Non-profits are not corporations that don’t make profits


One of the ideas that keep getting rediscovered is that if only we applied business principles to government and nonprofits like schools and charities, they would run much better, and the way to do this is to put business people in charge of them. This idea seems to never get old however many times it fails.

The latest victim is the Red Cross. The Red Cross has one of the best name recognitions of aid organizations, and is the group that most people expect to see turn up after any major disaster and provide aid to the victims. But the investigative journalistic group ProPublica has for some time been exposing the fact that the organization has been woefully mismanaged and its funds squandered. This led to a major housecleaning in 2008 that was supposed to set the organization back on the right track.

They now have a new report that the new management team of former private sector corporate executives is proving to not be up to the job either.

When Gail McGovern was picked to head the American Red Cross in 2008, the organization was reeling. Her predecessor had been fired after impregnating a subordinate. The charity was running an annual deficit of hundreds of millions of dollars.

A former AT&T executive who had taught marketing at Harvard Business School, McGovern pledged to make the tough choices that would revitalize the Red Cross, which was chartered by Congress to provide aid after disasters. In a speech five years ago, she imagined a bright future, a “revolution” in which there would be “a Red Cross location in every single community.’’

It hasn’t worked out that way.

McGovern and her handpicked team of former AT&T colleagues have presided over a string of previously unreported management blunders that have eroded the charity’s ability to fulfill its core mission of aiding Americans in times of need.

Under McGovern, the Red Cross has slashed its payroll by more than a third, eliminating thousands of jobs and closing hundreds of local chapters. Many veteran volunteers, who do the vital work of responding to local fires and floods have also left, alienated by what many perceive as an increasingly rigid, centralized management structure.

Far from opening offices in every city and town, the Red Cross is stumbling in response to even smaller scale disasters.

When a wildfire swept through three Northern California counties in September, the Red Cross showed up but provided shelter to just 25 of 1,000 victims at one site. Because of the charity’s strict rules and disorganization, many evacuees slept outside for over a week, even when the weather turned bad. “These families were sleeping in the rain with their children,” said Wendy Lopez, a local volunteer.

Local officials were so angry they relieved the Red Cross of its duties.

The idea that non-profit organizations should be run like businesses is popular among some people, despite the fact that the two cultures are so different and require different skills and talents.

Comments

  1. drascus says

    I would have to disagree somewhat. I know many “business people” who have spent part of their careers doing a fabulous job of running non-profits. I also know many who sit on the board of non-profit organizations and are a huge asset to the organization.

    The problem isn’t “business people”, because that category is extremely broad and varied. The problem is the goals of the reorganization, and the executives chosen.

    It’s extremely common to see profit driven by cost-cutting. And certainly, non-profits above all should be trying to get good deals on services and goods so that they can stretch their donations further. However, cutting labor in a non-profit is almost always bad. Treating volunteers like vendors or even employees is a horrible problem. The goal has to be to maximise whatever the goal of the non-profit is, be it marketing (spreading awareness / generating political action), services, delivery of needed goods, etc.

    It doesn’t matter how good the P/L statements look if the organization is falling behind on its mission. A skilled business person who actually pushes hard for the non-profit’s mission can really make an organization shine by creating an efficient organization that makes the most use of its funds. Just look a the immense good the Gates foundation does.

    Choosing a person who blindly cuts costs is just a fatal hiring blunder, as is choosing a person who doesn’t have a passion for the non-profit’s mission. Not every business person is a good fit to run a non-profit, just as success in one industry not necessarily indicate success in another. But lots of business skills, accounting knowledge, human resources skills, understanding of laws and regulations, contacts in the business community, etc can all be hugely valuable to a non-profit, especially at the executive level.

  2. says

    I agree with Drascus – it’s more a question of leadership culture than any specific for profit/nonprofit culture. Any executive that’s worth a bucket of reheated goat’s saliva is going to be able to understand their budget requirements, income, outgo, inventory needs, capital expenses, etc. and be able to manage those effectively. For example, HP when Carly Fiorina wasn’t running it, was fairly profitable, but then Fiorina made decisions that knocked the income/expense ratio (“profit margin”) in the wrong direction. It doesn’t take much to take even a major company from profitable to not profitable. For a non-profit, all the executives need to do is figure out what’s an appropriate cash cushion to keep, and then keep their income and expenses close to balanced at the end of each reporting period.

    In other words, it just sounds like they got the wrong people.

    Hint: “Marketing executive” probably doesn’t know much about service industry, which is what Red Cross is. Hiring a professional bullshit artist for the job – probably a mistake.

    Disclaimer: I used to sit on the board of a nonprofit, and I am a founder of a charitable nonprofit trust.

  3. Pierce R. Butler says

    The Red Cross suffered enough from the “leadership” of Elizabeth Dole – I would have hoped the RC directors had learned a lesson about picking chief executives more carefully from her prolonged debacle.

  4. hyphenman says

    Mano,

    I wish more people would stop using the misleading non-profit tag and use the proper term: Not For Profit.

    Not for profits, 501(c)(3), are only prohibited from paying profits to shareholders. They can overcharge and waste money on executive salaries, state-of-art office palaces, Lear jets and luxury junkets for staff with the best of them.

    Of course they prefer to be called non-profits because that sound so much more noble.

    Jeff Hess

  5. Knight in Sour Armor says

    Well they certainly can’t be expected to operate out of 1970s era buildings with a single bathroom for 200 people. It’s reasonable to have modern, clean, and efficient facilities to operate in.

  6. AMM says

    Actually, for-profit corporations that focus on the bottom line to the exclusion of some higher purpose don’t do very well, either. Ultimately, a business has to be doing something that’s worthwhile, at least to the people who provide the revenue, or there won’t be any revenue to profit from. You have to go beyond cost-cutting or else you end up cost-cutting your business to nothing.

  7. hyphenman says

    AMM,

    That’s true, you’re absolutely correct.

    Sadly, in a business world where the people who run companies don’t have any connection to the business—they’re hired guns of some sort—there is no sense of worth other than what can be extracted in the next quarter to enhance the personal wealth of those involved before they move on to the next opportunity.

    Jeff

  8. John Morales says

    hyphenman, exactly.

    AMM, the “higher purpose” might be not-so-nice, too… consider Blackwater or Corrections Corporation of America.

    (Capitalism is amoral)

  9. Reginald Selkirk says

    Choosing a person who blindly cuts costs is just a fatal hiring blunder

    And one unwaveringly supported by the board. Other problems cited in the article: Many executive hires were not just from the business world, but from the same corporation, and executives were given bonuses for meeting narrowly-defined goals even when the organization in toto was doing poorly.

  10. says

    And one unwaveringly supported by the board.

    Those are the cases you hear about. There are plenty of cases of “we’d like to keep using this provider because, in spite of the fact that they are having hard times, they have always done a great job for us. When I used my personal accounting firm for my company’s books my board (appropriately) challenged it, then allowed them to prove themselves. Etc. The whole idea of a board of directors is that it allows a decision-making process with some audit and some responsibility. It’s not magic or rocket science.

    After being lectured about cost control by my venture capitalists, the first board meeting of my start-up was catered with chinese food from the local carry-out, paid for out of my pocket ($35!) . and held in a hotel suite in Rockville. Boards of Directors are human so are executives.

  11. doublereed says

    Shrug, I would still say Mano has a point about the profit vs non-profit world. The profit world as it is right now is run by shareholders and financiers who are looking for prime investments. It completely changes the goals and mindset of the organization. And I don’t necessarily mean that as simply as “focusing on the bottom line.”

    Non-profits and charities like the Red Cross have fundamentally different goals. Their employees are expecting very different things.

  12. doublereed says

    @4 hyphenman

    My understanding is that 501c3 are nonprofit organizations. Nonprofit is the proper term. Certainly any charity would be a nonprofit organization, so in the case of The Red Cross, it’s a nonprofit.

    Not-for-profit refers to other things, like 501c7 or something.

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