Nonprofits face danger in blurring line between donors,  its managers

Published in the November 17, 2006 edition of Columbus Business First

There are three emerging trends in philanthropy that are well-intentioned but can have unintended adverse consequences for nonprofits.

If a harmful effect may be emerging, it is vitally important for nonprofit managers and their boards to engage donors in meaningful conversation on how the good intentions can be retained while minimizing the potential for harm. These three trends are:

• Philanthropy focused on seed funds, seed grants or starter funding.

• Philanthropy that requires matching funds.

• Philanthropy that requires the measurement of outcomes and quantitative evidence of positive effects.

Seed grants

Seed grants are made to support a new undertaking for two to three years with the expectation that the nonprofit will develop new sources of earned or donated funding to replace the seed grant money. The intention is to provide a source of scarce investment funding so  nonprofits can afford to take on new challenges or approach old problems in new ways. This is laudable. 

But as this type of grant becomes more prevalent, the flip side of the coin is that nonprofits are sent a strong signal that growth is necessary to attract donors. Not only can growth turn a successful nonprofit into a troubled one, the pressure created by seed grants can also subtly push nonprofits toward programs that can be supported with fees and charges.

Indeed, there is an emerging view that nonprofits that are 60 percent fee-supported and 40 percent donor-supported, for example, are better managed than those that have donated money supporting 50, 60, 70 percent or more of expenses. We need to remind ourselves that sometimes the current programs are the right programs to support and that nonprofits were created because community need could not be paid for with fees and charges.

Matching grants

Matching or challenge grants are made either to provide an incentive to other donors or to ensure the grantor that the nonprofit is committed to the program as evidenced by its willingness to “put skin in the game. This type of philanthropy is beneficial if it attracts new donors or encourages existing donors to increase the size of their gifts (this is called leveraging). 

On the other hand, when matching or challenge grants are directed to specific programs, they can weaken the nonprofit financially.

A nonprofit must be wary of matching gift programs’ forcing its fundraisers to shift part of their effort to the area supported by the matching gift and away from other areas needing support. In the extreme, matching gift programs can implicitly force unrestricted giving into restricted categories. 

In a world of scarce donor dollars, nonprofit executives need to preserve the unrestricted support of their core programs and their administrative systems. If a matching or challenge grant has the potential to divert fundraising away from unrestricted operating support, a nonprofit executive and board must try to change the terms of the grant or consider turning it down.

Performance measurement

Performance measurement is a useful management tool that is increasingly required by donors. Donors have expropriated this management tool as a way to measure the effectiveness of their giving.

The potential danger of performance measurement lies in the presumption that a benefit exists only when the benefit can be quantified or a problem can be solved.

In many cases, nonprofits are asked to deal with the community’s most intractable problems. One must consider that the mission of a nonprofit has merit – and merits support – even if an outcome or an improvement cannot be measured quantitatively. Do we help a child in reading only if the child’s reading scores improve? Do we help a homeless person only if he gets a job or moves into permanent housing? Do we support the arts only if audiences increase or community value can be quantified?

There is merit to feeding the hungry, helping troubled youth, housing the homeless, tutoring a child, producing art and making music even when a problem isn’t solved or when we can’t quantify improvement.

Let Good Managers Manage

Just as we need good nonprofit managers to be businesslike, the community also needs good nonprofit donors to support the decisions of good nonprofit managers. Trying to influence nonprofit managers through restrictions or limitations or quantitative reporting is not effective philanthropy. 

Jim Collins in “Good to Great and the Social Sectors” warns that donors’ imposing their preferences can lead nonprofits to what he calls “undisciplined decision-making.” Similarly, nonprofit managers need to examine skeptically any gift or grant that provides starter funds, calls for a match, or requires quantitative measures of outcomes. 

Visualize what your nonprofit might become five to 10 years from now if these conditions were to be the norm. If you see the potential for  adverse, albeit unintended, effects, talk to your donors and think twice about accepting that gift. 

It is difficult to challenge a donor, just as it is difficult for a for-profit executive to challenge a major investor. But your nonprofit exists to meet a community need and you owe it to your community to help donors to support your approach to mission. 

Allen J. Proctor was chief financial officer of Harvard University and is the author of “Linking Mission to Money Finance for Nonprofit Board Members.”  www.proctorconsulting.org

Copyright 2006. Reprinted with permission, Business First of Columbus Inc.