Nonprofit Organizations and Creating

Public Value

A commissioned background paper about Nonprofits

in Business as it relates to the creation of public

value.

Steven Rathgeb Smith

American University University of Washington

July, 2012

Nonprofit organizations have attracted growing interest from scholars, policymakers, and

citizens for their potential contributions to society. In the UK, David Cameron has proposed a

“Big Society” platform of reform that includes a very prominent role for nonprofit organizations,

volunteers, and self-help groups in addressing social problems, especially as an alternative to

existing public sector provision. Similarly, a succession of presidents dating to George H.W.

Bush in the late 1980s have supported voluntarism, community service, and local nonprofit

organizations as central to address social problems and community needs. By offering an

organizational vehicle for citizens to volunteer and participate in their communities, nonprofits

also provide opportunities to build social capital—or the bonds of cooperation---that can exist

among community members. Social capital can then promote thriving communities and more

effective governance. Volunteering can also have value for the individual person whose

experience may encourage greater commitment to the community, the resolution of social

problems, and more overall philanthropic behavior. The value of volunteering to the individual

and the community is also central to the promotion of volunteering by government. In Europe,

many countries have created “volunteer centres” to coordinate and encourage volunteering. In

the US, the Corporation for National and Community Service (CNCS), created in 1993, has

provided funding for modest stipends for AmeriCorps and VISTA volunteers to work in local

community organizations. CNCS has encouraged volunteering in general and service learning in

secondary schools and universities, further creating interest in local nonprofit organizations.

The growing interest in nonprofits for their contributions to “public value” also reflects a

profound shift in the role of government in society in the last 30 years. The New Public

Management (NPM) helped inaugurate a restructuring of the state that includes a reliance on

more market strategies to address public problems (Hood, 1991; Smith and Phillips, 2010). The

growth of nonprofits represents in part this shift to the market since government contracts with

nonprofits to provide public services, although nonprofits often have roots in local communities

and a public-spirited mission. Governments have also turned to nonprofits to provide services

even without extensive government contracts, in order to tap their community roots, volunteers,

and private donations.

The widespread enthusiasm for social entrepreneurship and social innovation has also sparked

more engagement of citizens and policymakers with nonprofit organizations. Since the early

1990s, trends in public and private management have emphasized a move away from large

bureaucratic organizations toward more flexible and less hierarchical organizations. In a rapidly

changing and turbulent environment, organizations need the ability to act quickly and creatively

to new opportunities. Given this new management thinking, nonprofits are regarded by citizens

and policymakers as possessing great potential as seedbeds of social innovation and reform.

Entrepreneurial individuals with a social mission who would like to add to “public value” are

thus drawn to the nonprofit form given its low barriers to entry and the ability to obtain public

and philanthropic funding for new ideas. Well-known nonprofit organizations such as Teach for

America, CityYear, YouthBuild, Citizen Schools, Parents as Teachers, and the Harlem

Children’s Zone are good examples of social innovation through nonprofits.

Further, the restructuring of the state in Eastern and Central Europe, the Middle East and Asia

has focused attention on nonprofit organizations as central to democracy and citizen engagement

in the policymaking process, locally and nationally. In this context, nonprofit organizations are

part of a vibrant civil society that allows for the effective representation of citizen interests.

Nonprofits serve as the training ground for the political skill needed to participate in the policy

process and provide personal and professional connections that can be very helpful for civic

participation. This representative role also overlaps with the service role of nonprofits as well.

Nonprofits are valued in part because of their particularism and ability to target specific niches or

minority interests. Neighborhoods or ethnic groups lacking representation or services can

organize a nonprofit to address their concern through advocacy or the provision of services.

Initially, this type of nonprofit may be entirely volunteer and dependent upon donations,

although eventually this nonprofit may receive public funds.

The broad international interest in nonprofits as well as NGOs, third sector organizations, and

civil society organizations represent in part the restructuring of the public/private boundary

within the context of the welfare state and society at large. This paper will apply a public values

framework to the evolving role of nonprofit organizations in public policy, civil society, and the

welfare state in the US and abroad. The analysis in the paper will address the different roles and

responsibilities of nonprofits within the context of this framework. Further, criteria will be

advanced that can diagnose and highlight the challenges faced by nonprofits in delivering public

value, especially in the context of the current fiscal crisis and welfare state restructuring in many

countries around the world. Specific strategies for government and nonprofit to employ to

advance the contribution of nonprofits to public value will also be discussed. The paper will

conclude with an analysis of the utility of the public values framework as it pertains to nonprofit

for theory, policy and practice.

Nonprofit Organizations and Public Value

Nonprofit organizations present a special challenge for a discussion of public values because the

set of organizations classified as nonprofit are quite diverse. In the US, the term nonprofit has

been typically used to refer to tax-exempt organizations under federal tax law. These

organizations include a varied set of organizations that include charitable organizations such as

soup kitchens, universities, and hospitals; trade associations and unions; social clubs such as the

Masons, the Knights of Columbus, sports clubs, and choral societies; churches; and homeowner

associations. Many of these organizations have an ostensibly private mission: sports clubs

provide an opportunity for citizens to collectively pursue a sports activity; country clubs are

designed for the private enjoyment of the members; and unions help negotiate wages and

benefits for their members. Yet government has implicitly recognized the benefit of these

organizations by exempting them from most taxes including income, sales and property taxes.

Moreover, a rich scholarly literature exists that touts the public value of nonprofits—even

nonprofits with a private mission. One perspective can be termed the “civil society/social

capital” perspective (Smith and Gronjberg, 2006). This perspective is rooted in the idea that

nonprofits represent communities of interest that can include neighborhoods, citizens interested

in similar issues such as the environment, and ethnic groups. These nonprofits are essential to

civil society which generally refers to the associations, groups, and informal networks that exist

between the market and the state (Walzer, 1992; Foley and Edwards, 1996; Cohen and Arato,

1994; Deakin, 2005; Brown and Jagadananda, 2007). Scholars working in this tradition tend to

emphasize the value of civil society organizations in terms of their contributions to liberty,

democracy, community building and social capital, and individual and community responsibility.

One of the first scholars in this tradition was de Tocqueville (2000 ed.) who argued that

voluntary associations in the US were critical to representation, democracy and liberty since they

served as an intermediary entity between the state and the individual. More recently, Nathan

Glazer (1988) proposed a “self-service society” where community groups, individuals, and local

voluntary associations would address social problems without direct aid from the government

(Also, Meyer, 1982; Woodsen, 1981). The Faith-Based and Community Initiative of President

George W. Bush also reflected this support for local, community solutions, preferably without

substantial government help (Smith, Bartowski, and Grettenberger, 2007). The widespread

support for volunteers in the US and abroad also reflects this vision of community members

organizing to help themselves rather than relying on public sector programs and funding. The

importance of civil society organizations for representative democracy has also received

widespread attention with the end of the Cold War and the democratization of previously

authoritarian regimes in Eastern and Central Europe, as well as more recently in the Middle East.

Civil society organizations are considered essential to the capacity of societies to sustain

democratic reforms.

But nonprofits were also valued for their distinctly private mission and values: de Tocqueville

extolled the ability of voluntary associations to represent citizen interests; social clubs such as

the Masons and the Knights of Columbus offered an opportunity for citizens with mutual

interests to associate; and churches and faith-related agencies were sites of worship and religious

outreach and practice. The “public value” of this private orientation remains an important strand

of policy and practice. The Bush administration through its Faith-Based and Community

Initiative hoped to support a more prominent role of churches, faith-based service providers, and

small community agencies in addressing social problems through changes in regulations and

funding. The private values of these organizations were viewed as an asset in addressing social

problems. The private values of nonprofits can also conflict with public policies and priorities as

illustrated in the ongoing controversy regarding the Affordable Care Act and the ability of

religious institutions to waive certain requirements that conflict with religious teaching (Kaiser

Family Foundation, 2012).

The public value of nonprofits as private entities is also evident in the argument on the value of

nonprofit organizations as producers of social capital. Social clubs including choral societies,

bowling leagues, and neighborhood associations encourage citizen interaction, creating social

bonds of cooperation that can be useful in resolving community problems (Putnam,1993; 2000).

Communities with higher levels of social capital tend to have more satisfied citizens, better

public services, and higher levels of economic development. In short, the participation of

individuals in private associations for ostensibly private goals (such as recreation or cultural

enrichment) may yield important and potentially enduring public value. At least rhetorically,

governmental efforts to support community organizations such as micro-credit organizations,

self-help groups, and neighborhood associations have often been justified in part on the grounds

of community building.

Nonprofit organizations may also add public value for their investments in human capital:

training leaders who may eventually work in the public sector including as legislators; training

street-level bureaucrats who may also work in government; and through AmeriCorps and other

volunteer programs, nonprofits may offer insights into social problems that encourage the staff

and volunteers of nonprofits to seek new solutions in different contexts (See Frumkin and

Jastrzab, 2010).

Closely allied with this social capital perspective is the extensive work by many different

scholars on the value of community organizations are opportunities for citizen participation and

greater democratic control by citizens. In the US context, community organizations in the 1960s

received extensive support from government in the US in order to promote more effective citizen

control and participation in local affairs, especially among the disadvantaged (Marris and Rein,

1982; Morone, 1990; O’Connor, 2001). Countless community initiatives since the 1960s have

been based in part on this participatory vision for community organizations to address local

community problems (See Fung, 2005; Marwell, 2010; McQuarrie, 2010; Sirianni, 2009; Majic,

2011). Also, nonprofit participation in the policy process such as neighborhood association input

into municipal decisionmaking can lend legitimacy and credibility to the final decisions reached

by government officials (Diers, 2004; Sirianni, 2009). As Berry and Portney (forthcoming) note,

nonprofit organizations have become much more prominent in urban policymaking in the US in

the last 25 years.

Moreover, this participatory model is also embedded in many volunteer community programs

where direct engagement by youth is an essential strategy to assist at-risk youth achieve self-

confidence and a more appropriate set of behaviors; thus, empowerment through participation

yields great public value by helping at-risk youth become contributing, productive members of

society (Eliasoph, 2011). This empowerment model is part of a wider trend toward the “co-

production” of public services---or the joint production of services such as police or workforce

training between government and individual citizens. Co-production is underpinned by the idea

that many public services require the active participation of citizens in order to be effective. For

instance, policing will be more successful in reducing crime with the active participation of

citizens. Given the community roots of many nonprofits, they may be in a position to foster the

engagement of clients in a co-production process (Bovaird, 2007; Alford; 2010; Loeffler, Taylor-

Gooby, Bovaird, Hine-Hughes, and Wilkes, 2012). The implicit attractiveness of “co-

production” is also reflected in the growth of government funding of local organizations

representing neighborhoods or ethnic groups, underpinned by an assumption that these

community organizations can provide more effective service than public sector organizations

which face more general imperatives to serve citizens equitably (Smith and Lipsky, 1993).

These various strands of the civil society/social capital perspective tend to emphasize the non-

market aspects of nonprofits in terms of their contributions to public value. This emphasis also

fits, at least in part, with the work of Bozeman (2007) who conceptualizes public value as a

normative consensus on rights, obligations and principles of public policy and government (p.

13). In this sense, he regards public values as a counter to the emphasis on marketization and

economic individualism in public policy discourse. Nonprofits can help build social capital

which can facilitate deliberative processes at the local level and contribute to the forging of

consensus on key public priorities. However, many nonprofits ---especially service providers----

may face challenges in building this type of consensus. Many nonprofits do not have extensive

community roots and participation; instead they are directed by social entrepreneurs or

professionals who are relying upon the nonprofit organizational form to pursue their policy goals

such as improving the environment or helping the disadvantaged through new services. Many

nonprofits rely upon local citizens for donations but these individuals have little ongoing

connection to the agency (See also Skocpol, 2002). In addition, nonprofits may represent

relatively narrow interests and contribute to the fragmentation of local community services and

programs. The ability of these nonprofits to overcome this fragmentation may hinge on the

extent to which local government and private funders support more collaborative and integrative

community strategies.

The public value of nonprofits can also be understood in relationship to markets and market

failure in particular. One highly influential theory rooted in market failure theory is based upon

“contract failure” which refers to imperfections in the system of market transactions for private

goods so that trust in the provider, rather than known product quality, guides purchase decisions.

Here government or nonprofit entities emerge as preferred providers because they give

purchasers leverage or confidence that their interests will ultimately be served, not those of a

profit-maximizing owner. In the case of nonprofits, the prohibition against distributing profits for

private gain and systems of patron control ---the so-called “non-distribution constraint”-- serves

to ensure such trust (Hansmann 1980; Also, Ben-Ner 1987). Thus, a nonprofit theater troupe may

reassure donors and the public that it is dedicated to quality programming and the broader

community because donors know that the board and staff cannot divert organizational funds to

their own personal benefit. Or an individual might donate to a nonprofit international

humanitarian relief organization for disaster assistance because the donor can trust that the

organization will use the funds for the designated public purpose. In this sense, the public value

of nonprofits is providing an organizational vehicle to overcome problems of asymmetric

information in the provision of public goods.

Since the key component of “nonprofitedness” for Hansmann (1980) is the non-distributional

constraint and the trust relationship between nonprofits and philanthropic donors, the rationale

for tax-exempt status rests upon donative income and the provision of public goods. Thus,

nonprofits reliant primarily on fee income such as hospitals or nursing homes are “commercial”

nonprofits and raise questions on the merits of tax-exempt status. A related argument that is

currently used by many localities around the country is that nonprofit hospitals should provide a

level of charity care that compensates for the loss of tax revenues. More generally, hospitals

now have to report their “community benefit” to the federal Internal Revenue Service (IRS) and

this information includes the amount of charity care provided by the hospital (See Schlesinger

and Gray, 2006; Gray and Schlesinger, forthcoming). Given the fiscal crisis facing local

government, the demands for demonstrated community benefit by larger nonprofit institutions

including hospitals and universities is likely to increase.

Theories of market failure also pertain to an equally fundamental problem of market exchange

systems--that is, that markets fail to operate efficiently when the product is a public good for

which an appropriate price cannot be established in the private marketplace. In this case, the

purchaser would pay for goods that, while of personal utility, also benefit others who do not pay-

-the so-called free riders. Under such conditions, the private market would not produce the goods

in sufficient quantity to meet demand or maximize overall economic welfare. Consequently, non-

market mechanisms, such as government, must step in to provide the public goods, at least those

that are highly valued. Government can do so because its power of taxation forces everyone to

share in the costs. Classic public goods include national defense and lighthouses. Weisbrod

(1988) built upon this essential understanding of public goods to argue that government, in its

provision of public goods, will respond to the demands of the “majority” or the median voter,

leaving special needs or those affecting small minorities or powerless groups unsatisfied. In his

view, nonprofits emerge to provide public goods provided by these minority interests. Examples

include nonprofits as diverse as a local neighborhood association, Catholic Charities, or Jewish

Family Services. Nonprofits may also serve a similar function for social entrepreneurs, as

suggested by the role of nonprofits in pioneering third-party health insurance, kidney dialysis,

health-maintenance organizations, hospices, and AIDS service agencies (Gray and Schlesinger,

forthcoming).

In essence, Weisbrod’s (1988) rationale for the existence of nonprofits rests upon a theory of

“government failure”. Other scholars have also argued that government faces serious constraints

on their ability to experiment and innovate, in part because government needs to respond to

citizens through uniformity, fairness, and equity. In order to justify that their actions are

equitable, government also needs to document its actions and put in place regulations and

procedures to facilitate the fair implementation of laws and the equitable distribution of public

resources (Douglas, 1987; Wilson 1967; Smith and Lipsky,1993).

Nonprofits do not face these constraints; nonprofits can focus on the needs of specific minority

interests or communities of similar interests such as individuals concerned with the environment

or advocates for breast cancer prevention and research (Also, Smith and Lipsky, 1993).

Nonprofits can meet special niche demands because they have access to particular types of

resources or supply structures (James 1987; also, Smith and Gronbjerg, 2006). They can solicit

and obtain voluntary contributions or membership dues to subsidize the provision of services to

those unable or unwilling to pay the full costs.

Nonprofits are also not politically accountable in the same way as government, since they are

governed by a volunteer board of directors. Limited external accountability also means that

nonprofits do not need to document their activities or demonstrate their equity and fairness to

nearly the same extent as government. Thus, nonprofits can be flexible and considerate of

special, individual circumstances. For this reason, nonprofits are regarded a major seedbed of

social innovation, since they have the flexibility and autonomy (at least theoretically) to pursue

creative ideas, unencumbered and constrained by bureaucratic regulations. The current

enthusiasm for social innovation and social entrepreneurship is based in part in this vision of a

nonprofit flexibility and responsiveness to new trends and complex problems (See Light, 2007;

Bornstein, 2007; Jackson and Javits, 2011). In this sense, the public value of nonprofits is

envisioned as their capacity for innovation which then may lead to more effective solutions to

social problems.

The ability of social entrepreneurs in nonprofits to mobilize resources may also hinge on the

level and nature of civic and social engagement present in a community or society (Putnam 1993,

2000) and on the prevalence of interest and stakeholder groups (Tschirhart, 2006). Nonprofits

will thus be more likely to raise donations, attract and retain volunteers, and more generally

sustain themselves in communities with higher levels of social capital. Yet, limits exist to the

capacity of nonprofits to mobilize resources. Indeed, Salamon (1987) has propounded a

theoretical framework for understanding the public value of nonprofit that turns Weisbrod’s idea

of government failure on its head: Salamon argues that nonprofits, not government, initiate the

delivery of public goods. However, nonprofits encounter “failures” of their own--insufficiency,

amateurism, particularism, and paternalism--that government is able to address. Insufficiency

reflects the fact that nonprofits depend on donations from those able and willing to make

contributions. However, the demand for nonprofit public goods most likely exceeds the available

donative resources, especially during economic downturns. In response to resource insufficiency,

Salamon (1987) argues that government intervenes to provide needs funds and support.

Nonprofits also face problems of amateurism because they may rely on staff and volunteers

without extensive professional training and/or supervision or cannot properly professionalize and

expand their operations with their own internal resources. Government resources and regulations

help nonprofits professionalize (allowing expansion) and meet the demand for public goods

(Also, Hwang and Powell, 2009).

The focus of nonprofits on specific communities of interest means that nonprofits are not well-

suited---without extensive government subsidy and regulation ---to offer broad-based services to

wide segments of the population. For example, without public funding, many nonprofits would

not be able to offer programs to the disadvantaged or the poor. With government funding, a

nonprofit dance troupe can offer programs to low-income people or a nonprofit child welfare

agency can serve children with special needs. Relatedly, Salamon also argues that nonprofits

suffer from paternalism--that is, their definition of community problems is driven by the visions

and preferences of those who control them, not the community at large. Nonprofits do not,

individually or collectively, represent the general population; rather, they tend to be governed by

small, self-perpetuating boards, disproportionately selected from the community elite, and they

may pay close attention to the wishes and interests of major private donors (Ostrower 1995;

Galaskiewicz, 1985) and/or public funders. To Salamon (1987), these offsetting “failures” of

government and nonprofits create the basis for an exchange relation between them and

encourage government and nonprofits to enter into partnerships. As a result, the public value of

nonprofits cannot be fully realized without government support. Salamon’s perspective is also

consistent with many scholars of the welfare state including T.H. Marshall (1962), Beveridge

(1948), Kramer (1981), and Deakin (1995; 2005) who argued for a partnership between the state

and the voluntary sector. The voluntary sector played a key role in targeting minority interests,

spurring innovation, and helping to identify new social problems and needs but assistance from

the statutory sector was also crucial.

However, a reliance on nonprofit organizations to provide valued public services may actually

prevent the emergence of a political consensus to vest public resources in addressing those needs

(Wilensky and Lebeaux, 1965; Esping-Anderson, 1990). Further, the utilization by government

of nonprofit organizations may mask the responsibility of government in funding these

nonprofits, thus creating obstacles to extensive public support of government programs (Smith,

1993; Also see, Hacker, 2002; Mettler, 2010). Yet, these sectoral divisions can shift as well,

especially given the big increase in public funding of nonprofit organizations (at least until fiscal

crisis of 2008). For instance, the hospice movement was pioneered by socially-minded

individuals (especially people with connections to religious organizations) and in the beginning

hospices were almost entirely nonprofit. But the growth in funding, especially through the

Medicare program, has encouraged the entry of for-profit hospice firms, so that for-profit firms

now dominate the hospice field. As the balance of sectors shifts in particular policy or service

fields, the demand for nonprofit (or government and for-profit) services can potentially shift

dramatically.

While Salamon proposes a “win-win” bargain for a government-nonprofit partnership, other

authors suggest that government is a threat to private business and philanthropy; thus,

government funding of social programs can “crowd-out” private philanthropy and voluntarism

(Brooks, 2000; Day and Devlin, 1996; Schlesinger, 2012). Recently, this perspective has been

articulated by the political conservatives in the context of health care reform and the role of

government in general. Framed in the context of the public value definition of Bozeman (2007),

the argument would be that the government can undermine the key values of nonprofits

including their capacity to build social capital, engage local communities, and promote diversity.

Government funding of nonprofits may encourage professionalization, more competition, and

more business-like behavior. Consequently, nonprofits, in response to government funding and

regulations, substitute a market logic for their previous emphasis on community norms and

priorities (Eikenberry and Kluver, 2004; Rosenman, Scotchmer and Van Benschoten, 1999;

Salamon, 1993). As noted, Hansmann (1980) also employs this basic perspective to argue that

nonprofits primarily dependent on commercial revenue may be operating like “for-profits in

disguise”, undermining the rationale for their tax-exemption.

Implicitly, the arguments regarding “crowding out” suggest that the public value of nonprofits is

related substantially to the sector’s size within the overall economy and society. For example,

total private giving was $303.8 billion in 2009 and 26.8 percent of the population volunteered

(Wing, Roeger, and Pollak, 2010). Government contracting with nonprofit social and health

organizations is in the hundreds of millions of dollars. As Salamon and Anheier (1998) and

Brooks (2006) have noted, the US for example has a much higher level of private philanthropic

giving and nonprofit organizations than countries in continental Europe. The former tend to

ascribe the sharp variations to different developmental patterns including the welfare state

regime of the country. Brooks tends to view the lower level of philanthropic activity in Europe

as an indication of crowding out and the dampening effect of higher levels of government

spending in Europe on the philanthropic activity.

Challenges to Creating Public Value

Given the growth of the sector and popularity of programs like Teach for American and the

Harlem Children’s Zone, the contribution to public value of nonprofits might appear to be at an

all-time high. Yet, important trends in public policy, public management and the economy are

creating serious obstacles to the capacity of nonprofits to create public value. In this regard,

three trends are especially important: the fiscal crisis; more competition among nonprofits for

contracts and donations; and the advent of new performance management regimes.

The fiscal crisis of 2008 continues to have profound effects on nonprofit organizations---from

social services agencies to cultural institutions to environmental advocacy coalitions. State and

local governments in the US have had to reduce funding, sometimes quite drastically, to many

nonprofit organizations. Some states such as California have even cut state contracts to

nonprofits in the middle of fiscal year. Further, the fiscal crisis affected the asset values of

private foundations, leading them in the immediate aftermath of the crisis to also reduce their

funding to local grantees. The federal government initially provided funding to offset the budget

cuts at the state and local level through the stimulus funding through the Troubled Asset Relief

Program (TARP). But this program has now ended, leaving state and local government and their

nonprofit grantees with more budget gaps to fill.

The response of nonprofits to the fiscal crisis has varied. Some agencies have tried to reduce

their expenses through cooperation with other nonprofits through measures such as sharing staff,

co-locating facilities, and pooling their resources to reduce expenses for insurance and health

care. Nonprofits have also altered their mission in order to position the agency to tap new

markets and funding sources. This re-positioning of the agency can also include a new name and

brand for the organization. Many nonprofits have increased their use of volunteers such as the

substitution of volunteers for paid administrative staff. Fees for various services have been

raised and at least some nonprofits are trying to generate higher levels of earned income

(Harrison, Eleveld, and Ahern, 2011). The latter effort can reflect many different strategies

including: using assets such as parking lots to raise revenue; creating for-profit subsidiaries to

reach new target audiences; and increasing their fee income through various government

programs such as Medicaid. In general, nonprofits have also adopted more commercial and

“business-like” in order to create a sustainable business model, amidst a more competitive

funding environment.

While broad interest exists in mergers as a strategy to cope with the more austere funding

environment, relatively few mergers have occurred, although accurate data is lacking. But

anecdotal reports from local communities indicate that agencies find mergers complicated, time-

consuming, and difficult. The reasons for the relative lack of mergers reflect the commitment of

the staff and volunteers to a nonprofit despite funding challenges as well as the legitimate

concern of board members and staff on the risk posed to a healthy organization of merging with

a financially ailing organization.

Overall, the fiscal crisis then has greatly complicated the capacity of nonprofits to contribute to

public value. As noted, Bozeman (2007) argues that public value is a normative consensus on

rights and obligations. But the fiscal crisis has pushed nonprofits to be more market-oriented and

hence more focused on a bottom-line management ethos. Many nonprofits ---especially smaller

community organizations--- are also quite vulnerable financially so the fiscal crisis has made

them more risk averse and less likely to engage in activities that do not have ongoing financial

support. Consequently, non-revenue producing programs or activities such as advocacy,

community outreach, and social capital building are often quite difficult to initiate and/or sustain

in the current environment. The priority placed by public and private funders on outcomes and

efficiency tends to exacerbate this shift away from non-revenue producing activities.

Another major challenge to the creation of public value by nonprofit is the widespread

implementation of various performance management regimes governing nonprofits. At one level,

the emphasis on performance would appear to promote greater public value by nonprofits. That

is, funders are expecting improved performance and outcomes from nonprofits. This focus

represents a shift from previous eras. In the initial buildup of government contracting with

nonprofit agencies in the 1960s and 1970s, government administrators tended to emphasize

“process” accountability, which focused on the outputs and activities of the contract agencies.

But this approach did not focus on outcomes. At this time, private foundations also lacked an

emphasis on outcomes as well.

Subsequently, the advent of the government reform movement of the 1990s encouraged

government administrators to restructure their contracts to emphasize performance and outcomes

(Osborne and Gaebler 1992; Hood 1991; Phillips and Smith 2010). To varying degrees, many

government contracts, including welfare-to-work, mental health, workforce development, and

child welfare, are now performance-based contracts wherein agencies are reimbursed for services

only if they meet specific performance targets (Heinrich and Choi 2007; Smith 2010). (Many

private funders such as local United Way chapters and national foundations such as the Edna

McConnell Clark Foundation are also tying their grants to an expectation of meeting specific

performance targets.)

The logic of performance contracting tends to promote market competition among providers:

government is supposed to hold agencies accountable for specific outcomes and if they do not

meet these outcomes, government will turn to a different provider. Thus the very existence of

performance contracting promotes greater uncertainty and more competition among nonprofit

and for-profit providers. To the extent that nonprofit agencies are subject to contract termination

(for non-performance), then agencies will be understandably more concerned about potential

competitors and may adjust their programs and management styles accordingly. Agencies which

may not have considered bidding upon particular contracts may do so in a performance contract

arrangement as an ‘insurance policy’ in case other contracts are lost.

Greater market competition has been reinforced by the diversification of the tools of government

support for nonprofits. Whereas previously, government tended to support nonprofits primarily

through grants and contracts, it has increasingly moved to more funding and subsidies tied to the

client such as vouchers (child care and housing), quasi-vouchers such as Medicaid, and tax

credits such as caring for the disabled or children (Smith, forthcoming; Grønbjerg and Salamon,

2002). Performance-based contracting and consumer-oriented subsidies tend to squeeze

nonprofits financially since they rarely allow sufficient funding for administration and overhead.

More importantly, perhaps, they also force nonprofits to market their services to subsidy-bearing

clients and to give priority to controlling costs rather than maximizing the quality of services

(Smith and Gronbjerg, 2006; Smith, forthcoming; Gray and Schlesinger, forthcoming).

This heightened interest in performance has a number of implications for the governance and

management of nonprofit organizations, including the role of voluntarism within these agencies.

In particular, the shift to outcome evaluation often involves a revolution in management

thinking. Agencies need new investments in information systems in order to track outcomes and

compile relevant programmatic and financial data. A key ripple effect is the

“professionalization” of the administrative and programmatic infrastructure of nonprofits,

especially for smaller community organizations that may have roots in local voluntarism (Hwang

and Powell, 2009). Greater investment in administration and programs can be a severe challenge

for these community organizations, given their relative undercapitalization. Also, the resources

necessary to comply with performance contracts can raise questions about mission and

programmatic focus, since the performance contracts may contain expectations that are at

variance with the previous client and program emphases, although some agencies may be able to

shape these contract requirements to fit their previous client and program goals. For example, a

community agency for youth may shrink its counseling program and target youths who meet

specific contract expectations in order to meet the performance contract requirements (See

Smith, forthcoming). In welfare-to-work programs, the staff of nonprofits often forced to fit their

decisions into a rigid performance targets (Soss, Schram, and Fording, 2011). In essence,

performance contracts often require agencies to shift from a priority on responsiveness to their

community of interest such as a particular client group or neighborhood to government priorities

and expectations (Smith and Lipsky, 1993).

The emphasis on outcomes goes well beyond performance-based contracts. Prominent charity

rating services such as Charity Navigator and Guidestar are forcefully promoting an outcome

orientation among nonprofits. The national organization representing nonprofits, Independent

Sector, has promulgated a set of good governance principles for nonprofits including

foundations. At the state level, the Maryland Association of Nonprofits has developed a

“Standards of Excellence” to promote high standards of ethical behavior and good governance in

nonprofits. Further, nonprofit agencies in specific service categories, such as addiction services,

are using accreditation to help support their efforts to enhance their impact and effectiveness.

And, greater interest exists among nonprofits in particular service categories such as child

welfare or drug treatment for cooperation to agree upon standards of good care and practice. In

some jurisdictions, policymakers are encouraging or requiring nonprofit agencies to adhere to

“evidence-based practices,” that is, practices that have been proved effective through research

and field testing (Metz, Blasé and Bowie, 2007). The evidence-based practice movement, like

other performance management strategies such as performance contracting, is an effort to

standardize service and reduce the discretion of service agency workers. Some jurisdictions, such

as Oregon, are requiring evidence-based practice as a condition of financial support, but

meanwhile many nonprofit agencies are voluntarily adopting these practices in response to

evolving professional norms and expectations and encouragement by government and private

funders. Many professionals in a particular field such as home care or child welfare may in the

course of their professional career work in the public, nonprofit and even the for-profit sector,

further encouraging a professional consensus on norms of good practice.

Arguably, nonprofits are more seriously focused on performance and efficiency due the

emergent performance management expectations among public and private funders. Moreover,

consensus on good practice has developed in many policy fields and more generally among

nonprofits, creating a certain type of public value. But increased competition and government

regulation can encourage nonprofits to focus on more narrow organizational interests and their

market position rather than broader societal goals or community needs. Moore (2000) for

example proposed that a distinguishing feature of nonprofits ---in his view, their public value---

was the disconnect between mission and financial performance, unlike for-profit organizations.

Yet, the fiscal crisis and performance contracting are promoting a tighter linkage between the

financial bottom-line and mission, affecting their capacity to engage more broadly with their

community.

One other challenge to the creation of public value by nonprofits is operational capacity. As

noted, nonprofits have certain characteristics including the “non-distribution constraint” which

prevents the distribution of profits to the board or staff of a nonprofit organization. This non-

distribution constraint in turn encourages donors to trust the organization that donations will be

used for its intended purposes (Hansmann, 1980). Trust is based in part on the mission that is

supposed to guide the organization in its operations. While this constraint has potential

advantages, it also means that nonprofit cannot raise money from investors, placing nonprofits at

a disadvantage in raising capital in comparison to for-profit organizations, creating obstacles to

their ability to create public value. Philanthropists and foundations can provide the grants but it is

often insufficient to adequately address the capital needs of nonprofits.

The importance of operational capacity within nonprofits is an urgent concern given the growth

of nonprofits in recent years; many of the newer nonprofits are relatively small and struggle with

sustainability, professionalism, and resource development. The problems of smaller

organizations have prompted many public and private funders to provide funding for capacity

building and technical assistance for local nonprofits. The capital challenges of nonprofits is

also encouraging more interest in nonprofit-corporate partnerships and new hybrid organizational

forms such as LC3s that combine also allow a social purpose organizations to receive money

from investors.

Public Value, Nonprofits, and the Role of Government

The growing role and presence of nonprofits in society and public policy represents in part the

value and advantages offered to government by nonprofits. In terms of formal government

contracting with nonprofits, the benefits include most explicitly being able to purchase

specialized services without having to develop the expertise in-house. This attraction of

nonprofits is especially apparent in government contracting with neighborhood or ethnic based

organizations to deliver services to targeted populations. The increasing use of nonprofit charter

schools with special themes such as Montessori education is another example. Similarly, many

cities across the country have shifted their zoos and aquariums from municipal management to

nonprofit management (even as they retain ownership of the land and the zoo facilities). This

shift, usually to a “Friends of the Zoo” association, allows the city to shift responsibility for zoo

staffing to a nonprofit with much more flexible hiring rules. (Typically, the relation between the

society and the city is in the form of a complicated contractual agreement that specifies the

extent of continuing city subsidy as well as the nonprofit organization’s financial and

management responsibility.) By shifting to a partnership model with nonprofits for zoos, local

government may be able to tap private donations to help support zoo operations. Indeed, many

local governments have created affiliated foundations for city agencies such as the police or the

parks department to raise private donations, thus augmenting city funds.

In addition, contracting with nonprofits allows government to circumvent civil service

restrictions that require complex--and lengthy--hiring procedures and make it difficult to reward

performance or shift government employees from one type of position to another. Thus

contracting allows government to substantially reduce program startup costs and quickly respond

to newly identified needs or the demands of emergent groups. Many examples exist including

the government’s response to AIDS and tragedies such as the September 11th

attacks on the

World Trade Center.

Significantly, this reliance on nonprofits—either through direct contracts or indirect support and

encouragement—shifts the risk of funding and delivery of public services to the nonprofit sector.

This risk-shifting is especially apparent in performance contracts where performance is the

responsibility of the nonprofit, even though the performance targets are often set by government

and funding is typically inadequate. If a program fails, the blame rests with the nonprofit.

Moreover, the increasingly complicated arrangements of contracting and sub-contracting often

make it difficult to hold any agency accountable. For instance, state and local governments

frequently contract with an intermediate nonprofit or for-profit entity that then sub-contracts with

nonprofits (or for-profits) to provide the service. Government’s role at the street level given the

complexity of the contracting structure can be very elusive. Citizens are unlikely to regard

government as very involved in the actual delivery of services at the point of contact with the

client. Yet, government is indeed responsible for funding, regulation, contractor selection,

monitoring and evaluation; thus, government is profoundly intertwined with contractor success.

Many very successful and acclaimed nonprofit programs including the Harlem Children’s Zone,

Teach for America, and YouthBuild have received extensive direct and indirect government

support including substantial federal funding and support from the Corporation for National

Service. Yet the contributions of government to the success of these programs is not often

acknowledged, thus creating challenges for nonprofits in building political support for continued

public funding (Smith, 1993; Smith and Gronbjerg, 2006). Alternatively, the existence of a local

soup kitchen, if it only provides infrequent service, may serve as a justification for government

cutbacks in the funding of food stamps and related social programs.

Relatedly, the utilization of nonprofit organizations by government means that it difficult for

government to take full credit for successful programs. While government may wish to take

credit for such programs, nonprofits that provide the services will have the easier case to make.

After all, they are on the ground with detailed knowledge of client problems and workable

solutions. They will also have strong incentives for taking much of the credit for themselves

since that strengthens their bargaining position for the next round of contract negotiations. All of

these costs impose opportunity costs on government in that they absorb staff and other financial

resources that could otherwise be devoted to alternative activities.

In short, nonprofits and their relationship to public value reflect the complicated American

welfare state. Prior to the 1960s, nonprofits played an important role in local communities in

addressing social problems, primarily through private philanthropic funding. But the 1960s led

to the growth of public support for local nonprofits. Over time, nonprofits adapted to public

funding and were very supportive of increased government funding in a whole range of social

and health programs provided by nonprofit agencies. But public funding has been reduced for

many nonprofits in recent years, often quite substantially; indeed the only major funding

programs which have continues to grow significantly are health related such as Medicaid and

Medicare. Despite the austere funding climate, the continued importance of nonprofits within

the context of the welfare state reflects the complicated mixed public/private American welfare

state. As noted by Howard (2007), America’s welfare state is comprised of a diverse array of

programs including direct grant programs, tax credits and deductions, vouchers and quasi-

vouchers, and tax-exempt bonds. The growth of nonprofit community programs have been the

beneficiaries of these diverse array of policy tools to varying extents depending upon the policy

area. Yet, political support for nonprofits is often quite fragmented, creating challenges for the

sustainability of many local programs and organizations. \

Implications for Leadership and Governance

The creation of public value by nonprofits in this mixed public/private world requires new

approaches to leadership and governance, especially given the powerful trends such as increased

competition that can be counter to public value creation. Nonprofit management and leadership

programs have proliferated in the last twenty years in response to the sharp growth in the number

of nonprofit organizations and the widespread interest of young people for careers in the

nonprofit sector. These programs have appropriately focused on key management issues

including budgeting and financial management, resource development, board governance, and

strategic planning. Increasingly many management programs are focusing the development of

sustainable business plans. Given the challenges of managing nonprofits in this multi-sectoral

world with acute market pressures, education programs should also strive to include content on

policy advocacy, collaboration, cross-sectoral partnerships, and coalition building, stakeholder

analysis, and civic and community engagement into the nonprofit-related curriculum. Some of

this content can be included in required courses on management and the policy process but

arguably nonprofit specific courses should also devote more time to these subjects given the

changes in public policy.

Course content on civic and community engagement is particularly needed. Given the interest in

accountability and the demonstrated importance of government funding and regulation to health,

vitality and sustainability of many nonprofits, it is imperative that nonprofit leaders understand

effective strategies to influence public policy and mobilize local community support on an

ongoing basis. Many nonprofits founded in the last 30 years were frequently oriented toward

public and private funders and did not invest in nurturing community support. However, the

lack of community support is a distinct disadvantage today when many nonprofits are wrestling

with cutbacks or new performance expectations and need to be able to influence public policy on

behalf of the staff, volunteers and users of the agency.

Importantly, the curriculum for nonprofit managers should approach the subject of community

engagement and support broadly. In general, a tendency has existed at least within some

agencies to conceptualize community engagement as volunteer participation and community

fundraising. But community engagement that can translate into broad support of the

organization requires a deeper, more substantive relationship to the community. Many different

examples exist including: advisory committees comprised of staff and community members;

participation by nonprofit staff in other community organizations and events; membership of

local community members on the board of directors; and ongoing outreach of local citizens about

the programs and needs of the agency.

Community and civic engagement by nonprofits can have a number of potential benefits. First,

community engagement can be helpful to nonprofit managers and board members as they seek

favorable regulatory and funding decisions. As nonprofits have more individuals engaged in

their programs as volunteers, committee members, board members and service users, they

naturally form at least the basis for broader community support for the agency.

In addition, the engagement of the community can help educate citizens about the organization,

its services and its clients. Nonprofits can be sites of civic education and learning about the

policy process and community needs; given the fiscal crisis and the difficult choices facing

policymakers, the capacity of nonprofits for civic learning broadly defined could be especially

important (Fung, 2006; Sirianni, 2009; Loeffler, Taylor-Gooby, Bovaird, Hine-Hughes, and

Wilkes, 2012; Majic, 2011). In essence, the public value contribution from the Bozeman (2007)

framework hinges on the capacity of nonprofits to promote community engagement. One

challenge to this creation of public value is the “particularism” of many nonprofits which can

lead to a narrow focus, making it difficult to build community wide consensus and norms. One

strategy to overcome this narrowness is the creation of coalitions and collaborations that can

bring together community members of disparate views including representatives of nonprofits

with different goals and objectives.

The value of community engagement has been heightened by the diversification of funding and

the rise of market pressures. Nonprofits need to be able to market their services to the

community including potential users. Thus, the creation of an ongoing community connection

which would help raise the awareness of the agency in the community and promote more direct

engagement of citizens in the organization could potentially be very helpful.

Concluding Thoughts

The increasing hybrid character of nonprofits with public and for-profit features raises important

conceptual issues for scholars and researchers. Scholarship on the nonprofit sector and its public

value has tended to be informed by a view that nonprofits are distinctly different from for-profit

and public organizations (See Hansmann, 1980; Weisbrod, 1988; James, 1983; Moore, 2000).

Yet, the universe of public services is now characterized by multiple organizational forms with

mixed public, nonprofit, and/or for-profit features. This hybridity indicates a need to revisit

prevailing frameworks in order to inform contemporary research on nonprofits. This research

should include a more detailed analysis of the contributions of nonprofits to public value broadly

defined. Schlesinger and Gray (2006) have examined the community benefit contributions of

nonprofit hospitals and they conclude that nonprofit hospitals should be encouraged to engage

the community in the identification of local health care needs; in this sense, nonprofits are the

organizational vehicles for community problem-solving---a public value that is certainly

consistent with Bozeman’s vision of public value (2007).

Ultimately, the public value of nonprofits may hinge on the ongoing restructuring of the welfare

state in the US and abroad. The growth of nonprofits was spurred in part by a shift to nonprofit

organizations supported by government, providing a diverse array of services to the citizenry

including health and social care. Consequently, nonprofits are central to the access of citizens to

social benefits; consequently, the staff and volunteers on nonprofits are the street-level

bureaucrats for the contemporary era. Given the importance of nonprofits to the delivery of

public services, the trend toward performance management and greater accountability has

important implications for nonprofits including more corporate management strategies and

increased marketization. The effect is to make the access to social and health care benefits more

conditional and contingent, affecting the citizenship rights of individuals and their families. In

this context, one of the major challenges facing nonprofits in the coming years will be balancing

their obligations to their funders and their communities of interest as they strive to offer

enhanced public value to society through direct service provision and community engagement

and representation.

Acknowledgements

The author would like to thank Staci GoldbergBelle for her excellent research assistance in the

preparation of this paper and the Department of Public Administration and Policy at American

University for funding support.

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