Not-For-Profits Needing For-Profit Discipline

Wikipedia defines a not-for-profit in this way:

Not-for-profit organizations are able to earn a profit, more accurately termed a surplus, such earnings must be retained by the organization for its self-preservation, expansion, or plans. NPOs have controlling members or boards. Many have paid staff including management, while others employ unpaid volunteers and even executives who work without compensation.

Profit is not the primary goal of an NPO, but because an NPO can legally and ethically trade at a profit, the term Not-for-profit is often considered more appropriate than Non-profit. The extent to which an NPO can generate income may be constrained, or the use of that income may be restricted. Nonprofits therefore are funded typically by donations (which may be tax deductible) from the private or public sector, and are typically exempt from income and property taxation. Some NPOs may internalize profit in the form of comparatively good wages or benefits.

One of the primary differences between a for-profit and a not-for-profit is how surplus revenue is generated and how this surplus revenue must be handled.

I have discovered over the years, through serving on the boards of international charities and consulting to international charities of all sizes, that somewhere along the way this basic difference has morphed into something more insidious and disappointing.

For some reason, in more situations than I am happy with, this difference has morphed into the belief that appropriate business processes, methodologies and best-practices don’t apply to not-for-profits because “not-for-profits are different”.

Some examples …..

From the “We’re Different” Camp

1. One international charity whose board refused to take action against their Executive Director who was known to be taking money illegally for the purpose of launching his own organization.  When I vehemently protested this as a board member, it was explained to me “Unlike in a for-profit business where a board provides transparency, accountability and governance, you should realize that the purpose of a not-for-profit board is to support ALL actions of the Executive Director and to provide guidance when asked for”.  By the way, the board was made up of senior lawyers and well known executives.  The board later came to its senses but in firing the ED, had to pay him a “keep quiet” bonus so that the ED didn’t blow the whistle on the board for allowing him to steal in the first place. Say what?

From the “You Business Guys Don’t Understand Us” Camp

2. Another household name in the international charity space that blows through tens of millions of dollars a year without having a single idea where the money is going or whether their use of capital is effective or appropriate.  They garner millions of dollars a year in donations because of their internationally-recognized name and the assumption by donors that this charity must be doing the right thing.  When I asked why they didn’t apply appropriate strategy and tactics to maximize their effectiveness and to leverage this demonstrable success to generate even more revenue, I was gently reminded that such practices only work in the for-profit space and attempting to apply processes to generate strategic, measurable outcomes are impossible in the not-for-profit space. Please forgive me for daring to think such audacious thoughts.

From the “You Should Be Kissing Our Feet” Camp

3. A multitude of charities that pay themselves quite handsomely but lament that there aren’t enough people in the world who are willing to provide them with quality pro-bono work for extended periods of time.  They have the curious belief that the rest of the world should be aching to do for free what they in fact are unwilling to do without being paid extremely well.  In fact, some of these charities have almost no budget for programs because their salaries and consulting fees have swallowed up most of the capital.

From the “I’ve Never Heard of This” Camp

4. A very large international charity that for over 40 years never had its books audited ONCE.  The person in charge of the coffers lifted money from them routinely during that period and now the organization faces bankruptcy.  The cry of “We didn’t know that we should have an auditor come in annually” doesn’t draw much pity in this day-and-age and proves that ignorance doesn’t always produce bliss.

From the “Dirty Little Secrets Aren’t Fatal, Are They?” Camp

5. The dirty little secret of many charities in Canada and the US that are routinely ripped off significantly by their treasurers or other execs.  Why is it a dirty secret?  Since many of these charities keep such events quiet for fear of discouraging donors, they have become a favorite target of some unscrupulous people.  One well-known children’s charity in Canada has been robbed by their last three treasurers in a row.  Charges haven’t been pressed because that would draw unnecessary attention from the media and so the game continues. If you need an extra source of income, email me and I will tell you who they are so that you can apply for the position.

From the “Money is the Root of All Evil” Camp

6. A number of charities, especially in the religious community, who believe that to raise money to maximize their effort is an affront to the true heart of charity or to God.  For this reason, they avoid appropriate means of generating extra revenue because they believe that to generate this money places them in the “all money is evil” camp and somehow their acts of charity will become tainted as a result.  Meanwhile, they constantly lament that they can’t help more people with their meager annual budgets.

It’s Not All Bad

Now don’t get me wrong.

There are MANY excellent, well-run not-for-profits in the world that make a significant contribution to the people and community that they serve.  They are staffed by passionate, talented people who we should be grateful for everyday.

But there is another side to the not-for-profit world that is not as positive, with far too many organizations not living up to the commitments that they constantly promote.

The difficult challenge is that we can’t help these organizations to execute in a better fashion until they accept the need to do so.  And until we help those organizations maximize their ability to serve their target audience, then we are all just pretending to do the right things for others.

The problem is that public disclosure, embarrassment and humiliation doesn’t solve the problem.  In fact, the only thing it will probably produce is a lot of litigation in an effort to hide the ineffectiveness.  Meanwhile, the people who need help are still not being helped and that’s not useful at all.

There has to be a better way – I just wish I knew what it was.  Connecting those who execute well with those who don’t will help some organizations, the ones with enough humility to recognize a better way.  For those organizations whose leaders are filled with hubris and bravado, such techniques will prove to be a waste of time.

Ultimately, it is the donors, board members, affected consumers and people at-large who must hold these organizations accountable to their stated purpose.

Pretty posters, nice slogans, rah-rah presentations, leveraging of international brands and inspiring commercials are all well and good.

But when much of the capital is wasted by people serving their own needs or executing with the belief that not-for-profits can’t leverage for-profit best practices, then we have a big problem.

Meanwhile, we are not making our best effort to put food in the bellies of the hungry, empower the homeless to become self-sufficient, help the downtrodden to feel human again or help children with special needs reach their ultimate potential.

And that is where the real shame lies.

In service and servanthood,

Harry

PS This blog post has only been out for seven or eight hours and I have been bombarded by emails.  A few observations:

1. I cannot divulge the names of the organizations to people I don’t know.  I do, however, find many of the guesses to be both interesting and revealing.

2. For some people who may have figured out that their charity is one of the ones referenced, what is more important … that the secret is out or that you do something to fix it?

3. In many of the examples, the stories shared only touch the surface of what is really happening within those organizations.  I left out the juicy bits to avoid obvious identification.

4. Many of the respondents have shared their own stories, some of which leave mine in the dust in terms of negative impact and audacity.

The bottom line

Change is necessary – do we have the courage to be that change on behalf of the people who need it?

 

Addendum: May 10, 2012

No matter how many times you warn people, not-for-profits will continue to get ripped off, as noted in this headline today - Former Calgary art gallery CEO charged with fraud

The funny (and sad) thing about this blog entry is that some people have recently discovered it and reached out to me, asking if it was charities x, y or z.  They had additional stories beyond the ones I had personally experienced.

What will it take for these organizations to execute with more discipline?

Board Members Need to Be Made Accountable

Every time I see news such as that which was posted today, the first thing I look at are the Board of Directors.  Therein lies the ultimate responsibility for governance, transparency and the overall strategic and tactical thoroughness of execution of an organization.

Unfortunately, too many board members in not-for-profits are there because it provides networking opportunities, resume padding, fellowship, opportunities to make themselves look good in the eyes of the community or an opportunity to obtain a personal feel-good (that they are making a difference to their community).

This quote from the police report for the item in today’s headlines is disturbing and, if you are a board member, embarrassing:

The documents say the board relied on Cooper to run the gallery and board members didn't, and had no reason to, suspect Cooper was misappropriating funds.

It was only when approached by Calgary police that they did an internal audit of the art gallery's finances, and discovered $497,586 was missing.

Many times, governance, transparency and accountability often don’t make it on the agenda and when people are found to be ripping off not-for-profits, usually the person committing the act gets prosecuted while the board members go scot-free.

Perhaps if board members were trained better and prosecuted more frequently when wrong-doing occurs, they would take their job more seriously and situations like the one noted today would become a rarity.

Perhaps.

 

Addendum: June 20, 2013

Canadian entrepreneur and philanthropist Brett Wilson offered this insightful musing in regards to Justin Trudeau and demands of him by a charity that he refund a speaking fee because they did not sell enough tickets to cover their cost.  In his musing, Mr. Wilson provides an interesting viewpoint on encouraging not-for-profits to think in a different, more entrepreneurial way.