Purpose and Nonprofit Enterprise

Nonprofit enterprise is responsible for a large share of economic activity across the globe. And yet, leading theories fail to explain why nonprofit business survives and even thrives across a vast number of industries, ranging from artificial intelligence to beer brewing, despite an absence of shareholder control. Indeed, as shareholder ownership and intervention rights have become the core component of successful corporate governance, this success is all the more surprising.

We offer a novel “purposeful enterprise” theory to explain the puzzling success of nonprofit enterprises. Drawing on research in behavioral economics and organizational science, we argue that organizational purpose can serve as a substitute for shareholder control and monitoring, by mitigating managerial agency costs and aligning employee incentives. Nonprofit enterprise may also promote value creation by improving the stability of the entity. Our theory clarifies why nonprofit businesses and other related purposeful enterprises have thrived in certain industries and not others. It also sheds light on fundamental debates in corporate law, including that of the corporation’s purpose in society. In particular, it suggests that shareholder ownership and control is not the only means of addressing agency costs and improving organizational efficiency.