GOOD NEWS: Nonprofits Are a Business, Kind of
Good News: An enewsletter for donors and nonprofits
on strategic planning, governance, fundraising, and executive leadership.
Nonprofits Are a Business, Kind of
Lots of foundation and nonprofit boardrooms I encounter are dominated by businessmen and women (ok, mostly middle aged white men like me). So naturally they bring their life and professional, for-profit experiences to the nonprofit conversation. Sometimes that for-profit perspective is invaluable. And sometimes it is not. So when is a nonprofit or foundation like a business? And when isn't it?
A few of the many instances in which the for-profit business mindset is helpful:
Value Proposition and Belief System
Successful businesses require a strong value proposition and compelling belief system. It has been said that people buy Apple products for what the company seems to believe, not just for the product itself. "Think Different." The same holds true for nonprofits. Putting a stake in the ground over your value proposition and what you stand for is an excellent place to start as you apply a business rubric to nonprofits. What do we do? Who are we? What do we believe in? And why? All are excellent questions to answer and communicate deliberately and often. Beware of trying to be too much for too many. Pick a lane and stay in it.
Board and Executive Leadership
Leadership matters. Emerson said, “Every institution is the lengthened shadow of one man (person)." In other words, show me a board and chief executive that is trustworthy, selfless, and an expert in their field and I'll show you a successful company. Show me a duplicitous, selfish, incompetent board or chief executive and I'll show you a company in big trouble. It is hard to lead from the bottom. These principles apply to nonprofits too so take great care in making board appointments and hiring and assessing your chief executive. Too many nonprofit and foundation boards make the mistake of not assessing their chief executive and themselves. They can be accountable to no one which hardly ever ends well.
A Sustainable Financial Model
More and more of my donor clients are thinking about their nonprofit giving as investments in an important enterprise. They even use terms like "venture philanthropy" and helping "startups launch or grow." Maximum financial return is not their aim. Maximum sustainability and performance is. The days of sending off checks to alma mater or other institutions that have benefited from generational loyalty and trust are diminishing. So be sure that your nonprofit can present a highly performing service, competent leadership, and a financial model that is sustainable. To me that means do not over-rely on one event or a handful of donors to make budget. That lesson should have been learned during Covid. Try to generate sources of income in addition to private philanthropy. And prepare yourself for the day when government funding dwindles or simply goes away.
A few of the many instances in which the business mindset is not helpful:
Bottom Lines
By definition, for profit enterprises generally exist to generate maximum income, usually for ownership and/or shareholders. Sometimes this profit margin comes at the expense of those below the C-Suite. Sometimes it even comes at the expense of the product or service being offered itself. Anyone following the airline industry or recent for-profit hospital crises?
Nonprofits are after a very different bottom line: maximum welfare for those they seek to serve and society at large. Even though businesses may have vision and mission statements, generally they are not motivated by such statements anywhere near their nonprofit counterparts. This bedrock truth influences matters of employee culture, compensation, and delivery of services.
Shareholder and Executive Compensation
Outsized ratios of shareholder and executive compensation to median employee compensation have been growing steadily for at least forty years. The model of the well-compensated chief executive overseeing everyone else who makes much less takes hold at many businesses and even some nonprofits. It can come at the cost of attracting the right kind of nonprofit leader who seeks to serve and the very nature of their service. Rather than working with a servant's heart for fair compensation, some chief executives seek wealth and status akin to their for-profit counterparts. Such a dynamic can negatively influence employee morale and belief in the institution. It can also negatively influence the quality of the services being offered by the nonprofit as limited resources are diverted from front line employees and the service itself. Look no further than the cellar-dwelling New England Patriots who for too long paid one coach tens of millions while shipping out high quality players (even Tom Brady?) and coaches for less expensive replacements.
Transactional Culture
In the business world, it is common to view relationships as a series of transactions in pursuit of profit. Many nonprofit people are motivated by their deep belief systems and matters of the heart that led them to their chosen work in the first place. Whether programming, hiring, or with respect to governance, a mindset of making transactions can be ruinous to a nonprofit's direct services, fundraising, board composition, and much more. Nonprofits need people who see themselves as long term relationship builders, not flyby night vendors or brokers doing deals.
Of course there is much more to say about other topics such as grantee accountability, board decisions to take on debt, developing and retaining talent, building teams with a diversity of life experiences, the use and misuse of data... the list goes on. The main takeaway is that when someone tells you that your foundation or nonprofit is like a business, it is important to engage in a conversation about when that perspective is helpful and when it is not.
Stuff Steve Is Watching, Listening To, and Reading
Start with Why (18 minute watch)
“The goal is not to sell people what you have. It is to sell people what you believe. People don’t buy what you do. They buy why you do it. What you do is proof of what you believe.” Simon Sinek
Watch Here
Beyond the Hustle (13 minute listen)
"We only build a company for one of three reasons. Either to put a stake in the ground to say we've accomplished something. Or to give us money. Or to give us free time. What happens to many entrepreneurs is they lose sight of who they are as a person. They don't have any hobbies or interests. They lose sight of their hobbies, relationships, spouse, kids, and selves. They tell themselves their business is their hobby. Well if that's the case, their hobby sucks. They can end up with nothing left other than their business." Cameron Herold, Second In Command
How The Ivy League Broke America (10 minute read)
"It's not obvious that we have produced either a better leadership class or a healthier relationship between our society and its elites. Generations of young geniuses were given the most lavish education in the history of the world, and then decided to take their talents to finance and consulting. Princeton's unofficial motto is 'In the nation's service and the service of humanity' - and yet every year, about a fifth of its graduating class decides to serve humanity by going into banking or consulting or some other well-remunerated finance job." David Brooks, The Atlantic
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