I often hear that nonprofits should be run more like businesses. There’s a prevailing sentiment that the realities of the market impart a kind of discipline on businesses that is sorely lacking in the nonprofit world.
To which I say: It’s more complicated than that.
First of all, the goals are different.
A business’s bottom line is, well, its bottom line. It exists to turn a profit. In the process a successful business will provide good employment, deliver a needed service, and perhaps give back to the community in the form of charitable contributions. But it does all of these things as a means to an end: profit.
A nonprofit exists to fulfill its mission. It needs money in order to do that, and it cannot run continual or even occasional deficits. But it does not exist to turn a profit. It exists to do good.
In some ways nonprofits and for-profits do the same things, but in a different sequence, and with a different end goal. A nonprofit needs money in order to help people in the community. A for-profit business needs to treat people in the community well (suppliers, customers, employees) in order to make money.
So there are limits to the comparison. And nonprofit and business folks inadvertently bruise one another when they try to impose their world views.
I’ve been guilty of this myself. When I was younger, I would criticize businesses for only making contributions that benefited their business plans. I’ve come to accept that corporations are required to justify their actions as providing value for the shareholders, and so those are precisely the kinds of charitable gifts they are allowed to make.
And businesspeople, for their part, get under the skin of nonprofit leaders by being condescending toward the very real challenges and complex management decisions that fill the nonprofit day.
I was once involved with a very successful and complex nonprofit with an annual budget of several million dollars. The CEO was marvelous: nimble in reacting to opportunity, inspiring to all, effective both at the big picture direction of the organization and setting an excellent tone with the staff and clients. The organization had expanded its services, raised its visibility, and won significant public recognition. And it did all of this while working in a very challenging funding environment and dealing with some very needy clients.
The organization had a board member who was the CEO of a very successful business. In many ways he was a very valuable and generous board member. Unfortunately, he also had a habit of punctuating meetings with comments along the lines of, “Well, in the business world, here’s how we would handle this situation…”
The CEO would fight off a grimace. I could almost see the thought bubble rising up over her head: “And you don’t consider this a business?”
Businesspeople can also lose patience with the very deliberate pace of decision-making at a nonprofit. The emphasis on process — the feeling that you need to get buy-in from each and every stakeholder (staff, board, funders, regulators, clients) before moving forward — can seem foreign and unnecessarily cumbersome to people used to the quicker decision-making of the for-profit world. But those very same businesspeople are often the first to object if a decision is made that had not been fully vetted by them as board members.
Let’s be clear: There is much that nonprofits can learn from the business community. There are many for-profit practices that can be overlaid onto nonprofits to improve their efficiency and, perhaps, effectiveness: benefits management, cash management, and risk management come to mind. But let’s not get carried away. For example, evaluations of employees are often clearer and easier in the for-profit world, where staff can be assessed in terms of their contribution to the company’s profits. Given that there are, by definition, no profits in the nonprofit world, it’s more than a little stretch to think that those same practices can work at charitable organizations.
And when it comes to operating budgets, these are two very different worlds. In a start-up for-profit business, it’s typical to borrow and spend a bundle for several years building your product, team, market share, and brand, all in anticipation of eventual profits. Deficits are built into the business plan. In the nonprofit world, by contrast, funders take a punitive approach toward a nonprofit that’s running a deficit. Deficit spending is seen as a sign of poor management. Period. It’s almost impossible, without a very large multi-year start-up grant, for a nonprofit to get any sort of a running start on building its infrastructure and team. Instead, nonprofits add a staff member here, a half-time person there, as they feel they can afford them. Businesspeople wring their hands over the incremental nature of the growth. But really — do nonprofits have any choice?
So can we agree that the nonprofit and the for-profit worlds are two different spheres? There is some overlap, but many differences are baked into the nature of the organizations. Neither is better than the other. And we need to promote a sense of mutual respect so each can do what it does best, for the good of all.
Copyright Alan Cantor 2013. All rights reserved.
Good column, Alan. I will just add two comments: It is important for both not-for-profits and businesses to remember that a not-for-profit should also be a not-for-loss. Also this: In my experience, one great practice that not-for-profits can and should learn from businesses is focused goal-setting. Having a mission statement that includes, “our goal is to eliminate poverty…” or some such other high-flown objective. Your not-for-profit is not going to eliminate poverty any more than your HVAC business is going to boil the ocean.
Excellent points, Jocelyn. Thank you!
For our non-profit, it’s always a juggling act between fulfilling the mission and raising funds for our operating budget. Our small land-conservation organization has a very dedicated staff; dedication to a mission is something which few for-profits possess or, from which, they benefit.
There is also a growing trend for companies to characterize their mission as “for-benefit,” “hybrid,” or “triple-bottom-line”. These businesses claim to promote social benefits as well as profit and many of them are members of the Social Venture Network (www.svn.org). Some companies undoubtedly promote a hybrid mission largely for PR purposes. Do you think the trend for businesses to self-identify this way will encourage some of them to become more like non-profits?
Thanks, Sheryl, for raising this.
There is indeed a rapidly growing movement in this area. Nine states have now passed legislation allowing for “L3C” businesses (Low-profit Limited Liability Companies). The notion behind L3Cs is that they have responsibilities not only to the shareholders (that is, to maximize profit), but also to a defined social or environmental mission. For example, a company that wants to make environmentally-friendly paper products has permission, under its L3C status, to both make its products with sustainably sourced and organic materials and sell the end product for less than it might, in order to promote wide use. In doing so, they sacrifice profits for impact. Similarly, there are over 700 “B Corps,” which have been certified by a nonprofit organization called B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency.
Though my cynical side shines through in many of my blog posts, I’m supportive of these and similar efforts. It’s too early to pass judgment, and of course some companies will weigh the mission side more heavily than others, but I think this is an interesting twist on traditional capitalism. Those companies that I know that are involved in this movement seem driven by much more than PR.
You should post this on EJewish Philanthropy