Philanthropy 400’s 20 Years Spotlight Nonprofit World’s Stagnation

According to the economist Joseph Schumpeter, one of the keys to successful entrepreneurship is the “creative destruction” of existing organizations to make room for new and more innovative ones.

If so, The Chronicle’s Philanthropy 400 raises doubts about the extent to which this process is occurring in the nonprofit world.

Now in its 20th year, The Chronicle’s list, which ranks organizations according to the amount they raise from private sources, looks more like it did two decades ago than a comparable list of for-profit organizations does. That suggests that philanthropy may be more resistant to change than businesses are.

Half the nonprofit groups that received the most private support in 1991 remain in the Philanthropy 400 in 2010. Of the 20 largest organizations in 1991, 10 remained at the top two decades later, and those that slipped usually did not fall far down the list.

While the money raised by the organizations in the Philanthropy 400, measured in 2009 dollars, grew by 60 percent during this period, the share received by the 20 largest groups remained about the same: nearly 30 percent.

By comparison, American business today looks much different than it did 20 years ago. In 1991, according to Fortune magazine’s ranking of the nation’s largest companies, the biggest revenue earner was General Motors; in 2010, it is Wal-Mart. In 1991, eight of the 20 largest firms were oil companies; this year, just three are. Few finance, health-care, or technology-driven firms were leaders in American industry two decades ago; now they make up most of the top 20. Indeed, just one-quarter of the companies that made the Fortune 500 in 1991 were there two decades later.

To be sure, the rankings can be a bit misleading. Some of the companies that disappeared from Fortune’s tally—Texaco, for example—remain on the list but have submerged their identities in another business (Chevron, in this case). On the other hand, as a result of organizational changes, the group that was third on the initial Philanthropy 400—United Jewish Appeal—is now accounted for through a number of smaller (but sizable) local Jewish federations. And the organization that tops the list in 2010-United Way Worldwide-did not make the top 20 in 1991, since it reported its revenue then on a chapter-by-chapter basis.

Moreover, earnings and private support are not always good measures of how successful organizations are. Some businesses—oil companies are an obvious example—can grow because the cost of what they produce increases. By the same token, some nonprofits—universities, perhaps—can obtain more private support by becoming more effective at generating income than at meeting new demands.

Even so, the contrast between what has happened in the past two decades in the corporate and philanthropic worlds is worth considering. As the demand for goods and services has altered and digital technologies have come of age, a new group of companies has prospered, taking the place of older ones as leaders of American business. To a greater degree, despite a host of changes in American society during this period, the same organizations that dominated the nonprofit world in 1991 continue to do so today.

Indeed, among the most notable newcomers to the Philanthropy 400 is a group of organizations that exemplify business innovation. They are charitable-gift funds, which were established by for-profit investment companies in response to donor interest in alternative ways of giving. Two are ranked among the top 20 nonprofits in 2010.

While the Philanthropy 400 does not include grant-making foundations, several large ones also emerged from high-tech fortunes during the past two decades. Nonetheless, foundations do not offer an exception to the stability generally found among large nonprofits. Three-quarters of grant makers with assets that exceed $100-million were endowed before 1990.

In addition to the charitable-gift funds, humanitarian and food-relief charities are the other important set of additions to the largest nonprofits in the United States in the past two decades.

Even before the recession started in 2007, they began appearing among the top 20 charities on The Chronicle’s list. Five are now included, compared with two 20 years ago. Habitat for Humanity has also joined this elite group, ascending from the bottom half of the Philanthropy 400 in just two decades.

However, Habitat is unusual. Most organizations at or near the top—roughly 75 percent of the 100 largest among the initial Philanthropy 400—have stayed there.

That does not necessarily signify these charities are not performing real and significant services. Nor does their continued presence on The Chronicle’s list mean they have not changed in two decades. Many undoubtedly have modified their programs to try to keep up with social, economic, technological, and other kinds of changes. But so, surely, did many businesses that nonetheless fell victim to “creative destruction” as other companies—including international ones—managed to find better ways to produce what people wanted.

For whatever reasons, the Philanthropy 400 suggests this has not been happening in the nonprofit world. Where substantial change has occurred since the 1990s, however, is in the number of nonprofit organizations. According to the National Center for Charitable Statistics, nonprofits registered with the Internal Revenue Service rose by 50 percent since 1995—from 1.1 million to 1.6 million organizations. Since many groups see no need for official recognition, this is probably an underestimate of groups that have been formed to promote charitable purposes.

One should not assume, of course, that all these groups are responding innovatively to emerging needs any more than that large, existing groups are persisting in their older (and perhaps obsolescent) ways.

Still, if Joseph Schumpeter was right that the key to successful entrepreneurship lies in replacing older organizations with newer ones, the stability of the Philanthropy 400 suggests that innovation in the nonprofit world may depend crucially on keeping the barriers to entry as low as possible.