On the Businessification of Nonprofits

There has been chatter for decades about making the nonprofit sector more like the for-profit sector. But that chatter has increased in recent years as the idea of social entrepreneurship has spread in the for-profit sector, blurring the lines between organizations that exist for societal goodwill and those that exist to quest for the almighty dollar.

As the concept of social entrepreneurship pushes for-profit entities to be more charitable, what about the opposite side of the coin? Is it good for the nonprofit sector to be more like its for-profit counterpart?

GrantStation recently had the pleasure of screening the movie UnCharitable in partnership with the Nonprofit Collective Foundation and The Nonprofit Cooperative. Spawned from a TED Talk by Dan Pallota, which also led to a book of the same name, the movie looks at the concept of overhead in the nonprofit sector and advocates that high overhead isn't necessarily a bad thing.

The movie also makes a powerful point that nonprofits have difficulty trying to match the wages offered in the for-profit sector (though the film does seem most focused on those already at the top of the pay scale, such as CEOs). But how to bring more parity to this pay gap? As the movie and others in the field have argued, the solution may be to make the nonprofit sector more like the sector with which it is competing. (For example, diversification of revenue instead of a reliance on grants and donations, devising a plan for scaling up the organization, or viewing donors more like customers.)

But I keep circling back to a central contradiction at the heart of this argument: The charitable sector exists partially because of the failures of our capitalist, free-market system. And now certain folks want capitalism to transform the charitable sector.

The work of the nonprofit sector has long been supplemented by government social welfare programs. But the push to maximize profits for businesses and earnings for certain parts of the population, particularly high-wealth individuals, has resulted in tax cuts and decreased government programs over the last 50 years.

After the rise of certain government social programs—such as food stamps and the Comprehensive Employment and Training Act—in the mid-60s through the start of the 1980s, the Reagan administration brought social welfare cuts of $22 billion in 1981 and 1982. These cuts, coupled with a policy of decreased taxation (dubbed "supply-side economics," "trickle-down economics," or even "voodoo economics," depending on who's doing the talking), resulted in a government that was unwilling and somewhat unable to help folks in need. In the wake of Reagan, the stigma around government welfare continued, as Bill Clinton claimed that he had "a plan to end welfare as we know it" and "to break the cycle of welfare dependency."

With less government aid, nonprofits are left with more work to do to help those in need. And depending on the organization's mission, the makeup of who needs help has also changed.

Much has been written about the decline of the American middle class. (Pew Research Center has a nice breakdown of changes over the last five decades.) The widening gap between the haves and have-nots is partially perpetuated by tax policy. In early May, data was released showing that America's richest billionaires are now, for the first time, paying a lower percentage in taxes than the working class. Corporate policy also plays a role in pay gaps, as we've seen CEO pay balloon astronomically. (From 1978 to 2021, pay for the top 350 CEOs in the U.S. jumped 1,460%, compared with an increase of 18.1% for the typical worker.)

Unfortunately, there has always been a group at the bottom of the economic ladder that has needed assistance. But as the middle class and working class struggle, nonprofits find themselves with yet another group that needs support. (Costs of housing, education, and other needs have increased at a much faster rate than wages.) And there is another interesting twist: With even more money at the top, how is donation behavior affected? Hence why we are hearing more and more about megadonors. The folks at the top of the earnings ladder now have more power over the charitable sector than ever.

Let's take a moment to look at the nonprofit sector's influence on businesses. Corporations often partake in corporate philanthropy, giving a portion of their earnings back to their communities. In addition, some corporations may partake in DEI and ESG initiatives (diversity, equity, and inclusion and environmental, social, and governance, respectively). While these types of efforts may have a bit of altruism at their roots, they have been shown to be good for business, whether that be through a boost in reputation or better employee engagement.

So if charity can be good for business, can business be good for charity? Social enterprises fall somewhere in that middle ground. A social enterprise is defined as a business with social objectives. For a couple high-profile examples, think of TOMS Shoes, which sells shoes but also donates them to children in need. Or Warby Parker, an eyewear company which donates glasses to the needy.

While the idea of social enterprises has been around since the late 1970s, according to Loyola University Chicago's Supply Chain and Sustainability Center, the desire for social enterprises has increased in the wake of the COVID pandemic and the death of George Floyd. It is good that we are focusing more on social outcomes. But social enterprises still flip the nonprofit model on its head: They are a business using profits to do good; the business is still the primary aspect. Whereas nonprofits are set up to do good, with funding as the secondary concern.

The folks pushing for the businessification of charity want to flip it more in the direction of social enterprises. The classic business adage of "You gotta spend money to make money!" morphs into "You gotta spend more on fundraising to raise more funds!" Which does have a sort of logic to it. But scaling up in that way isn't an easy task. Where does the money come from initially?

Nonprofits are currently behind the eight ball when it comes to employee compensation. We've previously mentioned overhead, and donors like to see that number low. Increased salaries increase overhead, which may then decrease donations. A recent survey in Minnesota pointed out the public's weird view on nonprofit pay. While 42% of respondents said that employees in the charitable sector should be paid comparable to the for-profit sector, 34% said that they should be paid less but enough to earn a living, while another 14% thought they should just be paid a basic stipend. So a plurality of respondents thinks nonprofit work doesn't deserve equal pay. And this belief structure definitely affects donation behavior.

UnCharitable and advocates who focus on fundraising seem to go by a Field of Dreams sort of idea: "If you build it, they will come." If you bulk up your fundraising department, you will then raise more funds that can pay for the department as well as the entity's other endeavors. By offering competitive salaries, nonprofits can hire quality employees away from the for-profit sector, which will then strengthen the organization.

Again, this idea makes sense on the surface. But it also creates several issues. The first is a sort of veneration of industry, the idea that the nonprofit sector can only be saved by folks from outside the sector. The second is what I like to think of as the "passion gap." While I do believe that folks in the charitable sector should be paid comparable to folks outside of the sector, there is currently a strength in the fact that the people already there are generally there because of a real commitment to their organizations' goals. When the situation becomes merely a battle for competitive salary, some of that commitment and passion for the work might be lost.

But the answer isn't just to keep wages low as a sort of passion means-test. Instead of investing in outsiders, nonprofits can reach for capacity-building grants to train their existing staff. This can be time-consuming. And if the team is being trained on fundraising, there is a delayed reward that you would need to have your team onboard with. We're going to start this process now, and after we've raised funds, we can explore raising compensation. But the process could leave you with a team that is both impassioned and ready to strengthen the organization.

Another big issue is messaging. We can say that overhead isn't the demon it's been made out to be. But that doesn't solve the problem of public perception. Again, seeking capacity-building support helps your organization acquire funding to work on a messaging campaign in part with your fundraising. Being transparent with your potential donors about why your money is being spent the way it is can help you overcome immediate negative perceptions folks have about any funds that don't go straight to programs.

When someone is trying to sell you on something, it's fair to take a moment to ask why. The nonprofit sector has its troubles and struggles. And if the answer was easy, we'd have solved those issues by now. And while innovation is needed and welcome, we need to be careful that the changes we bring in don't alter the very soul of our organizations and what we are trying to accomplish.