Donor Governance and Financial Management in Prominent Art Museums

Donations play a fundamental (and increasing) role in supporting art museums and other nonprofit corporations. However, donations are often not freely given and may come at the price of certain restrictions upon the donation’s use and expropriation. This practice, termed here as “donor governance,” represents a form of corporate governance for nonprofits—the “restrictive covenants” on the donation’s use limit nonprofit managers’ ability to freely use the funding.

Donor governance manifests itself particularly strongly in the art-museum context. Many art museums suffer from recurring encounters with financial distress and self-perpetuating boards of trustees, incentivizing donors to be wary of donating without restrictions.

Studying a panel dataset of prominent U.S. art museums from 1999–2013, this paper finds that donor governance (through restricted donations) has greatly increased in recent years and has had a real and significant impact on museums’ balance sheets and cost structures. Museums with high amounts of restricted donor capital tend to spend more on programming and less on administration, suggesting that donors had successfully limited management’s discretionary appropriation of resources. To put this in numbers, museums typically add about 45 cents of each donated dollar to their endowments. That figure stands in stark contrast to the virtually zero amount saved from operating surpluses and other sources of cash. Such museums also exhibit more year-to-year stability in operating margins. However, while stable, those margins are lower than those of museums receiving gifts with fewer restrictions.

Organization and Economics of the U.S. Art-Museum Industry

Leading museums often have a more or less permanent clientele of visitors. It’s thus a stable industry, subject primarily to fixed costs. The marginal cost of accommodating additional visitors is virtually zero, which volunteer docents help enable. Most museum revenue comes from donations, with a minority coming from admission charges and affiliated operations like restaurants and gift shops. Although some donors make unrestricted gifts to support all aspects of museum operations, donors tend to restrict gifts to the expansion of facilities, acquisitions of new art, or preservation of the museum’s collection.

Donors’ restrictions on gifts serve as a form of bonding between donors and museums’ trained curators. These restrictions prevent the museum’s professional staff from consuming collections’ value through excessive compensation or fringe benefits. This bonding proves particularly important in the museum context, given that nonprofit enterprises feature special agency problems—such firms have no residual claimants (i.e., shareholders) who would typically have the incentives to monitor the nonprofit’s professional staff. This may grow problematic when most museum boards are too oversized to operate effectively. In this study’s sample, museums have a mean of 32.6 directors apiece. These positions are often merely ceremonial.

Dataset and Selected Statistics

The study’s format. The study draws on 242 museums belonging to the Association of Art Museum Directors (AAMD), a group to which almost every culturally significant fine-arts institution belongs. This study then excludes institutions in the AAMD that lack permanent collections, are owned by or affiliated with universities, are federal-, state-, or municipal-government entities, or are legally organized as private foundations rather than public charitable trusts. These excluded entities may lack separate financial disclosures or face fundamentally different issues of financial risk than the analyzed independent museums. These exclusions narrow the sample to 129 museums.

Each of the identified 129 museums has Form 990 financial data from, providing 14 annual observations from 1999–2013 and up to 1,789 museum-year observations for the sample. Missing values in the data typically stem from museums not completing all of Form 990’s required fields.

Study results. The mean value of donations per museum year is roughly four times larger than the mean value of program-service revenue (i.e., admission chargers, membership fees, and other fees paid by customers). Almost half of a museum’s assets are restricted by donors. Some 21% of total assets, on average, are restricted on a temporary basis. Some 26% of total assets, on average, are restricted on a permanent basis. Unrestricted assets available to management have declined sharply as a trend throughout the 1999–2013 sample period, falling from about 45% of capital in 1999 to about 30% in 2013.

Evidence of risky museum practices was identified in the data. Only four out of 129 museums placed their art in trust funds protected from creditors, designed to limit vulnerability to foreclosure in the event of insolvency. In six cases, museum collections are jeopardized from exposure to the finances of their host city, as the municipality retains title to all or part of the collection (leading to potential seizure by city creditors). Almost all museums elected not to insure their collections against theft or casualty loss.

Table 1 below presents data on the growth rate and riskiness of various museum revenue streams.

Obs Mean growth rate Standard deviation Program service revenue Other museum revenue Cash donations Government grants
Program service revenue 1,561 4.7% 52.0%
Other museum revenue 1,355 -8.5% 104.3% 0.01
Cash donations 1,610 3.4% 70.0% -0.02 -.01
Government grants 1,309 1.8% 99.0% -0.03 .03 .01
Endowment investment income 491 2.3% 13.6% -.13 .32 .07 .02
Total revenue 1,596 2.0% 61.4%

Table 1:  The table shows the annual growth rates, standard deviations of the growth rates, and correlations among different museum revenue sources. Program service revenue includes admission charges, memberships, and related costs. Other museum revenue includes parking, restaurants, and gift shops. The growth rate for endowment investment income equals the annual investment return on the endowment fund. All growth rates are compounded continuously to reduce the importance of outliers. The sample includes 1,789 annual observations for 129 museums. Data are obtained from museums’ U.S. Internal Revenue Service Form 990 filings.

Despite museum revenue rising at roughly 2% per year, a particularly interesting data point is the standard deviation of the annual growth rates in each subcategory of revenue. Four of the five major revenue streams for museums (program services, donations, government grants, and other revenue) are subject to large year-to-year swings in growth rates—the standard deviation for growth rates in donations is about 70% per year. These numbers are 2–3 times more volatile than a typical publicly traded stock.


The paper analyzes the impact of donor restrictions on museums’ financial policies and performances. Some of the paper’s results are highlighted below:

The study finds that for each dollar in gifts received, 45 cents is typically added to a museum’s endowment—an extraordinarily large savings rate, especially given that almost none of museums’ profits are added to the endowment. Perhaps donor restrictions are forcing museums to save gifts and spend them gradually over time, or perhaps many gifts are solicited for the express purpose of building the organization’s endowment fund.

  • The study finds that new grant income received correlates strongly negatively to endowment contributions. One guess at why might be that government grants often require organizations to raise or provide a matching amount of money to support project funding.
  • No significant association is identified between new debt issues and increases in endowment funds (providing evidence against “endowment arbitrage,” the idea that wealthy nonprofits issue debt at low interest rates then invest the proceeds to earn a higher return in the stock market).
  • The study computes a negative coefficient of -0.13 for the variable measuring operating profits. This implies that when a deficit occurs in museum operations, only a fraction is covered by funds taken from the endowment.
  • The study also identifies the impact of different changes in cash upon the net inflow of funds to or from an endowment—the result is that museums do save a very large proportion of gifts, a modest fraction of their operating surpluses, and reduce the endowment to support projects funded by government grants. This suggests a large influence of donor governance.
  • The influx of funds in or out of the endowment fund does not seem to be affected by the fund’s performance.
  • Results suggesting that museum endowments are conservatively managed, with close to half of their assets earning the risk-free rate. Museums manage their endowments conservatively, and these results do not vary with the extent of donor restrictions (contrary to a hypothesis that restrictions reduce expected investment return since assets earmarked for specific use may be invested only in cash and risk-free bonds).
  • Art market performance does not seem to have any explanatory power for the investment returns earned by art museums’ endowment funds. Museums do not invest in stocks correlated with art returns, nor do they succeed in using their investments to hedge the market risk of art.
  • Donor restrictions appear to have large and significant impact upon museums’ cost structures. When donor restrictions are high, resources are taken out of the administration and placed into programming—meaning that these museums spend less on administrative overhead and spend more on exhibitions and other programming more in line with their missions (i.e., what donors prize). Results also suggest that donor restrictions improve museums’ overall efficiency—when gifts are more restricted, museums exhibit significantly less volatile operating and financial returns.


Donor restrictions on gifts are analogous to an increase in permanent equity capital subject to restrictive covenants that are more commonly associated with debt capital. Based on this study, the presence of these restrictions appears to reduce agency problems by shifting museums’ spending away from administration and into programming. These agency costs are reduced by limiting perquisite consumption and asset substitution, among other problems. The tradeoff for these benefits is reduced operating flexibility, which leads to lower profit margins for museums when restricted gifts are sizeable.

]This paper leaves open the possibility for future research into donor restrictions: What types of restrictions are used in practice? How long do they usually last? How do managers limit or contract around donor restrictions, and how successfully? Regardless, gifts remain one of the most significant sources of capital for the nonprofit sector, and it would do well to understand them.

This post comes to us from David Yermack, the Albert Fingerhut Professor of Finance and Business Transformation at New York University Stern School of Business.  It is based on his recent article which is entitled “Donor Governance and Financial Management in Prominent U.S. Art Museums” and available here.