 HODGE, PICCOLO

Method
In the following sections, we provide an overview of the research
method and design, with a description of the sample, measures, and
statistical analyses.
Sample and Data Collection
The study reported here used board involvement and financial statement
data from a sample of nonprofit human service organizations affiliated
with the Heart of Florida United Way (HFUW), which provides services
to residents in Central Florida through eighty-six affiliate agencies,
including the Central Florida YMCA, Mothers Against Drunk Driving,
and Meals on Wheels. CEOs of each affiliate were asked to participate in
the study, assured of confidentiality, and told that research on boards of
directors was being conducted at a local university. Surveys were then
faxed to the seventy-five CEOs who agreed to participate. A follow-up
telephone call was used to increase the fulfillment rate for the survey.
Fifty-two of the seventy-five CEOs returned the survey material,
for a response rate of 71 percent. At the time of this study, Year 2000
and 2001 IRS 990 forms were available for only forty-two of the
participating agencies, so analysis was done on this subset. Table 1
provides descriptive statistics of the participating agencies.
To test for nonresponse bias, Form 990 information was
collected for a sample of twenty of the nonrespondent organizations

Table 1. Descriptive Statistics of Participating Organizations

Operating budget Number in sample
Under $100,000 1
$100,000–$499,999 7
$500,000–$999,999 9
$1,000,000–$2,000,000 4
Over $2,000,000 21
Average percentage
Funding structure of total revenue
Private contributions and donations 41
Government grants 26
Commercial activity/private-sector payments 25
Other 8
National affiliation Number in sample
Yes 12
No 30
Board size (number of members) Number in sample
6–10 3
11–20 26
21–30 9
31– 40 3
50 and over 1

Note: n ⫽ 42.
 F U N D I N G , I N V O LV E M E N T, AND VULNERABILITY 179

and compared to the response group. On each relevant variable—the

FVI, organization size, and percentage of revenue from each funding
source—differences between the response and nonresponse groups
were nonsignificant. Thus, there does not appear to be response bias
in the current study.
Measures
Following is a description of the measures used to evaluate the
study’s primary variables of interest.
Funding Source. Part I of IRS Form 990 (Revenue, Expenses and
Changes in Net Assets) reports a filer’s revenue across funding cate-
gory, including direct and indirect public support, membership fees,
and government grants. In this study, private funding included
cash and noncash donations, corporate contributions, indirect sup-
port, and foundation grants; commercial activity included private sec-
tor payments for service, rental income, membership fees and dues,
and revenue realized from government contracts. All govern-
ment funding was in the form of grants as listed on line 1c of
Form 990. Funding source was operationalized by identifying the
agency’s primary funding source and assigning a corresponding cat- In our study, we
egorical variable (1 ⫽ private, 2 ⫽ government, 3 ⫽ commercial). were particularly
Board Involvement Techniques. To assess a CEO’s use of board
interested in
involvement practices, survey items were adopted from the “Ele-
ments of Correct Procedure Effectiveness” by Herman and Renz practices that the
(2000, p. 155). Based on normative board literature and on consul- CEO uses to
tation with nonprofit practitioners, Herman and Renz developed a
facilitate active
list of frequently recommended board practices. According to the
authors, “Boards using a greater number of these recommended prac- involvement
tices will be more effective” (p. 156). The original Herman and Renz among board
scale contained twenty-five items, which covered a broad range of
members
board practices, including member selection and the use of written
policies for attendance and individual performance. In our study, we
were particularly interested in practices that the CEO uses to facili-
tate active involvement among board members. Thus, CEOs were
asked to indicate the frequency (1 ⫽ never to 5 ⫽ always) with
which they used twelve different board involvement practices such
as member participation in strategy development, use of a board
member attendance policy, and evaluation of board member partici-
pation. Items that did not measure actions executed by the CEO (for
example, the existence of an executive committee) were excluded.
Board involvement was determined by calculating the mean score for
each agency across the twelve-item scale.
Financial Vulnerability. Financial vulnerability was calculated
using the recommendations of Trussel, Greenlee, and Brady (2002).
This measure, an extension of the framework originally developed
by Tuckman and Chang (1992), provides a financial vulnerability
prediction equation based on a weighted average of five indicators.
Values for input into the FVI equation were drawn from an agency’s
180 HODGE, PICCOLO

2000–2001 990 Form, which is available for public review based on

501(c)3 reporting regulations. High scores on the FVI (above .20)
indicate that a firm is vulnerable to financial shock (Trussel,
Greenlee, and Brady, 2002).
A number of control variables were also assessed, including
board size (number of active board members) and national affiliation
(1 ⫽ national affiliation, 0 ⫽ no national affiliation).
Analysis
To investigate the relationships between funding structure and the
study’s outcomes, we used between-subjects analysis of variance
(ANOVA) and hierarchical linear regression. ANOVA is useful for eval-
uating differences among categorical variables, and hierarchical regres-
sion allows assessment of the importance of each independent variable.
Finally, we conducted a usefulness analysis (Darlington, 1990) to deter-
mine if funding source was a valuable predictor of the study’s outcomes
beyond characteristics of the organization and board.

Results
Table 2 provides descriptive statistics and a summary of correlations
among the study’s variables. Although not of primary interest, it is
noteworthy to report the strong relationships between organization
and board characteristics with board involvement and financial vul-
nerability. National affiliation, for example, is negatively related to
financial vulnerability (r ⫽ ⫺.31, p ⬍ .05), suggesting that agencies
with a national affiliation are less vulnerable to financial shock. Board
size is positively related to the use of board involvement techniques
(r ⫽ .39. p ⬍ .05), suggesting that CEOs use board involvement
practices depending, in part, on the size of the board. This particu-
lar result may be contrary to an emerging trend in the nonprofit sec-
tor where agencies are reducing the size of their boards so as to
encourage involvement and a high level of board effectiveness

Table 2. Descriptive Statistics and Zero-Order Correlations

Among Variables
M SD 1 2 3 4 5

1. Use of board 3.78 .64 (.78)

involvement
techniques
2. National affiliation .29 .46 .24 —
3. Board size 3.38 .91 .39* .38* —
4. Organization size 13.88 1.42 ⫺.19 .14 .35* —
5. Funding source 1.95 .83 .44* ⫺.01 ⫺.02 ⫺.24 —
6. Financial .21 .10 ⫺.10 ⫺.31* ⫺.17 .35* ⫺.30*
vulnerability

Note: n ⫽ 42. *p ⬍ .05.

 F U N D I N G , I N V O LV E M E N T, AND VULNERABILITY 181

Table 3. Comparison of Agencies Based on Primary Funding Source

Private Government Commercial
(n ⫽ 16) (n ⫽ 14) (n ⫽ 12)

M SD M SD M SD F p

Use of board involvement 4.14 .53 3.62 .57 3.48 .66 5.22 .01
techniques
Financial vulnerability .18 .08 .22 .07 .25 .13 1.98 .15

Figure 2. Comparison of Involvement and FVI

by Funding Source
4.20 0.30
Board Involvement

4.00 0.25

FVI
3.80 0.20

3.60 0.15

3.40 0.10
Private Government Commercial

Board Involvement FVI

(Callen, Klein, and Tinkelman, 2003). However, it should be noted

that board involvement in the current study measures the CEO’s use
of board involvement techniques and not a measured level of actual
board member involvement.
Hypothesis 1 suggested that funding source would be related to
the use of board involvement techniques, and the correlation
between the two was positive and significant (r ⫽ .44, p ⬍ .05). We
then conducted a one-way ANOVA for board involvement to deter-
mine if group means were significantly different. Results are sum-
marized in Table 3 and Figure 2. Privately funded agencies display,
on average, a higher level of board involvement (M ⫽ 4.14, SD ⫽ .53)
than government organizations (M ⫽ 3.62, SD ⫽ .57) and commer-
cially funded organizations (M ⫽ 3.48, SD ⫽ .66), and ANOVA
results indicate that these differences are statistically significant,
F(41) ⫽ 5.22, p ⬍ .05.
182 HODGE, PICCOLO

Hypothesis 2 suggested that primary funding source would be

meaningfully related to financial vulnerability, and the correlation
between the two is negative and significant (r ⫽ ⫺.30, p ⬍ .05).
ANOVA results are summarized in Table 3 and Figure 2. Agencies that
drew a majority of their funding from private sources have a lower aver-
age financial vulnerability score (MFVI ⫽ .18, SD ⫽ .08) than agencies
with a majority of government grants (MFVI ⫽ .22, SD ⫽ .07) and a
majority of commercial funding (MFVI ⫽ .25, SD ⫽ .13). While group
means are in the hypothesized direction, ANOVA results indicate that
differences are not significant across agencies, F(41) ⫽ 1.98, ns). It
should be noted that organizations with FVI scores greater than .20 are
deemed financially vulnerable (Trussel, Greenlee, and Brady, 2002);
only the privately funded agencies provided scores below this bench-
mark. However, while privately funded agencies are, on average, less
vulnerable than government or commercially funded agencies, results
provide only partial support for hypothesis 2.
Figure 2 provides a summary of observed results for both board
involvement and financial vulnerability. The use of board involve-
ment techniques is plotted on the figure’s left axis while financial vul-
nerability is plotted on the right axis. Worth noting, Figure 2
highlights the inverse relationship between the use of board involve-
ment techniques and financial vulnerability, as organizations that use
board involvement techniques (privately funded agencies) tend to
demonstrate lower levels of financial vulnerability.
We then conducted a usefulness analysis (Darlington, 1990) to
determine if funding source explained incremental variance in the
study’s outcomes beyond board size, organization size, and national
affiliation. We first considered the amount of variance in involvement
and vulnerability that is explained by funding source when it is
entered alone in a simple linear regression. Then the control variables
were entered in the first step of a hierarchical regression, and fund-
ing source was entered in step 2. If the standardized beta coefficient
for funding source in step 2 is significant, then funding source adds
to the prediction of board involvement and vulnerability beyond the
variables entered in step 1. Results are summarized in Table 4.

Table 4. Incremental Variance of Funding Source

in Predicting Outcomes
Board Involvement Financial Vulnerability

␤ R2 ⌬R2 ␤ R2 ⌬R2

Step 1
National affiliation .12 .28* .28* ⫺.29 .10 .10
Board size .48* ⫺.06
Organization size ⫺.37
Step 2
Funding source ⫺.38* .45* .17* .31* .19 .09

Note: n ⫽ 42. *p ⬍ .05.

 F U N D I N G , I N V O LV E M E N T, AND VULNERABILITY 183

When entered as a single independent predictor, funding source

explains 20 percent of the variance in board involvement techniques
and 17 percent incremental variance beyond the control variables.
For financial vulnerability, we removed organization size from the
regression equation in step 1. Organization size is a component of
the FVI calculation, and so including size as a predictor of vulnera-
bility would have inflated regression estimates (Bobko, 2001). Fund-
ing source explains 6 percent of the variance in vulnerability when
entered alone in simple regression, and an additional 9 percent
beyond the national affiliation and board size. These results support
hypothesis 3 and indicate that funding source is an important pre-
dictor beyond organization and board characteristics.
Hypothesis 4 suggested that board involvement would be related
to financial vulnerability. The observed relationship between involve-
ment and vulnerability is the hypothesized direction (r ⫽ ⫺.10), but
the correlation is not significant at p ⬍ .05. Agencies were split into
two groups (high and low levels of board involvement), and an inde-
pendent t-test on the group mean FVI was conducted to determine
if differences between the groups existed. As expected, agencies with
a high level of board involvement are, on average, less vulnerable These results . . .
(MFVI ⫽ .19, SD ⫽ .09) than agencies with low levels of board
involvement (MFVI ⫽ .25, SD ⫽ .11), but this difference is not sig- indicate that
nificant at conventional levels, t(40) ⫽ 1.83, p ⫽ .07. While results funding source is
approached significance, hypothesis 4 is not fully supported. an important
In addition to the results noted, we were interested in whether
observed relationships were unique to organizations that maintain a predictor beyond
national affiliation. Umbrella organizations tend to enforce a set of organization and
standards for resource management and board involvement (Holland, board
2002), so it may be possible that relationships among the study’s vari-
ables were unique to organizations governed by a national organiza- characteristics
tion. To determine if national affiliation moderated observed effects,
we split the data set into two independent groups (national affil-
iation, n ⫽ 12; no national affiliation, n ⫽ 30) and estimated corre-
lation coefficients among the study’s variables in each group. We used
the Fisher z-transformation on each correlation coefficient (Bobko,
2001) and then calculated a Z-score for the differences across groups.
If the Z-score is greater than ⫹1.96 or less than ⫺1.96, then the
observed difference is significant at p ⬍ .05.
The correlations between funding source and the use of board
involvement techniques are r ⫽ ⫺.46 and r ⫽ ⫺.47 for agencies
with and without national affiliation, respectively. These correla-
tions are not significantly different (Z ⫽ .03, ns) suggesting that
national affiliation does not moderate the relationship between
funding and the CEO’s use of board involvement techniques. The
relationship between funding source and vulnerability is significant
(r ⫽ .58, p ⬍ .05) for agencies with a national affiliation but non-
significant for agencies without national affiliation (r ⫽ .25, ns).
However, this difference is not significant (Z ⫽ 1.04, ns). Taken
together, these results indicate that funding source has similar levels
184 HODGE, PICCOLO

of influence on strategy and performance across organizations with

and without national affiliation.

Summary of Findings
This study set out to examine relationships between funding source,
board involvement, and financial vulnerability in a sample of non-
profit organizations. Consistent with resource dependence theory, we
suggested that an organization’s funding source would have an influ-
ence on strategy implementation, as measured by the CEO’s use of
board involvement techniques, and an influence on performance,
measured as financial vulnerability in the face of economic shock.
Results on a sample of United Way affiliates suggest that funding
source is significantly related to the use of board involvement tech-
niques, as CEOs of privately funded agencies use more board involve-
ment techniques than CEOs of government and commercially funded
agencies. Funding source is also marginally related to financial vul-
nerability, as privately funded agencies are, on average, less vulnera-
ble than government or commercially funded agencies. These results
Funding source in are consistent with other studies that have evaluated business-level
nonprofits strategy and board involvement on measured financial performance
(Bowman and Helfat, 2001; Hoskisson and Hitt, 1990; Zahra and
appears to be an Pearce, 1989).
important and As hypothesized, funding structure explained incremental vari-
consistent ance in board involvement and financial vulnerability beyond orga-
nization size, board size, and national affiliation. Thus, as resource
predictor of dependence theory would suggest, funding source in nonprofits
strategy and appears to be an important and consistent predictor of strategy and
performance performance. While we suggested that the use of board involvement
practices would reduce financial vulnerability, results in the current
study did not fully support our predictions. With that stated, the FVI
score is below the .20 threshold for vulnerability in agencies with
high levels of board involvement. Additional research is needed to
explore the board’s impact on financial performance.
Practical Implications
Results of this study have practical implications for nonprofit CEOs.
For one, engaging the organization’s board of directors in a way that
encourages member participation in strategic planning, committee
involvement, and resource development will likely reduce the orga-
nization’s vulnerability. CEOs can draw on a short list of board
involvement practices to reduce dependencies on external con-
stituencies. Agencies that encourage board involvement in planning,
for example, appear to be less vulnerable and will be more likely to
deliver services over a greater period of time.
In addition, consistent with a resource dependence perspective,
our study suggests that flexibility with resources has a positive influ-
ence on an organization’s financial stability. Privately funded agencies,
 F U N D I N G , I N V O LV E M E N T, AND VULNERABILITY 185

which have the most flexibility in resource use, appear to be the least
vulnerable and have the best opportunity for funding diversification.
Whereas a high concentration of private support allows the devel-
opment of public sources of funding (government grants), the oppo-
site is not always true (Brooks, 2000). Thus, for the sake of survival,
CEOs should structure activities to enhance the organization’s pri-
vate fundraising effort.
Limitations
This study contains limitations that should be noted. One possible
criticism may be the relatively small sample size (n ⫽ 42) used to
evaluate relationships among the variables. The small sample size
generally reduces the power of the statistical tests, which may explain
why some relationships in the study were significant at conventional
levels of probability, and others were not. Nevertheless, other impor-
tant studies in the nonprofit sector have used similar sample sizes
(Provan, 1980), and studies that evaluate variables at the organiza-
tion level of analysis generally use smaller sample sizes than studies
conducted at the individual level. However, additional cases would
improve the power of the tests and the accuracy of observed effects. For the sake of
The agencies considered in the current study are all affiliated with survival, CEOs
HFUW, and it is possible that this association biased observed rela-
tionships. United Way affiliation could have had a meaningful impact should structure
on how CEOs engage members of the board, and whereas the use of activities to
board involvement practices by the CEO was measured, no indication enhance the
of HFUW influence was considered. That said, the current study is
among several that have restricted its sample to agencies that are affil- organization’s
iated with the United Way (Cordes, Henig, Twombly, and Saunders, private
1999; Gronbjerg, Harmon, Olkkonen, and Raza, 1996; Paulson, 1980; fundraising effort
Stone, Hager, and Griffin, 2001). Examining HFUW organizations,
each of which operated in the same locality, allowed us to isolate the
impact of funding on performance and eliminate the possibility that
historical or macroeconomic factors had an influence.
Finally, the use of board involvement techniques was assessed by
CEO self-report. Whereas prior research supports the use of self-
report assessment tools for board analysis (Heracleous and Luh,
2002; Jackson and Holland, 1998), it does introduce some limitations
to the study. Financial vulnerability and funding source were drawn
from objective measures, but a single-source estimate of board
involvement does not allow a perfectly accurate estimate. Future
studies should include input from board members, donors, and other
organizational stakeholders.

Conclusion
The study examined here provided general support for resource
dependence theory in a sample of nonprofit social service agencies.
Consistent with the notion that resources affect strategy, a nonprofit
186 HODGE, PICCOLO

organization’s primary funding source significantly influenced the

CEO’s use of board involvement techniques. CEOs of privately
funded agencies tended to use more board involvement techniques
than CEOs of agencies funded by government grants or commercial
activity.

Appendix: A Measure of Financial Vulnerability

in Nonprofit Organizations
The measure of financial vulnerability used in this study was pro-
posed by Trussel, Greenlee, and Brady (2002). Five financial distress
indicators—debt ratio, revenue concentration, surplus margin,
administrative cost ratio, and size—are weighted in a regression
equation to derive a financial vulnerability index (FVI). The distress
indicators were calculated as suggested, and a single FVI score was
computed for each participating firm. A low FVI score (less than .10)
indicates that a firm is well positioned financially to overcome finan-
cial shock, as in the loss of a major source of funding, while an FVI
score greater than .20 indicates that a firm is vulnerable to major
changes in its revenue stream.
Following are the equations used to calculate each financial
distress indicator and the regression equation offered by Trussel,
Greenlee, and Brady to calculate financial vulnerability:

Debt ratio (Equity): Total liabilities兾total assets

Revenue concentration (Concen): ⌺(RevenueI兾total revenues)2
Surplus margin (Margin): (Total revenues ⫺ total expenses)兾total
revenues
Administrative cost ratio (Admin): Administrative expenses兾total
revenues
Size (Size): Natural log of total assets

Regression equation: FVI ⫽ 1兾(1 ⫹ e⫺Z) when Z ⫽ 0.7754 ⫹

0.9272Debt ⫹ 0.1496Concen ⫺ 2.8419Margin ⫹ 0.1206Admin ⫺
0.1665Size, and e ⫽ 2.718.

Relevant information was drawn from each firm’s most recent

990 Form, which is made available for public use by 1996 federal
regulations.

MATTHEW M. HODGE is executive director of the Seminole Community

College Foundation in Central Florida.

RONALD F. PICCOLO is an assistant professor in the Department of

Management at the University of Central Florida.
 F U N D I N G , I N V O LV E M E N T, AND VULNERABILITY 187

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