The Corporate/Nonprofit Identity Swap

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Cartoon Drawing of Two Men

Should nonprofit organizations spend less time helping orphans and more time balancing their budgets? Should you support businesses that donate their profits to charity? If you want to help a good cause, do you need to know how to read a pie chart? Can $10 loans improve lives for the long term? The answers to these questions may be less obvious than they seem.

The roles of nonprofit organizations and for-profit companies are shifting and overlapping in new ways that challenge traditional ways of thinking about the function of each in society. As communication technology has made people more aware of the inequalities, injustices, and suffering taking place in other parts of the world, people have taken to forming and expanding more organizations dedicated to ameliorating both domestic and international problems.

These nonprofit organizations are being expected to demonstrate results, meaning that adopting business-like efficiency is becoming more important. At the same time, businesses are increasingly treading on traditionally nonprofit territory. Today, more for-profits engage in campaigns for world needs and in what’s been called corporate social responsibility, social innovation, or social enterprise – in short, using their resources to better the communities in which they work, adopting ethical work practices, and joining in an effort to address global problems.

The more you ponder the increasing overlap between business and nonprofits, the more questions arise that affect us as Christians and as citizens in an increasingly global society. For example, who is best equipped to solve global problems concerning health, poverty, and the environment? What is being compromised or gained when nonprofits and for-profits make use of each other’s tactics and causes? And what might we as Christians support, or question, about the shifts taking place?

BECOMING MORE BUSINESS-LIKE

Nonprofit organizations are changing. And we should care.

Christians have long been associated with nonprofit organizations of all kinds. Many service, aid, religious, and cause- based organizations are nonprofits. So is Point Loma Nazarene University. Point Loma alumni found, work at, volunteer with, and give to nonprofits. Just in recent issues of the Viewpoint, we have highlighted alumni and students working with organizations as diverse as Heart to Heart International, Floresta, Fight2Walk, Healing Waters, Towel & Basin, Restore International, and World Vision. And Point Loma students, in addition to volunteering and interning with nonprofits, are learning in classes about the changes facing this so-called “third sector” – the other sectors being the public sector (government) and corporate sector (for-profits).

Enron, Tyco, WorldCom – recent corporate scandals are burned into public memory, and they haven’t affected business alone. Problems with the Red Cross 9/11 fund, United Way, and other nonprofits have also garnered media attention and drawn criticism from donors who feel betrayed. According to Newsweek, “A poll by Harris Interactive released this summer found only one in 10 Americans strongly believes charities are ‘honest and ethical’ in their use of donated funds.”

Corporate and nonprofit scandals have undermined the public trust of charitable organizations at a time when these same organizations are facing new challenges in obtaining funding.

According to the 2007 charity almanac, there were 1.4 million nonprofits registered with the IRS in 2004.

“The growth in the nonprofit sector has led to increased competition for limited funds from donors, foundations, and the government,” explained Rob Gailey, director of PLNU’s Armenian Center for International Development.

Because there is a limited pool of “free money” (in the form of donations and grants) from which nonprofits seek to draw, Gailey says the increased competition has led to a greater “commercialization” of nonprofits. Grant makers – usually foundations or government bodies – now often ask for nonprofit grant seekers to demonstrate that the projects for which they want funding are effective and sustainable. Having a good cause isn’t enough; a good plan and good results are required, too. Increasingly, donors are asking nonprofits for business plans that show long-term sustainability projections that are meant to either supplement or replace traditional project proposals, which were time-specific and implied a cessation of services when funding was complete.

“There is the expectation that nonprofit grant seekers have in place plans for sophisticated evaluation of whether proposed programs are meeting their stated objectives,” Gailey explained. “More grant makers are expecting quantitative analysis to be provided either before a grant is made or during the funding period. Qualitative measures are also expected to be more sophisticated.”

PLNU’s vice president for External Relations, Dr. Joe Watkins, agrees and sees the issue as fundamentally related to stewardship – both on the part of the organizations and the donors.

“It is an act of stewardship to find out who reports results well and can document those results. Such stewardship creates sustainability for the organization and the recipient of the services,” Watkins said.

The expectations of grant makers mean that nonprofit organizations seeking funding have a need for professionals with business knowledge to help them craft their action plans and grant proposals, as well as to appropriately gauge their effectiveness.

In addition, the competition for limited funds has inspired some nonprofits to seek other means of raising money for their operations. For example, the San Diego Humane Society operates an antique store, the proceeds of which help to fund the organization’s programs for animals. The traditional booster club bake sale is another example of an enterprise strategy for generating revenues by a nonprofit.

As more nonprofits turn to commercial revenue-raising tactics instead of relying solely on donor gifts and grants, experts like George Dillon and Matthew Wilkins of Guidestar, are calling for nonprofits to act more like the businesses whose models they emulate.This often entails hiring professionals with business expertise in areas like marketing, sales, accounting, and human resources, in addition to employing traditional program and development people.

“With the pervading misconception that nonprofits cannot make a profit, most tax-exempt organizations do not take full advantage of permitted ‘for-profit’ and capital acquisition opportunities in order to accomplish their missions. Not-for-profit, or nonprofit, is not synonymous with unprofitable. In fact, the term is not only a misnomer but has impeded many nonprofits from succeeding in their missions and being good stewards of the resources entrusted to them by donors,” write Dillon and Wilkins.

Gailey, like many nonprofit leaders, believes that becoming more business-like in terms of being more sustainable, more closely focused on monitoring and evaluation, and more accountable to the general public is a positive thing for nonprofit organizations. Christians have traditionally valued a strong work ethic and the pursuit of excellence. While some critics worry that engaging in business practices may make nonprofits less mission-focused, Gailey says most nonprofits view commercial undertakings as enabling them to raise more funds and help more people or causes.

TRANSPARENCY AND TRUST

Being more business-like may mean that nonprofits submit to greater regulation by the IRS and provide greater financial accountability and transparency. Taking these steps has the potential to soothe public worries about scandals and ethics, bolstering donations, support, and trust. It’s also appealing to Christian organizations that take seriously the biblical call to be good stewards, challenging them to assess their efforts and make decisions more carefully. In addition, when Christian donors have access to information about how nonprofit organizations use their funds, they are empowered to make better stewardship choices with what they have been entrusted.

More transparency and better stewardship on the part of nonprofits and donors may help the image of the entire sector, since even a few high-profile cases can damage public perception.

Newsweek’s Jane Bryant Quinn writes, “In a skeptical age, charities need to prove they’re using money well. I’d bet that the more they tell, the more they’ll find people eager to help.”

Of course, there are some challenges inherent in greater transparency. For example, some donors may take issue with overhead costs that nonprofits have when operating more professionally and commercially – even if those costs are important in helping serve the cause. Not all donors will understand the relationship between administrative costs and mission-oriented results and may question why all funds are not directed into program services. It is important for nonprofit supporters to understand why nonprofits must spend money on marketing, human resources, and program evaluation, and to accept that these are valid uses of nonprofit generated funds. In short, greater transparency, without greater donor education, may lead to greater mistrust for some donors.

A REASONABLE RESPONSE

Nonprofit organizations have always played an important role in society, and Christians have traditionally played a significant role in nonprofits. As charities act to address global and local concerns and face increased competition and scrutiny, Christians can continue to support worthwhile organizations with their time, finances, commitment to ethics, and, perhaps, even their business savvy. Rather than criticizing the adoption of some for-profit strategies by nonprofits, we might best be served by approaching good causes in a manner that considers effectiveness, sustainability, and accountability, as well as heart and good intentions.

BECOMING MORE CHARITABLE

For awhile, the trendy new cell phone color was pink. But Bono, lead singer of U2, hopes it will soon be red.

Bono’s new campaign, buy (RED), is hoping that enticing consumers to purchase red phones, iPods, Gap jeans, Converse shoes, and other products will help to battle the AIDS crisis in Africa. How? A portion of each (RED) purchase goes to the cause. It may seem a bit paradoxical that Western consumerism is the impetus for fighting a disease ravaging the poor overseas, but (RED) is only part of a growing trend of business dabbling in social causes.

Bono makes the argument that since people are going to be buying products like cell phones and jeans anyway, some of the profits might as well be used to save lives. The (RED) campaign Web site asserts that “up to 50 percent” of the proceeds from (RED) products are donated to the Global Fund, which works to fight AIDS, malaria, and tuberculosis. The money from (RED) products is used to buy anti- retroviral drugs for mothers and children with AIDS in Africa. In a note on the Web site, Bono acknowledges that this kind of campaign isn’t a total solution, and he intends it to partner with his poverty-fighting campaign, ONE.

“Where ONE takes on the bigger, longer-term beast of changing policy and influencing government, (RED) is, I guess, about a more instant kind of gratification,” he writes.

The (RED) campaign is expressive of a growing public interest in corporate social responsibility (CSR). According to the World Business Council for Sustainable Development, “Corporate social responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.”

THE UPSURGE IN CAUSE-RELATED MARKETING

Despite a public interest in CSR, some are skeptical of the (RED) campaign and other cause-related marketing approaches. Recently, a group critical of the idea of shopping as a solution started a rival BUY (LESS) Give More campaign, urging people to give directly to charities like Global Fund rather than buying (RED) products. They cite numbers like those recently reported in Advertising Age, which estimated that the (RED) campaign has spent approximately $100 million on marketing but raised only $18 million for Global Fund. (RED) representatives say that those numbers are inaccurate, arguing that marketing costs are valued at less than $50 million compared to $25 million raised for Global Fund. Either way, groups like BUY (LESS) point out that since the money spent on marketing exceeds the amount of money raised, campaigns like (RED) may be better at increasing awareness and profits than saving lives.

Cause-related marketing is one approach to combining business endeavors with charity. Besides (RED), other examples include products marked with pink ribbons for breast cancer research, credit cards affiliated with charities, and corporate foundations like Ronald McDonald House and Target Foundation.

Businesses have much to gain from associating with charities – market differentiation, consumer loyalty, new customer acquisition, and support from shareholders and the community. A 2004 Cone Corporate Citizenship Study found 86 percent of respondents would switch to a brand associated with a charitable cause if it was similar in price and quality.

The charities also have something to gain: attention. Additionally, some cause-related marketing plans offer branding expertise and big ad budgets to nonprofits that may not have these things on their own.

The downside is that, like some nonprofit budgets, cause-related products are not very transparent, meaning it isn’t easy to tell how much of the money you’ve spent actually goes to the cause you’re hoping to support. In addition, it’s often difficult to determine if the charity is only receiving a preset maximum amount or if they will receive a percentage of the total increase in the

company’s revenue. As the BUY (LESS) team points out, in most cases, you can’t compare how much is spent on marketing to how much is raised for the given cause. It’s not that the intention is bad, just that the effectiveness is shrouded. For this reason, some people argue that making cause-related purchases is more about the consumer feeling good than enacting significant change.

MICROFINANCE AND SOCIAL ENTERPRISE

Cause-related marketing isn’t the only way businesses are getting involved with social issues. More and more businesses are being created with a mission to make a difference rather than a dollar.They aren’t nonprofits, but – to borrow PLNU’s Fermanian School of Business tagline – they are focused on “more than the bottom line.” PLNU professors teach both undergraduate and MBA students how to use business to help with international development. It’s a model that is becoming more accepted globally.

Microfinance is one example of this trend. Muhammad Yunus, the Bangladeshi founder of the Grameen Bank, won the 2006 Nobel Peace Prize for his microfinance work, giving small loans to very poor people – especially women. Yunus has had great success making small loans through the Grameen Bank – some for just $10-$20 – to poverty-stricken Bangladeshis. As of January 2007, Grameen had 6.95 million members, 97 percent women. One recent internal report found that 64 percent of Grameen members had crossed the poverty line already. One of the successes of microfinance in Bangladesh has been that nearly all Grameen borrowers pay back their loans, even though they aren’t able to offer up initial collateral.Their responsibility enables the bank’s programs to continue.

In addition to microfinance, Yunus is focusing attention on what he calls “social business enterprise.” A current major project involves both his Grameen Bank and Danone, the French company that manufactures Dannon yogurt. The Grameen Danone Food Co. will create a nutritionally fortified dairy product that will be made and packaged in Bangladesh, helping to combat malnutrition. The yogurt will be sold for a very low price, will provide new local jobs, and will be produced withconsideration for thelocal environment.The enterprise will notbe a nonprofit, charityventure, but a business.Its stated purpose,however, is not revenuefor Danone and Grameenbut improving the lives ofimpoverished Bangladeshis.The goal will be no financial gainand no financial loss. Profits will be reinvested in the company and will be used to open additional facilities.

This is not to say that creating a social enterprise offers no potential financial benefits for Danone. In fact, companies have a growing financial reason to care about corporate social responsibility (CSR). The rising interest in “socially responsible investing” (SRI) or “ethical investing” means that some shareholders are placing value on what a company accomplishes socially and environmentally, as well as financially. People who seek out socially responsible mutual funds see projects like Danone’s as increasing overall company value. If investors care about businesses’ CSR, companies have an added incentive to give and to make social contributions.

Still, while both cause-related marketing and social enterpriseoffer potential benefits to companies, social enterprise is a more proactive approach. For example, rather than donating profits from yogurt Danone is already selling in America, the new venture will provide jobs, offer local nutrition, and be sustainable. It’s also potentially replicable. As such, it doesn’t equate to a loss of revenue that might limit its ultimate duration. Other enterprises not born out of already existing companies could offer similar local advantages without benefiting a parent company (see Movers & Shapers for an example).

Social enterprise may be a relatively new idea, and it is certainly not an entirely tested one. Still, for Point Loma students with entrepreneurial interests and concerns for the poor, the possibility is enticing.

SO WHOSE (BOTTOM) LINE IS IT ANYWAY?

While the trend of corporate social responsibility as a whole may seem like a positive, it may be worthwhile to make a more measured evaluation of social actions by the corporate sector.

While a practice like ethical investing can push companies to take action, it also falls short as a cure-all. (What are investors to do about a company with a stellar environmental policy but low wages for its own workers?) Cause-related marketing is not inherently bad, but in most cases, neither is it a wholesale – or even a logical or particularly effective – solution. Social enterprise seems to be a more promising idea because of its potential for sustainability and transferability. But some might argue, like Bono, that business solutions alone, no matter how creative and exciting, are only part of the necessary solution to poverty, environmental concerns, and world health issues. Point Loma supports social enterprise, but also values nonprofits’ work and recognizes that political and spiritual actions are important in meeting world needs.

As Christians, we can appreciate and even choose to support genuine efforts by businesses to do good. We can also choose not to increase our consumerism to support a cause, opting instead for more meaningful action. Ultimately, we must also remember that neither businesses nor nonprofits hold the answers to solving the problems we face. A faithful and prayerful approach to working with both kinds of organizations may best help us “to look after orphans and widows in their distress” (James 1:27) and to be good stewards.

Questions to Ask Before Joining a Nonprofit Board

  • Do I believe in the mission of the organization?
  • Do I believe in the leader? Does he or she have the capacity to lead the organization in the fulfillment of the organizational mission?
  • What are the reporting practices of the organization (financial and otherwise)? Have they completed a review or audit of their finances recently? Is there transparency throughout the organization?
  • Why am I being asked to join the board? What is my role on the board?
  • Am I expected to be an annual donor? If so, how much am I expected to give?
  • Am I expected to recruit donors?
  • How much time am I expected to give to the organization?