Nonprofit/For-Profit Distinction “Starting to Collapse?”

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A.Punpleng /

December 14, 2012; Source: New York Times

It’s great to see Stephanie Strom back on the nonprofit beat again, but the story she tells about foundations investing in for-profits is disturbing in an odd way. It touts the investments of foundations, such as the W.K. Kellogg Foundation, in for-profit entities consistent with the foundations’ philanthropic missions, which is what we know as “mission-related investments” (MRIs). Advocates have long supported foundations using their assets to invest in corporations that can generate reasonable market returns and simultaneously contribute to philanthropic purposes, the model being the F.B. Heron Foundation’s program of MRIs.

But some people have drunk the tea that the market is a cure-all, and if it isn’t totally working, it’s because we haven’t invested enough in strengthening and fixing market mechanisms. Strom quotes Antony Bugg-Levine, a former Rockefeller Foundation official now leading the Nonprofit Finance Fund, who says, “The actual distinction between the two sectors, for-profit and nonprofit, is starting to collapse.” The distinction may be collapsing because nonprofits have been so reticent to take on the market-cheering social enterprise crowd which has relegated the nonprofit sector to a category of institutions that aren’t business-like enough—sort of a bunch of organizations that don’t measure up to the capabilities and performance of for-profit entities.

Bugg-Levine’s statement is unchallenged in the Strom article except for a statement by Phil Buchanan of the Center for Effective Philanthropy that nonprofits often exist because of market failures. The Bugg-Levine argument is an echo of similar sentiments voiced by some others in the social enterprise or philanthrocapitalism movements. Nonprofits rarely, if ever, respond, perhaps because of the foundation and government pressure that nonprofits should act more business-like and place income-generation higher on their priority lists. Some observers have noticed the prolonged silence of some nonprofit sector leaders in response to statements like Bugg-Levine’s. Isn’t it time that national nonprofit leaders take on these market ideologues and those who view nonprofits as little more than a not-ready-for-the-market sector?

The answer shouldn’t be “nonprofits are good, too” or “nonprofits are getting more business-like,” but a more cogent and powerful analysis of the inherent limitations of the market as a tool for social improvement. Nonprofits don’t exist just because of market failures, but in part because the market is not designed to address and solve social problems. In many cases, the market creates the conditions and problems that nonprofits respond to.

It’s good that at least Buchanan responded to part of the market question, but the nation’s nonprofit association leaders and the nation’s foundation leaders have to speak out publicly about the juggernaut of market thinking that has increasingly relegated nonprofits to a category of unexciting, not particularly effective, second-rate responders to the social and economic problems of our country. Those problems are largely the product of our market economy. Hopefully, nonprofits won’t see themselves as having collapsed into the for-profit sector’s bench. —Rick Cohen

  • Allen Bromberger

    Rick, I think you miss a big point about mission related investments and program related investment. Rather than taking funds away from nonprofits as you insinuate, these kinds of investments put foundation dollars to work in enterprises that are formed to pursue public benefit and profit at the same time. By contracts, most foundation investments are in conventional profit-oriented companies that may pay little if any heed to the needs of the community, the environment, or to social responsibility. Since charities in general cannot accept investments nor pay a return above market-rate interest, they have no skin in this particular game, nor is there any reason to believe that charities are negatively impacted by this kind of investing at all.

  • rick cohen

    Allen: i don’t insinuate that at all. I’m calling to account the question of whether the nonprofit sector can stand up for itself and speak to the failures of the market. the nonprofit sector lately is enveloped in a realm of thinking that the market cures all (or can cure all if it is improved and fixed) that is silly. Nowhere did I insinuate what you say I insinuated. I’m talking about nonprofits talking about what the market can’t do and can’t deliver.

  • Antony Bugg-Levine

    Rick: Thanks for starting this debate. To clarify: I certainly do not believe that the market is a cure all. I am proud to lead a nonprofit that strives each day to be an exciting, effective and first-rate responder to social and economic problems. But NFF believes nonprofits and the communities we serve are better off when we have more options available to us to mobilize resources and talent. For some nonprofits, loan capital and skills developed in for-profit businesses can be useful resources. For others these are not. Informed management teams and empowered clients are best placed to determine how an organization should engage with these potential resources. Given how hard it is for so many nonprofits to keep up with service demand in a dynamic funding environment, we cannot afford to demonize or idealize either markets or the nonprofit organizations that exist to step in when market solutions fail.

  • Rosemary Bayer

    One way to think of the social enterprise movement is as an opportunity to change the market into something that makes more sense for today, rather than to change non-profits into something more market-savvy.

    The mission-driven enterprise, whether a non-profit or one of the low-profit models like the L3C here in Michigan, provides the opportunity for stakeholders to appreciate that there are successful business models where business decisions are driven by the mission, rather than by the all-holy PROFIT and shareholder return. The social enterprise allows profitability (as in, earn income and operate in the black) while not sacrificing service in exchange for profits. Unlike so many for-profit companies (telecom, retail, etc), where we all just gave up good service in exchange for higher rates, non-profit services cannot simply do a terrible job and get away with it – human lives or the health of the planet are at risk.

    The social enterprise legally allows us to say to our investors, board members, stakeholders – we are not here to make gobs of money for you. We are here to serve our constituents. We will do this in a sustainable (profitable, earned income) way, but our daily and strategic decisions will be driven by our mission, rather than solely on shareholder return.

    We believe you should invest in us because of the very large social return you will see, PLUS a (smaller) financial return.

    Rosemary Bayer
    ardentCause, L3C