Nonprofit University Blog

We’ll be back on 12/4/09.  (Guess we could have tweeted that. )

My intent was to write about L3Cs—low-profit limited liability companies.    Five states already allow them, several more have legislation pending, and many are encouraging the congress to create such legislation.  Ever heard of them?

So I went looking for a simple, yet clear, definition of just what an L3C is.  In the process, I got sidetracked by a table comparing an LLC, an L3C and a nonprofit.

According to the design and intent of an L3C, it is a cross between a for-profit and nonprofit organization:  it is supposed to work for social good, but it can make a small profit, provide a return to investors AND apply for philanthropic dollars.  Funny, it sounds like a nonprofit!  You’ll get my drift in a minute, if you don’t already.

Take a look at this chart, provided by the Americans for Community Development, an L3C created to work “working with legislators across the country to enact the legal framework necessary to permit the formation of the L³C.”

If you are smart  (a given with my blog readers), then you see the slight of hand these self-promoters have used to create this new organization that will compete with nonprofits.  Too bad they, as so many others do, like to spin things on an ignorant public, preferring slight of hand to truth and honestly. Too bad that these self-promoters didn’t understand, as so many people don’t, what a nonprofit is and how it operates.  If they had, they would have understood that there is no need for L3Cs, as nonprofits already are a better model for achieving the same ends.

Let’s begin with the second column of the chart:  organizational purpose.  I’m going to ignore the row for LLCs, because we get them:  they are all about making money, the more the merrier, for most.  But looking at the stated difference in that box for an L3C and a nonprofit, there really is no difference.  Every executive director, other staff member and board member of a nonprofit that wishes to survive knows that if the nonprofit is going to be able to deliver its mission purpose, it has to have a financial purpose.  Thus, nonprofits are financial and mission driven.  We know that we have to pay attention to our bottom line, run like that LLC, while always making sure that that bottom line allows us to fulfill our mission promises.  If not, how and why should we exist?  So, you tell me:  how do an L3C and a nonprofit differ?

Column three:  potential rate of financial return.  This is what really caused my ire.  For the L3C, it has 0%-5% ROI; for the nonprofit, it has “0% to negative 100%.”  Excuse me?  Those who believe enough in a social mission to invest in it—not make a gift, not a donation, but invest in an organization’s ability to deliver on its mission—understand that returns on investment are not always monetary, and that intrinsic rewards are just as valuable, if not more so, than financial returns.  And where does this minus 100% come from.  Do these managers of an L3C not understand the basics of operating a business?  If a company cannot provide a good enough product—be it a pair of sneakers, a washing machine, moving the homeless to homeownership, improving literacy in children, etc.—then that business will fail?  Because then, truly, the investor will see no return and will not continue to invest.

The return nonprofits offer is enormous.  Ask anyone why they volunteer with a nonprofit in helping to deliver the service or on the board, and the first thing out of their mouths will be something to the equivalent of “to give back” or “to help others.”  The return on this investment means more to them than a %5 financial return.  As anyone why they make a financial investment in a nonprofit, and one of the last things out of their mouth will be “to make money.”  They aren’t doing it for a financial return; most aren’t even looking for the tax deduction, though for some that doesn’t hurt, and may effect how much they invest.  Nonprofits are about helping—others, ourselves, our communities.  Not about making money for ourselves.

Why must this society sully things by seeing good only happening if it comes with a financial reward?  Nonprofits do a more than admirable jobs at serving the social good.  Why dilute that work by feeding America’s greed and creating an entity where mission takes a back seat to financial reward?  Haven’t we had enough lessons already what greed does to America’s economic system?

There is so much chatter these days about what needs to be done for nonprofits do to get the resources to survive these tough economic times, from what organizations should organizations do; to what should funders do; to what individuals should do.  But from what I’ve seen, with the only exception possibly being social networking, nothing is new.  But that’s not necessarily bad.

Pablo Eisenberg, who I have always deeply respected, but do so even more when he plays the role of “irascible critic,” had an article in the November 9 Wall Street Journal in which he identifies nine ways to “fix” charitable giving.  His suggestions range from increasing the mandatory foundation minimum distribution percentage to increasing general operating support and funding the government watchdog agencies to simplifying the application and reporting processes.  You won’t get any argument from me on any of these.  And yet, with the possible exception of funding the watchdog agencies, none of his nine points is new.

One of the old mantras of tough economic is “the board needs to step up and fulfill its fundraising responsibilities.”  And yet, apparently many are not.  Our economic impact survey done in May, 2009, found only 25% of responding organizations had individual board members stepping up the fundraising plate, making larger gifts, bringing in more donors, selling more tickets.  Six months later, and lots of layoffs and cutbacks later, our follow-up survey, still in the collection stage, shows that has only inched up to 28%.

So, I tell you a tale of one, albeit very cautiously.  As a lapsed statistician, I know how skewed one can be and the dangers of generalizing from one.  So, do not take this story and generalize, but take it as a demonstration of how old advice still works today.

We just held the third annual meeting of the organization on whose board I sit.    This is NOT and never was intended to be a fundraising event; it is, totally and completely, a friend-raiser.  This year, I, stupidly, agreed to chair this event.  Last year, we had 350 people register for the event.  That means they bought or were given a ticket to attend.  That was before everyone realized just how much the economy had really tanked.  Notwithstanding the economy, our goal this year was to match that goal, despite having raised ticket prices by $10.  Well, we saw it and raised it by more than 25 additional attendees.

Why? How? Bulldogs!  The board president, vice president/board of advisors chair and I constantly hounded our fellow board members to send out invitations, buy tickets to give to the right people (nonprofit leaders and people with money), follow-up with individuals, etc.  All members of the board and board of advisors had to buy and give away 10 tickets; many bought twice that many, gave them away, and continued to send invitations.  Two members of the board of advisors approached every chapter in our geographic region of a particular service organization, even making visits to meetings, encouraging members to attend.

As for my own tickets, I did what fundraising experts always tell us to do.  I began cultivating relationships—though perhaps with a little twist.  I can claim all of the same things that board members trying to duck out of their fundraising responsibilities always throw at me:

• I don’t know people with money
• don’t know people in high places
• don’t belong to the posh country clubs, etc.

But I do know how to read.  I’d been collecting names of people I’d read about that I thought should know about this organization.  I wrote each a personal note (not in my usual illegible scribble either), and invited these eight people I’ve never met to attend this event as my guest.  Six responded positively!  I can’t wait to meet them, put a face to a name, a description to the causes that matter to them.

What this board did truly should not be considered exceptional, but the mandatory minimum of what boards of directors and the other supporting boards of a nonprofit should do.  Forgot the cutesy slogans that people like to throw at you:  board members should bring time, treasure and talent; no, they should bring work, wealth, wallop (as in clout), and wisdom.

Regardless of the economic times, board members need to bring to their board service expertise of use to the organization, a willingness to do the work and go the extra mile and an evangelical fervor for the mission.  That’s how you get to push 400 guests, even in tough economic times.

I understand that sometimes people just aren’t ready to hear things.  A couple of years ago, received a card from a student that I’d had in class a good 15 plus years before.  She was writing to thank me for something that I had, apparently, repeated multiple times throughout the courses she took with me.  She finally understood why I had stressed it as I had.   Why I then repeated—and continue to do so today—the important messages in hopes that someday, they will stick.

But sometimes, even with colleagues and others repeating the same messages, it just doesn’t seem to get heard.

To wit:  I receive Google alerts for “nonprofits.”  A recent alert contained what is becoming all too common:  two articles about questionable finances of nonprofits.  (For the record, the bulk of the items on these alerts are generally positive.)  And to make it to a Google alert means the scandal has hit the media and Google has picked it up.

The first one I came across grabbed my attention with the headline “Nonprofit Company Makes its Owners Wealthy.”  “No,” I scream, “this can’t be; no one owns a nonprofit!”  But despite this message being sent repeatedly, by lawyers, consultants, the IRS, etc., this message hasn’t taken.  And in particular, it seems never to have even made it to the ears of boards with founders as executive directors.   The “company” to which Los Angeles Times’ article refers is Social Vocational Services, a $63 million, state-wide organization that provides vocational and life skills assistance, as well as housing, to the disabled.

Over the course of the last five years, the CEO and his wife, who is the CFO, have made over $7 million, along with millions of dollars in real estate holdings.  And the dealings—renting property they own back to the nonprofit, starting a for-profit company that just leases vans to the nonprofit, etc.—are your standard conflict-of-interest practices that allow senior managers of the nonprofit to gain financially through dealings with the nonprofit.

Come on.  That lesson should have been learned by now by every board member and every executive director, her sister, his mother, etc.  What is the problem?

The other headline that caught my eye was from The Washington Post and read “FBI examines spending by Md. nonprofit.”  Here the deal was that the organization apparently couldn’t account for approximately $900,000 over two years.  It gets worse:  the organization’s annual budget is $700,000.  The organization claims that the disputed amount is a mere $61,000.

What don’t people get?

I read these newspaper articles today after earlier starting to read the main articles from the November 2009 issue of the Harvard Business Review:  “The Drucker Centennial:  What Would Peter Do?  How his wisdom can help you navigate turbulent times.”  I’ve read Drucker, attended lectures and read books by his disciples (unfortunately, though, I was never able to hear him), use some of his ideas, but I am not a flag waving Druckerite.  Nevertheless, as I was reading these two articles, and another about ACORN, revealing horrendous mismanagement and mis-governance of nonprofits, two things that I had read earlier in the Drucker articles sprang to mind.

First, in talking about Drucker’s early warnings about excessive executive compensation, Rosabeth Moss Kanter, in the article of “What Would Peter Say?” says, “More than 20 years ago, Drucker pointed to a top-to-bottom ratio that was then rushing past 40 to 1.  Just before his death [November 2005], the ratio was greater than 400 to 1.”  Is a nonprofit CEO salary of $872,311 excessive?

Second, there was a Drucker quote from an article he wrote for the July-August 1989 issue of the Harvard Business Review:  “Nonprofits need management even more than business does, precisely because they lack the discipline of the bottom line.”

Perhaps it is time to become that flag-waving Druckerite.

Editor’s Note:  And if two examples were not enough, Laura was interviewed for an article about a nonprofit in Arizona with some interesting practices.  Read the article in the Arizona Star.