The nonprofit sector is the only sector in
society that is defined by what it does not do. They do not make a profit. Nowhere does it suggest, that nonprofits, unlike their for-profit
counterparts, exist to provide a social good to some segment of society. So what is wrong with this
description? In part it is this
very term nonprofit that contributes
to the low regard that this sector is held in by other sectors.
It is easy to not make a profit. In fact, anybody can not make a
profit. It takes skills to run a business
and make a profit year after year over the long run. But to not make a profit, that does not require any
definable skills. If social sector
or mission-based organizations were to be identified by what it is that they provide
- a social benefit – it would be obvious then that leading these organizations
requires a specific skill set.
These skills include the ability to maintain a viable and sustainable
organization, provide a social benefit while also being a responsible steward
of funds provided by others, and convincing others to invest in an organization
even though they do not receive a direct benefit for their investment. Not everybody can do that. In fact, that requires a completely
different skill set than running a for-profit corporation selling goods and
services that return a profit.
According to a recent article in the Journal of
Philanthropy titled, Nonprofit Weakness
Starts With too Few Leaders and too Many Managers, “challenging economic times expose a common problem among
nonprofit leaders: that they often work hand-to-mouth, chasing the next
donation or grant, focusing on program and day-to-day operations. Operational
expertise is essential to keep an organization running, of course, but
nonprofits’ propensity to plug along without a strategic vision does not bode
well for their long-term survival. “(Male, 2/10/13) While the author makes the point that nonprofits must
survive hand to mouth, he then falls back on the easy way out of blaming the
victim. Nonprofit leaders
are forced to live hand to mouth, but then they are faulted for not thinking
strategically and long-term. When
you do not know where the rent or next payroll is coming from, long-term thinking
does indeed feel like a luxury.
For too long, and in far too many circles it
has been assumed that there is a lower skill set to running a nonprofit and
that if nonprofit leaders had a stronger skill set they would be in the for
profit world where they could earn a real living. In fact, the fiction goes so far as to suggest that
nonprofit leaders are being paid too much – far more than they are worth. One example of how this plays itself
out is in state efforts to legislate nonprofit executive salaries. In state houses across the country,
legislators and governors are attempting to place limits on nonprofit executive
compensation. An executive order
by Governor Cuomo in New York limits such compensation in nonprofit
organizations that receive 30% or more of their revenues from the state. In Florida the benchmark for regulating
these salaries is if a nonprofit receives two-thirds or more of its revenues
from state sources. A similar
measure passed in the Massachusetts House but failed in the Senate where an
amendment called for a feasibility study.
However, in these same states, there has been no effort to limit the
salaries of for-profit CEO’s whose companies earn large portions of their
revenue from government.
It is easy to see how a double standard plays
itself out when it comes to politicians distributing the largesse of public
funds under the guise of economic development. Governor Andrew Cuomo’s
generosity to the film industry is legend in the form of an annual $420 million
tax credit. Nowhere in his selling
of this tax credit did the governor call for salary limitations on those
employed by or leading the industry.
In fact, the governor refuses to disclose how much of a tax advantage
each company is receiving, and there is no contractual obligation to produce a
minimum number of new jobs.
However, this same $420 million could be used to fund 5,000 new teachers
or create 45,000 Head Start slots for low-income children. But it seems that the governor trusts
the for-profit film industry with public funds more than he does the nonprofit
social sector.
When it comes to for profit corporations,
with or without government contracts, it appears that the sky is the limit for
employee and executive compensation. One need look no further than the recent financial industry
bailout. The federal government
invested more than $700 billion in taxpayer dollars to bail out the failed
giants of the financial industry, and required very little in return, unlike
the demands that are made on nonprofits that utilize government funds. One case in point is AIG, the company
at the very heart of the meltdown.
After receiving more than $165 billion in federal dollars, AIG proceeded
to pay out more than $165 million in bonuses to the very executives whose
stewardship oversaw the financial chicanery that caused the meltdown.
However, when it comes to oversight of
government dollars going to private organizations, only nonprofit executive
salaries receive scrutiny. Dan Pallotta
(2012) refers to this as double standard that exists between the for-profit and
the humanitarian sectors. He
states that this “is not a zero-sum game.
The money paid to a valuable CEO is not money taken away from the
cause. It is an investment in the cause.”(pg.
32)
A 2010 New York Times article, “Lawmakers
Seeking Cuts Look at Nonprofit Salaries,” reported on an attempt by four
senators to block federal funding to the Boys and Girls Clubs of America, based
upon the most recent compensation of its CEO who received almost $511,000 in
salary and $478,000 in retirement benefits. Senator Grassley (R-Iowa) requested that the Treasury
Secretary review regulations on nonprofit salaries, because he stated they are
“not tough enough in policing pay in the nonprofit sector and that regulations
governing compensation are too weak.
Grassley, his Senate colleagues and the media reports all ignored the
fact that in her eight-year tenure at the Girls and Boys club, the CEO tripled
its revenues and more than doubled the number of children served. In contrast to popular belief, her
large compensation package did not take away form the needs of those being
served, instead retaining a highly qualified and skilled CEO allowed the
organization to serve more children with expanded programming.
However, according to Pallotta (2102) in
the same year that the Senate was scrutinizing nonprofit executive
compensation, “Lockheed Martin received 83 per cent of its $45.2 billion 2009
revenues from US government contracts.
Its CEO’s 2010 compensation was $14.6 million.” (pg 33) That represents a compensation package
of more than fourteen times that of the Boys and Girls club CEO, but there was
no mention of this in the Senate despite the fact that the federal government
supported 83% of this salary.
Another example of this double standard of oversight is Booz Allen
Hamilton, the federal government’s go to intelligence contractor that receives
fully 100% of its revenue from the federal government and paid its five top
employees $20 million in compensation.
However, Senator Grassley seemed to have no problem with the salary
scale at this government contractor even though their CEO at $4.228 million
earned more than ten times the President of the US and more than twenty-four
times Grassley’s annual salary as a Senator. But companies like Lockheed Martine and Booz Allen Hamilton
have cadres of lobbyists, lawyers and friends on capital hill that protect them
from the same oversight that is afforded nonprofits without the lobbyists,
lawyers and friends.
The role and challenges of the nonprofit
executive are both misunderstood and underrated. One nonprofit executive who was overseeing renovation of
factory space to house his agency tells this story as an illustration,
We were involved in a large renovation turning
vacant factory space into a multi-service community center. This space was on the second floor and
part of the work included converting a freight elevator into a self-service
passenger elevator. Midway through
the elevator conversion the buildings department sent an inspector to check on
the progress. Shortly after the
inspector left the head of the elevator company called to inform me that
additional work was needed and that it would double the cost of the
conversion. It seems that the
building code required that the elevator shaft be closed so that the elevator
could not go to the basement, which would not be safe, or other safety measures
implemented. I informed him that
he should go ahead with the work, but I would hold him to the original contract
cost. I told him that I hired him
as the expert and he should have known about this requirement therefore the
original price was the price that I would honor. We went back and forth and he insisted that he could not do
it. I then informed him that in my
business of running a nonprofit, if I have funds left over at the end of a
contract I must return them and if I run short by the end of a contract I must
make up the difference. Well he
gave me the most incredulous look, scratched his head and asked how I am able
to run a business like that. Then
he gave me an ultimatum, agree to the extra cost or he would pull his men off
the job. I did not, and he
did. Needless to day I called him
back to complete the job and paid the extra costs.
Therein lies the difference between managing
a for profit and a nonprofit. For
profit managers have the ability to raise fess, reduce costs, discontinue
unprofitable product lines or services, all in service of their true mission to
provide a fair return (profit) to their shareholders or to the owners. They also have the freedom to fail
miserably and count on the taxpayers to bail them out, without any calls for
caps on their compensation.
Witness the bailout of the banks and auto companies that were then
followed by record bonuses to CEO’s of the very same banks that the taxpayers
bailed out.
Managing an organization for a social
purpose means that you are judged by a different standard than a for profit
manager. Success is not measured
in dollars and cents, but often by intangibles such whether or not you are
making progress toward your mission, are the people you serve improving their
lives, getting jobs, becoming permanently housed, etc., etc. It is easier to impact the bottom
line of an organization than it is to impact people’s lives. If your business is to produce widgets
or cars or manufactured homes your costs are predictable and you can base the
selling price of each on a predictable set of factors. If those costs increase, you have the
option to increase the selling price, reduce the quality or cut back on your
labor force. You can predict
the difference between the cost of manufacturing a good or providing a service
and what that good or service can sell for. Unlike a nonprofit executive who provides services to
individuals, each with their own individual needs, abilities and challenges. The cost can vary widely providing
interventions for people with different needs and differing levels of
resources.
In the social sector, organizations
generally provide a service that is supported by or paid for by people other
than those utilizing that service.
Providers of social services, mental health services, housing and income
support services for example, rely on the generosity of government,
foundations, corporate contributors and individuals for support. For profit corporations generate their
income from the people that they serve.
If they can provide a product or service that people want and are
willing to pay for at a price that produces a desired profit the company
succeeds. Corporate managers have
two constituencies to satisfy, and both are direct beneficiaries of the work of
the corporation – their customers and their investors. Social sector organizations have the
same two main constituencies – their customers and their investors. However the fundamental difference here
is that in the social sector the customers usually do not pay the full cost of
the services and the investors do not benefit directly from their investment,
otherwise known as their contribution or donation. In the private sector the customers pay the full cost of the
goods or services plus an amount over the cost that produces the profit, but
they benefit by obtaining the good or service that they can freely choose. Private sector investors also benefit
directly from their investment in the form of income on their investment.
While both the social sector and the
private sector must demonstrate over and over that their goods and services are
wanted or needed by their customer base, only the private sector has the
sanction to discontinue or redesign these at will. Change in the social sector is slower as a result of grants
and contracts given for specified programs or interventions over a specified
period. Once that grant or
contract is awarded, the organization is not free to make changes that it may
deem necessary from lessons learned providing that good or service. There are many examples of how this
works in the private sector. In
1985, amid much fanfare and significant financial investment, Ford Motor
Company introduced the Edsel. This
was going to be the flagship car of its newest division. The car was an instant failure and after
three years the Edsel line was discontinued, Ford absorbed its losses and moved
on. Similarly Coke introduced its
“New Coke” in 1985 and discontinued the original formula. Despite heavy investment in marketing,
their customer base rejected the New Coke, forcing Coca Cola to reintroduce its
original formula, now dubbed Classic Coke. The New Coke was discontinued seven years later.
Both of these cases illustrate how
private corporations are free to introduce and discontinue products at will
depending on market studies and customer demand. They do not have to go back tot their investors for prior
approval nor do their investors attach strings to their investments. People invest in companies because they
believe that they will be profitable and because they have confidence in the
company’s ability to increase its market share. This includes introducing new and profitable product lines,
and eliminating those that are not profitable or do not produce a high enough
profit.
The leadership style of Laura Sen, the much-lauded
CEO of BJ’s Wholesale Clubs, demonstrates the difference between the leadership
in the two sectors. Catherine Elton the Boston Globe describes Sen’s management style,
It’s Sen’s management style that sets her apart: She has flattened out
the company’s traditionally top-down way of doing business, spent an unheard-of
amount of time on the floors of BJ’s stores, given everyone from rank-and-file
wage workers to those at the home office an unprecedented level of input and responsibility
in the running of the business, and made herself accessible to and supportive
of her suppliers and employees alike.
While her leadership style may seem more tailored to a nonprofit
setting, her management decisions are definitely those of a for profit
manager. In her first full year as
CEO, BJ’s posted a five per cent increase in revenues in stores open at least
one year. As a result of its
growth and potential, two private equity firms began the process of purchasing
the company to take it private. To
make the company more attractive to these investors, Sen made strategic
decisions based solely on making the company more marketable. In spite of the growing profitability of
the company, its positive outlook, and as described by Elton her unique management style that
brought her into contact with all levels of workers, Sen ordered the closing of
five stores and the layoffs of more then 500 employees.
Sen described the move in this way, “Our management team has been working for several months on a
strategic plan to optimize our performance and build for the future. In making
these very difficult but necessary choices, we eliminated positions held by
team members who have contributed to our success. We will be supporting
affected team members in many ways to help ease their transitions.’’ Employees are expendable in the name of
maximizing profits. But this is
not an isolated example. Another example,
among many is when AT&T laid off 10,000 employees in 1995 its CEO received
a salary of $3.3 million and a bonus of 750,000 stock options worth $9.7
million (The Spokesman Review). It
seems that laying off workers is good business as it decreases costs and
increases profits returned to shareholders. However, these business practices are not only seen as
acceptable, they are subsidized by federal tax dollars. In the two year period ending in 1995,
the year of the large layoffs and even larger CEO compensation package,
AT&T received more than $3 billion in tax subsides from the federal government
(Citizens for Tax Justice)
In spite of
the fact that the nonprofit sector is an economic driver, it is still seen by
many as a drag on the economy.
However, according to a 2012 study by the Center for Civil Society, the
nonprofit sector employs 10.7 million workers, which is 10.1% of total
employment. (These numbers do not include public schools or public hospitals)
It is the third largest sector in the US economy, behind retail and
manufacturing. However, as pubic
mistrust of the nonprofit sector grows, more services traditionally provided by
this sector are being taken over by for profit ventures. In the decade from 2000 to 2010, for
profit employment increased more rapidly than nonprofit employment in
education, health care and social services. These facts portend poorly for the sector as more and more
of these services are provided by for profit enterprises with their eye on the
bottom line and the profit margin.
While a nonprofit executive must keep both eyes on the bottom line and
on the services provided, the for profit emphasis on the bottom line first may
result in shorter interventions and choosing less costly clients and services. While nonprofits have a social mission,
in the words of Nobel winning economist Milton Friedman “"there is
one and only one social responsibility of business–to use its resources and
engage in activities designed to increase its profits”(New York
Times, 9/13/70) But if you lead a nonprofit,
there is a different purpose and measure of success; a bit more elusive than maximizing profits and harder to
come by.
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