Nonprofit World Faces Many Dangers

American nonprofit organizations have exhibited enormous resilience in the face of an extraordinary array of financial, competitive, accountability, and legitimacy challenges over the past two decades. But the steps they have taken, while allowing them to survive and even to thrive, pose risks to the very qualities that make these organizations so valuable.

America’s nonprofit organizations have experienced substantial growth over the past two decades, largely due to their growing integration into the market economy. Nonprofit organizations have successfully marketed their services to paying customers, started commercial ventures, forged partnerships with businesses, adopted business-style management techniques, reshaped their organizational structures, incorporated sophisticated marketing and money-management techniques into even their charitable fund raising, and generally found new ways to tap the dynamism and resources of the market to promote their organizational objectives. As a result, the nonprofit world in the 21st century is no longer “your father’s nonprofit sector.” Rather, it has been substantially reinvented and re-engineered.

Helpful as these changes have been to nonprofit operations, however, they also carry enormous potential problems to the charities themselves, and to all of us who depend on them for the special roles they play. Among the most significant risks:

Identity crisis. Tension is growing between the market character of the services nonprofit organizations are increasingly providing and the continued nonprofit character of the organizations.

This tension is already stark in the health field, where reimbursement rates in government and private insurance programs are making it increasingly difficult for nonprofit providers to sustain the charity care, community service, teaching, and research that have long been hallmarks of their involvement.

Private universities also face increasing strains between their mission to propagate knowledge and the expansion of their reliance on corporate licensing arrangements, which call on universities to restrict access to the fruits of scientific research in the interest of commercial development. Similar pressures are intruding into the operations of other nonprofit organizations as well, inducing human-service organizations to follow affluent clients into the suburbs and transforming arts and cultural institutions into social enterprises as attentive to market demand as artistic quality.

Expanded pressures on nonprofit managers. The intensified pressures on nonprofit organizations have also vastly complicated the job of the nonprofit executive, requiring charity officials to master not only the substantive dimensions of their fields, but also the broader private markets within which they operate, the numerous public policies that affect them, and the massive new developments in technology and management with which they must contend.

They must do all this, moreover, while balancing an increasingly complex array of stakeholders that includes clients, employees, board members, donors, regulators, government-program officials, for-profit competitors, and business partners; and while also demonstrating performance and competing with other nonprofit groups and with for-profit firms for fees, board members, customers, contracts, gifts, visibility, prestige, political influence, and volunteers. No wonder executive burnout has become such a serious problem in the field despite the excitement and fulfillment nonprofit jobs often entail.

Increased threat to nonprofit missions. Not surprisingly, these pressures are making it harder for many charities to stick to their primary goals.

Forced to rely increasingly on fees and charges, organizations naturally begin to skew their service offerings to clients who are able to pay. What start out as sliding-fee scales designed to cross-subsidize services for the needy soon become essential sources of revenue. Organizations that need to raise capital to expand are naturally tempted to locate new facilities in places where they will attract paying clients. As they are drawn more and more into the commercial market, nonprofit organizations consequently face more and more threats to their basic charitable purposes.

Putting small charities at a disadvantage. These pressures have created particular dilemmas for small groups since successful adaptation to the prevailing market pressures requires effective access to advanced technology, professional marketing, corporate partners, sophisticated fund raising, and complex government reimbursement systems, all of which are problematic for small organizations. Market pressures are therefore creating not just a digital divide, but a much broader “sustainability chasm” that smaller organizations are finding increasingly difficult to bridge. The result may be to reduce the diversity of the nonprofit world and reduce one of its most cherished attributes — its availability as a testing ground for new ideas.

Erosion of public trust. America’s charities have moved well beyond the quaint, Norman Rockwell stereotype of selfless volunteers ministering to the needy and supported largely by charitable gifts. Yet popular images remain rooted in this older image, and far too little attention has been given to bringing popular perceptions into better alignment with the realities that now exist.

As a consequence, nonprofit groups find themselves vulnerable when highly visible events, such as the September 11 tragedy, let alone instances of mismanagement or scandal, reveal them to be far more complex and commercially engaged institutions than the public suspects. The result is a growing threat to the public trust on which nonprofit organizations ultimately depend.

What all of this suggests is a growing imbalance between the nonprofit world’s “distinctiveness imperative,” that is, the things nonprofit groups do to remain distinctive and thereby justify the special tax and other privileges they enjoy, and its “survival imperative,” that is, the things these organizations must do to survive. Current trends appear to be tipping this balance decisively toward the latter.

To correct this, scholars and nonprofit leaders need to rethink the basic values and purposes of nonprofit organizations.

The evolution of the nonprofit world in America has clearly leapt beyond what our existing concepts and values are able to accommodate very easily. Existing notions of “public benefit” or “charitable purpose” that focus narrowly on “service to the poor” overlook or play down other valid objectives that nonprofit organizations can also usefully advance, such as the pursuit of quality, the encouragement of diversity, the willingness to serve even in the absence of profit, and the promotion of community.

Nonprofit executives need to articulate anew the rationale for the existence of nonprofit organizations in 21st-century America and make sure that this rationale is reflected in legal doctrines and in the missions and operations of individual organizations.

American nonprofit groups and the people they serve are also in need of better information about the challenges these organizations are facing and about the way they are responding.

Despite the heartening growth of nonprofit scholarship, charity managers still do not have anything approaching a Bloomberg News pumping timely information to them about the trends confronting their work or the ways in which other managers are coping with them. What is more, the public remains largely in the dark about how nonprofit organizations actually operate in contemporary America.

To remedy this, better information systems must be developed and an aggressive public-information effort started. What is needed, moreover, is not a ritualistic celebration of charitable giving and volunteerism of the sort that currently characterizes much of the nonprofit world’s public-relations efforts. Rather, the public must be introduced to the complex realities of contemporary nonprofit operations. This will require, for example, a more explicit acknowledgment of the nonprofit world’s substantial and longstanding partnership with government, and its efforts to use business approaches to promote nonprofit ends.

Finally, serious consideration must be given to a variety of additional concrete steps that could revitalize nonprofit organizations and reconnect them to the American public.

Among the steps:

• Encourage governments to make greater use of matching grants in their assistance to nonprofit groups to help ensure that tax dollars go to causes that enjoy public support, and to provide incentives for nonprofit organizations to remain focused on generating philanthropic resources.
• Press Congress to deregulate nonprofit advocacy, which is more heavily restricted in the United States than in most developed democracies.
• Urge nonprofit groups to formulate guidelines on the appropriate levels and uses of the fees they charge their clients to clarify the distinction between nonprofit organizations and commercial firms.
• Promote Congressional enactment of a broad-based tax credit for investments in nonprofit facilities and equipment to overcome the structural disadvantage nonprofit groups face in raising capital because of their lack of access to equity financing through the stock market. Few steps would help more in creating a more level playing field for nonprofits in their competition with for-profit firms.
• Persuade foundations to transform themselves into “philanthropic banks” with separate “grant,” “loan,” and “loan guarantee” windows to maximize the impact of philanthropic resources.
• Make sure the reimbursement policies in the major government entitlement programs that nonprofit groups now rely on heavily to finance their activities do not make it impossible for nonprofit groups to perform their public-benefit purposes, such as charity care, teaching, advocacy, and research.
• Replace the current system of tax deductions for charitable contributions with a system of tax credits under which the value of a tax deduction for charitable contributions does not depend on the tax bracket the taxpayer is in. This will help democratize giving and potentially give a needed push to charitable support.

Americans have long paid lip service to the importance we attach to our voluntary institutions, while largely ignoring the challenges these institutions face. Nonprofit managers have therefore been pretty much on their own in deciding what risks it is acceptable to take to permit their organizations to survive.

Given the stake that all Americans have in the special roles that these organizations perform, it seems clear that this is no longer sufficient. In the face of the enormous pressures, nonprofit managers need help to make sure that the balance they are having to strike between distinctiveness and survival is the best one available. Otherwise Americans are in danger of preserving a nonprofit world that differs very sharply from the one we desire.

Lester M. Salamon is the director of the Center for Civil Society Studies at the Johns Hopkins Institute for Policy Studies. This article is adapted from his recent book,

The Resilient Sector: the State of Nonprofit America, published by Brookings Institution Press in cooperation with the Aspen Institute.