Balancing the Mission Checkbook

Wow, I was sure that something terrible had been discovered when I read these newsfeed headlines earlier this month:

• Social Enterprises Linked to Poor Performance in Nonprofits (Nonprofit Quarterly)
• Study Questions Efficiency of Charity Business Activities (Chronicle of Philanthropy)
• Report Faults Nonprofits on Service (Wall Street Journal)

Looking for the scandal, I read the stories and then read the report behind them. Nothing terrible happened, but a hot button certainly was pushed. I wonder what it is about social enterprise or other earned income ventures at nonprofits that engender such a strong overreaction.

Here’s a summary: Rebecca Tekula, PhD, from Pace University released a research study, Social Enterprise: Innovation or Mission Distraction? The study reviewed IRS 990 data for large human service nonprofits in New York with analysis of the correlation between unrelated business income, program expense ratio, and the asset to liability ratio. Based on the data and analysis, Dr. Tekula concludes that there are negative relationships between social enterprise activities and value of programmatic output as well as between social enterprise activities and financial distress.

The report, and subsequent coverage, raise some big questions for me.

My first concerns are with the data used in the report, which are premised on some assumptions and definitions. Social enterprise activity is represented by unrelated business income, which is a small component of earned income activities at nonprofits. Programmatic output is represented by the program expense ratio, notorious for being inconsistently reported. Financial distress is measured by the asset to liability ratio, which is a better measure of the nonprofit’s need for and use of leverage and commonly needed for any real estate asset.

I also take issue with the conclusions in the report. They are based purely on the statistical analysis, which Dr. Tekula acknowledges. Research reports are always built on a hypothesis and methodology. However, I think that her conclusions are overly broad. The press release about the report summarizes:

In other words, as income from side businesses went up, the share of a contributed dollar that went to actual services went down. Why? Tekula speculates that many organizations with unrelated businesses were not really investing profits in their mission-related services. Instead, profits were reinvested in the business, and losses were subsidized with funds that might have gone to clients.

There is no evidence at all, though, that the nonprofits included in the study were providing substandard or ineffective services to clients.  And there was no data included to indicate that the business operate at a loss.  So speculating that “losses were subsidized with funds that might have gone to clients” is a pretty big jump from statistical correlation based on a narrowly defined ratio.

I have an even bigger question about the sensational tone of the headlines listed above. The heading for the press release from Pace University was Study Finds Nonprofits May Bleed Their Services by Trying to Earn Money. The editors at the Nonprofit Quarterly, Social Enterprises Linked to Poor Performance in Nonprofits, and Chronicle of Philanthropy, Study Questions Efficiency of Charity Business Activities, really went for the bait with this one. There is nothing in the report data or conclusions that support the notion that the nonprofits included in the data are bleeding their services, performing poorly, or are inefficient.

What is it about social enterprise that invites this response?