The New copy of this book will include any supplemental materials advertised. Please check the title of the book to determine if it should include any access cards, study guides, lab manuals, CDs, etc.

The Used, Rental and eBook copies of this book are not guaranteed to include any supplemental materials. Typically, only the book itself is included. This is true even if the title states it includes any access cards, study guides, lab manuals, CDs, etc.

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 daycare 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 daycare 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 from school 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 nonprofit organizations.

* 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 a million nonprofit organizations in the United States, a number that has increased over 25 percent in the past quarter century. They range from large universities with assets in the billions of dollars to small all-volunteer, community-based, grass roots organizations that seem to operate on a shoestring. Though they represent less than 5 percent of all institutions and they own only 2 percent of the nation's assets, their contribution to the nation's quality of life is incalculable. They contribute hundreds of billions of dollars to the nation's economy and employ over 15 million people. On a per capita basis, Americans contribute nearly $300 per year of their own personal money to nonprofits plus substantially more in contributed hours. In fact, at the end of the twentieth century, nearly one hundred million Americans (and almost 50 percent of the adult population) volunteered their time to nonprofit organizations with an estimated value of over $200 billion.

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 ofpublic 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 field. 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 public or governmental agencies working in the same field). Many 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 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 maybe 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 termnonprofit organizationrefers 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 organizationsas described in this bookdonotinclude 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 haveallthe 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 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 ofownershipis 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 around 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 around 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 in Latin America, 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 diversity, and the cost-effectiveness of service delivery. For nonprofit organizations, these criteria may be relevant, but more often than not they are only indirect measures of success. Consider a nonprofit university-affiliated teaching hospital. Unlike the public hospital down the street, it cannot directly measure its success by counting the numbers of patients served and the cost-effectiveness of medical treatment. The nonprofit hospital's mission of promoting excellence in medical practice through exemplary training is less concrete, and success criteria are more difficult to establish.

Thus we come to the first major challenge for a nonprofit organization -- the challenge of articulating a clear public service mission. The challenge is not only to come up with a statement that defines what the organization is and what it has been set up to do but to state these things in such a way that the organization can evaluate its success in carrying out this mission over time.

Developing a Mission Statement

The challenge of developing a good mission statement is to create a text that is sufficiently broad to encompass the many possible activities that the organization may wish to engage in. This is crucial inasmuch as the law obligates the trustees of the organization to limit their activities to those covered by the mission statement as contained in the organizing charter. However, in addition to a broad statement of purpose, a mission statement is only valuable if it gives some specific guidance on the direction the organization should take in regard to programs, services, and activities.

In designing a mission statement, it is important to remember that whatever is decided on is not cast in stone. Although the filing of the statement of purpose with the organization's incorporation papers is an important step, this document can be updated and changed through a clearly articulated legal procedure. Mission statements should be reviewed and revised periodically. A regular review and revision process is itself valuable in helping to clarify the assumptions and desires of those most involved in the organization. How is a mission statement created? Let's look at a case history.

THE UTOPIAVILLE ARTS CENTER

In the late 1990s, the city of Utopiaville wanted to create a local arts council that would oversee the cultural activities in the community. City officials appointed a committee to look into the question of how best to proceed, and the group held public meetings to determine what kinds of activities would be most appropriate for the organization. Initially the group developed a simple mission statement as follows:

The purpose of the Utopiaville Arts Council is to develop, foster, and promote the arts as experiences central to the lives of the citizens of the city of Utopiaville.

While this statement certainly met the standard of being broad, the city council members were not satisfied. They felt the statement was too broad and did not provide enough of a sense of direction and intent. The planning group went back to their notes from the public meetings and the lists of responsibilities and activities that people said should be part of the local arts council's mandate. They rewrote and expanded the mission statement as follows:

The purpose of the Utopiaville Arts Council is to develop, foster, and promote the arts as experiences central to the lives of the citizens of the city of Utopiaville. Toward this end, it will undertake the following activities:

* Initiate programs in art, music, dance, and theater to benefit the citizens of Utopiaville

* Advise the city council on all matters concerning the arts, including pending legislation

* Work closely with the Utopiaville School District, with colleges and universities, and with any other educational institutions in the city on the development of appropriate arts education programs

* Allocate public and/or private funds as appropriate to organizations, agencies, or individuals who can provide arts programs or products of high quality that are deemed beneficial to the community

* Seek and apply for state, federal, and private funds available in support of the arts

* Review and make recommendations on all works of art to be acquired by the city, either by purchase or gift, and make recommendations concerning their proposed locations

* Develop directories of local arts groups, artists, performing and visual arts spaces; assemble calendars and schedules of arts events; and compile other material as appropriate to promote the arts in Utopiaville

* Conduct ongoing planning, researching the arts needs of the city, including new arts facilities, and developing, updating, and evaluating progress against periodic written plans for the growth of the arts in Utopiaville

* Develop an awareness in the business community, in local government, and in the general public of the value of the arts in Utopiaville

* Promote and encourage the cultural diversity of the city and assist in preserving the cultural heritage of the area

* Engage in any other activities that will enhance the arts and cultural life of Utopiaville

This new mission statement was far stronger than the first. Not only did it include a broad opening statement of purpose but it also included a more detailed framework from which the organization could develop a coherent program. And, of equal importance, it provided a structure against which some meaningful evaluation of the organization's effectiveness could be carried out in the years to come.

PUBLIC SERVICE AND RISK VERSUS SURVIVAL

James Sully is the president of the board of a summer camp in northern California. The camp was founded in 1949 primarily to serve the needs of disadvantaged youth and it runs a special program for inner-city teenagers on its pristine acreage in the mountains. The camp's program has been based around a curriculum of outdoor survival skills and teenagers of all ethnic and racial backgrounds have been encouraged to work in groups to foster increased understanding and affection for one another.

Despite the popularity of the camp, costs have been rising and funding has been diminishing for its core inner-city youth program. At a meeting of the board, Sully put the problem plainly: "For several years we've had a serious cash problem and until that's solved we won't be continuing the program for the disadvantaged. We will be taking only full tuition-paying campers. Balancing the books has become our top priority."

James Sully's survival-and-safety-first attitude suggests that he may have forgotten the camp's original mission or has relegated it to a second-level priority. He seems to be telling us that running a nonprofit organization is just like running a business, that financial problems have to be tended to first. In some ways he may be right. After all, no organization, profit or nonprofit, can lose money forever and survive. But perhaps it is not quite that simple. There may be many ways to meet a financial crisis, some more consistent with the organization's mission than others. As one board member said in response to Sully's statements, "Given the present crisis, it is clear that changes will have to be made; it's the nature of the changes that has people concerned."

Here is a classic manifestation of one of the great dilemmas for nonprofit organizations. Which is more important: To ensure the continuity and the survival of the organization or to stay true to the organization's mission even if this involves certain financial and institutional risks? Consider the following cases:

* A legal aid group must decide whether it will begin to charge clients a modest fee in order to generate much-needed earned income (the mission statement talks about providing free legal aid).

* A church must decide whether to take a stand on abortion. Regardless of the position it takes, it risks alienating a large number of church members. Yet the minister believes that the mission of the church is to provide guidance on moral issues.

* An all-male school, responding to decreasing enrollments, has been advised by a marketing consultant to go coed. Yet the faculty and many alumni feel that the original mission to offer a quality education to young men is still valid.

* A symphony orchestra, organized to improve the quality of the musical life of its city, must decide whether to increase the number of pop concerts and decrease its regular subscription concerts of classical music. The programming change would assist the organization in meeting its payroll but, some say, would compromise the mission of the organization.

* A women's health organization, founded as a collective, must decide whether it will reorganize around more conventional management lines in order to increase efficiency and professionalism. Several of the organization's founders believe that collective management is central to the organization's mission.

Each of these examples suggests a choice between risks and compromises. The original missions of the various organizations suggest one direction, prudence and good management sense suggest another. Staying true to the original missions may be risky and expensive, yet focusing only on the relative security of organizational survival may lead to a compromise in principles. The tug between these two competing tendencies is constant in the nonprofit environment, and it becomes extreme when organizations are under pressure, when funds are scarce, and when there is lack of agreement about basic purposes.

Once again, the contrast with the public and profit sectors is striking. In the public sector, risk is measured in political terms and agencies generally have a clear idea of how far they can and should go. The authorization to operate comes from elected officials who set limits on what is permissible. To extend those limits requires political persuasion, advocacy, and in extreme cases, a change brought about by voters who put new people in office. In the profit sector, businesses are constantly faced with choices involving varying degrees of risk. But the risks are almost always measured in terms of the ultimate return or payoff. If the effect of a risky decision today is greater profitability tomorrow, then the decision may have merit.

The situation for the nonprofit organization is different because the standards of value are not stated primarily in political or financial terms. Who can decide how much it is worth to take a moral stand, perform more classical music, preserve a collective decision-making structure, or continue to provide free legal aid? Risk in each case will not lead to greater profitability. In fact, in most cases, risk will place greater financial burdens on the organization. Thus there is no single simple criterion on which to base a decision. It is a judgment call. On one side are the people who say the organization cannot afford to put itself in jeopardy; on the other side are the people who claim that a nonprofit organization that does not stay true to its ideals should not continue to operate. Indeed, as we shall see in chapter 2, it is possible for trustees who do not uphold the mission of an organization to be held legally accountable for their actions.

For all practical purposes, there is rarely a correct place to draw the line between organizational security and a public service mission. A nonprofit organization that is responsibly governed and managed finds itself debating the question continually, issue by issue, decision by decision. This is the second major challenge for a nonprofit organization -- risk/survival analysis, or the search for the proper balance between organizational extension and risk taking and organizational security. Meeting the challenge involves the willingness of the governing group:

* To engage in an ongoing planning process

* To analyze future options from both a practical and an idealistic point of view

* To debate the pros and cons of each proposed action in terms of the organization's stated mission and its long-term security

Consider the following example of an organization that successfully met this challenge.

LEGAL EDUCATION SOCIETY

The Legal Education Society has been in existence for several decades. Its mission is to provide legal assistance in a variety of ways -- legal aid to individuals who cannot afford it, legal assistance to nonprofit organizations, and scholarly contributions to advance the public's understanding of the law. The multiracial board of directors of the Legal Education Society is composed of lawyers, judges, and private citizens representing different socioeconomic groups. At present, the organization is adequately funded, has a modest endowment, and has a permanent staff of twelve people.

In 1983, the Legal Education Society hired a woman who was widely recognized as one of the brightest young lawyers in the country to be the society's executive director. She had been on the Law Review at a prestigious law school, had contributed significantly to the law literature, and had spent two years clerking for a Supreme Court justice. Her appointment was hailed as a turning point in the history of the Legal Education Society. However, it was a turning point in a way that no one had expected.

During the first four years of her tenure as executive director, the young woman pleased everyone. She added programs, secured increased funding, wrote important articles, attracted new staff (including minorities and women), and appeared to be the dynamo that everyone thought she would be when they hired her. After four years, her interest began to shift. With her growing prominence in the field, organizations throughout the country wanted to hire her as a consultant to advise them on setting up legal education programs. At first she accepted these assignments only on weekends and vacations, having received permission to do so from the board of directors. But as the demand for her consulting services grew, as her own interest in these projects increased, and as the scope of the projects demanded greater time commitments, she asked the board whether she might set up a small consulting program through the Legal Education Society, bringing the consulting contracts through the organization. The advantage, she explained, would be that the Legal Education Society could earn income and expand its influence nationally in the field of legal education.

At first, the arrangement worked well. Two large contracts during the first year netted the organization $42,000 in additional income. The Legal Education Society was cited as a leader in its field. The executive director, with the assistance of several key staff people, continued to be happy with the challenge and growth of the consulting work, but the Legal Education Society's primary constituency back home was becoming restless. The focus of the organization was changing. Individual staff members appeared to be less interested in their constituents' problems as they became more focused on the problems facing people halfway across the country. The board of directors was receiving conflicting signals. The national press and funding agencies throughout the country were praising the work of the Legal Education Society; the local constituency (individuals and organizations seeking legal assistance) was complaining about inadequate service.

On the fifth anniversary of the executive director's tenure, she proposed a major restructuring of the Legal Education Society in which the consulting business would become -- within five years -- the major activity of the organization. Her plan, brilliant in its conception, saw the organization doubling its budget and staff during that period and becoming far less reliant on grants. Legal assistance would still be provided, but it would be offered through a number of subcontracts, and the Legal Education Society would simply act as broker. One of her justifications for the plan was especially compelling. At the time, federal and state governments seemed to be placing less priority on the funding of legal aid programs and the private sector did not indicate enthusiasm about making up the difference. Realistically, there was less money available and greater competition for that money. By way of contrast, the consulting business offered a very promising financial future.

There was no doubt in the minds of those serving on the board of directors that the executive director could pull off the plan. Her ability had been proven time and time again. There was also no debate on the question of the short-term funding outlook. Simply stated, the funding picture for basic legal services looked bleak. However, the board of directors was concerned about what impact the change would have on the organization's central and original mission. Although a consulting business would ensure organizational survival and continued growth, it would also mean a major shift away from basic legal services for the poor and for nonprofit organizations. That need existed, now more than ever, and several community members of the board of directors argued passionately that the organization must return to its original purpose.

The question was debated for two months. Surveys were conducted both among constituents and national authorities. At first, the majority of trustees seemed to favor the executive director's plan. But another group stated unequivocally that it was the legal obligation of the board of directors to safeguard the organization's mission and they threatened to seek the support of the state attorney general to compel the board to reject the plan. In the end, the board of directors, in a close vote, turned down the executive director's request and called for a new plan that would return the or

---

Excerpted from Managing a Nonprofit Organization in the Twenty-First Century by Thomas Wolf
All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.