July 2009
Has Small Business Gotten a Bad Rap in the Nonprofit World?
We’ve witnessed some spectacular abuses of ethics and management among U.S. corporations recently – and some of us have been tragically affected by the resulting loss of savings and investments. It’s left a bad taste in my mouth, as I’m sure it has in yours. What happened to honest business men and women meeting the needs of their customers and making a modest profit in return for their hard work, risk, investments and wise management? It’s been the “Me Generation” at its worst, and I’ve been ashamed to even share the same generation with some of these criminals.
I suppose it shouldn’t be surprising, given these abuses, for some nonprofit leaders to lump all for-profit business in the same basket and make negative assumptions about them. On the other hand, business folks also make a few generalizations about nonprofit organizations.
In the next few Exchanges, I’ll offer up a variety of viewpoints surrounding business and nonprofit ethical issues. I encourage you to use the topics as a jumping-off point to discuss these issues within your own organization and in the broader public arena. I think the issues are important and that a wider discussion is warranted.
As a caveat, I’ve been both a nonprofit officer and a small business owner, so I’ve worked in both chairs. I also admit up front that I don’t have all the answers. But sometimes the best place to start solving a problem is to define the questions correctly, and that’s the spirit in which this is offered.
“Watch your Attitude, Young Man…”
There are attitudes in both business and in nonprofit organizations about the ‘other side’ that affect business-nonprofit relationships. Here are a few – nonprofits first, then business -- along with a few ideas to stimulate your thought process:
Nonprofit Assumption #1: Making a profit is the highest value of all business except nonprofit corporations, and profits are a bad thing.
Consider this:
Covering the cost of delivering goods or services is an absolute must for all businesses and organizations. If you can’t cover the cost of operations, you’ll no longer be able to serve your clients because you’ll be out of business, plain and simple. And if you want to expand programs or grow, you’ll need to have funds to do it if you want to survive. This is true for nonprofit organizations as well as for corporations and sole proprietorships.
Profit may be a high priority for some businesses simply because of their legal structure. Shareholder-owned corporations focus on profit partly in order to return a dividend to their investors. This is a built-in part of their legal structure and often has made it possible for the business to exist in the first place, i.e., ‘no investors’ may have meant ‘no funds’ to get a much-needed business started. A for-profit structure doesn’t preclude a corporation from providing valuable services to their clients at a reasonable price, and many shareholder corporations do.
Nonprofit Assumption #2: Nonprofit organizations should always obtain services from another nonprofit because they share altruistic goals and values and because they are not paying for a business owner’s greed.
Consider this:
There are distinct customer advantages to offering services as a small business rather than as a nonprofit:
As a nonprofit CEO, I found a frustratingly-slow lag time between our identification of client needs and the implementation of a solution. Our nonprofit structure required any significant changes to flow through the Board of Directors (who might meet only monthly or quarterly), and often through a committee of the Board before that. The quickest I could change something without calling a special meeting of the Board was about a month. Our clients and our organization missed a lot of opportunities that way.
As a small business owner, however, I can implement a change today in response to a compelling client need. This ability to act quickly in response to needs or opportunities means that our clients receive discounts or added value earlier, and problems and requests are resolved and responded to more quickly. When the business owner is ethical and entrepreneurial, their clients benefit.
For-profit business sometimes have altruistic goals, and greed is no stranger to nonprofit organizations.
While small business owners make their living from their business, I haven’t met many small business owners who take large profits from their business. Successful small business owners are generally conservative people with a ‘long view’ of things. If a business owner is successful at what they do, they know the value of setting realistic goals and re-investing in their own company. Generally, they prefer to defer short-term profit in favor of long-term, steady growth for their company. Successful small business owners reinvest most of their profits directly back into their business.
Conversely, greed is no stranger to nonprofit organizations -- it just sometimes takes a different form than money. In my experience, nonprofit leaders are tempted as much or more by power, influence and ‘kingdom-building’ than they are by money (especially since the vast majority of nonprofits struggle financially).
But as we’ve seen, nonprofits aren’t the only ones with assumptions:
Business Assumption #1: There’s a nonprofit for every idea under the sun, and it’s difficult to sort through them to find a credible organization we can be proud to contribute to and have our company name associated with.
Consider this:
Business owners see an exploding population of nonprofit organizations all clamoring for their charitable donation funds. It’s not uncommon for a typical businessman to be approached two or three times a day to donate to a cause. While many nonprofits address important issues, business owners are put off by the fact that there’s tremendous duplication of services and too little collaboration and accountability in the nonprofit world.
I encourage you to honestly consider whether your nonprofit is competing with other organizations that offer similar services. If the answer is ‘yes’, I encourage you to hold internal and joint discussions about merging your organization with another nonprofit holding similar values. The financial savings from consolidating your management, finances and programs, along with the credibility you’ll gain among the businesses and individuals from whom you seek funds will go a long way to increase your success rate when seeking donations and grants.
On the other hand, these difficult economic times have highlighted the fact that many nonprofit organizations continually struggle to survive. If your organization has had budget struggles for the last three years, your CEO and board of directors need to consider the following questions:
Is our mission still relevant? For what purpose were we created, and have we moved off-target from that mission?
There’s a tendency among nonprofits to seek a new purpose when their original mission is completed or when it fails. This practice should be recognized as unethical and unacceptable… If your mission has failed, accept that fact and discontinue your organization. Conversely, if your mission has been accomplished, celebrate your success and close the organization. In both cases, you can identify a compatible nonprofit and help them further their goals by donating your assets to them.
Is our organization being continued to benefit one person or a small group of people?
Nonprofits that exist or are controlled by one person or a small, elite group of people are common, but they’re unethical and unhealthy. This can easily happen on a nonprofit board of directors when one person had the original vision and put tremendous effort into starting the organization. It can also happen when a CEO or director has been in place far longer than others in the organization. But it is fatal for the health of a nonprofit for anyone to begin to believe that they ‘own’ the organization or they are owed a primary role or veto power in the direction it takes.
Business Assumption #2: I can’t trust a nonprofit to spend my contribution wisely. Nonprofits don’t adhere to proven business principles and practices.
Consider this:
Here’s another question for a nonprofit board’s consideration:
Does our organization make sense from a business standpoint? Do we truly follow good business principles, or do we just pick and choose from the principles that aren’t too painful?
A good example of this kind of thinking is considering a fundraiser a success if you make a small profit but haven’t included costs like employee time into your expenses. Another example is paying employees wages far below what they would make doing similar work in a for-profit business. Businesses rightfully expect to see leanness in nonprofit management and finances because it means their donations go more directly to the cause, but they know that paying employees below-market rates means burned-out employees and high turnover. That’s a poor investment and takes an organization’s focus off their mission.
How open to scrutiny are your organization’s financial records and practices?
Do you have an outside audit performed at least every three years? An independent auditor is trained to identify areas of weakness in your organization’s financial practices and can document where you’re doing a good job. Foundations are increasingly requiring an outside auditor’s report before considering your funding request.
Final Thoughts
Every business – nonprofit and for-profit alike – operates by values that drive its mission. The Funding Exchange is a small corporation with a mission to assist nonprofits, agencies and tribal entities to raise the funds they must have in order to accomplish their good work. We’re built on “more-than-profit” values that recognize the need to train, support, and – where needed or desired – actually perform the hands-on work of research, writing, and evaluating projects that further the mission of our clients.
Next month, we’ll take a look at some ways that nonprofit organizations and small businesses have incorporated some of the best parts of the other side to the benefit of their clients, employees, and investors. My hope is that if I’ve offended anyone in business or from a nonprofit, I’ve offended both sides equally. My goal is to ‘acknowledge the elephant in the room’ and stimulate a wider discussion of the issues from folks representing nonprofits and business alike. Please feel free to contribute to the discussion by e-mailing me your ideas at sharon@funding-exchange.org.
