Managing a Nonprofit Organization

Updated Twenty-First-Century Edition

Thomas Wolf

• Publisher: Free Press
• Year: 2012
• ISBN:
  9781439134894
• Topic: Business
• Subtopic: Nonprofit Organizations & Charities
• Index: Business

Ron Powers's tour de force has been widely acclaimed as the best life and times, filled with Mark Twain's voice, and as a great American story. Samuel Clemens, the man known as Mark Twain, invented the American voice and became one of our greatest celebrities. His life mirrored his country's, as he grew from a Mississippi River boyhood in the days of the frontier, to a Wild-West journalist during the Gold Rush, to become the king of the eastern establishment and a global celebrity as America became an international power. Along the way, Mark Twain keenly observed the characters and voices that filled the growing country, and left us our first authentically American literature. Ron Powers's magnificent biography offers the definitive life of the founding father of our culture.

ONE

Understanding Nonprofit Organizations

The Spencer family lives in a small city in the western United States. Sam Spencer runs a plumbing supply business; Jane, his wife, teaches at a school for the learning disabled. On a typical day, their lives—like the lives of most Americans—are touched repeatedly by the world of nonprofit organizations.

• At 7:30 A.M., Jane takes Sammy Jr., aged three, to a day-care center housed at the Baptist church to which the family belongs. She then goes directly to her school, which serves learning-disabled high school students. The day-care center, the church, and the school are all nonprofit organizations.

• At about the same time that Jane leaves, Sam is loading his truck with plumbing supplies for the regional hospital, which is located in their city. The hospital, which employs more than a thousand people, is also a nonprofit organization, one that makes a significant contribution to the local economy.

• Before leaving home, Sam reminds son John, aged nine, that he should pack his bathing suit and towel because there is swim practice after school at the local YMCA. The YMCA is the city’s principal recreational organization and is organized as a nonprofit.

• On this particular day, Jane is on release time from the classroom, taking an in-service workshop on language arts instruction at the local college. The college is the largest nonprofit organization in the city.

• While Jane is on release time, half of her students are on a field trip to the science museum, and the other half are attending an open rehearsal at the local symphony. Both of these organizations are nonprofits.

• Meanwhile, Sam has completed his delivery of plumbing supplies and drives over to the job training center where he teaches the essentials of plumbing two mornings a week. Although supported almost exclusively with government funding, the center is a nongovernment, private nonprofit organization.

• When school is over, Jane meets with a group of teachers who are working on a special grant proposal that they will submit to a local foundation. They are seeking funds to support a computer-based language arts program in their classrooms. The foundation, whose income is derived mainly from a large endowment and is exempt from taxation, is a nonprofit organization.

• After leaving school, Jane drives over to a local nursing home to visit her father. The nursing home is a nonprofit organization.

• Sam leaves work early to go to a public hearing. A local builder, one of Sam’s customers, has proposed a new development in what was formerly marshland. An environmental group, organized as a nonprofit organization, is opposing the development and is presenting its testimony at the public hearing.

• When Jane arrives home, there is a letter from daughter Amy, who is spending the fall of her junior year in South America as part of an exchange program. The exchange was organized by a national nonprofit organization with a local chapter in the city where the Spencers live.

• Finally, after dinner, the Spencers receive a call from the public radio station. It is pledge week, and the caller asks whether the Spencers will renew their membership in this nonprofit organization. Jane leaves soon after for a planning meeting for the local Girl Scouts’ cookie drive. The Girl Scouts is a prominent national nonprofit organization.

There are over 1.5 million nonprofit organizations in the United States, a number that has increased by over 30 percent in the past decade.¹ This includes public charities active in health care, religion, culture, education, human services, and the environment. It also includes advocacy organizations, labor unions, business and professional associations, and social and recreational clubs. The public charities, identified with the special 501(c)(3) designation by the United States Internal Revenue Service (IRS), alone number over a million organizations. This subsector grew by 64 percent over the decade from 1999 to 2009.

Many of these nonprofit organizations have relatively small operating budgets. Indeed, fully 45 percent of the sector in 2008 had budgets of under $100,000. Move up to the $500,000 level, and almost three quarters of the organizations had budgets less than that. Fewer than 5 percent have budgets of over $10 million, though they account for 85 percent of all expenditures.²

With so many small organizations, what is their financial impact? Actually it is quite dramatic. In total, the sector’s spending was approximately 11 to 12 percent of the nation’s gross domestic product in 2007.³ Based on 2008 statistics, nonprofits employ over 15 million people, or 13 percent of all private-sector workers.⁴ But beyond this, their contribution to the nation’s quality of life is incalculable. American households contributed nearly $2,000 per year of their personal money⁵ to nonprofits plus substantially more in contributed hours. In fact, at the end of the first decade of the twenty-first century, over 63 million Americans (27 percent of the population) volunteered their time to nonprofit organizations with an estimated value of over $278 billion.⁶

Despite the tremendous size and impact of the nonprofit sector, it is not well understood by most people. The purpose of this chapter is to describe what nonprofit organizations are, what distinctive features they possess, and what special challenges they pose for the people who manage and govern them.

WHAT IS A NONPROFIT ORGANIZATION?

Suppose you asked someone, “What is an elephant?” and the person answered, “An elephant is a nonhorse.” You would probably find the answer unsatisfactory. Yet, the term nonprofit organization describes something that is not something else—it suggests a business enterprise not organized to make a profit. But it tells us very little about the essential characteristics of this type of entity.

It is not easy to describe nonprofit organizations, and this is partly what makes managing them such a difficult task fraught with challenges and problems. Unlike management issues in the profit sector, which tend to be clear and related to specific economic measures, issues in the nonprofit environment are more nebulous because they relate to the somewhat abstract concept of public service. In a profit-making company, a manager generally knows whether he or she is doing a good job, but it is often less clear in a nonprofit organization in which the primary purpose is not to make money but to serve the public.

Some say that the essential defining characteristic of nonprofit organizations is the fact that they are established to provide a service to the public, and to some extent this is true. But this idea of a public service mission can be misleading. For one thing, there are a number of nonprofit organizations that are not organized to serve the public (for example, country clubs and labor unions). For another, the idea that nonprofit organizations are simply organized to solve some societal problem or deliver some much-needed public service flies in the face of the exclusivity often associated with their respective constituencies. This is perhaps most clear when nonprofit organizations are compared to public (or government) organizations and agencies working in the same area of activity. Although the nonprofit organizations often have a stated public service mission, they do not necessarily have a requirement of equity (that is, a mandate to serve everyone) the way public agencies usually do. As a result, the nonprofit organization’s actual constituency may be far more limited than that of a public agency working in the same field.

Others claim that the essential defining characteristic of nonprofit organizations is that their mission is not to make money. Again, this is partly true. But many nonprofit organizations are quite entrepreneurial (again, this distinguishes them from most public or governmental agencies working in the same field). Many nonprofits engage in all sorts of money-making ventures that bear a close resemblance to profit-making entities, and this has been cause for some concern among those working in commercial endeavors whose businesses must compete with nonprofits for customers.

In fact, a nonprofit organization is neither in the for-profit sector nor in the public sector but sits somewhere between the two. This position allows the nonprofit great flexibility in its operation but also requires great skill in its management. On the one hand, managers must learn the same management techniques and analytical strategies that apply in profit-making companies. However, while these techniques are relevant in the nonprofit world, their application is dissimilar. Although both profit-making and nonprofit organizations engage in planning, budgeting, accounting, and marketing; although both have to contend with issues of governance, personnel, and information management; and although both have to raise money from time to time, these activities are carried out in markedly different ways. Similarly, while it may be useful to know about the workings of a public agency and the development of public policy, it is not sufficient preparation for the nonprofit manager or trustee. Governance, organizational accountability, financial reporting, and long-range planning are very different in nonprofit organizations whose special defining characteristics are laid down in state and federal law.

Toward a Definition

In this book, the term nonprofit organization refers to those legally constituted, nongovernmental entities incorporated under state law as charitable or not-for-profit corporations that have been set up to serve some public purpose and are tax-exempt according to the IRS. All must have the following five characteristics:

• They must have a public service mission.

• They must be organized as a not-for-profit or charitable corporation.

• Their governance structures must preclude self-interest and private financial gain.

• They must be exempt from paying federal tax.

• They must possess the special legal status that stipulates gifts made to them are tax deductible.

Consequently, nonprofit organizations as described in this book do not include three other categories of organizations:

• Entities that have been set up to make a profit but are failing to do so

• Organizations that are governed informally by a collection of people who, although they have banded together to serve some public good, have been granted no special corporate status by federal and state authorities

• Organizations that are recognized as nonprofit by the IRS but do not have a public purpose (for example, trade associations, labor unions, country clubs, and fraternal organizations)

Because these various classes of organizations do not have all the characteristics previously listed, their missions, governance structures, or method of management may be significantly different from what is described in this book.

This chapter considers four major challenges that face nonprofit organizations as a consequence of these special characteristics. The challenges are:

• Articulating a clear public service mission

• Engaging in risk/survival analysis

• Identifying and involving the constituency

• Testing for “Organized Abandonment”

By looking closely at each of these, we will continue to refine our understanding of the special nature of nonprofit organizations.

CONSEQUENCES OF A PUBLIC SERVICE MISSION

An essential difference between for-profit and nonprofit organizations centers on the concept of mission. The ultimate mission of the profit-making entity is to earn money for its owners. Ownership can come in many forms, of course, from outright ownership of the organization by a single individual to shared ownership (by partners or shareholders or some other group). The concept of ownership is completely absent from nonprofit organizations, and consequently the nonprofit’s mission has a totally different thrust. There can be no owners in a nonprofit organization, because such an entity is intended to serve a broad public purpose and the law is clear in specifying that ownership (with concomitant private gain) is incompatible with public purpose. This is not to say that nonprofit organizations cannot make money. Nonprofit organizations can and do make money—in the same way profit-making entities do—but the money that is taken in must be directed toward the public purpose for which the organization was set up, held in reserve, or turned over to another organization with a public purpose.

It is much more difficult to identify and articulate the mission of a nonprofit organization and consequently to develop criteria by which success can be measured. In a profit-making organization, because the mission is clear, success criteria are also clear. The mission centers on profitability; thus the criteria for success (and for decision making) include the bottom line, return on investment, sales, profit margins, market share, and other easily calculated measures. In a nonprofit organization, where the mission centers on public service, it is not only more difficult to define purposes, but it can be a bewildering task to try to find the proper yardstick by which to measure success. If the purpose of a school is to produce well-educated citizens, if a peace group is established to oppose the use of military force, if a recreation center is to offer constructive activities to urban teenagers, what criteria should each use to measure success? There will always be quantitative measures at hand—College Board scores for the school, statistics on attendance at political rallies for the peace group, and numbers of participating teenagers in the case of the recreation center—but these measures are only indirect indexes of success.

Because the missions of nonprofit organizations center on the concept of public service, one might look to the public sector for models that demonstrate how mission statements are articulated and tested. Unfortunately, there is a problem with this approach. In the public sector, as we have already seen, there is an implied or stated mandate of equity in every mission statement. That is, public agencies are obligated to serve anyone who is eligible for assistance. For that reason, quantitative measures of success are often possible on the basis of the numbers of people served, their geographic distribution, their racial and socioeconomic d...