September 16, 2012

Charities Should Resist Drinking the 'Kool-Aid’ of Business Superiority

Many nonprofit leaders, donors, policy makers, and others are increasingly looking, starry-eyed, to business and markets to solve social problems.

But in so doing, they run the risk of dismissing the importance of nonprofits—and diminishing the value of organizations that seek to make a difference without the potential conflicts that come with the profit motive.

The problem is widespread, and the rhetoric seems to be everywhere, from the trade press to the mainstream media, including online and print publications that reach the most influential people in America.

While some hybrid organizations that blend social and business goals may do tremendous good, the rush to embrace the idea that for-profits can more easily combat our toughest social problems denies the reality that many crucial objectives simply cannot be accomplished while generating a financial return.

The laudable push for companies to commit more energy to dealing with social problems while pursuing profit should not obscure the need for strong independent nonprofits that focus on mission, not profit. And while nonprofits can learn from companies and companies can learn from nonprofits, it is a mistake to erase boundaries or deny differences.

Some influential leaders have gone so far as to suggest it’s time to banish the label nonprofit, arguing that it is wrong to define charities and foundations by what they are not. But now it’s more important than ever to embrace the term “nonprofit”—or not-for-profit—because in describing what they aren’t, charities and foundations fundamentally differentiate themselves from business in important ways.

After all, the distinction between an institution that reinvests surpluses in its mission and one that faces unrelenting pressure to distribute profit to shareholders is crucial. Ignoring that distinction might be helpful for pharmaceutical or oil companies that would rather people not discuss their high levels of profitability, but it’s not helpful to anyone else.

Consider higher education in the United States. Nonprofit universities frequently offer an education that costs more than what a student and her family pays—the difference made up through charitable gifts and endowment returns­—while for-profit institutions must cover their costs with tuition and create a profit margin.

The results-and the evidence from lawsuits, media reports, and congressional and GAO investigations of for-profit universities—speak for themselves.

Despite this and many other cautionary tales, an increasing number of people both inside and outside the nonprofit world seem drunk on the Kool-Aid of business superiority.

Too often people equate “business thinking” with effectiveness. You would think, after the global financial problems we have witnessed in the past several years, that the word “business” would not be used as a synonym for “effective.”

Alexis Ohanian, co-founder of Reddit, takes that approach when he writes on the Wired Web site, “Let’s be real: The nonprofit model is broken.

The 20th-century way of guilting people into giving to an opaque, inefficient organization with massive overhead is no longer a viable model. The good news is that a better way of unleashing the charitable spirit in us all is being pioneered by"—you guessed it—him.He cites as evidence of the superiority of his model the fact that his organization, Breadpig, has raised $190,000. (No, I did not forget a zero.)

Sadly, the kind of ignorance spouted by Mr. Ohanian is typically accepted without challenge. Even those inside the world of nonprofits and philanthropy have internalized the idea that operating “like a business” means operating effectively (never asking, which business: BP? Enron?).

In a Wall Street Journal article that was featured on the cover of a special section on philanthropy, Charles Bronfman and Jeffrey Solomon argue “that to have a sustained and strategic impact, philanthropy must be conducted like business—with discipline, strategy, and a strong focus on outcomes.” But since when is “strategy”—derived from the Greek word for “army”—the sole province of business?

The stereotypes of nonprofits are just that, stereotypes. As Peter Fader, a University of Pennsylvania professor and director of the Wharton Customer Analytics Initiative, observed: Nonprofits often excel at using “their data to better understand their 'customer base. In this area, big companies with lots of resources really can learn from their cash-strapped nonprofit cousins."

The point is this: No type of organization—government, business, or nonprofit—has a monopoly on strategy or effectiveness.

Yet many prominent thinkers insist or imply that nonprofits are increasingly irrelevant because companies will solve our most vexing social problems.

Forbes asks in an apparently serious headline that might as well have come from The Onion, “Can Venture Capital Save the World?” Leslie Crutchfield, John Kania, and Mark Kramer assert in their book Do More Than Give that “an ever-growing set of social entrepreneurs are choosing for-profit business models as the best way to make a social impact.”

And in an influential 2006 article in the Harvard Business Review, Mr. Kramer and Michael Porter declare, “When a well-run business applies its vast resources, expertise, and management talent to problems that it understands and in which it has a stake, it can have a greater impact on social good than any other institution or philanthropic organization.”

But those who argue that business will solve our social problems come armed with assertions and anecdotes masquerading as research but little in the way of convincing evidence.

I find it increasingly difficult to distinguish between the kind of hype you’d expect from the Chamber of Commerce (and others interested in keeping regulators at bay) and the published articles of business-school professors.

Look, I am a huge believer in free-market capitalism. I have an M.B.A. and have worked as a consultant to corporations. But I think we’re better off being sober about what markets can and cannot accomplish.

Yes, many companies have powerfully promoted the social good—sometimes working collaboratively with nonprofits, grant makers, and government—especially when doing so increases profits.

But corporate self-interest frequently runs counter to the public good (and it is often the role of nonprofits to point it out when it does). This obvious reality seems to have been lost.

We seem afraid to push back, to discuss the limits of markets.

As Michael Sandel argues in an Atlantic article based on his new book, What Money Can’t Buy: The Moral Limits of Markets: “We live in a time when almost everything can be bought and sold. Over the past three decades, markets—and market values—have come to govern our lives as never before. To contend with this condition, we need to have a public debate about where markets belong—and where they don’t.”

That debate isn’t happening. Instead, many people in the nonprofit world are silent while companies are heralded as the solvers of all our society’s problems.

If nonprofits are to continue attracting the talent and support needed to pursue our missions, we must champion the distinct role and relevance of charities and foundations.

We need to cite not just the obvious historical and contemporary examples of nonprofit influence and impact but also the present-day examples that are lesser known—such as the work of the Institute for Healthcare Improvement, a nonprofit whose 18-month campaign to reduce hospital mortality rates has saved an estimated 122,300 lives by inspiring and guiding hospital executives, physicians, and nurses to adopt six basic patient-safety practices.

And we need to keep pushing nonprofits to get better results. While there are many terrific nonprofits, there are also too many ineffective ones, just as there are too many mediocre companies and unwieldy government agencies.

Given the importance of nonprofits’ work, how tiny our assets are compared with business and government, the enormous scale and complexity of the problems we seek to solve, and the ways we are increasingly overlooked in public discourse, we can afford to tolerate ineffectiveness least of all.

Phil Buchanan is president of the Center for Effective Philanthropy. This piece is adapted from a series of blog posts he wrote that are available on his organization’s Web site, effectivephilanthopy.org.