Excerpt from the Introduction
In September 2006, the founders of Google, who had just made a splash with a highly successful public stock offering, garnered headlines once again by setting up a foundation, appropriately named Google.org, with about $1 billion in funding. What captured the public’s attention, however, was not the creation by newly wealthy dot-com entrepreneurs of a foundation with a mission to address problems of poverty, disease, and global warming. Rather, it was that Google.org was to be established not as a traditional grantmaking foundation but as what many would regard as an organizational oxymoron: a for-profit, taxpaying charity.
Google.org was one of several examples in 2006 that led the New York Times to remark that "this year, as never before, the line between philanthropy and business is blurring" (Strom 2006). Although Google.org may be the most prominent recent instance of such blurring, those familiar with the recent history of the nonprofit sector in the United States will recognize it as one of many examples of how the boundaries between nonprofit and for-profit activities continue to shift, redefining what it means to be a nonprofit organization and forcing new attention to existing laws about public policy, taxation, and business regulation.
Traditionally, economists and legal scholars have argued that what differentiates nonprofit and for-profit organizations is the so-called non-distribution constraint (the lack of a formal profit function) that prevents some group of owners (but not necessarily managers and staff) of nonprofit organizations from appropriating any economic surplus a nonprofit generates. An important corollary attribute has been the privilege of tax exemption that has been accorded to entities that organize themselves as nonprofits by imposing the non-distribution constraint.
As has been noted by Weisbrod (1988), this particular set of institutional attributes creates both incentives and constraints that set nonprofits apart both from government and from for-profit enterprises. The organizational boundary associated with nonprofit status has traditionally accompanied a number of other differences between for-profits and not-for-profits, including what goods and services are produced, how goods and services are produced, and internal organization and culture. The organizational boundary has also at least implicitly if not explicitly defined what many regarded to be an appropriate relationship between for-profits and nonprofits, which typically involved grants or contributions from the former to the latter.
Although these traditional boundaries between for-profit and not-for-profit organizations continue to exist, they have never been universal, and, increasingly, they have become more permeable. Many nonprofits have found it advantageous to operate more like businesses in some respects; some for-profit businesses have adopted some nonprofit attributes; and businesses and nonprofits have discovered mutual benefit from acting as partners, both in for-profit and in not-for-profit ventures. The result is that there is a spectrum of nonprofit organizational forms, ranging from traditional donative nonprofits that rely almost entirely on contributions and grants to for-profit enterprises with related charitable activities, such as Ben and Jerry’s and Newman’s Own. Between these polar cases lie a range of intermediate arrangements, including newer hybrid forms that combine charitable mission and the non-distribution constraint with business activities.
Some of these adaptations are relatively recent, such as the evolution of new institutional arrangements in the form of "double bottom-line" social ventures and nonprofits’ creation of for-profit affiliates and subsidiaries that incorporate profit seeking as an integral rather than ancillary part of operations.
Adjusting to changing needs and market demands is hardly a new phenomenon. In the past, nonprofit staff and managers have shown themselves to be quite able to adapt to a changing environment (Hammack and Young 1993; Weisbrod 1998). For example, it has long been recognized that some missions, such as providing job training, can be fruitfully carried out by actively engaging in business activities, and Weisbrod (1988) cites a 1985 survey of 700 nonprofit hospitals showing that a third of respondents were involved in joint ventures with nonprofit firms.
The response of traditional nonprofits and for-profits to changing circumstances takes on new salience, however, as events and forces—such as devolution of government services and the evolution from an industrial to an information economy—offer new opportunities and incentives for existing organizations to explore new modes of operating; new relationships between for-profit and not-for-profit organizations; and new organizational forms. Examples of such adaptations include nonprofits’ creation of for-profit affiliates and subsidiaries that incorporate profit-seeking as an integral rather than ancillary part of operations, as well as new institutional arrangements in the form of "double bottom-line" social ventures, in which a nonprofit entity is organized to create economic value both through a traditional commercial bottom line, defined in terms of market revenue and cost, and a social bottom line that identifies and values mission-related outputs that have clear social value not explicitly captured in the marketplace.
In exploring these issues, this book follows and builds on prior work on the intersection of the nonprofit and for-profit sectors, including Weisbrod (1988, 1998) and Hammack and Young (1993). Our purpose is not to reexamine such issues as competition between for-profits and nonprofits or the role and tax treatment of unrelated business income earned by nonprofits. Rather, it is to consider new developments in the relationship between nonprofits and business ventures, and the adoption of business-like practices by nonprofits. In a distinctive approach, we examine the blurring of the boundaries between nonprofit and for-profit organizations from an evolutionary organizational perspective (Aldrich and Ruef 2006). A key organizing theme is that nonprofits, like other organizations, have natural tendencies to adapt to changes in their environment as well as to changes in organizational culture caused by shifts in attitudes and norms. The organizational propensity for adaptation creates a natural, dynamic process of change in the boundaries between nonprofit and for-profit sectors. Such adaptations may be inevitable and may or may not be desirable; regardless, many have interesting and important implications for public policy.
The contributing authors focus on several aspects of this process of adaptation. The first three chapters examine factors that implicitly or explicitly influence choice of organizational form: organizational identity (chapter 2); the economic environment in which nonprofit organizations operate (chapter 3); and laws and public policies that regulate use of the nonprofit form of organization (chapter 4). The discussion then turns to examples of institutional arrangements that mix and match for-profit and nonprofit elements in response to changes in the environment and organizational identity: the creation of hybrid organizational structures involving cross-ownership between nonprofit and for-profit enterprises (chapter 5); partnerships involving separate nonprofit and corporate partners (chapter 6); and double-bottom-line investment strategies of foundations (chapter 7).
Lastly, we consider how nonprofits have taken on more businesslike ways of operating while retaining the traditional nonprofit form. Calls for nonprofits to engage in more systematic and strategic assessment of performance create an environment in which they face incentives to behave more like their for-profit counterparts on decisions of allocating scarce resources internally (chapter 8), whereas competition for financing and staff means that nonprofits increasingly have to be prepared to meet a changing market when hiring employees (chapter 9).
Nonprofits and Business, edited by Joseph J. Cordes and C. Eugene Steuerle, is available from the Urban Institute Press (ISBN 978-0-87766-741-4, paper, 296 pages, $29.50).
