Balancing the Mission Checkbook

Eight years ago, ACORN, a national grassroots community organizing nonprofit, was the victim of an embezzlement of almost $1 million from an employee who was the brother of the organization’s founder. The fraud was never reported to their board of directors or legal authorities, but a small internal group negotiated a restitution agreement and then kept the perpetrator on staff. The situation just became public after pressure from a whistle-blower and was reported this week in The New York Times. Quoted in the article, ACORN’s president said, “We thought it best at the time to protect the organization, as well as to get the funds back into the organization, to deal with it in-house.”

Can we make a list of the problems with this scenario? Among other reactions, I want to thank the whistle-blower, though I would like to know why it took eight years for anyone to think this was not OK. Yesterday, ACORN released a statement from the president apologizing for their handling of the situation and announcing that the founder (brother of the embezzler) had stepped down. The most alarming phrase in the statement is that “The ACORN Board recently learned …” How comfortable would you be if you sat on that board – with fiduciary responsibility – and learned that you had been sitting for years on this ethical powder keg?

The statement says, “We want to assure our many friends and supporters that ACORN’s Board has taken additional steps to ensure increased transparency and accountability” (emphasis mine). It seems to me that they need to start with basic transparency and accountability. They can start with a basic accountability overview from Independent Sector.

There is a lesson here for every nonprofit organization. Public trust really is the most important asset for each individual nonprofit and for the whole sector. It’s too easy to mess it up, which is why we all get asked to answer questions and fill out forms and certifications by donors, foundations, the IRS, state Attorney General, etc, etc, etc. As long as these kind of egregious situations occur, and especially when they are mishandled, nonprofits will be subject to deeper scrutiny and misgivings about trustworthiness.

This week has brought an interesting alignment in the discussion, or debate, about the future of philanthropy. Last Sunday, the magazine section of The New York Times was all about “Giving it Away” and trends in philanthropy. One particular article, “For Good, Measure” discusses a current hot topic: “Foundations are increasingly using “metrics” to determine if their grants are working. But can you really measure the return-on-investment of giving to a cause?” The article is one of many that I’ve read on this theme of trying to quantify impact, and it’s direct cost and value. An interesting article and we could debate many of the points. I really paid attention, though when, in a single day this week, two business leaders in Minneapolis asked me if I had read the article. They were impressed and very interested. That was a sign to me that this is moving from the conferences and into daily reality. On the heels of this article, Nonprofit Quarterly offered a preview of a new book, Just Another Emperor: the Myths and Realities of Philanthrocapitalism, by author Mike Edwards, opening with: “A new movement is afoot that promises to save the world by revolutionizing philanthropy, making non-profit organizations operate like business, and creating new markets for goods and services that benefit society. Nick-named ‘philanthrocapitalism’ for short, its supporters believe that business principles can be successfully combined with the search for social transformation.” Edwards makes a strong argument that this movement is the wrong direction for several reasons, chiefly that social transformation is an entirely different “product” than producing goods and services. The preview sparked a lively response in blogs and on NPQ’s Forum from leaders in the sector. There is an air of “think tank” to this for me, though. We can have a healthy, and undoubtedly lengthy, debate on theory, myth, and reality. Most of the nonprofit organizations that we work with every day are not immediately affected by this trend, if that’s what it is. Most charitable dollars are still received from individuals or from traditional grantmaking practices. For “service-providing” nonprofits, delivering the essential social services, health care, and education needed in the community, public dollars dominate and are unlikely to take a radical turn towards long-term “investment.” The growing awareness of philanthrocapitalism in the business world will require an equal awareness and response from nonprofits. If you think this debate can be ignored and relegated to the think tankers, I’d suggest that the discussion is important for us all to pay close attention to. Remember that there was a time decades ago that the basic structure of grantmaking was created. You wouldn’t want to be caught napping if the world that you know really changes. This topic relates to my post last week, which generated a comment recommending the book Good to Great and the Social Sectors by Jim Collins. Edwards also notes this short (35 pages) and valuable book - add it to your must read list.

I’ve been mulling the question of what makes a nonprofit organization distinctly different from a for-profit business. Thinking about this is percolating because of an article in The New York Times about a week ago, A Capitalist Jolt for Charity, about the nonprofit In2Books, the related for-profit business ePals, Inc, and the enthusiasm of venture capital entrepreneurs to use their money and talents to do good. According to the article, by morphing the nonprofit into a for-profit with access to angel capital and business practices, the combined organization is better than it could have been as a single nonprofit. They are “making use of some of capitalism’s virtues.” Really? I’m all for any trend that gets smart people from business, and their capital, focused on doing good work, but I am put off by the implication that (a) “regular” nonprofits don’t employ growth strategies already, and (b) there is not a real difference between a for-profit business and a nonprofit, as long as the business owners are working towards a community good.

Some of the phrases used in the Times article include “encourage more nonprofits to become self-sustaining” and “make the market work for social goals.” The terms revenue, profit, earned income, investment, and entrepreneur are bandied about as if they have a clear, singular definition that is unique to this topic. This muddy and imprecise use of business terms applied to nonprofit organizations (as if we hadn’t thought about these before) contributes to the confusion.

First of all, I can think of numerous nonprofits (including Nonprofits Assistance Fund) that have demonstrated smart growth, good business and financial practices, and important community impact. Would we have done better work if we had been a for-profit instead? The bigger issue to me is the essence question – what makes a nonprofit different? Is it just tax status, or is there a more essential distinction? I would love to participate in a broad discussion about this, starting with two fundamentals.

1. Business model differences – nonprofits almost always require some form and amount of subsidy to make the income, expense, and asset model work. Subsidy can take the form of direct financial contributions or grants to pay for some or all expenses, but volunteers, donated inventory and services, sponsorships, and low cost or free physical and financial capital are also forms of subsidy. In the case of ePals, described in the Times article, Intel is including the ePals icon on the Classmate laptop computers. This is a type of subsidy, since a traditional business partner would surely have to pay for this access. I also think that the investors who are willing to purchase shares in a social business without expectation of a market rate return on investment are effectively providing another form of subsidy. All this leads me to suggest that the idea that business practices will help nonprofits become “self-sustaining” and “make the market work” is trickier than it looks on a spreadsheet.

2. Structural differences – nonprofits and for-profit businesses have very different sources of accountability. The shareholders of a business can certainly decide to have a social mission. But the board of directors of ePals, Inc, even with its social mission and good intentions, has the option of changing their mind at a later date and reorganizing to return maximum profit. A nonprofit organization is accountable to the mission and community forever. The workings of boards of directors and staff can certainly be messy, confusing, and inefficient, but the measure will always be a true double bottom line, as it always has been.

What do you think – does this hit a nerve for you, or do you think I’m way off base?

Continuing on this theme, how effective are nonprofits at making the case for unrestricted support? Rather than bemoaning the lack of unrestricted funds, what can we learn? An article in last Sunday’s New York Times, “Here’s My Check, Spend It All At Once”, connects the current financial challenges at the American Red Cross to their Donor Direct policy established in response to the fallout about the use of funds donated after the September 11 attacks. When the Red Cross commits to direct all of your donated funds wherever you choose, what donor wouldn’t take the opportunity to be the master of their own philanthropy? The long-term results, though, may be the kind of deficits that the American Red Cross is facing. Was the Donor Direct policy an extreme reaction – did the Red Cross go too far as a reaction to a communications and PR problem?Following the references in the Times article, I compared the online fundraising messages of the American Red Cross and of Doctors Without Borders. The choice of how to direct donations is the first question for a donor at the American Red Cross. While the option “Where the Need is Greatest” is the first choice offered, specific funds are immediately listed below. The FAQ section even offers more options:

I don’t see the fund that I wanted to donate to. What do I do?
Due to space limitations, we are limited in how many funds we can make available for online donations. If you would like to donate to a fund that is not listed, please contact Donor Services.

Contrast this with the Doctors Without Borders website, which provides a concise summary of how funding is used to carry out their programs. Note that the information doesn’t offer the donor a choice to designate their funds to a specific use. In the FAQ section, in fact, Doctors Without Borders makes the case for unrestricted gifts:

Can I earmark my donation for a certain area/project?
We appreciate your interest in supporting our programs. While it is possible to have your gift directed toward a specific program or country where we are currently working, we ask that you contribute unrestricted funding. By not restricting your contribution for a specific emergency or project, you will enable us to allocate our resources more efficiently and where the needs are greatest.

All of these appeals and messages rely on trust, of course, and donor trust is what the American Red Cross must rebuild. Every nonprofit should care about this, because the public’s perception and confidence in the Red Cross is a good indicator of confidence in all nonprofits.

I find it interesting that I’ve read and heard quite a lot lately about foundation leaders discussing the relative merits and challenges of moving some of their grantmaking from program and project grants to general operating support. The New York Times recently published a re-framing piece on this by Denise Caruso, “Can Foundations Take the Long View Again?” The members of GEO (Grantmakers for Effective Organizations) have been engaged in a long discussion and analysis on this topic. They have published several thoughtful guides (free registration is required to view them). What I don’t think I’ve heard is a comparable discussion from nonprofit leaders about how much impact and long-term value their clients and communities would gain from more general operating support. If you are the director of a nonprofit, you may think that is an obvious statement – but I don’t think that connection is made very well. There are several issues involved, including different terminology and understanding of budgets.

What is a general operating grant? Is it a grant to pay for overhead expenses, or is it funding to provide comprehensive support for the organization’s mission and activities? Too frequently, the term is used as in this excerpt from an article, “General operating money is certainly one of the more difficult categories of funding to secure, mostly because it’s a lot less appealing to the funder. Let’s face it, paying rent is not nearly as sexy as helping people fulfill their potential as human beings.” STOP saying that. This is the kind of thinking and woe-is-me mentality that can’t make the case for general operating support. There is an implicit choice in this article: We have $10,000. Should we spend it on rent, or should we spend it to help people fulfill their potential as human beings? How about this instead: Let’s spend it on rent, salaries, benefits, supplies, and phones to operate our effective, innovative programs that help people fulfill their potential.

Do we need some new terminology to cut through this mess?

• General Operating Grant: Apparently, this is a grant to pay for distracting, hard to justify, and uninteresting expenses (like rent and phones).

• Program Grant: A grant that is restricted for a defined set of activities and outcomes that fit with the organization’s mission. All expenses included in the program budget, including salaries, rent, and supplies, are needed to carry out the program’s goals.

• Core Mission Grant: A grant provided to an effective organization to use as their leaders direct in order to support and achieve their mission. Some of the funds may be spent on immediate program and organizational needs and some on long-term investments, such as program development, staff training, and technology.

According to Caruso’s article, “The majority of foundation leaders polled in the studies acknowledged that unrestricted operating funds were better and more effective for grantees. But they continue to focus their grantmaking on project support, they said, because they prefer its clear-cut results.” Flexibility is the key value of core, or operating, support. Think about how you can make the case that flexibility will enable your nonprofit to be more responsive to community, better prepared for the future, and more effective in all of your programs and activities - that’s results.

My last post of 2007 is a few suggestions and recommendations for your leisure time review.

Tucked in the Business section of the Saturday, December 22, 2007 New York Times was a wonderful story, Emerald City of Giving Does Exist, about the Twin Cities’ enviable amount of corporate philanthropy and commitment. I hope you don’t miss this in the flurry of the holidays. We may wish there was even more to go around, but we are the envy of many nonprofit leaders in other cities, and I thank the business community for that.I have three books to suggest. First, I recommend that everyone interested in developing great boards read Governance as Leadership: Reframing the Work of Nonprofit Boards by Richard Chait, William Ryan, and Barbara Taylor. This book, published in 2005 by BoardSource, starts with the premise that many boards do not really have a problem of performance, they have a problem of purpose. The book will open your eyes and mind to a new way of thinking about board roles and leadership.

The two other books were published in 2007 and offer interesting ideas and thinking on important nonprofit management topics. I’m still reading both of them, so my reviews will wait for another time. Forces for Good: The Six Practices of High Impact Nonprofits by Leslie Crutchfield and Heather McLeod Grant offers an analysis of twelve organizations that the authors selected based on their impact, reputation, and scale. One important finding was that the high impact nonprofits achieved this impact not only through their direct services, but also by deliberately rallying others to the bigger cause through networks.

ROI For Nonprofits: The New Key to Sustainability by Tom Ralser (published by Wiley) offers a detailed study of how to translate the work of nonprofits into the increasingly important frame of venture capital and business. Whatever your personal opinion of this trend, it is here now and it’s worth your while to understand it.

Finally, a few favorite blogs to read next year:

• Mission-Based Management: Smart, interesting, and useful management perspective
• Gift Hub: Incredibly timely and interesting references, links, and thoughts on philanthropy
• Stanford Social Innovation Review: In-depth analysis and ideas, requires some time to read and consider.
• Nonprofit Technology Blog: Even if you’re not a tech person, we all need to pay attention to trends and new uses.
• Nonprofit Accounting Boot Camp: How can I resist a regular blog about nonprofit accounting issues?
• Give & Take from The Chronicle of Philanthropy: The editors read all the blogs and compile interesting posts in one place – a timesaver.

Cheers, and Happy New Year to you all!