The Management of Nonprofit Organization v3

8/2/2019 The Management of Nonprofit Organization v3

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Prof. univ.dr. MihaelaVlsceanu

THE MANAGEMENT OF NONPROFITORGANIZATIONS

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The aim of the course is to offer anunderstanding of how private, public andnonprofit organizations differ in terms of

their missions and capabilities.We focus on a variety of sectors health care,

social services, culture, education etc. where there is a substantial competition

among organizations from different sectors.Students will learn through readings, classdiscussions and development of a researchproposal that addresses questions of

institutional form and organizational

Goals of the course

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PART I.

THE NONPROFIT SECTOR: ITS SCOPE,

SIGNIFICANCE AND SOCIETALIMPORTANCE

The Emergence of Nonprofits. Relationship with the Other Two Sectors

The three sectors of the society

Conceptual problems in defining the third (nonprofit) sector

Defining Features of the Nonprofit Sector

Societal Importance of the Third Sector

What is a nonprofit organization? The distinctive character of nonprofitorganization

The mission statement

The formal organization and nonprofit distributing

The specific tasks and values The hybrid character of voluntary organization

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Diversity in Nonprofit Sector. Major Types of Nonprofit Organizations

The scope of nonprofit organizations in terms of their principal field of activity(International Classification of Nonprofit Organizations)

The assumed (declared) mission: providing services or advocacy

The sources of resources

Why do we have nonprofits? Theories explaining the existence, the role,

and the behavior of nonprofit organizations

Theories explaining the economic role of nonprofit organization

DemandSide Theories

Public failure

Market failure

SupplySide Theories

Preferences of the people who work in the nonprofit sector

The Theory of GovernmentNonprofit Relations

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Theories explaining the behavior of nonprofit organizations

Optimizing models

Productive Inefficiency

Supply response

PART II

ORGANIZATION and MANAGEMENT in

NONPROFIT SECTOR

The Mission of the Nonprofit Organization

The Role of the Mission Statement

Developing a Mission Statement

Engaging in Risk/Survival Analysis Identifying and involving the constituency

Testing for Organized Abandonment

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The Distinctive Character of Management in Nonprofit Organizations

Distinctive organizational problems

A theory of voluntary organization and its implication for the internalmanagement of voluntary agencies

Voluntary agencies and the management of ambiguity

Nonprofit Board of Directors

The responsibilities and duties of the board

Board composition

Functions of the board

Executive Leadership in Nonprofit Organizations

Functions of executive

The executive as entrepreneur The executive as personnel manager

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THE NONPROFIT SECTOR: ITS SCOPE, SIGNICANCE ANDSOCIETAL IMPORTANCE

The Emergence of Nonprofits. Relationship withthe Other Two Sectors


It is already accepted that one of the distinctive

signs of contemporary society is represented bythe multiplication, extension and the diversity oforganizations. Despite the immense diversity thatcomprise modern society, we have come toaccept the existence of two grand complexes ofinstitutions two broad sectors into which it hasbecome conventional to divide social life.

We refer to this typically as the marketand thestate, or the privateand the publicsectors.

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Publicand privateare terms taken from Latin:

Publicmeans of the people; Privatemeans set apart.

A variety of classifications have been used to distinguish betweenmeanings as they apply

to public and private organizations. Some researchers distinguish

between private andpublic organizations

by whether gains and losses are communal or individual,

by the openness of the organization to scrutinity, and

by the degree to which the organization acts as an agent for a

community andnot individuals.

Others distinguish between public and private organizations by usingdefinitions of the public interest. The notion of services as publicgoodsis often used to make public-private distinctions. For example,

the fluoridation of drinking water has notable health benefits that wouldbe enjoyed by all, whether they pay for fluoridation or not.8


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Because everyone benefits if such a service isprovided, taxes are collected to pay for service,creating what economists call public goods.Public goods are recognized when markets fail to

fairly allocate these goods or when collectingpayments for use is not feasible, such as billingfor clean air. Ownership and property rights alsomake public organizations appear distinct

because these rights cannot be transferred andthe risks of acting are spread among variousbodies

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What recent dissatisfaction with the roleof the state has done, however, is tochallenge this two-sectorconceptualization rather fundamentally. It

has done so by focusing attention on athird set of institutions that has longmade major contributions to thealleviation of human problems throughoutthe world, but has been largelyoverlooked in both scholarly inquiry andpublic debates: a set of organizationsthat are private in form but public inpurpose.

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Conceptual problems in defining the third (nonprofit)sector

The problem, however, is that the increased expectations

with regard to the third sector are not based on a veryclear understanding of the nature of this sector or what itscapabilities really are. There is a little agreement about theexistence or the precise boundaries of a definable third

sector occupying distinctive social space outside bothmarket and the state. The conceptual confusion can beillustrated by the different ways of defining the thirdsector in different countries. The French conomie sociale,the British public charities, the American nonprofit sector,the Central and Eastern European foundation, associationor NGO, and the Latin American and African NGO ornongovernmental organizationare not simply linguisticallydifferent. They reflect wholly different concepts and refer to

distinctly different groupings of institutions.11


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Conceptual problems in defining the third (nonprofit)

sector

Even within the same country a wide variety ofdifferent terms is used to depict the set of organizations

of concern to us here, and each has its own nuance of

meaning. Thus in U.K., organizations outside the

market and the state are variously referred to

- each one depicting a slightly different

set of actual organizations.

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Conceptual problems in defining the third(nonprofit) sector

As a matter of fact, few countries use the Americanterms nonprofit sectorto describe the set oforganizations located between the private, for-profit and the public sector. While the term

nonprofit sector refers to a relatively well definedorganizational universe in the United States andperhaps in the United Kingdom, the term seemsless precise when used to distinguish such

sectors in most European countries. Forcomparative purpose, it seems useful to adoptthe term third sector to designate all

organizations which are neither profit-oriented

business nor governmental agencies or13


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Despite this terminological confusion it is almostunanimously accepted that the organizations of thethird sector share important common features that

justify thinking of them as a distinctive set ofinstitutions, as an identifiable social . Theyare private in character and not part of thegovernmental apparatus.But unlike other private

institutions, these entities are expected to servesome public or community purpose and notsimply to generate profits for those involved inthem.

They therefore embody two seemingly contradictoryimpulses: first, a commitment to freedom and

personal initiative, to the idea that people have theright to act on their own authority to improve thequality of their own lives or the lives of persons theycare about; and second, an emphasis on solidarity, onthe idea that people have responsibilities not only tothemselves but also to the communities of which theyare a part. Uniquely among social institutions, the

institutions of the nonprofit or civil society sectormerge these two impulses, producing a set of private

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Organizations in the third sector often pursueeducational, health, cultural, religious, artistic,political, charitable, philanthropic, or other socialgoals. They seek to serve public at large (such as the

disaster-relief efforts of the Red Cross) or the publicof narrowly defined membership (such as homeowners association).

Nonprofit organizations fulfill a unique role in

society. They differ from business in that they do notseek to maximize profits. Their aims follow from theirmission to serve the public good; activities are notconstrained or prioritized on the basis of their profitpotential.

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Moreover, surpluses are reinvested in theorganization rather than distributed to corporateowners. Nonprofits also differ from publicorganizations in that their activities are not

subject to process of democratic governance.Nonprofits often take over where inadequatepolitical will exist, such as providing additionalsupport for the arts or education that includes

religious elements. In recent years, nonprofits arealso used by governments in helping toimplement public policy, such as providingservices to special populations.

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In order to depict the most important features of the nonprofit sector, itis necessary to develop a definition which helps us to establish the

boundaries of the sector. Therefore, to be included in the nonprofitsector, an organization has to be:

Private, i.e. institutionally separate from government. Nonprofitorganizations are neither part of the governmental apparatus norgoverned by boards dominated by government of officials. This does

not mean that they may not receive significant government support orthat the government officials cannot sit on their boards. The key here isthat nonprofit organizations are fundamentally private institutionsin basic structure;

Non-profit-distributing, i.e. not returning profits generated to their

owners or directors. Nonprofits organizations may accumulate profits ina given year, but the profits must be used to serve the basicmission of the agency, not distributed to the organizationsowners or governing body. In this sense, nonprofit organizationsare private organizations that do not exist primarily to generate profits.Rather, they have some public purpose and are not primarily

commercial in operation and purpose. This differentiates nonprofitorganizations from the other components of the private sector private17


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Self-governing, i.e., equipped to control their ownactivities.Nonprofit organizations have their own internalprocedures for governance and are not controlled byoutside entities;Voluntary, i.e. involving some meaningful degree of

voluntary participation, either in the actual conduct of theagencys activities or in the management of its affairs. This

does not mean that all or the most of the income of anorganization must come from voluntary contributions, or thatmost of its staff must be volunteers. The presence of some

voluntary input, even if only a voluntary board of directors, itis sufficient to qualify an organization as in some sensevoluntary.

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In his remarkable Democracy in America,Tocqueville (2) wrote about the importance ofAmericas voluntary associations:

Nothing, in my view, more deserves attentionthan the intellectual and moral associationsin America. American political and industrialassociations easily catch our eyes, but the

others tend not to be noticed. And even if wedo notice them, we tend to misunderstandthem, hardly ever having seen anythingsimilar before. However, we shouldrecognize that the latter are necessary as

the former to the American people; perhapsmore so. In democratic countries knowledgeof how to combine is the mother of all otherforms of knowledge; on its progress dependsthat of all the others. Among laws controllinghuman societies there is one more precise

and clearer, it seems to me, then the others.19


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.

Tocqueville argued that there is a vital connection

between the principle of association and theskills necessary to make a democracy work. In anaristocracy, he wrote, things get done because thereare wealthy powerful people who can command theaction of a great many other people. In a democracy,

however, there is no such mechanism for ensuringcollective action: but among democratic peoples all the

citizens are independent and weak. They can do hardlyanything for themselves, and none of them is in aposition to force his fellows to help him (p. 514).

Therefore, a democracys progress is directly related

not only to the ability of citizens to vote forrepresentatives but also to their ability to associatevoluntarily in order to solve problems and meet needs.Voluntary associations accomplish many things vital tothe full functioning of the society, and they teach group

action skills that can be transferred to the political and-

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Tocqueville also held that a strong network of voluntary

associations would limit the growth and power ofgovernment: the more government takes the place ofassociations, the more will individuals lose the idea offorming associations and need the government to

come to their help. That is a vicious circle of causeand effect(p. 515).

He further noted that just as an energetic businesscommunity is necessary to keep government out ofcommerce, so vigorous intellectual and moral

associations are necessary to prevent government

domination of opinions and sentiments: a

government, by itself, is equally incapable ofrefreshing the circulation of feelings and ideas among

a great people, as it is of controlling every industrial


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German sociologist Max Weber argued that voluntary associations playan important role between large, bureaucratic institutions and

individual. Elaborating on these themes, Smith (3) presented the

following functions or roles of the voluntary sector:

provides society a wide variety of partially tested social innovations,

from which business, government, and other institutions can select andinstitutionalize those innovations which seem most promising

provides a forum for countervailing definitions of reality and morality

ideologies, perspectives, and world viewsthat frequently challenge

the prevailing assumptions about what exists and what is good and

what should be done in society

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provides for the recreational, or play, element of society

has a major impact on the level of social integration in society

is active in preserving numerous old ideas [is characterized by] its embodiment and representation in

society of the same sense of mystery, wonder, and the sacred

[is characterized by] its ability to liberate the individual and permitthe fullest possible measure of expression of personal capacitiesand potentialities within an otherwise constraining socialenvironment

[is] a source of negative feedback for the society as a whole

gives [support] specifically to the economic system of a society,especially in a modern industrial society

plays a major role in providing for the general welfare of society

through all manner of social services constitutes an important latent resourcefor all kinds of goal

attainment in the interests of the society as a whole.

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Societal Importance of the Third SectorAs we can notice, the most important functions of the nonprofit sector are:

promoting the social innovations or the new social ideas, playing, at the same

time, a major role in nourishing the collective memory of society throughhistorical societies, ethnic groups, churches, and museums. Often the old is asource of the new. For example, the private schools often combine the oldestand newest approaches to education.

The third sector responds to human needs for sociability beyond the family andworkplace.

Voluntary associations play an important role in leadership development for

those with limited access to such roles in business and governmentorganizations. Many women and members of minority groups have hadopportunities to become leaders only in their own third-sector organizations.

Nonprofits contribute significantly to the strength of both business andgovernment through education, research, and development. The graduates ofnonprofit educational institutions and the research produced by theseinstitutions have had a major impact on other sectors of the society.

Nonprofits daily assist millions of people in need through health care, socialservice, and legal assistance agencies. Nonprofits work with government in amajor partnership to meet the needs of the sick, the poor, the aged, theemotionally disturbed, and the physically handicapped. Nonprofits often play avanguard role in provision of such services.

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What is a nonprofit organization? The distinctivecharacter of nonprofit organization

The most common definitions of the third sector organization arenegative: a nonprofit/nongovernmental organization is one that isnot part of government and does not exist to make profit.

Another way to differentiate the third sector organizations by the

ones from private and public sector is to underline thenondistribution constraint(H. Hansmann).

Nonprofits can also be distinguished by:



The specific tasks and values

The hybrid character of voluntary organization

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One of the best known criteria for defining the thirdsector organizations is by referring to their objectives,goals or mission statement. There are at least two kindsof interpretations regarding the mission statement.

Within the first interpretation it is considered that nonprofitstypically exist to provide some service or advance

some cause. This is how they can be distinguished bythe business, on one side, (which exist to make a profit),and by the government, on the other side (whosemission is to provide an essential structure of law andorder ant to promote the general welfare). The service

or cause may be physical or psychological health,historical awareness, religious improvement, protectionof minority group rights or the prevention of child abuse.But there is usually some relationship to the good ofsociety even if immediate beneficiaries (for instance,disabled children) are a more narrowly defined group.

Thus, nonprofits are often characterized as


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A good illustration of this way to define the nonprofits is offeredby P. D. Hall (4)

I define a nonprofit organization as a body of individuals

who associate for any of three purposes: (1) to perform

public tasks that have been delegated to them by the state;(2) to perform public tasks for which there is a demand thatneither the state nor for-profit organizations are willing tofulfill; or (3) to influence the direction of policy in the state,for-profit sector, or other nonprofit organizations.

According to this interpretation the mission of nonprofitorganization is focused either on providing some public or quasi-public services or on promoting of some causes.

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Another way of defining the nonprofitorganization is by distinguishing them by thosegovernmental or for-profit organizations whosemission is alsoto provide some public or quasi-

public services. Unlike these two types oforganizations, the fundamental mission ofnonprofits is always focused not only on servingpeople, but on changingthe human being, the

community and even the society as a whole.

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Trying to extract the distinctive character of nonprofitorganizations, Peter Drucker offers his own definition:

The is a negative term and tells us only whatthese institutions are not. But at least it shows that we havecome to realize that all these institutions, whatever theirspecific concerns, have something in common. And we nowbegin to realize what that is. It is not that theyare not business. It is also not that they are . It is that they do something very differentfrom either the business or government. Business supplies,either goods or services. Government controls. A business

has discharged its task when the customer buys theproduct, pays for it, and is satisfied with it. Government hasdischarged its function when its policies are effective. The institution neither supplies goods or servicesnor controls. Its is neither a pair of shoes nor aneffective regulation. Its product is a changed human being.The non-profit institutions are human-change agents.29


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Another distinguishing characteristic of nonprofits

from public or for-profit organizationsfocuses on thelegal and formal frameworkon one side, andnon-

distribution constrainton the other side. According

to this view, the fact that nonprofit organizations are

included in the private sector is what differentiatesthem from public agencies, and the constraint of

nonprofit distribution separates them from for-profit

organizations.

To illustrate the distinctive character of nonprofitorganizations from this point of view, we offer two

definitions.

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The first one is promoted by Henry Hansmann(6) a well known economist who introduced theterm of non-profit constraint:

The firms organized as - that

is firms that are formally organized as eithernonprofit corporations or charitable trusts [}are all characterized by the fact that they aresubject, by the laws of the state in which they are

formed, to a constraintwhich I shall call the

- that prohibits thedistribution if residual earning to individuals whoexercise control over the firm, such as directorsor members. Note that nonprofitsare not

prohibited from earning profits: rather, they mustsim l devote an sur lus to inancin uture31


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Taking over Hansmanns definition, E. James (7)extends this argumentation, focusing not only on thecase of USA, but also on what happens in othercountries:

In the U.S., the term is

commonly used and refers to a set of organizations thatqualify for tax exemption and for tax-deductibledonations. However, in other countries, the termnonprofit organization is much less common, and taxprivileges often dont apply. Similar organizations exist,however, and are called by many other names: non-

governmental organizations (NGOs), private voluntaryorganizations (PVOs), or community associations, forexample. The characteristic they all share in common isthat they do not have owners who are entitled toreceive the profits of the organization in the form ofdividends or capital gains. These organizations may

earn profits, but may not distribute them. Instead, all32


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The specific tasks and values (residual approach)

Another way of differentiating the third sector from public one andthe private one is byevaluatingthe tasks which are best fulfilled

by each of the three sectors. According to this view, each sectorhas its own limits which can be overcome by exploiting thequalities of the other two. Therefore, it is important to know thestrengths and the weaknesses of each sector in order to choosethe best alternative.

Business does some things better than government, but governmentdoes some things better than business. The public sector tendsto be better, for instance, at policy management, regulation,ensuring equity, preventing discrimination or exploitation,ensuring continuity and stability of services and ensuring socialcohesion. Business tends to be better at performing economictasks, innovating, replicating successful experiments, adapting torapid change, abandoning unsuccessful or obsolete activities andperforming complex or technical tasks. The third sector tendsto be best at performing tasks that generate little or no profit,demand compassion and commitment to individuals, requireextensive trust on the part of customers or clients, personalattention (such as day care, counseling, and services to thehandicapped or ill), require volunteer work and a comprehensive,33


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The specific tasks and values (residual approach)Regarding the limits and the strengths of each

sector, D. Osborne and T. Gaebler(8) arguethat the third sector proved to be better at:

enforcing moral codes and individualresponsibility for behavior. Whether aninstitution is running homeless shelters,schools, or day-care centers, it must oftenenforce a code of behavior (shelter residentsshall not use alcohol or drugs, for instance).

Public institution often have trouble doing this,because their employees have been inculcatedwith the idea that it is wrong for a government toimpose any particular set of values on itscitizens. For-profit firms have trouble doing thisbecause it might cost them money if theyexpel a paying student, for instance. But

religious organizations, community groups, andthe like which typically exist to fulfill a mission

often have both a strong sense of values anda willingness to enforce them, despite thefinancial implications.

On the other hand, third sector organizations

often choose to serve only certain people (onlyCatholics, or only poor people or only34


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According to the same residual approach focusedon task evaluation, Lester Salamon(11) arguesthat

The nonprofit sector is actually societyspreferred mechanism for providing collective

goods. It existed long before most government

services existed. It coped with social problemslong beforegovernments took on that role.Governments stepped in only when the thirdsector proved incapable of dealing with particularproblems. Consequently, government can beviewed as the residual institution, needed only

because of certain shortcomings or failings of thevoluntary sector. Anyway, given the fact that inmost cases the failings of the voluntary sector arecounterbalanced by the strengths of thegovernment agencies, neither the replacement ofthe voluntary sector by government nor the

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Nonprofits also stand on their own, regardless of the

distinctions among the three sectors. Nonprofits areoften unique in the values they adopt and the passionwith which they operate. For example, many nonprofitschools commit to educating the child as a whole,rather than only focusing on narrow, academic skills.

Some focus on helping the child to perform in a webof social relationships, whereas others emphasizemoral development or self-esteem. Likewise,environmental organizations are often passionatelycommitted to preserving nature as their first priority,

leaving it to business and government to balanceother priorities.

Nonprofit organizations operate under their own setof values and have their own ideology with whichthey pursue their goals. Although many private and

public organizations seek to make the world a better36


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Knowledge about the third sector and itsvalues is fundamental to understandingthe broader society in which we live:

It provides contrast between thegovernmental and for-profit sectors;

It reflects the emergent and ongoingconcerns of society;

It often serves as the springboard forsocial change in local, national andinternational arenas.

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Apart from being subject to the nondistributionconstraint and the other distinguishingcharacteristics of the nonprofits presentedbefore, there is another way of defining theidentityof the third sector. In this case thereferences to the nonprofit organizations

emphasize the blurred orambiguousboundaries of the sector. For example, at aEuropean conference session voluntaryorganizations were described thus:

Situated between markets and bureaucracies orhierarchies, they have to balance out the

competing logics of efficient market competition,the provision of public goods and theirequitable distribution - and responsiveness tospecific membership, clienteles, communities interms of services provided and advocacy ofinterests. In balancing elements of community,

market, and state or politics, NPOs represent38


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Based on the results of a comparativeresearch, Kramer et al(8)havesummarized the distinguishingcharacteristics of nonprofit organizationsin terms of three M: Mixed,Multiplicity, and Mediating.

Mixedrefers to a hybridcharacter, whichcombines structural features of a servicebureaucracy andavoluntaryassociation,resulting in the coexistence of contrastingstructures of authority, responsibility, and

power, with two different organizationalcultures of work norms, values andinterests. The blurring of the boundariesbetween the sectors presupposesborrowing some attributes from the

other sector. Consequently, it could be

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Multiplicity,the second M, also refers at the same time tothediversityof voluntary organization constituencies,goals, accountabilities, and funding sources. In addition tothe dual functions of service provision and advocacy, themission and the goals of voluntary organizations aretypically diffuse. That the multiple goals of most voluntaryorganizations are on a high level of abstraction makes it

difficult not only to evaluate their performance, but also todetermine whether any deflection has occurred. As aresult, the characteristic breadth and ambiguity of theirgoals makes it possible for a wide range of social purposesto be considered appropriate without having to defendthemselves as abandoning the organizations mission.

The other side of this characteristic is that while suchorganizations have a plurality of choicesconsiderablymore than a governmental agencyonce critical programdecisions are made, they have a way of becominginstitutionalized and resistant to change.

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Mediating,the third M, refers to avoluntary organizations intermediarycharacter on the sectoral level amongstate, market, and the informal socialsystems in the community. On theinterorganizational level, voluntaryagencies mediate as a buffer betweenthe citizen and the state, donors andclients. On the intraorganizational level,

voluntary agency can be conceived asmediating between the interests of:

staff and clients;

board and executive;

professionals and volunteers;41

T d d fi iti f th fit t


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Toward a definition of the nonprofit sector

To summarize the main arguments presented in

order to emphasize the distinctive character ofthe third sector, we shall define it by referring to

the most important attributes.

The term nonprofit/nongovernmental/

independent/ voluntary/ social organizations referto:

Those nongovernmental entities, legally andformally organized in a charitable or not for

profit form Their fundamental mission is either providing

public or quasi-public goods/services, orpromoting some social causes

They are private organizations whose mission42


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Toward a definition of the nonprofit sector

The distinctness of nonprofit organizations

consists of:

the nongovernmental character

the supply of public/quasi-public or personal,diversified services

the nondistribution constraint

the presence of some voluntary input the capacity of self-governing

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Diversity in Nonprofit Sector. Major Types ofNonprofit Organizations

There are many ways of classifying the third sector

organizations. We will consider the most well known, inaccordance with a few criteria.

The scope of nonprofit organizations in terms of theirprincipal field of activity (ICNPO)

L. Salamon and H. K. Anheier (9) developed a classificationsystem to group these organizations systematically. The criterion

used by the authors takes into account their main field of activity.Their typology is known as the International Classification ofNonprofit Organizations(ICNPO). The organizations of the thirdsector are classified in 12 groups:

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The scope of nonprofit organizations in terms of their principalfield of activity: International Classification of NonprofitOrganizations(ICNPO)

Group 1: CULTURE AND RECREATION

Culture and arts:Media & communications; Visual arts, architecture, ceramicart; Historical, literary and humanistic societies; Museums; Zoos & aquariums;Multipurpose culture and arts organizations; Support and service organizations,auxiliaries, councils, standard settings and governance organizations; Cultureand arts organizations not elsewhere classified

Recreation:Sports clubs; Recreation/pleasure or social clubs; Multipurposerecreational organizations; Support and service organizations, auxiliaries,standard settings and governance organizations; Recreational organizations notelsewhere classified

Service Clubs:Service Clubs; Multipurpose service clubs; Support and serviceorganizations, auxiliaries, standard settings and governance organizations;Service clubs not elsewhere classified

Group 2: EDUCATION AND RESEARCH Primary and Secondary Education:Elementary, primary &secondary education

Higher Education: Higher education (university level) Other Education:Vocational/technical schools; Adult/continuing education;

Multipurpose educational organizations; Support and service organizations,auxiliaries, standard settings and governance organizations; Educationorganizations not elsewhere classified

Research:Medical research; Science and technology; Social sciences, policystudies; Multipurpose research organizations; Support and serviceorganizations, auxiliaries, standard settings and governance organizations;45


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International Classification of NonprofitOrganizations

Group 3: HEALTH Hospitals and Rehabilitation: Hospitals; Rehabilitation hospitals

Nursing Homes:Nursing Homes

Mental Health and Crisis Intervention:Psychiatric hospitals;Mental health treatment; Crisis Intervention; Multipurpose mentalhealth organizations; Support and service organizations, auxiliaries,standard settings and governance organizations; Mental healthorganizations not elsewhere classified

Other Health Services: Public health & wellness education; Healthtreatment, primarily outpatient; Rehabilitative medical services;Emergency medical services; Multipurpose health service

organizations; Support and service organizations, auxiliaries,standard settings and governance organizations; Health serviceorganizations not elsewhere classified

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..

Group 4: SOCIAL SERVICE Social Services:Child welfare, child services, day care; Youth

services and youth welfare; Family services; Services forhandicapped; Services for elderly; Self-help and other personal socialservices; Multipurpose social service organizations; Support andservice organizations, auxiliaries, standard settings and governanceorganizations; Social service organizations not elsewhere classified

Emergency and Refugees:Disaster/emergency prevention, relief andcontrol; Temporary shelters; Refugee assistance; Multipurposeemergency & refugee assistance organizations; Support and serviceorganizations, auxiliaries, standard settings and governanceorganizations; Emergency and refugee assistance organizations notelsewhere classified

Income Support and Maintenance: Income support andmaintenance; Material assistance; Multipurpose income support &maintenance organizations; Support and service organizations,auxiliaries, standard settings and governance organizations; Incomesupport and maintenance organizations not elsewhere classified

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....

GROUP 5:ENVIRONMENT

Environment: Pollution abatement & control; Naturalresources conservation & protection; Environmental

beautification & open spaces; Multipurposeenvironmental organizations; Support and serviceorganizations, auxiliaries, standard settings andgovernance organizations; Environmental organizationsnot elsewhere classified

Animals: Animal protection &welfare; Wildlifepreservation & protection; Veterinary services;Multipurpose animal services organizations; Support andservice organizations, auxiliaries, standard settings andgovernance organizations; Animal related organizations

not elsewhere classified48


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..

GROUP 6: DEVELOPMENT AND HOUSING Economic, Social and Community Development: Community and

neighborhood organizations ; Economic development Socialdevelopment; Multipurpose economic, social and communitydevelopment organizations ; Support and service organizations,auxiliaries, standard settings and governance organizations ;

Economic, social and community development organizations notelsewhere classified

Housing: Housing association; Housing assistance; Multipurposehousing organizations; Support and service organizations,auxiliaries, standard settings and governance organizations;

Housing organizations not elsewhere classifiedEmployment and training: Job training programs, Vocational

counseling and guidance ;Vocational rehabilitation and shelteredworkshops; Multipurpose employment and training organizations;Support and service organizations, auxiliaries, standard settings andgovernance organizations; Employment and training organizations

not elsewhere classified49


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..

GROUP 7: LAW, ADVOCACY AND POLITICSCivic and Advocacy Organizations:Civic associations

;Advocacy organization; Civil rights association; Ethnicassociations; Multipurpose civil and advocacy organizations;Support and service organizations, auxiliaries, standard settingsand governance organizations ;Civic and advocacy organizationsnot elsewhere classified

Law and Legal Services: Legal services ;Crime prevention andpublic safety; Rehabilitation of offenders; Victim support;Consumer protection associations; Multipurpose law and legalservice organizations; Support and service organizations,

auxiliaries, standard settings and governance organizations; Lawand legal organizations not elsewhere classified

Political Organizations: Political parties Political actioncommittees Multipurpose political organizations Support andservice organizations, auxiliaries, standard settings and

governance organizations Political organizations not elsewhereclassified50


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..

GROUP 8: PHILANTROPIC INTERMEDIARIES & VOLUNTARISMPROMOTION

Philanthropic Intermediaries: Grantmaking foundations;Voluntarism promotion and support; Fund-raising intermediaries;Multipurpose philanthropic intermediaries and voluntarismorganizations; Support and service organizations, auxiliaries,standard settings and governance organizations; Philanthropicintermediaries organizations not elsewhere classified

GROUP 9: INTERNATIONAL ACTIVITIES

International Activities: Exchange/friendship/cultural programsDevelopment assistance associations International disaster

&relief organizations International human rights & peaceorganizations Multipurpose international organizations Supportand service organizations, auxiliaries, standard settings andgovernance organizations International organizations notelsewhere classified

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.

GROUP 10: RELIGION Religious Congregations and Associations: Protestant churches;

Catholic churches; Jewish synagogues; Hindu temples; Shinto shrines;Arab mosques; Multipurpose religious organizations; Support andservice organizations, auxiliaries, standard settings and governanceorganizations; Religious organizations not elsewhere classified

GROUP 11: BUSINESS AND PROFESSIONAL ASSOCIATIONS,UNIONS

Business and Professional Associations, Unions: Businessassociations Professional associations Labor unions Multipurposebusiness, professional associations and unions Support and service

organizations, auxiliaries, standard settings and governanceorganizations Business, professional associations and unionsorganizations not elsewhere classified

GROUP 12: [NOT ELSEWHERE CLASSIFIED]

N.E.C.

52

The assumed (declared) mission: providing services ord


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advocacy

Another way to classify the nonprofit organizations isfocused on the declared mission statement: providing

some servicesor advance some cause. According to thiscriterion, James Douglas (10) identifies three groups ofnonprofit organizations:

the public benefitorganizations, i.e. those organizations

set up to provide a public benefit from private funds. Thisform of nonprofit organization is, in a real sense, analternative to government, permitting a greater diversity ofsocial provision than the state itself can achieve. Moreover,according to the results of a comparative internationalresearch, it is estimated that this class of nonprofits, inaddition to its social and political importance, accounts fora significant share of national expenditure andemployment. The information collected in 35 countriesshown that this part of the nonprofit sector accounts for 5.1percent of the combined gross domestic product (GDP) [of

the surveyed countries] and, at the same time, is a major53


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.

the mutual benefit organizations which are established toprovide collective benefits more or less exclusively for itsmembers. They range from elitist social clubs to trade unions. Inmany ways these are closer to the for-profit sector than to thephilanthropic. There is frequently very little altruism about themotivation of their members. They differ from the typicalcommercial for-profit enterprise in providing goods or services for

their members collectivelyrather than a quid pro quotransactionbasis, which usually is why the nonprofit is adopted. It is cheaperand more satisfactory to make facilities available to the memberscollectively in return for membership fees rather than chargingmembers individually each time a service is used.

the pressure groups, or political action organizations which aim

not to provide benefits itself but to persuade government to doso. This class of nonprofit organizations that have public policyobjectives is considered crucially important to the working ofdemocratic government. Political parties are themselvesmembers of this class, but, even apart from them, it is almostimpossible to imagine the workings of a modern democraticsystem without a constellation of lobbies, interest groups, and

the like to articulate the range of interests and values that must54


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.Of these three classes, only the first is technically a charity.

Obviously, a mutual benefit association in which all the benefits are

captured by the members and contributors themselves has noclaim to special legal or tax privileges. It no more serves a publicpurpose than does a for-profit organization. Similarly, although thereasons for this are less obvious, organizations set up primarily toachieve a political objective are not regarded as charitable.

In practice the distinction between the three classes or nonprofit

organizations is not always so clear. For example, it is consideredthat minority mutual benefit agencies have provided valuableleadership training to people who have no other opportunities.Religious institutions, which have many of the characteristics ofmutual benefit organizations, provide charitable services tomembers and nonmembers. Labor unions and farmers

organizations are driven primarily by the economic interests oftheir members yet historically have played a much broader socialrole. It should also be noted that many charitable organizationsbenefit their members socially, economically, and in other ways.Consequently, it could be said that altruistic and self-directedbehaviors coexist comfortably in every part of the nonprofit sector.There is a legitimate distinction between public benefit and55


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The sources of resources

Generally, it is accepted that there are five mainsources potentially generating financialresources:

Fees for goods and services(in which case thebehavior of the nonprofits is very similar with thebehavior of commercial firms; they only differ by

the fact the first ones are subject tonondistribution constraint);

Subsidies(government grants and contracts,funding from foundations, corporations and

charitable trusts); Private donations(individual gifts, bequests,

private giving from foundations and corporations);

Charges and membership dues(in the case of

mutual benefit organizations)56

....


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Despite the common opinion that the major source of nonprofitsfunding is represented by private donations, it seems in fact that only asmall percent of nonprofit revenue (15%) come from this source. The

results of the comparative research carried out by Salamon and hiscolleagues (17) have shown that:

Fees are the dominant source of revenue. In the 32countries studied, over half (53%) of the nonprofit organization incomecomes, on average, not from private philanthropy but from fees andcharges for the services that these organizations provide and therelated commercial income they receive from investments and othercommercial sources, including dues.

Significant public sector support. Nor is philanthropy thesecond largest source of third sector organization revenueinternationally. That distinction belongs, rather, to government or thepublic sector. An average of 35% of all civil society organization revenuecomes from public sector sources, either through grants and contracts

or reimbursement payments made by governmental agencies. Limited role of private philanthropy. Private giving from all

sources individuals, foundations, and corporations accounts for amuch smaller 12% of total civil society organization revenue in thecountries examined, or one-third as much as government and less thanone-forth as much as fees and charges.

Fee dominance holds in most fields. This pattern of feedominance in the revenue base of nonprofit sector is fairly consistent57


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.

Conclusion: as the results of the research show, thecharitable sector is far from being dependent oncharity alone. However, there is at least one characteristicof the sector which should be emphasized from this pointof view. Philanthropic organizations are unique in that theprices for services (hospital charges, tuition, admissionfees and so on) are not intended to cover the costs of

producing these services. Philanthropic production is onlypartially financed by sales of services; the remainder iscovered by various subsidies. This means that, to a greatextent, it is precisely the gap between production costsand charges that defines the uniqueness of the nonprofitsector. Certain personal and social needs, such ascounseling for low-income families and litigations to protectthe environment, are insufficiently lucrative to be providedon a for-profit basis. Therefore, they must be provided orsubsidized by other sources. This explains why the majorsource of financing these kinds of services (whose costsexceed the market value) is a combination of governmentand nonprofit sector providing services

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.

Hansmanns classification scheme (12). Firms aredistinguished according to:

Their source of income and

The way in which they are controlled.

Considering the source of income:

nonprofits that receive a substantial portion of their income in

the form of donations will be referred to as donative nonprofits; firms whose income derives primarily or exclusively from sales

of goods and services will be called commercial nonprofits.

The Red Cross is an example of the former; most nonprofitshospitals and nursing homes would be in the latter category. Theauthor uses the term patronsto denote those individuals who arethe ultimate source of the organizations income. Thus, in adonative nonprofit the patrons are the donors, whereas in acommercial nonprofit they are the firms customers. In thecase of nonprofits that have both donors and customers, theterm comprises both.

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.

Mechanisms of control: Firms in which ultimate control (the power to elect the board of

directors) is in the hands of the organizations patrons arereferred to as mutual nonprofits

Other nonprofits including, in particular, those in which theboard of directors is self-perpetuating are called

entrepreneurial nonprofits. The process of self-perpetuating board is usually described as a process wherebyboards select only those who fit in and rid themselves of thosewho are seen as radical or deviant. One could hypothesize that atruly self-perpetuating board is one in which intangible qualitiestake on maximum importance and are perpetuated through thestrong ties of existing board members. Through this process,

similarity in board members outlook and status is increasedwhile the more strategic considerations of organizational needsare neglected. For example, it is often said that an unstatedpurpose of some arts organizations is to maintain certain classdistinctions in society, so that the arts become a crucial part ofelite screening and socialization. Their boards are composed of

members of wealthy families who have contributed to the art foryears.60


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. The intersections of these two two-way classifications yield four

types of nonprofits: donative mutual, donative entrepreneurial,

commercial mutual, and commercial entrepreneurial.

Table 1. A four categorization of nonprofit firms

Source: Adapted from Hansmann, 1980

Source of incomeDistribution of

control

MUTUAL ENTREPREUNERIAL

DONATIVE Charitable trustsPolitical clubs

Hospitals, universitiesor private schools

COMMERCIAL Associations of

consumersCountry clubs

Hospitals, nursing

homes

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Why do we have Nonprofits? Theories explaining the


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Why do we have Nonprofits? Theories explaining theexistence, the role, and the behavior of nonprofitorganizations

Several theories have been advanced to date to explainthe economic role of nonprofit organizations. In order tosystematize the information, we shall classify them in twogroups:

Theories of the roleof nonprofit organizations which in

the first place address such questions as these: Why dononprofit organizations exist in our economy? Whateconomic functions do they perform? Why, in particular,are nonprofit firms to be found in some industries and notin others? How nondistribution constraint influences the

decision to found an organization in the nonprofit form? Theories of the behavior of nonprofit organizations,

focused primarily on explaining the specific purposespursued by nonprofits, the reasons of managers and

entrepreneurs in the nonprofit sector, the relationshipsbetween these reasons and the ob ectives ursued b62


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Theories explaining the economic role of nonprofitorganizations

The various theories of the role of nonprofitorganizations can be classified in twocategories:

Demand side theorieswhichtry to explainthe reasons consumers might choose topatronize nonprofit firms in preference to

government agencies or to for-profit firms inparticular industries. Within the demand - sidetheories, some explanations focus on thegovernment failureto provide goods andservices in sufficient amount to satisfy theconsumers, while other explanations focus on

market failure. Supply side theories develop an alternative

approach that emphasizes private supply-sidevariables in explaining why founders chooseand government support the nonprofit form,when consumers choose nonprofit services,

and in what circumstances (industries,63

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Demand Side Explanations

Public Failure The Public Goods Theory (Theory of excess demand)

The first general economic theory of the role of nonprofit enterprise wasoffered by Weisbrod (13) who suggested that nonprofits serve as privateproducers of public goods. Governmental entities, Weisbrod argued, willtend to provide public goods only at the level that satisfies the medianvoter; consequently, there will be some residual unsatisfied demand forpublic goods among those individuals whose taste for such good isgreater than the median. Nonprofit organizations arise to meet this

residual demand by providing public goods in amountssupplemental to those provided by government. Theory of differentiated demand

A second demand-side model views private nonprofit production ofquasi-public goods as a response not only to an unsatisfied demand butalso as a response to differentiated tastesabout the kindof serviceto be consumed in situations where that differentiation is notaccommodated by government production. E. James (14) argues on thebasis of an empirical comparative research that differential preferencesabout quality, one group demanding a better product than the medianvoter choice, may also lead to the development of a private alternative.Using education as an example, many private schools exist indeveloping countries because the public school capacity is not largeenough to enroll everyone who wants to attend. If the private rate of

return is high, people are willing to pay for a privately produced service.In modern societies ar ues James rivate schools exist as a result of

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D d Sid E l ti


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Market Failure (The contract failure theory)

The elements of a somewhat different theory of the role of nonprofits were

set forth in an essay on day care by Nelson and Krashinsky (15), whonoted that the quality of service offered by a day-care center can bedifficult for a parent to judge. Consequently, they suggested, parentsmight wish to patronize a service provider in which they can place moretrust that they can in a proprietary firm, which they might reasonably fear

could take advantage of them by providing services of inferior quality. Thestrong presence of nonprofit firms in the day-care industry, they argued,could perhaps be explained as a response to this demand.

The theme advanced by Nelson and Krashinsky was taken over andgeneralized by Henry Hansmann (16) who argues that nonprofits of alltypes typically arise in situations in which, owing:

a) either to the circumstances under which a service is purchased orconsumed or

b) to the nature of the service itself,

consumers feel unable to evaluate accurately the quantity or

quality of the service a firm produces for them.65

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In elaborating his theory, Hansmann pointsout that it most obvious application is to

donative nonprofits. A donoris, in animportant sense, a purchaser of services,differing from the customers of commercialnonprofits (and of for-profit firms) only in thatthe services he or she is purchasing are

eitherdelivery of goods to a third party (as in the case

of charities for the relief of the poor ordistressed) or

collective consumption goods produced in suchaggregate magnitude that the incrementpurchased by a single individual cannot beeasily discerned.

In either case, the purchaser is in a poorposition to determine whether the seller hasactuall erformed the services romised;

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Conclusion: In attempting to explain the existence and the roleof nonprofit organizations, demand side theoriesconcentrate:

on the government failureto provide in a sufficient amount(quantitatively and qualitatively) goods and services demandedby the consumers. Consequently, nonprofits operate in many ofthe same areas as public sector, and act as partial substitute for

public provision. on the comparative advantage of nonprofits versus profit-

maximizing organizations. This advantage is owing to theasymmetric informationbetween producer and consumer. Thismeans that, because the nonprofits are subject to nondistributionconstraint, the people are more willing to make philanthropic

contributions to nonprofit organizations. Thus, nonprofitsdevelop, and constitute an efficient contractual form, wheretrustworthiness is important because many small customers ordonors do not have adequate information about outputcharacteristics. Briefly, contract failure theories emphasize thedevelopment on nonprofits in sectors which trust andreputation are important.67

Supply Side Explanations


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An alternative approach to the demand-sideexplanation emphasizes private supply-side

variables in explaining: why founders choose and government support the

nonprofit form,

when consumers choose nonprofit services, and

in what circumstances (industries, countries) we find a

large nonprofit sector. Based on the results of a comparative research,

Estelle James (17) argues that apart fromexplanations offered by demand-side theories, thereare other motives (supply-side variables) which can

explain why the private sector took the form ofnonprofits rather than for-profits, especially in areassuch as education, health and social service. Jamesidentifies three factors which are responsible, in herview, for the preferences of the people to choose anonprofit form of organization and to work in the

nonprofit sector. These are:68



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Disguised Profit Distribution

One major motive for founding is the possibility ofdisguised profit distribution, and there is a popular belief inmany countries (for example Japan, Columbia) that thistakes place, particularly in areas where nonprofit statusmay be a legal requirement for schools and universities(also, the case of Romania). Although called nonprofit,

these organizations are, allegedly, really profit-makingentities.

The illegal ways of distributing profitsare only rarelybrought to light, as when student places or professionalappointments are sold to families giving large gifts to the

schools administrator. The legal waysare moreinteresting but very difficult to detect or prove. Forexample, the founder may become the headmaster ordirector and be paid a salary beyond the market wagethat is, beyond what he could earn elsewhere; he is, in

effect, receiving monetary profits, albeit in disguised form.Even more valuable dis uised rofit distribution is said to

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Status Prestige and Political Power


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Status, Prestige, and Political PowerBenefits to founders make also take intangible

form: perpetuation of a family name on a school

or status and prestige from being connected withan important institution. In effect, by creatingthese status distinctions, a society is increasingthe coinage at its disposal and using some of it to

pay for nonprofit entrepreneurship. Thesemotivations are common in the United States.

Another intangible benefit to school founders inmany countries (for example, Japan, India Kenya)is the political support they gain in a local

community. The community may be beholden toan individual to an individual who starts a schoolor hospital there. Thus, political ambition is oftenpointed to as a motivation for founding nonprofit

organizations.70


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This simply observation that religious groupsare the major founders of private schools andother nonprofits has important implicationsfor nonprofit theory.

It explains why nonprofits are concentrated inareas such as education and health and

it suggests a particular reason for which thenonprofit was chosen by the founders: theirobject was not to maximize profits but tomaximize religious faith or religiousadherentsand schools are one of the most

important institutions of taste formation andsocialization. Similarly, hospitals are a servicefor which people will have an urgent periodicneed; hence they constitute an effective wayfor religious groups to gain entre and

goodwill in a society. The nonprofit form waschosen because the main ob ective was72


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.

Once these religious groups and hospitals are foundedthey have a comparative advantage over their profit-maximizing alternatives. Let see the reasons:

They have a semi captive audience; it means that thatparents may prefer to send their children to a school with a

particular religious orientation. Some people may trust such schools and hospitals

precisely because they are run by religious groups, notbecause their nonprofit legal status.

Religious groups have, in the past, had access to low cost

volunteer labor (such as priests and nuns) and donatedcapital, which allow them to undercut their secular rivalsand compete with government schools.

Once a school or a hospital has been founded by areligious group, it develops a reputation that may allow it to

continue attracting a clientele even if it later loses its cost73


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.

Conclusion: The religious motive for foundingprovides a powerful supply-side explanation forwhere nonprofits are found, why the nonprofitform is used, which services are provided by

nonprofits, and how these institutions maycompete effectively with a public or secular profit-maximizing alternative.

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The Theory of Government Nonprofit Relations


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The Theory of Government Nonprofit Relations

Essentially, the theories presented earlier have been advanced toexplain the existence of the nonprofit sector in terms of failures of the

market system and of government. The nonprofit sector is thus seen asa derivative and secondary, filling in whether other systems fall short.

Trying to develop a new theory of the nonprofit sector, L. Salamon(18) argues that it is possible to turn the discussion on its head. Thismeans to reject the view that the voluntary sector is merely a residualresponse to failures of government and the market and to see it insteadas the preferred mechanism for providing collective goods.Government would be viewed, under this theory, as the residualinstitution, needed only because of certain shortcomings or failings ofthe voluntary sector.

The central argument for Salamons approach is that the creation

of a sense of social obligation of the sort that is required to supportcollective action on community problems is best done on a voluntarybasis and at the local or group level, where individuals can participatewith their neighbors without sacrificing their freedom of choice.Government action thus becomes appropriate under this alternativetheory only to correct forvoluntary failures, for inherent shortcomings

of the voluntary sector.75


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.But what are the voluntary failures that justify governmentinvolvement and governmental support for the voluntarysector? Broadly speaking, argues Salamon, there are four:philanthropic insufficiency, philanthropic particularism,philanthropic paternalism, and philanthropic amateurism.

Philanthropic insufficiency. The central failing of thevoluntary system as a provider of collective goods hasbeen its inability to generate resources on a scale that isboth adequate enough and reliable enough to cope withthe human service problems of an advanced industrialsociety. Philanthropic insufficiency also results from the

twists and turns of economic fortune. The fluctuations thathave accompanied the growing complexity of economic lifemean that benevolent individuals may find themselvesleast able to help others when those others are most inneed of help, as happens in periods of economic crises.

Similarly, the voluntary system often leaves serious gaps ineo ra hic covera e since the locus of the resources

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.

Philanthropic particularism. Particularism refers to the tendency ofvoluntary organizations and their benefactors to focus on particular subgroups ofthe population. Voluntary organizations provide the vehicle through whichsubgroups ethnic, religious, neighborhood, interest, or other can cometogether for common purposes.

But particularism also has its drawbacks as the basis for organizing a

communitys response to human needs. For example, some subgroups of thecommunity may not be adequately represented in the structure of voluntaryorganizations. Even voluntary organizations require resources, and it is possiblethat those in command of the needed resources financial, as well asorganizational may not favor all segments of the community equally. As aresult, serious gaps can occur in the availability of services. More generally, theprivate sector has long had a tendency to leave the most difficult cases to publicinstitutions.

Not only can particularism, and the favoritism that inevitably accompaniesit, leave serious gaps in coverage; it can also contribute to duplication ofservices. Voluntary organizations and charitable activity are motivated by

considerations not only of social need but also of communal or individual pride.

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.

Philanthropic paternalism. Philanthropicpaternalism refers to the fact that most of the influenceover definition of community needs is in the hands ofthose in command of the greatest resources. This is sodespite the importance of volunteer effort in this sector.

Indeed, voluntarism itself requires resources of time andknowledge. But, in addition, the growing need forprofessional approaches to social problems has made itnecessary to go beyond voluntary effort. So long asprivate charity is the only support for the voluntary sector,

those in control of the charitable resources can determinewhat the sector does and whom it serves. The nature ofthe sector thus comes to be shaped by the preferencesnot of the community as a whole but of its wealthymembers. As a consequence, some services favored by

the wealthy such as the arts may be promoted, while78


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.

Philanthropic amateurism. One final problem withthe voluntary sector has been its association with amateurapproaches to coping with human problems. In part, thishas reflected the sectors paternalism noted before: for aconsiderable period of time, the problems of poverty were

attributed to the moral turpitude of the poor. However, these approaches lost favor; attention

turned to more professional treatment modes involvingtrained social workers and counselors. Voluntaryagencies, which stressed volunteer effort and were limited

by dependence on contributions from offering adequatesalaries, were in a poor position to attract professionalpersonnel. It was partly for this reason that social welfareadvocates of the late 19th century and early 20th centuriesopposed public support for private charitable institutions,fearing this would siphon off resources needed to build an

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In short, the voluntary sector has a number of drawbacks as a

mechanism for responding to the human service needs of an advancedindustrial society. It is limited in its ability to generate an adequate level ofresources, it is vulnerable to particularism and the favoritism of thewealthy and it has ar times been associated with amateur, as opposed toprofessional forms of care.

Significantly, however, the voluntary sectors weaknesses

correspond well with governments strengths, and vice versa. Potentially,at least, government is in a position to generate a more reliable stream ofresources, to set priorities on the basis of a democratic political processinstead of the wishes of the wealthy, and to improve the quality of care byinstituting quality-control standards. By the same token, however,voluntary organizations can personalize the provision of services,operate on a smaller scale than government bureaucracies, reduce the

scale of public institutions needed, adjust care to the needs of clientsrather than to the structure of government agencies, and permit a degreeof competition among service providers.

Under these circumstances, argues Salamon, neither thereplacement of the voluntary sector by government northe replacement of government by the voluntary sector

makes as much sense as collaboration between the two.80

Th i l i i th b h i f fit


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Theories explaining the behavior of nonprofitorganizations

The theories of the role of nonprofit organizations are all based on the assumptionthat nonprofit firms are or at least appear to their patrons to be bound by anondistribution constraint. This constraint, however, is consistent with a varietyof forms of behavior on the part of nonprofit firms. Therefore, commitment toone of these theories does not necessarily involve commitment to a particulartheory of the behavior of nonprofit firms, and vice versa. Consequently, thebehavioral models of nonprofit organizations developed to date have been tosome degree disconnected from models of the role of such firms.

Optimizing Models Following the neoclassical tradition, most models of the behavior of nonprofit

firms have been optimizing models, typically focusing on firms in a particularindustry. Hospitals have been the most common subject.

Most commonly, nonprofit firms have been assumed to maximize the qualityand/or the quantity of the service they produce. The first of these goals might

seem reasonable for a nonprofit firm run by professionals who derive strongsatisfaction from doing highly professional work, independent of the needs ordesires of their clientele. Quantity maximization, in turn, might be attributed tomanagers who are empire builders or who are altruists of a type that seek toserve as broad a segment of public as possible.

Models of nonprofits that seek to maximize their budgets have also beencommon. Presumably budget maximization might be chosen as a goal because

it enhances the apparent importance of (or justify a higher salary for) the firmsmanagers or, alternatively, because it provides a combination between quality

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Productive Inefficiency Optimizing models of the type just presented implicitly assume that the

firms involved minimize costs. Another line of behavioral theory has argued

that, whatever objectives nonprofits may pursue with respect to quantity orquality of output, they are inherently subject to productive inefficiency (thatis, failure to minimize costs) owing to the absence of ownership claims toresidual earnings. This argument is clearest when applied to entrepreneurialnonprofits, which constitute the great majority of financial significant nonprofits.Those who control such organizations whether the managers or the board ofdirectors who appoint the managers are unable, by virtue of the nondistributionconstraint, to appropriate for themselves the net earnings obtained by reducingcosts, and thus have little pecuniary incentive to operate the organization in amanner that minimize costs. Of course, it could be that managers of somenonprofits derive substantially utility from having the firm produce large amountsof output and thus have a desire to minimize costs that is independent of theincome they derive from the firm (Young, 19). And there is reason to believe thatnonprofit organizations tend to attract more managers of this type than do for-profit firms. Nevertheless, nonprofit managers in general might be expected to

derive some satisfaction from various perquisites of office including some formsof nonpecuniary income as well as more relaxed attitude toward their duties to agreater extent than do their counterparts in for-profit firms.

However, most of the researchers argue that nonprofit firms are productivelyinefficient in the sense that, in the absence of subsidies or a substantial degree ofmarket failure of some type (such as contract failure) in the product market, theywill generally produce any given good or service at higher costs than would a for-

profit firm. If it were otherwise, we would expect to find nonprofit firms operating82

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Supply Response

Empirical work indicates strongly that nonprofit firms tend torespond much more slowly to increases in demand than dotheir for-profit counterparts. For example, in those industriespopulated by both nonprofit and for-profit firms, such as nursingcare, hospital care, and primary and secondary education, theratio of nonprofit to for-profit firms is much lower in markets inwhich demand has been expanding rapidly than in the markets in

which demand has remained stable or declined. One likely explanation for this phenomenon is that, in

comparison to for-profit firms, nonprofit firms areconstrained in their access to capital. Unlike for-profit firms,nonprofit firms cannot raise capital by issuing equity shares;rather, they must rely on sources that, even in combination, offer

a less responsive supply of capital than does the equity market. An alternative explanation for nonprofits relatively poor supply

response points to problems of entrepreneurship. Owing tothe nondistribution constraint, nonprofit entrepreneurs are unableto capture the full return that can be gained by establishing anew firm or expanding an old one in the face of increased

demand. Consequently, their incentive to undertake such entry orexpansion is limited relative to that of entrepreneurs in the for-83



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NONPROFIT SECTOR




Engaging in Risk/Survival Analysis

Identifying and involving the constituency

Testing for Organized Abandonment

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p g


An essential difference between public, for-profit and nonprofit

organizations centers on the concept of mission. What do we mean when we talk about an organizations mission?

In the business world, the ultimate mission of the profit-making firm is to earnmoney for its owners. The concept of ownershipis completely absent from anonprofit organization and consequently the nonprofits mission has a totallydifferent interpretation. There can be no owners in a nonprofit organizationbecause such an entity is intended to serve a broad public or quasi-publicpurpose, and ownership (with concomitant private gain) is incompatible withpublic purpose. As a result, it is much more difficult to identify and articulate themission of a nonprofit organization and, at the same time, to develop criteria bywhich success can be measured. In a for-profit organization, because themission is clear, success criteria are also clear.

The mission centers around profit-ability; thus criteria for success (and decisionmaking) include things like return on investment, sales, profit margins, marketshare, and other easily calculated measures. In a nonprofit organization, wherethe mission centers around public service it is much more difficult to define thepurposes and to find proper criteria by which to measure success.

If the purpose of a school is to produce well-educated citizens, or if a recreation

center is established to offer constructive activities to urban teenagers, whatcriteria should we use to measure success? There will always be quantitative

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Generally, it is admitted that mission statement shouldserve three functions for an organization:

Boundary functions

Act to motivate both staff and donors

Help in the process of evaluation of the organization

Boundary function. A mission statement describes thebounds of the business of the organization.

The boundary function is important as a way to provide focus

for all organizations, but for nonprofits it is particularly sogiven the ambiguity of control and criteria for success inthis sector. A for-profit enterprise interested in a newproject will typically make its decision by looking at theeffect of that decision on profits. For nonprofits, which areoften producing either collective or hard-to-evaluate goods,the profitability venture is often not the right criteria for

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The nonprofit also lacks clarity in ownership.Given the absence of shareholders, the staff,clients, volunteers, and the board all will competefor control at one time or another. Discussions of

the mission statement often form part of thebattleground for these struggles for control. Aclear mission statement can often limit strugglewithin an organization, both because it attracts

people with similar ideas and because it makesclearer the basis on which decisions will be made.Thus, a clear mission statement, by resolvingsome of the boundary issues for the organization,

can allow organizations with many competing87



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Motivating the staff, board, volunteers anddonors of an organization. This second role is

particularly important in the nonprofit sector.Mission statements help to carry the ideology ofthe organization, to serve as a flag around whichthe organization can rally.

The evaluation functionrefers to the possibilityto state the mission in such a way as tosubstitutes for profits as criteria for success.

Just as there are three functions served by themission statement, there are also threeconstituencies the statement will affect: the staff,the donors including volunteers and the users

of the service. As a boundary mechanism, themission statement serves all three groups. Ithelps attract donors, focus the staff, and identifyclient. The motivational function of the missionoperates principally on staff while the evaluation

function is a staff donor domain.88



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One of the constant issues in designing a missionstatement involves just how broad one should make it.The challenge of developing a good mission statement isto create a text that is sufficiently broad to encompass themany possible activities that the organization may wish toengage in. This is crucial inasmuch as the law obligatesthe nonprofit organization to limit its activities to thosecovered by the mission statement as contained in theorganizing charter. However, in addition to a broad

statement of purpose, a mission statement is onlyvaluable if it gives some specific guidance on thedirection that the organization should take in regard toprograms, services, and activities.

Nevertheless, the process of mission-setting has to take89



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A broad mission statementcan direct anorganization toward new opportunities; broadlydrawn boundaries are thus sometimes useful. Fora nonprofit that relies on fundraisers, a moregeneral mission statement can allow it to appealto a range of donors as well. Overly broadstatements, however, have substantial dangers,particularly around the functions of motivation andevaluation. On the other hand, the narrower themission, the less dissension is likely to be seenamong stakeholders and the easier it will be toevaluate programs. For nonprofits, with theirmultiple constituencies and hard-to measureproducts, this may be a considerable advantage.90



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Designing the mission statement

In designing a mission statement, it is important toremember that whatever is decided on is not cast instone. Although the filing of the statement of purpose

with the org

The Management of Nonprofit Organization v3

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Transcript of The Management of Nonprofit Organization v3