The Nonprofitization of Business

For years, especially in the business community, many have assumed that nonprofits need to adopt hardnosed business practices to become more effective. In May of 2012, we read with interest Phil Buchanan’s engaging Center for Effective Philanthropy blog post series on this topic. Buchanan expressed frustration with this thinking, which devalues the guiding ideals and contributions of nonprofits, and elevates the role of business and markets as the long-awaited panacea that can out-perform nonprofits and solve the world’s problems. We agree with much of Buchanan’s thesis. Between the two of us, we have spent a lot of time on the front lines of nonprofit management, working with high-risk and underappreciated people. Given our hands-on experience in the work and management of nonprofits, we believe that we have an important practitioner’s perspective to share on this difficult topic.

We hope to move the conversation beyond the one-sided and uninformed “business is the panacea for all that ails nonprofits” argument, and instead suggest that there is an ongoing cross-pollination between the two sectors. Business practices help nonprofits, and the values of nonprofit management and operations positively influence how businesses conduct their work. We call this “the nonprofitization of business”—the infusion of nonprofit qualities and practices into business. We are confident that the nonprofitization of business can truly make our world a better place while still providing shareholder value. We express this opinion in the spirit of collaboration and keeping in mind Buchanan’s admonition that:

The right answer is not to disparage companies, in a sort of tit-for-tat “Sector War,” but rather to point out that each sector has its strengths and limitations. There is much to be learned, and much work to do, across sectors … But we need to remember that each of the sectors play distinct, and vital, roles.

As evidence of this ongoing cross-pollination, consider the myth of surplus vs. profit. Many assume that when a business is financially healthy, it generates a profit, whereas a nonprofit generates a surplus. Many also assume that corporations pursue only profit and that nonprofits are left to work only in areas of “market failure,” where there is little or no reward. This distinction is simplistic and in many ways erroneous. The distinctions are in fact far less clear, and there is ample evidence of overlap. For example, although many business leaders vigorously defend the independence of their profits, the truth is that a significant amount of business revenues come from government investment and subsidies—$170 billion, according to The New York Times.

On the nonprofit side, half of all annual revenue comes from earned income—profit-generating ventures such as healthcare spending and college tuition. So for those who assume that the nonprofit sector has no profit-making ability or focus, the evidence speaks loudly to the contrary. Therefore, it has long been the case that business needs to provide a public benefit alongside at least some of its services, and nonprofits need to generate billions of dollars of earned income each year.

The value proposition in the nonprofitization of business falls into at least two important categories: workforce and corporate model evolution.

1. Workforce implications: There is increasing evidence that not everyone who goes into the business world is solely interested in making money. In fact, we believe that most people want a sense of meaning in their work. Courses in social entrepreneurship are gaining in numbers and popularity. Today’s MBA students, according to Dean of Stern School of Business at NYU Peter Henry, “are clamoring for more course content on the role of business in reducing world poverty and the ways in which globalization can benefit [the] poor.” One journal reports that Millennials “seek meaning from work—even at the entry level” and Kevin Thompson at the University of Connecticut writes that they “prefer having the option to learn independently or in small groups to deepen their understanding of new knowledge.” Others observe that Millennials who frequently participate in workplace volunteer activities are more likely to have higher employee satisfaction, as compared to those who rarely or never volunteer. Some experts take this reality a step further and observe that “in the long run … social and economic goals are not inherently conflicting but integrally connected.”

2. Corporate model evolution: In a Business Development Strategies post, the author writes, “The rapid development of international markets and globalization demanded a corporate ‘shake up’.” That “shake up” does not come easy for corporations still struggling with diversity and equality. This need to change or “shake up” corporate culture is magnified when US businesses operate in a foreign market with a different set of cultural values. For example, in China and India, experts observe a belief that “the human race is so intricately woven together that one person's misbehavior may harm many; they also feel and experience this interdependence.” The business model of short-sighted maximization of profits is not the best long-term approach for expansion in such a cultural context. People will require that others respect their cultural values. Nonprofit values of cultural sensitivity help corporations find the right balance. Indeed, many of the aforementioned Millenials will also expect that such a value proposition is the norm where they work.

We believe that we are seeing these two value propositions in the nonprofitization of business with the advent of B Corporations and L3C hybrids—organizational models that promise to drive social impact while earning a profit for the investor. These new corporate models can potentially address at least some of the Millenials’ workplace demands. At the same time, there are reasons why LC3s and B Corporations cannot replace the nonprofit model. For example, we believe it will be quite challenging to show how to make a profit on operating permanent housing and support services for the chronically mentally ill. So we should welcome these organizations but not make the mistake of assuming that there is a “one size fits all” solution to helping others.

In conclusion, when we compare our challenges in the nonprofit sector (such as weak management skills, frequently tight budgets, and the never ending challenges of reaching scale) to those in the for-profit sector, a typical response from our business colleagues is: “You think it is any better in the for profit realm? Well it is not!" Some suggest that these problems are even worse in the for-profit realm, which often has less of a participatory management approach, a short-sighted fixation on immediate profit over quality, and so on. But we are not going to take sides on which is better and which is worse. As the old saying goes: Let's not judge someone until we have walked two moons in their organization. Otherwise, there is no profit in it!

Read more stories by Ken Berger & Jeremy Kohomban.