Third Sector

The contribution of non-profit and cooperative enterprise in Australia

Mark Lyons

• Publisher: Routledge
• Year: 2020
• Print ISBN:
  9781864487428
• eBook ISBN:
  9781000248210
• Topic: Business
• Subtopic: Business General
• Index: Business

'Not for profit' enterprises provide services enjoyed or depended upon by many Australians. But the charities, sports clubs, churches, community organisations, welfare groups, associations, unions, and foundations that draw on our support - and comprise the third sector - also make a significant contribution to our society. They promote social change and defend traditional values; they express our capacity to work together without being ordered by government or lured by profit.

Third Sector provides the first overview of Australia's non-profit enterprises. It describes how this vital part of our economy developed and how it operates today, including interaction with the government and business sectors. As well as documenting the third sector's contributions, it warns of the threats it faces from massive economic, technological and demographic changes. Third sector organisations must now adapt to new circumstances, and prove worthy of continuing support.

For community leaders, this book is essential reading. For politicians, public servants and anyone else who interacts with the third sector, it will be an invaluable resource. As the most comprehensive reference available, Third Sector will be useful to students and teachers of politics, public policy, and welfare studies.

PART I
WHAT IS THE THIRD SECTOR?

THE FIRST PART of this book introduces the object of the study: the organisations that comprise the third sector. It begins with a definition of the third sector and some of the other terms that are commonly used to describe this broad class of organisation, or at least large parts of it. Chapter 2 sketches the many ways in which organisations in the sector vary by looking at differences in terminology used, the activities performed, their age, size and structure, whether or not they employ staff, their governance, legal forms and their tax treatment.

Chapter 3 identifies the distinctive characteristics of third sector organisations, the features that differentiate them from business and government organisations. It also reviews the particular challenges posed for those responsible for running third sector organisations.

Readers who are unfamiliar with the third sector and its various component parts may find these chapters a little abstract. A great deal more concrete information is provided about the various components of the third sector in Part II and some readers may therefore wish to begin there and then tackle Part I.

1
DEFINING THE THIRD SECTOR

THE FIRST TASK of this book is to convince its readers that there is a distinctive third sector. We all understand what is meant by the public or government sector; we know what is meant by the business sector, though the more formal terminology, ‘for-profit sector’, may be unfamiliar. Within each of these sectors there is a great diversity. Within the public sector there are government departments, the police and armed forces, government schools and hospitals, trains and buses. There is the judiciary, whose members are appointed and funded by the government but who are in other respects independent. But we know that what they have in common is that they are, in the final analysis, accountable through a minister to parliament.

Within the business sector there are large corporations and small corner stores; there are firms that grow things, build things and sell things; there are firms that own newspapers, stage musicals, provide mercenaries, run hospitals, help us search the Internet and groom dogs. But we understand that what these firms have in common is the wish to profit from their activities, to give their owners a return on the money they have invested.

The third sector also encompasses great variety, in the size of organisations and the activities they undertake. More will be said of that later. At its simplest, the third sector encompasses all those organisations that are not part of the public or business sectors. But, to be more positive, we can say that:

The third sector consists of private organisations

1. that are formed and sustained by groups of people (members) acting voluntarily and without seeking personal profit to provide benefits for themselves or for others,
2. that are democratically controlled and
3. where any material benefit gained by a member is proportionate to their use of the organisation.

This definition can be explained by elaborating on the key terms or phrases.

Private Third sector organisations are independent of government. They are not directed or controlled by ministers or government officials.

Organisation The third sector is comprised of formal organisations. It does not contain informal groups of friends or family members. An organisation is formally constituted when a group of people agree to a purpose and a set of rules that potentially enable the organisation to continue when its founders are no longer involved.

Groups of people (members) Third sector organisations are the product of collective action. They are formed when a group of people agree to work together for a common goal. These become the organisation’s members. Third sector organisations are sustained and renewed by others joining the organisation as new members. Some are also sustained by the gifts of money or time from people who do not seek membership.

Acting voluntarily Third sector organisations are started by people who joined together voluntarily. So too are those who join subsequently mostly volunteers. A few third sector organisations succeed in requiring everyone who belongs to a certain profession or works for a certain company or attends a university to join a professional organisation, a union or a students union. This does not make them any the less third sector organisations. Rather, it testifies to the success of past political activity and is likely still to be contested. Those who are active in directing the organisation are still volunteers in the conventional sense.

Without seeking personal profit Third sector organisations are not formed or joined by people seeking personal profit. Most third sector organisations are prohibited from distributing any surplus they might generate as payments to members; the few that do, do so proportionately to the individual’s use, not the funds he or she has invested.

Benefit People come together to provide things or services or to do things that they cannot provide or do on their own. Through such collective action they generate value. The benefit may be to provide opportunities for worship, to advance a cause, to organise games, to set and maintain standards within an occupation or profession, to strengthen their position in a labour or product market, to provide services not available from firms or at a more affordable price, to help the sick, to educate children, to house the homeless, to empower the disadvantaged, to find a cure for an illness and so on.

For themselves or for others In many cases, those who benefit from the new values created by collective action are those who have acted and those who have subsequently joined them: the members of the third sector organisation. In other cases, the beneficiaries are other people: other members of the public, disadvantaged groups, future generations. Within the third sector it is important to distinguish between member-serving and public-serving (or member-benefit and public-benefit) organisations. The former are sometimes called self-help or mutual organisations. The distinction is not always easy to draw as many third sector organisations have both member-benefit and public-benefit aspects. To take some examples, trade unions, business associations, sporting and social clubs are member-serving; nonprofit hospitals and community welfare agencies are public-serving.

Democratically controlled Almost all third sector organisations have members and are controlled by their members on the democratic principle of one member, one vote. Sometimes small organisations are run as collectives. Usually, members elect representatives to a board or committee that governs the organisation. The exceptions are some churches and charitable trusts and a few public-serving organisations that are owned by other third sector organisations.

Material benefit … proportionate to use An important feature of member-benefit organisations is that the benefit is proportionate to the member’s use of the organisation. This happens automatically in the case of mutuals and many cooperatives. If a social club offers food and drink at lower prices than a nearby hotel or if a credit union offers lower interest on a loan, the member receives the advantage to the extent that they use the service. In the case of those few trading cooperatives that actually pay a dividend, the dividend is proportionate to the use that the member has made of the cooperative over the relevant period.

This, together with the previous feature (democratic control) is what distinguishes the third sector from for-profit firms. In a firm, the owners or investors receive a dividend and the right to exercise control proportionate to the level of their investment. In a third sector organisation, each member has an equal right to control but either no member gains a material benefit (public-serving) or the benefit gained is proportionate to use (member-serving).

NONPROFITS,MUTUALS AND COOPERATIVES

This last point is important, not only for differentiating third sector organisations from firms but also for delineating important differences in emphasis in comprehending the third sector between the United States and continental Europe. To understand these differences, we have to explore the relationship between third sector organisations and profit.

Profit is the surplus of an organisation’s income over its expenditure at the end of a reporting period, usually a year. Any third sector organisation, unless it has no need of money at all, such as a babysitting club, must have at least a modest excess of income over expenditure or profit for most years. That is, third sector organisations must make a profit or at least break even. But this is not their main purpose. Indeed, if a third sector organisation continued to make large profits year after year, it has clearly failed in its purpose. With one exception, public-benefit third sector organisations should spend whatever is their revenue providing services to others. The exception is that they may be attempting to build a reserve, a prudent step for those that employ staff. With two exceptions, member-benefit third sector organisations should price their income generating services at the lowest possible cost to their members and should therefore have little or no surplus at the end of their reporting period. One exception is that of producer cooperatives, which should seek to pay the highest possible price to their members for their produce, which the cooperative then processes and markets. In some cases cooperatives may find it easier to pay a dividend (proportionate to use) from profits at the end of the year. The other exception is that member-benefit organisations, especially large ones, also need to build a reserve fund.

Most third sector organisations are prohibited from distributing a profit. Some forms of incorporation and most tax concessions require that the organisation prohibits distribution of any profit to members, or any surplus assets if the organisation should be wound up. Such organisations are known as nonprofit organisations. Nonprofit means nonprofit distributing. All public-benefit third sector organisations are nonprofit organisations in this sense and most member-benefit organisations are also; they distribute benefits to members in the form of lower prices for services rather than a formal distribution of profits. In the United States, most scholarly attention has focussed only on these public-serving nonprofits. Generally it is only these that are referred to when Americans talk of a nonprofit sector. However, in law, most member-benefit organisations are also part of the nonprofit sector. Cooperatives and finance mutuals are not legally nonprofit organisations and do not figure in the American literature on the third sector.

In continental Europe, far greater emphasis is placed on third sector organisations as expressions of solidarity or mutuality and on their democratic control. The European Union has adopted the French concept of l’economie sociale or social economy. The social economy consists of cooperatives, mutuals and nonprofit associations. It is synonymous with the third sector as defined here.

GLOSSARY

Many terms are used to describe different groups of organisations that constitute the third sector. Common Australian terms are identified and briefly discussed in chapter 2. Some terms are used internationally to cover large groups of third sector organisations and they are noted here along with an indication of the scope of their coverage.

Nonprofit sector As noted in the preceding section, this refers to third sector organisations that are explicitly prohibited from distributing a profit and surplus assets when they are wound up. However, such organisations are permitted to distribute benefits by other means, such as lower costs for members.

Voluntary sector This term is the preferred term in the United Kingdom. It approximates to nonprofit sector. As the United Kingdom becomes more closely aligned with the rest of Europe, the more encompassing term social economy is receiving increasing use.

Social economy Social economy refers to cooperatives and mutuals as well as nonprofit organisations. It is synonymous with third sector as that term is used here.

Third sector This term is most commonly used by the international research community as the most encompassing term with a neutral connotation. The definition provided earlier in this chapter (pp. 5–7) is the first attempt to give it a formal meaning.

Community organisations This term usually refers to small third sector organisations operating in a limited geographical area. They may include member-benefit as well as public-benefit nonprofit organisations.

Community sector An Australian term that refers to third sector organisations providing community services plus small locally based organisations in adjacent fields or activities such as health, legal services, employment services and the arts.

Civil society organisation Civil society is an increasingly popular term, but one that has many meanings. Civil society organisations are generally understood as coextensive with third sector organisations, although sometimes the emphasis is on small advocacy organisations that are clearly controlled by their members and designed to give them voice.

Non-government organisation (NGO) This term is commonly used in Southern or developing countries and in development literature. It generally refers to public-benefit nonprofit organisations, often from the North and distinguished from people’s or community organisations. In Australia, the term is sometimes used to refer to public-benefit nonprofits in the health and community services fields, though in government documents it often encompasses for-profit organisations as well.

CLARIFYING RELATED TERMS

Several other terms need to be clarified before a clear picture of what is, and is not, meant by the third sector and what organisations should, and should not, be included within it.

One is the term ‘public’. Earlier it was emphasised that the third sector is the product of private initiatives and is controlled by private individuals as opposed to government officials. This does not mean that third sector organisations might not pursue public purposes; indeed those that seek to benefit people other than their members do just that. Neither does it mean that third sector organisations might not be heavily, even entirely, funded by governments. The test is control; while a private organisation that receives all or most of its revenue from government is likely to be influenced by the government, it is not owned or controlled by government.

In several fields, third sector organisations receive all or most of their funding from governments on the same terms as government-owned organisations. These organisations are part of groups collectively referred to as public hospitals or public universities, but that title does not necessarily mean that they are part of government and not third sector. In most cases, these third sector organisations are owned by religious organisations, such as St Vincent’s Hospital in Sydney or Melbourne or the Australian Catholic University. These organisations are free to refuse government funds or, if government funding stops, they can still continue to operate, as did, for example, the Mater Hospital in North Sydney.

Further, the fact that some third sector organisations are incorporated by a special Act of parliament does not necessarily make them part of government; some public companies such as Westpac and AGL are incorporated by their own legislation. It is worth noting that they and many other companies are described as ‘public’ companies because their shares are traded on the stock market and not because of any suggestion of government control.

This study focusses on organisations that comprise a third sec...

Table of contents

• Cover
• Title Page
• Copyright Page
• Contents
• List of tables
• Acknowledgments
• Introduction
• Part I What is the third sector?
• Part II Where is the third sector?
• Part III Why is the third sector where it is?
• Part IV How third sector organisations work
• Part V Relations with other sectors
• Part VI Thinking about the third sector and its importance
• Part VII Challenges
• Notes
• Index