As featured on BoardSource.
Nonprofits face many challenges today that are unique to the sector, with fundraising being one that immediately comes to mind. But nonprofit organizations are not necessarily as different from their for-profit counterparts as one might think; both require strong governance and oversight to accomplish their goals. They also face challenges common to all types of organizations, such as employing the right talent, having a strong infrastructure, keeping up with advances in technology, and meeting the demand for their services. So, why do we use different language when discussing for-profit and nonprofit organizations?
We tend to talk about the “passion” for the mission that an individual should have when serving on a nonprofit board, a characteristic we don’t often use to describe its for-profit counterpart. We focus primarily on the impact of our missions and emphasize that we are designed primarily to benefit society rather than make a profit. Yet, nonprofit organizations are businesses too, though we don’t usually describe ourselves as such. To successfully carry out our missions, nonprofits need to have a strong foundation and business infrastructure.
Many individuals serving on nonprofit boards are members of the business community — the same community from which for-profits draw their board members — and are familiar with the same business terminology used by their counterparts in for-profit boardrooms. So why not use this same terminology in our boardrooms? It could help our board members think about our organizations as the businesses they actually are. A common language establishes a baseline across both types of organizations and allows boards to operate and govern in a manner that can result in an improved management and oversight structure.
At its core, the purpose of a board of directors is to care for the organization and its stakeholders, advance its work through ensuring strategies in its best interest, and to adhere to stated procedures and laws governing the organization. This purpose applies to both for-profit and nonprofit organizations. Over time, though, some nonprofit organizations have ended up with large boards whose function has become primarily fundraising. However, research from Bain Capital supports the idea that nonprofit organizations are more successful when they have a small, targeted board that focuses on providing strategic oversight that is aligned with the organization’s mission.
Nonprofits have a variety of stakeholders: employees, recipients of the organization’s services, various levels of government, volunteers, and the community at large, to name a few. These stakeholders have an interest in seeing a return on their “investment,” whether that’s an investment of time, money, or energy to the organization, or as a recipient of its activities and success.
Donors function as a form of nonprofit “shareholder,” and their contributions are a form of investment in the organization. In return, they expect the nonprofit to deliver on its mission and provide its intended services to the targeted “customers.” When companies don’t deliver returns to their shareholders or stay true to their “mission,” investors can sell their shares and invest elsewhere, an option also open to nonprofit investors. There are, after all, a plethora of organizations in which they can invest.
We must utilize the resources of these groups, these nonprofit shareholders and stakeholders, in the best possible way. I believe that a small change in language can help nonprofits think about our missions in a new light. By framing our nonprofits as businesses — and looking at our similarities, rather than our differences to for-profit organizations — we can help them succeed and provide our stakeholders with a return on their investment.
Serving on a nonprofit board should not be a duty that is taken lightly. Though nonprofits are not designed to generate profits for our investors, we do need good governance to function and ultimately return value to our shareholders in the form of success of our missions and continued viability — just like for-profits do.
The Raj & Kamla Gupta Governance Institute at Drexel University will continue to lead the discussion around the business of nonprofits and promote a change in language to guide nonprofits and their boards to ensure the success and vitality of their organizations in the long-term. We encourage you to do the same.