Wearing it Proudly: Clarity on Being Nonprofit

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 @philCEP.

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


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