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The International Journal
of Not-for-Profit Law

Volume 6, Issue 2, February 2004

A publication of the International Center for Not-for-Profit Law

Table of Contents

Letter from the Editor

The Pacific

Social Inclusion and the Indigenous People of Australia: Achieving a Better Fit Between Social Need and the Charity Law Framework
Kerry O'Halloran

Australia Crawls Closer to Reform of the Definition of Charity
Myles McGregor-Lowndes

Consultations Toward Legal Reform in Tuvalu
James Duckworth and Mose Saitala

Social Capital and Philanthropy in Maori Society
Tuwhakairiora Williams and David Robinson

The Challenges Facing American Nonprofits

Deterring Donors: Anti-Terrorist Financing Rules and American Philanthropy
Barnett F. Baron

A Needless Silence: American Nonprofits and the Right to Lobby
Jeffrey M. Berry

The Nonprofit Paradox: For-Profit Business Models in the Third Sector
Bill E. Landsberg

Articles

Survival Strategies for Civil Society Organizations in China
Julia Greenwood Bentley

An Introduction to Canadian Tax Treatment of the Third Sector
Robert Hayhoe

"Organized" Civil Society and Its Limits
Antonio Itriago and Miguel Angel Itriago

The Fiscal Framework for Corporate Philanthropy in CEE and NIS
David Moore

Defining Characteristics of Civil Society
Timothy J. Peterson and Jon Van Til

The Alchemy of Success: The Case of Corporate Responsibility
Simon Zadek

Civil Society at the Movies
Rod Smolla

Reviews

The Civil Society Reader
Edited by Virginia A. Hodgkinson and Michael W. Foley
Reviewed by Morgan Meis

The Perfect Gift: The Philanthropic Imagination in
Poetry and Prose
Edited by Amy A. Kass

Does Civil Society Matter?: Governance in Contemporary India
Edited by Rajesh Tandon and Ranjita Mohanty

The State of Civil Society in Japan
Edited by Frank J. Schwartz and Susan J. Pharr

Paved With Good Intentions: The NGO Experience in North Korea
Edited by L. Gordon Flake and Scott Snyder

The Legal and Regulatory Framework for CSO Self-Financing in Colombia;
The Legal and Regulatory Framework for CSO Self-Financing in Chile
By Nicole Etchart, Brian Milder, Maria Cecilia Jara, and Lee Davis

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Editorial Board

The Nonprofit Paradox: For-Profit Business Models in the Third Sector

By Bill E. Landsberg *

In a competitive business environment, with shrinking support from both government contracts and private donors, and with society’s increasing need for its services, the nonprofit must embrace the best practices of the commercial, for-profit world in order to survive. Yet for-profit strategies can become the nonprofit’s downfall by undermining its culture, mission, and public image. In an effort to save its bottom line, the modern nonprofit risks losing its soul. This article discusses the paradox--its causes, symptoms, and possible remedies.

Introduction

It has become a generally accepted truth in the nonprofit world that third-sector organizations must embrace the best practices of the for-profit, business world in order to survive. The mantra “no money, no mission,” is heard throughout the third sector. The loftiest mission will fail if its delivering organization lacks the financial stability to stay afloat. An increasingly competitive business environment, with shrinking support from government and private donors, dictates that nonprofits acquire the efficiency, flexibility, innovativeness, and discipline traditionally represented in the competitive for-profit sector.

But does this solution carry the seeds of destruction? Others have argued that for-profit commercialization and resulting revenue streams threaten the nonprofit sector (Weisbord, 1998). Here the focus is on not the dollars but the for-profit model itself. The position proposed in this article is that the modern nonprofit faces a paradox. The business practices the nonprofit embraces to assure its survival threaten to undermine its culture, mission, and public image. In an effort to save its bottom line, the modern nonprofit risks losing its soul.

The first section of this article discusses some of the characteristics of the for-profit business model and demonstrates how, like a virus in a new organism, they can become fundamentally unhealthy to the nonprofit. The second section suggests several underlying reasons for the paradox. The third section presents the case of a large community mental health center; its success in incorporating the efficiency, flexibility, innovativeness, and discipline of the for-profit business world; and the resulting dangers to its culture, public image, and mission. The fourth section reviews the tradition of the nonprofit sector in American culture and various theories for its success. Finally, this article concludes with suggestions for solving the nonprofit paradox. Strategies call for reexamining board governance and staff management, constantly reevaluating mission relevance, and even asking whether to retain nonprofit status.

The Dynamics of the Nonprofit Paradox

There can be no doubt about the general trend of nonprofits embracing the concepts and techniques of for-profit business and industry. For years, the task of operating a nonprofit was considered administration, from the Latin administrare, “to serve.” The term was used as a substitute for management, which was associated in the public mind with business and profit making (Mulhare, 1999). In 1973, the Commission on Private Philanthropy and Public Needs, known as the Filer Commission, was formed to conduct a comprehensive, multidisciplinary survey of the nation’s nonprofit sector (Hall, 1987: 20; Commission on Private Philanthropy and Public Needs, 1975a, 1975b, 1977). The commission concluded that the nonprofit sector faced serious problems, including a shortage of pertinent research and no academic programs to prepare nonprofit leaders. Yale University created the Program on Nonprofit Organizations in 1976, the first research center of its kind (Powell, 1987: xi). In 1980, the Independent Sector was formed as a permanent consortium dedicated to strengthening nonprofit organizations through research, education, and advocacy (Independent Sector, 1989).

Research centers, academic programs awarding degrees or certificates in nonprofit management, and continuing education programs developed during the 1980s (Hodgkinson, 1988: 3-5, 13). New trade periodicals and scholarly journals gained in popularity, including Nonprofit and Voluntary Sector Quarterly, Nonprofit Management and Leadership, Nonprofit World Report, Chronicle of Philanthropy, and Nonprofit Times. For-profit organizations underwrote research projects on nonprofit management issues (e.g., Independent Sector 1986). Today more than 60 U.S. colleges and universities offer coursework or research opportunities in nonprofit management (Whittaker, 1995: 59-62). From coast to coast, highly rated programs flourish: Harvard University, University of Indiana at Bloomington, University of Minnesota, Yale University, Northwestern University, University of Michigan at Ann Arbor, and Stanford University.

Professionalized nonprofit management incorporates concepts and techniques almost exclusively from for-profit business and industry (Bailey, Grochau, and Speltz, 1990). Perhaps this reliance on for-profit models stems from the financial uncertainty in which nonprofit organizations have found themselves during the past several decades. Government budgets have been cut even while needs have continued to grow. Organizations under stress look to outside models they perceive as successful and promising (DiMaggio and Powell, 1983). A related explanation is offered by Ryan (1999), who notes that the social services industry in the United States is in a period of transition marked by the entry of for-profit organizations that compete directly with nonprofits for government contracts. According to Ryan, for-profits entering the social services industry enjoy four distinct advantages: size, capital means capability, mobility, and responsiveness. In an attempt to compete head to head with for-profits, nonprofits in the industry are adopting for-profit management models in hopes of sharing these advantages.

What is this for-profit business model to which the nonprofit sector has looked for salvation? Generally, it has been a developing series of management models emphasizing quality (of products or services), efficiency (cost management), flexibility (assuring adaptation to change), innovation (striving for improvements in products and services), and above all a disciplined focus on the financial bottom line, the for-profit’s raison d’etre.

But adoption of this model has not occurred without consequences. Consider the following:

  1. More business people are recruited for nonprofit boards of trustees because of their influence, money, and business expertise.
  2. Nonprofits are understandably encouraged to hire staff, especially senior executive staff, with business expertise and skill as opposed to mission-related acumen. In addition, non-mission-related outside consultants, such as accountants and attorneys, are brought in to address issues such issues as financial accountability and risk management.
  3. New for-profit management systems, which emphasize productivity, quality assurance, budget discipline, or strategic planning, are forced on a mission-oriented staff. 
  4. Even the lexicon of business has effloresced in the nonprofit world.

Much of the above is undeniably good for public charities, especially those plagued by financial ills or lackluster delivery of services. However, the following side-effects are often troubling:

  1. Boards of directors tend to be underused for their proper role of assuring mission integrity, strategic planning, and high-level policy-making. Business-oriented board members are inclined to emphasize financial issues over mission issues. When they micromanage, their focus on financial issues exacerbates the problem by diverting even more staff time and resources away from mission activities.
  2. Psychological distancing develops between management and program staff. People of different orientations are drawn to these different roles. Management’s focus on financial health and program staff’s concerns with mission delivery create two camps in the organization, each failing to understand and communicate with the other. 
  3. As management’s decisions are increasingly driven by managers' natural interests and familiarity with financial issues, mission concerns are deemphasized. This can diminish morale among program staff members who are uncomfortable with the new procedures and unfamiliar with their advantages.
  4. Public image suffers. To paraphrase an old saying, “If you walk like a duck and quack like a duck, eventually people will think that you are a duck.” As nonprofit organizations increasingly resemble for-profit organizations, they look less and less like the public charities they are meant to be. Donors are less inclined to support organizations outside their traditional notions of public charities. When donors cease to recognize these organizations as public charities, they stop supporting them. This in turn causes management to rely on commercialism to sustain financial viability. The problem compounds itself. With the best of intentions, an organization seeking to assure its financial health ends up trading one set of problems for another.

Reasons for the Paradox

The management strategies borrowed from the for-profit world threaten to undermine the culture, mission, and public image of the nonprofit. Why? Four answers are suggested. They have to do with complexity, transferability, motivation, and values.

Nonprofits are surprisingly complex by comparison to for-profits. The “law of nonprofit complexity” argues that they “tend to be more complex than business firms of comparable size” (Anheier, 2000: 7). Anheier (2000) proposes that the nonprofit environment requires managing diverse constituencies and stakeholders, including a professional core of managers, a governing board of experts and community representatives, a client or user base and their representatives, a volunteer and membership component, and actual service providers. He adds that the nonprofit also must manage a set of contractual relations with both government and business, as well as multiple revenue sources, including donations, fees, charges, subsidies, grants, and contracts.

As a result of this diverse list of constituents, stakeholders, obligations, and revenue sources, nonprofits have, in effect, multiple bottom lines. A recognition of nonprofits as uniquely complex suggests one problem with incorporating ready-made management models from the business world, where prices, wages, profits, and taxes drop down into a single bottom line (Anheier, 2000). In sum, the for-profit model may be too unsophisticated to meet the needs of the non-profit organization.

Some for-profit management models need serious modification for the nonprofit environment. Take, for example, financial management. Bryce (1999) argues that the financial functions in nonprofits and for-profit organizations differ in fundamental ways:

  1. For-profit organizations fund growth and finance new initiatives through retained earnings, stock sales, and borrowing. There are no stockholders in a nonprofit.  Nonprofit leaders therefore need to be more innovative in exploiting other revenue sources, such as contributions and assessments of membership.
  2. For-profit organizations commonly have large investors who own the organizations and may even exercise total control. In nonprofit organizations, large contributors are prohibited from exercising unbridled control.
  3. Non-profit public charities must demonstrate that a large portion of their revenues comes from public support or that they are owned by a publicly supported organization. For-profits face no such requirement.
  4. The nonprofit sector often has prohibitions against certain types of investments or investment strategies, such as commodity and options trading. Again, for-profits face no such rule.

No judgment of motivation or values is intended here. The motivations of for-profit organizations and those of nonprofit organizations are both perfectly appropriate. Likewise, the values of each sector may be exemplary. The problem is that they differ. It is also important to note that the problem is not that business people are stingy. Quite the contrary, it is impressive how much time and energy business leaders invest in nonprofit work (McFarlan, 1999).

The goal of a commercial business enterprise is profitability, not the specific product or service it provides. This differs fundamentally from a nonprofit organization that exists solely to accomplish its mission. For the nonprofit, financial health is a means to the end; for the for-profit, financial health is the end. When people from these two sectors come together in an organization, whether as staff or board members, ambiguity develops around mission, especially when business-oriented people predominate. After all, as Young states, “Calvin Coolidge would not have said, ‘The business of nonprofits is not business’” (Young, 2001: 8).

Regarding values, one view holds that a fundamental conflict exists between the moral foundations of the public sectors (government and nonprofits) and those of commerce. Jane Jacobs (1992) describes the “guardian moral syndrome” and the “commercial moral syndrome,” both valid and necessary moral systems in their respective contexts. However, when one sort of organization adopts the other's moral system, it will sink into “functional and moral quagmire.” Kolthoff and Huberts (2002) hypothesize similarities as well as differences and contradictions between public- and private-sector ethics. They also hypothesize that by adopting a business-style approach to management, nonprofits adopt some values of the business sector.

On a less complimentary note, deLeon and Denhart (2000) discuss the values associated with “entrepreneurial management.” They maintain that entrepreneurs are creative and innovative, but also characterized by a narrow focus, an unwillingness to follow rules and stay within boundaries, and so strong a preference for action as to threaten accountability. These are values opposed to those found traditionally in the nonprofit sector. Going further, and assuming that one can closely relate the values of the public sector with those of the nonprofit sector, Bellone and Goerl (1992) argue that entrepreneurship values autonomy, personal vision, secrecy, and risk taking, which may be opposed to administrating values such as democratic accountability, participation, openness, and stewardship.

Less judgmentally, I prefer the example of a city that hires a stonemason and a sculptor to create a memorial for the city square. Both bring valuable talents to the project. However, the stonemason may be primarily motivated to create a structurally sound, lasting memorial, while the sculptor’s primary motivation is to create a work of art. Their values of practicality and beauty may also conflict. Each possesses appropriate motivation and values, but they differ, and that creates a problem.

Young (2001) discusses ways that entanglement with business can endanger nonprofits. He notes that nonprofit leaders have few strong counterbalancing influences when faced with financial temptations. They must rely on internalized values and an understanding of the mission if they are to stay on course. Mulgan (2000) acknowledges evidence of a growing convergence between public and private sectors. The continued use of private-sector management practices as the model for public-sector management is bringing pressure to bear on public accountability, as is the growing tendency to appoint private-sector managers to public-sector positions. Mulgan maintains that private, business-oriented managers, when suddenly operating in the non-private sector, resist the comparatively higher degree of scrutiny.

Case in Point

I studied the case of a large community mental health center through interviews and questionnaires of management and program staff, interviews of board members, and observations of the organization over a four-year period. Pikes Peak Mental Health is the name used to refer to a group of associated companies that provide comprehensive mental health and chemical-dependency treatment services to residents of the greater metropolitan area of Colorado Springs, Colorado, and seven surrounding counties in the southern part of the state. Pikes Peak Mental Health employs more than 400 people. It serves more than 13,000 consumers annually. The combined budgets of the four companies exceed $35 million. Comprehensive behavioral health-care services are provided through 21 company-owned facilities and 26 additional off-site programs that supplement public and private endeavors, including services to schools, jails, and nursing homes. The organization is a 501 (c)(3) private nonprofit corporation with funding from Medicaid, public support, local government contracts, state contracts, and client and third-party insurance. The organization’s greatest challenge is securing the funding to continue to treat the indigent mentally ill population.

The original Pikes Peak Mental Health Center first became a comprehensive community mental health provider in 1970. Legislation of the 1960s, enacted under President John F. Kennedy, resulted in mentally ill patients being moved out of institutions and into community mental health centers that were multipurpose and comprehensive. The chief executive officer at the outset had originally trained as a mental health therapist, and he continued to run the organization for 30 years. In 2000, he retired and was replaced by a new CEO, who also had been trained as a mental health therapist and who had been with the organization for 25 years. Obviously, leadership had been stable and closely tied to mission.

Under state fee-for-service contracts, the Mental Health Center grew slowly but consistently. With the fee-for-service model, relatively little concern was given to business efficiencies, because the way to earn more revenue to cover expenses was simply to provide more services. In addition, the organization, through its original CEO, developed a reputation for entrepreneurship by creating new revenue sources to supplement fee-for-service. It purchased real estate, some quite profitable. Property that had been a motel was leveled and leased to a Wendy’s fast-food franchise, which paid a percentage of its earnings to the Mental Health Center. Following the savings and loan crisis of the 1980s, the Mental Health Center purchased a large apartment complex from the Resolution Trust Corporation at a depressed price. Sound management and a rising real estate market have turned that property into a substantial revenue source. These types of real-estate activities have given Pikes Peak Mental Health something of a national reputation as an innovative entrepreneurial nonprofit. Another prominent source of revenue developed under a state Medicaid contract for providing behavior health-care services to Medicaid patients in the area.

From time to time, it was suggested that a more efficient business model be implemented. However, the organization had little financial motivation to change, and it grew without any fundamental alteration in the way it managed business.

That all changed in 1996, when Medicaid went from a fee-for-service model to a capitation model. With profits now based on the difference between costs and the captivated fee provided under the contract, the organization immediately had an incentive to become more efficient. In addition, the margin earned under the Medicaid contract had provided much of the funding for treating the indigent mentally ill. With this new incentive, the organization began to emphasize efficient business practices. While management personnel made this transition, clinical personnel providing health services lagged behind, as might be expected. Clinical personnel, many of whom had not appreciated the earlier entrepreneurial investments, likewise did not appreciate the need for a new, more efficient way of doing business. With every change toward more professional, business-oriented management, clinical staff morale suffered.

For a period in the late 1990s, Medicaid grew but general funds from the State of Colorado for treating the indigent stayed level and then began to decline. The situation reached crisis proportions in 2002, when both Medicaid and general fund monies were cut.

The new Chief Executive Officer undertook a number of changes in an effort to gain even more efficiency and professionalism in management. The organization restructured itself as a family of four separate companies, each providing different services for the mentally ill. The Pikes Peak Mental Health Center continued to provide therapy for the mentally ill; Aspen Diversified Industries provided job training and employment for the mentally disabled; Connect Care provided managed-care contract administration in the behavior health field; and the Pikes Peak Foundation for Mental Health provided fundraising and asset management for all of the companies. More business-trained senior staff came in to run these companies. The organization adopted updated financial management techniques and tried to acquire the latest in information-technology infrastructure. Eventually, in 2003, a corporate restructuring resulted in the elimination or reduction of the operating companies’ boards of directors and the creation of the overarching holding company board of directors to oversee and coordinate the activities of all the companies. The theory was that this new emphasis on sound business management would minimize cost and maximize profits in an environment of decreasing government support, and also would encourage growth and revenue among three of the companies even while the original Mental Health Center suffered under state budget cuts. Working together, the family of companies would support one another through bad times. The organization had been proactive, even bold, in anticipating the challenges facing it.

Today the organization continues in transition, and the news is mixed. The senior executive staff is highly trained and experienced in professional business management. Best business practices are incorporated in all areas of administration. Accountability and profitability are emphasized. The organization has been updated in its technology, management efficiencies, and clinical models. Despite a crisis in funding, it has found innovative financing solutions and continues to provide behavioral health-care services in a difficult financial environment, though some services for the indigent are still seriously limited. Several of the companies are actually growing. However, not all news is good.

Board of Directors

The members of the new holding company board of directors are unsure of their new role. What were once four separate boards have now been consolidated into one overarching, managing board of directors. While their opportunity for micro-management has been decreased, they are uncertain about their new role in leading the combined organizations. Remaining foundation board members, traditionally asset managers, are now being asked to move into the area of fundraising, and they are finding this transition difficult. Other board members, who have concerned themselves with the issues of individual companies, hesitate to take on broad leadership and strategic issues for the family of companies. How well these board members will rise to the new challenge of strategic leadership for the families of companies is yet unknown.

Staff

Morale among clinical staff suffers. Clinical staff is uncomfortable with the changes made toward more business-like management. Staff members are not convinced of the necessity for these changes. There is concern that the organizations are not living up to their mission of providing sufficient mental health services to the indigent community. Staff members question the priorities of senior management, financial versus mission. They feel that they are not sufficiently consulted and that management does not always value their opinions. Clinical staff members do not feel connected to the members of the board of directors, with whom they say they have little to no contact. 

Public Image

The public image of the companies is not clear. Many people in the region mistakenly view the organizations as a quasi-government mental health center, totally supported by government funds in providing mental health treatment. The organization is not widely understood as a public charity in need of public support. Even among those who do understand the organization as a nonprofit mental health-care provider, there has been some resentment over its entrepreneurial endeavors and its failure to act like a more traditional nonprofit organization. All this has inhibited fundraising efforts.

Mission

The integrity of the mission of the affiliated companies of Pikes Peak Mental Health remains a concern. As earlier stated, clinicians continue to worry that financial issues are placed ahead of mission issues. The chief executive officer, while having achieved significant success in maintaining the financial health of the organizations, is also concerned with this mission dilemma. He speaks of the importance of remaining “relevant” to the community. He asks senior staff rhetorically, “If tomorrow Pikes Peak Mental Health ceased to exist, would our community notice?” He is asking the right questions. Is the organization’s mission important to the needs of its community? Is this nonprofit meeting those needs? If the future of Pikes Peak Mental Health is bright, it is so precisely because the CEO is confronting this issue of mission. Having spent his professional career in community mental health, he is not about to let the organization drift away from its purpose.

The Nonprofit Tradition in America: Does It Matter?

So what if nonprofits evolve into for-profits providing the same services? Does it matter?

Indeed, it matters a great deal. In the United States, the concept of voluntary association and its evolution into the nonprofit sector are unique in the world. It has provided our society with services considered vital yet unprofitable.

Alexis de Tocqueville traveled the United States in 1831 as an early observer of American traditions. He described voluntary association as uniquely American and influential in promoting America’s democratic character (de Tocqueville, 1848). He noted examples of voluntary association, including planting and harvesting, militias, self-protection from hostiles, and barn raisings. He found that four characteristics contributed to this phenomenon of voluntary association:

  1. A lack of class structure.
  2. Frontier dangers and difficulties.
  3. Open spaces.
  4. A lack of governing presence to do the job.

These associations were motivated to provide services seen as vital to American life yet unavailable from third-party businesses or government because they were not seen as profitable or practical. From this beginning the nonprofit sector evolved.

Americans have never been comfortable with the idea of private institutions controlling large amounts of wealth, but at the same time, they place great value on such concepts as individualism, self-expression, personal initiative, and private-over-public action to pursue even public ends. The resulting compromise supported private nonprofit institutions but required that they remain largely volunteer-based, separate from government, and dedicated to those most in need (Salamon, 1997).

Other paradigms may also help us understand the nonprofit sector’s value in American society. Hansmann (1980) and others have argued for a view they call “contract failure.” Hansmann (1980: page 835) argues that “nonprofits typically arise and are preferred in situations in which, either owing to the circumstances under which a service is purchased or consumed or to the nature of the service itself, customers feel unable to evaluate accurately the quantity or quality of the service a firm produces for them.” Customers therefore distrust for-profit organizations and look to the nonprofit whose bottom line is supposedly providing the service and not making a profit. Imagine yourself visiting nursing homes in an attempt to find a comfortable home and a competent and caring staff for your elderly and failing parents. Which are you going to trust most: the for-profit organization with its eye on the bottom line or the nonprofit organization focused on its charitable mission?

Douglas (1987) added to this model the concept of “government failure.” In order for government to provide expensive public goods, the goods are subject to what he calls “categorical restraints.” The service they offer must be equitable, equal, uniform, and universal. Douglas finds government failure when the categorical restraints, together with the need for popular political support, prevent the government from offering diverse, experimental, or flexible non-bureaucratic services. When these services are needed, the nonprofit organization again fills the void.

Another compelling theory for the purpose and function of a nonprofit organization is proposed by Berger and Neuhaus (1977). They argue that there are two contradicting realities in American life. The first, despite much rhetoric to the contrary, is the continuing desire on the part of Americans for most of the services provided by the modern welfare state. The second is Americans' strong animus against the government, big bureaucracy, and indeed any large institutions of public life, including large economic conglomerates of capitalistic enterprise and big labor. These “mega structures” are a fact of life, yet people look to their private lives for meaning, fulfillment, and personal identity. Nonprofits organizations act as “mediating structures,” institutions that mediate and prevent the political order from becoming detached from the values and realities of individual life. Mediating structures are as fundamental as neighborhood organizations. Families, churches, voluntary associations, and others are the value-generating and value-maintaining agencies in society. In a society as conflicting as ours, they are vital. Democracy is more vulnerable to the erosion of meaning in its institutions compared to totalitarianism, which, although a terrible system, tends to be very stable and long-lasting. Berger and Neuhaus conclude that mediating structures are essential to any vital democracy, and public policy should protect and foster them. Further, public policy should use these mediating structures, these nonprofit organizations, for the realization of social purposes.

Galambros (1993) proposes that nonprofits act as “institutional facilitators.” Historically, American society has come to embrace certain dominant values: equity, security, efficiency, and innovation. As these values came to the fore, nonprofit organizations acting as institutional facilitators were largely responsible for transforming these concepts into reality. Examples include the labor movement; trade associations; and science, engineering, and education associations.

Ryan (1999) notes unique advantages non-profits have traditionally brought to the third sector: better services, due to longer experience and special commitment; unsubsidized services, due to the reinvestment of surplus revenue into more services that government contracts may leave unfulfilled; promotion of civic virtues, by offering opportunities for citizens to become involved in community affairs as volunteers and trustees; and advocacy, by acting as educators, advocates, and vigorous agents of social change. Ryan argues that for-profits are simply unmotivated or ill-equipped to provide these added values.

We make a grave mistake if we forget the nonprofit models and their advantages described by such scholars as Solomon, Hansmann, Douglas, Berger and Neuhaus, Galambros, and Ryan. It is within these models that nonprofit organizations find their intellectual, moral, and practical effectiveness. Here nonprofits, better than any other sector, provide services recognized by our society as vital. The American public will continue to value and support the nonprofit sector as long as it satisfies these needs.

Solutions

Solutions to the nonprofit dilemma involve addressing issues of governance, management, mission, and nonprofit status.

Governance

Strong nonprofit organizations have strong boards of directors. Organizations that make the mistake of developing over-controlled, rubber-stamp boards will be handicapped by their shortsightedness. Visionary, passionate boards of directors lead nonprofit organizations to excellence and relevancy for their communities. They focus on strategic goals, mission integrity, and high-level policy decisions (Stone, 1991). Boards of directors need to recruit members who are driven by passion for the mission of the organization and who possess particular skills. Staff and board members should join in a partnership dedicated to providing boards with the information and education that will enable them to focus on high-level mission-related issues. Board members should insist on board agendas that promote this focus and discourage preoccupation with operational matters.

Choosing the right CEO may be the most important duty of any nonprofit board. The right CEO for a nonprofit is mission-driven and understands the unique complexities of governance under a nonprofit board of directors (McFarland, 1999). A CEO not motivated by the organization’s mission will be seduced by profitability, the marker of for-profit success. A successful nonprofit CEO needs to understand how very different a for-profit board of directors is from a nonprofit board (McFarland, 1999). Unlike the for-profit CEO, who is often the chairman of the board and his own boss, the nonprofit CEO almost always reports to a separate board chairperson. A good working relationship is absolutely essential. McFarland adds that, unlike most for-profit boards, nonprofit boards tend to be large, with active and powerful standing committees. A new CEO who does not know how to work within this framework is destined for trouble.

Boards of directors are a nonprofit’s most important link to the community it serves. They, more than anyone else, can create and promote the appropriate image in the community. Public image-building, community connections, and fundraising should be accepted unconditionally as primary board responsibilities and integral to board members' leadership.

Management

In nonprofit organizations, flat, horizontal organizational and management structures promote closer connections between management and program staff, who are the organizations' best connection to mission. Program staff professionals and, if possible, program clientele should be involved in high-level decision-making whenever appropriate. This includes both management decisions and board activities. Some program professionals should attend senior management meetings and board meetings. Their connection to programs and the clientele served will be a constant reminder to staff and board of mission priority (Young, 2001).

As CEOs lead organizations in change, especially management change, justification to staff and board should always be made in terms of the advantage to mission, not financial health, efficiency, or productivity. This message should also be central to an on-going educational effort directed toward management and program staff. There must be no question of senior management’s priorities.

On a related issue, nonprofit leadership should ask whether business management tools are actually promoting mission. The answer may be surprising. Okrepkie and Goodman (2003) investigated whether churches that operate like businesses are significantly more successful than those that do not. Analysis of their survey data showed a statistically significant growth in receipts for churches employing a high level of professional management. However, the statistics did not necessarily support the same conclusions regarding church attendance, which, after all, seems more relevant to a religious mission. Mulharv (1999) suggests that the widespread use of strategic planning by nonprofit organizations today may have more to do with the growing influence of professional management than with strategic planning’s efficacies as a management technique. He recommends that applied anthropologists and other management advisers consider whether the nonprofit’s customary style of decision-making (an aspect of its organization culture) can be adapted to making wiser decisions about the future. The result may suggest that strategic planning is unnecessary and even counterproductive.

Compared to for-profit businesses, nonprofit organizations are more complex, with more stakeholders, more components, more cultures, more goals, and more operating procedures. This multiplicity requires that management develop multiple models of management to fit the “multiple bottom lines” (Anheier 2000). Professional budget management, for example, doesn’t address important areas such as volunteer management, fundraising, and program management.

Mission Relevancy

The American public will continue to value and support the nonprofit sector as long as it satisfies recognized needs not addressed by government or the for-profit sector. The nonprofit sector provides historically valued services that, because they bring no profit, no one else provides. Do the services protect and preserve personal values of private life? Do the services require the hallmark of trustworthiness? Does the organization promote new ideas and theories and policies that have not yet developed a foothold in society? Nonprofits stray from these questions at their own risk.

Changing Nonprofit Status to For-Profit  

Perhaps some nonprofits should become for-profit organizations. The nonprofit organization is uniquely complex and multi-functional. If, over time, a single component becomes more market-driven and begins to dominate the organization, consideration should be given to turning this simpler component into a for-profit (Anheier, 2000). Anheier notes that this decision has been made in the U.S. health-care field, where for-profit hospitals and clinics are on the increase. A nonprofit organization that has lost its distinctive multiplicity may function much more smoothly in the for-profit arena. For example, a hospital may partner with for-profit pharmaceutical companies and engage in lucrative research. If the research component of the hospital activities becomes predominant, overshadowing indigent health-care, should that organization consider giving up its tax-exempt status and operating in a sector where it is more recognizable? To carry the conceit to its conclusion, shouldn’t a duck admit it’s a duck?

Summary and Conclusion

The nonprofit sector has looked to the for-profit professional management model for solutions to the challenges it faces, including the loss of government support, increased competition from the for-profit sector, and society’s growing need for services. Greater professionalism in management is needed to ensure financial health, which supports the missions of nonprofit organizations.

“Whether an organization's goals be lofty or modest, public serving or private, they can be achieved only with appropriate financial support. This is no less true of nonprofit universities, hospitals, museums, homeless shelters, and disease research organizations, than it is true for Marshall Fields or General Motors” (Weisbrod, 1998: page 167).

For-profit business models have emphasized efficiency, flexibility, innovation, quality, and a disciplined focus on the bottom line. However, adoption of for-profit management models has not been without consequences for nonprofits. They include the following:

  1. More business people recruited for boards of directors, resulting in a greater emphasis on financial concerns over mission-related issues.
  2. Senior management staff with greater business experience and skill, but less emotional connection to the mission of the organization.
  3. An increased use of outside professional consultants to address such issues as risk management and accountability.
  4. A variety of management systems focusing on quality, productivity, accountability, and financial health over mission. 
  5. Adoption of much of the culture and lexicon of business in the nonprofit organization.

The results may be troubling and problematic:

  1. Boards tend to be underused for their proper role of mission integrity, strategic planning, and high-level policy-making.
  2. A psychological distancing develops between management staff and program staff. Management’s focus on financial health and program staff’s concern about mission serve to create two camps in the organization, each failing to understand and communicate with the other.
  3. As management decisions are more and more driven by financial issues, mission concerns are deemphasized, and morale suffers among program staff.
  4. Public image suffers as the public begins to see the organization as a for-profit organization rather than as a public charity.
  5. Donors are less inclined to support charitable organizations they no longer recognize as such.
  6. This lack of public charitable support encourages nonprofit managers to rely more on commercialism for funding. The problem compounds itself.

Four reasons are suggested for the development of this scenario:

  1. Nonprofit complexity and multiplicity make the typical nonprofit organization too complex for the comparably simple design of for-profit management models.
  2. Transferability of for-profit management models is not always effective. Because of the differing functions and limitations of nonprofits, for-profit management models can be ineffective without serious modifications.
  3. Differing motivations underlie the for-profit and not-for-profit organizations: for-profit—bottom line; nonprofit—mission.
  4. Conflicts exist between the values expressed in the for-profit sector and those of the nonprofit sector.

These issues were illustrated by the case of a large community mental health center; its success incorporating the entrepreneurial spirit, efficiency, flexibility, innovativeness, and discipline of the for-profit business world, and the consequential dangers to its culture, staff morale, public image, and mission.

It matters a great deal that the nonprofit sector not evolve into another version of the for-profit sector with an emphasis on profitability. At stake is the cultural relevance of the nonprofit sector and the needs that it has served so well, vital services that nobody else can or wants to provide. Public policy writers have offered examples of effective nonprofit models that include the following:

  1. Organizations that provide vital services that no other sector provides because there is no profit or no governmental consensus.
  2. Services that protect and preserve personal values of private life.
  3. Organizations whose services require the hallmark of trustworthiness.
  4. Organizations that promote new ideas, theories, and policies that have not yet developed a foothold in society.

Solutions to this paradox are offered:

  1. Governance: Boards of directors need to focus on mission integrity, strategic goals, and high-level policy decisions, which are the hallmark of board leadership. Board members need to be recruited for their mission passion as well as their skills. Boards of directors need to connect with the community by promoting the organization’s image and fundraising. Boards of directors need to choose the right CEO, one motivated by mission and skilled in the unique characteristics of nonprofit governance.
  2. Management: Flat organizational and management structures promote closer connections between management staff and program staff, with their passion for mission. Program professionals should be included at high-level staff and board discussions whenever appropriate. Nonprofit organizations should incorporate multiple management models to address the multiple bottom lines characteristic of nonprofits. Some models, such as financial management, need significant modification to meet nonprofit needs. Management must continually educate program staff on the importance of management tools to accomplish mission. CEOs must lead by a commitment to the mission, with financial health, accountability, and productivity as means to that end.
  3. Mission Relevancy: An organization must constantly reevaluate the relevance of its mission against the changing environment. Is its mission needed in the community? If so, is the organization meeting those needs? 
  4. Nonprofit Status: Some nonprofits should consider changing to for-profit status. As a nonprofit loses its character and acquires a more market-driven character, consideration should be given to the appropriateness of becoming a for-profit organization.

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Notes

* Bill Landsberg, an attorney, is Executive Director of The Pikes Peak Foundation for Mental Health. Copyright 2004 by Bill Landsberg.

 

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ISSN: 1556-5157