Managing nonprofit organizations tschirhart pdf

The Blurring of Nonprofit Structure
Board member and CEO responsibilities can often be blurred. Choose one of the responsibilities discussed in the required readings this week and discuss how it can be blurred. Suggest what you would do to provide further clarification of roles for this responsibility.

Guidance Report
Day-to-day operations of any business entity are critical, and it is no different with nonprofits, to a degree. Nonprofits cannot have shareholders (who share in profits) and do not have private ownership, so there is no obligation to an owner. Nevertheless, they DO have stakeholders (those who have an interest in seeing that the nonprofit fulfills its mission). Of the one-and-a-half million nonprofits in the US, some are huge.

· The American Red Cross has revenue of about $3.3billion with 90% of its finds going to its programs.

· National Goodwill Industries generates over $5 billion in revenues with 83%returned to program services.

· The YMCA generates $ 6.25 billion in revenues with 85% going back into programs. (Ullman, 2014)

Many that we have known about since we were children have been around over 100 years (the Red Cross since Clara Barton in 1881, the Boys (and Girls) clubs since 1860, the YMCA since 1844, the Salvation Army since 1865.
These are superb “businesses” that are run well and have had a phenomenal impact on society. How do they do it?

References
· Board Roles and Responsibilities (Links to an external site.). (2018, May 26). Retrieved from https://www.councilofnonprofits.org/tools-resources/board-roles-and-responsibilities (Links to an external site.)

· Magloff, L. (2018, February 12). The typical non-profit organizational structure (Links to an external site.). Retrieved from http://smallbusiness.chron.com/typical-non-profit-organizational-structure-4896.html (Links to an external site.)

· Ullman, M. (2014, October 27). The top nonprofit organizations (Links to an external site.). Retrieved from https://www.investopedia.com/articles/personal-finance/102714/top-nonprofit-organizations.asp

· Williamson, J. (2014, December 11). A nonprofit's board of directors - What is a board? (Links to an external site.) Retrieved from https://www.501c3.org/nonprofits-board-directors-board/

·

·

In your first Discussion Forum this week, you will be looking at the roles of the executives and board members. In your second Discussion Forum this week, you are asked to explore the structure of a nonprofit. If you can, consider the nonprofit from your first week’s work.

Managing Nonprofit Organizations is accompanied by an Instructor’s Guide, which is available free online. If you would like to download and print a copy of the guide, please visit: www.wiley.com/college/tschirhart

ffirs.indd iiiffirs.indd iii 08/05/12 5:01 PM08/05/12 5:01 PM

http://www.wiley.com/college/tschirhart
Essential Texts for Nonprofi t and Public Leadership and Management

The Handbook of Nonprofi t Governance, by BoardSource

Strategic Planning for Public and Nonprofi t Organizations, 4th Edition, by John M. Bryson

The Effective Public Manager, 4th Edition, by Steven Cohen et al.

Handbook of Human Resources Management in Government, 3rd Edition, by Stephen E. Condrey (Ed.)

The Responsible Administrator, 6th Edition, by Terry L. Cooper

The Jossey-Bass Handbook of Nonprofi t Leadership and Management, 3rd Edition, by David O. Renz, Robert D. Herman & Associates (Eds.)

Benchmarking in the Public and Nonprofi t Sectors, 2nd Edition, by Patricia Keehley et al.

Museum Marketing and Strategy, 2nd Edition, by Neil Kotler et al.

The Ethics Challenge in Public Service, 3rd Edition, by Carol W. Lewis et al.

Measuring Performance in Public and Nonprofi t Organizations, by Theodore H. Poister

Human Resources Management for Public and Nonprofi t Organizations: A Strategic Approach, 3rd Edition, by Joan E. Pynes

Understanding and Managing Public Organizations, 4th Edition, by Hal G. Rainey

Fundraising Principles and Practice, by Adrian Sargeant, Jen Shang, and Associates

Making Critical Decisions, by Roberta M. Snow et al.

Achieving Excellence in Fundraising, 3rd Edition, by Eugene R. Tempel, Timothy L. Seiler, and Eva E. Aldrich (Eds.)

Handbook of Practical Program Evaluation, 3rd Edition, by Joseph S. Wholey et al. (Eds.)

ffirs.indd ivffirs.indd iv 08/05/12 5:01 PM08/05/12 5:01 PM

MANAGING NONPROFIT ORGANIZATIONS

Mary Tschirhart and Wolfgang Bielefeld

ffirs.indd vffirs.indd v 08/05/12 5:01 PM08/05/12 5:01 PM

Copyright © 2012 by John Wiley & Sons, Inc. All rights reserved.

Published by Jossey-Bass A Wiley Imprint One Montgomery Street, Suite 1200, San Francisco, CA 94104-4594 www.josseybass.com

Cover image by Getty. Copyright © by Ashim Mittler, Frankfurt am Main.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the Web at www.copyright.com. Requests to the publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or com- pleteness of the contents of this book and specifi cally disclaim any implied warranties of merchantability or fi tness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situa- tion. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profi t or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. Readers should be aware that Internet Web sites offered as citations and/or sources for further information may have changed or disappeared between the time this was written and when it is read.

Jossey-Bass books and products are available through most bookstores. To contact Jossey-Bass directly call our Customer Care Department within the U.S. at 800-956-7739, outside the U.S. at 317-572-3986, or fax 317-572-4002.

Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.

Library of Congress Cataloging-in-Publication Data

Tschirhart, Mary. Managing nonprofi t organizations / Mary Tschirhart, Wolfgang Bielefeld. —1st ed. p. cm. Includes bibliographical references and index. ISBN: 978-0-470-40299-3 (hardback); ISBN: 978-1-118-25864-4 (ebk); ISBN: 978-1-118-23388-7 (ebk); ISBN: 978-1-118-22017-7 (ebk) 1. Nonprofi t organizations—Management. I. Bielefeld, Wolfgang. II. Title. HD62.6.T785 2012 658'.048—dc23 2012015525

Printed in the United States of America FIRST EDITION HB Printing 10 9 8 7 6 5 4 3 2 1

ffirs.indd viffirs.indd vi 08/05/12 5:01 PM08/05/12 5:01 PM

http://www.josseybass.com
http://www.copyright.com
http://www.wiley.com/go/permissions
http://www.wiley.com
http://booksupport.wiley.com
vii

CONTENTS

Acknowledgments ix

The Authors xiii

PART ONE: UNDERSTANDING, ENVISIONING, AND CREATING 1

1 Understanding Nonprofi t Organizations 3

2 Effective and Ethical Organizations 11

3 Founding Nonprofi ts and the Business Case 33

4 Organizational Structure 60

PART TWO: STRATEGIZING, RESOURCING, AND ALIGNING 83

5 Formulation of Strategy 85

6 Resource Acquisition 111

7 Financial Stewardship and Management 140

8 Marketing 168

ftoc.indd viiftoc.indd vii 08/05/12 5:02 PM08/05/12 5:02 PM

viii Contents

PART THREE: LEADING, MANAGING, AND DELIVERING 199

9 Boards and Governance 201

10 Executive Directors and Leadership 228

11 Strategic Human Resource Management 255

12 Motivation and Performance 280

PART FOUR: EVALUATING, CONNECTING, AND ADAPTING 299

13 Program Evaluation 301

14 Public and Government Relations 327

15 Partnerships, Alliances, and Affi liations 356

16 Organizational Change and Innovation 384

17 The Future of Nonprofi t Leadership and Management 418

Appendix: Mapping of Chapter Content to NACC Guidelines for Study in Nonprofi t Leadership, the Nonprofi t Sector, and Philanthropy 425

Notes 429

Index 469

ftoc.indd viiiftoc.indd viii 08/05/12 5:02 PM08/05/12 5:02 PM

ix

ACKNOWLEDGMENTS

We would like to thank the Jossey-Bass/Wiley team for their support and encouragement. This book would not have been possible without the patience and gentle guidance of Allison Brunner, Nathinee Chen, Alison Hankey, Rebecca Heider, Nina Kreiden, Elspeth MacHattie, and Dani Scoville.

Our sincere gratitude extends to Charles Coe and Lynda S. Clair. Charlie expertly drafted the fi nancial management chapter and was a cheerleader during our efforts to fi nish the book manuscript. Lynda was instrumental in helping us distill complex fi nancial and human resource management topics into material suitable for our audiences.

This book has benefi ted greatly from the thoughtful comments of review- ers. Their suggestions on content and presentation have helped to improve the chapters and the supplementary teaching materials. We sincerely thank them for joining us on this journey as we worked to meld our individual writing styles and perspectives. We list the reviewers here, along with their institutional affi liations at the time of the review process.

Alan Abramson, director, Center for Nonprofi t Management, Philanthropy, and Policy, George Mason University

Rikki Abzug, associate professor, Anisfi eld School of Business, Ramapo College of New Jersey

flast.indd ixflast.indd ix 08/05/12 5:02 PM08/05/12 5:02 PM

x Acknowledgments

Richard Brewster, executive director, National Center on Nonprofi t Enterprise

William A. Brown, associate professor, Bush School of Government and Public Service, Texas A&M University

Jeffrey L. Brudney, Albert A. Levin Chair of Urban Studies and Public Service, Cleveland State University

David Campbell, associate professor, Department of Public Administration, Binghamton University, State University of New York

Russell A. Cargo, senior fellow, Midwest Center for Nonprofi t Leadership, University of Missouri-Kansas City; principal, Third Sector Services, LLC

Celine Chew, senior lecturer, Cardiff Business School, Cardiff University

Monica Dignam, chief of research, ASAE: The Center for Association Leadership

Mark Hager, associate professor, School of Community Resources and Development, Arizona State University

Margaret E. Harris, emeritus professor, Voluntary Sector Organisation, Aston University, England

Margaret Henderson, director, Public Intersection Project, School of Government, University of North Carolina

Thomas Jeavons, executive director, Association for Research on Nonprofi t Organizations and Voluntary Action (ARNOVA)

Kevin P. Kearns, professor, Graduate School of Public and International Affairs, University of Pittsburgh

Jane S. Kornblut, principal, Third Sector Services, LLC

Jack Krauskopf, distinguished lecturer and director, Center for Nonprofi t Strategy and Management, School of Public Affairs, Baruch College, City University of New York

Roger A. Lohmann, emeritus professor, Division of Social Work, West Virginia University

Roseanne Mirabella, professor, Department of Political Science and Public Affairs, Seton Hall University

Vic Murray, adjunct professor, School of Public Administration, University of Victoria

Michael O’Neill, professor, School of Management, University of San Francisco

flast.indd xflast.indd x 08/05/12 5:02 PM08/05/12 5:02 PM

Acknowledgments xi

John Palmer Smith, former director, Helen Bader Institute for Nonprofi t Management, University of Wisconsin-Milwaukee

Stefan Toepler, assistant professor, Department of Public and International Affairs, George Mason University

Dennis R. Young, Bernard B. and Eugenia A. Ramsey Chair of Private Enterprise, Andrew Young School of Policy Studies, Georgia State University

flast.indd xiflast.indd xi 08/05/12 5:02 PM08/05/12 5:02 PM

flast.indd xiiflast.indd xii 08/05/12 5:02 PM08/05/12 5:02 PM

xiii

THE AUTHORS

Mary Tschirhart is a professor in the School of Public and International Affairs at North Carolina State University, and she also directs the university’s Institute for Nonprofi t Research, Education and Engagement. She formerly taught non- profi t management as a faculty member at Indiana and Syracuse Universities. She is the president of Pi Alpha Alpha, the national honor society for students of pub- lic administration. She has served as a vice president on the boards of ARNOVA (Association for Research on Nonprofi t Organizations and Voluntary Action) and IRSPM (International Research Society for Public Management), and as Nonprofi t Management Section chair for the National Association of Schools of Public Affairs and Administration and chair of the Public and Nonprofi t Division of the Academy of Management. She is on the editorial boards of the Nonprofi t and Voluntary Sector Quarterly, Public Administration Review, Public Management Review, and Journal of Public and Nonprofi t Sector Marketing. She has also served on the boards of nonprofi t organizations and a community library. Her experience includes being the executive director of a statewide nonprofi t arts organization and con- sulting to nonprofi t organizations in the United States and other countries. She holds a PhD degree in organizational behavior and human resource management from the University of Michigan, an MBA degree in arts administration, and a BA degree in philosophy.

Wolfgang Bielefeld is professor emeritus at the School of Public and Environmental Affairs and the Center on Philanthropy at Indiana University- Purdue University Indianapolis. He has taught at the University of Texas at Dallas, the University of Minnesota, and Stanford University. He is a former coeditor

flast.indd xiiiflast.indd xiii 08/05/12 5:02 PM08/05/12 5:02 PM

xiv The Authors

of the Nonprofi t and Voluntary Sector Quarterly (from 2005 to 2010) and has served on the editorial board of VOLUNTAS: International Journal of Voluntary and Nonprofi t Organizations. He has served on the board of ARNOVA and was the program chair for an annual conference of that organization. His profes- sional experiences include serving on the board of Lutheran Child and Family Services of Indiana/Kentucky and consulting for a variety of nonprofi t orga- nizations. Bielefeld earned his PhD degree in sociology from the University of Minnesota. He also holds an MA degree in marketing, an MA degree in sociology, and a BS degree in engineering. He has authored numerous articles and coauthored a number of books, including Nonprofi t Organizations in an Age of Uncertainty: A Study of Organizational Change, which won the 2001 ARNOVA Best Book Award, the 1999 Independent Sector Virginia A. Hodgkinson Research Prize, and the 1999 Academy of Management, Public and Nonprofi t Division, Book of the Year Award.

flast.indd xivflast.indd xiv 08/05/12 5:02 PM08/05/12 5:02 PM

PART ONE

UNDERSTANDING, ENVISIONING, AND CREATING

c01.indd 1c01.indd 1 08/05/12 4:05 PM08/05/12 4:05 PM

c01.indd 2c01.indd 2 08/05/12 4:05 PM08/05/12 4:05 PM

3

CHAPTER ONE

UNDERSTANDING NONPROFIT ORGANIZATIONS

It all starts with the mission. Nonprofi t organizations have a distinct mandate to be good stewards of the resources they receive toward the pursuit of their mis- sion, whether those resources come in as philanthropic dollars, government con- tracts and grants, membership dues, or earned income through revenue-generating activities. In this book we focus primarily on how nonprofi ts pursue their missions in the general social, cultural, legal, historical, and economic context of American life. We offer some examples from other countries and believe much of what we offer is applicable to international contexts. Still, this is a book about leadership and management and thus needs to be embedded in a particular place and time.

The importance of context becomes clear when we look at the competencies proposed in November 2011 for nonprofi t managers and leaders by the Non- Profi t Management Education Section of NASPAA (National Association of Schools of Public Affairs and Administration). Members of this NASPAA sec- tion suggest that students pursuing nonprofi t careers should be able to apply knowledge and understanding of

1. The history, values, ethics, and philosophies of nonprofi t organizations, and the need for transparency in nonprofi t management practices to maintain the public trust

2. The current legal frameworks for operating a nonprofi t organization, and the process of forming an incorporated nonprofi t organization

c01.indd 3c01.indd 3 08/05/12 4:05 PM08/05/12 4:05 PM

4 Managing Nonprofi t Organizations

3. The fundamental principles and concepts of fi scal management, revenue generation, and fundraising, and the ethical imperative to be a good steward of the fi nancial resources of the nonprofi t sector

4. The leadership challenges of the sector as they relate to the strategic manage- ment of nonprofi t organizations, which requires integrating the roles, respon- sibilities, and relationships of the board of directors, the executive director, the employees, the volunteers, and all stakeholders in meeting the mission of the organization

5. The human resource and volunteer management principles necessary to manage a nonprofi t organization’s core services and functions

6. The standards for accountability, performance measurement, and program evaluation, and the appropriate techniques for using both quantitative and qualitative methods to measure the performance of nonprofi t organizations

The contents of this book can serve as a foundation for these six competency areas. We go beyond building knowledge and understanding in each area and add additional topics to enhance leadership and management capacity. To orient readers and provide a roadmap of what is to come, we offer a quick overview of each part and chapter.

A Roadmap Through the Chapters

Our comprehensive approach to excelling at managing and leading nonprofi ts is built around competency and curriculum guidelines developed by NASPAA and by NACC (Nonprofi t Academic Centers Council). A summary of the NACC guidelines appears in the Appendix, where they are mapped to the chapters in this book. The six NASPAA competency guidelines have been given earlier in this chapter. Both NASPAA and NACC recognize the importance of understanding the historical development of the nonprofi t sector and its values base. These issues are touchstones for our chapters. We discuss how ideas about specifi c manage- ment and leadership topics evolved over time and whether or not they are backed up by theory and empirical evidence. We repeatedly return to the ways in which values infl uence management and leadership decisions as well as the behaviors of board members, donors, staff, volunteers, and others, and how all this affects the effectiveness of a nonprofi t.

As a social psychologist and a sociologist, we are steeped in our respective disciplinary traditions. However, we draw from additional disciplines as well to introduce readers to source documents and thought leaders for the ideas in

c01.indd 4c01.indd 4 08/05/12 4:05 PM08/05/12 4:05 PM

Understanding Nonprofi t Organizations 5

the book. All our topics and recommendations for practice are grounded in the academic literature. In choosing our main examples we made sure that readers would have enough background information and in some cases even videos for a further exploration of these cases. We also provide additional learning tools in the form of questions for discussion and exercises at the end of each of the main content chapters.

In Part One, we discuss understanding, envisioning, and creating nonprofi t organizations. In Chapter One, after this introduction to the book, we give a general overview of the nonprofi t sector. In Chapter Two we explore ways to consider the effectiveness of nonprofi ts and encourage ethical behavior among those working within them. We look at multiple dimensions of organizational effectiveness: goal achievement, resource acquisition, health and effi ciency of internal processes, stakeholder satisfaction, and ability to learn and adapt. In Chapter Three we examine topics important to those interested in establishing a nonprofi t organization and laying an effective groundwork for future action. We show the many different origins of nonprofi ts. Drawing on the entrepreneurship literature, we consider how people, capital, and opportunity come together in nonprofi ts to deliver social value. We also discuss how to make the case for a new nonprofi t, including writing the business plan. Chapter Four covers options for organizational structure. We look at formalization, complexity, and other struc- tural elements that infl uence information processing, and we consider possible structural defi ciencies.

In Part Two we turn to strategizing, resourcing, and aligning, because throughout their existence nonprofi ts should have a mission and a vision and should acquire and manage resources to pursue them. Chapter Five covers the formulation of strategy. Topics include the general strategic orientations that non- profi ts adopt and the strategic planning process. We also consider the emergence of strategies in nonprofi ts. Chapter Six covers resource acquisition. In this chap- ter we examine the variety of revenue sources employed by nonprofi ts, includ- ing grants, gifts, and earned income. We discuss philanthropy, addressing types of gifts and donors, as well as fund development and grant proposal writing. Chapter Seven reviews fi nancial stewardship and management. We outline best practices for policies, accounting, budgeting, banking, borrowing, fi nancial risk management, auditing, and fi nancial analysis. Chapter Eight provides knowledge and tools for effective marketing. We cover the philosophy of and orientations to marketing, marketing planning, and branding. In addition we explore options for the pricing, promotion, and distribution of goods and services.

In Part Three we focus on human resources and discuss leading, managing, and delivering the mission. Chapter Nine covers boards and the broader topic of governance. We discuss the responsibilities of boards, roles of executive directors in

c01.indd 5c01.indd 5 08/05/12 4:05 PM08/05/12 4:05 PM

6 Managing Nonprofi t Organizations

relation to boards, determinants of board effectiveness, options for board confi gu- rations and composition, and tools for facilitating governance and managing con- fl ict. Chapter Ten adds leadership and executive directors to the mix. We explore the basis of leadership and the responsibilities of executive directors. We also con- sider nonprofi t founders, leadership transition, and leadership development. In Chapter Eleven we turn our attention to strategic human resource management. We look at ways to measure and build human resource capacity. We then look at human resource management through the stages of initial involvement, develop- ment, maintenance, and separation. As a follow-up to Chapter Eleven, in Chapter Twelve we explore performance as determined by ability and motivation. We offer tools to increase ability and to enhance motivation to perform.

Our fi nal section, Part Four, covers evaluating, connecting, and adapting the nonprofi t. We begin with program evaluation in Chapter Thirteen. We see an effective program evaluation process as key to accountability management. We review how to prepare for evaluation, choose an evaluation approach, apply theories of change and logic models, clarify program goals, and collect data, all with an eye to meeting the practical challenges to effective evaluation. Chapter Fourteen covers public and government relations. In this chapter we look at image and reputation, strategic communication, and the public relations process. We also cover risk assessment and crisis management. Focusing on government rela- tions, we discuss lobbying and advocacy. Chapter Fifteen covers partnerships, alliances, and affi liations. We examine reasons for collaboration, types of relation- ships, the collaboration process, and ways to promote successful collaborations. Chapter Sixteen introduces readers to models of organizational change and inno- vation in nonprofi ts, external and internal drivers of change, and resistance to change. We lay out strategies for managing change and innovation processes and include ideas on how to generate innovations. In Chapter Seventeen, our fi nal chapter, we consider the future of nonprofi t management. We share both our own and others’ thoughts on trends in the nonprofi t sector and how they may change nonprofi t management practices. Our goal is to leave readers with ideas on how they may develop their leadership skills for an ever-changing world.

The Nature of Nonprofi t Organizations

This book is not about management and leadership in general; it is about manage- ment and leadership in the nonprofi t sector. Yet it may not be clear what we mean by nonprofi t, given the many different types of nonprofi ts in the United States and the alternative terms used to describe the sector. Although none of these terms describe the nonprofi t sector completely, each emphasizes an important aspect

c01.indd 6c01.indd 6 08/05/12 4:05 PM08/05/12 4:05 PM

Understanding Nonprofi t Organizations 7

of it. The term voluntary sector emphasizes that the sector benefi ts greatly from the work of volunteers. The sector has always been rooted in voluntarism and although the degree of voluntary participation in service delivery and manage- ment varies across the organizational types in the sector, all have boards of direc- tors and most do not offer any form of monetary compensation or reimbursement for expenses to board members. Independent sector, or third sector, emphasizes that the sector is part of neither government nor the business sector, although it may have close relations with both. Not-for-profi t sector emphasizes the distinction from profi t-focused enterprises. Charitable sector underscores the sector’s role in providing direct relief to those in need. Philanthropic sector highlights the fact that many orga- nizations in the sector receive charitable donations. Civil society sector emphasizes that many organizations in the sector are the embodiment of an engaged group of citizens with a shared interest in improving their communities. Tax-exempt sector points out that these organizations are eligible for exemptions from most taxes. These exemptions are granted to promote activities benefi ting the public. Social sector captures the role of the sector in enhancing the social fabric. Other countries use yet other terms to describe the organizations that people in the United States call nonprofi ts. Popular names include nongovernmental organizations (NGOs) and civil society organizations.

Throughout this book, we use the term most commonly used in the United States, the nonprofi t sector. It does not mean that the organizations in the sector can- not make a profi t. Organizational growth may rely on obtaining more resources than are needed to cover current expenses. What the term nonprofi t stresses here is that these organizations do not exist to make a profi t to enrich private owners, as businesses do. In fact, nonprofi ts do not have owners or stockholders who are legally entitled to a share of the organization’s profi ts. Any profi ts made should be allocated toward the accomplishment of the organization’s mission.

Diversity in the Nonprofi t Sector

In the United States the common feature of all nonprofi t organizations is that they qualify for tax-exempt status under the U.S. Internal Revenue Code.1 Of the close to 1.6 million registered nonprofi ts in the United States, the majority are public charities, about 1 million. This group, exempt under Section 501(c)(3) of the tax code, includes but is not limited to churches, hospitals, clinics, schools, day-care centers, all manner of human service organizations, museums and theaters, and a variety of neighborhood organizations. Members of this group have broad public support, rather than funding from a single source, and are considered public-serving organizations. In Chapter Three we go into more detail on the qualifi cations an

c01.indd 7c01.indd 7 08/05/12 4:05 PM08/05/12 4:05 PM

8 Managing Nonprofi t Organizations

organization must meet to be classifi ed as a public charity. Public charities employ over 7 percent of the country’s paid workforce.

The U.S. tax code recognizes twenty-fi ve types of nonprofi ts, including public charities, the most common type. About 100,000 nonprofi ts are classifi ed as private foundations. These nonprofi ts make grants to support worthy causes and may oper- ate their own programs using funding from a single source or a small number of sources. Over 500,000 tax-exempt organizations are classified as other types of nonprofi ts, such as chambers of commerce, fraternal organizations, social and recreational clubs, and business leagues. These nonprofi ts provide valued ser- vices and attract resources as mutual benefi t (member-serving) organizations. Overall in 2009, registered nonprofi ts in all Internal Revenue Service (IRS) categories accounted for 9 percent of the wages and salaries paid in the United States.

There is no precise, accurate count of the number of organizations making up the U.S. nonprofi t sector. The U.S. government does not require churches and other religious places of worship to register as nonprofi ts, so it is diffi cult to get a handle on how many exist. One estimate is that there are close to 280,000 reli- gious congregations in the country, all eligible for the benefi ts given to 501(c)(3) nonprofi ts.2 There are also many grassroots organizations that are not legally incor- porated and thus left uncounted. These may be local, volunteer organizations that have a political change agenda or that rely on volunteer workers to care for and help others using little fi nancial capital or physical infrastructure. David Horton Smith suggests that the nonprofi t sector also contains what he refers to as deviant nonprofi ts, such as gangs, cults, covens, and quasi-underground organizations such as the Ku Klux Klan. These organizations operate outside normal conventions and are not legally recognized or tax exempt, but they are like nonprofi ts in not being organized to make a profi t.3

A variety of factors account for the existence of this diverse set of organiza- tions.4 In the early history of the United States, voluntary action was the primary way things got done in communities. Lacking an extensive government and with limited private wealth, citizens voluntarily banded together to deal with social prob- lems. Some nonprofi ts were established to provide services that neither govern- ment nor businesses would or could effectively provide. Nonprofi ts often function in areas where markets are lacking, such as the provision of food and shelter to those without money to pay for them. In addition, nonprofi ts provide services that government, with its reliance on voter mandates, cannot. For example, nonprofi ts provide public health services and education that government is unable to fund with public dollars.

Nonprofi ts serve a number of other functions. They are an important fea- ture of the U.S. political landscape, providing vehicles for combining people’s individual voices and pushing their desires for action. Advocacy nonprofi ts can

c01.indd 8c01.indd 8 08/05/12 4:05 PM08/05/12 4:05 PM

Understanding Nonprofi t Organizations 9

be found on all sides of political issues. In this way they contribute to pluralism in the U.S. political system. Nonprofi ts may also provide people with places to meet and to relate to others who share their interests and values. This gives individuals ways to have fun and to enjoy activities such as sports competitions or cultural fes- tivals. In this way nonprofi ts contribute to the establishment of social capital and the solidarity of American society, helping individuals to form bonds of trust and reciprocity with others. These bonds make it easier for community members to jointly address matters of common concern. When community members trust each other and can rely on each other to help when needed, joint actions such as community watch programs are more effective. Nonprofi ts also help with personal development needs. They allow individuals to express their spirituality, creativity, and altruistic impulses and to develop social and leadership skills. At their core, nonprofi ts nurture and sustain the values and identities of their participants.

Between September of 2009 and September of 2010, 26.3 percent of Americans over sixteen years of age volunteered through or for a nonprofi t. In 2010, nonprofi t organizations received $290.9 billion in charitable contributions (of which $211.8 billion came from individuals). These fi gures attest to the impor- tance of nonprofi ts to the social fabric of American life. Couple this with the fi nancial scope of the nonprofi t sector and nonprofi ts’ importance increases. In 2009, the nonprofi t sector’s share of the gross domestic product (GDP) was 5.4 percent. In that year, public charities reported over $1.41 trillion in revenues. They also held $2.56 trillion in total assets.

Leading and Managing in the Nonprofi t Sector

Leaders and managers of nonprofi ts face a variety of challenges. One of the most important is to keep the mission in mind in all decision making. Nonprofi ts must operate to fulfi ll their mission and are limited in their engagement in activities far afi eld from it. In addition they must keep in mind that the real owner of a nonprofi t is the public.5 It is the public to whom they are ultimately accountable. There are no designated shareholders or owners to please. Nonprofi ts are subject to the claims, and possible control, of many stakeholders, including donors, cli- ents, board members, staff, volunteers, government at all levels, and community members. The expectations of these stakeholders can vary widely and leaders must balance competing demands.

Lester Salamon and others describe a number of additional challenges.6 Many nonprofi ts face fi scal diffi culties, some starting with government cutbacks in the 1980s in areas where nonprofi ts were active. Government assistance has became more targeted and tied to stricter requirements. Not all nonprofits

c01.indd 9c01.indd 9 08/05/12 4:05 PM08/05/12 4:05 PM

10 Managing Nonprofi t Organizations

experiencing losses in government funding have been able to offset those losses with growth in private giving or earned income. There is growing competition as more for-profi ts move into areas traditionally served by nonprofi ts, such as health care, higher education, and employment training. The rise of B corporations, which are required to make decisions good for society, not just their sharehold- ers, adds to the continuing erosion of sector boundaries.7 In addition nonprofi ts are under pressure from funders who are demanding more evidence that the nonprofi ts they fund are making a measurable positive impact, with some funders seeing themselves as investors with rights to infl uence strategic decisions.

The legitimacy of the nonprofi t sector has been challenged on a number of fronts. One challenge is presented by those who feel this sector is part of an expanding government welfare state and is serving as an instrument of govern- ment. Another comes from those who feel it is too professionalized and out of touch with those it serves. These criticisms, coupled with a number of high-profi le scandals, have raised public concerns about the nonprofi t sector. This confronts nonprofi ts with a distinctiveness imperative.8 Nonprofi ts need to reinforce their iden- tity and their worthiness for the benefi ts and discretion afforded them.

As this short summary of challenges illustrates, today’s nonprofi t leaders must navigate turbulent waters in the pursuit of their organization’s mission. As part of a larger network of actors, some with contradictory views and approaches to pressing social problems, nonprofi ts are shaping our current reality and our future. Innovations that emerge and are tested in nonprofi ts will contribute to fundamental debates about what is possible and how to achieve it or avoid it.

We wrote this book with the sincere hope that it will not only provide infor- mation and tools to enhance the capacity of nonprofi t managers and leaders but also inspire individuals to consider careers in the nonprofi t sector. Whether serv- ing in a paid position, as a board member, or as a volunteer, individuals working in the nonprofi t sector have the opportunity to act on their values and promote their vision for a better world.

c01.indd 10c01.indd 10 08/05/12 4:05 PM08/05/12 4:05 PM

11

CHAPTER TWO

EFFECTIVE AND ETHICAL ORGANIZATIONS

T he Chicago Association of Neighborhood Development Organizations (CANDO) closed its doors in 2002 after suffering disagreement about its mission, diffi culty gaining fi nancial support, and disengagement by its members.1 Even its leaders questioned the need for CANDO by the end of its last strategic planning process. What happened to this organization after almost twenty-three years of serving neighborhood development agencies and advancing policy benefi ting them? On some dimensions the organization was effective. It membership had grown from 20 agencies to over 220. However, this growth may partially explain its downfall as it tried to serve more and more diverse interests. Also, individual member agencies were becoming more power- ful, partly due to the successful efforts of CANDO to get them legitimacy and resources. As they became more self-reliant, they had less need for CANDO. Many CANDO members pursued contracts from the City of Chicago, making them reluctant to support CANDO’s efforts to aggres- sively lobby the city for resources and changes. Over time a new generation of leaders, with less fi re in their bellies for advocacy and community organizing, took charge of CANDO. Expectations for quantifi able results grew, both for CANDO and its member agencies. In the end, CANDO’s lack of focus and expansive, noncontroversial programming left it with apathetic board members, staff, and external stakeholders who lacked the desire to fi ght for its survival.

The Baptist Foundation of Arizona (BFA) closed after over fi fty years in existence, but not due to the apathy of those associated with it. In this case, fraudulent behavior led to fi nes and jail sentences for top leaders. When it fi led for bankruptcy in 1999, BFA had $530 million in liabilities despite its claims of $70 million in assets. The BFA had been founded as a fi nancial institution that promised market returns to participants entrusting their assets to the nonprofi t to manage. The idea was that BFA would help worthy ministries with resources and expertise

c02.indd 11c02.indd 11 08/05/12 4:06 PM08/05/12 4:06 PM

12 Managing Nonprofi t Organizations

while investing participants’ funds. However, to maintain an attractive facade for participants, it hid its bad loans and debts; misrepresented its certifi cates of deposit, thus harming the fi nancial status of elderly clients purchasing the CDs; used a Ponzi scheme, which allowed early investors to make a profi t but required a continual infl ux of new investors to pay earlier ones; sold only the right to occupy property to elderly clients who thought they were buying the property itself; and inappropriately infl ated the value of properties. At least one inappropriate transaction person- ally benefi ted specifi c BFA leaders engaged in the activity. Leaders’ unethical efforts to keep the nonprofi t afl oat resulted in losses for many BFA investors.2

� � �

This chapter addresses the question of what makes a good nonprofi t. Our open- ing cases illustrate the diffi culty of ensuring that nonprofi t organizations are effec- tive and ethical. Multiple stakeholders can pull a nonprofi t in different directions and lead to compromises that keep it from excelling. Questions can arise con- cerning which stakeholders’ interests should have the greatest priority and how to handle confl icts of interest. A nonprofi t can experience mission drift. In this chapter we explore how to evaluate nonprofi ts and avoid these diffi culties.

Nonprofi t organizations directly or indirectly infl uence many aspects of our lives, including our education, health, spirituality, recreation, security, news and infor- mation, safety, consumer behavior, and housing. Nonprofi ts make signifi cant con- tributions to the economic well-being of neighborhoods through employment and other activities. The tax and other government benefi ts they may receive are drawn from public resources. Many nonprofi ts attract philanthropic dollars from individuals and institutions. Some compete with for-profi t businesses for contracts and clients.

Because of the central role of nonprofi ts in people’s lives and communities, as well as the government and philanthropic funds they receive, nonprofi ts have a heightened responsibility to operate in an effective and ethical manner. Nonprofi ts that are seen by stakeholders as acting inappropriately or ineffectively are unlikely to be able to attract support. Scandals can raise concerns about the nonprofi t sector as a whole, not just the individual nonprofi ts involved in them.

Given the importance of effective and ethical behavior for nonprofi t organiza- tions, we use this chapter to set some foundational ideas for later chapters of the book. First, we examine the multiple dimensions of organizational effectiveness, and then we look at the context for ethical decision making at the personal, profes- sional, organizational, and societal levels. These overarching views lead to impli- cations for leaders who wish to ensure that their nonprofi t is perceived as being good as well as doing good. In later chapters we elaborate on the basic concepts presented here. For example, in Chapter Thirteen we go into detail on the techni- cal process for evaluating programs and in Chapter Seven we offer guidance for fi nancial management to avoid fraud and other unethical behaviors.

c02.indd 12c02.indd 12 08/05/12 4:06 PM08/05/12 4:06 PM

Effective and Ethical Organizations 13

Multiple Dimensions for Evaluating Effectiveness

In the simplest terms, effective organizations are the ones that accomplish their missions. However, there are numerous reasons why this calculation is often not feasible in evaluating the effectiveness of nonprofi ts. It may be hard to quan- tify the achievement of a mission, especially if the nonprofi t’s purpose relates to intangible quality issues or addresses complex social problems. It is diffi cult to judge the effectiveness of some nonprofi ts in the short term. Are nonprofi ts that are attempting to alleviate poverty or fi nd a cure for cancer ineffective because poverty and cancer have not been eradicated? Can we determine if a nonprofi t whose mission is to develop youths for productive roles in society is effective before these youths become adults? We may even disagree on what it means to be a pro- ductive member of society. Assessment of nonprofi t organizational effectiveness requires multifaceted approaches that acknowledge the challenges of achieving complex, diffi cult, long-term missions. We also need to recognize that effective- ness assessments may come from multiple stakeholders with different perspectives and potentially competing interests. What looks like an effective nonprofi t to one stakeholder may not look nearly as effective to another stakeholder.

We draw from the academic literature to focus on fi ve general and com- plementary approaches to judging effectiveness that can help nonprofi t leaders identify their organization’s strengths and weaknesses.3 The fi rst, the goal accom- plishment approach, examines organizational outputs. The second, the resource acquisition approach (sometimes called the system resource approach) focuses on inputs needed by the organization. The third, the internal processes approach, assesses the health and effi ciency of internal dynamics as inputs are transformed into outputs. The fourth, the stakeholder approach, looks at the satisfaction of stakeholders inside and outside the organization. The fi fth approach examines how well the organization adapts over time.

Goal Accomplishment

One approach to evaluating a nonprofi t is to consider how well it meets or exceeds its goals. Goals may be set to encourage a certain level of outputs, such as number of clients served, programs delivered, or service sites added. Unlike the business sector, which can comfortably use profi t as a metric for success, the nonprofi t sector should be careful to treat the amount of revenue generated or donations received as an input, not a goal.4

In the case of CANDO, the nonprofi t was a victim of its own success in reaching its early goals to bring more resources for neighborhood development activities to

c02.indd 13c02.indd 13 08/05/12 4:06 PM08/05/12 4:06 PM

14 Managing Nonprofi t Organizations

its member organizations and to increase its number of members. As the mem- bers became more diverse and less dependent on CANDO, their motivation to support the nonprofi t diminished. CANDO struggled to set new goals and fi nd ways to measure its success in reaching them. Members disagreed on CANDO advocacy goals, given their desire to avoid offending the City of Chicago in order to preserve the city’s goodwill toward their own organizations. In the end CANDO was unable to demonstrate that it should be kept alive.

Achievement of goals may not indicate achievement of mission. If goals are set and rewards tied to them, staff may change their behavior to achieve the goals and even compete against one another, ignoring the more fundamental mission, and ultimately resulting in the folly of achieving one outcome while hop- ing for another.5 For example, a nursing home’s goals to build a new facility and expand its number of beds may be met, but the emphasis placed on expansion may undermine the home’s mission of providing high-quality care to its current patients. Teachers’ desire to meet goals set for student satisfaction ratings may result in teachers who are popular but students who are not well educated.

A nonprofi t should set goals that are highly likely to align with its mission. Chapter Thirteen offers a logic model approach that can be helpful in linking goal-related outputs to mission-related outcomes. We recommend that goals be

• Measurable. There should be clear evidence available to show whether or not a goal has been met. A goal to provide households with educational materi- als on nutritious diets is easily measureable, but a goal to change eating behav- iors of members of those households is not measureable without extensive research.

• Time bounded. It should be clear how long the nonprofi t has to achieve the goal. For example, a goal to reduce obesity among young adults cannot be accomplished in a day or even a week. The timeline should be realistic.

• Accepted. Goals need to be clearly understood and accepted by those held accountable for their achievement as well as by those who will be using goal achievement to judge a nonprofi t’s effectiveness. Consensus on goals can be achieved through strategic planning and performance review processes, as dis- cussed in Chapters Five and Thirteen.

• Challenging but feasible. When goals are too easy or impossible, they are unlikely to be taken seriously by stakeholders. A classic goal statement is President John F. Kennedy’s address to Congress announcing the goal of sending a man to the moon and back before the end of the decade. Another example of the power of challenging but feasible goals is found in the achieve- ments of the March of Dimes, an organization that started with a mission to

c02.indd 14c02.indd 14 08/05/12 4:06 PM08/05/12 4:06 PM

Effective and Ethical Organizations 15

eradicate polio and that then, when that goal was reached, set a less concrete but more ambitious goal of preventing birth defects.

• Prioritized. Setting parameters on how to pursue multiple goals helps to make clear the policies and codes of conduct that are not to be violated and the resources that will be available for the pursuit of certain goals versus others. For example, a foundation may set a goal to build the capacity of youth-serving nonprofi ts through its grantmaking but may also limit its reach to a specifi c geographical area or to what can be funded after other program priorities are addressed.

Resource Acquisition

In addition to looking at goal-related outputs, a nonprofi t can evaluate effective- ness in terms of the extent to which it has acquired the inputs needed to accom- plish its mission. Following are examples of types of inputs that nonprofi t leaders may wish to use as partial indicators of effectiveness:

• Human resources: number and quality of staff, volunteers, and board members

• Financial resources: number and size of donations, grants, contracts, and sponsorships

• Capital resources: facilities, equipment, and materials

• Knowledge resources: expertise, information from needs assessments and evaluations, and consulting services

• Program resources: participants, waiting lists, referrals, collaborators, part- ners, technology, programs, and products

• Community-based resources: positive media attention, endorsements, and public goodwill toward nonprofi t