Common Assumptions
While I worked at a non-profit radio station early in my career and volunteered for nonprofits much of my life, my first paid leadership role in one was over a decade later, as a marketing, public relations and eventually resource development director for a local chapter of a national non-profit. This was the first time I really began to learn about similarities, differences and even perceived differences about which I had wrongly made assumptions. An example of this was when I learned 501(c)3’s still have to pay sales tax—the opposite of which is an assumption I find many still mistakenly make. While this ends up actually being a similarity between non-profits and for-profits, it presents as a difference in regard to our perceptions about it. This is only the tip of what can be a confusing non-profit-versus-for-profit iceberg!
Major Differences
In exploring the major differences between non-profits and for-profits, some are easy to see (i.e. product/service sales versus serving a mission, etc.) while others are not as clear. Marc J. Epstein and F. Warren McFarlan’s Nonprofit vs. For-Profit Boards: Critical Differences states “…new board members must understand deep differences to avoid irretrievable damage to their credibility and effectiveness in a nonprofit organization. Five major differences are:- Mission
- Nonfinancial performance metrics against mission
- Financial metrics
- Governance
- The chair and CEO relationship
To me, there is clarity in such a structure, so it’s beneficial to briefly visit each piece…
Exploring in More Depth
If we stick to the mission and ensure we are using our resources to serve it to the best of our abilities, we should be golden, right? Simple as this may sound, the challenges can come with building consensus in what are often large non-profit boards, because each member has deep emotional passion for certain pieces and little interest in other pieces of the mission pie. It’s a delicate dance to engage a large group of highly dedicated volunteers toward a common goal and ensure they all feel needed, appreciated and valuable in creating successful outcomes relating to mission goals.When speaking of measuring a non-profit’s nonfinancial and/or financial metrics against mission, the main difference between it and a for-profit becomes clearer: accomplishing mission goals is key, and any surplus goes back into growing the ability to serve those goals, rather than dispersed to shareholders.
The governance structure is another unique difference between non-profits and forprofits in that a large group of volunteers serves as an oversight body for the paid staff leadership. This structure sometimes seems out-of-the-box, but it does have a balance that makes sense in ensuring the health of the organization as a whole.
Challenges sometimes arise in the financial expectations related to non-profit board service. The aforementioned Epstein and McFarland state, “because of the philanthropic aspect…expectations for capital gifts, annual giving, and participation in galas…are so high that many people can’t afford to consider being a board member.”
Henry Hansmann states, in Two Systems of Law for Corporate Governance: Nonprofit Versus For-Profit, that perhaps the most salient difference between the two is in their objectives. He says business corporations have a single clear goal: maximization of share price. He goes on to say, “Nonprofits, meanwhile, have no such clear single goal…they’re dedicated to a broad group of rather ill-specified goals that are all hard to measure. This means that different donors or beneficiaries might have different views of what goals should be pursued.”
I can say, from personal experience, this is true.
As a recently hired education foundation executive director in a newly created position, I’ve had an interesting journey learning what has and has not been in place in the foundation's first 30+ years. As many school foundations before it, ours began as a vehicle through which donors could set up memorial scholarships and make tax deductible donations to benefit the school district. We are blessed with a very active board, several members of which serve as committee chairs--often more like department heads--with volunteer staff ensuring several pieces of the foundation are moving forward. While this independence can present challenges in ensuring we’re all on the same page at times, I appreciate all the efforts and the foundation could not accomplish near what it is currently without this level of dedication.
