Other people’s money is not just the name of a play by Jerry Sterner. It is the temptation put before an “agent” when working on behalf of a “principal” that gives rise to “moral hazard.” Other people’s money is also what nonprofit organizations – like theatre companies – use to produce work. There is a lot of business literature, organizational behavior literature, and economics literature that address the relationship between agents and principals and the moral hazard inherent to the task of using other people’s money. There’s even some scholarly literature on principal agent relationship in the nonprofit sector, but nothing specific to the arts. As my colleague Andrew Taylor said, “the nonprofit arts are dripping with principal-agent problems. Just ask any governing board who they work for.” Seeing this question as part of a public conversation on twitter spurred #2amt editor David J. Loehr to ask me to explain moral hazard and principal agent theory as it relates to theatre.

Here’s one example of how the principal-agent problem plays out:

A visionary director, let’s call her Jane Doe, decides to start a theatre company in a mid-size city and, against the advice of her friend the arts administrator, incorporates in her state as a 501c3 with a mission “to enrich the cultural life of the region by presenting new plays generated from interaction with the regional community.” She has three years to get a board in place. She quickly recruits people she trusts, people who buy into her vision and the mission of the organization. Her college roommate is now a lawyer – score! Her neighbor is an accountant – score again! And, her best friend does PR for a health group to round out the functional board trifecta: legal, financial, and marketing. Fundraising begins and private gifts come in. Grant applications go out and grant money comes in. Plays get written and produced. Sometimes, people even buy tickets, but not too many.

Jane’s artistic vision evolves and she wants to direct more classics. Her board of three friends goes along with her programming. Oops…the board now appears to be reporting to Jane rather than the other way around. In a nonprofit organization, the board -– the governing body — is the principal, the steward of the mission and all of its funds, and the artistic director is the agent. Here the moral hazard results from stewardship of mission rather than money, but whenever the goals of the principal and the agent fall out of alignment, you got yourself a principal-agent problem. There are myriad examples of this situation, the unintentional (or intentional) mission drift that happens over time, mission drift that goes uncorrected because of principal-agent reversal. I’m too polite to name names.

This situation begs the question: “Why did Jane bother with a board at all?” Law require it of a tax-exempt organization. If she had developed a more flexible organizational structure instead of a 501c3, she likely could have recruited the assistance of her three friends while maintaining her artistic autonomy. Poor Jane.

To be continued…

Read Linda’s blog, Creative Infrastructure.

  • October 28, 2011
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