Let's Run Charities Like the Big Businesses They Are

By Russell C. Pomeranz

This article originally appeared in the July 1994 edition of the Chronicle of Philanthropy.


In the late 1970's, when baseball players earned the right to become free agents, many fans discovered a harsh reality that owners and players had understood all along. Baseball was not a game played by a few lucky guys for the love of it, or run by owners content to be contributing to a greater societal good. Baseball was a big business, with a lot of money at stake.

It is time for the public to realize that, just like baseball, non-profit organizations are not the domain of wealthy men and women with time on their hands and social calendars to fill. Nor are non-profits inspired missionaries for various causes that can accomplish miracles with a few meager dollars that they should be thankful to receive.

Charities are big business, spending billions of dollars, investing tens of billions of dollars, and fulfilling an agenda essential to the well-being of our country. Non-profits educate our children, maintain our hospitals, form the cultural core of our country, preserve our history, and reach into the inner city to help the forgotten, dispossessed, and people struggling for a way out. Yet when compared to for-profit organizations, non-profits are considered more like wasteful, bloated government bureaucracies than successful, efficient business organizations.

In a capitalist society, the self-esteem of any organization that lacks private ownership and a profit motive is bound to suffer. Charities must overcome the sense that they are second-class organizational citizens and take pride in successfully and efficiently completing their missions. Practically—and emotionally—non-profits can only get respect when they adopt some of the managerial, marketing, and financial practices that define successful for-profit corporations. 

To run efficient organizations, charities must be able to attract skilled managers. To do so, they must offer a challenging career path with significant financial rewards to complement the intrinsic rewards of doing good. Chief executives and staff members should be paid salaries comparable to their peers in for-profit organizations of similar size. If society wants its schools, museums, hospitals, and other important institutions to run efficiently, it should be willing to encourage the most able and qualified of America's work force to participate.

One important way that non-profits could attract more talented workers would be to set up new systems to tie workers' pay to their performance. Such a change would have to be accompanied by increased public scrutiny of compensation arrangements. Just as CEOs of business answer to stockholders, top executives of non-profit organizations must be accountable to a constituency able to judge their performance and to decide who deserves significant pay raises. For example, a non-profit could assemble an independent review board composed of people who understand the mission of the organization, as well as its cost and income structure. The review board would be able to determine whether manages have maintained the integrity of the bottom line while fulfilling the mission of the organization.

Ironically, the irresponsible behavior of several leaders of large non-profit organizations like United Way of America represents an argument for the change to a more competitive wage structure than currently exists. Due to the significantly higher pay scales, for-profit organizations are able to siphon off much of the executive talent in this country, leaving an insufficient pool of experienced managers to responsibly run billion- and multimillion-dollar charitable organizations.

The board of non-profit organizations should also be revamped so they more closely resemble those of for-profits. Instead of demanding a big contribution for the honor of participating on a board, and establishing a pecking order based on the amount donated, non-profits should pay board members for their service. The pool of board members and managerial, legal, and financial talent would increase dramatically. What's more, many wealthy patrons, who are now placed on boards simply because they make large gifts, would probably be pleased to receive other forms of public recognition for their donations.

It is not just a change in the way we think about compensation that is needed in the non-profit world. Other steps should be taken:

  • Foundations, corporations, and individual donors should increase the amount of money they provide to charities for general operating support. Such funds allow non-profits to hire strong managers and enough staff members to insure that programs are well run.
     
  • Grant makers should give non-profits an incentive to manage their grants efficiently. Right now, most grant makers require a charity to return to the donor any money not spend on a project. Therefore, little incentive exists to complete a project under budget. Corporations and foundations should allow charities to use leftover money from a project for their general operating expenses or their endowments.
     
  • Non-profit organizations should be allowed to tap into U.S. capital markets to raise money for capital expenditures, programs, or research. Charities should explore the feasibility of issuing stock in a way that could balance the financial needs of the organization with some acceptable level of decreased control and a modest return to the investor. They should also consider whether mutual funds could be used to generate proceeds to support a non-profit's operations or endowment. If we could lock a group of investment bankers, lawyers, and leaders of the non-profit world in a room for a day, they would probably come up with numerous ideas about how best to direct a small percentage of trillions of dollars invested in American capital markets into the coffers of non-profit organizations.

America cannot afford to let its charities slide toward bureaucratic inertia. It must abandon obsolete ideas about how charities should be run and encourage innovation so that the non-profit world can provide all the services that our society expects—and deserves.