The Nonprofit Sector: More Than Charity (Part 1)

Written by: Peter Atherton

Published: October 2016

This is the first of a four-part article series looking at Measuring Your ROi – The Return on Your Individual Impact Investment. This series is developed by ActionsProve, LLC, a new impact and significance consulting practice.   

We begin this series with an article on the non-profit sector.  We begin here because the role that non-profit organizations play in our communities is immense, even if we don't quite understand how it all works.  It may seem that non-profits vary enormously in scope and scale - ranging from local grass root volunteer organizations to billion dollar hospitals, universities, and foundations - and that is correct. However, the diversity and complexity of the non-profit sector is uniquely American and a part of our great advancement and potential as a nation of people. 

There is a common theme woven throughout our history with non-profit organizations that is still relevant today.  It includes the power of private individuals taking initiative to band together and, using their time, resources and influence, meeting needs that cannot or would not be met by the established institutions of the day.  Non-profit organizations are our form of social innovation and advancement, and our path to building a better world.

A Micro-History of Non-Profits in America 

As mentioned above, the non-profit sector we know today is uniquely American.  The influence of non-profit organizations began in our colonial days.  Tax exempt 'voluntary associations' helped spread the ideas of freedom of speech, freedom of assembly, freedom of worship, the rights of individual citizens, and personal and economic skills development - helping to spark and drive the American Revolution.  Over time, these associations also taught Americans how to establish, organize, and self-govern both private and public entities to meet various needs.  During the 1800s, voluntary associations and charitable institutions played an increasingly important role in building social networks, addressing societal needs, and creating reform movements. Some of these popular associations included the Freemasons, the Knights of Columbus, professional and trade associations, and labor unions. 

Moving toward the 1900s, Andrew Carnegie’s essay “The Gospel of Wealth” urged business leaders to return surplus wealth by investing in the wellbeing of communities, helping to usher in a new form of larger scale and targeted philanthropy. This phenomenon gave rise to ‘private grant-making foundations’ including the Carnegie and Rockefeller foundations. With concern over the high concentration of private wealth and power, ‘The Community Chest’, the predecessor to the United Way, and ‘community foundations’ were developed.  These helped to democratize and retain local control over philanthropy, and also had the vital support of both businesses and employees.  During this same period, membership organizations including Kiwanis and Rotary became popular organized ways for the business community to come together to meet larger community needs.

Following the Great Depression and through the 1970s, new social and education programs gave rise to government funding.  This period also saw a substantial increase in the number of private charity institutions to help meet needs. Encouraged by new tax policy, 'corporate foundations,' including the Ford and Alcoa foundations, became new vehicles for charitable giving.

An even larger rise in the number of non-profit charity institutions occurred during the 1980s 'devolution' and the 1990s welfare reform initiatives.  These initiatives were to reduce the size of government and shift services more locally and privately. For non-profits, however, these shifts increased both the complexity and competition for receiving funds needed to meet community needs. Non-profits would, in some cases, also need to compete with for-profit entities for government resources. Reduced government funding and the threat of further reductions in government expenditures intensify the pressures non-profits face today. 

Nonprofit Challenges Today

In addition to having to expend resources to compete for both government and foundation-based grants and contracts, non-profits are also competing for individual donations. It is certainly very American to compete.  It can also be a healthy process for any organization to routinely confirm their mission and vision, and refine their value proposition.  That is not an issue for non-profit organizations.  The issue today is that we often just do not realize the full nature of the burdens non-profits face.  We are often asking them to perform many competing mission and business-related tasks increasingly well. These performance ‘asks’ often exceed the more singular expectations we have for both the government and for-profit sectors.  And this is at a time when there is increasing demand for the services of the non-profit sector that cannot, will not, or are just not yet being met by the established institutions of today.

Until very recently, the burdens and disadvantages for non-profits were further compounded by “the overhead myth.” Overhead is a term used to describe the ongoing operating costs of an organization that cannot be directly associated with a specific program or project. These costs can include: management, general administrative, marketing, donor relations and grant application expenses; office space; and computer hardware and software systems. The myth is that the lower a non-profit organization’s overhead is, the better the organization is at fulfilling its mission.  This is just not true as a single metric to evaluate the effectiveness of any organization – public or private, for-profit or non-profit.  For non-profits, this myth has long perpetuated a “non-profit starvation cycle” (Stanford Social Innovation Review, Fall 2009).  The cycle begins with wide-spread donor demands for low overhead and directives to have all or most of any donation fund only specific programs or projects.  Since non-profits are dependent on donors, this triggers a cycle of necessary compliance and under-investment. Over time, this under-investment reduces an organization’s core capacity – and hurts all parties.  

In contrast to this cycle, the Stanford Social Innovation Review concludes that ‘organizations that build robust infrastructure - which includes sturdy information technology systems, financial systems, skills training, fundraising processes, and other essential overhead – are more likely to succeed than those that do not.”  Fortunately, traction is starting to be gained to debunk this myth - at least with some government and foundation funding sources.  However, much work still needs to be done.  This work will include educating all donors on the true costs of a non-profit’s mission, as well as working to demonstrate the results and trends toward achieving their mission – and doing so in a compelling fashion.

Individual donors - many of us – are generally overwhelmed. Donor fatigue and the overhead myth that we have been taught in the past still affect non-profits.  Non-profits need to continuously do more than ever to reach and effectively engage with individual donors. The significant rise in the number of donor-advised funds and smaller family foundations over recent years also affect non-profits.  In the case of these, donations that once flowed directly to non-profits annually are now building ‘on the sidelines’ in private accounts for future disbursement.  This reduces the available resources today for non-profits dependent on funding.         

Opportunities

Despite the burdens and challenges, there are increasing opportunities to support and partner with non-profits to meet our collective needs.  Being more knowledgeable about non-profits can help spur both generosity in giving and increased engagement.  Many individuals have a renewed desire to get connected within our communities and to make a difference. Connecting with a local non-profit working within an area of interest and passion can provide leverage for greater impact and personal satisfaction and significance.   

There is also a clear nexus between the non-profit and the for-profit sectors. Non-profits will need to continue to appropriately employ business principles.  At the same time, interest in the ‘triple bottom line’ and corporate social impact is accelerating in the for-profit sector.  These endeavors are often tangible opportunities to engage and retain valuable employees and customers while being stewards within the local community.  Effectiveness in these for-profit endeavors can be further developed in collaboration with the non-profit sector.  There is also growing interest in market-based models in all sectors to help spur economic development to advance social justice and poverty alleviation – furthering this nexus. 

Moving Forward

The scope of the challenges non-profits face today are only dwarfed by the power of their mission and the role we, as private individuals taking initiative, can play in helping to achieve this mission.  We can each – as both individuals and as corporate citizens – be informed. An informed donor can make a difference.  An informed volunteer can be a catalyst for the blending of our skills, talents, experiences and passions to meet the needs of today and build a better tomorrow together.   

For the next article, we will look further into the personal significance movement. The third and fourth articles in the series will include defining the corporate social impact movements for you and your business, and ways to measure impact. 

Peter Atherton

Peter Atherton is the President and Founder of ActionsProve, LLC. ActionsProve partners with businesses, individuals and non-profits to create impact and significance through vehicles including strategic philanthropy, corporate social impact, social enterprise, and impact tracking. Having served communities through the design and construction of public infrastructure for over 20 years as a professional engineer and business owner, Pete now focuses on serving communities through people and the organizations they lead. Pete also serves in multiple capacities within the non-profit sector focusing on both local and global impact, and is a co-founder of the new 100 Men Who Care chapter for Southern Maine.