This is the third in a series of six blog posts.
Beating up on the label “nonprofit” has become an almost reflexive habit of those speaking and writing about the sector.
“Anyone who has thought about it for more than a nanosecond agrees that ‘nonprofit’ is about the worst possible summary we could give of ourselves and our work,” writes Harvard Business Review blogger Dan Pallotta, crediting Harvard Business School (HBS) Professor Allen Grossman for noting that the sector “suffers from the distinction of being the only sector whose name begins with a negative.” (I had Professor Grossman as a second-year MBA student at HBS and he is an outstanding professor, who I respect greatly and stay in touch with to this day. But I disagree with him when it comes to the way he views the sector and the comparisons he draws to business.)
In a much more constructive spirit than Pallotta’s, Peter Hero, former president of the Silicon Valley Community Foundation, has also argued that the term “nonprofit” is problematic because of what it conveys. Writing in Alliance magazine in 2007, Hero argues, “The term is unfortunate on several counts: It can lead potential donors, especially in the corporate sector, to dismiss it because they do not understand the sector’s mission and roles. It conveys to many a sort of fuzzy, volunteer-driven, unmanaged circus of good intentions. Finally, it does nothing to explain the social value of the sector.” Instead, he has suggested the term “public benefit corporation.”
I understand and respect Hero’s arguments – he obviously has experienced, first-hand, some of the difficulties the word “nonprofit” presents. But, perhaps foolishly, I’d like to suggest we embrace our label, taking on the challenge of helping people understand why it matters. Because in describing what it isn’t, the sector differentiates itself in a fundamental and important way. I think the negative matters: “nonprofitness” matters.
The distinction between an institution that reinvests the difference between revenue and expenses in its core mission and one that distributes it to shareholders is a crucial one. Glossing over that distinction might be helpful for, say, pharmaceutical or oil companies that would rather people not discuss their high levels of profitability, but it’s not helpful for the rest of us.
Higher education in the U.S. provides a particularly good illustration. Where nonprofit universities frequently offer an education that costs more than what a student and her family pays, the difference made up through charitable gifts and endowment returns, for-profit institutions of higher education must cover their costs with their tuitions and create a profit margin. The results, and the evidence surfaced in lawsuits, media reports, and congressional and GAO investigations of for-profit universities, speak for themselves.
It is clear that, in education, being nonprofit matters. And it is not hard to think of many other types of organizations where the logic for being nonprofit seems powerful.
Consider the myriad nonprofit organizations that have touched your life. The hospital where a loved one was cared for. The associations you have joined. The college or university you attended. The museum you visited with your family as a child – where, perhaps, today you take your own children. The social service agency that helped a family member, friend, or neighbor who fell on hard times and needed help – or maybe even helped you.
Would you have wanted these organizations making decisions based on what would generate the most profit?
The reach of philanthropy and nonprofits in the United States is deep and broad, as Olivier Zunz makes clear in an important new book, Philanthropy in America: A History. “From Andrew Carnegie to Bill Gates, and from ordinary people who purchased Christmas seals to fight tuberculosis to those who wear pink ribbons to battle breast cancer, the nation has come to view philanthropy as both a quintessential part of being American and another means of achieving major objectives,” Zunz writes. “Together they have forged a philanthropic sector that donors, beneficiaries, and the state recognize as a critical source of ideas as well as funding.”
Moreover, we need to recognize that an important role of nonprofits is to call attention to and seek to reign in – or at least inspire others to reign in – the excesses of business. Claire Gaudiani, in her provocative book The Greater Good: How Philanthropy Drives the American Economy and Can Save Capitalism, discusses examples such as the ban on DDT or the successful effort to convince McDonald’s to discontinue using foam containers in 1990.
Gaudiani goes so far as to argue that “philanthropy saves … capitalism. … Generosity has saved capitalism over many, many decades, like a smart, kind friend watches out for a somewhat intemperate but gifted colleague, advising him throughout his life on the need for self‐restraint and better judgment.”
As Cynthia M. Gibson has noted, “Nonprofits are …. frequently the sole voices in contesting governments and other institutions when they threaten to overtake public will.” In a similar vein, Zunz notes that, “Philanthropists have invested their resources in the greater American fight over the definition of the common good. They have taken all sides in all the partisan encounters that have divided our society and have strategically intervened in essential debates on citizenship, opportunity, and rights.” Zunz argues that this activity has “enlarged democracy.”
Foundations and nonprofits have also invested in research that would be unlikely to attract for-profit investment capital – because of the difficulty of assessing the probability of generating a decent return – but have had a transformative effect on our lives. “Rocketry, commercial aviation, stock market portfolio analysis, and radar are just a few of the important ideas that have flourished because innovative donors supported innovative thinkers and built prosperity in America through gifts to grow intellectual capital,” Gaudiani writes.
It is the very “nonprofitness” of nonprofits that enables them to play the roles Gaudiani, Gibson, and Zunz describe.
Do we honestly believe that companies will always act in the ways the November 2011 Harvard Business Review cover suggests (“great companies … create value for society, solve the world’s problems, and still make money, too”) – doing good while making money? Do we honestly believe that these instincts won’t come into tension even for the well-meaning, and that when they do, good will always win out?
It is hard to conceive of how we could persuade ourselves to answer these questions in the affirmative. And, if we recognize that there is a need for organizations that pursue a mission, not a profit, then we must have a sector with some clear boundaries – a sector that wears its label, nonprofit, proudly.
We need to remember (and we surely get unwelcome reminders all too frequently) that markets fail – and that nonprofits’ missions are often focused on redressing those failures. The fact is, each sector has a vital and different role to play in making our society better. Frequently, pursuing mission necessitates a decision not to pursue profit. And, sometimes, nonprofits need to be the voice of opposition to those whose motivation is profit.
Boundaries matter.
“Nonprofitness” matters.
Phil Buchanan is President of CEP. You can follow him on Twitter at @pbuchanan_CEP.
Author’s note and acknowledgment: The views expressed here are mine. Healthy debate on these issues occurs within the walls of CEP and in our board room. I am grateful to the many people, including CEP board members and staff, as well as colleagues and friends outside CEP, who gave me feedback on earlier drafts of these posts, much of which I incorporated.
Please read on to see the rest of this series:
Part One – Our Starry-Eyed Idealization of Markets
Part Two – The Need for Clear Boundaries
Part Four – “Business Thinking”
Part Five – Companies to the Rescue
Part Six – The Risks Posed by a Sector’s Silence: Toward a Forceful and Positive Articulation of the Nonprofit Sector
Hi Phil- I understand your point, but I’ve always found the term “nonprofit” to be problematic, since it seems to suggest that groups should strive only to break even. If we want to build a sector of resilient, sustainable and effective organizations, we should recognize that many nonprofit organizations need to be good at securing resources and building assets. I prefer the term “not-for-profit”, since it suggests that the primary intent of such organizations isn’t to make money, but allows for the possibility of revenue surpluses. But I’d happily scrap both terms if we could agree on language that gets away from the notion of profitlessness and instead places an emphasis social impact.
Paul,
Thanks for your comment. I like “not-for-profit” and see your case for it. But I don’t read “nonprofit” as striving to break even — rather, that making a profit is not the ultimate goal. I completely agree, of course, that to pursue their impact goals nonprofits (or not-for-profits) need to be good at securing resources and building assets. And, as Antony Bugg-Levine pointed out on our blog a couple of weeks back, many have a long way yet to go.
Thanks for your comment,
Phil
Having worked in nonprofits and government social services for 25 years, and the last 15 years for a ‘for profit’ which only services nonprofits, I would like to contribute to this conversation.
Our company now works with nonprofit boards, particularly to assist them to understand the implications of growing reserves and building long-term capability, and having a thought through strategy.
In our work, we also meet nonprofit Directors who believe that they are obliged to spend all that they receive, and eliminate surpluses (profits) every year. And then we watch as they fade away, provide inadequate services which have no investment regime, and where staff spend more time chasing (begging?) for bailouts to get them through cashflow or unplanned ‘disasters’.
And we also work alongside ‘for profits’ like us, who work in the social space, reinvest in our business and our staff, but choose not to deal with a board or philanthropists, and risk being taken off mission. We believe there is no single ‘right’ governance model.
So I suggest its not that clear cut – as much as we would want it to be – and there are many great social enterprises and private companies doing social good, just as there are many which exploit the gap between revenue and costs for personal gain… AND there are many nonprofits which provide low level and poor quality services, for founders or CEO personal gain (financial and non-financial) with inadequate capital, and with even less reference to consumer choice..
Our preference would be to ‘raise the boats’ and encourage for profits and nonprofits to invest in quality services, to give real choice to service users, and of course to pay their staff well – wether that reward is from philanthropy or from surpluses.
It may just be semantic to say that founders/owners/CEOs/managers are paid from profits or are paid from the expenses.
So thanks for inviting the debate, and I encourage your readers to join in to tease out the real issues here. Having been in both places, I am very comfortable in this place, where I am completely responsible for providing the best services I can to our nonprofit clients, because they will very quickly vote with their feet if we let them down.
Best wishes
Morri Young
Morri,
Thanks for your comment.
Totally agree it’s not either / or: in fact, that was the point of my post. I am simply arguing that our society is stronger for the existence of organizations that face only one imperative – to pursue mission – and are free to use surpluses to pursue their goals rather than to distribute profits to shareholders. There are important goals that cannot be pursued effectively or responsibly in a way that also generates profit.
For our society to be as strong as it can be we need a strong business sector, good government, and a strong and effective nonprofit sector: each playing its distinct, and crucial, roles.
It’s also important to remember that earned revenue is a huge part of many nonprofit models, and has been from the beginning. You seem to assume that nonprofits are somehow free from competitive dynamics, and that is not the case.
Thanks for weighing in.
Phil
Phil,
I agree that good fences make good neighbors, and that there is a benefit to having clear and distinct boundaries between the sectors. But despite my pride for our governance structure we work hard to make sure VolunteerMatch is understood to be more than just an institutional lack of profit…as the web’s largest volunteer engagement network, money is a means, not an end, and that is important.
I recognize that ‘nonprofit’ has become a convenient handle for our sector, but I’d certainly prefer to be thought of as the ‘for-purpose’ sector. We’ve got a long way to go, but change is coming, in fact, in California we enjoy the distinction of being one of the organizations officially recognized as a ‘Public Benefit Corporation.’ Thanks Peter Hero.
Labels matter, but If in the end you are looking for support I’d be willing to more publicly embrace our ‘not-for-profit-ness’ if you can persuade the Chamber of Commerce to embrace its ‘not-for-purpose-ness.’
I’ll be standing by…
In the meantime, thanks for encouraging the conversation.
Greg
Thanks, Greg. I appreciate your thoughtful comment. I maintain that there is value in emphasizing organizations’ “nonprofitness,” although I think the points you make are good ones. Obviously, my hope is that all nonprofits pursue their purposes — and that they do so effectively. Those purposes vary widely, but what unites the organizations in the sector is that they are intended to pursue those varied purposes, not profit. In a world in which the profit motive seems to color everything, I think that matters. Many companies will maintain they are both for purpose and for profit, and that will often, or at least sometimes, be true. So I think there is value in differentiating those organizations that do not seek profit by emphasizing that fact.
Phil, I appreciate your detailed thoughts on the value of the word nonprofit. That said, I think the only value in the word is its brevity; it’s awfully handy to be able to use nonprofit as a standalone noun. Still, I prefer the frightfully unwieldy “social sector organization” because, while unwieldy, it avoids two fatal problems with the word nonprofit: It’s false, and it’s disempowering.
The word nonprofit is false because anytime the value an organization creates exceeds the cost of creating it, it has produced a profit. Certainly higher education institutions, to use your example, do this with most if not all of their individual students, to say nothing of their research contributions.
The word nonprofit is disempowering because, as I think Dr. Grossman would agree, we should never describe someone (that is, a nonprofit worker) as something she or he is not.
I’m leading a small charge against the word nonprofit and for the term social sector organization here in Lincoln, Nebraska’s social sector, and making some headway. Won’t you join me?
Thanks for your comment, but I will politely decline to join you — for the reasons enumerated in my post.
Actually, many nonprofit institutions of higher education provide an education that costs more than what a student pays: this is not only true for those students who, like me, received significant financial aid. It is also true for full-payers at many institutions. Annual contributions and revenue from endowments make up the difference.
It is true that many nonprofits generate surpluses but the difference, of course, is what is done with the surplus. As I wrote in my post, “The distinction between an institution that reinvests the difference between revenue and expenses in its core mission and one that distributes it to shareholders is a crucial one. Glossing over that distinction might be helpful for, say, pharmaceutical or oil companies that would rather people not discuss their high levels of profitability, but it’s not helpful for the rest of us.”
So there is nothing “false” about the word nonprofit. It is, in fact, perfectly apt.
Finally, I disagree with your contention that “we should never describe someone (that is, a nonprofit worker) as something she or he is not.” Why not? I am proud not to be many things. It is easy to be “for” things, much harder often to say what you are not. My argument is that the term “nonprofit” is clarifying.
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Phil, if I had the honor of editing your post, I would suggest clarifying in the first paragraph that you are speaking about the “American” voluntary sector.
I find it interesting and a bit puzzling is that the United States is one of very few countries to use the term “nonprofit” to describe organizations that are neither businesses nor government organizations. Most often in the international arena the term “nongovernmental organization,” or “NGO,” is favored.
Part of the reason for adopting the term “nonprofit organization,” of course, is because of the legal definition of these organizations in the U.S. But I do find it ironic that a country that is notorious for its fear of “big government” and that celebrates that advocacy role of nonprofit organizations is also the one that does not employ the term “nongovernmental organization.”
Point well taken, Katie. Absolutely was writing about the American nonprofit sector.
These are wonderfully thoughtful comments in response to Phil’s equally thoughtful post, but I wonder if we’re getting caught up too much in semantics. Don’t get me wrong; semantics matter — very much. But taking a step back, my interpretation of Phil’s post was less focused on the “word” and more about the ethos behind the creation, development and now, future of nonprofits.
There are some who argue that, indeed, the “nonprofit sector” (and nonprofits within it) will eventually morph into “hybrid” organizations or alternative structural (or even virtual) forms. Some even believe that there may not be a nonprofit sector (or that type of distinction) at the end of the next decade. Given how fluid the boundaries that once delineated all three sectors — public, private, and nonprofit — are now becoming, that vision isn’t so far fetched. The issue then becomes less about what makes a “nonprofit” a nonprofit and more about what values, worldview and purpose nonprofits now can bring to the table and that can be adapted and, hopefully, incorporated into the practices of corporations and government agencies so that if and when a full melding occurs, there is equal representation of the value of each sector in a single organization or institution.
The problem, which I think Phil is getting at, is that nonprofits and the sector overall has not done a very good job at framing what they are, what they stand for, and why they’re different (and with different aims and incentives). Many years ago, our friend Paul Light was repeating the importance of us doing this; otherwise, we risked being defined by what we are not and, thus constantly being seen as “the underdog” that other sectors (most recently, the private sector) must “help” and “make more efficient.” To me, the key test (which I think Greg is alluding to) as to whether nonprofits are really viewed and operate on a par with private and governmental organizations is whether and to what extent the latter are asking/inviting nonprofits to “consult” with them on how to do THEIR work better. Today, it’s skewed, with nonprofits as the beneficiary of the wisdom and skills of other types of organizations that, like it or not, don’t necessarily share the values-driven foundation on which the nonprofit sector was built. When nonprofits are viewed as having something to help a multinational corporation with — e.g., “relationship skills” — then may be the time to move forward with the notion that there is overlap. Right now, however, there may seem to be overlap, but from where I and others sit, that overlap is pretty thin.
Not to mention that, when all is said and done, there is never going to be a time that the private and public sectors can do everything — nor should they. As Phil notes, there’s a reason John Gardner called the nonprofit sector “independent”: There are few other outlets or organizations that can serve as civil/societal “monitors” that ensure equity, civic participation, and “voice” in important processes, especially those that are inherently democratic. Nor is the private sector ever going to have the incentive to foot the bill for the most underserved in society. As we saw with Medicaid managed care many years ago, when private sector companies realized that they weren’t going to make large profits by serving some of the poorest people in need of health care, they bolted, and nonprofit health care clinics were left holding the safety net together (sometimes by a thread).
In short, all sectors have something to learn and gain from one another, but unlike the private and public sectors, the nonprofit sector has yet to tell the latter what that is. If we fail to do that (and do it soon), we risk losing ourselves completely in the race to “do things better” by becoming other types of organizations. I can safely assume that’s not the vision that those who built the country’s strong ‘independent” sector had in mind.
I totally agree, Cyndi. I often say that the day when nonprofit leaders become heads of corporations –reversing the trend we often see– it will be the day our value would have been recognized by society.
Cynthia – I am with you on your interpretation of Phil’s column. I hope readers can look at this as more than a discussion of the WORDS – move beyond the argument of language and focus on what I see as a core issue. The nonprofit sector has yet to truly reach a point where the majority of people understand the role and value of nonprofit organizations in their communities. With this understanding and appreciation, I think the word actually changes from having a “negative” connotation to one that is valued and embraced. Reclaiming a negative word – using it as a positive – but this can only be accomplished in concert with impact and actions to back it up.
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Thanks Cindy for your incredibly thoughtful comment — and to Edith and Jeff for their additions. To your point, Jeff, I think it is true that the sector must do much better in terms of effectiveness in order to be able to really make its case as strongly as possible. Yet I think it is also true that there are many more powerful cases of contribution — even impact — that we can point to with pride today than we sometimes realize and remember. We have not done enough to tell those stories. That is why I so appreciate efforts like Zunz’s history and Joel Fleishman’s book, The Foundation: A Great American Secret. I’d argue, further, that if we are to improve our effectiveness, we will need to learn from these successes, rather than pretending — as too many new entrants to the world of philanthropy do — that the quest for greater effectiveness started today, or even yesterday.