American Society for Public Administration

Series in Public Administration and Public Policy

EFFECTIVE
NON-PROFIT
MANAGEMENT
Context, Concepts, and Competencies

SHAMIMA AHMED
 EFFECTIVE
NON-PROFIT
MANAGEMENT
Context, Concepts, and Competencies
 American Society for Public Administration

American Society for Public Administration

Book Series on Public Administration & Public Policy
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Recent PuBlicAtionS
Effective Non-Profit Management:
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Environmental Decision-Making in Context: A Toolbox
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Government Contracting: Promises and Perils
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 American Society for Public Administration
Series in Public Administration and Public Policy

EFFECTIVE
NON-PROFIT
MANAGEMENT
Context, Concepts, and Competencies

SHAMIMA AHMED
CRC Press
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This book is dedicated to the memories of my parents (Momtaz and Rahima)
who taught me at an early age the value of commitment,
service, and responsibility.
Contents
Preface............................................................................................................ xv
Acknowledgments........................................................................................xvii
1 Introducing Non-Profit Organizations (NPOs)......................................1
1.1 Non-Profits: The Essential Characteristics..........................................2
1.2 Different Categories of Non-Profits....................................................5
1.3 Growth of Non-Profits.......................................................................8
1.4 Scope and Significance of Non-Profits..............................................11
1.4.1 Significance of Non-Profits..................................................12
1.4.1.1 Economic Significance........................................12
1.4.1.2 Service Provisions................................................13
1.4.1.3 Innovation and Entrepreneurship........................13
1.4.1.4 Policy Making.....................................................13
1.4.1.5 Providers of “Common Goods”...........................14
1.4.1.6 Individualism and Plurality.................................14
1.4.1.7 Social Mobilization and Advocacy.......................15
1.4.1.8 Social Bonding....................................................15
1.4.1.9 Democracy..........................................................15
1.4.1.10 Preservation.........................................................16
1.5 Contemporary Issue: The Non-Profit Sector’s Identity Crisis............16
Discussion Questions..................................................................................20
Web Resources............................................................................................21
End-of-Chapter Review of Terms...............................................................21
References...................................................................................................22
Endnotes.....................................................................................................24
2 Essential Linkages—Non-Profits, Government, and Business.............25
2.1 Shared Features among Non-Profit Organizations (NPOs),
Government, and Business Organizations........................................26
2.1.1 The “Publicness” of NPOs: Shared Characteristics with
the Public Sector..................................................................26
2.1.2 Look-Alike: Shared Characteristics with the
Business Sector....................................................................29

vii
viii ◾ Contents

2.2 Cross-Sectoral Relationships.............................................................31

2.2.1 Forms of NPO and Government Relationships...................31
2.2.1.1 Non-Profits as a Supplement to Government.......33
2.2.1.2 Non-Profits as a Complement to Government.... 34
2.2.1.3 Non-Profits in a Collaborative Relationship
with the Public Sector..........................................35
2.2.1.4 Non-Profits and Government in an
Adversarial Relationship......................................37
2.2.2 Forms of NPOs and Business Relationships........................39
2.2.2.1 Collaborative Relationship Continuum.............. 40
2.2.2.2 NPOs and For-Profits in an Adversarial
Relationship....................................................... 44
2.2.2.3 NPOs and For-Profits’ Engagement in Each
Others’ Areas of Operation................................. 44
2.3 Collaboration Challenges and Cross-Sectoral Learning....................45
2.3.1 Effective Linkages: Collaboration Essentials........................47
2.3.2 Cross-Sectoral Learning......................................................47
2.4 Contemporary Issue: The Faith-Based Initiative...............................49
Discussion Questions..................................................................................57
Web Resources............................................................................................57
End-of-Chapter Review of Terms...............................................................57
References...................................................................................................58
Endnotes.....................................................................................................62
3 Non-Profit Laws and Regulations.........................................................63
3.1 Tax Exemption and Non-Profit Organizations (NPOs)................... 64
3.2 Types of 501(c) NPOs.......................................................................65
3.2.1 Public Charities versus Private Foundations........................65
3.3 Creating an Incorporated Non-Profit Agency...................................67
3.3.1 The Process of Incorporation...............................................68
3.4 Operating a Non-Profit Organization: The Essential Requirements....75
3.4.1 Reporting Requirements......................................................75
3.4.1.1 Federal Requirements: Annual Financial
Return Form (Form 990)....................................75
3.4.1.2 State Requirements............................................. 77
3.4.2 Public Document................................................................78
3.4.3 Unrelated Business Income Taxes........................................78
3.5 Legal Restrictions.............................................................................79
3.5.1 Political Campaign Activities...............................................79
3.5.2 Limitations on Private Inurement........................................81
3.5.3 Lobbying Rights and Restrictions.......................................82
3.5.4 The Sarbanes-Oxley Act (2002)...........................................83
3.6 Private Foundations..........................................................................85
 Contents ◾ ix

3.7 Contemporary Issue: Who Deserves Tax Exemption?......................87

Discussion Questions..................................................................................92
Web Resources............................................................................................93
End-of-Chapter Review of Terms...............................................................93
References...................................................................................................93
Endnotes.....................................................................................................94
4 Non-Profit Governance.........................................................................95
4.1 Non-Profit Governance: Who Governs?...........................................96
4.1.1 The Traditional Approach....................................................96
4.1.2 The Shared Partnership........................................................97
4.1.3 The Situational Approach....................................................97
4.2 Boards of Non-Profit Organizations (NPOs)....................................99
4.2.1 Roles and Responsibilities..................................................100
4.2.1.1 Legal Responsibilities........................................100
4.2.1.2 Functional Responsibilities................................103
4.2.2 Board Recruitment, Selection, and Development..............106
4.2.2.1 Recruitment and Selection.................................107
4.2.2.2 Board Size and Committees..............................108
4.2.2.3 Development and Training................................ 110
4.2.2.4 Evaluations........................................................ 111
4.2.2.5 Important Policy Documents............................ 111
4.3 Chief Executive Officer (CEO).......................................................113
4.3.1 Common Job Duties and Responsibilities.........................113
4.3.2 Required Competencies of the CEO................................. 115
4.4 Key Leadership Roles..................................................................... 116
4.4.1 Strategic Planning............................................................. 116
4.4.2 Promotion of Public Interest—The Contemporary
Notion of NPO Governance.............................................120
4.5 Contemporary Issue: Non-Profit Executive Leadership
Challenges......................................................................................122
Discussion Questions................................................................................127
Web Resources..........................................................................................127
End-of-Chapter Review of Terms.............................................................127
Appendix 4.1: An Example of a Sample Skill Inventory............................128
References.................................................................................................129
Endnotes...................................................................................................131
5 Human Resource Management in Non-Profit Organizations.............133
5.1 Laws and Relevant Legal Issues......................................................134
5.1.1 Fair Labor Standards Act (FLSA), 1938.............................135
5.1.2 The Equal Pay Act (EPA), 1963.........................................135
5.1.3 Civil Rights Act (CRA) of 1964........................................136
x ◾ Contents

5.1.4 The Age Discrimination in Employment Act (ADEA),

1967...................................................................................137
5.1.5 The Americans with Disabilities Act (ADA), 1990............137
5.1.6 Sexual Harassment............................................................138
5.1.7 Family and Medical Leave Act (FMLA), 1993...................139
5.2 Volunteer Management..................................................................140
5.2.1 Volunteer Management Program.......................................140
5.2.1.1 Needs Assessment..............................................142
5.2.1.2 Organizational Preparation for Volunteers.........143
5.2.1.3 Budget...............................................................143
5.2.1.4 Written Job Descriptions...................................143
5.2.1.5 Recruitment, Selection, Orientation, and
Training............................................................144
5.2.1.6 Retention...........................................................146
5.2.1.7 Formal Policies—Volunteer Handbook
or Manual..........................................................147
5.2.1.8 Evaluation.........................................................147
5.2.1.9 Risk Management.............................................148
5.2.2 Volunteer Motivation.........................................................150
5.2.2.1 Altruism as a Motivator.....................................150
5.2.2.2 Instrumental Theory..........................................150
5.2.2.3 Reinforcement Theory....................................... 151
5.2.2.4 Maslow’s Need Hierarchy.................................. 151
5.2.2.5 McClelland’s Needs Theory............................... 151
5.3 Current Issue: NPO Executive Compensation................................ 152
Discussion Questions................................................................................ 158
Web Resources.......................................................................................... 158
End-of-Chapter Review of Terms............................................................. 159
Appendix 5.1: Ideas for Volunteer Recognition......................................... 159
References.................................................................................................160
Endnotes................................................................................................... 161
6 Resource Acquisition and Management..............................................163
6.1 Non-Profit Organization (NPO) Revenue Sources.........................164
6.2 Fundraising....................................................................................168
6.2.1 Government Regulations................................................... 176
6.3 Financial Management...................................................................177
6.3.1 NPO Financial Reporting and Accounting Uniqueness....177
6.3.2 Basic Financial Statements of an NPO..............................179
6.3.2.1 Statement of Financial Position.........................179
6.3.2.2 Statement of Activity......................................... 181
6.3.2.3 Statement of Cash Flows.................................... 181
 Contents ◾ xi

6.4 Financial Leadership.......................................................................183

6.5 Issue: Perils of Government Dependency—The Recent
Funding Issue with Planned Parenthood........................................186
Discussion Questions................................................................................189
Web Resources..........................................................................................189
End-of-Chapter Review of Terms.............................................................190
Appendix 6.1: Code of Ethical Principles, American Fundraising
Professionals............................................................................................. 191
References.................................................................................................192
Endnotes...................................................................................................193
7 Non-Profit Organizations and Information Technology....................195
7.1 Why Information Technology (IT)?...............................................196
7.2 Information Technology and Strategy............................................197
7.3 IT Uses and Applications............................................................... 200
7.3.1 E-Mail...............................................................................201
7.3.2 Online Presentations and Meetings...................................201
7.3.3 Posting Digital Signs.........................................................202
7.3.4 Using RSS (Really Simple Syndication).............................202
7.3.5 Text Messaging..................................................................202
7.3.6 Cell Phones and iPhones....................................................203
7.3.7 Podcasting.........................................................................203
7.3.8 Blogging............................................................................205
7.3.9 Hyperlinks.........................................................................205
7.3.10 Internet Interactive Functions........................................... 206
7.3.11 Twitter.............................................................................. 206
7.3.12 YouTube........................................................................... 206
7.3.13 Social Networking Sites.....................................................207
7.3.14 Microsites......................................................................... 208
7.4 Specific Uses of IT..........................................................................209
7.4.1 Online Fundraising...........................................................209
7.4.2 Recruitment and Management..........................................209
7.4.3 Marketing..........................................................................210
7.4.4 Disseminating, Affecting, and Monitoring Public
Policy Issues.......................................................................210
7.5 Issue—Digital Divide in the Non-Profit Sector.............................. 211
Discussion Question................................................................................. 214
Web Resources.......................................................................................... 214
End-of-Chapter Review of Terms............................................................. 215
References................................................................................................. 215
Endnotes...................................................................................................216
xii ◾ Contents

8 Non-Profit Marketing.........................................................................217
8.1 Non-Profit Marketing..................................................................... 218
8.1.1 Difference between For-Profit and Non-Profit
Organization (NPO) Marketing........................................ 219
8.1.2 Reasons for Marketing...................................................... 222
8.2 The Strategic Marketing Process.....................................................223
8.2.1 Organizational Readiness..................................................224
8.2.2 Market Research................................................................224
8.2.3 Strategic Marketing Plan...................................................225
8.2.3.1 Marketing Mix................................................. 226
8.2.3.2 Branding.......................................................... 228
8.2.3.3 Effective Communication................................. 228
8.2.4 Using Social Media in Marketing......................................229
8.3 Issue: Will Marketing Put the Civil Society at Risk?......................231
Discussion Questions................................................................................235
Web Resources on NPO Marketing..........................................................236
End-of-Chapter Review of Terms.............................................................236
References.................................................................................................237
9 Nongovernmental Organizations (NGOs)—International
Dimension...........................................................................................239
9.1 Defining Nongovernmental Organizations (NGOs)......................240
9.2 Scope and Growth..........................................................................243
9.3 Differences across Countries.......................................................... 246
9.3.1 Formation and Legal Structure......................................... 246
9.3.2 Political Activity................................................................249
9.4 International Non-Governmental Organization (INGO)
Structure and Organization............................................................250
9.4.1 Doctors Without Borders..................................................250
9.4.2 Amnesty International ......................................................251
9.4.3 Transparency International ...............................................252
9.5 NGO Roles....................................................................................252
9.5.1 Relief.................................................................................253
9.5.2 Social and Economic Development...................................253
9.5.3 Political.............................................................................255
9.6 Issues..............................................................................................259
9.6.1 Strategy.............................................................................259
9.6.2 Accountability...................................................................261
9.6.3 Legitimacy.........................................................................262
Discussion Questions................................................................................265
Web Resources......................................................................................... 266
End-of-Chapter Review of Terms............................................................ 266
References................................................................................................ 266
Endnotes.................................................................................................. 268
 Contents ◾ xiii

10 Non-Profit Effectiveness and Accountability......................................269

10.1 NPO Accountability: Scope and Challenges..................................270
10.1.1 Accountability to Whom, for What and How?..................271
10.2 NPO Effectiveness..........................................................................274
10.2.1 Challenges of Measuring NPO Effectiveness.....................275
10.2.2 Measurement Methods and Approaches............................277
10.2.2.1 Goal Approach..................................................278
10.2.2.2 System Approach...............................................278
10.2.2.3 Multi-Constituency Approach.......................... 280
10.2.2.4 Multidimensional Approach............................. 280
10.2.2.5 Outcome Assessment.........................................282
10.3 Charity Rating Agencies and Watchdogs........................................283
10.4 Issue: Measuring NPOs’ Impact on Society................................... 286
Discussion Questions................................................................................290
Web Resources..........................................................................................290
End-of-Chapter Review of Terms.............................................................290
Appendix 10.1: Common Outcome Framework for Health and
Human Services........................................................................................291
References.................................................................................................292
Endnotes...................................................................................................293
11 In Conclusion......................................................................................295
11.1 Social: Demographic Changes........................................................295
11.2 Economic: Financial Distress or Recession.....................................297
11.3 Professional: Increasing Need and Opportunities for
Professionalism...............................................................................299
11.4 Changing Nature of Non-Profit Leadership—A Unique Style
of Leadership................................................................................. 300
References.................................................................................................301
The Author...................................................................................................303
Preface

Today, the systematic study of non-profit management stands as a dynamic field

of study. This increased interest reflects the growing realization among non-profit
managers, public administrators, and researchers that there are significant differ-
ences in the management practices and issues that confront non-profits, for-profits,
and governmental organizations. In an environment of increased interdependency
and collaborations among the three sectors, researchers and practitioners have
begun to identify the need for a distinctive set of values, skills, and competencies
for effective non-profit management. This book focuses on the distinct set of com-
petencies, values, and skills that are central to effective management of non-profit
organizations.
The idea of writing this book was borne from the author’s frustration with
the dearth of scholarship, especially books on non-profit management that are
geared to graduate students or upper-division undergraduate students, and also
practitioners. The author regularly teaches a graduate course on Managing Non-
Profit Organizations. Each semester the author would search for books that could
possibly be used as a core text in that class, and it was a frustrating experience
to try to find a text or texts that gave adequate coverage to the necessary topics,
issues, and recent developments (e.g., change in Internal Revenue Service [IRS]
regulations, information technology, social business enterprises) that are central
to effective non-profit management in the twenty-first century. When coverage is
given, it is only in a very limited and non-contextual manner, which does not help
in understanding or improving practices. For example, some texts on non-profit
human resource management discuss non-profit compensation and raise the issue
of excessive compensation. However, the actual compensation figures of non-profit
executives are not included. In order to understand why compensation is a contro-
versial issue in non-profit management, readers need to see some real compensation
figures. Similarly, the few non-profit management texts that discuss the different
anti-discrimination laws do not integrate the discussion with regard to their rel-
evance to volunteers—a core component in non-profit management.
From a public administrative perspective, existing books on non-profit man-
agement are also very limiting in the sense that they do not provide any focused

xv
xvi ◾ Preface

discussion on the linkages between public administration and the non-profit sector
beyond the discussion of government contracting with non-profits. Considering
the reality that these two sectors are increasingly becoming interdependent, and the
theoretical and operational lines separating the two are getting blurred, this stands
as a major gap in the existing scholarship on non-profit management. Whether
administrators (public and non-profit) are engaged in contract negotiations, or bor-
rowing best practices from each other, or switching careers into the other sector,
a knowledge of the relationship between these two sectors has become an essen-
tial aspect of their competencies. While current texts in public administration and
political science offer students good exposure to the interdependent nature of poli-
tics and administration, in contrast, students have only a vague understanding of
the emerging interdependencies between the public and the non-profit sectors, at
the local, national, and global levels. This text provides the necessary exposure and
clarity to significantly reduce the gap.
Needless to say, there are numerous books on non-profit management on the mar-
ket, written mostly by practitioners. However, these texts are limited in the sense that
they do not provide the broad theoretical basis of management concepts or the contex-
tual basis of their distinctive practice. In terms of the coverage, most existing books,
written by practitioners, also tend to focus on one specific topic (e.g., fundraising, vol-
unteer management) and thus do not provide a comprehensive or an integrated cover-
age on non-profit management. For example, Helen Little’s popular book, Volunteers:
How to Get Them, How to Keep Them (Panacea Press, Naperville, Illinois, 1999),
deals exclusively with one topic—volunteer management.
This book is designed and written with three specific goals in mind: (1) to
provide comprehensive coverage of the practical art of forming, managing, and
leading non-profit organizations; (2) to provide coverage of recent information,
developments, and issues in the non-profit sector; and (3) to explain the essential
linkages between the public and the non-profit sectors. The text has 12 chapters.
Each chapter concludes with a discussion of a recent issue and a case study. There
are discussion questions, a listing of Web resources, and a review of terms at the
end of each chapter. The introductory chapter discusses non-profit organizations,
their phenomenal growth, the different categories of non-profits, and the scope and
significance of this sector. The second chapter focuses on explaining the linkages
among non-profits, for-profits, and government organizations. The next couple of
chapters provide a detailed discussion of essential non-profit law, non-profit gover-
nance, human resource management, resource acquisition and management, mar-
keting, technology, nongovernmental organizations (NGOs), and effectiveness.
The final concluding chapter discusses four major developments in the non-profit
environment that have implications for the future of this sector.
The different chapters are written with input from the book advisory group.
Thus, the text is grounded in the shared experiences of a varied group of non-profit
practitioners. Hopefully, the readers will find a fine balance of theories and practice
in the text.
Acknowledgments

I want to thank several people for giving me guidance and continuous feedback on
the book proposal and the draft chapters, and for giving me constant encouragement
to complete the manuscript. When I submitted the proposal to Evan M. Berman (the
initial editor-in-chief for this book series), he suggested that I form a book advisory
group of non-profit practitioners who would review and provide feedback on the book
proposal and the different chapters. The idea was to use their feedback to make this
book appealing to both students and practitioners. I cannot thank him enough for this
excellent idea. I am extremely grateful to the following members in the advisory group
for their reviews and feedback in finalizing the book proposal and the book manuscript:

Lois Grady-Wesbecher, Director, Planning and Evaluation, Red Cross National

Headquarters, Washington, DC
Don W. McClure, former Chief Executive Officer (CEO), American Cancer
Society, Columbus, Ohio; he retired in December 2009 after gaining 40
years of non-profit experience
Kathleen P. List, President and CEO, Big Brothers Big Sisters of Greater
Cincinnati, Ohio
Jason Hecker, Director of Special Projects at Learn iT! San Francisco Bay Area,
California; former CEO, Literary Center West, Cincinnati, Ohio
Jeffrey D. Brasie, CEO, Michigan Primary Care Consortium, Lansing, Michigan
Amy Roberts, United Way 211 Director, United Way of Greater Cincinnati, Ohio

I would like to express my heartfelt thanks to Jeffrey Brasie for taking the time
not only to review and comment on each of the chapters but also to thoroughly edit
the chapters. Needless to say, I am very fortunate to have this extremely dedicated
group of non-profit practitioners work with me so closely throughout this journey.
Special thanks go to Enamul H. Choudhury for helping me write the case study
on “The Salience of Non-Profits in the Current Housing Mortgage Crisis,” and for
reviewing and commenting on the different chapters.
Last, but not least, I want to thank my two boys (Rashikh and Adeed) for their
continuous encouragement and support to complete the manuscript.

xvii
Chapter 1

Introducing Non-Profit
Organizations (NPOs)

Consider the following description of a typical day in Kristi Lobb’s life in Cincinnati,
Ohio. At around 7:30 a.m., Kristi drops her 2-year-old son to Child Care Focus
before leaving for her office. She is a senior-level administrator with the Hamilton
County Job and Family Services. As Kristi entered her office, she reminded herself
to call Tony Reed who works at the Council on Aging of Southwestern Ohio. Tony
had called her yesterday to verify a client’s Medicaid eligibility for home care ser-
vices. At 11 a.m, her husband John calls to inform her that he just mailed the RFP
(request for proposals), which he has been working on for the last several days, to
the Health Foundation of Greater Cincinnati. John works with the county mental
health agency. As Kristi was about to take her lunch break, her phone rang again.
This time it is her friend Laura. Laura wanted to know whether Kristi knew of any
agency that could provide some legal advice to her neighbor, a recent immigrant,
on a domestic violence situation. Kristi promptly gave her the contact information
of the Legal Aid Society of Greater Cincinnati. During lunch, Kristi and one of her
colleagues engaged in a debate as to why churches should or should not be allowed
to engage in political campaign activities. Around 4:30 p.m. Kristi calls back her
husband to remind him that she would have to drop some supplies to the Salvation
Army’s drop-off center and that John would pick up their son and take him to the
YMCA at 5:30 p.m. for his swimming lessons. At around 6:30 p.m., a tired Kristi
on her way back home turned on the car radio (NPR) and was surprised to learn
that since 1990, according to a document released by Amnesty International, a total
of 61 juvenile offenders have been executed in nine countries and that the United
States is one of them.

1
2 ◾ Effective Non-Profit Management

All the eight organizations, in italics, are non-profit organizations (NPOs). Some
are well known, like the YMCA and Amnesty International, and the others (e.g., Child
Care Focus) are less known or unknown to others. However, as The Nonprofit Almanac
2008 (Wing et al., 2008) suggests, at least 900,000, or more than half of the non-
profits that exist in the United States are small ones, having gross receipts of $25,000
or less. These and millions of other non-profits form the rich but complex fabric of the
non-profit sector. The varieties no doubt add richness to the sector; however, they also
bring confusion as to what non-profits actually are, as well as how they relate to the
government, the private sector, and the lives of citizens in the communities they serve.
It is therefore important to understand the heterogeneous fabric of this sector,
its growth, and its growing significance. In this context, it is also important to point
out that the non-profit sector is currently facing several emerging issues including
accountability, ethics, legitimacy, excessive executive compensation, sustainability,
and an identity crisis.
This chapter will introduce non-profits and their distinctiveness as what has come
to be known as the third sector.1 This chapter will also discuss one of the emerging
issues—the sector’s “identity crisis,” and will conclude with a short case illustration
that shows the scope and salience of non-profits in addressing the nation’s current
national housing mortgage crisis. The terms non-profits and non-profit organizations
(NPOs) are used interchangeably in this and the following chapters.
The chapter has the following learning objectives:

1. Describe NPOs and their similarities and differences with for-profit and gov-
ernment sectors.
2. Become familiar with the major classifications of NPOs.
3. Illustrate the different subsectors and the sector’s significance.
4. Understand the issue of the sector’s “identity crisis.”

1.1 Non-Profits: The Essential Characteristics

NPOs include religious organizations, public schools, public charities, human ser-
vice agencies, public clinics and hospitals, political organizations, legal aid societ-
ies, volunteer service organizations, labor unions, professional associations, research
institutes, museums, and many other types of entities.
What exactly is a non-profit organization or the non-profit sector? As one can
imagine, defining a non-profit organization, let alone trying to develop a definition
of the sector is anything but easy. The wide variety of entities that compose the non-
profit sector has, thus, prompted a variety of definitions of the sector.
Following are some widely used definitions of NPOs:

An organization where none of the members has a property right over any frac-
tion of the difference between its revenues and costs. (Gassler, 1986, 99)
 Introducing Non-Profit Organizations (NPOs) ◾ 3

Refers to a set of organizations that are formal, private, self-governing, volun-

tary, and of public benefit. (Salamon, 1999)
A grouping of individuals who collectively form a social unit—an organiza-
tion—to accomplish some public or societal purpose. (Block, 2001, 152)
Three features characterize the non-profit and voluntary sectors: they do not
coerce participation, they operate without distributing profits to stakehold-
ers, and they exist without simple and clear lines of ownership and account-
ability. (Frumkin, 2002, 3)
[L]egally constituted, nongovernmental entities incorporated under state law as
charitable or not-for-profit corporations that have been set up to serve some
public purpose and are tax-exempt according to IRS. (Wolf, 1999, 20–21)
They are self-governing organizations that do not distribute profits to those who
control them and are exempt from federal income taxes by virtue of being
organized for public purposes. (Boris and Steuerle, 2006, 3)

In addition to the variety of definitions, there exists a plethora of terms that refer
to non-profits collectively such as civil society, independent sector, voluntary sector,
charitable organization, tax-exempt organizations, nongovernmental organizations
(NGOs), and the private non-profit sector. Some scholars try to dismiss their use
by pointing to the limitations of these concepts to fully comprehend the nature
of non-profits. However, the reality is that each of these terms illuminates one or
more of the inherent characteristics of NPOs, and together, they help us under-
stand more fully the essential characteristics of this nebulous sector. The following
section will address each of these concepts to explain how each illuminates one or
more of the essential characteristics of non-profits.

◾◾ The term civil society was coined by classical philosophers (e.g., Hegel, Hobbes)
to refer to the broad private realm outside of the state. Paul Wapner defines
it as the arena above the individual in which “people engage in spontaneous,
customary and nonlegalistic forms of association” with the intention of pursu-
ing common goals (1996, 5). Such a description or definition, however, implies
that civil society includes all private forms of association and entities including
family, church, and even for-profit organizations, making the concept ambig-
uous and slippery. In this context, it is important to note that NPOs are only
a part of civil society and do not represent the full spectrum of civil society.
As Frumkin explains, “In practice, it [civil society] has come to denote a set
of voluntary mediating institutions that invite individuals to come together to
pursue shared interests, values, and commitments” (2002, 13).
◾◾ Independent sector denotes a sector that is relatively independent from the
governmental and market forces. Again, in relation to NPOs, it only brings
to surface the fact that these organizations are not owned by the government,
and their survival is not dependent on the profit criterion of the market-
place. The fact, however, is that NPOs are totally independent of neither the
4 ◾ Effective Non-Profit Management

government nor the market forces. They are rather regulated by the govern-
ment, and market forces have impact on their operations as can be found
when non-profits compete with other similar non-profits and for-profits for
resources, clients, and in many other aspects.
◾◾ The term voluntary sector signifies the element of volunteerism in NPOs; how-
ever, along with formal non-profit organizations, the sector also “may include
informal and unorganized activity by person and groups for charitable or
broadly inclusive mutual benefit purposes, so long as voluntary action is evi-
dent in governance, provision of direct services, and/or financial support”
(Scott, 2001, 40). NPOs are voluntary organizations but refer only to the
organized activity of a group or groups of individuals.
◾◾ The term private non-profit organization underscores the two core features of
NPOs—that they are created by a private group of individuals, for a non-
profit mission. The term non-profit does not imply that a non-profit organi-
zation cannot make a profit; it only indicates that profit making is not the
goal of the agency. It is perfectly legal for a non-profit organization to make
a profit. Similar to the voluntary sector, the term private NPOs refers to both
formal and informal groups and organizations.
◾◾ The term third sector refers to an umbrella of formal and informal NPOs and
groups that distinguish them from the government and private sectors.
◾◾ The term NGO has also been used to refer to NPOs. Even though the terms
“NPO and NGO are nearly synonymous in the United States” (Ahmed and
Potter, 2006, 9), NGOs usually refer to non-profits that have operations
in two or more countries.2 The term is also used to refer to non-profits in
developing countries. NGOs, thus, are an important component of the non-
profit sector.
◾◾ In contrast to the other terms, tax exempt organization refers to “[A]n orga-
nization exempt from income taxation because it operates to provide either
broad social benefits to the public or mutual benefits to its members” (Hoyt,
2001, 148). While the statement is mostly true, it is also a fact that some
NPOs do have to pay taxes (e.g., unrelated business income tax, excise tax).

As mentioned earlier, each of the above terms helps us to understand more the nature
of NPOs in their variations and complexity. Using the above discussion, this text
describes a non-profit organization as a private agency with the following characteristics:

1. It is formally organized to achieve goals that are not profit oriented.

2. It pursues public service or member service goals as its core mission.
3. It is created by private citizens.
4. It has constraints on redistribution of earnings (cannot pay dividends).
5. It operates with voluntary and paid membership and staff.
6. It is usually tax exempt.
 Introducing Non-Profit Organizations (NPOs) ◾ 5

A non-profit organization is thus different from a government agency—the lat-

ter is created and owned by the government. However, both agencies share a core
characteristic—they both work to promote some type of “public interest.” A non-
profit organization is also different from a for-profit organization—the latter is cre-
ated and owned by private citizens where the goal is to make a profit. However, as
explained in Chapter 2, in practice the non-profit sector is much more interlinked
with these two sectors.

1.2 Different Categories of Non-Profits

The non-profit sector undoubtedly is a sector with a wide variety of organizations
working with a diverse set of goals. It is thus difficult to classify all these millions of
organizations into one particular over-encompassing format. Nonetheless, different
classifications have been developed by practitioners and scholars as suitable to their
uses. The following are some useful classifications:

◾◾ Incorporated versus unincorporated—Structurally, “[A]ny nonprofit orga-

nization legally must be one of three types: a corporation, a trust,3 or an
‘other’ (usually an unincorporated association)” (Hopkins, 1993, 11). An
incorporated non-profit is a corporation that is formed by following the
state’s corporation act that requires preparing and filing articles of incorpo-
ration. In contrast, an unincorporated non-profit is formed with the adop-
tion of a constitution, whose content is similar to articles of incorporation.
Unincorporated non-profit associations are not legal entities but are a collec-
tion of a group of individuals who have joined together for some common
public service goal. Unincorporated non-profits usually include informally
organized churches, civic organizations, political committees, fraternal
orders, and patriotic societies.
◾◾ Member service versus public service mission—Using a client’s perspective, non-
profits can be grouped into member-serving and public service organizations.
Examples of member-serving organizations are those that primarily provide
benefits to their members rather than the broader public. Examples of such
non-profits include the chambers of commerce, labor association, different
professional associations, and political action committees. Public service
organizations, on the other hand, refer to non-profits whose primary goal is
to serve the broader public. Examples of such non-profits include religious
organizations, social welfare organizations, museums, hospitals, and social
service organizations.
◾◾ The National Taxonomy of Exempt Entities (NTEE) is used by the Internal
Revenue Service (IRS) and the National Center for Charitable Statistics
(NCCS) to classify non-profits.
6 ◾ Effective Non-Profit Management

The classification divides non-profits into 26 different fields (each designated by

a letter of the alphabet) under 10 broad categories:

1. Arts, Culture, and Humanities—A

2. Education—B
3. Environment and Animals—C, D
4. Health—E, F, G, H
5. Human Service—I, J, K, L, M, N, O, P
6. International Foreign Affairs—Q
7. Public, Societal Benefit—R, S, T, U, V, W
8. Religion Related—X
9. Mutual/Membership Benefit—Y
10. Unknown, Unclassified—Z

Within the major groups, non-profits are broken down into subdivisions by spe-
cific activity areas (decile level codes) that are further subdivided into more
specific types of organizations (centile level codes). Organizations that exist
across most or all of the 26 major groups are treated separately and are given
what is known as “common codes” (second to fourth digit). The seven com-
mon codes used are as follows:

01 Alliance/Advocacy Organizations
02 Management and Technical Assistance
03 Professional Societies/Associations
05 Research Institutes and/or Public Policy Analysis
11 Monetary Support—Single Organization
12 Monetary Support—Multiple Organization
19 Nonmonetary Support Not Elsewhere Classified (N.E.C)

Following are examples of two NPOs, from the 2008 IRS Master Data File on
Alabama State’s list of tax exempt organizations, that explain the codes:

Example 1: Black Men of Birmingham, Inc., is listed as B90. This means that
this non-profit is an educational (B—major group) support organization
(90-decile level code indicating subdivision within the major group).
Example 2: Alabama Deer Management Association Inc., is listed as D053.
This means that this non-profit’s focus is on animals (D—major group),
it is a research institute and public policy agency (05—common code),
and it falls within wildlife and preservation (30-decile level code indicat-
ing subdivision within the major group).
 Introducing Non-Profit Organizations (NPOs) ◾ 7

◾◾ Internal Revenue Service (IRS) classification—The IRS Internal Revenue Code

(IRC), section 501(c), distinguishes 26 separate sections or classes of non-
profits that can claim tax exemption. Following are the three main classes
of non-profits:
−− 501(c)(3): These are organizations that engage primarily in charitable
activities. According to the IRS, they are organized and operated exclu-
sively for one or more of the following purposes: charitable, religious,
educational, scientific, literary, testing for public safety, fostering national
or international amateur sports competition, the prevention of cruelty of
children or animals (IRS Publication 557).
Examples of 501(c)(3) non-profits include schools, colleges, hospi-
tals, clinics, home for the elderly, child care, religious organizations, and
bookstores.
The main advantage of 501(c)(3) organizations is that donors’ contri-
butions are deductible.
−− 501(c)(4): These are non-profits whose general activities include pro-
motion of community welfare, charitable, educational or recreational
(IRS Publication 557). Examples include the National Association for
the Advancement of Colored People (NAACP), Sierra Club, League of
Women’s Voters, Kiwanis Club, volunteer fire companies, civic associa-
tions, and homeowners’ associations.
A major difference between 501(c)(3) and 501(c)(4) organizations is
that donations that are contributed to the latter are not tax deductible.
−− 501(c)(6): These are non-profits characterized by a common business
interest. Their mission is to focus on the advancement of the conditions
of a particular trade or the interests of the community. They are not
engaged in any regular business typically carried on by for-profit organi-
zations. Examples include local chamber of commerce, professional foot-
ball leagues, home builders’ associations, and the National Association
of Truck Stop Operators. Donations to these non-profits are not tax
deductible.
◾◾ Funding intermediaries—The majority of non-profits are service provid-
ing agencies. However, there are some non-profits whose primary mission
is to provide funds to other non-profits, and some of them also raise funds
for such a cause. Salamon (2001) calls them the “funding intermediaries”
and the “least well understood” non-profits. These include different types
of foundations, including private foundations (e.g., Melanie and Bill Gates
Foundation, Rockefeller Foundations); corporate foundations (e.g., Wal-Mart
Foundation); community foundations (e.g., the Cleveland Foundation); and
federated funders (e.g., United Way).
8 ◾ Effective Non-Profit Management

1.3 Growth of Non-Profits
The growth of non-profits for the last few decades has been phenomenal. Following
are some testimonies to this growth:

◾◾ The number of nonprofits grew by 31% between 1987 and 1997, surpassing
the growth rate of both the business and government sectors. (Weitzman et al.,
2002, 9)
◾◾ From 1980 to 1993, the number of foundations increased by 70%; the
number of charitable 501(c)(3) organizations registered with the Internal
Revenue Service (IRS) nearly doubled from 1977 to 1992. (Hodgkinson and
Weitzman, 2001, 17)
◾◾ Nearly three-quarters of all charitable 501(c)(3) organizations, excluding
most religious organizations and private foundations, have been founded
since 1970. (Hodgkinson and Weitzman, 2001, 17–18)
◾◾ From 1999 to 2009, the number of NPOs has increased by 31.5%. (Urban
Institute, 2010)

Table 1.1 captures this growth.

Since the beginning of the formation of human communities, individuals have
formed voluntary groups for a variety of services including education, religion, and
many others. As Salamon noted, “[I]n the first place, the nonprofit sector came into
existence for reasons that are largely historical. In the United States, as well as in
many other countries, society predated the state” (2001, 64).
Table 1.1 N
 umber of Non-Profit Organizations (NPOs) in the United
States, 1999–2009
1999 2009

Number Percent of Number Percent to Percent

of NPOs All NPOs of NPOs All NPOs Change

All NPOs 1,202,573 100.0% 1,581,111 100.0% 31.5%

501(c)(3) Public 631,902 52.5% 1,006,670 63.7% 59.3%

Charities

501(c)(3) Private 77,978 6.5% 120,617 7.6% 54.7%

Foundations

501(c)(4) 124,774 10.4% 111,849 7.1% –10.4%

501(c)(6) 70,718 5.9% 72,801 4.6% 2.9%

Source: IRS Business Data File 01/2010 (with modifications by the National Center for
Charitable Statistics at the Urban Institute to exclude foreign and govern-
mental organizations), http://nccsdataweb.urban.org (accessed October 24,
2011).
 Introducing Non-Profit Organizations (NPOs) ◾ 9

However, this historical factor does not explain the phenomenal growth of the
sector in recent decades. Scholars have identified different factors and theories to
explain the situation. The following section discusses some of these major factors:

1. Market failure—This theory points to the inherent limitations of the mar-

ket system to address the variety of needs of different groups. First, market,
meaning for-profit organizations, will not undertake any enterprise that does
not yield any profits (e.g., providing legal aid services to poor women, pro-
viding shelter to the homeless). Second, they will not engage in producing
or providing goods or services (e.g., clean air or national security) that will
bring the “free rider” problems. Such limitations of the market system thus
leave a vacuum of unmet needs and hence the need and opportunities for
other actors (government and non-profits) to intervene (Hansmann, 1987;
Weisbrod, 1975).
2. Contract failure—This is a “particular aspect of the more general economic
theory of ‘market failure’ that specifies conditions under which unfettered
competition among profit-making firms fails to provide particular goods
or services efficiently” (Young, 2001, 193). Hansmann (1987) explains that
contract failure occurs when due to “information asymmetry,” consumers
feel unable to make decisions competently regarding the quality of services
they will receive. “Information asymmetry” usually occurs in areas where the
nature of the services or goods provided requires specialized knowledge to
make a judgment (e.g., medical care), or situations where the consumer is
not capable of evaluating the service (e.g., a mentally disabled consumer), or
the consumer is not directly consuming the service (e.g., nursing home care
purchased by children). Under these situations, consumers might find the
non-profit organization more trustworthy due to the sector’s non-distribution
constraint.
3. Government failure—This theory explains government’s limitation to provide
services to all individuals or groups’ demands. One major reason is the reality
that government’s policy needs support from the majority. Thus programs
and actions that support small groups’ needs may not get into the govern-
ment’s action agenda. Another reason is the traditional resistance to a big
government. As Salamon (2001) explains, even when there is a majority sup-
port, due to the cultural resistance for government expansion, there is a pref-
erence to delegate certain services to the non-profit sector.
4. Supportive conditions—To a large extent, non-profits’ existence and prosperity
depend on a variety of cultural and political values and ideologies including
freedom of speech and freedom of association. Non-profits in the United
States have flourished due to those factors. It is also important to point out
that “[T]oday, for quite different reasons, nonprofit and voluntary organi-
zations are embraced by both conservatives and liberals” (Frumkin, 2002,
16). As Frumkin explains, liberals see non-profits as allies for three major
10 ◾ Effective Non-Profit Management

reasons: potential supporters of progressive policies, effective channels repre-

senting an ideal “bottom up” approach to implementation, and the sector’s
flexibility and freedom to operate and advocate for social change and justice.
Conservatives, on the other hand, according to Frumkin are attracted to non-
profits for totally different reasons: the sector’s usefulness in implementing
the idea of devolution and privatization and in promoting moral or spiritual
values, and its potentiality for policy innovations. Throughout the years, non-
profits have thus been able to continue to grow irrespective of who (conserva-
tives or liberals) controls the government.
5. Heterogeneity—The more heterogeneous the society is in terms of culture,
religion, lifestyle, ethnicity, age, and economic classes, the more one will see
a growth in NPOs. The demographics of the United States is increasingly
becoming more diverse and hence more heterogeneous, due to several factors
including a huge growth of the elderly population, increased labor participation
by women, immigration, a wide variety of lifestyles, and so forth. In a heteroge-
neous society there are different groups with different needs, and government
cannot attend to all these different groups’ needs (Weisbrod, 1975). Changing
social and demographic shifts also create new demands for new types of services
and for the expansion of existing types of services. Since government is limited
(financially and politically) to provide all these emerging needs or growth of
needs, more non-profits are created to attend to these unsatisfied needs.
6. Supply-side theory—The previous factors (viz. contract failure, government
failure, market failure, heterogeneity) together are also known as the demand-
side approach to understand non-profits’ growth. However, this approach
does not fully explain the impressive growth of non-profits. For example, the
demand-side approach does not explain the case where “nonprofits, firms,
(and sometimes governments) often compete in the same functional space
for the same contracts, and often for the same paying clients” (Bryce 2006,
312). Frumkin (2002) proposes a supply-side approach or theory as a comple-
ment to the demand-side approach to understand fully the growth of NPOs.
According to Frumkin, “the supply-side perspective holds that nonprofit and
voluntary organizations are really all about the people with resources and
commitments who fire the engine of nonprofit and voluntary action” (2002,
21). This refers to the role of social entrepreneurs, donors, and volunteers
who are drawn to the sector to satisfy their own needs and ideas, with strong
commitment to act on their own worldviews. Some of these actions may
have nothing to do with the obvious and dire community needs. An example
of this would be an entrepreneur who starts a free music school in a poor
neighborhood. Initially, this will not fit the demand-side explanation of non-
profits’ growth, because the poor neighborhood obviously has many other
dire needs to satisfy. However, once the neighborhood children start slowly
to join the school, after a period of time, children and their parents may
realize that they are enjoying the experience and would want to continue the
 Introducing Non-Profit Organizations (NPOs) ◾ 11

music lessons. In this situation, supply can generate demand. Frumkin calls
this supply-side approach to non-profits the “expressive” role of the sector in
contrast to its “instrumental” role (i.e., the demand-side approach).

1.4 Scope and Significance of Non-Profits

In order to fully grasp the significance of this sector, it is important to provide a
layout of the sector in terms of its different subsectors. The subsectors not only point
to the all-encompassing reality of the non-profit sector with many areas of service
provisions, but they also underscore the significant economic, social, and political
significance of the sector. To give the readers a glimpse of the size of these subsec-
tors, the following section uses the The Nonprofit Almanac 2008 (Wing et al., 2008)
to provide the number of non-profits that submitted Form 990 (annual financial
information form) to the IRS. Because religious organizations and non-profits that
have gross receipts less than $25,000 were not required to file Form 990 until 2008,
these numbers provide only a partial account of these subsectors. Following are the
major subsectors:

1. Health services—Although hospitals are the most recognizable non-profit

institution, non-profits “also provide virtually every other kind of health
related services” (Salamon, 2002, 65). The health service subsector also
includes hospices, managed care organizations (health maintenance organiza-
tion [HMO], preferred provider organization [PPO], point of service [POS]),
nursing homes, mental health organizations, clinics (e.g., dialysis center, drug
treatment), and different types of residential treatment facilities. This is the
biggest and the fastest-growing subsector. The reasons for this growth are
obvious: an aging population, increase in poverty, rising healthcare costs,
increase in illegal immigration, and so forth. In 2005, 50,759 health service
non-profits reported (i.e., filed Form 990) to the IRS (The Nonprofit Almanac
2008, Wing et al.).
2. Human services—Human services refer to a wide variety of non-profits
engaged in a variety of crime, employment, housing, public safety, youth
development, and family services. These include legal aid societies, child care
service providers, soup kitchens, job training centers, foster care, family plan-
ning, residential care, home health, and a variety of advocacy organizations
(e.g., NAACP, Sierra Club). In 2005, there were 144,964 human service non-
profits that reported to the IRS (The Nonprofit Almanac 2008, Wing et al.).
3. Educational/research institutions—This subsector includes private non-profit
elementary and secondary schools, colleges and universities in higher educa-
tion, libraries, and research centers or institutes. In 2005, 78,074 non-profit
educational institutions reported to the IRS (The Nonprofit Almanac 2008,
Wing et al.).
12 ◾ Effective Non-Profit Management

4. Religious organizations—This includes all types of religious organizations and

associations. Examples include churches, mosques, temples, and synagogues. It
is impossible to have a valid count of the total number of religious organizations
operating in this country, because they are not required to file for tax exempt
status or submit Form 990 to the IRS. One estimate puts the total number of
religious organizations at 488,000 (American Church Lists, http://list.infousa.
com/acl.htm).
5. Arts and cultural organizations—Similar to the other subsector, this sector
is diverse and represents non-profits that are “engaged in the creation, pro-
duction, presentation, distribution, and preservation of and education about
aesthetic, heritage, and entertainment activities, products, and artifacts”
(Salamon, 2002, 187). Museums, operas, orchestras, theaters, and botani-
cal gardens are some examples of this subsector. According to The Nonprofit
Almanac 2008 (Wing et al., 2008), in 2005, 43,392 arts, cultural, and
humanities organizations reported to the IRS.

1.4.1 Significance of Non-Profits
Even though it is impossible to count precisely the total number of non-profits,
the above numbers listed under the subsectors undoubtedly give a clear picture of
the salience of non-profits in different aspects of our lives and their implications
on our community, government, employment, and service provisions. There is no
doubt that our life is integrally related to the third sector, whether in terms of
employment, services, or our voluntary contributions (physical or in-kind). The
scope and operations of these organizations thus beg the following question: What
is their contribution or significance? It will be an insurmountable, if not an impos-
sible, task to measure the sector’s total contributions or significance; however, one
can delineate the major ones and the following discussion attempts to do that in
this section.

1.4.1.1 Economic Significance
The non-profit sector has become a growing job market and is a significant contribu-
tor to our national gross domestic product (GDP). Consider the following statistics:

◾◾ In 2006, non-profits received $1 trillion in revenue, a 5.7% increase over 2005.

◾◾ In 2005, 12.9 million people worked for non-profits, up from 11.1 million
in 1998.
◾◾ In 2006, wages and salaries in the non-profit sector totaled $489.4 billion,
compared with $318.9 billion in 1998 (not adjusted for inflation).
◾◾ In 2006, non-profits contributed $666.1 billion to the U.S. economy.
◾◾ In 2006, non-profits accounted for 8.1% of the economy’s wages and 9.7% of
jobs (The Nonprofit Almanac 2008, Wing et al.).
 Introducing Non-Profit Organizations (NPOs) ◾ 13

The Nonprofit Almanac 2008 (Wing et al., 2008) also reports that from 1998
to 2005, non-profit employment grew an estimated 16%, with a compound
annual growth rate of 2.2%. During this period, U.S. nonfarm employment
other than non-profits grew just 5.2% with just 0.7% compound annual growth.
This means non-profit employment grew more than three times faster than the
rest of the economy from 1998 to 2005 (Wing et al., 2008, 18–19). The Urban
Institute reported that in 2010, NPOs contributed $779 billion, through its
products and services, to the nation’s economy which accounted for 5.4% of the
nation’s GDP (http://www.urban.org/nonprofits/more.cfm).

1.4.1.2 Service Provisions
Non-profits, undoubtedly, have now become significant providers of different types
of services, whether it is providing shelter to the homeless, or after school programs,
or different types of heathcare services. The enormity or scale of this function cannot
be underscored. As mentioned earlier, in 2005 there were 50,757 health service and
another 144,964 human service non-profits that reported to the IRS. In some cases,
they may be working as the sole provider of a much needed service (e.g., homeless shel-
ter) or to support for-profit businesses (e.g., local chamber of commerce) or to work as
government contractors to provide some specific mandated services (e.g., job training).

1.4.1.3 Innovation and Entrepreneurship

One of the major impacts of the non-profit sector lies in experimentation. Its flex-
ibility and freedom from the pressure to make profits (unlike for-profit), and to cater
to the majority consensus (unlike government organizations) give this sector the
opportunity to engage in entrepreneurship, research, and innovation. “Nearly every
function currently performed by governments at various levels was once a new social
idea and the experiment of some voluntary group, formal or informal—this is true
of education, welfare, care for the aged, building roads, even fighting wars (volun-
teer citizen militias)” (Smith, 2001, 80). A specific example is Planned Parenthood
pioneering the first birth control pills that went into the market in the 1960s. The
agency had successfully brought together the goals of the birth control movement
and the population control movement, and promoted the pill’s development.

1.4.1.4 Policy Making
Non-profits participate in the public policy-making arena in several ways. First,
there are some non-profits [viz. 501(c)(4)] that are permitted to engage in unlimited
lobbying. Some of these organizations are powerful political actors in this regard.
The National Rifle Association and the American Medical Association are two such
powerful non-profits. Second, there exists a variety of non-profit research institutes
(e.g., Brookings Institution, Urban Institute) that conduct research on a variety
14 ◾ Effective Non-Profit Management

of issues of policy importance, prepare policy papers, and provide crucial relevant
information to policy makers in their deliberation on future public policies. Third,
some non-profits like political action committees are directly involved in partisan
political campaigns. Various studies have reported that charitable organizations
engage in a wide variety of activities on behalf of social welfare recipients to influ-
ence public policy through their opposition to or support for proposed legislation
(e.g., welfare reforms, educational policy), including testifying before legislative
bodies (for example, Berry and Arons, 2003). Similarly, corporations rely on non-
profit associations to influence trade and tax policy affecting their industries. As
Walden pointed out, “[S]uch associational behavior has been recognized as the bed-
rock of American democracy since de Tocqueville” (2006, 718).

1.4.1.5 Providers of “Common Goods”

Roger Lohmann in his Theory of the Commons emphasizes a distinctive type of
goods that non-profits provide and named it the commons. He refers to a broad
category of social organizations that include “eleemosynary or donative associations,
organizations, and groups engaged in unproductive or volunteer labor as ‘com-
mons’, irrespective of their status of being incorporated, recognized by the state,
tabulated in national data, or made up of paid employees” (Lohmann, 2001, 167).
He further clarifies the concept of commons by stating that “any set of related social
acts characterized by uncoerced participation, common purpose, shared resources,
mutuality, and fairness can be characterized as common, and [the] social organiza-
tions and institutions in which such norms predominate can [also] be called com-
mons” (Lohmann, 2001, 171).
The outcomes of such processes, as Lohmann suggests, bring common goods.
He distinguishes common goods from public goods (provided by the government)
and private goods (provided by the market) by pointing out that common goods
(unlike private goods) cannot be consumed alone by an individual; at the same time
they are not of interest to all people (unlike public goods). Unlike public and private
goods, common goods according to Lohmann (1992) are of interest to all members
of particular commons, but possibly not those beyond. Examples of common goods
include services provided by professional associations like the American Society for
Public Administration, an amateur theater group, a non-profit that serves the inter-
est of relatives of AIDS, and so forth. Lohmann criticizes the market and govern-
ment failure theories as inadequate to explain the significant role that non-profits
play in providing these common goods.

1.4.1.6 Individualism and Plurality

Individuals establish non-profits to channel their creativity and to achieve their
aspirations, whether it is to start a new music school in a poor neighborhood or
a parochial school in an affluent neighborhood. “Philanthropy and voluntarism,
 Introducing Non-Profit Organizations (NPOs) ◾ 15

collectively organized and enabled through nonprofit sector organizations, are the
primary means in our society for making individual choices among value prefer-
ences” (Ott, 2001, 50). As previously mentioned, Frumkin (2002) calls this the
“expressive” function of the sector. Considering the fact that establishing a non-
profit (even an incorporated one) is relatively easy, an individual can choose to form
his or her own non-profit organization to promote or implement his or her ideas.
A related impact of this freedom is the opportunity for individuals for personal
growth and to realize their potentialities to the fullest level. These all support the
value and practice of plurality in society.

1.4.1.7 Social Mobilization and Advocacy

Since the early nineteenth century, non-profits have successfully mobilized social
groups to promote one or more causes, whether that means bringing more justice
in society (e.g., the anti-abolitionist movement) or making the world healthier
(e.g., environmental groups) or protecting individual rights (e.g., first amend-
ment rights to carry arms). Along the same line, the advocacy role of non-profits
is well known. There are a wide range of NPOs that are known as advocacy orga-
nizations. Examples include Mothers against Drunk Driving (MADD), People
for the Ethical Treatment of Animals (PETA), National Organization of Women
(NOW), National Rifle Association (NRA), NAACP, and many other national
non-profits. “In the process of doing this, the voluntary sector as a whole pro-
vides moral and ideological leadership to the majority of human society, and
often calls into question the existing legitimacy structures and accepted defini-
tions of social reality of particular societies” (Smith, 2001, 80).

1.4.1.8 Social Bonding
Through opening up venues for individuals to form into groups and connect
themselves for a purpose, the non-profit sector facilitates a very important role
in society—social integration and bonding. It helps reduce social isolation and
alienation. This is of special importance for groups who do not feel integrated in
a society due to a variety of personal, situational, and societal factors. Examples
include different and new immigrant groups (e.g., Asian, Hispanics), gays and
lesbians, parents of HIV-infected children, and others. Some scholars call this
the social capital building function (Frumkin, 2002; Putnam, 1993). Frumkin
argues that “[T]his trust, or ‘social capital,’ represents a critical reservoir of good
will and serves as a catalyst for civic and political engagement” (2002, 29–30).

1.4.1.9 Democracy
By providing opportunities to individuals to participate in different civic and commu-
nity engagement and in grassroots advocacy activities at the local, state, and national
16 ◾ Effective Non-Profit Management

levels, non-profits help democracy to flourish. When non-profits engage in voter edu-
cation or provide information on the voter registration process, they are helping raise
individuals’ consciousness of their rights. Berger and Neuhaus (2001) use the term
“mediating structure” to explain the vital role that non-profits play in a democracy.
Mediating structures as they define are “those institutions standing between the indi-
vidual in his private life and the large institutions of public life” (2001, 241). They
explain that megastructures (i.e., states) are usually considered as alienating and that
private life could also be limiting in the sense that individuals are left to their own
resources and strategies. Non-profits, by providing venues for individuals to form
associations, to lobby, to connect with similar minds, and to participate in politics,
provide a bridge between the state’s and individual’s private initiatives.

1.4.1.10 Preservation
Smith (2001) points to another important role of non-profits—preservation of his-
tory, old ideas, way of life, productions, and artifacts. Examples include the work
of thousands of museums, libraries, and historical societies. In addition, as Smith
pointed out, “there are a number of voluntary organizations whose primary func-
tion is to preserve the values of cultures and subcultures that no longer have any
substantial power or importance in American society” (2001, 82). But they all have
historical importance, and non-profits play a significant function in preserving
those values, cultures, and lifestyle.
The non-profit sector is thus not only heterogeneous in terms of the organiza-
tional types and forms, its variations are also rooted in the numerous social, eco-
nomic, organizational, and motivational factors that sustain them.

1.5 Contemporary Issue:
The Non-Profit Sector’s Identity Crisis
Non-profits, as explained before, are on a growth spurt and one can assume that
such growth will be steady. The salience of this sector, however, has also brought
several issues in the forefront, and most probably questions about their identity are
the most important ones for the sector to reckon with. Some refer to this as the
identity crisis of the sector. Three major factors, which are also interlinked with one
another, are contributing to this identity crisis.
First, is the increased commercialization of the sector. As Salamon pointed out,
“the nonprofit sector is increasingly confronting an identity crisis as a result of a
growing tension between the market character of the services it is providing and
the continued nonprofit character of the institution providing them” (2002, 46).
Several factors are contributing to this issue. For example, the increasing adoption
of business management practices like user fees, hiring managers with for-profit
 Introducing Non-Profit Organizations (NPOs) ◾ 17

background, and the growing reliance on non-profit and for-profit partnerships as

can be found in casual related marketing.
There is no doubt that more and more non-profits are engaging in these activities
in an attempt to address their current financial challenges. The financial challenge is
escalating with the increase in competition between for-profits and non-profits for
clients and services, competition for scarce resources including human resources,
and a growing budget deficit of the national government. Thus the increasing com-
mercial nature of the sector is raising questions about the very essence of its public
service and charitable missions. Salamon noted, “[A] massive gap has thus opened
between the modern reality of a sector intimately involved with government and
moving into commercial activities in the wake of governmental cutback, and the
popular image of community-based institutions mobilizing purely voluntary ener-
gies to assist those in need” (2001, 428).
Second, the blurring of the lines between the public and the non-profit sectors is
another reason for the emergence of the crisis. Non-profits, over time, have become
a strong and steady partner of the government as a preferred vehicle for service
provisions. However, as Smith and Lipsky (2001) point out, the longer a non-profit
relies extensively on government contracts, the more it will tend to look, think, feel,
and act like a small government. To this observation, Alexander and her colleagues
(1999) raise the question as to whether such blurring might threaten the future
of civil society. Frumkin adds an additional perspective on this issue noting that
“[N]onprofit organizations must strive, however, to be more than mere engines of
service production if they are to claim a compelling rationale for the sector. After
all, government is more than capable of delivering a great range of critical human
services” (2002, 168).
The third factor that has propelled this discussion is the emerging question of
“who actually benefits from this sector?” Increasingly, significant stakeholders (e.g.,
the general public, donors) are asking this question. The questioning rests on the
assumption that at least a majority of these organizations are supposedly working
to address the needs of a needy population. The general public and government’s
support of this sector is mostly based on this assumption. Some research has been
done in this regard, and some of the findings are contrary to this assumption. For
example, Salamon (1995) found that out of the 1,474 agencies that were asked
whether they serve poor clients (family income below the official poverty line), only
27% indicated that most of their clients were poor and another 20% reported that
they served some poor clients. Many hospitals are currently being sued by groups of
lawyers who claim that these non-profits are not fulfilling their tax-exempt status
because they allegedly overbill the poor (Raasch, 2005). A recent study focusing on
the five-county region of southern California reports that “nonprofit institutions
often fail to target the poorest areas of the region” (Joassart-Marcelli and Wolch,
2003, 92).
There is no doubt that the future of this sector will depend on its ability to main-
tain the inherent values of the sector: caring, charity, benevolence, and innovation.
18 ◾ Effective Non-Profit Management

However, the challenge of the sector also lies in its ability to adapt to the changing
circumstances. Some of the specific challenges are as follows:

1. Finding ways to renew and maintain these traditional values and at the same
time maintain financial stability and a competitive edge.
2. Developing strong partnerships with both the government and the private
sectors while maintaining the sector’s distinctiveness and unique contribu-
tions to society.
3. Adapting to new technology to be cost effective in operation, expansion of
outreach, and networking, without undermining the centrality of human
interaction and emotion in interacting with the community.
4. Innovating entrepreneurial approaches to deal with new social issues while
addressing the ones that are continuing.

Case Study: The Salience of Non-Profits

in the Current Housing Mortgage Crisis
The Center for Responsible Lending (a non-profit group) pro-
jected that “almost 2.2 million subprime foreclosures will occur,
primarily in late 2008, through the end of 2009, up from our
original 1.1 million estimates made in 2006” (2008). The situ-
ation is, however, bleaker than that projection. In 2010 alone,
banks seized 1.05 million homes (Reuters, 2011). A succinct
illustration of the growth, scope, and significance of non-profits
is their role in addressing the current housing mortgage crisis.
There are numerous national-, state-, and community-
level NPOs working with individual homeowners, a consor-
tium of NPOs, and government to intervene in this mortgage
crisis. Before the mortgage crisis started in 2006, there were
NPOs who were providing a variety of services to homeown-
ers, including new borrowers, in regard to mortgage counsel-
ing. A U.S. Department of Housing and Urban Development
report (2003) noted that NPOs played a significant role in
educating borrowers before they took out a loan or a mort-
gage, counseling borrowers if they had trouble paying off a
loan, and referring them to legal assistance if they had been
victims of a predatory loan. A variety of non-profits have thus
been active in providing such services: Center for Responsible
Lending, Institute for Foreclosure Legal Assistance, SCORE,
Homeowner Preservation Foundation, Massachusetts Alliance
Against Predatory Lending, The National Hope Foundation,
among many others.
 Introducing Non-Profit Organizations (NPOs) ◾ 19

The difference between this sector’s role before 2006 and

during this crisis is that they are now playing a more concerted
active role to mitigate the situation. Along with providing mort-
gage counseling and assistance services to individuals who have
lost their homes to foreclosures or are about to lose their homes,
numerous NPOs are proactively working to buy, renovate, and
sell those foreclosed homes either to the previous owners or to
new buyers. Most of these NPOs are accessing grant money from
the federal government’s Neighborhood Stabilization Program
(NSP) grants. The federal government established the NSP in
2008 with the goal to stabilize communities that have suffered
from foreclosures and abandonment. The program provides
grants to state, local governments, non-profits, and consortiums
of non-profit groups on a competitive basis (U.S. Department of
Housing and Urban Development, 2003) to rehabilitate, resell,
or redevelop foreclosed or abandoned homes in order to sta-
bilize neighborhoods and address the declining housing values
of neighborhoods. Numerous NPOs have successfully utilized
the grant money. Examples include the Neighborhood Housing
Services of New Haven (NHS) that purchased 18 foreclosed
homes, spent $25,000 on each for renovation, and had put
them on the market for sale (Prevost, 2011); Boston Community
Capital purchased these properties and provided former owners
with lower mortgage rates to buy back their properties. Over the
last 18 months, this NPO has helped previous owners to repur-
chase more than 70 houses (Wallace, 2011).
NPOs are effectively forging partnerships with other NPOs
and community partners to acquire and effectively utilize grants
from the NSP program. “In some cases, regional or national non-
profits got large sums for multi-city or multi-state work, some-
times in addition to their local affiliates getting funding through
state or city grants: for example, $137.6 million to Habitat for
Humanity international for work in five states” (Cohen, 2008).
Some NPOs have received praises and acclamations for
doing a more effective job in assisting distressed home owners
with their mortgage payments. One example is the work of
the Neighborhood Assistance Corporation of America (NACA)
who in 2010 organized a national convention (Save the Dream
tour) and brought banks and homeowners face-to-face to nego-
tiate lower mortgage payments. It is reported that 80% of the
approximate 10,000 participants got help and were successful
in arranging a lower mortgage payment. NACA has developed
a more successful record than the Obama Administration’s
Home Affordable Modification program which has helped
20 ◾ Effective Non-Profit Management

only 15% of eligible homeowners to lower their mortgage pay-

ments (Whitaker, 2010).
The housing crisis has been brought about by both mar-
ket and government failures as is well illustrated in the cur-
rent crisis. The current solutions of the crisis, be it the $700
billion bailout involving banks and their credit lines (correct-
ing a market failure), or the more stringent regulations of loans
(correcting government failure), leaves out the mechanisms that
are necessary to address contract failure arising from preda-
tory lending, which leaves vulnerable consumers as victims
of unfair practices, burdened with loans, which eventuate in
housing foreclosures. The need for fair representation of the
interests of the vulnerable population (minorities, elderly) is
the problem of the commons that non-profits take up as their
cause, for example, in providing credit counseling. In doing
so, non-profits also pursue the mission of social mobilization
and advocacy, for example, forging alliances against predatory
lending. The reasons for non-profit activism in this mortgage
crisis area are found in the inherent nature of their mission to
assist individuals (in this case the home buyers).
In the coming years the policy role of non-profits and part-
nerships with government and banks hopefully will grow both
in depth and breadth of coverage with the goal to address the
housing crisis and to prevent such a crisis from repeating again.
However, such partnership and activism also raise the chal-
lenge for non-profits to maintain their distinctive identity. This
is because when the lines of demarcation blur, when finan-
cial dependency becomes great, or when non-profits subject
themselves to stringent regulations, or find opportunity to make
money, the very nature of their adaptive response may lead
to opportunistic behavior, thus threatening their standing and
identity as the third sector of society.

Discussion Questions
1. Even though non-profits, as the above case study showed, are actively work-
ing to address the nation’s current housing market crisis, are they really able
to effectively make any real difference in the housing market?
2. Conduct a Web search to find the various partnership arrangements that
have developed between public and non-profit agencies designed to address
the current housing mortgage crisis. Discuss those partnership programs
and projects. What policy advice can you offer to improve these partnership
arrangements or develop new ones?
 Introducing Non-Profit Organizations (NPOs) ◾ 21

Web Resources
America’s Charities (http://www.charities.org): A searchable directory of its
charity members (each with a gross receipt of less than $25,000). This data-
base is useful in finding small non-profits.
Guidestar (http://www.guidestar.org): A searchable directory with a database of
over 1.7 million IRS-recognized non-profits. Listing includes address, con-
tact information, description, mission, and financial information.
Internal Revenue Service, Exempt Organization Division (http://www.irs.gov/
charities/index.html): Provides detailed information on the different exempt
organizations, law, instructions on completing Forms 990 and tax exemption
application, along with a thorough FAQ section.
The National Center for Charitable Statistics (http://nccs.urban.org): Provides a rich
collection of statistical information (e.g., taxes, financial information) on non-
profits. It also has a complete description and explanation of the NTEE codes.
The National Council of Nonprofits (NCNA) (http://www.ncna.org): A net-
work of state and regional non-profit associations that provides a variety of
information including legislation and regulations, technical assistance, and
research. Links to Web sites are organized by state.
The NonProfit Times 100 Biggest Nonprofits (http://www.nptimes.com):
Includes incomes of these larger non-profits, and breaks down the income in
terms of the different sources. It also analyzes trends within the non-profit
sector during the previous year by examining growth, layoffs, risks, use of
special events as fundraisers, and a variety of other issues.

End-of-Chapter Review of Terms

501(c)(3)
501(c)(4)
501(c)(6)
Civil society
Common goods
Contract failure
Government failure
Incorporated versus unincorporated
Independent sector
Market failure
Non-profit organization
Non-profits
NTEE
Private goods
Public goods
Third sector
Voluntary sector
22 ◾ Effective Non-Profit Management

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24 ◾ Effective Non-Profit Management

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Endnotes
1. The term third sector implies the existence of the other two sectors—the first sector (i.e.,
the public sector) and the second sector (i.e., the business sector).
2. Some well-known NGOs include Greenpeace, Save the Children, Oxfam, Amnesty
International, and Doctors Without Borders.
3. A trust is formed by the execution of a trust or an agreement. A trust is rarely an appro-
priate form for a non-profit organization other than a charitable entity or some of the
funds associated with employee plans.
Chapter 2

Essential Linkages—
Non-Profits, Government,
and Business

Contemporary democratic societies function through three sectors: public (govern-

ment), business, and non-profit. As Vernis et al. (2006) put it, “like a three legged
stool, these three sectors have to work together to drive societies toward balance
(2).” The balance is maintained when each sector performs its role in terms of its
distinctive competency as well as when they complement one another. As briefly
mentioned in Chapter 1, while non-profit organizations (NPOs) have distinctive
characteristics, they also share certain common features with both the public and
the business sectors.
Within this interactive context, the legitimacy and effectiveness of the non-
profit sector to a great extent depend on the nature of relationships that they forge
with government and business organizations. This is due to the possibility that
these relationships could either erode or enrich the distinctive characteristics of
NPOs. It is important, therefore, to understand how the basic features of these
relationships affect the operation and performance of the non-profit sector.
Understanding the different features that non-profits share with the other two
sectors, and the different relationships that non-profits forge with business and
government (public) hold both institutional and practical significance. The insti-
tutional significance lies in the non-profit sector’s capacity to retain its distinc-
tive characteristics and promote important services through collaboration; while
the practical significance lies in making collaboration a basis for overcoming the
constraints of resources and expertise of different sectors. Chapter 1 discussed the

25
26 ◾ Effective Non-Profit Management

unique characteristics of NPOs and briefly explained their differences with govern-
ment and business organizations. This chapter extensively discusses the features
that NPOs share with government and business organizations, the forms of rela-
tionships between NPOs and government organizations, and NPOs and business
organizations, and the challenges and issues that emerge with these interactions
and relationships. This chapter has the following learning objectives:

1. Identify and explain the shared features between NPOs and government
organizations.
2. Identify and explain the shared features between NPOs and business
organizations.
3. Explain the different forms of cross-sectoral relationships.
4. Discuss the challenges and issues in NPOs’ relationship with government
and business organizations.

The chapter also discusses the faith-based initiative, a contemporary case of

government partnership with NPOs, and the issues that are raised with such part-
nership. The chapter ends with a case study on Hurricane Katrina. The case study
explains the complexity and challenges of collaboration among NPOs, govern-
ment, and business organizations under emergency situations.

2.1 Shared Features among Non-Profit Organizations

(NPOs), Government, and Business Organizations
2.1.1 The “Publicness” of NPOs: Shared
Characteristics with the Public Sector
The public character of NPOs stems from their own institutional characteris-
tics as well as from their interdependence with the public sector. In several ways,
NPOs share similar features with government or public-sector organizations. To
explain the publicness of NPOs, this section relies on the enduring debate in pub-
lic administration scholarship on the issue of public versus private organizations’
differences and similarities. The debate focuses mostly on the differences between
a public agency and a private for-profit agency (i.e., a business organization).
However, considering the salience of non-profits in our society and the economy,
it is important to add NPOs into this discussion, and explain how in so many dif-
ferent ways NPOs are becoming a major component of the broader umbrella of
public administration.
There are three major approaches (generic, core, and the dimensional) that
scholars have developed to explain the similarities and differences between pub-
lic and private organizations1 (Antonsen and Jorgensen, 1997; Bozeman and
Bretschneider, 1994; Pesch, 2008). Below is a short summary of these approaches
 Essential Linkages—Non-Profits, Government, and Business ◾ 27

and a discussion on where non-profits fit in the debate on private versus public sec-
tors’ differences and similarities.

1. The generic approach assumes that public and private organizations do not
differ significantly (Bozeman, 1987; Chandler, 1991; Simon, 1946, 1948;
Thompson, 1962). This approach holds that all organizations are public, and
that some organizations are more public than others. For example, Simon
(1946), the leading intellectual figure in organizational theory, argues that
public, private, and NPOs are equivalent on key dimensions. “He thus
implied that his insights about satisfying and other organizational processes
applied across all types of organizations” (Rainey, 2003, 57). Similarly,
Thompson (1962), a leading contingency theorist, assumed that public and
private organizations have more similarities than differences.
In terms of organizational features, non-profits share some common fea-
tures with government and business organizations. For example, Gassler (1986)
pointed out that, like all organizations, NPOs share the features of separation
of ownership and control, satisfying behavior, group-choice decision problems
(e.g., voting paradoxes in boards), as well as the goals of self-perpetuation,
self-expansion, and self-challenge. Along with these, all organizations (NPOs,
government, and businesses) engage in certain similar functions (e.g., hiring,
planning, budgeting, financial management) to support their missions.
Despite the shared features, government organizations are more than a
composite of these characteristics; the same is true of business organizations.
There are some unique characteristics that define government or public orga-
nizations; likewise, there are some unique characteristics that define non-
profits and business organizations. The core and dimensional approaches, as
described below, focus on delineating these differences.
2. The core approach uses the legal status (i.e., ownership) as the criterion to
distinguish organizations and assumes that organizations are either public
or private. Thus government organizations are different from private organi-
zations because the former are government owned, while the latter are pri-
vately owned. If we try to use the core approach to understand the place of
non-profits, it illuminates a very interesting reality—non-profits are neither
owned by the government nor are privately owned. Technically speaking, the
idea of “ownership” does not even apply to non-profits. No one owns a non-
profit. Non-profits are created by private individuals and/or “cause-oriented”
groups, but the assets of the agency do not belong to them or to any other
stakeholders. No one—not the founder, the chief executive officers (CEOs),
or the board owns a non-profit. No matter how hard the board members
or the CEOs might have worked to get that non-profit off the ground or to
keep it running, it is not theirs. Along the same line, they cannot “sell” their
non-profit because they do not own it. Non-profits also work under the non-
distributional constraint as discussed in Chapter 1.
28 ◾ Effective Non-Profit Management

What happens when a non-profit ceases to operate? Who owns the remain-
ing assets? The law is very clear here—when a non-profit ceases to operate,
its assets have to be transferred to another similar non-profit or non-profits.
In situations where such transfer is not done or is not feasible, the state or
the particular governmental jurisdiction will make the determination. These
are stated clearly in the article of dissolution which is a part of the Articles of
Incorporation—the legal instrument for creating a NPO.
Thus, even though non-profits are not government owned, the article of
dissolution points to the very essence of NPOs—that they are public organi-
zations, they work for the public, and even when they are about to cease their
operations, the government ensures that their remaining assets are spent or
transferred to another similar non-profit. The publicness of the NPOs is also
reflected in the variety of functions they perform in society (as explained in
Chapter 1) including the service, advocacy, expressive, community building,
and value guardian functions (Salamon, 2002).
3. The dimensional approach emphasizes that the differences between public
and private organizations are a matter of degree. Different scholars have used
different criteria to explain this. Following are three such criteria that explain
their position:
a. The economist core approach (see Allison, 1992; Rainey et al., 1976)
assumes that private and public management are fundamentally alike
only in unimportant matters (viz., management, leadership) and that
they differ significantly in important matters. Examples of such impor-
tant matters include the reality that public organizations have a broader
impact, face greater scrutiny, work under higher expectations, and are
less flexible and more political. A closer look at non-profits shows that
many of these features also exist in non-profits. As explained in Chapter
1, NPOs’ roles and impacts are far reaching and significant; they also cur-
rently work under heightened scrutiny from different stakeholders, mostly
due to increased pressures from donors and policy makers for account-
ability and effectiveness. Along with these, similar to the public sector,
stakeholders expect a higher standard of conduct from non-profits. These
features make the non-profit sector resemble more the public sector.
b. The political core approach emphasizes the political character of public
organizations. This view emphasizes the close connection between poli-
tics and administration. As Demortain explains, “[A]n organization is
public in so far as it contributes to the implementation of public poli-
cies, has received a mandate defined by a principal, and is exposed to the
political arena” (2004, 976). Publicness thus accounts for the existence
of a type of authority expressed through public action. The discussion in
Chapter 1 of the political roles of non-profits is relevant here. Through
different advocacy, lobbying, and policy-making roles and activities, dif-
ferent non-profits (e.g., think tank, advocacy groups) exercise various
 Essential Linkages—Non-Profits, Government, and Business ◾ 29

forms of political power and influence. In recent times (both nationally

and internationally), policy changes (e.g., in welfare and education) and
innovation in the governance process together have forged powerful link-
ages between NPOs and government. Salamon (2002) identified these
changes with the broadening of federal entitlement spending, new federal
initiatives that led to the welfare reform contracts, and new governance
tools of policy implementation (e.g., loan guarantees, tax subsidies). In
this new governance process, NPOs function both as service providers
and as advocates of new service production. These developments have
also led to the forging of a variety of collaborative arrangements between
government organizations and NPOs (whether through contacts or net-
works), resulting in broadening of the public character of NPOs.
c. Finally, the normative approach emphasizes the public interest role of public
organizations. As Pesch noted, “Public organizations not only have to pro-
duce goods and services but also have to work on behalf of the ‘public inter-
est’, which is conceived as a broad and a normative action” (2008, 175). This
expectation fully applies to non-profits, too. The mission and goals of most
non-profits are geared to promote some type of public interest whether that
means providing shelter to homeless, providing free or reduced legal aid or
healthcare, promoting civic engagement, promoting community building,
or promoting arts. Non-profits also affect income distribution through cash
and in-kind transfers, thereby compensating for the effects of natural condi-
tion and past market transactions (Gassler, 1986, 5).

NPOs are a distinct type of organization; however, the above discussion also shows
that the idea of “publicness” of organizations is broader than the concept of “gov-
ernment organizations” and that NPOs represent several of the essential character-
istics or dimensions of being a “public” entity.

2.1.2 Look-Alike: Shared Characteristics

with the Business Sector
As explained in Chapter 1, both businesses and non-profits have missions. However,
non-profits are culturally, operationally, and structurally different from businesses.
Some of the significant differences between the two are listed here:

1. Mission—NPOs’ mission is to serve individuals, groups, community, and

society; their mission is not to make a profit, which is a defining characteristic
of a business organization.
2. Volunteerism—Volunteers are a key resource for so many NPOs; this is in fact
a core characteristic of the non-profit sector, a feature that is almost absent in
the business sector.
30 ◾ Effective Non-Profit Management

3. Tax-exempt status—Unlike business organizations, non-profits (most of

them) enjoy tax-exempt status.
4. Boards—Non-profit boards (the ultimate unit accountable for a non-profit)
are significantly different from for-profit boards in the sense that unlike for-
profit boards, non-profit board members are all volunteers (usually unpaid)
and have no financial stake in the non-profit agency.
5. Revenue earning and cost shifting—NPOs rely on diverse revenue sources includ-
ing donations, user fees, and government grants. Unlike business organizations,
they usually cannot pass on the clients to recover their costs of operation.2
6. Success measure—For businesses, earnings or profit is the ultimate measure of
success. In contrast, the output or outcome of an NPO is important indepen-
dent of the income earned by the sales of that output (Gassler, 1986).

While the above features make NPOs distinct from business organizations, it is
important to point out that NPOs also share several important features with busi-
ness organizations. The following are the major ones:

1. Internal process—NPOs’ internal processes, in most cases, resemble the flex-

ibility that businesses enjoy. Examples of such internal processes include the
hiring and firing of employees, budgeting, strategic planning, and compensa-
tion. Unlike most public-sector employees, NPO employees are considered
as “at will” employees similar to those of business organizations. This gives
them a degree of flexibility in hiring, firing, and compensation not found in
the public sector, where employees in most situations are afforded due process
rights. Similarly, NPOs’ budgeting and strategic planning processes enjoy the
flexibility of businesses in the sense that their design and implementation are
mostly internally initiated and controlled.
2. Revenues—User fees now constitute approximately one-third of the revenues
of non-profits. User fees are similar to business organizations’ sales receipts.
3. Market competition—NPOs in today’s world also operate in a competitive
market, similar to business organizations. They compete with other non-prof-
its, business organizations, and in some cases with government organizations
for contracts and other resources (e.g., human resources).
4. Importation of business methods—Increasingly NPOs are drawing upon pri-
vate sector’s sophisticated business practices to optimize their resources and
effectively compete with other non-profits and for-profits. Such practices
include strategic planning, cost benefit analysis, information technology, and
marketing. Use of information technology and marketing strategies allows
NPOs to forge collaborative relationship with other NPOs, for-profits, gov-
ernment organizations, and community groups. Thus like effective firms,
NPOs can reach out to new constituencies and create strong relationships
with the donors, government organizations, and communities of interest
(Hecht and Ramsey, 2002).
 Essential Linkages—Non-Profits, Government, and Business ◾ 31

5. Profit making—Even though NPOs’ goals are not to make profits, legally
they are allowed to do so.

2.2 Cross-Sectoral Relationships
The three sectors not only share some common features with one another, they also
have close interactions among themselves, thereby developing different patterns of
relationships. The following section explains those relationships.

2.2.1 Forms of NPO and Government Relationships

The NPO sector and government are interconnected in numerous and significant ways
(for example, Boris and Steuerle, 2006).
First, government spending has a significant impact on the shape and role of the
non-profit sector. Through their spending decisions, government affects the scope
of societal needs that remain for non-profits to address. For instance, when federal
funding for building low-cost housing declines, more needy people may turn to
homeless shelters. This is an indirect effect of budget decisions on non-profit scope
of operations. The same budget cut, if tied to government contracts, will also limit
non-profits’ ability to provide this service.
Second, tax policies significantly influence individuals’ propensities to make
charitable contributions. “Tax rates are important because they influence giving
both through the ‘price’ of giving and the income taxpayers have available for gifts”
(Abramson et al., 2006, 121). Generally speaking, the higher the tax rate, the lower
the actual price of giving, and hence the greater incentive to give and vice versa. As
Abramson and his colleagues explain,

For example, the cost of giving $100 to charity for an individual item-
izing deductions and in the 45 percent tax bracket is $55, because the
government would have taken $45 of the $100 of the gift anyway if the
donor has not chosen to give it away. If the tax rate for this individual
falls to 35 percent, however, her cost of making the same gift would
rise to $65, because this is the actual amount of spending that the giver
would have to forgo to make this gift. (2006, 121)

Changes in tax policy also affect the income people have to spend, which affects the
amount they give to charities as donations.
There are other federal acts and policies that shape individuals’ decisions to give
to non-profits. For example, the Economic Recovery Tax Act of 1981 established
for the first time charitable deductions for non-itemizers, thereby increasing their
incentive to give. The Deficit Reduction Act of 1984 also affected charitable giving
by increasing the limit on deductible gifts to private foundations from 20% to 30%.
32 ◾ Effective Non-Profit Management

Finally, NPOs do not have to pay any corporate income tax (exceptions are
unrelated business income taxes). The federal government also subsidizes charities
by granting them the ability to issue section 501(c)(3) bonds, the interest on which
is tax exempt. States also typically exempt them from income and property taxes.
Most recently, the implementation of the 1996 welfare reform legislation (also
known as the Personal Responsibility and Work Opportunity Reconciliation Act)
and policies have affected a closer relationship between non-profit and govern-
ment (Smith and Lipsky, 1995). “The 1996 national welfare reform legislation and
policies have led to the devolving of authority and responsibility downward from
national government to local governments and ultimately to nongovernmental
organizations” (Austin, 2003, 98).
The 1996 act focuses on moving former welfare recipients from welfare to work
with policies to address barriers to work as well as opportunities to sustain employ-
ability. Former recipients of the income maintenance program (Aid to Families with
Dependent Children, AFDC) became participants in the program of Temporary
Assistance to Needy Families (TANF) that promoted workforce development ser-
vices that were often contracted out to community-based non-profits. These changes
have significantly impacted especially social service agencies in that they changed
their income maintenance programs from client eligibility determination to client
employability enhancement. As a result, many of them began to actively promote
more community and outreach activities and collaboration with non-profits for ser-
vice delivery. Milwaukee (Wisconsin), for example, chose to contract out nearly its
entire welfare-to-work program to non-profit agencies. Even though such a contract-
ing relationship has a long history, during the 1990s, with the welfare reform, such
a relationship took a different direction. “The contractual relationship between non-
profits and public social service agencies includes a new set of expectations related to
welfare reform” (Austin, 2003, 99). As Austin (2003) explained, a community-based
non-profit organization could be expected to provide neighborhood-based service
delivery to include job development and outreach programs, employment training,
employment retention programs, along with linkages with community colleges.
These expectations have led to different types of community partnership relation-
ships among public agencies and non-profits. For example, many county social ser-
vice agencies have contracted with non-profits to provide transportation services for
TANF participants and train them as drivers for future jobs in transit systems.
Such a changing environment has affected non-profits in other ways too, includ-
ing changing their internal cultures and management practices. For example, they
are now paying more attention to marketing and professionalizing internal man-
agement processes so they can compete well with other non-profits and private
organizations. Competition has also surged an interest in merger and other forms
of collaborative or alliance structures.
Such interconnectedness between the two sectors has led to different patterns
of relationships between NPOs and government (for example, Young, 2006), as
explained below.
 Essential Linkages—Non-Profits, Government, and Business ◾ 33

2.2.1.1 Non-Profits as a Supplement to Government

In this mode of relationship, non-profits are viewed as fulfilling the demand for
public goods left unsatisfied by government, for different reasons, as explained in
Chapter 1.
What is the scope of this supplementary role that non-profits engage in? It is
difficult to give an accurate estimate on this role due to lack of a comprehensive
database. But there is no doubt that non-profits play a significant role, as described
in Chapter 1, in providing services that government cannot or will not engage in.
Salamon reports that the non-profit sector constitutes half of the nation’s hospi-
tals, one-third of its health clinics, over a quarter of its nursing homes, nearly half
of its higher education institutions, four-fifths of its individual and family service
agencies, 70% of its vocational rehabilitation facilities, 30% of its day care centers,
over 90% of its orchestras and operas, and is the delivery vehicle for 70% of its
foreign disaster assistance (2002, 9–10).
Table 2.1 provides useful data to help one comprehend the scope of public
charities, across the major subsectors.
In certain service provisions, non-profits’ roles are substantial, in others they are
more limited. For example, one can expect to see significant involvement of non-
profits in education and social service areas, and less in policing.
As Weisbrod (1977) explains, non-profits are not the only solution to the prob-
lem of public goods provisions. For example, citizens have options for the private
Table 2.1 P
 ublic Charities That Reported to the Internal Revenue Service
(IRS), 2005
Subsector Public Charities Percent (%)

Arts, culture, and humanities 35,840 11.5

Education 57,991 18.7

Environment and animals 13,399 4.3

Health 41,243 13.3

Human services 100,436 32.3

International and foreign affairs 5,075 1.6

Othera 56,699 18.2

Total 310,683 100.0

Source: Wing, K. T., T. H. Pollack, and A. Blackwood, 2008, The Nonprofit Almanac
2008, Washington, DC: Urban Institute. With permission.
a Other includes different civil rights advocacy, community improvement, science
and technology, social science, philanthropy, and other public and societal ben-
efit nonprofits.
34 ◾ Effective Non-Profit Management

market substitutes, or to move to other jurisdictions where tax rates and public
goods best match their preferences (Tiebout, 1956). However, these alternatives
also have problems including the market and contract failures (as discussed in
Chapter 1), and the limited options that some citizens have to pursue these other
options.

2.2.1.2 Non-Profits as a Complement to Government

In this mode of relationship, non-profits are seen as partners of government.
Salamon (1995) explains that non-profits and government are engaged primarily in
a contractual relationship in which government finances public services and non-
profits deliver them. As Young (2000) points out, aspects of both the economic
theory of public goods and economic theory of organizations help clarify the ratio-
nale behind this relationship.

Where the goods to be provided is “nonrival,” meaning that it can be

consumed by one party without reducing the amount available to oth-
ers, and “nonexcludable,” meaning that it cannot be made available to
one party without making it simultaneously available to others, then
people have the incentive to avoid contributing it to its provision but
to consume it once it is provided by others. As a result, such goods will
not be provided at efficient levels through voluntary collective efforts.
(Young, 2000, 153)

Young (2000) explained that solutions to the public good problem include social
pressure (e.g., peer-to-peer solicitations), private incentives with public goods sup-
port (e.g., bonuses given to members of a public radio station), and coercion (e.g.,
using the police power of the state to collect taxes). It is the latter solution that
suggests that government should undertake to finance public goods, either directly
or through tax incentives, although not necessarily becoming the vehicle for their
delivery. Under this relationship, as government expenditures increase, they help
finance increasing levels of activity by non-profits.
Using the economic theory of organizations (viz., transaction cost analysis),
we also know that it is cheaper to contract outside rather than to expand work
internally due to “diminishing returns to management.” Along with this, there is
a widely shared assumption that government is inefficient, and the private sector
including the non-profit sector can deliver the same services in a more efficient and
also effective way.
Non-profit revenues come from different sources, including fees for services,
government and foundation grants, individual and corporate donations, and rev-
enues from commercial ventures. Among these, Boris noted that “[D]irect govern-
ment grants are less important than fee-for-service income, which is the dominant
source of revenue for the sector in aggregate terms” (2006, 9). Such fees involve
 Essential Linkages—Non-Profits, Government, and Business ◾ 35

Table 2.2 Sources of Revenues for Reporting Public Charities, 2005

Sources of Revenue Percentage

Government grants 9%

Fees for services and goods from governmenta 20.4%

Private contribution 12.3%

Fees from services and goods from private sources 50%

Investment income 5.4%

Other income 2.9%

Source: Wing, K. T., T. H. Pollack, and A. Blackwood, 2008, The Nonprofit Almanac
2008, Washington, DC: Urban Institute. With permission.
a Includes Medicaid and Medicare payments.

payments for services provided (e.g., individual payments for tuition), government
contracts through Medicare and Medicaid, and government or private vouch-
ers for job training or child care. For the past several years, Medicaid has been
a driving force in the growth of government funding of non-profits. As Steuerle
and Hodgkinson pointed out, “A driving force behind many recent changes in
the size and scope of the nonprofit sector has been the use of charities and non-
profit institutions as intermediaries or contractors in providing the services govern-
ment finances” (2006, 82). The federal government is also increasingly partnering
with non-profit organizations. One estimate (Government Accountability Office
[GAO], 2007) is that the federal government spent about $317 billion on non-profit
organizations in fiscal year 2004.
Table 2.2 shows the share of government financial support to non-profit
organizations.

2.2.1.3 Non-Profits in a Collaborative Relationship

with the Public Sector
Collaboration between non-profit and public-sector organizations has become an
increasingly important phenomenon in state and local public service delivery. Sink
defines collaboration as the “process by which organizations with a stake in a prob-
lem seek mutually determined solution [pursuing] objectives they could not achieve
working alone” (1998, 1188). Collaboration requires voluntary, autonomous mem-
bers (partners retain their independent decision-making powers even when they
agree to some common rules), who have some transformational purpose or desire
to increase capacity by tapping shared resources (Wood and Gray, 1991). As Linden
emphasized, “Collaboration occurs when people from different organizations (or
units within one organization) produce something together through joint effort,
36 ◾ Effective Non-Profit Management

resources, and decision making and share ownership of the final product or service”
(2002, 7).
Collaboration between local governments and NPOs, thus, would exclude
purely contractual relationships, in which power is not shared. The relationship
in this mode is one of equals, rather than of the principal-agent type as found in a
contractual relationship.
Peters (1998, 12–13) identified the following conditions for a collaborative type
of partnership involving government:

1. They involve two or more actors, at least one of which is public.

2. Each of the actors can bargain on its own behalf.
3. The partnership involves a long-term and enduring relationship. This con-
dition would exclude relationships dependent on grants or competitive
contracts.
4. Each actor makes a contribution to the partnership, either material (e.g.,
resources) or symbolic (e.g., sharing authority).
5. All actors share responsibility for the outcomes.

Why do NPO and government collaborate with each other? One of the major
reasons is resource dependency (Cho and Gillispie, 2006). As Salamon (1995)
explained, non-profits often lack sufficient resources to pursue their mission and
thus turn to government for financial support. On the other hand, public leaders
are willing to collaborate because they believe non-profits can respond to social
problems with greater efficiency, effectiveness, and local sensitivities than can gov-
ernment. In some instances, non-profits may have organizational capacity such
as expertise in clinical services that public agencies lack. The social issues platform
theory stipulates that actors from different sectors collaborate when the issues they
face are too large in scope for their organization to address individually (Selsky and
Parker, 2005).
Examples of such collaboration include different schools partnering with
the city or county police department to implement the Drug Abuse Resistance
Education (D.A.R.E.) program, the American Red Cross offering regular train-
ing to different city and county offices on disaster training and drills, and public
defenders working with legal aid societies to offer their expertise to clients of dif-
ferent non-profits. Another specific example of such collaboration is the non-profit-
as-supplement collaboration (NSC) mode of relationship as discussed by Brecher
and Wise (2008). In this relationship, the non-profit agency serves as a source of
funding for the public agency, with the money derived from philanthropic sources
(viz., individual contributions). The non-profit seeks to supplement the role of the
public agency that remains ultimately responsible for the basic role and for most of
the direct service delivery. Their support to public agencies would be direct finan-
cial grants, but often takes the form of in-kind support through paid or volunteer
staff or other resources. “In most cases, NSCs are arranged so that the non-profit
 Essential Linkages—Non-Profits, Government, and Business ◾ 37

will have no operational responsibility for a service, but in some instances, they
assume some administrative role normally provided by government” (Brecher
and Wise, 2008, S148). One specific example is the Philadelphia Museum of Art
that is an art collection and a building owned by the city of Philadelphia, but the
museum is operated by a non-profit agency on whose board the Pennsylvania gov-
ernor and the Philadelphia mayor sit. Another example is the Louisville Olmsted
Parks Conservatory (Kentucky) which raises private funds to supplement capital
improvements and maintenance costs in three parks in the Louisville Park system.
There are several advantages with this mode of relationship including the
ability to address shared problems more effectively and efficiently, opportunities
for organizational learning, and access to new skills or markets. It also diffuses
the risks for the parties involved in collaboration. For the non-profits, inter-
organizational collaboration can improve services and build a stronger sense
of community (Snavely and Tracy, 2000). For public agencies, it can promote
greater public accountability. Gazley and Brudney (2007) in their survey of
Georgia’s cities and counties found that 54.3% (sample 285) were collaborating
with at least one non-profit organization in public service delivery or planning
in a relationship that involved more than a service delivery contract or govern-
mental grants.
Referring to these three patterns of relationship, Young noted that “[T]he three
perspectives are by no means mutually exclusive. Non-profits may simultaneously
finance and deliver services where government does not, deliver services that are
financed or otherwise assisted by government, advocate for changes in government
policies and practices and can be affected by government pressure and oversight”
(2000, 151).
Box 2.1 provides an example of a successful non-profit and government col-
laboration effort.

2.2.1.4 Non-Profits and Government in an

Adversarial Relationship
In this form of relationship, non-profits advocate, lobby, and influence the gov-
ernment to initiate changes in public policies or to enact new public policies (see
the discussion in Chapter 1 on the lobbying function of NPOs). In addition to
lobbying, several NPOs act as watchdogs over government. Examples include the
Citizens Against Government Waste, a non-profit agency in Washington, DC,
with more than one million members nationwide, whose mission is to eliminate
waste, mismanagement, and inefficiency in the federal government; the Center for
Public Integrity (Washington, DC) whose mission is “to provide the American
public with the findings of its investigations and analyses of public service, govern-
ment accountability and ethics-related issues via books, reports and newsletters”;
Public Citizen, a national, non-profit consumer advocacy organization founded
38 ◾ Effective Non-Profit Management

BOX 2.1 PRINCE WILLIAM AREA COALITION FOR HUMAN

SERVICES (VIRGINIA): A SUCCESS STORY OF COLLABORATION
The Prince William Area Coalition for Human Services, established over
20 years ago, consists of 41 local public agencies and local non-profits.
The Coalition “addresses problems and needs of the residents of Manassas,
Manassas Park, and Prince William County by providing opportunities for
the following:

◾◾ Information sharing and coordination

◾◾ Conducting bi-annual Community Needs Assessment
◾◾ Establishing goals, objectives, and actions to help solve social problems
◾◾ Promoting organizational and professional development among its
membership.” (http://www.pwchs.org/default.html)

It has several notable accomplishments including playing a major role in

establishing accessible public transportation in the region, developing a com-
prehensive directory of local services, conducting annual community needs
surveys (e.g., the 2005 Hispanic Needs Assessment Report), and ensuring the
inclusion of human service goals in the county’s strategic plan.
The board of the Coalition meets for monthly and quarterly lunches. It
provides regular updates on political, economic, and social trends in the
Prince William area. It also schedules annual recognition of outstanding
contributors to the formulation of human services policy and delivery of ser-
vices and sponsors periodic public seminars and workshops on human ser-
vice topics of broad community interest. “Most importantly, the coalition has
produced meaningful results and has confirmed the potential—and critical
need—for non-profits and public agencies to work together to identify and
meet the needs of the local community” (Greeley 2006, 22).

by Ralph Nader in 1971, which represents consumer interests in Congress, the

executive branch, and the courts.
When non-profits expand, government loses revenues (Weisbrod, 2001, 401). As
Weisbrod (2001) explained, the effect is especially felt at the local government level
where property tax is their major source of revenues. Thus, conflicts between non-
profits and state and local governments are not uncommon (Feiock and Andrew,
2006). For instance, city governments sometimes use land use and zoning to keep
out non-profits that might undermine the local tax base (Clingermayer, 2004).
Recently, different states have challenged the tax exempt status of non-profits.
Hospitals are one of the major non-profit groups experiencing such challenge. For
example, in 1985, the Utah Supreme Court in Utah County v. Intermountain Health
Care established a quid pro quo test under which a hospital can lose its exemption
 Essential Linkages—Non-Profits, Government, and Business ◾ 39

from state and local property taxes unless it meets three conditions: (1) it is sup-
ported mainly by donations and gifts, (2) most of its patients receive their care for
free or at reduced costs, and (3) income is sufficient only to cover operating and
long-term maintenance costs. Such a ruling rejected the prevailing common law (as
far as hospitals are concerned) that the promotion of health is itself an inherently
charitable activity.
A more recent example is the 2008 Minnesota Supreme Court’s ruling denying
tax exempt status to Under the Rainbow Child Care Center (Red Wing, Minnesota).
The decision was premised on the concern that the child care center was not pro-
viding any free or reduced-price services to needy families and therefore did not
deserve property-tax exemption (Russell, 2008).
At the federal level, since 2004, members of Congress and the IRS have held
several hearings on perceived non-profit’s abuse of tax exempt status and lack of
accountability. One of the investigation’s outcomes is a report that advocated several
changes including the financial reporting of non-profits and government’s monitor-
ing processes of the sector. Recently, the Chronicle of Philanthropy reported that
the IRS will ask approximately 400 colleges to disclose intimate financial details,
including spending on perks like housekeeping services for executives, and their
income and losses on business activities like catering and travel tours (Kelderman,
2008).
The 2002 Patriot Act and the Sarbanes-Oxley Act have brought new and addi-
tional government surveillance of non-profits. They require non-profits to (1) adhere
to stringent accounting and reporting standards, (2) use more objective measure-
ments standards, and (3) be aware of increased governmental surveillance.
Non-profits, in some cases, are also raising objections and concerns regarding
government’s exercise of its political authority and control over them. As an exam-
ple, in 2004, 13 non-profit organizations, including the American Civil Liberties
Union, Amnesty International, and the Natural Resources Defense Council (New
York), sued the federal government with the goal to block a controversial new
regulation governing solicitations of government workers (Wolverton, 2004). The
rule requires groups participating in the Combined Federal Campaign, the federal
government’s annual charity drive, to certify that they do not knowingly employ
people or give money to groups whose names appear on several terrorist watch
lists—a requirement that had caused several organizations to withdraw their sup-
port to this charity drive.

2.2.2 Forms of NPOs and Business Relationships

Similar to the relationships between NPOs and governments, NPOs and business
organizations have also forged a variety of relationships among themselves. The dif-
ferent forms of NPOs and business relationships can be categorized into (1) col-
laborative, (2) adversarial, and (3) engagement/crossing into each other’s areas of
operations.
40 ◾ Effective Non-Profit Management

2.2.2.1 Collaborative Relationship Continuum

NPOs and businesses are increasingly engaging in a wide variety of collaborative
relationships. According to Austin (2000), such relationships could be seen in a con-
tinuum ranging from corporate philanthropy stage (least collaboration) to integra-
tive stage (optimal level of collaboration). These relationships are explained below.

2.2.2.1.1 For-Profit in a Supportive Relationship to NPOs

In some ways, for-profits offer support to NPOs’ operation and their mission accom-
plishment. The most obvious source of this support is their financial contribution,
either on an episodic basis or on a regular basis (allocating funds to a corporate philan-
thropy account and disbursing funds from that account). This relationship is largely
that of a charitable donor and a recipient, and at the philanthropic stage (Austin, 2000).
However, corporate contribution to the third sector is still quite modest.
According to some scholars’ estimates, in several Western nations only 10% of
private contributions to non-profits come from companies (for example, Useem,
1987). In fact, in the United States this support is much leaner. For instance, in
2006, corporations, including corporate foundations, donated $12.7 billion, which
comprised only 4.3% of total private giving (that includes individual donations,
bequests, foundation gifts, and corporation gifts). In addition to financial support,
for-profits support non-profits in other ways, including providing in-kind contribu-
tions (e.g., new or used computers, softwares, vehicles), volunteering to offer differ-
ent types of technical expertise (e.g., accounting, audit, Web master, and training),
along with their employees serving on NPO boards. Such support is especially
important for small and medium-sized NPOs.
Why do for-profits support non-profits in this way? The primary benefits to
them are the favorable publicity, enhanced public goodwill, and greater public
awareness of their businesses (Wymer and Samu, 2003, 5). For NPOs, this provides
another source of revenues, and in cases involving high-profile businesses, this may
lead to increased revenues from other sources.

2.2.2.1.2 NPOs and For-Profits in a Partnership Relationship

Increasingly, non-profits and for-profit corporations are forging partnership rela-
tionships among themselves. Austin (2000) terms this relationship at the transac-
tional stage because there are explicit resource exchanges between the two parties.
Examples of such a relationship include cause marketing, licensing agreements,
joint sponsorship, and joint issue promotions. In a cause marketing alliance, a cor-
poration donates a specific amount of cash, food, or equipment in direct propor-
tion to sales (often up to some limit) to one or more non-profit firms (Andreasen,
2001, 224). One of the successful partnerships that exemplifies this relationship
is the 1983 alliance between American Express and the non-profit foundation
 Essential Linkages—Non-Profits, Government, and Business ◾ 41

overseeing the renovation of Ellis Island and the Statue of Liberty. The partnership
entailed American Express to donate to the foundation 1 cent for every transaction
with the card anywhere in the country, and $1 for each new card issued during the
last quarter of the year. In 1983, American Express helped raise $1.7 million for
the foundation and claimed a significant increase (28%) in card usage (Josephson,
1984). Recently, many non-profits have taken the cause-related marketing to a new
level, by engaging in “transactional programs.” An example is the widely known
General Mills’ “Box Tops for Education” through which the company donates as
much as $20,000 per school annually by giving 10 cents per box coupon redeemed
from more than 800 General Mills products (Massarsky, 2005, 445).
In a licensing agreement, NPOs permit businesses to use their logos or names in
return for a flat fee or a royalty. A well-known example is the partnership between
Sesame Workshop (the non-profit organization that originated Sesame Street) and
the numerous toys, videos, books, and clothing manufacturers, which grants them
the right to reproduce many of the Sesame Street characters. Another example is
Save the Children Federation’s (Westport, Connecticut) alliance with different
manufacturers of greeting cards, calendars, and décor for children’s rooms, permit-
ting them the right to use the non-profit’s children’s design.
In a joint sponsorship partnership, the business pays the non-profit a sponsor-
ship fee for using its brand in the NPO’s advertisements or other external commu-
nications. The business pays the NPO to associate itself with the activity and acts
as a co-sponsor in terms of marketing and implementing the event/activity. Sports
sponsorship is a widely known example of this arrangement.
Under a joint issue promotion partnership, NPOs and businesses work together
to support a cause. “In such a partnership, a corporation and one or more nonprofits
agree to tackle a social problem through tactics such as distributing products and
promotional materials, and advertising” (Andreasen, 2001, 225). A successful exam-
ple of such a partnership is the Hand in Hand program that was started in 1992. The
goal of the program is to promote breast health. The partnership includes Glamour
magazine, Hanes Hosiery, the National Cancer Institute, the American College of
Obstetricians and Gynecologists, and the American Health Foundation. Together
these partners through publishing relevant literature in Glamour magazine, con-
ducting different in-store promotions (sponsored by Hanes), and distributing free
educational materials try to increase women’s awareness of breast cancer and pro-
mote a healthy lifestyle. While supporting a worthy cause, the other motivation for
businesses here is to target a particular market segment, in this case young women.

2.2.2.1.3 NPOs and For-Profits in an Integrative

Collaborative Relationship
Austin terms this as the integrative stage where “the partners’ missions, people, and
activities begin to merge into more collective action and organizational integration
. . . represent the highest level of collaboration” (2000, 71). Together NPOs and
42 ◾ Effective Non-Profit Management

business organizations work closely to address a need or a problem or an issue. This

form of NPOs and business alliances offers tremendous opportunity to address
broad-ranging issues including environmental, educational, and other societal
problems. In this relationship, “[I]nstead of a business giving money to a non-
profit to support its activities, businesses engage in activities to further the cause”
(Wymer and Samu, 2003, 13).
The Environmental Defense Fund’s (New York) collaboration with business
organizations is one example of such a partnership. This non-profit agency has
worked successfully with McDonald’s restaurants to reduce fast-food waste and
develop packaging that is environment friendly. As a result, the restaurant reduced
its packaging volume by more than 70% by changing from polystyrene “clamshell”
food packing to paper, replaced disposable containers with reusable bulk storage
systems, and started recycling materials (Rondinelli and London, 2001). The non-
profit is currently working with Wal-Mart on several issues including creating a
supply chain system to reduce total greenhouse gas emissions while the business
grows. This is slightly different than the joint issue promotion partnership discussed
before. In this relationship, instead of thinking about one or more market segments,
businesses are trying to show that they are socially responsible actors, too.
Why would the two sectors go into a collaborative arrangement? The reasons
differ for each sector.
Businesses that value corporate social responsibility use this opportunity to
enhance their public relations and strengthen a positive image (Vernis et al., 2006,
29). In the United States, 89% of consumers value socially responsible compa-
nies (Independent Sector, 2001). Two-thirds of all consumers are willing to switch
brands to promote worthy causes (Yankey, 1996). A 1999 Cone-Roper survey
found that two-thirds of Americans have greater trust in companies aligned with
a social issue, and more than half of all workers wish their employers would do
more to support social causes (Salamon, 2002, 40). Such connections also reinforce
employee motivation (human resource development and retention). Among other
benefits (such as developing a sense of purpose and employee skills in community
relations), employees may also feel a renewed loyalty to their company. “Companies
that contribute to civil society enjoy three times as much employee motivation as
other companies” (Useem, 1987). This leads to long-term performance improve-
ments as well as increases the chances to retain highly qualified individuals (Vernis
et al., 2006, 31). For businesses, such partnerships are also good marketing strategy,
and for NPOs, these are viable sources of revenues.
In the current context, non-profits seem to need business relations more than
the other way around. Their main reason is to diversify their funding sources.
Additionally, such collaboration introduces non-profits to new operating fields.
Vernis and his colleagues point out that “collaboration between nonprofits and
business corporations generally implies an exchange not only in the technical
terms associated with knowledge and intervention methodologies, but also regard-
ing values and principles. Thus, collaborations allow a mutual flow of influence
 Essential Linkages—Non-Profits, Government, and Business ◾ 43

on different perspectives that enrich both parties involved” (2006, 28–29). Such
collaborative relationships also assist NPOs in marketing, and offer prospects for
greater publicity and recognition of their missions and activities.
Box 2.2 outlines the management of effective alliances between NPOs and
businesses.

BOX 2.2 MANAGING EFFECTIVE ALLIANCES

BETWEEN NPOs AND BUSINESSES
Identify specific projects for collaboration
◾◾ Identify and assess costs and benefits of collaboration
◾◾ Identify interests and objectives
◾◾ Develop criteria for selecting partners
◾◾ Mobilize internal support
◾◾ Identify champions or supporters
◾◾ Use cross-functional teams
Identify appropriate partners
◾◾ Explore and assess values and perspectives
◾◾ Identify common interests and objectives
Develop procedures for collaboration
◾◾ Negotiate written memo of agreement between partners
◾◾ Decide on procedures to settle disputes
◾◾ Decide on ways to select mediators and technical experts
Define problems and explore feasible solutions
◾◾ Develop open and transparent procedures for assessing problems
◾◾ Create metrics to assess problems and performance
◾◾ Specify outcomes and results
◾◾ Develop mechanisms for information sharing
Focus on manageable sets of tasks
◾◾ Identify and assess feasible solutions
◾◾ Test potential solutions in pilot or demonstration projects
Formulate an action plan
◾◾ Set time schedule for accomplishment
◾◾ Focus first on actions and projects most likely to succeed
Execute implementation plan
◾◾ Measure and assess results
◾◾ Integrate solutions into procedures for operations and administration
Protect confidentiality and issue joint non-profit-corporate public report
◾◾ Protect confidential business information
◾◾ Agree on joint report process and results
Source: Adapted from Rondinelli, Dennis A., and Ted London, 2001, Partnering
for Sustainability, Washington, DC: The Aspen Institute.
44 ◾ Effective Non-Profit Management

2.2.2.2 NPOs and For-Profits in an Adversarial Relationship

As Salamon pointed out, there is a “striking growth of for-profit involvement in
many traditional fields of nonprofit activity, from health care and welfare assistance
to higher education and employment training” (2002, 14–15). This development
has brought these two sectors in a competitive relationship. Businesses object to the
expansion of non-profits into commercial arenas, while they continue to venture
into areas of healthcare, social services, and education that previously were the
exclusive domains of non-profit activity.
Businesses’ objection is based on the unfair competition that they face with
NPOs (due to NPO’s tax exempt status). The income tax exemption becomes a
crucial competitive issue when non-profit organizations pursue commercial (i.e.,
for-profit) activities.
Adversarial relationships have emerged from another front—an increasing
growth of watchdog NPOs overseeing and monitoring business activities and
operations. Several of them publish/report on the unethical practices and other
questionable activities of business organizations. Examples of such watchdogs
include the Corporate Accountability International (CAI), Aviation Consumer
Action Project, CorpWatch, Better Business Bureau, Consumers Union, Funeral
Consumers Alliance, and Foundation for Taxpayer and Consumer Rights.
For example, CAI, headquartered in Boston (Massachusetts) works to chal-
lenge corporate abuse and promote corporate accountability through campaign
and other strategies. One of their earliest campaigns was the 1977 Infant Formula
Campaign and Nestlé Boycott—the first boycott in history to bring a major corpo-
ration to change its practices. The campaign challenged Nestlé’s aggressive market-
ing of its breast milk substitutes to mothers in poor countries who could not afford
the formula powder and did not have clean water to mix it. As a result, millions of
babies from Africa to South America died from malnutrition.
Working with allies around the world, CAI organized an international boycott
of Nestlé products and eventually contributed to the World Health Organization’s
adoption of a global code regulating the marketing of breast milk substitutes. In
1984, boycotters achieved a major victory, forcing Nestlé to commit to major changes
in its practices. Recently, CAI has urged consumers to select the “most abusive” cor-
porations in 2008. The group’s nominees for its annual “Corporate Hall of Shame”
elections include big corporations such as Toyota, Mattel, Nestlé, Wal-Mart, Archer
Daniels Midland (ADM), Countrywide, Blackwater, and Wendy’s restaurants.

2.2.2.3 NPOs and For-Profits’ Engagement

in Each Others’ Areas of Operation
Yet in another way, NPOs and for-profits are getting connected—through engaging
in each others’ traditional realm of operations. For-profits are doing that through
creating different corporate foundations, and NPOs are doing that through creat-
ing different for-profit subsidiaries.
 Essential Linkages—Non-Profits, Government, and Business ◾ 45

Numerous corporations have created their own corporate foundations (e.g., Bill
and Melinda Gates Foundation, Kroger Foundation, Wal-Mart Foundation, GE
Foundation, ExxonMobil Foundation, AT&T Foundation). The goals here are to
promote and manage corporations’ philanthropy objectives. The business partner
maintains control through its corporate officers who are usually the trustees of
the corporation. Along with promoting their philanthropic goals, corporations also
gain some degree of recognition and publicity. On a side note, there are some non-
profits (pro-industry groups) who actually work to promote business interests. As
an example, the Center for Consumer Freedom (Washington, DC) is a non-profit
coalition of restaurants, food companies, and consumers who work to promote
personal responsibility and protect consumer choices. In 2004, they had launched
a campaign to sign a petition to have PETA’s (People for the Ethical Treatment of
Animals) tax-exemption status removed on the ground that PETA members regu-
larly break different laws during their protest activities.
In a similar way, some non-profits also form for-profit subsidiaries. There are many
reasons why a tax-exempt organization may establish a for-profit subsidiary corpora-
tion. The usual reasons are as follows: (1) the tax-exempt organization desires to engage
in business activities unrelated to its exempt purpose, (2) the existing or projected reve-
nues from the unrelated business activity are substantial, (3) the business activities may
carry risks of liability unacceptable to the organization, (4) the organization desires to
own an asset of increasing value, (5) the organization desires to reward certain employ-
ees with increasing compensation, and so forth. An example is the Massachusetts
eHealth Collaborative’s newly established for-profit subsidiary to help healthcare pro-
viders adopt new technology. The new subsidiary is working with commercial clients,
such as the Beth Israel Deaconess Medical Center and its physician group.
Another example is the Mozilla Foundation (Mountain View, California), a
non-profit public benefit software development organization, which owns a for-
profit subsidiary—the Mozilla Corporation. The Mozilla Corporation is a taxable
subsidiary that serves the non-profit, public benefit goals of its parent, the Mozilla
Foundation, and is responsible for product development, marketing, and distribu-
tion of Mozilla products.

2.3 Collaboration Challenges and

Cross-Sectoral Learning
Intersectoral collaboration, as explained before, helps different sectors to achieve
their goals and offers effective integration among the three sectors to collectively
address different types of societal problems. However, along with the advantages,
such collaboration sometimes presents disadvantages or problems.
For NPOs, partnership and collaboration with government may lead to the
prospects or dangers of losing autonomy, becoming too dependent on government
for revenues (i.e., government grants and contract), increasing bureaucracy, and
46 ◾ Effective Non-Profit Management

losing identity (Slyke, 2002). Referring to government and non-profit partnership,

Salamon (1995) also cautions that the more closely they work, large non-profits may
suffer from the same limitations as bureaucratic organizations. Frumkin (2002)
raises an interesting point on this matter. He pointed out that, “[W]hen nonprofit
organizations become nothing more than tools of government action or efficient
private producers, they lose the middle ground between the pubic and the private
that defines the character of nonprofit and voluntary action” (Frumkin, 2002, 167).
Thus NPOs need to be careful on how such partnership might affect their identities.
When NPOs form collaborative relationship with businesses, they risk creating
a perception of being business-like. The more they engage in activities like cause
marketing, licensing, or sponsorship, the more they fuel critics who are skeptical
of the true mission and identity of non-profits. Therefore non-profits need to be
selective and vigilant in their relationships with businesses. NPOs also have to be
careful regarding whom they join as partner with. (See Box 2.3.) As Wymer and
Samu explained, “[F]or nonprofit partners, the potential risk of collaboration with

BOX 2.3 QUESTIONABLE PARTNERSHIPS WITH BUSINESSES

1. Sierra Club (one of the world’s largest environmental NGOs) faced
serious concerns from different groups including volunteers and other
environmental NGOs on a deal it entered into with Clorox in 2007
to sell, for an undisclosed sum, the rights to use its brand label on
Clorox’s line of Green Works cleaners produced without chlorine.
Among the environmental groups, Clorox is considered as a pariah due
to the alleged dangers in making chlorine-based products. Different
environmental groups like Greenpeace have strict policies banning
products or endorsements of company products that are deemed to
harm the environment. Opponents say the Sierra Club should not be
taking money from a corporation that uses toxic chemicals in some of
its products. Defenders say the deal will encourage more consumers to
go green.
2. The American Lung Association allowed its logo to be used on carbon
monoxide detectors by American Sensors Inc. Later, three models were
found as “unacceptable.”
3. In 1997, the American Medical Association had signed an exclusive
5-year contract to allow Sunbeam Corp. to display its logo on its prod-
ucts. Consumers and advocates and even doctors who were members
of that association argued that this eroded its reputation for objectivity
and fairness. After the association backed off in the face of intense criti-
cism, it settled a breach-of-contract lawsuit filed by Sunbeam for nearly
$10 million.
 Essential Linkages—Non-Profits, Government, and Business ◾ 47

businesses may be even greater than for the business partners” (2003, 8). As an
example, “licensing agreement does expose the nonprofit to a higher level of risk
as such an agreement implies that the nonprofit endorses the product” (Wymer and
Samu, 2003, 11).
Furthermore, a wrongdoing on the part of the business partner or a public
scandal might damage the reputation of the non-profit, thereby affecting negatively
private giving. Businesses may also withdraw funding during economic crisis situ-
ations, making the non-profit vulnerable.

2.3.1 Effective Linkages: Collaboration Essentials

It is extremely important for non-profits to preserve their distinct identity as they
forge different patterns of relationships with the government and for-profit organi-
zations. Increasing integrative collaborative relationships might be one of the solu-
tions to sector blurring.
Collaborations provide synergies and coordination opportunities and enhance
the optimal utilization of a society’s resources, expertise, and means of legitimacy.
However, collaboration takes effort, leadership, and long-term investment in rela-
tionship building (Linden, 2002).
La Piana (2001) noted that “real collaboration” needs to be distinguished from
“marriage of convenience” if it is to foster trusting relationships, focus on substan-
tive issues requiring extensive interaction and engagement, emphasize the voluntary
aspects of collaboration and reduce the coercive aspects associated with gaining or
losing funding, and promote a commitment to finding the time needed to nurture
the collaborative process.
For the non-profit sector, focusing solely on economic result will not be ade-
quate. The focus should be on leveraging the sector’s intrinsic values, and continu-
ity of service (Vernis et al., 2006).
Several scholars (for example, Austin, 2000; Fosler, 2002; Linden, 2002) have
offered guidelines for a successful collaborative relationship. (See Box 2.4.) Having
a shared purpose and an open and trusting relationship are the keys to successful
collaborative relationships. Success also depends on a climate that favors cross-sec-
tor collaboration and on supportive civic capacity (Fosler, 2002).

2.3.2 Cross-Sectoral Learning
Effective collaboration also creates opportunities for mutual learning from each other.
Arthur Brooks (2002) through his survey of the non-profit literature on board
governance, volunteer management, and performance measurement argued that the
non-profit management is a natural complement to public management. Referring
to the three “Big questions for public management” that Robert D. Behn’s 1995
famous article focused on, Brooks makes the point that the non-profit sector faces
similar questions. Behn’s (1995) three big questions for public management were:
48 ◾ Effective Non-Profit Management

BOX 2.4 PRINCIPAL STAGES OF COLLABORATION

AND THE KEYS TO SUCCESS
1. Recognizing common needs and convening potential
Successful collaboration links public purpose to collaborative goals, to
collaborative functional objectives, to organizational missions and
interests of partners.
2. Mutual planning for performance
Public purposes and collaboration goals and objectives should be clearly
linked and expressed in terms of measurable results.
3. Agreement on operational design
Partners agree on the purposes, goals, and functional objectives, strate-
gies, roles and responsibilities, organization and management of the
project, resources; open and trusting relationships with commitment
from top leadership. Agreement articulated in a formal medium.
4. Start-up
Mobilizing resources, systems, logistics along with effective communi-
cation to all partners and stakeholders and the broader public.
5. Operation and management
Collaborations operated and managed in a professional way and in
keeping with the initial agreement.
6. Performance monitoring, communicating, learning, and improving
Continuing monitoring, learning, and taking appropriate action for
improvement.
7. Termination or modification
Collaboration terminated when objectives are accomplished, or partners
unable to continue the relationship, or success is highly unlikely or
not worthy anymore.

Source: Adapted from Fosler, R. S., 2002, Working Better Together: How
Government, Business, and Nonprofit Organizations Can Achieve Public
Purposes through Cross-Sector Collaboration, Alliances, and Partnerships,
Washington, DC: Independent Sector.

1. How can public managers break the cycle of micromanagement?

2. How can public managers motivate people to work toward achieving public
purpose?
3. How can public managers measure performance?

As Brooks (2002) explained, NPOs also face the issues of micromanagement by

the board, challenge of motivating employees especially the volunteers, and similar
 Essential Linkages—Non-Profits, Government, and Business ◾ 49

to public agencies, non-profits also struggle with effectiveness measurements. He

points out that NPOs are usually more successful in addressing these issues. For
example, the study and practice of non-profits emphasize the importance of boards’
role as overseers and policy makers, non-pecuniary incentives for volunteer motiva-
tion, and use of a multidimensional model of agency effectiveness.
Brooks also pointed out that “none of this is to imply the intellectual relation-
ship between the sectors is a one-way street, however. Indeed, pubic management is
well placed to illuminate nonprofit administration and vice versa” (2002, 64). On
several arenas, non-profits can learn from public management. For example, non-
profits can learn a great deal from government officials about living in a fishbowl
life. They can also look at the Government Performance and Results Act (GPRA)
of 1993 to get some guidance on their recent quest to ensure accountability. The
GPRA directed federal agencies to develop “performance plans” and to prepare
reports documenting their performances along those goals. All federal agencies
now post these reports on their Web sites.
Similarly, NPOs and businesses can also learn from each other. Earlier, it was
discussed how NPOs are borrowing and learning from business practices. However,
here too, the relationship could be based on mutual learning. Business organiza-
tions could learn several things from NPOs including focusing on ways to connect
their employees and clients at a deeper level to develop loyalty and to cultivate rela-
tionships through developing regular and effective communication, and focusing
more on non-financial incentives.

2.4 Contemporary Issue: The Faith-Based Initiative

Government’s partnership with faith-based NPOs offers a special case to examine
issues that are raised when government tries to use such partnerships to promote
values that lie in the borderline of the separation of state and church.
The faith-based initiative started with the 1996 Personal Responsibility and
Work Opportunity Reconciliation Act’s “charitable choice’ clause. The four main
principles of the “charitable choice” clause include

1. Faith-based providers cannot be excluded from federal funds simply because

they are religious.
2. Respect for religious character of faith-based providers must be maintained.
3. Respect for the religious liberty of clients must be maintained. Coerced reli-
gious practice is forbidden, as is religious discrimination.
4. Federal funds must achieve their purposes and not be diverted to support
inherently religious practices (e.g., worship, religious education, proselytizing).

On January 29, 2001, President George W. Bush signed Executive Order 13198,
requiring executive branch agencies to identify and remove bureaucratic barriers
for faith-based organizations (FBOs) to participate more effectively in providing
50 ◾ Effective Non-Profit Management

different services. In 2001, he also established the White House Office of Faith
Based and Community Initiatives (OFBCI). He also established similar offices in
11 federal agencies with the goal to “lead a determined attack on need by strength-
ening and expanding the role of FBCOs in providing social services” (http://www.
whitehouse.gov/government/fbci/president-initiative.html).
The foci of the initiative are the following:

◾◾ Identifying and eliminating barriers that impede the full participation of

FBCOs in the federal grants process.
◾◾ Ensuring that federally funded social services administered by state and local
governments are consistent with equal treatment provisions.
◾◾ Encouraging greater corporate and philanthropic support for FBCOs’ social
service programs through public education and outreach activities.
◾◾ Pursuing legislative efforts to extend charitable choice provisions that prevent
discrimination against faith-based organizations, protect the religious free-
dom of beneficiaries, and preserve religious hiring rights of faith-based chari-
ties (http://www.whitehouse.gov/government/fbci/president-initiative.html).

The Bush administration had issued several executive orders and regulations
to encourage and assist faith-based non-profits to provide various types of public
services. Following are some major ones:

1. The Charitable Choice rules now apply to all social service programs using
federal funds, including state and local ones underwritten by federal money.
2. FBOs are not obligated to conceal or downplay their religious character, just
as the federal government “does not ask other types of private organizations
to compromise their philosophical character or ideology” (quoted in Carlson-
Thies, 2004, 65).
3. The revisions to Department of Labor’s (DOL) Workforce Investment Act
(WIA) interim final rules allow participants to use their individual training
accounts (ITAs), or similar training accounts under programs established by
states or Local Workforce Investment Areas (LWIAs), for religious training,
as long as the training account programs afford participants genuine and
independent choice between religious and nonreligious training options, and
the religious organizations serving as eligible training providers otherwise
satisfy the requirements of the program.
4. A DOL-supported FBO can retain its name (even if the name made a religious
reference), select its board members, and otherwise govern itself on a religious
basis, and include religious references in its mission statements and other govern-
ing documents (DOL, Employment and Training Administration Regulation).
However, in operating the federally funded program, the FBO must ensure that
any inherently religious activities, such as worship or religious classes, are offered
“separately in time or location” from the federally funded program.
 Essential Linkages—Non-Profits, Government, and Business ◾ 51

5. The Compassion Capital Fund of the OFBCI provided grants for various
kinds of support (e.g., training, purchasing computers, develop capacity) to
faith-based community organizations not familiar with federal funding or
not prepared to offer public services.
6. The DOL has awarded funds to states and non-profits to promote partnership
between the One-Stop Career Centers that deliver federally funded job services
and faith-based groups that offer job preparation and job support program.
7. A HUD (Housing and Urban Development) policy change permits fed-
eral funding of the portion of a faith-based group’s building that is used for
HUD-funded programs, even though other parts of the building are used for
“inherently religious” purposes.

As Frumkin (2002) pointed out, the charitable choice provision has strength-
ened FBOs’ ability to provide human services in two ways: (1) they can get govern-
ment funding and still provide overtly religious support to their members, and (2)
it offers the option to fund non-profits indirectly through providing vouchers to
clients, who can use those to buy services of their choice.
However, the faith-based initiative has also raised several issues and concerns;
foremost among them are the following:

1. Blurring of the separation of state and church—Critics are raising concerns

about the close partnership (as indicated in the provisions of different recent
regulations, the compassionate funds, and other support) that the govern-
ment has forged with different faith-based non-profits. In July 2001, the
Washington Post reported that the Bush Administration made an arrange-
ment with the Salvation Army that the non-profit would spend upwards of
$110,000 per month to lobby for the administration’s faith-based initiative
and the White House would give the Salvation Army a “firm commitment”
allowing greater freedom in discrimination against gays.
2. Religious discrimination—Concerns here focus on religious-based job dis-
crimination in publicly funded programs run by churches. There are other
concerns, too, including the possibility of religious preference in awarding
government contracts.
3. Capacity of religious organizations—Doubts are raised about the capacity of
religious organizations to deliver services, in terms of the required skills and
competencies that some of these agencies may not possess.
4. Accountability—Religious organizations do not have to apply for tax-exempt
status, nor are they required to submit the annual financial statements (Form
990) to the IRS. Under this context, critics wonder how to ensure account-
ability in this subsector.

There are some emerging legal issues, too. For example, a judge has blocked
the Bush administration from providing future grants to an Arizona mentoring
52 ◾ Effective Non-Profit Management

group (MentorKids USA) that used federal grant money to support activities
like worship and religious instructions. The Department of Health and Human
Services later decided to cut off money to the group after evidence showed that
it used public money to support such religious activities (The New York Times,
2005). Texas was sued for financing a job-training program that required stu-
dents to study the Bible. Once this came to light, the state stopped financing
the program (Gossett and Pynes, 2003, 163). In Philadelphia, several Muslim
clients complained that a church-run job retention program financed by the state
required them to read from the Bible. A supervisor eventually intervened and
allowed Muslims to choose alternative readings from the Koran and the National
Geographic (Goodstein, 2001).
One of the reasons behind the escalation of the problem is the lack of guidance
on what constitutes prohibited religious activity. A study done by the Government
Accountability Office (2002) found that states’ officials differed in their under-
standing of what is allowed and what is not allowed for FBOs under the Charitable
Choice rules.
President Obama, during his election campaign, had emphasized that he would
continue federal grants for religious charities, but he would focus more on provid-
ing training to faith-based charities and emphasize on evaluating their effectiveness
in service provision. During the first month of his presidency, Obama renamed
the Office of Faith-Based and Community Initiatives to Office of Faith-Based and
Neighborhood Partnerships, and later appointed Josh DuBois as the head of the
White House office. The Council is charged with:

1. Strengthening the role of community organizations in the economic recovery.

2. Reducing unintended pregnancies, supporting maternal and child health,
and reducing the need for abortion.
3. Promoting responsible fatherhood and strong communities.
4. Promoting interfaith dialogue and cooperation (http://www.whitehouse.gov/
administration/eop/ofbnp/policy).

In 2009, the Obama administration created an Advisory Council on Faith-

Based and Neighborhood Partnership composed of 25 members—these are leaders
and experts in faith-based and non-sectarian organizations. The council’s main
purpose is to develop recommendations on effective partnerships between the fed-
eral government and faith-based and neighborhood organizations. Each council
serves a 1-year term.
During the early days of the new administration, it was assumed that “The
Obama administration will seek to expand the role of this office as it relates to
policy issues where religious and local leaders can be effective. DuBois will coor-
dinate with faith-based and community organizations on social service outreach
and will work to utilize these organizations’ efforts to advance the administration’s
policies, with a primary focus on poverty” (Travers, 2009). However, as President
 Essential Linkages—Non-Profits, Government, and Business ◾ 53

Obama approaches completion of his 3 years of presidency, there are now doubts
as to whether the Office of Faith-Based and Neighborhood Partnerships will bring
any significant change to the previous administration’s direction of the faith-based
initiative. Religious leaders, from both the liberal and conservative groups, are
expressing disappointment “with the current administration’s dealing with the ini-
tiative for reflecting the same values and purpose of Bush’s era” (Waters, 2010).
One example of the current administration’s seemingly inactive stand on this is
the 2010 executive order that clarified the constitutional separation of church and
state regarding religious groups’ getting or using federal money to provide social
services. The executive order states that religious groups must separate their reli-
gious activities from the programs that get government dollars and refer people
who are uncomfortable with the organization’s religious nature to other providers.
It also requires that government grants to religious organizations and other groups
providing social services be listed on the federal Web sites. However, the executive
order has been criticized, among other issues, for not addressing the 2007 Justice
Department memo that stated that the government cannot order religious groups
not to discriminate as a condition of federal financing.

Case Study: Hurricane Katrina—

A Case of Collaboration Failures and Promises
Effective disaster response involves a variety of functions
including evacuations, medical support, basic necessities like
water and food, law and order, housing, counseling, child
care, as well as pet care. These functions are carried out by
a multitude of actors and a wide variety of government, non-
profit and for-profit agencies. The major government agencies
and units in disaster response and management include fed-
eral agencies (viz., Federal Emergency Management Agency
[FEMA], Coast Guard, Army Corps of Engineers), state agencies
and offices (governor, State Emergency Management Agency,
National Guard), and local government (mayor, police, fire).
NPOs working in this area include different major religious
(e.g., Salvation Army, churches) and secular organizations (e.g.,
Red Cross), different environmental groups, university research
centers, and Chamber of Commerce. For-profit organizations
involved in disaster management or response include private
firms with particular disaster experience or with applicable
non-disaster expertise (e.g., construction firms, grocery stores).
Hurricane Katrina (2005) is considered as one of the most
costly and one of the five deadliest in America’s history. The
54 ◾ Effective Non-Profit Management

hurricane affected over 100,000 square miles, destroying or

seriously damaging around 160,000 homes and apartments,
with the total damage estimated by FEMA to be about $37 bil-
lion (De Vita et al., 2008). As Pipa (2006) explained, disasters
move through four distinct phases: rescue (moving people to
safety), relief (providing the basic needs), recovery, and rebuild-
ing, and that even in extraordinary circumstances the first two
phases typically last no more than 7 to 10 days. In the case of
Katrina, “If measured as the stretch of time during which emer-
gency shelters remained open, the relief stage for Hurricanes
Katrina and Rita stretched somewhere near two months before
the majority finally began closing their doors in late October
2005” (Pipa, 2006, 10).
The hurricane relief and recovery efforts and the aftermaths
have been severely criticized by all stakeholders, including the
general public. The emergency management system in place
broke down and became dysfunctional—from the failure of
presidential and FEMA leadership to the unplanned housing
of the evacuees in the Superdome. Reasons range from inad-
equately trained staff, resources, lack of a plan to address disas-
ter of this magnitude, bureaucracy, lack of creativity, and a lack
of a process in place to ensure effective coordination and col-
laboration among these different agencies.
The emergency management system in place was based
on the National Response Plan and the National Incident
Management system that is perceived to have failed in response
to Hurricane Katrina. The State Emergency Management Plan
closely follows the National Response Plan. Under the plan,
FEMA is the lead agency in implementing the plan. In terms of
coordinating its effort with the non-profit sector, FEMA relies
upon the Voluntary Agency Liaisons (VALs) through its regional
offices. The regional VALs in turn are tasked with forming and
sustaining a network of local and state Voluntary Organizations
Active in Disaster (VOAD) chapters. During a disaster, the core
VAL has access to a corps of reserve staff—standby disaster
assistance employees who are available for deployment to
interface with the responding non-profits and faith-based orga-
nizations (Pipa, 2006, 25). The plan also rests on the presump-
tion that the American Red Cross is the lead agency3 to handle
most of the mass care needs in disaster, with some support
from other voluntary agencies, including members of VOAD.
FEMA assigns only one core VAL staff per each of FEMA’s 10
regions. One VAL can have primary responsibility for covering
up to eight states (Pipa, 2006, 5).
Essential Linkages—Non-Profits, Government, and Business ◾ 55

The effectiveness of the plan rests on improvisation, adapt-

ability, and creativity that are critical to coordination, collabo-
ration, and communication for solving problems (Comfort,
2005). Although the plan was in place, none of the condi-
tions of its effective execution were, resulting in the failure of
responses at all levels of the government. Despite the long-
standing warnings, none of the key officials was ready. There
were not only intergovernmental failures in coordination, but
also a huge loss of continuity in government—the disruption of
communication and isolation of top government officials who
can affect a collaborative response (Kettl, 2007, 70). This was
true for NPOs also. Many non-profits incurred huge disruption
in their facility, data, and personnel. Several key non-profits
were wiped out. The failure of coordination was staggering.
For example, the GAO found that the mistakes of FEMA’s dis-
tribution of emergency checks and debit cards totaled as much
as $1.4 billion, one of every $6 spent in relief (Kettl, 2007, 70).
The relief and recovery efforts also mark the largest disas-
ter response efforts by NGOs and charitable organizations. In
the recovery effort, a total of 83 charities—with $2.6 billion in
annual expenditure and more than 15,000 employees—pro-
vided a wide range of services to New Orleans residents (Simo
and Bies, 2007, 128). The strengths of NPOs lie in their flex-
ibility, mission, and familiarity of the disadvantaged population,
adaptability, and access to dedicated volunteers. However,
similar to government organizations, they too faced serious
problems of coordination and direction in their relief and
recovery efforts including managing the surge of volunteers,
managing the need for housing and supervision, facing liability
concerns, aligning domestic and international non-profits, and
coordinating not only among themselves but also with FEMA
and other government offices and agencies.
There was a lack of clarity of purpose and process. Many of
the NPOs found that they were on their own. Both FEMA and
the American Red Cross offered limited support and coordina-
tion to small, local non-profit agencies. This stemmed from the
fact that FEMA and the American Red Cross disagreed as to
their roles and responsibilities in coordinating the broader non-
profit sector (Pipa, 2006, 4). According to Pipa (2006), among
other issues, the Red Cross’s problems are rooted in its rela-
tive lack of integration with local networks of social welfare
agencies and public and private funders. Except in times of
disaster, the Red Cross does not work closely with local ser-
vice organizations, given its emphasis on blood donations,
56 ◾ Effective Non-Profit Management

temporary assistance after house fires, and relief from smaller-

scale natural disasters, and health and safety courses. Many
faith-based agencies came together; however, most were not
well positioned to coordinate case management for hurricane
victims. Local secular organizations and FBOs received mil-
lions of dollars to help disaster victims; there was no lack of
philanthropic support. However, that could not make up the
other deficiencies.
Charities operating in the Gulf Coast region tried to coor-
dinate their services through convening the major national
disaster relief organizations at the American Red Cross head-
quarters, making daily conference calls organized by the
National VOAD, and using databases established by CAN
(Coordinated Assistance Network). However, the usefulness
of these was questioned by several charity representatives.
Among other problems, the conference calls had too many
participants (sometimes over 40), leading to ineffective and
inefficient group discussion and decisions. The CAN database
was still at a development stage, and hence was not ready to
be activated on such a large scale. Some volunteers also did
not have the training to use it.
Katrina also exposed the fiscal weaknesses of state and
local governments and the corresponding effect on non-profits.
Prior to the hurricane, Louisiana’s spending on nonhealth social
services was far below most states even including the poor
states of Arizona and Mississippi (Smith, 2006, 6). Per capital
expenditures in the New Orleans metropolitan statistical area
was $291 in 2003, compared to $646 in Columbus (Ohio), a
city with a comparable population. Widespread poverty in the
state also explains the low level of private charitable donations,
and the lower number of non-profits. The devastation exposed
serious capacity and funding weaknesses among local public
and non-profit agencies; they were simply overwhelmed with
the magnitude of the disaster.
In a 2005 Harris Poll, the overall average public rating of
non-profits came out to be positive—65 on a scale of 1 to 100.
In that poll, several non-profits received high praise including
Habitat for Humanity, the American Red Cross, the Salvation
Army, Catholic Charities, and the National Guard. However,
the hurricane also exposed the limitations of non-profits in
terms of how much they can do by themselves when faced
with a disaster of this magnitude, the importance of a strong
government leadership, and effective coordination among the
sectors.
 Essential Linkages—Non-Profits, Government, and Business ◾ 57

As Fremont-Smith et al. argued, “the nonprofit sector func-

tions most effectively as an adjunct to a strong state. The state
response was strong after September 11, and the nonprofit sec-
tor tried to work alongside the government as well as fill in
the gaps the government left behind, both short and long term.
With Katrina, in contrast, the immediate state response was
weak, and the nonprofit sector had neither the organizational
structure nor the resources to meet immediate needs” (2006, 1).

Discussion Questions
1. In 2005 Hurricane Katrina exposed very clearly the inadequacy and limita-
tions of the existing structure of coordination between NPOs and FEMA. If
you are hired as a consultant by FEMA to help them design a plan for a more
effective coordination structure, what would your plan include?
2. What could the non-profit sector do to ensure effective coordination among
themselves for future emergencies?
3. The GAO provides nonpartisan analysis of government agencies’ perfor-
mances during emergency and non-emergency situations. Such analysis
assists government to learn from experiences and to prepare themselves for
the future. In the non-profit sector, there is no such comparable agency. Does
the non-profit sector need a similar type of agency? If yes, what would be its
roles? Is it feasible for one such agency to analyze the performances of non-
profits in a similar fashion as does the GAO?

Web Resources
Center on Nonprofits and Philanthropy, Urban Institute (www.urban.org/cen-
ter/CNP): Conducts research, collects data, and publishes reports, policy
papers, and documents on NPOs.

End-of-Chapter Review of Terms

Articles of dissolution
Articles of incorporation
Cause-related marketing
Collaboration
Faith-based organizations
Licensing
58 ◾ Effective Non-Profit Management

Patriot Act (2002)

Personal Responsibility and Work Opportunity Reconciliation Act (1996)
Public goods
Publicness

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62 ◾ Effective Non-Profit Management

Endnotes
1. Most scholars (e.g., Antonsen and Jorgensen, 1977; Bozeman and Bretschneider,
1994; Pesch, 2008) actually focus on the core and the dimensional approaches to
distinguish between public and private organizations. We added here scholars (e.g.,
Simon, 1946; Thompson, 1962) who believed more in the similarities between the
two sectors as another approach in our discussion in this section.
2. There are some non-profits that do rely on what they call a “cost recovery” model.
Usually it is for a training course but may relate to a product, and the cost to the con-
sumer is inclusive of the costs of providing the training and the item.
3. The National Response Plan no longer has the Red Cross as the lead for mass care, but
it is now a support agency. This changed after Hurricane Katrina.
Chapter 3

Non-Profit Laws
and Regulations

“In America, the law is a relatively weak force in the realm of charity operations.
Within broadly bounded charitable purposes, and subject only to a general pro-
scription against insider self-dealing, no laws tell the entity or its managers how
to ‘do’ charity” (Brody, 2006, 243). This statement is, however, only partially true
because there are a variety of laws and regulations that affect non-profits’ operations
and their management.
American non-profits are the creatures of state laws. However, in terms of their
operation, they are legally accountable to both the federal and the state govern-
ments, and to a limited extent the local government.
This chapter discusses the major legal aspects of forming and running a non-
profit organization (NPO), and focuses mostly on 501(c)(3) and 501(c)(4) non-prof-
its which constitute the vast majority of the sector. One cautionary note here—this
chapter is written from a layperson’s perspective, with the goal of providing non-
profit managers and staff an overview of the fundamental laws and regulations that
guide the formation and operation of a non-profit. This chapter does not answer or
address all the legal questions that pertain to the non-profit sector.
With this scope in mind, the chapter has the following learning outcomes:

1. Identify and explain the major reasons behind non-profit’s tax-exempt status.
2. List the major types of 501(c) non-profits and distinguish public charities
versus private foundations.
3. Understand the process or steps in forming an incorporated non-profit agency.
4. Explain the major legal requirements in running a public charity.
5. Provide an overview of the basic legal requirements of a private charity.

63
64 ◾ Effective Non-Profit Management

The chapter also discusses the issue of who deserves tax exemption? This is a
question that has recently come to the forefront of public debate. The chapter con-
cludes with a case study on the struggle of the Internal Revenue Service (IRS) in
regulating and supporting the non-profit sector.

3.1 Tax Exemption and Non-Profit

Organizations (NPOs)
While it is true that all tax-exempt organizations are non-profits, it is not true that
all NPOs are tax exempt. An example of a NPO that pays tax is a private foun-
dation. The most important statute that grants tax exemption to a non-profit is
Section 501(c) of the Internal Revenue Code. Non-profits who are in that section
do not have to pay any corporate income taxes (although there are some exceptions,
discussed later in the chapter), and in most states they are also exempt from paying
state and local taxes. In effect this means that federal, state, and local governments
are actually foregoing a big source of revenue that they could otherwise earn. This
thus raises the question of why non-profits are given this privilege.
There are three main reasons for granting tax exemption to NPOs: heritage,
public policy, and special interests. These are explained below:

Heritage—The history of the existence of non-profits predates any tax law. Thus,
traditionally they were not paying any taxes. Exemption existed by virtue of
statutory commission (Scrivner, 2001, 127). In the United States, the 1894
Tariff Act was the first major piece of legislation that specified entities subject
to taxation. Keeping the spirit of the heritage, this act provided tax exemption
for different types of NPOs including charities and religious and educational
organizations. The 1894 Act, however, was found unconstitutional by the
Supreme Court (Pollock v. Farmers’ Loan and Trust Co.); but, with the ratifica-
tion of the Sixteenth Amendment in 1913, the federal government was autho-
rized to levy income taxes. In 1913, the Revenue Act permanently established
tax exemptions to certain organizations including those that were covered in
the 1894 Tariff Act. It also included the private inurement prohibition provi-
sion. Subsequent acts continued the expansion of various charitable categories.
Public policy—The policy rationale for tax exemption rests on the realization
that these organizations perform important functions that otherwise would
have to be performed by the government. This is tied to a moral argument,
too, as explained by Scrivner. He argues, “because we have a moral obliga-
tion to provide these services, we should impose as few impediments (such
as taxation) as possible on their provision” (2001, 127). According to Simon
et al., the federal government through its tax exemption of NPOs pursues
several policy goals such as to (1) support the continuation of the non-profit
sector, (2) promote a degree of fairness or equity by redistributing resources
 Non-Profit Laws and Regulations ◾ 65

and opportunities, (3) regulate (i.e., border patrol) the fiduciary behavior of
non-profit managers, and (4) regulate and constrain non-profit’s commercial
activities so that they do not unduly compete with businesses or government
entities (2006, 267).
Special interests—Political factors also have played a significant role in providing
tax-exempt status for certain non-profits. There are some non-profits, mostly
member serving like the chamber of commerce, trade associations, veterans’
organizations, different labor and agricultural organizations, which enjoy the
same privilege as charitable organizations due to the political pressure that
they exerted on Congress for tax exemption and the political support they
garnered among policy makers.

3.2 Types of 501(c) NPOs

501(c) is a provision of the U.S. Internal Revenue Code of 1986,1 which lists 27
different types of exempt non-profit organizations. (See Box 3.1.)

3.2.1 Public Charities versus Private Foundations

Chapter 1 discussed the major types of NPOs [501(c)(3), (4), and (6)]. There is
another distinction among NPOs—some are private foundations and others are
public charities. A private foundation is any organization described in Section
501(c)(3), unless it falls into one of the categories specifically excluded from the
term in Section 509(a). Following are the major categories:

1. Churches or a convention or association of churches

2. Schools
3. Hospitals or an associate medical research organization
4. Endowment funds operated for the benefit of certain state and municipal col-
leges and universities
5. Governmental units
6. Publicly supported organization (IRS, 1999)
The IRS (1999) defines an organization as a publicly supported organization
if it receives a substantial part of its support from a governmental unit or from
the general public. Examples include museums, homeless shelters, and com-
munity centers. An organization will qualify as publicly supported if it passes
the one-third support test or at least the facts and circumstances test.
One-third support test: Whether the organization receives at least one-third of
its total support from governmental units, contributions from the general
public, or a combination of both these sources.
Facts and circumstances test: Whether the organization meets the 10%-of-sup-
port requirement (i.e., at least 10% support from the governmental units
66 ◾ Effective Non-Profit Management

BOX 3.1 CATEGORIES OF 501(C) ORGANIZATIONS

Section 501(c) Description of Organization

501(c)(1) Corporations Organized Under Act of Congress
501(c)(2) Title Holding Organizations for Exempt Organizations
501(c)(3) Religious, Educational, Charitable, and
Similar Organizations
501(c)(4) Civic Leagues, and Social Welfare Organizations
501(c)(5) Labor, Agricultural, and Horticultural Organizations
501(c)(6) Business Leagues, Chamber of Commerce,
Real Estate Boards, etc.
501(c)(7) Social and Recreational Clubs
501(c)(8) Fraternity Beneficiary Societies and Associations
501(c)(9) Voluntary Employees’ Beneficiary Associations
501(c)(10) Domestic Fraternal Societies and Associations
501(c)(11) Teachers’ Retirement Fund Associations
501(c)(12) Benevolent Life Associations, Mutual Telephone Companies,
etc.
501(c)(13) Cemetery Companies
501(c)(14) State Chartered Credit Unions, Mutual Reserve Funds
501(c)(15) Mutual Insurance Companies or Associations
501(c)(16) Cooperative Organizations to Finance Crop Operations
501(c)(17) Supplemental Unemployment Benefit Trusts
501(c)(18) Employee Funded Pension Trust
(created before June 25, 1959)
501(c)(19) Post or Organization of Past or Present Members of the
Armed Forces
501(c)(21) Black Lung Benefit Trust
501(c)(22) Withdrawal Liability Payment Fund
501(c)(23) Veterans Organizations (created before 1880)
501(c)(24) Trusts Described in the Employment Retirement Security
Act of 1974
501(c)(25) Title Holding Corporations or Trusts with Multiple Parents
501(c)(26) State-Sponsored Organization Providing Health Coverage
for High-Risk Individuals
501(c)(27) State-Sponsored Workers’ Compensation Reinsurance
Organizations
 Non-Profit Laws and Regulations ◾ 67

or from the general public or a combination of both) and the attraction of

public support requirement (i.e., has fundraising programs and processes).
7. Organizations that normally receive no more than one-third of support from
gross investment income and income after tax from unrelated business taxable
income, and receive more than one-third of support from contributions, mem-
bership fees, and gross receipts from activities relating to its exempt function.
8. An organization operated, supervised, or controlled by or connected with
one or more of the above organizations, but not controlled by disqualified
persons.
9. Organizations operated solely for the benefit of one or more organizations
that are exempt as civic leagues or social welfare organizations, local associa-
tions, chamber of commerce, labor unions, real estate boards, and profes-
sional football leagues as long as they meet the above #8 and #9 requirements.
10. Organizations organized and operated to test for public safety.
One very important note here—the IRS will pre-assume that all organizations
(exceptions are those that are not required to file Form 1023) are private
foundations, unless they notify the IRS otherwise. Form 1023 is the tax-
exemption application form. Part X of Form 1023 asks for information to
identify a non-profit’s status—private foundation or public charity.

3.3 Creating an Incorporated Non-Profit Agency

Chapter 1 introduced the three types (incorporated, trust, and unincorporated) of
non-profit organizations. This section describes the process and the requirements
to form an incorporated non-profit organization. Why would someone or a group
want to form an incorporated non-profit organization? The reasons are in the vari-
ety of advantages that incorporation brings, including the following major ones:

1. Tax exemption—Incorporated NPOs generally do not pay any income tax.

There are some exceptions to this as mentioned before. Tax exemption is
reserved for incorporated non-profits, and in most states, an unincorporated
non-profit will not be able to apply for state or federal tax exemption until it
becomes incorporated.
2. Receiving public and private funds—Governmental and foundation funders
require or at least want to be assured that their scarce dollars are used by
properly established organizations. Generally tax-exempt government foun-
dations (e.g., National Endowment for the Arts or Humanities) as well as
private foundations (e.g., Ford Foundation) and charities are required by their
own operating rules and IRS regulations to donate their funds to 501(c)(3)
tax-exempt groups. Federal and state laws also allow individuals and corpo-
rate donors to deduct their contributions to 501(c)(3) non-profits from their
gross incomes for tax purpose.
68 ◾ Effective Non-Profit Management

3. Formality and structure—States’ Incorporation Acts and Requirements

provide specific information to non-profits in regard to different aspects
of their structure (e.g., bylaws, requirement of a board, fundraising regula-
tions) and management. This assists a non-profit to organize itself in a more
professional way, compared to an unincorporated non-profit. For example,
maintaining clear lines of accountability and authority can be easier under
the structure of a formally constituted corporation, governing board, and
set of bylaws.
4. Separate and perpetual existence—Because non-profits have to follow states’
incorporation law and regulations, incorporation gives a formal structure
that also provides the non-profit its own existence, separate from the found-
er’s identity, and hence the opportunity to continue in perpetuity.
5. Limited liability—Because incorporation gives the NPO a separate identity,
in situations of liability, the NPO will be held legally liable (with some excep-
tions) instead of the founders or the members. In an unincorporated non-
profit, the members of the agency will bear that liability.
6. Other benefits—Along with these advantages and benefits, incorporated non-
profits also enjoy other benefits including receiving lower postal rates and free
or reduced media coverage. Corporate status also provides credibility to the
organization in its dealings with third parties and the community.

Incorporation, however, may bring some disadvantages for some non-profits.

As, for example, incorporation will mean more federal and state monitoring, annual
information filing, more rules and regulations to follow, and more paperwork to
complete and record. Therefore, the question of whether to incorporate or not
should be a well-thought-out decision on the part of the NPO founder or founders.

3.3.1 The Process of Incorporation

The formation of legal entities is regulated, in almost all instances, by state law rather
than by federal law. Three government agencies are usually involved in the process
of creating a tax-exempt organization: the IRS, the particular state’s (where the
non-profit will be located2) Secretary of State, and State Attorney General Offices.
The following section discusses the different steps that a group has to follow to
create an incorporated non-profit public benefit corporation. Let us use an example
of a hypothetical group’s (The Rogers) journey to create an incorporated non-profit
in the State of Ohio, whose mission will be to provide shelter to those who are
homeless. The discussion will refer to some states’ laws and requirements on non-
profit incorporation to show some of the similarities and differences:

Step 1—Develop and clarify the mission and goals. The Rogers first have to have a
clear idea about the mission and goals of the non-profit organization. A mis-
sion statement describes the overall purpose of the organization. It addresses
 Non-Profit Laws and Regulations ◾ 69

the question, “Why does the organization exist?” A clear mission statement
and a set of specific goals are essential for any organization, more so for a non-
profit agency, because it is important for the group to understand why they
want to spend their time and resources. This is a very important step because
the group will be returning to the mission and goals statement throughout
the process of forming a non-profit agency.
Step 2—Collect information from the Secretary of State’s office on forming non-
profit corporation. There are two ways to collect information. The most effi-
cient way is to visit the Secretary of State’s office Web site and download
the relevant information. Most states have that information online. As an
example, Ohio’s Secretary of State’s office Web site (http://www.sos.state.
oh.us/SOS/Text.aspx?page=345&AspxAutoDetectCookieSupport=1) has a
wide variety of information on how to create a non-profit agency, including
a publication on Guide to Nonprofit Organizations in Ohio. This publication
lists all the different steps in forming a non-profit. The other option is to con-
tact the office and request them to mail all the relevant documents for incor-
poration. A state’s corporate filing division, usually part of the Secretary or
Department of State’s office, will mail a packet of non-profit materials which
usually include sample or fill-in-the blank articles of incorporation, the state’s
non-profit corporation law, a filing fee schedule, and forms and instructions
for checking the availability of the group’s proposed business name.
Step 3—Recruit and appoint board of directors who would support and believe in
the NPO’s mission. States’ laws differ on the number and qualifications of
the directors. For example, Kentucky and Ohio laws require at least three
directors, whereas Georgia and Michigan laws require at least one director.
New York law requires that the directors are at least 18 years of age, whereas
Michigan allows directors who are 17 and even 16 years old. Usually there is
no residency requirement. Under California law, no more than 49% of a board
of directors may be interested persons. An interested person is a director who
provides non-director services to the non-profit public benefit corporation and
is paid for the services rendered. This is a very important step for The Rogers;
they have to carefully choose the initial board members because this will be a
new organization, they need board members who are not only committed but
also have some understanding of the operations of a non-profit organization.
Step 4—Choose the appropriate designation. As discussed in Chapter 1, there are
different types of 501(c) non-profits, and the most common forms are the
501(c)(3) and 501(c)(4). Before The Rogers can start the process of forming an
incorporated non-profit, they have to decide on the form that applies to their
situation. The main criterion is the nature of the mission of the non-profit,
also known as the primary purpose test. If the agency’s mission is to promote
a social cause or the rights of one or more groups and lobbying as a major
activity, then the appropriate form will be to create a 501(c)(4) entity. As dis-
cussed in Chapter 1, 501(c)(4) non-profits are usually advocacy organizations
70 ◾ Effective Non-Profit Management

and enjoy unlimited lobbying rights. On the other hand, if the mission is to
provide a service to a broader group of clients, and the agency does not need
to lobby or needs only limited lobbying rights, then the appropriate form will
be a 501(c)(3) form. For The Rogers, because the mission of this hypothetical
non-profit is to provide “shelter to homeless,” 501(c)(3) is the appropriate form
to choose.
Step 5—Choose a name for the non-profit corporation. The corporation’s name
cannot be the same as, or deceptively similar to, other corporate names on file
with the Secretary of State of a state. This means that The Rogers have to check
name availability, which can be easily done with a simple search from the
Secretary of State’s Web site. Most states also require that the name contain
the terms corporation, incorporated, or their abbreviations, but not the term
company. Often, for a small fee, one can reserve the name for a short period of
time until the articles of incorporation are filed. (See Box 3.2.)

BOX 3.2 THE FLORIDA STATUTE, 2008

Section 617.0401 Corporate name—

(1) A corporate name:

(a) Must contain the word “corporation” or “incorporated” or the
abbreviation “corp.” or “inc.” or words or abbreviations of like
import in language, as will clearly indicate that it is a corporation
instead of a natural person, unincorporated association, or part-
nership. The name of the corporation may not contain the word
“company” or its abbreviation “co.”;
(b) May contain the word “cooperative” or “co-op” only if the resulting
name is distinguishable from the name of any corporation, agricul-
tural cooperative marketing association, or non-profit cooperative
association existing or doing business in this state under chapter
607, chapter 618, or chapter 619;
(c) May not contain language stating or implying that the corporation
is organized for a purpose other than that permitted in this act and
its articles of incorporation;
(d) May not contain language stating or implying that the corporation
is connected with a state or federal government agency or a corpo-
ration chartered under the laws of the United States; and
(e) Must be distinguishable from the names of all other entities or
filings, except fictitious name registrations pursuant to s. 865.09,
organized, registered, or reserved under the laws of this state, that
are on file with the Division of Corporations.
 Non-Profit Laws and Regulations ◾ 71

The Rogers will find that the State of Ohio is one of the few states where
a corporate designator is not required. In contrast, the State of Oklahoma
requires that the corporation’s name must contain one of the following: asso-
ciation, company, corporation, club, foundation, fund, incorporated, insti-
tute, society, union, syndicate, or limited, or one of the abbreviations “co.,”
“corp.,” or “inc.”
Step 6—Prepare and file articles of incorporation with the Secretary of State. In order
to form a non-profit corporation, The Rogers must file articles of incorporation
(sometimes called a “certificate of incorporation” or “charter document” or
“articles of organization”) with the state and pay a filing fee. The filing fee
generally ranges between $30 and $125 depending on the state. The articles of
incorporation are usually posted on the Secretary of State’s Web site or could
be requested to be mailed. Several states have modeled their state laws after
the Model Nonprofit Corporation Act, which was approved by the Business
Law Section of the American Bar Association in 1964 and revised in 1987.
The Model Nonprofit Corporation Act is a comprehensive set of statutes that
can be adopted by states to regulate the establishment and operation of non-
profit corporations within their jurisdictions. The Revised Model Nonprofit
Corporation describes both the requirements for registration with the state,
and what must be included in an acceptable set of Articles of Incorporation
and Bylaws. The Revised Model Act has been adopted, in whole or in part, in
Arkansas, Indiana, Mississippi, Montana, North Carolina, South Carolina,
Tennessee, Washington, and Wyoming. Georgia and Ohio have rejected the
Revised Model Act (Welytok and Welytok, 2007, 28).
The articles of incorporation act like a constitution and usually include the
following information:

◾◾ The corporation’s name

◾◾ The name of the person(s) organizing the corporation
◾◾ Purposes for which the corporation is formed
◾◾ Wording that states that no part of the assets of the non-profit corpora-
tion are to benefit the members
◾◾ Number and names of the corporation’s initial board of directors
◾◾ The initial director(s) or registered agent
◾◾ Location of the corporation’s registered office where legal papers can be
served to the corporation if necessary
◾◾ Provisions on dissolution

In addition to the above common components, different states may have

other requirements for the incorporation. For example, Georgia requires
that the non-profit, while filing the articles of incorporation, must also
submit a Transmittal Information Form certifying that the group is filing
articles of incorporation and will publish a notice of intent to incorporate
72 ◾ Effective Non-Profit Management

in a local newspaper. Pennsylvania has a similar requirement to publish a

statement of the intent to file or the actual filing of the articles of incor-
poration in two newspapers of general circulation, one of which is a legal
journal. There is usually a prepared form for doing this. The Rogers will
file the articles of incorporation to the Ohio Secretary of State’s Office
and enclose the filing fee. The state’s incorporation office will review the
articles, and if the form has been completed will accept it for filing and
will return a copy of the articles of incorporation to the non-profit agency.
Later, if The Rogers want to amend the articles, they can do so by filing
articles of amendment with the same official to whom they submitted the
original articles.
Step 7—Create bylaws. Once the articles have been filed and returned, the initial
board will meet to develop and adopt its bylaws. Bylaws are internal rules that
the organization will follow to govern itself. They usually include sections
describing the board of directors (terms, election, and rules for conducting
meetings), place and schedule of meetings, membership provisions, duties of
the officers, and other internal policies. The bylaws are effective as soon as
they are adopted by the board. It is not necessary to obtain approval from any
government agency. Later, if the group decided to revise/amend some provi-
sions of the bylaws, they could easily do so at a later board meeting.
Step 8—Create a record book. All states have requirements about record keep-
ing of meetings and important documents. There is no requirement that the
minutes be filed with any government agency; however, if they are requested
in connection with any audit of the organization, they must be produced. In
Ohio, according to Revenue Code 1702.15:

Each corporation shall keep correct and complete books and records
of account, together with minutes of the proceedings of its incorpo-
rators, members, directors, and committees of the directors or mem-
bers. Subject to limitations prescribed in the articles or the regulations
upon the right of members of a corporation to examine the books and
records, all books and records of a corporation, including the member-
ship records prescribed by section 1702.13 of the Revised Code, may be
examined by any member or director or the agent or attorney of either,
for any reasonable and proper purpose and at any reasonable time.

Step 9—Apply for an Employer Identification Number (EIN). The Rogers will need to
apply for an EIN from the Internal Revenue Service (IRS) for the non-profit cor-
poration. Every organization must have an EIN, even if it will not have employ-
ees. This number is a unique number that identifies the organization to the IRS.
The Rogers can apply for an EIN by submitting the required information
online at the IRS Web site, or by telephone or by mailing or faxing Form SS-4
(available at the IRS Web site). The IRS will issue an EIN immediately after
 Non-Profit Laws and Regulations ◾ 73

the information is validated. They will also likely need to obtain a state EIN
or account for tax purposes.
Step 10—Apply for tax exemptions. NPOs are not automatically exempt from
taxes; they have to apply for this exemption. NPOs qualify for federal, state,
and local tax exemptions, but they have to apply first for federal tax exemp-
tions in order to obtain the others. Non-profits that want to form a 501(c)(3)
will complete IRS Form 1023; those who want to form a 501(c)(4) will com-
plete IRS Form 1024. There are two major exceptions to this requirement:
NPOs (excluding private foundations) that have less than $5,000 annually in
gross receipt, and churches, religious organizations, and their auxiliaries do
not have to apply for tax-exempt status—they are automatically granted such
exemption. Box 3.3 lists the major components of Form 1023. Along with
the form, The Rogers also has to submit to the IRS Form 8718 (User Fee for
Exempt Organization Determination Letter).
After the IRS reviews the application, it will issue a determination letter
containing a ruling, in which it will either reject their application or recog-
nize the non-profit corporation’s exempt status and provide its public charity
classification.
In some states (e.g., Ohio), The Rogers will receive state tax exemptions
once they have filed their articles of incorporation and have gained 501(c)(3)
tax exemptions from the federal government. In other states, NPOs will have
to apply for state tax exemptions. For example, in Georgia and Indiana NPOs
have to apply separately for state tax exemption. In most states, NPOs have to
apply for exemptions from state sales tax.
The non-profit organization may be exempt from paying property taxes on
property it owns or leases. Such exemptions vary widely by location, so The
Rogers need to check with the tax assessor of their local government (town or city
hall, or the seat of county government) to find out how to apply for applicable
exemptions.
Step 11—Register with state’s offices.

1. Attorney General’s Office: Several states (e.g., California, New York)

require non-profits to register with the State’s Attorney General’s Office.
The main reason is that in those states the Attorney General’s Office is in
charge of monitoring the activities of the non-profits. In other states (e.g.,
Florida, Ohio) it is a requirement only if the non-profit solicits contribu-
tions from the public.
2. Secretary of State’s Office: In some states, non-profits have to register with
the Secretary of State if they solicit contributions (e.g., North Carolina,
Washington).
3. Department of Revenue: In some states (e.g., Texas, Virginia, Ohio), a
non-profit is required to register with this agency for employment and
other taxes.
74 ◾ Effective Non-Profit Management

BOX 3.3 MAJOR COMPONENTS OF FORM 1023

Part I: Identification of Applicant (basic information about the agency
including its name, EIN, contact information, date formed, annual
accounting period, and Web site information)
Part II: Organizational Structure (type of organization—corporation,
trust, or association and article of incorporation for a corporation)
Part III: Required Provisions in the Organizing Document (whether the
articles of incorporation include exempt purpose/s and dissolution
provision)
Part IV: Narrative describing the Agency’s Activities
Part V: Compensation and Other Financial Arrangements with Officers
and Staff (names, titles, addresses, and compensation of all officers and
staff, and list the five highest-paid compensated employees who receive
or will receive $50,000 per year, other financial relationship, conflict of
interest policy)
Part VI: Members, Individuals and Organizations That Receive Benefits
(description of programs that provide benefits—goods, services, and
funds)
Part VII: History of the Agency
Part VIII: Specific Activities (inquiries related to any political campaign,
lobbying, gaming, fundraising, and joint ventures activities; operation
in foreign country or countries)
Part IX: Financial Data (revenues and expenses, balance sheet)
Part X: Public Charity Status (inquiries related to identifying private foun-
dation versus public charity)—directs agency to complete the appropri-
ate schedule as follows:

Church, a convention or association of churches: Schedule A

School: Schedule B
Hospital, medical research organization: Schedule C
A section 509(a)(3) supporting organization: Schedule D

Part XI: User Fee Information (must include the appropriate user fee pay-
ment with the application)

Step 12—Open a bank account. The Rogers should keep the non-profit corpora-
tion’s finances separate from their personal accounts. A good way to do this
is by opening a bank account for the non-profit corporation. In order to open
a bank account for the non-profit, banks usually ask for the EIN, a copy of
the articles of incorporation, and a resolution identifying authorized signers
if those names are not listed in the articles.
 Non-Profit Laws and Regulations ◾ 75

Step 13—Apply for a non-profit postal permit. In general, 501(c)(3) non-profit

organizations qualify for significantly reduced postage rates for certain types
of printed mail. In order to take advantage of these rates, The Rogers will have
to apply for a non-profit mailing permit from the U.S. Postal Service using
PS Form 3624.

3.4 Operating a Non-Profit Organization:

The Essential Requirements
Once the non-profit is formed, board members and the executive director (chief
executive officer [CEO])/president have to ensure that the non-profit is abiding by
all the legal requirements and is not engaging in any activities that might jeopardize
its tax-exempt status.
Following are some of the essential requirements that non-profit managers,
CEO, and board members need to be aware of.

3.4.1 Reporting Requirements
3.4.1.1 Federal Requirements: Annual Financial
Return Form (Form 990)
Most non-profits are required to file Form 990 with the IRS. Until 2007, reli-
gious organizations and their auxiliaries, associations and conventions, and small
non-profits (only public charities, not private foundations) who have less than
$25,000 in gross receipts were exempt from this requirement. However, the Pension
Protection Act of 2006 issued a reporting requirement for these small non-profits.
They are now required to file an annual report (Form 990N) to the IRS which will
include their legal name, mailing address, and evidence of the continuing basis for
the organization’s exemption from filing form 990, and upon termination notice of
that termination. Subsequently the IRS made several revisions to Form 990 series
(see Box 3.4), which have been effective since the 2008 tax year. The Form 990
series now has three forms: 990, 990EZ, and 990N (also known as an e-postcard).
The new form has been effective since the 2008 tax year. The use of Form 990
goes back to the 1940s. The IRS realized that the existing form had failed to reflect
some of the important changes in the laws affecting NPOs, the increasing size and
complexity of their operations, and to ensuring good governance in the sector. The
new 2008 form was designed based on inputs from members of the non-profit sector.
Following are the major changes in reporting requirements:

1. Part VI (Governance, Management, and Disclosure) is a new section on the

form. It asks questions about the organization’s governance, management,
and dis­closure and includes the following questions:
76 ◾ Effective Non-Profit Management

BOX 3.4 THE REDESIGNED FORM 990—MAIN PROVISIONS

The following 11 parts are to be completed by all organizations required to file
Form 990:
◾◾ Part I, Summary
◾◾ Part II, Signature Block
◾◾ Part III, Statement of Program Service Accomplishments
◾◾ Part IV, Checklist of Required Schedules
◾◾ Part V, Statements Regarding Other IRS Filings and Tax Compliance
◾◾ Part VI, Governance, Management, and Disclosure
◾◾ Part VII, Compensation of Officers, Directors, Trustees, Key Employees,
Highest Compensated Employees, and Independent Contractors
◾◾ Schedule J-2 Continuation Sheet for Form 990, Part VII, Section A,
Line 1a (Compensation information)
◾◾ Part VIII, Statement of Revenue
◾◾ Part IX, Statement of Functional Expenses
◾◾ Part X, Balance Sheet
◾◾ Part XI, Financial Statements and Reporting
The form also has 16 schedules; Part IV will determine how many of these
schedules the non-profit has to complete:
Schedule A: Public Charity Status and Public Support
Schedule B: Schedule of Contributors
Schedule C: Political Campaign and Lobbying Activities
Schedule D: Supplemental Financial Statements
Schedule F: Statement of Activities Outside the United States
Schedule G: Supplemental Information on Fundraising and Gaming
Activities
The other Schedules include E (schools), H (hospitals), I (Grants and Other
Assistance to Organizations, Governments, and Individuals in the United
States), J (Compensation Information), K (Supplementary Information for
Tax-Exempt Bonds), L (Transaction with Interested Persons), M (Non-
Cash Contribution), N (Liquidation, Termination, and Dissolution), O
(Supplementary Information to Form 990), and R (Related Organizations
and Unrelated Partners).

◾◾ How many voting members are on the governing body? How many of
them are independent?
◾◾ Does the organization have a written conflict of interest policy?
◾◾ Does the organization have a written whistle-blower policy?
 Non-Profit Laws and Regulations ◾ 77

◾◾ Does the organization have a written document retention and destruction

policy?
◾◾ Does the organization contemporane­ously document the meetings of the
governing body and its committees?
◾◾ If the organization has local chapters, branches, or affiliates, does it have
written policies and procedures governing their activities to ensure that
their operations are consistent with the organization’s mission?
◾◾ How does the agency make the following avail­able to the public: govern-
ing documents; conflict of interest policy; Forms 1023, 990, and 990-T;
and financial statements?
2. Part VII (Compensation of Officers, Directors, Trustees, Key Employees, Highest
Compensated Employees, and Independent Contractors) contains important
changes, including new definitions of officers and key employees applicable to all
organizations, and extending the reporting of compensation paid to the top five
highest-compensated employees from organizations described in section 501(c)
(3) as was previously the case, to all organizations filing the Form 990, such
as social welfare organizations, business leagues, trade associations, and social
clubs. The new Schedule J, Supplemental Compen­sation Information, requires
disclosure of compensation for these individuals which is broken down in
greater detail than ever before required of tax-exempt organizations. Disclosure
is mandated not only for base compensation, but also for bonuses and incen-
tives, severance and change in control payments, first-class travel, spousal travel,
club fees, housing allowances, supplemental nonqualified retirement plans, and
equity-based compensation. With this level of disclosure, all trustees and direc-
tors, not just those who serve on the compensation committee, will need to more
fully understand the compensation mechanisms of the agency and be prepared
to respond to questions that result from these disclosures.
3. The original form was two pages long, along with several schedules. The new
form is 11 pages long and may include up to 16 schedules. Schedule A which
was also in the previous form is now redesigned and divided into several
schedules; along with that, several new or almost new schedules have now
been added (D, F, H, J, K, M, O, and R).

3.4.1.2 State Requirements
Different states have their own reporting requirements for non-profits. As an exam-
ple, Michigan requires non-profits to file an annual report with the Secretary of
State every 2 years after their date of creation. The filing fee is $20, and the infor-
mation required on the report is basic business information, such as the names of
all officers and directors and the business’s principal location. In Ohio, non-profits
have to file a copy of Form 990 to Ohio Attorney General. They are also required to
file Form “Statement of continued existence” with the Ohio Secretary of State once
every 5 years, either from the date of incorporation or from the last corporate filing.
78 ◾ Effective Non-Profit Management

3.4.2 Public Document
The 1996 Tax Payers’ Bill of Rights II requires most tax-exempt organizations to
provide copies of Form 990 (three most recent ones) and Forms 1023 or 1034 to
anyone requesting them. If the request is made in person, the copy must be pro-
vided immediately. If someone makes a mail request, then they will have to provide
it within 30 days.

3.4.3 Unrelated Business Income Taxes

Non-profits are required to report and pay taxes on unrelated business income taxes
for gross income of $1,000 or more. As the IRS explains, “if an exempt organization
regularly carries on a trade or business that is not substantially related to its exempt
purpose, except that it provides fund to carry out that purpose, the organization
is subject to taxation on its income from that unrelated trade or business” (IRS
Publication 598). These organizations are required to file Form 990-T to the IRS.
The two main criteria to determine whether income is unrelated business
income are (1) the trade or business is regularly carried on and (2) is not substan-
tially related to the mission of the non-profit agency. IRS publication 598 provides
explanation and examples of unrelated business activities and taxes, some of which
are explained below:
A “trade” or “business” include “any activity carried on for the pro-
duction of income from selling goods or performing services.” (IRS
Publication 598, 3)

“Regular” business activities includes activities that are carried on frequently

and on a continual basis “similar to comparable commercial activities of nonex-
empt organizations” (IRS Publication 598, 3). A non-profit income from a rental
property is an example of a regular business activity; whereas a non-profit agency
selling baked goods for a week at a county fair will not be considered as conducting
a business activity on a regular basis.
The IRS excludes several activities from the definition of unrelated business or
trade (see Box 3.5). The following are examples of these activities:

1. An activity that is substantially carried out by volunteers without any

compensation.
2. A service provided primarily for the convenience of the organization’s employ-
ees, officers, or the clients.
3. A trade or business that consists of selling merchandise that consists of mostly
donated or gift items.
4. Certain bingo games that meet the legal definition of bingo are legal where
they are played, and are played in a jurisdiction where bingo games are not
regularly carried on by for-profit organizations.
 Non-Profit Laws and Regulations ◾ 79

BOX 3.5 EXAMPLES OF RELATED AND

UNRELATED BUSINESS ACTIVITIES

Unrelated Business Activities

1. A non-profit hospital operating a commercial parking lot every Saturday
throughout the year
2. A non-profit college selling membership mailing lists to business firms
3. An exempt university leasing its football stadium for several months to
a professional football team for a fixed fee
4. A non-profit selling advertising space in a journal that publishes materi-
als of professional interest to its members

Related Business Activities

1. A non-profit selling products or services that result from the perfor-
mance of its exempt functions (e.g., a non-profit engaged in rehabilitat-
ing handicapped persons [its exempt function] selling products made
by these persons as part of their rehabilitation training)
2. A hospital gift store that is used by employees, patients, and visitors
3. A museum’s restaurant that is open to its employees, staff, volunteers,
and visitors

Source: Publication 598, Tax on Unrelated Business Income of Exempt Organizations,

U.S. Department of Treasury, IRS, 2000.

3.5 Legal Restrictions
Federal laws also put certain restrictions on non-profits’ activities and operations. These
restrictions vary in terms of the type of non-profits. Following are the major restrictions.

3.5.1 Political Campaign Activities

A 501(c)(3) non-profit is totally prohibited from engaging in any political cam-
paign activities. Examples of such prohibited activities include endorsing a political
candidate running for election, soliciting votes for political candidates, and raising
funds for campaign activities. They are, however, allowed to engage in nonpartisan
activities. Examples include offering voter education programs, distributing pam-
phlets on voter registration, and bringing speakers to speak on major election issues.
501(c)(3) non-profits if found engaged in prohibited political activities will pay
a penalty tax using the following rule: 10% tax on the agency, 100% if not cor-
rected; 2.5% on managers up to $5,000, 50% tax up to $10,000 if not corrected.
The 2006 Pension Protection Act doubled the limit for penalties on managers for
prohibited activities from $5,000 to $10,000.
80 ◾ Effective Non-Profit Management

BOX 3.6 IRS SUFFERS ANOTHER SETBACK IN EFFORT

TO CONDUCT AUDIT OF A MINNESOTA CHURCH
A U.S. District Court judge in Minneapolis ruled (United States v. Living
Word Christian Center) that the Living Word Christian Center, in Brooklyn
Park, Minnesota, does not have to comply with an IRS summons for infor-
mation because the summons was authorized by a government official of
insufficient rank.
The IRS began investigating the non-profit following reports that the Rev.
Mac Hammond had endorsed U.S. Rep. Michele Bachmann, a Minnesota
Republican—a prohibited activity by the federal tax code. During the inves-
tigation, the IRS found instances of improper financial transaction between
Rev. Hammond and the church including the latter leasing planes that
Mr. Hammond owned, and forgiving a portion of the loan that the Rev.
Hammond had borrowed from them—both may lead to the revocation of its
tax-exempt status.
Living Word Christian provided some of the information that the IRS
requested but refused to answer later questions about its operations and can-
celed a scheduled conference with tax agents. The agency argued that the April
2007 letter from the IRS alerting it to an inquiry into the agency’s operation
was signed by the IRS director of Exempt Organizations for Examination
and hence violated one of the provisions of the Church Audit Procedures Act.
The IRS has issued regulations, after the Act was enacted, stating that
the lowest-ranking revenue official who could approve a church audit was
a regional commissioner, just one level of authority below the IRS commis-
sioner. However, in 1998, the IRS had gone through a major reorganization
and in the process had eliminated the regional-commissioner position. After
the reorganization, the IRS gave the authority to order church audit to the
director of the exempt organization, which is four levels below the commis-
sioner’s level. That authority was delegated not by a formal rule-making pro-
cess, but by the IRS’s manual, which according to the judge “does not carry
the force of law.”

Source: Excerpt from The Chronicle of Philanthropy, February 12, 2009, 21 (8): 21.

It is important to note that a 501(c)(4) non-profit, on the other hand, is per-

mitted to engage in campaign activity under the Internal Revenue Code (IRC)
so long as its primary activity is promoting social welfare. While such non-profits
may participate in campaign activity under the IRC, they must abide by applicable
restrictions in the Federal Election Campaign Act (FECA). The agency can endorse
federal political candidates for offices to the organization’s members and share the
endorsement with the agency’s press list. They can also expressly advocate for a
 Non-Profit Laws and Regulations ◾ 81

BOX 3.7 THE PENSION PROTECTION ACT

(2006), TITLE XII—MAJOR PROVISIONS
1. Small non-profits (less than $25,000 in gross receipts) not required to
file Form 990, will have to report annually to IRS, in electronic form,
basic information about themselves (viz., name, mailing address, EIN
number, name and address of a principal officer, evidence of the basis of
exemption from filing Form 990. Notice of termination must be filed
with the IRS if they continue to exist. Penalty for non-compliance:
automatic revocation of tax-exempt status (if failure to file Form 990
for three consecutive years).
2. Increase in penalties on charitable organizations, including private
foundations, for (1) self-dealing and excess benefit transactions; (2) fail-
ure to distribute income; (3) excess business holdings; (4) investments
that jeopardize charitable purpose; and (5) taxable expenditures (e.g.,
political activities). The excise tax increases from 5% to 10% and the
limit for penalties on managers for prohibited activities doubles from
$5,000 to $10,000.
3. Tax-exempt charitable organizations that file Form 990-T (unrelated
business income tax returns) must now make these returns available for
public inspection and copying.

federal political candidate’s election with its membership. In some states, a 501(c)
(4) non-profit can make cash or in-kind contributions to state or local candidates.

3.5.2 Limitations on Private Inurement

Private inurement is strictly prohibited in all non-profits. A non-profit cannot be
created or operated to benefit the particular founder or his or her family members.
Private inurement also happens when an insider—an individual who has significant
influence over the organization—enters into an arrangement with the non-profit
and receives benefits greater than she or he provides in return. Examples of private
inurement include excessive compensation to an employee, purchase of a property
(that belongs to a board member) at a price higher than the market price, and pay-
ing higher than market rent to a rental property that belongs to a member of that
organization. Hopkins pointed out that “Despite the fact that this law is applicable
to these many types of tax-exempt organizations, nearly all of the law concerning
private inurement has been developed in the context of transactions with charitable
501(c)(3) organizations” (2004, 60).
What happens when a non-profit is found to engage in private inurement? Until
1997, the IRS had only one recourse—revoke the tax-exempt status of the non-
profit. However, in 1996, Congress passed a new act, the Tax Payers’ Bill of Rights
82 ◾ Effective Non-Profit Management

II, that imposes intermediate sanctions on 501(c)(3) and 501(c)(4) non-profits. This
involves levying a two-tier tax in the following way: in cases of private inurement,
the organization would be subject to a first-tier penalty of 10% of the taxable inure-
ment, 5% could be imposed on beneficiaries of the inurement, and a 2.5% penalty
on organizational managers (up to $10,000). The second-tier tax would be up to
100% on the organizational manager, 200% on the beneficiary, and 50% of the
taxable inurement amount on a manager who refuses to “correct” within a speci-
fied time.

3.5.3 Lobbying Rights and Restrictions

As Herman and Associates (2005) explained, there is a difference between lobbying
and advocacy; the former includes activities that attempt to influence legislation,
while the latter includes a much wider range of activities (e.g., boycott of a product,
picket) of which lobbying might be only one. 501(c)(3) and 501(c)(4) non-profits
have different lobbying rights. The law provides the latter to engage in unlimited
lobbying activities as long as lobbying does not become the main exempt function
or mission of the non-profit. However, 501(c)(3) non-profits are permitted to lobby
only to an insubstantial level. There was great confusion among non-profit man-
agers as to what defines “an insubstantial level” of lobbying until 1976. The 1976
Lobbying Law and the 1990 IRS regulations for the law clearly defined lobbying
activities and the financial limits for those activities.
Following are the major provisions of the 1976 law:

1. The law excludes several public policy–related activities as lobbying. Following

are some of the major excluded activities:
a. Contacts with employees in the executive branch or legislators in support
of or opposition to proposed regulations are excluded.
b. Lobbying by volunteers is considered a lobbying expenditure only if the
non-profit incurs expenses associated with the volunteers’ lobbying.
c. A non-profit’s communication to its members on legislation, even if it
takes a position on the legislation, is not considered as lobbying as long as
it does not directly encourage its members to lobby.
d. A non-profit’s response to written requests from a legislative body for
technical advice on pending legislation is excluded.
e. Lobbying legislators on matters that may affect the non-profit’s own exis-
tence (also known as the self-defense activity) is excluded.
f. Nonpartisan analysis or research on a legislative issue is excluded.
2. The law defines lobbying and the two different types of lobbying: direct and
grassroots.
Direct lobbying refers to the communication that the non-profit engages
about legislation (1) with legislators or government officials involved in
formulating the legislation, and (2) with its own members. An example
 Non-Profit Laws and Regulations ◾ 83

Table 3.1 Lobbying Ceilings

Amount of
Total Lobbying Total Allowable for
Non-Profit’s Budget Expenditures Grassroots Lobbying

Up to $500,000 20% of the budget 5% of the budget

$500,000 to $1 million $100,000 + 15% of $25,000 + 3.75% of

excess over $500,000 excess over $500,000

$1 million to $1.5 million $175,000 + 10% of $43,750 + 2.5% of excess

excess over $1 million over $1 million

$1.5 million to $17 $225,000 + 5% of excess $56,250 + 1.25% of

million over $1.5 million excess over $1.5 million

Over $17 million $1 million $250,000

Source: Smucker, B., 1994, Nonprofit Lobbying. In The Jossey-Bass Handbook of

Nonprofit Leadership and Management, ed. David O. Renz & Associates, 216,
New York: Wiley. Reprinted with permission from John Wiley & Sons, Inc.

would be a non-profit visiting a legislator about a pending bill or urging

its members to contact a legislator. Grassroots lobbying, on the other hand,
refers to any attempt by a non-profit to influence legislation by affecting
the opinion of the general public.
3. The law specifies the level of spending limit on lobbying, including the allow-
able limit for direct and grassroots lobbying. The limit varies in terms of the
size of the non-profit’s budget. Table 3.1 shows the lobbying ceilings.
4. The law offers non-profits the option to elect to have their legislative efforts
governed by the law or subject themselves to the “no substantial part” rule.
5. The law establishes a flexible system of sanctions for violating the lobbying
restrictions. Until 1976, the only sanction that the IRS had was to revoke
the tax exemption. Under the 1976 law, non-profits will pay a 25% excise tax
on the lobbying expenditure in any year in excess of the ceiling. If spending
exceeds 150% of the overall or the grassroots limits, generally determined by
aggregating both spending and limits over a 4-year period, then the sanction
is loss of tax exemption (Herman and Associates, 2005, 244).

3.5.4 The Sarbanes-Oxley Act (2002)

In the wake of numerous major corporate and accounting scandals (e.g., Enron,
Arthur Andersen), Congress enacted the Public Accounting Reform and Investor
Protection Act of 2002, commonly known as the Sarbanes-Oxley Act (see
Box 3.8).
84 ◾ Effective Non-Profit Management

BOX 3.8 SARBANES-OXLEY ACT—MAJOR PROVISIONS

1. Created the Public Company Accounting Oversight Board (PCAOB). The
goal of this private non-profit organization is to oversee the auditors of
public companies. All accounting firms that wish to prepare or issue
audit reports on U.S. public companies (or to participate in such audits)
must register with the PCAOB.
2. Financial records. Companies are required to maintain detailed finan-
cial records. Management is required to establish and maintain ade-
quate internal control and procedures for financial reporting.
3. Document destruction. Destroying documents in a federal or bank-
ruptcy investigation is considered a felony and can carry penalties of up
to 20 years.
4. Fraud discovery. The statute of limitations for the discovery of fraud is
extended from 1 year to 2 years from the date of discovery and from 3
years to 5 years after the act.
5. Securities fraud penalty. Criminal penalties for securities fraud have
been increased to 25 years.
6. Auditor independence. This is specifically required by defining and
limiting the services the auditor may provide and prohibits conflict of
interest between auditors and the audited company.
7. Certifications of financial statements and reports by CEOs and CFOs that
they fully comply with security laws. Knowingly violating this provision
will result in fines of $1 million and imprisonment up to 10 years; will-
ful false certification will result in fines of up to $5 million and impris-
onment up to 20 years.
8. Personal loans. Personal loans to executive officers and company directors
are banned.
9. Reporting insider trading. Accelerated reporting of insider trading is
now required.
10. Prohibited trading. Insider trading is prohibited during pension fund
blackouts.
11. Protection of corporate whistle-blowers.
12. Accountability. Holds CEOs and directors accountable for the crimes of
their company even if they had no knowledge of those crimes and are
punishable by up to $5 million and 20 years in prison.

While it is generally assumed that because non-profit organizations do not issue

stock, they are exempt from Sarbanes-Oxley, there are actually two provisions of
the legislation that apply to all corporations, be they non-profit or for-profit. These
provisions address whistle-blower protection and document destruction.
 Non-Profit Laws and Regulations ◾ 85

3.6 Private Foundations
As explained earlier in the chapter, non-profits that are not public charities are con-
sidered private foundations. There are three different types of private foundations:

1. Private operating foundations are those that spend at least 85% of their adjusted
net income or minimum investment return (whichever is less) directly for the
active conduct of their exempt activities (e.g., salary expenses). This require-
ment is also known as the income test. In addition, they also meet one of the
following tests: (a) assets test, (b) endowment test, or (c) support test.
a. Assets test. This means that 65% of the assets of the private foundation are
devoted directly to the active conduct of its exempt function, consisting
of stock of a corporation that is controlled by the foundation or any com-
bination of the two.
b. Endowment test. This means that the foundation makes qualifying distri-
butions (viz., program related investment) directly for the active conduct
of its exempt activities of at least two-thirds of its minimum investment
return. The minimum investment return for a private foundation is 5% of
the excess of the combined fair market value of all assets of the foundations
(other than those used or held for use directly in the active conduct of its
exempt purpose) over the amount of indebtedness incurred to buy those
assets.
c. Support test. This means that at least 85% of the private foundation’s
support (viz., gifts, grants, contributions, membership fees) is normally
received from the general public and five or more unrelated exempt orga-
nizations, not more than 25% of its support is normally received from
any one exempt organization, and not more than 50% of its support is
normally received from gross investment income.
2. Exempt operating foundations are those that have been publicly supported
for 10 years; whose governing body consists of individuals less than 25% of
whom are “disqualified individuals”3 and are broadly representative of the
general public; and has no officer who is a disqualified individual during
the year.
3. Grant-making foundations are those that are neither private operating founda-
tions nor exempt operating foundations; they are also sometimes referred to
as private nonoperating foundations.

The laws and requirements are more stringent for private foundations. Following
are some of the major requirements and rules that apply to private foundations:

1. Excise tax—Private foundations are required to pay an excise tax of 2% on

their net investment income. This tax must be reported on Form 990-PF. The
exceptions are exempt operating foundations.
86 ◾ Effective Non-Profit Management

2. Restrictions on self-dealing—The IRS imposes an excise tax on self-dealing

activities between a private foundation and disqualified persons. Examples
of self-dealing activities include sales or lease of property, lending money,
providing unreasonable compensation, and other benefits.
In a case of self-dealing activities, an initial excise tax of 10% of the amount
involved in the act of self-dealing is imposed on the disqualified person for
each year or part of a year in the taxable period. Along with that, an excise
tax of 5% of the amount involved is imposed on a foundation manager who
knowingly participated in an act of self-dealing. If the act of self-dealing is
not corrected within the taxable year, then an additional excise tax of 200%
of the amount involved is imposed on the disqualified person.
If the additional tax described above is imposed on the disqualified per-
son, an excise tax of 50% of the amount involved is imposed on any foun-
dation manager who refuses to agree to part or all of the correction of the
self-dealing act.
3. Requirements to distribute income to charitable purposes—Private foundations
are required to spend annually a certain amount of money or property for
charitable purposes, including grants to other charitable organizations. The
amount that must be distributed annually is ascertained by computing the
foundation’s distributable amount. The distributable amount is equal to the
foundation’s minimum investment return with certain adjustments.
Failure to do so subjects a private foundation to a 30% excise tax on the
undistributed income and an additional 100% tax if the foundation fails to
distribute the required income within 90 days of receiving notification from
the IRS.
4. Investment must not jeopardize the carrying out of exempt purposes—If the pri-
vate foundation makes investment decisions that have financially jeopardized
its ability to carry out its exempt purposes, both the foundation and the foun-
dation managers will be held liable for taxes.
5. Political campaign and lobbying activities—Private foundations are strictly
prohibited to engage in any type of political campaign activity. Violation of
this may result in revocation of tax exemption and imposition of other excise
taxes. 501(c)(3) organizations that are private foundations are subject to excise
tax on any amounts paid or incurred in an attempt to influence legislation,
or in an attempt to influence the outcome of any public election or to carry
on certain voter registration drives. As long as a private foundation does not
earmark a grant for lobbying, it may make a general purpose grant to a 501(c)
(3) public charity that lobbies without incurring any penalty. A private foun-
dation also may make a grant to support a specific project of a public charity
that includes lobbying, so long as the grant is not earmarked for lobbying and
is not larger than the amount budgeted by the grantee for the nonlobbying
portion of the project.
 Non-Profit Laws and Regulations ◾ 87

3.7 Contemporary Issue:
Who Deserves Tax Exemption?
As mentioned earlier, one of the reasons for exempting non-profits from paying
taxes is history or tradition. It was assumed that non-profits deserve tax exemption
for the services they provide—services that seek to assist the disadvantaged popula-
tion. However, this taken-for-granted assumption is increasingly being questioned
by different stakeholders. During recent years, different groups including local tax
assessors, Congress, and the general public have been increasingly questioning and
in some cases challenging the tax-exempt status of different non-profit organiza-
tions. Such challenges rest on three major contentions:

1. Are charities giving enough charity to qualify for tax exemption? Stakeholders
are asking questions on, for example, whether hospitals are giving enough
charity care, or private universities are giving enough financial aid, or whether
non-profit child care centers are giving enough free child care to qualify for
tax-exempt status.
Several cases have recently been deliberated in the courts focusing on
the legitimacy of some non-profits’ tax-exempt status. A 2007 case involv-
ing Under the Rainbow Child Care Center in Minnesota (Under the Rainbow
Child Care Center Inc. v. County of Goodhue) brought renewed concern and
even alarm in the non-profit world. The Minnesota court agreed with the
Minnesota officials’ argument that the child care center was not providing
any free or reduced price services to needy families and hence did not deserve
property tax exemption. The agency, Under the Rainbow Child Care Center,
charged the same price per child regardless of whether their parents were able
to pay the full amount themselves or they received government support to
cover the cost. Some 95% of Under the Rainbow’s $550,582 budget in 2006
came from fees for services paid by families or by county and tribal govern-
ments. The court concluded that because the center charged all families the
same amount, regardless of their ability to pay, and because its rates were not
lower than those of its competitors, it was not an institution of “purely public
charity” under the law and thus was subject to thousands of dollars in prop-
erty taxes (Storm, 2008).
Hospitals are a prime group that has been facing this challenge for some
time. A recent case involves the Provena Covenant Medical Center in Illinois.
In February 2004, the Illinois Department of Revenue revoked the tax-
exempt status of Provena Covenant Medical Center, a Catholic-affiliated not-
for-profit hospital in Urbana, under the rationale that it had too aggressively
pursued payments from uninsured, poor patients. In 2007, the circuit court
restored the hospital’s exempt status. However, in 2008, The Fourth District
Appellate Court sided with the Illinois Department of Revenue and local
88 ◾ Effective Non-Profit Management

taxing authorities and ruled against the hospital (Provena Covenant Medical
Center v. The Dept. of Revenue of the State of Illinois), overturning the circuit
court’s ruling (Pressy, 2008).
2. What constitutes charity when more and more non-profits resemble busi-
nesses? As state and local governments face financial crisis, this question is
getting more attention. The tax-exempt status of charities costs local govern-
ments $8 billion to $13 billion annually (Storm, 2008). According to the
most recent data, 67% of non-profit revenues came from program services
revenues, including government fees and contract (Wing et al., 2008). As
more and more non-profits face a competitive environment, they are increas-
ingly facing legal challenges from their competitors (i.e., for-profit corpora-
tions) and from governmental jurisdictions. Different not-for-profit health
clubs, including the YMCAs, have faced legal challenges numerous times; in
some cases they lost (e.g., Sewickley Valley YMCA, Pennsylvania), in some
cases they won (e.g., the Milwaukee downtown YMCA), and in others they
had to make some adjustment to regain tax-exempt status (e.g., Portland
Metro Branch YMCA). There are also concerns about the haphazard situa-
tion in granting tax-exempt status to non-profits. In Milwaukee, for example,
the youth hockey league is tax exempt, while the baseball and the soccer
leagues pay taxes. Some argue that many exemptions extended by the legisla-
ture or courts simply reflect an investment of time by lawyers and lobbyists,
who win a tax break for their clients (Miner, 2006). In several cities, hospi-
tals, including prominent ones like Johns Hopkins (Baltimore, Maryland),
Massachusetts General (Boston), and Stanford (Stanford, California), are
now required to make payment in lieu of taxes (Thomas, 2008).
Educational institutions are also facing this issue. In 2008, the IRS sent a
compliance check questionnaire to 400 colleges and universities. The ques-
tionnaire focuses on the relationship between related and unrelated entities,
unrelated business income, endowments, and executive compensation pack-
ages. Financial challenges have led non-profits to engage more in commercial
activities; however, they are also putting some non-profits on the edge of
risking their tax-exempt status.
3. Do non-profits that serve the wealthy or the upper middle class deserve this
privilege? In Chapter 1, we discussed the supply-side theory of non-profit
growth. To recap, numerous non-profits are created by wealthy donors to sat-
isfy their own need or aspirations. Frumkin (2002) calls this the supply-side
explanation of the growth of non-profits. This perspective holds the position
that “non-profit and voluntary organizations are really all about the people
with resources and commitment who fire the engine of non-profit and volun-
tary action” (Frumkin, 2002, 21). These are social entrepreneurs—donors or
founders—who might promote programs or ideas that have no connection
with dire community needs or interest. As Frumkin explains, the supply-side
approach has an important normative component that directs us to look at
 Non-Profit Laws and Regulations ◾ 89

donors, volunteers, and social entrepreneurs as the centerpiece of the sector

and to recognize that the satisfaction of this group and their interest is a
critical normative task of the sector. Such a view or position however does
not sit well with the traditional assumption of the sector—that it promotes
the interest of the indigent population or the disadvantageous group. Hence,
during recent years, some stakeholders have been questioning whether these
non-profits who cater to the needs of the wealthy deserve the same privilege
(i.e., tax-exempt status) as those who serve the needy population.

Case Study: The IRS—A Tale of a Lonely

Journey with a Mammoth Task
Even though NPOs are created by state laws, and the state’s
Secretary of State and Attorney General’s offices have monitor-
ing jurisdiction over these agencies, it is still primarily the fed-
eral government, through the IRS Tax Exempt and Government
Entities (TE&GE) Division, that does the regulation and moni-
toring of these agencies.
The TE&GE is composed of three distinct business divi-
sions: Employee Plans (EP), Exempt Organizations (EO), and
Government Entities (GE). The mission of TE&GE is “to pro-
vide Exempt Organizations’ customers top quality service by
helping them to understand and comply with applicable tax
laws and to protect the public interest by applying the tax
law with integrity and fairness to all” (www.irs.gov). EO func-
tions are divided into three offices: Examinations, Rulings and
Agreements, and Customer Education and Outreach. A brief
description of each of these offices is as follows:

The EO Examinations is responsible for enforcement activi-

ties, including both compliance checks and audits of
exempt organizations. EO Examinations is made up of
field exam groups; the Exempt Organization Compliance
Unit (EOCU), which conducts compliance checks; Review
of Operations (ROO), which does follow-up reviews of
organizations; and Compliance Strategies Critical Initiative
(CSCI) which coordinates EO’s strategic planning, moni-
tors progress of critical initiatives, and analyzes the results
of these projects.
EO Rulings and Agreements (R&A), made up of Determi-
nations and Quality Assurance, EO Technical Guid-
ance Quality Assurance, is responsible for reviewing
90 ◾ Effective Non-Profit Management

applications for exemption, issuing private letter rulings,

providing technical advice, and collaborating with Chief
Counsel’s office and the Department of the Treasury to
deliver formal guidance.
Customer Education and Outreach (CE&O) spearheads EO’s
efforts to proactively help exempt organizations under-
stand their tax responsibilities through nationwide educa-
tion and outreach programs.

As the above description implies, the EO Division’s functions

are mostly carried out by the Examinations and the Rulings and
Agreements offices.
One may ask, how well equipped is the EO Division to
oversee the approximately 1.5 million tax-exempt organiza-
tions in this country? The following data will give the reader
some idea.
In 2008, the Examinations Office examined 7,861 returns
(i.e., Form 990) out of a total of 888,412. That means it exam-
ined only 0.88% of the total returns. Was 2008 an usual year?
The answer is a clear “no.” The following are the percentage
examination rates since 1991: 1.34% (1999), 0.89 (2000), 0.61
(2001), 0.67 (2002), 0.71 (2003), 0.67 (2004), 0.58 (2005),
0.83 (2006), and 0.87 (2007) (http://www.irs.gov/pub/irs-
news/2008_enforcement.pdf).
Let us look at the R&A office and its level of productiv-
ity. Here, too, the situation is not promising. The IRS recently
published a notice “Where Is My Exemption Application?”
in response to the delay caused by a backlog of exemption
applications.
The backlog and processing time have been recurrent
issues for the IRS. During the 1990s, the agency under pressure
from Congress had made a major reorganization. In the past,
staff members who regulated tax-exempt groups were scat-
tered around the country working under different supervisors.
Now, these employees ultimately report to the director. So, this
office now has more power and responsibility. Currently, all
staff who screen applications for tax-exempt status are located
in Cincinnati, all audit managers in Dallas, and all employ-
ees who provide guidance to charities in its Washington, DC,
office. However, the Cincinnati office has not been able to
handle all these applications and, hence, finds no other choice
but to forward some of these applications to its audit office in
Dallas. One estimate is that it has forwarded approximately
40% of these forms (Schwinn and Williams, 2001) to Dallas.
 Non-Profit Laws and Regulations ◾ 91

The EO follows the following process in reviewing exempt

applications:

Step 1: Organization submits tax exemption application form

to Covington, Kentucky.
Step 2: Application is entered into the system and the user
fee payment is processed. A notice is sent acknowledging
receipt of the application.
Step 3: Application is sent to the exempt office function in
Cincinnati.
Step 4: Application is assigned to Determination Specialist to
be screened.
Step 5: The Specialist makes one of the following determinations:
a. If all information is complete and satisfactory, an
approval letter is prepared and mailed to the applicant.
b. If additional minor information is required, the appli-
cation is assigned to Accelerated Processing Group to
secure that information. Upon receiving that informa-
tion, an approval letter is mailed to the applicant.
c. If substantial additional information is required, the
application is assigned to a Technical Group who con-
tacts the applicant and develops the case. Applications
are primarily closed in the following ways:
(1) Exemption is approved.
(2) Failure to establish (FTE)/Withdrawal. This happens
when the applicant fails to respond to requests for
information or submits a request of withdrawal.
(3) Proposed denial. This happens when an applicant
fails to meet exemption requirements. The appli-
cant may appeal the proposed denial.

The current waiting period for assignment of applications in the

third group is 9 to 10 months (http://www.nonprofitlawblog.
com/home/2006/09/starting_a_nonp.html).
How many applications did EO receive in FY 2008? The
answer is a staggering 84,329 applications. Out of these appli-
cations, the EO approved 58,590 applications. However, there
are concerns from some quarters that the agency is “rubber
stamping” most of these applications. Lawyers who represent
non-profit groups say the process to review applications has
become disorganized in recent years, with some organizations’
applications receiving very limited review, while others have
gotten held up by the revenue agents asking questions that
seem irrelevant (Schwinn and Williams, 2001).
92 ◾ Effective Non-Profit Management

Recently, additional new concerns are raised with the

agency’s capacity to work with non-profits to explain the new
Form 990, ability to process the increased number of annual
reports that now thousands of small grassroots organizations
are required to file, and the capacity to work with these organi-
zations in terms of providing them technical advice on comple-
tion of the form.
This leads one to ask the question of what explains the
above situation. According to some, it is mostly a resource
issue. In March 2007, the Independent Sector gave a testimony
to Congress urging the government to increase the budget allo-
cation for the IRS’s TE&GE Division. Following is an excerpt
from that testimony: “Over the past 20 years, the number of
charities and foundations has nearly doubled in size, with
applications for tax-exempt status increasing steadily. During
that time, the number of staff within the IRS Tax Exempt
and Government Entities Division has remained essentially
unchanged” (Independent Sector 2007, 3). It is widely under-
stood that lack of adequate resources has crippled that agency
to perform a more effective role.
At the end of FY 2008, the EO Division had a total 826
employees, with 461 working in the Examinations Office, 355
working in the R&A office, and the remaining 10 working in the
CE&O office. An additional 12 employees were working at the
director’s office (EO Annual Report and Fiscal Year 2009 Work
Plan, http://www.irs.gov/charities/article/0,,id=200617,00.html).

Discussion Questions
1. What do you think are the main reasons for the problems, as pointed out in
the case study, that the IRS Exempt Organization Division is facing? Is it the
resource problem or do you think that there are other underlying problems
that explain the situation?
2. If the Obama administration seeks suggestions from you for ways to improve
the functioning of the IRS in its dealing with the non-profit sector, what
would be your suggestions? Explain the rationale and the feasibility of your
suggestions.
 Non-Profit Laws and Regulations ◾ 93

Web Resources
The Citizen Media Law Project (http://www.citmedialaw.org/legal-guide/state-
law-forming-nonprofit): Includes state-specific information on forming non-
profit organizations.
Tax Information for Charities and Other Non-Profits (http://www.irs.gov/chari-
ties): Includes detailed information on all exempt organizations, reporting
requirements and relevant forms and documents, a variety of resource tools,
and FAQ sections.

End-of-Chapter Review of Terms

Articles of Incorporation
Bylaws
Employer Identification Number
Facts and circumstance test
Incorporation
Lobbying
One-third support test
Pension Protection Act
Private foundation
Private inurement
Public charities
Sarbanes-Oxley Act
Self-dealing
Tax Payer Bill of Rights Act
Unrelated business income taxes

References
Brody, E. 2006. The Legal Framework for Nonprofit Organizations. In The Non-Profit Sector.
A Research Handbook, ed. W. W. Powell and R. Steinberg, 243–266. New Haven, CT:
Yale University Press.
David O. Renz & Associates (ed.). 2005. The Jossey-Bass Handbook of Nonprofit Leadership
and Management. New York: Wiley.
Frumkin, P. 2002. On Being Nonprofit: A Conceptual and Policy Primer. Cambridge, MA:
Harvard University Press.
Hopkins, B. R. 2004. Planning Guide for the Law of Tax-Exempt Organizations. Strategies and
Commentaries. New York: Wiley.
94 ◾ Effective Non-Profit Management

Independent Sector. 2007. Testimony of Independent Sector, Washington, DC, U.S.

Senate Appropriations Committee, Financial Services and General Government
Subcommittee, May 23.
Internal Revenue Service (IRS). 2000. Tax on Unrelated Business Income of Exempt
Organizations. Publication 598. U.S. Department of Treasury, Rev. March.
Internal Revenue Service (IRS). 1999. Tax Exempt Status for Your Organization. Publication
557. Department of Treasury.
Miner, B. 2006. Tax Exempt. More Than 16,000 Private Properties in Wisconsin Pay No
Property Taxes. As a Result, Everyone Else Pays More. Why? Milwaukee Magazine
(November 17), http://www.milwaukeemagazine.com/currentIssue/full_feature_story.
asp?NewMessageID=11063 (accessed August 10, 2010).
Pressey, D. 2008. Provena Loses Tax Exemption Again in Appellate Court Ruling, http://
www.news-gazette.com/news/courts-police-and-fire/2008-08-27/provena-loses-tax-
exemption-again-appellate-court-ruling.html (accessed May 16, 2009).
Schwinn, E., and G. Williams. A Challenge for the IRS. Chronicles of Philanthropy 13(21): 1–4.
Scrivner, G. N. 2001. A Brief History of Tax Policy Changes Affecting Charitable
Organizations. In The Nature of the Nonprofit Sector, ed. J. S. Ott, 126–147. Boulder,
CO: Westview Press.
Simon, J., H. Dale, and L. Chisolm. 2006. The Federal Tax Treatment of Charitable
Organizations. In The Non-Profit Sector, ed. W. W. Powell and R. Steinberg, 267–306.
New Haven, CT: Yale University Press.
Smucker, B. 1994. Nonprofit Lobbying. In The Jossey-Bass Handbook of Nonprofit Leadership
and Management, ed. David O. Renz & Associates, 216. New York: Wiley.
Storm, S. 2008. Tax Exemptions of Charities Face New Challenges, http://www.nytimes.
com/2008/05/26/us/26tax.html?pagewanted=1&_r=1 (accessed May 15, 2009).
Thomas, R. 2008. City of Rice Lake Wants Payment in Lieu of Property Taxes for New
Hospital. Scrutiny of Hospitals’ Property Tax Exemption Grows Nationwide as
Municipalities Search for New Revenues, http://www.businessnorth.com/exclusives.
asp?RID=2795 (accessed December 12, 2009).
Welytok, J. G., and D. S. Welytok. 2007. Nonprofit Law and Governance for Dummies. New
York: Wiley.
Wing, K. T., T. H. Pollak, and A. Blackwood. 2008. The Nonprofit Almanac. Washington,
DC: Urban Institute.

Endnotes
1. Federal tax statutes are codified in Title 26 of the U.S. Code. Title 26 is commonly
referred to as the Internal Revenue Code (IRC). The first IRC was passed in 1939. The
IRC of 1939 was later comprehensively revised by, and replaced by the IRC of 1954.
The current version of the IRC is the IRC of 1986. The Tax Reform Act of 1986 sub-
stantially amended the IRC of 1954, so the statute was renamed the IRC of 1986.
2. A non-profit can operate in more than one state; however, it can be formed under one
state’s law. Usually, the non-profit will choose a state for its formation where it will have
its headquarters.
3. Disqualified persons include those who have substantial influence on the organization
including substantial contributors, foundation managers, and owners of more than
20% of the total combined voting power of the organization, family members, and
certain government officials.
Chapter 4

Non-Profit Governance

Governance usually refers to the “strategic leadership of nonprofit organizations.”

However, in most instances, it also includes both the management and leadership
functions. In the non-profit sector, the board and the chief executive officer (CEO)
work as partners in non-profit governance.
Non-profit governance has been conceptualized in two major ways: the tra-
ditional and the contemporary. The traditional framework views non-profit gov-
ernance at the organizational level where the board of directors and trustees are
considered as mostly responsible for higher-level policy decisions, accomplishment
of the agency’s goals, and for the non-profit organization’s (NPO) conformance to
all the legal requirements. Governance, thus, is internally focused. In this frame-
work, even though the governance body has the responsibility to undertake strate-
gic planning or public relations, the predominant goal of these boundary-spanning
functions is to promote the interest of the non-profit organization.
In contrast, the contemporary framework offers a broader scope of non-profit
governance. This approach views non-profit governance as moving beyond the
internal scope of responsibility to addressing the community or public interest.
This framework offers a more meaningful understanding of non-profit governance
in today’s world where we are witnessing the increasing blurring of the non-profit
and public sectors (as discussed in Chapter 2).
This chapter uses the different approaches of non-profit governance and explains
the roles and responsibilities of non-profit boards and CEOs—the key governing
bodies. The chapter discusses, at length two of their major governing roles: strategic
planning and promoting the public interest goals. It also discusses the issue of the
leadership challenges at the executive level, and ends with a case study on the 2010
scandal with Bernie Madoff and the lessons learned for non-profit boards.

95
96 ◾ Effective Non-Profit Management

The chapter has the following learning outcomes:

1. To identify and explain the roles and responsibilities of non-profit board and
executive directors, as key governing bodies.
2. To discuss board recruitment, selection, management, training, and development.
3. To analyze the shared partnership between the executive director and the
board.
4. To explain the process of strategic planning as a key leadership responsibility
of the governing bodies.
5. To explain the emerging leadership role of the governing bodies, moving
beyond accomplishment of internal organizational mission to promoting the
broader public interest goals.
6. To comprehend some of the emerging leadership challenges in non-profit
organizations.

4.1 Non-Profit Governance: Who Governs?

Non-profit boards and the CEOs are the key governing actors in non-profit orga-
nizations. They share some responsibilities as well as perform some unique ones.
The question of who actually governs non-profits has divided both scholars and
practitioners. Is it the board or the CEO? There are three clear approaches here.

4.1.1 The Traditional Approach

Several scholars (for example, Carver, 1990; Houle, 1989; Wolf, 1999) believe that
non-profit governance lies with the board of directors. Houle, for example, states that
“the failure of a board member to accept responsibility is a sign that in some respect
the board has not operated efficiently” (1989, 136). He places a special responsibil-
ity on the board chair to arouse board members’ interest, to ensure the non-profit
organization’s effectiveness, and argues that the CEO should only act in accordance
with the wishes of the board chair. Murray (2001) takes a similar position that the
final decision on governance ought to be with the non-profit organization’s board.
Carver (1990) also advances the traditional idea but does not see the board’s
chair as having the central power of authority and control. If that person had that
level of influence, according to Carver, then the board chair would be performing
the role of the paid executive director. He argues that the board as a whole must
take responsibility for its work. He makes it very clear that the responsibility for
improving board governance is not in the domain of the CEO. In Carver’s para-
digm the CEO is not responsible for motivating the board. As he argues, “only a
deluded board waits for its CEO to make it a good board” and that “the board is
responsible for its own development, its own job design, its own discipline, and its
own performance” (2006, 189).
 Non-Profit Governance ◾ 97

In this approach, the CEO is thus subordinate to the board and the working
relationship is characterized by distinct and separate roles for the board and the
executive director; with the board directing, supervising, and limiting the director’s
activities as it sees fit.

4.1.2 The Shared Partnership

Several authors have challenged the traditional approach and instead view non-
profit governance as a shared responsibility between the board and the CEO. As
an example, Herman and Heimovics (1991a) in their research found that effective
CEOs work very closely with their boards. They advance the idea of a “board-cen-
tered” approach, where the CEO plays a pivotal role in the success or failure of the
board. This model relies on the expertise, strength, and management capabilities
of the CEO in a similar manner as the Conjoint-Directorship paradigm developed
by Leduc and Block (1989). In the conjoint approach, leadership roles and respon-
sibilities are thoughtfully divided among the board and the CEO, based on open
discussion and careful assignment of tasks.
Unlike the traditional approach, the board-centered and conjoint-director
models perceive the executive director as a central figure that the board relies on
for its governance success. This shared partnership approach builds on the idea
of partnership and collegiality between the two actors. It acknowledges the legal
responsibilities of the board but views the CEO as taking an active role in assist-
ing with or coordinating the participation of board members in fulfilling their
governance commitment. In this approach, the quality of the board’s performance
is a direct result of the CEO’s ability to steer and promote productive interactions
among board members.

4.1.3 The Situational Approach

In contrast to the one-size-fits-all approach of the traditional and the shared part-
nership views or the prescriptive models of non-profit governance, empirical studies
of actual governance decisions in non-profit organizations reveal several common
patterns. Murray (2001, 11) explains that findings from this research show that
there are four different patterns of CEO–board relationships. One is the CEO-
dominant pattern that is most common in large and established NPOs. In this
pattern, the CEO gathers information from different sources, formulates decisions,
and has them ratified (rubber-stamped) by the board as a whole. The next com-
mon pattern is the board-dominant pattern, often found in smaller, younger, more
volunteer-driven non-profit organizations, in which a small core group in the board
plays an influential role in recommending a course of action on governance issues.
The CEO here is basically one of several important decision makers. The third
common pattern is the staff-dominant situation that is usually found in professional
bureaucracies like universities or hospitals. Here a core group of senior professional
98 ◾ Effective Non-Profit Management

staff (e.g., faculty members) has the power to make strategic decisions due to their
expertise, and the board and CEO basically ratify their decisions. Finally, there is
the collective governance pattern, usually found in advocacy organizations. This pat-
tern emphasizes collective decision making through involving all important stake-
holders (board, staff, CEO, other stakeholders).
These findings make one realize that the answer to the question of “who gov-
erns a nonprofit” depends on the unique situation of each non-profit and that the
relationship between the non-profit board and the CEO depends on a variety of
factors and circumstances. For example, McClusky (2002) suggests that the fol-
lowing seven factors affect the appropriate division of roles and responsibilities
among board, executive, and other staff and volunteers within an NPO: (1) the
size of the NPO’s budget, staff, and board; (2) the number of active volunteers
and breadth of roles they perform; (3) the stage of the NPO’s life cycle; (4) the
level of trust/confidence between the chief executive and the board; (5) executive
transition; (6) the presence of organizational crisis; and (7) environmental factors,
including fundamental change in funding sources and pressure toward merger or
intense collaboration.
A major factor is the life cycle of the non-profit. All non-profits go through
different stages of the life cycle, and each stage may require different patterns of
relationship between the CEO and the board in regard to non-profit governance.
Box 4.1 uses the life-cycle factor to outline the common relationship patterns

BOX 4.1 LIFE CYCLE AND BOARDS AND CHIEF

EXECUTIVE OFFICER RELATIONSHIPS

Stage I (Infancy): Board is involved in all aspects of management and gov-

ernance, including completing articles of incorporation, filing tax-exempt
application, fundraising, public relations, hiring a CEO, and implement-
ing programs.
Stage II (Juvenile): More staff is hired to support the board’s work; the board
still focuses on operations and policy making. There is a need for more
formal systems and oversight.
Stage III (Adolescence): CEO is responsible for operations and program
implementation, while the board focuses more on governance issues (e.g.,
oversight, public relations).
Stage IV (Mature): There is a clear separation of roles and responsibilities
between the board and the CEO, each holding the other accountable for
their respectively agreed upon roles.

Source: Adapted from Burns, M., 2010, Act Your Age! Organizational Life
Cycles: How They Impact Your Board, Branford, CT: BWB Solutions.
 Non-Profit Governance ◾ 99

between the CEO and the board’s relationship. However, one needs to keep in
mind that other factors, like a crisis or some other unexpected development, may
also redefine the CEO and board’s roles and relationships.
It is also important to understand that the role of board and the CEO will also
depend on the type of the non-profit. For example, in an all volunteer organiza-
tion, the board will always play a very strong role both in governance and manage-
ment. In contrast, in an entrepreneurial organization (NPOs which function more
like a social enterprise), it is usually the CEO who is more involved in governance.
The situational approach explains the dominant pattern of today’s CEO and board
relationships.

4.2 Boards of Non-Profit Organizations (NPOs)

Legally, NPO boards are at the top of the organizational hierarchy, meaning that
they are the ultimate body responsible for the agency’s accomplishment of its mis-
sion and for following the relevant laws and policies. Non-profit board members
are all volunteers, and as discussed above, it is not necessarily that boards’ roles
are clearly demarcated from the roles of a CEO, but instead both work as partners
in most organizations. So, why have boards? The main reason is obvious—it is a
legal requirement. As discussed in Chapter 3, state laws require that non-profits
have boards. However, there are two theories of organizations (the agency theory
and the resource acquisition theory) that also provide additional rationale for the
existence and value of non-profit boards. The agency theory perspective stresses the
importance of separating ownership from control (Fligstein and Freeland, 1995).
According to the agency theory, board members have the responsibility to select
and evaluate the CEO and to monitor his or her actions to ensure that the interests
of management are aligned in such a way as not to conflict with the interests of
the organization or society (Fligstein and Freeland, 1995).Therefore, in regard to a
NPO organization, having a volunteer board, with no financial stake, to select and
monitor the CEO and engage in the governance functions provides some assurance
and safeguards that the CEO will not engage in any self-inurement activities. It also
gives an extra cushion of support during a crisis or an emergency situation involv-
ing the CEO (e.g., sudden unforeseen departure of the CEO, a scandal involving
the CEO). During those situations, the board of directors could assume temporary
responsibility for managing the essential activities of the NPO.
The resource dependency theory, on the other hand, holds the view that the
ability to acquire and maintain resources is essential to organizational survival
(Pfeffer and Salancik, 1978). This perspective sheds light on the crucial role that a
NPO board could play in facilitating exchanges that reduce interdependencies and
uncertainties in the organization’s operating environment. The board of directors
through their personal and professional contacts can become an asset to a NPO for
resource acquisition.
100 ◾ Effective Non-Profit Management

While NPO boards share some similarities with for-profit boards, the differ-
ences are significant which in turn bring some unique dynamics to non-profit gov-
ernance and the relationship between the board and the CEO.
In terms of similarities between NPO and for-profit boards, both have fiduciary
and governance responsibilities and both must ensure that their respective agencies
are conforming to rules and regulations for the operation of corporations as enu-
merated in federal and state laws.
There are however significant differences as the following list portrays:

1. For-profit boards are often paid, while NPO boards usually are not (except
for reimbursement of expenses incurred).
2. For-profit board members make decisions on dispersing profits to sharehold-
ers; NPO boards do not engage in this process because such profit sharing
does not apply to NPOs.
3. Unlike for-profit boards, NPO boards participate or are expected to partici-
pate in fundraising.
4. Unlike for-profit boards, NPO boards must refrain from doing improper lob-
bying or self-dealing.
5. Unlike for-profit boards, NPO board members are all volunteers who have no
financial stake in the organization.
6. Lines of authority between the CEO and the board are less clear in NPOs
compared to for-profit organizations.
7. NPO board members are generally guided by a higher standard of ethics
compared to those who work in for-profit boards.

4.2.1 Roles and Responsibilities

Irrespective of the reality that a multitude of factors influence NPO boards’ roles
and responsibilities, one can delineate some of their core or common responsibilities.
These responsibilities are grouped here into two broad categories: legal and functional.

4.2.1.1 Legal Responsibilities
“Although the board may delegate management authority to a paid staff person,
known as the executive director, the board can never be relieved of its legal and
fiduciary responsibilities” (Block, 2001a, 15). The reality that is affirmed here is
that the board or trustees of NPOs are ultimately legally responsible for the affairs
and conduct of the organizations. As Wolf (1999) pointed out, the subject of board
liability is complex, particularly because it involves state laws that vary from state to
state. However, he also pointed out that there are some legal responsibilities across
different states that non-profit board members are required to perform.
The main responsibilities of NPO boards are summarized as the duty of care,
loyalty, and obedience. The duty of care responsibility refers to “paying attention
 Non-Profit Governance ◾ 101

and exercising due diligence in monitoring the organization’s finances and super-
vising the actions of its management” (Worth, 2009, 68). This basically means that
the board members, for example, need to attend meetings regularly, read important
documents (budget, financial reports), seek information from the CEO, and remain
informed of all important matters and activities of the NPO. The duty of loyalty
responsibility means that the board members will remain in complete loyalty to
the NPO and will not pursue their own personal interests at the expense of the
agency’s interest. The duty of obedience requires that the board members ensure that
the organization is complying with all the legal requirements, and that all activities
and programs are geared to promote the mission of the NPO.
Generally speaking:
1. Trustees cannot be held liable for business judgments or financial decisions, if
these are informed decisions, show no conflict of interest, and do not appear
highly irrational. Nevertheless, if they do not attend meetings, approve major
decisions involving the corporation’s funds without soliciting any background
financial information, or engage in any illegal financial activity, they can be
held liable.
2. They are liable when conflict of interest is involved.
3. They are accountable for carrying out the organization’s mission.
4. They are liable for gross negligence and according to the language in many
state laws, need only exhibit “such care as an ordinary prudent person in a
like position would use under similar circumstances.” Even though lawsuits
are relatively infrequent in the non-profit world, trustees get sued, and to a
much greater extent, become involved in threatened lawsuits that can require
the expenses of an attorney or a financial settlement even though these law-
suits might be without merit. (See Box 4.2.)

BOX 4.2 TRUSTEES MUST PAY $1.5 MILLION

FROM THEIR OWN POCKET
In February 1997, the Board of Regents of the State of New York removed 18
of the 19 members of the Board of Trustees of Adelphi University (a private
university, in Long Island). The main reason was the failure of the trustees
to exercise their fiduciary duties regarding the compensation of the presi-
dent (Dr. Peter Diamondopoulos) and payments to individual members of
the board for services provided to the university. Some specific information
regarding the nature of their failures includes the following:

1. In July 1985, the vice-chair negotiated by telephone a compensation

package with the then new President Peter Diamandopoulos which
included an annual salary of $95,000, plus a contribution to Teachers
102 ◾ Effective Non-Profit Management

BOX 4.2 (Continued) TRUSTEES MUST PAY

$1.5 MILLION FROM THEIR OWN POCKET

Insurance and Annuity Association–College Retirement Equities Fund

(TIAA-CREF) equal to 13% of his salary, a house, use of a car, and
related tangibles. The board did not review or approve this package as
required by the N-PCL (Not-for-Profit Corporation Law). At the end
of 2 years, this agreement was subject to automatic renewal.
2. One year later, the president asked for a review of his salary even
though he was only halfway through his contract term. The then
chair of the board (who had been the vice-chair) unilaterally selected
two trustees to advise him on the president’s compensation. No for-
mal evaluation was conducted, and the board neither reviewed nor
approved the raise granted by the committee.
3. Additional increases were provided each year until 1993.
4. In 1993, a board committee recommended among other things, with-
out reviewing any comparable data or any performance evaluation, a
$50,000 raise and subsequent 5% annual raise and an option for the
president to purchase a university-owned apartment in Manhattan at a
fixed price lower than that paid by the university in the prior year. The
president’s attorney drafted the agreement; no attorney reviewed it for
Adelphi. At the board meeting, no details were provided and the board
was not told the option on the apartment. No trustees asked any ques-
tions. By unanimous vote, the board authorized the chair to act.

In 1997, the New York State’s Attorney General began an inquiry into
allegations of misconduct by Diamandopoulos and the trustees, but the uni-
versity officials went to court opposing the subpoenas. Then the battle shifted
to a different forum: the State Board of Regents. After 27 days of hearings,
the regents removed 18 of Adelphi’s 19 trustees, including Diamandopoulos,
for neglect and misconduct. A new set of trustees, appointed by the regents,
terminated Diamandopoulos as president.
The Attorney General then sued the former trustees to recover millions
of dollars they had misspent on “a lavish life style for the college’s president”
(quoted in Lambert, 1997). The suit also sought restitution of $3.1 million in
legal fees that was spent to defend the former Adelphi officials.
The lawsuit charged that the trustees neglected their fiduciary responsibili-
ties in overseeing the former president. The trustees while not admitting any
wrongdoing, accepted personal liability and agreed to pay the money to settle
the charges.
 Non-Profit Governance ◾ 103

There are different options for a NPO to protect its board members on liability
issues or charges. The agency can:
1. Indemnify its trustees which does not protect the trustees from legal action, but
all the costs for such action are paid by the organization. However, this also
means that it might transfer risk from the trustee to the organization and put its
assets at risk. If the agency has this provision, it will usually be listed in its bylaws.
2. Purchase indemnification insurance that will reimburse the NPO for
expenses associated with the costs of indemnification.
3. Provide directors and officers (D&O) insurance to protect both against
indemnification costs and any other costs incurred by the trustee that would
not be covered by the NPO.
4. Purchase good liability coverage insurance to protect the NPO in the case of a
lawsuit.

4.2.1.2 Functional Responsibilities
Following are some of the common functional responsibilities of NPO board members:
1. Mission and policy development—Mission development and monitoring
progress toward mission accomplishment are major functional responsibili-
ties of boards. As mentioned before, they are legally liable for ensuring that
the agency’s programs and policies are promoting the agency’s mission. The
board’s role does not end in the determination of the agency’s mission. It is
important for the board to periodically revisit the mission and approve pro-
grams geared to accomplish the mission. Their policy-making roles include a
variety of responsibilities including developing the articles of incorporation
and the bylaws. The board is also responsible for developing policies on con-
flict of interest, travel, use of funds by boards and staff, and other organiza-
tional issues. It is good practice for a board to also develop a trustee manual
along with a personnel manual. Of course, this is one of the functions where
the board members will work closely with the CEO and other staff because
the latter are more involved in the day-to-day activities of the NPO and in
some NPOs may have more expertise than the board. As Block pointed out,
“Often, effective organizations are those in which the board adopts policy
with input of the staff and the staff implement policy with the advice, coun-
sel, and support of the board” (2001a, 16).
2. Strategic planning—Strategic planning is integrally related to the mission,
policies, and programs of the agency. Strategic planning involves setting up
long-term goals and objectives of the organization, and developing strate-
gies to implement them. Similar to the mission development function, this is
another function where in most cases the board works very closely with the
CEO and other staff. In a later section of this chapter, strategic planning is
discussed at length.
104 ◾ Effective Non-Profit Management

3. Fiscal responsibilities—This involves developing, monitoring budgets, and

establishing financial controls. Financial controls address issues like (a) who
approves invoices and signs checks, (b) who can transfer money from one
account to another, (c) who deposits money to the banks, (d) what type of
background check is needed for those who will work with the NPO finance,
and so forth. The board must also ensure that the organization keeps accu-
rate and up-to-date financial records, prepares and follows an annual budget,
prepares timely and accurate financial statements, effectively manages assets,
complies with all laws and reporting requirements, conducts annual external
financial audit, has internal financial controls, and engages in risk manage-
ment activities (e.g., conflict of interest policy, purchase of insurance).
4. Resource development—The board members are responsible for garnering
adequate resources for the activities of the organization through direct finan-
cial contributions and a commitment to fundraising. Wolf pointed out that
“No group of people should display a greater commitment to a non-profit
organization than its trustee. These individuals, who have agreed to serve
the organization in a variety of ways, must set the tone for others—people in
the community, funders, constituents, audience members, and clients” (1999,
57). Thus, in most charitable organizations (exceptions are professional asso-
ciations), the board is expected to play a significant role in providing and
soliciting philanthropic funds. According to the BoardSource Nonprofit
Governance Index 2010, “A decade ago, roughly 50% nonprofit board mem-
bers were required to make personal gifts, attend events, identify donors, and
solicit funds. Today, 70% of boards require a gift and in turn, board giving
has increased substantially” (2010, 14).
Even though critics might raise concerns with a firm policy that mandates
that all board members must make some financial contribution, it is actually
a best practice to do so. It shows the board’s commitment to the NPO, and in
turn this helps the agency to solicit funds from other sources. Fundraising is a
process, and depending on each member’s comfort zone, each trustee should
participate in one or more of the processes (e.g., direct solicitation, prospect
identification, prospect list development, and so forth).
5. Select, evaluate, and if necessary terminate the CEO—These are important
responsibilities of the board. Wolf pointed out, “The character of almost
every organization is set in large measure by the chief executive” (1999, 59).
As one may realize, the CEO is the most important staff person in a NPO.
His or her skills and competencies will determine to a large extent the success
of the NPO.
In selecting the CEO, it is important that the board has a clear agreement
on expectations, develops a job description, and has a clear idea about how to
evaluate the CEO’s performance. The importance of writing a clear and good
job description cannot be overemphasized. At times, this position description
may need to be revisited or updated.
 Non-Profit Governance ◾ 105

The recent trend in job description in human resource management is

to include working conditions and some performance standards (Klingner
and Nalbandian, 2003). Such a job description gives a thorough understand-
ing about not only the job duties but also the expectations and the working
environment.
NPOs, usually the larger ones, sometimes utilize the professional service
of an executive search firm. Once hired, the board has a responsibility to sup-
port the CEO and work with him or her closely.
6. Boundary-spanning role—This includes a variety of activities geared to garner
adequate resources (financial and nonfinancial) for the NPO and promote
its work. The board is responsible for maintaining a communication link
to the broader community and the external stakeholders. The board is also
responsible for promoting the work of the organization. As Zimmerman and
Stevens explained, the board has a responsibility to “represent the organiza-
tion and its programs positively to key stakeholders and the community at
large. Be a good ambassador” (2008, 24). Board members should make regu-
lar appearances on behalf of their organization; speak to community groups
and business groups as well as family and friends. Such engagements help the
board and the organization in different ways including building the percep-
tion of a loyal and well-informed board and staying connected with the needs
of the broader public and their expectations. This also provides opportunities
to citizens to engage with the NPO.
7. Maintain accountability—According to the articles of incorporation, the
board is held responsible for the organization. The board is thus the locus of
accountability. The board is accountable to federal, state, and local govern-
mental regulatory agencies. On occasion, they must answer to congressional
or legislative committees. According to Howe (2000), the board’s fiduciary
role is defined by five performance responsibilities: the mission, the chief
executive, finances (budget, audit, and investments), program oversight and
support, and finally fundraising. Board members are individually account-
able for attending board meetings, being informed, and making personal
contributions. The board is collectively accountable for the five performance
responsibilities.
The Sarbanes-Oxley Act has heightened the importance of having effective
mechanisms for NPO accountability. A 2005 survey1 conducted by the Urban
Institute (Ostrower, 2007) found that 47% of respondents indicated that their
organizations had created or revised their conflict-of-interest policy since the
passage of the Sarbanes-Oxley Act. Another 46% and 54%, respectively, indi-
cated that they had created or revised whistle-blower and separate audit com-
mittee policies and practices. However, the findings also show that one-third
of the participating charities did not conduct independent audits, and that half
did not have a conflict-of-interest policy—the two provisions required by the
act. The same study found that insider deals are common among non-profits:
106 ◾ Effective Non-Profit Management

44% of organizations with annual budget of $40 million or more reported

having bought goods, services, or property from companies affiliated with
their board members during the previous 2 years. Of those insider transac-
tions, 33% were not reviewed or approved by other board members.

The above discussion underscores the importance of board responsibilities.

However, a board needs to be careful not to engage in the day-to-day operations of
the organizations (with some exceptions) or hire staff other than the CEO or make
detailed programmatic decisions without consulting staff.
Given these significant responsibilities, it is not surprising that research has
found a positive relationship between non-profit organizational effectiveness and
overall board performance (Bradshaw et al., 1992; Jackson and Holland, 1998;
Preston and Brown, 2004).

4.2.2 Board Recruitment, Selection, and Development

Consider the following stories (real cases):

United Way of America: Longtime President William Aramony was accused of

using charitable donations to finance a lavish lifestyle, including support of
an expensive condominium, use of a limousine, and trips on the Concorde.
His salary of $463,000, including fringe benefits, also fueled the situation.
He was found guilty of 25 felony charges, including fraud and tax evasion,
and was sentenced to 7 years in prison.
National Association for the Advancement of Colored People (NAACP): Benjamin F.
Chavis, Jr., the new president, was fired in 1994 after it was revealed that he used
a large sum of NAACP money to settle a sex discrimination suit against himself.
Upsala College: Upsala College, a private liberal arts college, located in East
Orange, New Jersey, was shut down on March 31, 1995, after 102 years. It
was crushed by a $12.5 million debt that accumulated during a decade of
questionable financial mismanagement. The college had used 27 of its 29
buildings as collateral for loans to meet the operating expenses as its enroll-
ment plummeted during the 1980s.

When we read or hear stories like the above, a very logical question comes to
our mind: “What was the board doing?” One could safely assume that one or more
of the following were occurring in those boards:

1. The board members as a group did not understand their responsibilities.

2. They understood their responsibilities but were negligent in performing their
responsibilities.
3. The board delegated consciously or unconsciously their obligation for over-
sight to the executive director.
 Non-Profit Governance ◾ 107

One cannot thus underscore the importance of developing a well-thought pro-

cess that will guide board recruitment, selection, management, and development.

4.2.2.1 Recruitment and Selection

“It has been widely proposed that a board should be composed of the three W’s:
individuals who are willing to ‘work,’ some with ‘wisdom,’ and others with ‘wealth’
(Block, 1998, 30).
Before the agency (whether it is the founder in the case of a new non-profit,
or the CEO or existing board members) starts its recruiting process, it is impor-
tant to determine the skills and competencies that the NPO is looking for in
its prospects. Having board members with specific expertise that suits the need
of the non-profit and ensuring a diversified board representing the community
are important considerations for recruitment purposes. (See Box 4.3.) It is also
important to recognize that organizations go through different stages of devel-
opment or maturational stages, and each stage may present different needs and
issues. “Matching an organization’s life cycle to the requisite skills of a board
member could lead to more effective and purposeful organizational outcomes”
(Block, 2001a, 18).

BOX 4.3 COMMON SOURCES OF BOARD RECRUITING

1. Referrals from current board members

2. Public announcements
3. Internet recruiting
4. Committed volunteers
5. Volunteer job board
6. Sponsor “board fair”
7. Major business corporations and outstanding business leaders in the
community
8. Loyal donors
9. Board or volunteer recruitment Web sites (BoardNetUSA, BoardSource,
VolunteerMatch)
10. Friends and professional connections
11. Previous clients
12. Frequent visitors (e.g., museum visitors)

Sometimes, for expediency, the board may just hire friends of board mem-
bers. However, this is not a good process nor a good decision.
108 ◾ Effective Non-Profit Management

BoardSource (2007) suggested the following steps to recruit active and involved
board members:

1. Develop a short job description that will outline the basic responsibilities and
expectations (e.g., time commitment, financial contribution) of board members.
2. Identify and decide on the profile of the future board member by using a skill
inventory chart or a similar process. Appendix 4.1 shows a sample skill inven-
tory that boards can use for this purpose.
3. Develop required qualifications for serving. After the future board members’
profiles are developed and approved, the board should also develop some pro-
cess to develop required qualifications of the prospects once selected.
4. Adopt a plan to identify and nurture prospects. The entire board should be
involved in identifying prospects who meet the profile. Once a list is pre-
pared, the board members should first try to involve the prospects as volun-
teers in different capacities before asking them to join the board. This will
assist in recruiting interested board members.
5. Have a rigorous nomination process. One or more board members should
meet with the prospects, explain to them the responsibilities, and inform
them of the organization’s mission and programs. In their research, Herman
and Renz (2000) found that written expectations of giving and soliciting for
board members were present in most effective organizations.

As Worth (2009) explained, board members could be selected in different ways

including election by members (e.g., ASPA), appointment by outside authority (e.g.,
some college and university boards who are appointed by alumni associations), and
selection by existing board members. Most non-profit board members are selected
by existing board members; they are also known as self-perpetuating boards. The
advantage is that the existing board members are cognizant of the profile of the
existing board and hence the gaps or future needs. This process clearly is labor
intensive for the current board, but it provides an opportunity to bring together
a group of committed people who have had a chance to define their mutual goals
(www.boardsource.org). However, this process also may emphasize the status quo.
Table 4.1 shows that NP boards, in general, are not as diversified with regard to
race/ethnicity as one would hope them to be.

4.2.2.2 Board Size and Committees

Each state sets a minimum number (usually three) for non-profit board member-
ship. However, there is no ideal size for a board. It will depend on the needs and
particular situation of the NPO. Large and small boards have both advantages and
disadvantages. A large board could become unwieldy and difficult to work. On
the other hand, a new NPO in need of resource may find a large board useful in
fundraising. A small board may function well, in a more cohesive way. One useful
 Non-Profit Governance ◾ 109

Table 4.1 Board Demographics

Percentage of
Board Members

Race/Ethnicity

Caucasian 84%

African American/Black 8%

Hispanic, Latinos, or Spanish 4%

Asian 3%

Other (two or more races, American Indian, Pacific Islander) 1.9%

Gender

Female 48%

Male 52%

Age

Under 30 years 2%

30 to 39 years 12%

40 to 49 years 29%

50 to 64 years 43%

65+ years 14%

Source: Adapted from the BoardSource Governance Index 2010. Data are based on
survey of 978 NPO CEOs across the country.

way is to match the board size with the organizational life cycle. However, board
size may also be a result of tradition and cannot be explained rationally. It may also
result from trial and error, reflect the board practices of other non-profits in the
community, or may simply be a result of not finding replacements after individuals
completed their terms of office or quit their positions.
According to Block, “Organizations that do not rely heavily on the board alone
for fundraising or other supportive activities might be better served by a board or
no more than ten members” (1998, 38).
When a non-profit reaches a certain size, it is useful to form different com-
mittees to divide the workload. Some common board committees are executive,
finance, development, nominating, planning, marketing/public relations, events or
benefits, program, personnel, and investment.
The executive committee is usually empowered to act for the full board in
matters that require immediate action or do not involve major questions of policy
110 ◾ Effective Non-Profit Management

or funding. It acts as the chief coordinating committee for the board. It maps out
how the board’s business should be conducted, sets agendas, and organizes the
activities of other committees. This committee should be small enough (seven or
eight) to function effectively (Wolf, 1999). In a large board, the executive commit-
tee usually includes committee chairs or other selected leaders among the board.

4.2.2.3 Development and Training

To recap the discussion of the differences between non-profit and for-profit boards,
the former are all volunteers and may come from different backgrounds with little
or no knowledge of non-profit management/organizations. Therefore, one cannot
underscore the importance of proper orientation and training of board members
(Jackson and Holland, 1998).
New board members should have orientation sessions where they will meet the
staff, and listen to presentations by the CEO and board president. During the ori-
entation, it is important to distribute copies of the board policy manual, a copy of
the bylaws, and other important documents.
Box 4.4 includes an orientation checklist for new board members.
The board must also address leadership and development needs (through coach-
ing or mentoring, for example) that can facilitate leadership succession. Creating
a board development committee is highly recommended (Axelrod, 1994). Brown’s
(2007) research found that board development practices lead to competent board
members who are a significant predictor of board performance.

BOX 4.4 NEW BOARD MEMBER ORIENTATION CHECKLIST

1. Facility visit and staff introductions

2. Briefing on program strategies and results
3. Introduction to committees and advisory groups
4. Committee assignments and orientation
5. Calendar of meetings and events
6. Field visits (if applicable)
7. Library of organizational information
8. Review of audits, insurance, contracts
9. Additional information/documents as relevant to the NPO

Source: Excerpt from BoardSource, 2007, The Nonprofit Board Answer Book: A
Practical Guide for Board Members and Chief Executives, New York:
Wiley, p. 109.
 Non-Profit Governance ◾ 111

4.2.2.4 Evaluations
It is important to use some type of evaluation to ensure continued effective board per-
formance. Two types of evaluations are discussed in the non-profit governance liter-
ature: overall board performance and individual board performance. Unfortunately
both practices are relatively rare in board governance (Cornforth, 2001).
BoardSource suggests that a formal assessment of the full board’s functions
should be conducted every 3 or 4 years (2007, 135). Usually this is done through
a survey where board members anonymously answer different questions that ask
them to rate how well the board is doing in various areas. Other options include
informal discussion with each trustee or anonymous written statements. “Dismissal
through a majority vote of the board or some other procedure is an action that
should be taken in the case of gross misconduct” (Cornforth, 2001, 68).

4.2.2.5 Important Policy Documents

In order for a board to work effectively, it is important to set some policies in place.
Following are some important policies that all boards, irrespective of their sizes,
should develop and implement:

1. Terms of office limits—Limits should be placed on terms of office (usually

3 or 4 years) and on the number of times a trustee can be reelected. Such a
policy addresses the problem with deadwoods and also brings fresh blood to
the group. It is important that all board member terms do not expire at the
same time. Without some overlapping representation from the members of
the board, the organization would lose its important history and continuity
of policy development and strategic direction.
2. Attendance—This is a crucial policy that should also include a specific crite-
rion for the number of unexcused absences. Such a policy will not only re-
emphasize board member responsibility and commitment, but will also have
a process to address difficult issues that may emerge with non-attendance.
3. Financial commitment—This policy should make it clear whether board
members are expected or required to make a financial contribution. As men-
tioned before, it is a good practice to make financial commitment a man-
datory requirement. However, considering the possibility of this being a
disincentive for some prospects to join a board, it is better not to mandate a
specific amount of contribution.
4. The trustee manual—It should include the following at the least:
a. Articles of incorporation
b. Bylaws
c. A list of current trustees with affiliations, addresses, contact information,
and term expiration dates
112 ◾ Effective Non-Profit Management

d. A list of committees and their responsibilities

e. Brief history of the organization
f. A description of roles and responsibilities
g. Minutes of current fiscal year meetings
h. Specific planning documents if available
i. The annual report from the last completed fiscal year
5. Policies incorporating relevant provisions of the Sarbanes-Oxley Act.

Independent Sector and BoardSource have recommended that non-profits vol-

untarily adopt some provisions of the Sarbanes-Oxley Act, including those that
prohibit loans to board members or executives, require the CEO’s approval of the
organization’s Form 990, as well as require the creation of separate audit commit-
tees of the board, particularly for those organizations that have outside auditors.
Box 4.5 lists attributes of high-performance boards.

BOX 4.5 ATTRIBUTES OF A HIGH-PERFORMANCE BOARD

1. Board has clear roles which are distinct from the staff’s roles. Board’s
primary role is oversight, while staff’s is managerial.
2. Board members have three “hats” to wear—oversight, implementation,
and volunteer—and only one can be worn at a time.
3. The board has clear idea about the organization’s stakeholders and
its primary beneficiaries.
4. The board provides clear direction to the organization’s mission,
purposes, and priorities.
5. The chief executive is responsible for achieving goals within parameters
established by the board. The lines of authority and responsibility are
made clear.
6. The board chair manages the board with support from the chief execu-
tive. The board chair manages the board, and the CEO manages the
staff. When they provide mutual support to each other, it results in
high performance.
7. Committees serve the board’s needs, not the staff‘s needs.
8. Board meetings are well-planned. Meetings should include materials
sent in advance, clear agenda and time for the board to engage in pro-
ductive discussion.
9. Board members are carefully selected, oriented, and trained.

Source: Excerpts from BoardSource, 2007, The Nonprofit Board Answer Book:
A Practical Guide for Board Members and Chief Executives, New York:
Wiley.
 Non-Profit Governance ◾ 113

4.3 Chief Executive Officer (CEO)

In practice the CEO in a NPO assumes many of the governance and management
roles and responsibilities. As Worth explained, “Where the unique characteristics
of nonprofit management come together with the greatest significance is in the
position of the chief executive officer” (2009, 90).
Similarly, emphasizing the crucial role of non-profit executive directors, Block
argued that “In some organizations, the role of the executive director is not shaped
through the board’s articulation of expectations, but rather is shaped by the execu-
tive director’s experiences and know-how” (2001b, 100).
The uniqueness of a non-profit board may give the CEO this power. As dis-
cussed before, board members are all volunteers, have no financial stake with the
NPO, and may not have experience in non-profit management. The CEO may
know more about the organization than the board, especially if its programs pro-
vide technical services. The problem might be as Worth pointed out, “It may be
possible for a CEO to manipulate the board, orchestrate board meetings, and rel-
egate the board to the role of a rubber stamp for his or her initiatives” (2009, 73).
The board thus needs to work closely with the CEO not only to provide support
to him or her, but also to monitor that the CEO is not inappropriately redirecting
the NPO activities or jeopardizing its mission. However, micromanagement is also
not the alternative. Thus experts recommend developing a culture of partnership
between the CEO and the board in leading the NPO.

4.3.1 Common Job Duties and Responsibilities

All organizations’ functions and structures are affected by the environment, their
internal cultures and issues, sizes, history, and many other factors. Similar forces
and factors also influence the CEO’s job duties in a particular NPO. This means
that the job duties and responsibilities of the CEO vary widely depending on an
organization’s size, structure, history, and other factors. As Moyers explained,
“Even within a single organization, the role of the chief executive changes over
time based on shared history and trust, changing skills and personalities of the
board, the growth and professional development of the chief executive, and other
factors” (2006, x).
Following are several common job duties of NPO CEOs:

1. General duties—These are duties that any chief executive is expected to engage
in whether it is a NPO, for-profit, or a government organization.
Henry Mintzberg’s (1973) description of the 10 roles of an executive direc-
tor has been applied to NPOs. Mintzberg categorized executive managers’
10 roles within 3 sets of behaviors:
114 ◾ Effective Non-Profit Management

a. Four decisional roles (entrepreneur, disturbance handler, resource allocator,

negotiator)
b. Three informational roles (monitor, disseminator, spokesperson)
c. Three interpersonal roles (figurehead, leader, liaison)

NPO CEOs have to engage in different managerial functions including

planning, motivating, organizing, decision making, delegating, coordinat-
ing, reporting, supervising, managing, budgeting, and fundraising. Working
within this perspective, Herman and Heimovics (1991a) emphasized the
importance of the executives delegating much of the management of internal
affairs so that they can focus on the external issues. Similarly, Block (2001b)
emphasized that leaders in NPOs have to pay attention to both the external
and internal environments.

2. Non-profit specific job duties—Along with the above general duties, the CEO
of a NPO is also expected to engage in other major duties specific to manag-
ing the NPO.
Moyers (2006) lists 10 such basic responsibilities of non-profit CEOs:
a. Commitment to mission. Even though the board holds the ultimate
responsibility for determining the agency’s mission and purpose, in prac-
tice, most CEOs exercise considerable influence in this regard. They are
responsible to align programs and priorities with the mission along with
monitoring conditions that may require the agency to revisit the mission.
b. Leading the staff and managing the organizations. Usually, the CEO is
responsible for hiring and managing the staff, at the least, the staff at the
upper level. Here an effective CEO combines his or her leadership and
managerial skills in motivating, leading, supporting, and leading the staff.
c. Exercising responsible financial stewardship. This includes the CEO’s par-
ticipation in preparing the budget, monitoring the budget and financial
statements, explaining and keeping the board informed on budget, ensur-
ing sound financial decisions, and ensuring proper internal management
controls to protect against fraud and corruption.
d. Leading and managing fundraising. Fundraising has become an important
role of the CEO in most NPOs. Ahmed’s (2005) research, using content
analysis of 242 job advertisements of non-profit CEOs, found that “fund-
raising” was the most frequently listed job duty of the prospective chief
executives, followed by “overall management” and “leadership” duties. In
addition to fundraising, they are also responsible for working with the
board to develop fundraising strategies.
e. Accountability and ethics. Even though the board is responsible for legal
accountability, in practice, the CEO is mostly responsible to ensure that
the NPO is following the relevant state, local, and federal laws including
 Non-Profit Governance ◾ 115

fulfilling all the requirements of maintaining tax-exempt status. It is also

the CEO’s responsibility to set the tone for an ethical culture and to have
relevant policies (e.g., conflict of interest) in place.
f. Engaging the board in planning and leading implementation. The board
and the CEO work together in planning; however, often the CEO starts
the process mostly because of his or her full-time involvement with the
organization and his or her professional expertise. The CEO also has to
engage the board in the planning process and develop mechanisms and
processes for implementing and monitoring the progress of the plans.
g. Developing future leadership. This includes both board development (i.e.,
recruitment, training) and succession planning. The importance of suc-
cession planning cannot be overemphasized especially with the recent
surge in baby boomers retiring.
h. Building external relationships and serving as an advocate. This is another
responsibility that the CEO shares with the board. However, depend-
ing on the agency, this may fall more or less on the CEO. This includes
being the spokesperson of the agency, representing the agency in different
events, and developing and maintaining effective relationships with the
stakeholders.
i. Ensuring the quality and effectiveness of programs. This is a major job respon-
sibility, because the board does not oversee this. As Moyers (2006) pointed
out, this function cuts across other areas of responsibilities, but along with
those it also requires the CEO to periodically collect valid data on the qual-
ity or effectiveness of programs or to have assessment mechanisms in place.
j. Supporting the board. As mentioned before, board members are all volun-
teers and some do not have the required training or knowledge to assume
the director’s role. The CEO is thus responsible for supporting the board
and providing information and directives that will assist the board to
effectively perform its responsibilities.

The CEO’s leadership role cannot be overemphasized; at times the CEO may
have to do both leading and managing simultaneously especially in a small NPO.
But in a large organization, usually the CEO can delegate managerial duties to oth-
ers, but not the leadership role.

4.3.2 Required Competencies of the CEO

Block (2001b) explained that there is much evidence to suggest that many executive
directors are hired on the basis of their programmatic skills and not on their qualifica-
tions as executive directors. He also pointed out that more recently administrators are
hired based on their training or education in non-profit management. Hoefer (2003)
in his research on non-profit managers’ skills, reported that non-profit administrators
ranked high in the following skills: leadership, oral communication, decision making,
116 ◾ Effective Non-Profit Management

written communication, professionalism, identity with agency, conflict resolution,

commitment to clients, group dynamics, agency policy area, strategic planning, per-
sonnel management, meeting management, coordination, program planning, nego-
tiation, budgeting, tolerance for ambiguity, organization knowledge, and knowledge
of community. Ahmed (2005) in her research found that “communication” was the
most frequently listed skill or ability in the CEO’s job advertisement, followed by
fundraising, administration, interpersonal, and leadership skills.

4.4 Key Leadership Roles

The board and CEO provide leadership roles in a non-profit agency. The previous
discussion also underscores the importance of shared responsibilities between the
two. The following discussion describes in detail two important NPO leadership
roles: strategic planning and promotion of broader public interest (reflecting the
contemporary notion of non-profit governance). The former exemplifies the shared
responsibilities of the CEO and the board; the latter identifies an emerging gover-
nance role. These two are significant leadership roles because the former provides
safeguards to the present and the future of NPOs and the latter provides support to
enhance the legitimacy to the sector.

4.4.1 Strategic Planning
Strategic planning is “the process of deciding on the goals of the organization and
on the broad strategies that are to be used in attaining these goals” (Anthony and
Govindarajan, 2004). Bryson defines it as “a disciplined effort to produce funda-
mental decisions and actions that shape and guide what an organization (or other
entity) is, what it does, and why it does it” (2004, 6). As Bryson explained, “Strategic
planning is more than a strategy—it is a process that produces a product—a stra-
tegic plan—that puts meat on the strategy and points the way to implementing
it” (2001, 167). Long-range planning involves projecting trends and data into the
future—that is, estimating what is going to happen based on certain assumptions.
In contrast, strategic planning is goal oriented and action oriented; its purpose is to
change the future rather than merely predict it.
Successful strategic planning and the process, which includes different stake-
holders, promote shared agreement on the mission and vision of the organization,
build consensus and ownership among staff, prepare the organization to environ-
mental challenges, help develop opportunities that the organization can avail, and
give a clear future direction to the NPO. The strategic planning process also assists
the organization to review and challenge the status quo, to revisit its existing mis-
sion, and to re-think its way of doing things, thus providing meaningfulness to its
direction. In several ways strategic planning has become more important than ever,
mostly due to the changes in the environment of this sector.
 Non-Profit Governance ◾ 117

The environment of NPOs is always changing, and strategic planning helps a

non-profit to prepare itself better for an uncertain future and at the same time to cre-
ate and use opportunities to its advantage. For example, at this current time, there
are significant environmental changes occurring including an economic recession,
an upcoming presidential election in 2012, an increased influx of immigrants, an
aging population, and budget stress at all three levels of government. The future
is thus uncertain in terms of how long the recession might last or what types of
policies and priorities the new president may emphasize. Thus NPOs that have suc-
cessfully assessed these changes, developed some well-thought-out strategies, and
are implementing those will be in better shape to work more effectively now and in
the future. An increase in competition between non-profit and for-profit is another
environmental change that non-profits have to reckon with. Other environmental
changes include technological development and globalization.
Bryson (2004) identified the following steps in strategic planning:

1. Initiating and agreeing on a strategic planning process—There needs to be agree-

ment among stakeholders about the value and goals of the strategic plan, the
process, the timetable, and the responsibilities of different parties involved
in the process. So, one or more stakeholders initiates the process to bring the
major parties into some agreement on these matters. Sometimes the initiators
are organizational members (e.g., the board and CEO), sometimes NPOs
may hire an external consultant who may initiate the process.
2. Identifying organizational mandates—Mandates are things that the organiza-
tion is required to do, either by its charter or law. “The formal and informal
mandates placed on the organization consist of the various ‘musts’ it con-
forms—that is, the various requirements, restrictions, expectations, pressures,
and constraints it faces” (Bryson, 2004, 37). As an example, the American
Red Cross has mandated services that it is required to provide to the govern-
ment under its Congressional charter. In general, non-profit organizations
have fewer mandates than do public agencies. It is important to consider and
address these mandates during the strategic planning process.
3. Clarifying organizational mission, values, and vision—Mission is the purpose
(why the organization exists, the end result), and a statement of guiding val-
ues or beliefs, that is captured in the “mission statement” (Zietlow et al.,
2007). Mission is thus different than mandates. Identifying and revisiting the
mission are important because they not only provide opportunities to discuss
the mission and the need to define or redefine it, they also bring all stakehold-
ers on the same page. Some agencies also include a vision statement and set of
values that guide the mission and the vision. Values are those principles that
the organization holds most important and which the mission reflects.

The following (Box 4.6) is an example of an NPO with a clear mission, vision,
and values.
118 ◾ Effective Non-Profit Management

BOX 4.6 EASTER SEALS SUPERIOR CALIFORNIA

Mission
Easter Seals Superior California is dedicated to empowering people with dis-
abilities by offering a wide range of services and leadership opportunities to
encourage maximum independence.

Vision
People with disabilities will have equal opportunity to live, learn, work, and
play in their community.

◾◾ Children with disabilities will be fully included and have the same
experiences as their peers.
◾◾ Adults with disabilities will experience the lifestyle of their choice.
◾◾ Seniors will live out their lives in comfort and with dignity.

Values
Integrity
People-focused
Independence
Respect
Shared purpose
Excellence
Stewardship
Philanthropy

Source: Excerpt from: www.myeasterseals.org.

4. Assessing the external and internal environments—This step involves collecting

information from within and outside the organization in regard to differ-
ent forces and trends including political, technological, manpower, competi-
tion, and others that could help the agency identify its challenges, strengths,
and opportunities. There are various methods to collect this information;
one commonly used method is doing a SWOT analysis. A SWOT analysis
requires the organization to identify its strengths (S) and weaknesses (W),
and the external environment is examined to discern opportunities (O) and
threats (T).
Another method is to construct alternative scenarios of the future and
assess or identify the challenges and opportunities that the organization may
find itself in the future under these different scenarios.
 Non-Profit Governance ◾ 119

5. Identifying strategic issues—The next step is identifying strategic issues facing

the organization. Strategic issues are “fundamental policy questions or criti-
cal challenges facing the organization’s mandates, mission and values, prod-
uct or service level and mix clients, users or payers, cost, financing, structure,
processes, and management” (Bryson, 2004, 42). Identifying strategic issues
assists the organization in deciding where to focus its attention and what
activities to undertake.
Zietlow et al. identify three factors that distinguish strategic decisions
from other types of decisions:
a. Strategic decisions deal with concerns that are essential to the livelihood
and survival of the entire organization and usually involve a major por-
tion of the organization’s resources.
b. Strategic decisions involve new initiatives or areas of concern and usually
address issues that are unusual for the organization rather than issues that
are easily handled with routine decision making.
c. Strategic decisions could have major implications for the way other, lower-
level decisions in the organization are made (2007, 51). (See Box 4.7.)
6. Formulating strategies to manage the issues—“A strategy can be defined as a
pattern of purposes, policies, programs, actions, decisions, or resource alloca-
tions that define what an organization is, what it does, and why it does it”
(Bryson, 2004, 46). Bryson discusses two approaches to develop strategies.
The first approach involves identification of practical alternatives and visions
for resolving the strategic issues, the barriers to achieving those, development
of a proposal to achieve those alternatives, identification of actions to imple-
ment the major proposals along with a detailed work program to implement
the actions. The second method uses the strategic options development and
analysis (SODA) method. It involves listing multiple options for addressing
each strategic issue and its effects. The result is a map of action-to-outcome
relationships. Developing strategies is thus at the heart of the strategic plan-
ning process.
7. Reviewing and adopting the strategies or strategic plan—This stage involves a
thorough review of the strategies and the plan and formally adopting those.
The outcome will be a written plan with the strategies. These written docu-
ments should be communicated to all stakeholders of the organization.
8. Establishing an effective organizational vision—Vision is where the organiza-
tion envisions itself. Vision is the mental image of what successful attainment
of the mission would look like or how the world would be different if and
when the mission is accomplished (Zietlow et al., 2007).
Some organizations may develop their vision statement during the stage
when they formulate their mission statement. Others may find themselves
waiting until they have a clear sense of their strategies and work plan.
9. Developing an effective implementation process—To make the strategic plan
a reality, it is important to have a detailed operational plan to implement
120 ◾ Effective Non-Profit Management

BOX 4.7 SEVEN APPROACHES TO

STRATEGIC ISSUE IDENTIFICATION

1. Direct approach—Reviews the mandates, mission, strengths, weak-

nesses, opportunities, and challenges.
2. Goals approach—Identifies goals or performance standards and identi-
fies issues that need to be addressed before they can be achieved.
3. Oval mapping approach—Involves a mapping with words and arrows
that show the cause and effects of different actions and the interrela-
tionship among them. Identify important clusters of potential actions
to identify strategic issues.
4. Tensions approach—Critique the way issues are framed by showing the
tensions among four basic concerns in various combinations—human
resource and equity concerns, innovation and change, maintenance of
tradition, and productivity improvement. The goal is to find the best
way to frame the issue.
5. Indirect approach—Brainstorming with existing ideas, discussing the
action implications of those ideas, and recombining those ideas in new
ways so the participants can convince themselves of the need for change.
6. Vision of success approach—Develops a vision of success in order to iden-
tify issues that must be dealt with before the vision can be realized.
7. System analysis—The issue area is conceptualized as a system that con-
tains feedback effects that have to be modeled in order to understand
the system.

Source: Adapted from Bryson, J. M., 2004, Strategic Planning for Public and
Nonprofit Organizations: A Guide to Strengthening and Sustaining
Organizational Achievement, San Francisco, CA: Jossey-Bass.

it. This operational plan includes identifying specific tasks to be completed,

establishing a timeline for their completion, assigning responsibility for each
task, identifying the resources that will be needed, and so forth.
10. Reassessing strategies and the strategic planning process—This is an important
component of the strategic planning process—to revisit and reassess the strat-
egies and the plan to identify issues, problems, and their strengths so they
would serve as feedback in the future planning process.

4.4.2 Promotion of Public Interest—The

Contemporary Notion of NPO Governance
Non-profits occupy a special place in society due to the significant roles they play in
our lives (as explained in Chapter 2) as well as the ongoing public and government’s
 Non-Profit Governance ◾ 121

support for them. However, non-profits cannot be a mere functional instrument

to meet the needs of their clients, donors, staffs, or the government. The access to
volunteers, donors, and public support gives non-profits a unique opportunity to
promote values and goals beyond their organizational mission. Taking advantage
of this opportunity broadens the conceptualization of non-profit governance and
emphasizes NPOs’ (for example, McCambridge, 2004; Stone and Ostrower, 2007)
responsibility to engage with stakeholders and the broader citizenry to promote
broader values like democracy and public interest.

It is the responsibility of local nonprofits—if they are serious about

representing and responding to constituents interests—to have
governance mechanisms that can convene the individuals they are
established to serve with other stakeholders, engage them in dialogue
with the organization and one another, develop a collective dream of
the future or vision of what can be accomplished, and develop strat-
egies that will take the group from here to there. (McCambridge,
2004, 353)

This in essence means that non-profits should engage with their communities and
their constituents. As McCambridge pointed out, “Most people are wise enough
to eventually disengage from systems that disengage with them” (2004, 349). The
main reasons why this sector is thriving are the public’s support and confidence on
their capabilities. Thus non-profit leadership (i.e., the board and the CEO) has a
unique responsibility—to form the bridge to connect themselves with the differ-
ent stakeholders and the broader public. This mode emphasizes inclusion, trans-
parency, and active networking to ensure that the mission and strategies that are
chosen are both highly leveraged and supported. This stands in sharp contrast to
the usual vision of what non-profit boards and CEOs can and should do—organi-
zational control and resource development.
Other scholars (for example, Chait et al., 2005) make a similar argument.
They argue that governance is a shared responsibility among different stakeholders
including board, CEO, donors, staff, volunteers, and beneficiaries and that NPO
governance or leadership should engage more at the external boundaries of NPOs.
As Stone and Ostrower argued, “We must expand our notions of governance to
include the broader public interest when making critical decisions” (2007, 434).
Stone and Ostrower (2007) also pointed out that non-profit governance resem-
bles more and more public governance (i.e., government governance), and because
these two sectors are increasingly becoming blurred, aspects of public governance
now also apply to non-profit governance. This means that non-profit governance
also needs to pay attention to accountability, transparency, and citizen involvement,
and demonstrate performance and commitment to public purpose, not just their
private aims. Brody took a similar position and pointed out that “The nonprofit sec-
tor’s claims to exist for the public good are no longer taken on faith” (2002, 472).
122 ◾ Effective Non-Profit Management

4.5 Contemporary Issue: Non-Profit

Executive Leadership Challenges
At the dawn of the first decade of the twenty-first century, NPOs are facing several
leadership challenges surrounding the chief executive. This section discusses three
such challenges; how the sector deals with these will play a significant role in defin-
ing the future of this sector.
The first challenge is the increasing trend of hiring executives from the for-profit
sector. In an era of financial austerity and a growing appreciation of business values
and practices, more and more NPOs are hiring CEOs and directors with business
backgrounds. “Museum directors, for example, traditionally are trained in art his-
tory, and the love of art is why they got into the museum world. But, with declines
in funding from public sources, they must get out and raise vital funds for opera-
tions and the ever-present capital campaigning, as well as understand and appreci-
ate marketing” (Sims and Quatro, 2005, 91).
In 2009, Jeffrey S. Raikes, a Microsoft executive, was hired to lead the Bill and
Melinda Gates Foundation. “The trend has led some to wonder why current execu-
tives in nonprofit groups and foundations are being overlooked” (Gose, 2008, 31).
According to Robert B. Reich, U.S. Secretary of Labor during the Clinton admin-
istration, a good corporate manager can transfer his or her skills to the nonprofit
world, but “all other things being equal, it would be better to find someone from the
not-for-profit or philanthropic sectors” (quoted in Gose, 2008, 31). “A philanthropy
is not only or even mainly selling a brand or product,” continued Reich. “Leading
a foundation or nonprofit is about gaining expertise, depth, and knowledge in a
particular set of areas in which a society or planet needs help.” However, there
seems to be some disagreement on this matter. For example, a study conducted by
Bridgespan2 in 2009, showed that 73% of non-profit leaders said that they valued
for-profit experience in job candidates, and 42% said that they had significant busi-
ness world experience on their own résumés. At the same time, however, 79% said
that specific experience needed for a job was the most important qualification for
senior-level employees, and 73% cited fitting within the culture as an important
qualification. One has to be careful, though, as to how the professional background
and experience of executives may affect their focus and priorities. Evidence suggests
that knowledge gained from experience in functional specialties causes executives
to evaluate information through the lens of the dominant thinking of that func-
tional area (Finkelstein and Hambrick, 1996). Furthermore, it is not always the
case that all the skills of the for-profit sector are necessarily transferable to the non-
profit sector or that is all they need. Silverman and Taliento’s (2006) conversation
with 11 NPO executives, who have played leadership roles in both for-profits and
non-profits, revealed the following challenges: non-profit CEOs wield less authority
and control than their for-profit counterparts. At the same time, they must answer
to a wider range of stakeholders. Non-profits also lack straightforward performance
measures, and yet they are under greater scrutiny from politicians and the press.
 Non-Profit Governance ◾ 123

Finally, compared to the corporate world, this sector is underfunded, understaffed

and under-resourced, and undertrained.
The second challenge is the dominance of fundraising skill as a required compe-
tency for this position. Hager et al. (2002) found that 63% of non-profit organiza-
tions do not have any full-time staff dedicated to fundraising, placing the majority of
the fundraising responsibilities on the chief executive. Ahmed (2005) in her research
using advertised job positions for non-profit executives found that “fundraising”
was the predominantly required listed experience. Another finding of her research
was that “fundraising” was the most frequently listed job duty of the prospective
chief executives. According to a survey reported in the Chronicle of Philanthropy
(Berkshire, 2006), a vast majority of the 2,000 non-profit executives surveyed are so
frustrated with their fundraising responsibilities and other challenges that they plan
to quit. Fundraising was the least liked responsibility; 73% said that they want their
trustees to undertake fundraising. As Perry and Hall (2006) explain, fundraising
skills do not necessarily translate into the leadership skills of a chief executive.
While stepping into the top job can be a rewarding career path, many
former fund raisers who now run charities say they were ill prepared
for the demands and potential pitfalls that chief executive encounter,
such as tense relations with board members, overwhelming manage-
ment duties, and the expectation that they can do all the fundraising
and run the organization too. (Perry and Hall, 2006, 30)
It is not just lack of expertise in programs that causes problems. In order for fund-
raisers to succeed as chief executives, they must often shift their perceptions and the
leadership abilities they bring into the job.
Finally, the impending baby boomers’ retirement and its impact on non-profit
leadership pose another major challenge. A 2006 national survey3 with approxi-
mately 2,000 executive directors found that the non-profit sector is on the verge of
a major turnover. One reason for this is the sheer number of baby boomers who are
nearing retirement age. Other reasons include the relatively low salary, frustrations
with the board, and fundraising stress. Another major finding of this survey is that
around three-quarters of non-profit executive directors informed that they did not
expect to be in their current jobs 5 years from now, and 9% were already making
the transition. The 2009 survey by Bridgespan (mentioned previously) also found
that despite the recession and layoffs, 28% of non-profit organizations planned to
make senior management hires in 2009, translating to 24,000 senior-level non-
profit jobs. However, 60% of non-profit leaders who participated in this study also
predicted that they would have a hard time finding qualified candidates to take
those jobs, even though the pool of job seekers is deep, as a result of unemployment
in the business world. As for the future, according to the chairman of Bridgespan
(Thomas J. Tierney), “The actual number of open senior-level jobs could turn out to
be more than one million or as low as 300,000, depending on events between now
and 2016” (quoted in Joslyn et al., 2009).
124 ◾ Effective Non-Profit Management

Case Study: Madoff’s Ponzi Scheme

Scandal and Effects on NPOs
Madoff, the founder of Bernard L. Madoff Investment Securities
LLC, was arrested on December 11, 2009, after admitting that
his $50 billion hedge fund was nothing more than a Ponzi
scheme. On March 12, 2009, Bernard L. Madoff pleaded
guilty to an 11-count criminal complaint after admitting that he
defrauded thousands of investors by engaging in what has been
called the largest investor fraud ever committed by a single per-
son. He was convicted of operating, since 1960, a large Ponzi
scheme. A Ponzi scheme basically is any business operation
that gives returns to investors not through gains achieved by
tangible real investments, but through the simple use of sub-
sequent investors’ money. The main reason no one ever ques-
tioned Madoff was that he was very reputable and well known.
He was the former president of the NASDAQ and a frequent
advisor to the government on finances. Madoff was the chair-
man of Bernard Madoff Investment Securities that he founded
in 1960. His firm was one of the top market makers especially
in the NASDAQ. His firm offered consistent annual returns of
12% to 15% (Gose, 2009). It is estimated that the fraud would
cost the clients as much as $50 billion (Gose, 2009). On June
29, he was sentenced to 150 years in prison.
The effects of the scandal on non-profits are significant.
First, hundreds of foundations that had invested in Madoff’s
firm were directly affected. Several lost 100% of their assets
to this fraud. According to a study conducted by the National
Committee for Responsive Philanthropy (NCRP), 105 founda-
tions, of the approximately 150 foundations who invested in
Madoff’s firm, lost between 30% and 100% of their assets.
Examples include Yeshiva University (lost $14.5 million), the
Betty and Norma F. Levy Foundation (lost $244,389,849
or 100% of their assets), and Chais Family Foundation (lost
100% of their assets). Several of these foundations are closing
their doors. It is estimated that the charities affected by this
Ponzi scheme lost a combined total of more than $2 billion to
Madoff’s fraud (Dorfman, 2009).
Second, such a loss has ripple effects on other NPOs and
their clients. Several non-profits that were receiving money
from these foundations found themselves in a precarious situa-
tion—the source of revenue was no longer there. As an exam-
ple, Limmud International (a Jewish education non-profit) was
funded by the Chais Family Foundation. There were several
 Non-Profit Governance ◾ 125

other charities in different states (e.g., ACLU in New York) that

were getting funds from JEHT Foundation which also shut down
its operation due to its loss in investment. There are also thou-
sands of unknown non-profits who might be affected because
they were recipients of these major foundations.
Finally, questions are raised about the foundations that
made profits from Madoff’s firm. As an example, Picower
Foundation profited more than $5 billion investing in his firm.
There is concern that Picower Foundation may have partici-
pated in the scheme and knew what was happening (Sorkin,
2009). Whether they were complicit to this crime or not, they
along with other foundations (presumably innocent) did make
profits—there is no doubt that there are some net winners. So,
the question that has been raised is whether the net winners
would be required to return the money. As Davidoff asked,
“If they are not legally liable to return the money, do charities
have a moral obligation to do so?” (2009).
The NCRP report found that only 15% of the foundations
that lost their assets to Madoff’s firm had boards including five
or more individuals; 30 foundations listed only one or two trust-
ees; 46 foundations listed three or four trustees. Most of these
foundation boards were also homogeneous. For example, the
Chais Family Foundation had five trustees sharing the same last
name “Chais”; the Albert and Lillian Small foundation had five
trustees, all with the same last name “Small.”
Drawing on this problem, Dorfman pointed out that “The
small size and homogeneous nature of foundation boards is a
systematic weakness of institutions designed to channel private
wealth towards public purpose. Sector-wide, the median size
of foundations boards is 3 and the average size is only slightly
higher at 4.4. The most recent data show that 87 percent of
foundation trustees nationwide are non-Hispanic” (2009).
On January 16, 2009, the New York attorney general
(Andrew Cuomo) subpoenaed 15 non-profit organizations
that had invested with Madoff and Ezra Merkins who was on
the boards of several major non-profits affected by the Ponzi
scheme. Cuomo may invoke the power of the Martin Act,
which allows a case to be brought even without evidence that
there was intent to commit fraud (Crompton, 2009). Richard
Blumenthal, Connecticut’s attorney general, has asked the
court-appointed trustee responsible for liquidating Madoff’s
Investment Securities to provide a list of non-profit organiza-
tions in Connecticut that had investment with it. One of his
reasons for asking for the list is to determine whether some
126 ◾ Effective Non-Profit Management

directors of the charities should be held accountable for failing

to appropriately evaluate Madoff’s firm before placing assets
with it.
The case has major implications for non-profit organiza-
tions and especially board members and senior staff. At the
minimum it begs the following questions:

1. Did these NPOs have investment policies? If they did, did

the boards follow that policy in their decisions to invest in
Madoff’s firm?
2. Was there an investment committee? If there was an invest-
ment committee, were the other board members involved
in the final decision making? If there was no investment
committee, who made those investment decisions? Were
those informed decisions?
3. Did the boards exercise due diligence and duty of care in
their investment decisions and implementation?
 Non-Profit Governance ◾ 127

Discussion Questions
1. The case underscores the importance of having a diversified board. What
type of diversity factors should a non-profit organization strive for in its board
members? Why are these more important compared to other factors?
2. What type of policies would help a non-profit board avoid facing a similar
situation?
3. Are those non-profits that profited from investing in Madoff’s firm morally
obligated to return those profits?

Web Resources
Alliance for Nonprofit Management (www.allianceonline.org): Provides assis-
tance to NPOs on organizational and human resource development, fund-
raising, financial management, and marketing.
BoardSource (www.boardsource.org): A great resource for NPO boards and
CEOs for training, publications, assessment tools, and workshops on NPO
boards and different aspects of managing NPOs.
The Center on Philanthropy at Indiana University (www.philanthropy.iupui.
edu): Offers a variety of academic and training programs on NPO manage-
ment, fundraising, and faith-based operations; conducts research on NPOs;
and disseminates information and data on NPOs.
National Council of Nonprofits (www.councilofnonprofits.org): This Web site
has great resources on NPO public policy issues, developing and managing
NPOs, documents, and research publications.

End-of-Chapter Review of Terms

Boundary-spanning role
Duty of care
Duty of loyalty
Duty of obedience
Fiduciary responsibilities
Governance
Indemnification
Job description
Life cycle
Mission
Ponzi scheme
Strategic decisions
Strategic planning
128 ◾ Effective Non-Profit Management

Appendix 4.1: An Example of a Sample Skill Inventory

Number of Current Number of Prospective
Board Members with Members with
Categories to Consider Expertise/Characteristics Expertise/Characteristics
Organization
management
Financial management
Public relations
Fundraising
Government
regulations
Technology
Law
Marketing
Personnel
Strategic planning
Business skills
Government sector
Private sector
Nonprofit sector
Men
Female
Age: under 30
Age: 30 to 45
Age: 46 to 60
Age: 61 and above
Race/ethnicity: White
Race/ethnicity: African
American
Race/ethnicity:
Hispanic/Latino
Source: Improving Board and Organizational Effectiveness, Module 8.6, 2002, Southern
Rural Development Center, Mississippi State University, MS. Reprinted
with permission of the Southern Rural Development Center.
 Non-Profit Governance ◾ 129

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Endnotes
1. The survey was based on responses from 5,115 nonprofit organizations that varied in
size, type, and location.
2. The study was commissioned by American Express to understand the nature and
dimensions of the evolving nonprofit leadership deficit, the training and development
needs within the sector, and to look at how managerial skills from the business sector
can boost leadership capacity among nonprofits. Bridgespan is a 501(c)(3) nonprofit
organization that helps nonprofit and philanthropic leaders make strategic decisions to
build and develop the nonprofit sector.
3. The survey was conducted by the Eugene and Agnes E. Meyer Foundation and
CompassPoint Nonprofit Services, a nonprofit-management consulting group in San
Francisco, California.
Chapter 5

Human Resource
Management in
Non-Profit Organizations

Human resource management (HRM) includes the utilization and development

of human resources in organizations. The common HRM functions include
human resource planning, employee selection, performance evaluation, compen-
sation, training and development, job classification, and collective bargaining.
Non-profit HRM shares certain similarities with for-profit and public organiza-
tion HRM. One similarity is the fact that all the major federal anti-discrimi-
nation laws apply equally to all organizations: public, private, and non-profit.
The other similarity is that non-profit organizations (NPOs) engage in common
HRM functions that others engage in. Examples include selection, training,
compensation, human resource planning, and performance appraisal. However,
how they conduct those functions and under what conditions or contexts are
different than one or the other type of organization. For example, NPOs are
similar to for-profits in terms of their treatment of their employees in dismissals
and other adverse actions—typically NPO employees do not have a right to due
process. However, this is in sharp contrast with public-sector employees’ rights
to due process.
Even though NPOs share several similarities with for-profits and public organi-
zations on key HRM functions and issues, they face some unique HRM issues and

133
134 ◾ Effective Non-Profit Management

operations. A key difference is their use of volunteers. Volunteers bring some unique
legal (e.g., liability) and managerial issues (e.g., staff volunteers relations).
HRM is a very broad area to include in one chapter. Considering the focus of
this text on non-profit management, this chapter focuses only on those aspects of
HRM that are unique to NPOs and thus focuses mostly on volunteers. With that
goal in mind, this chapter has the following learning outcomes:

1. Understand the different federal laws that apply to NPOs.

2. Discuss different legal issues as they relate to volunteers.
3. Explain the different components of a volunteer development program.
4. Identify sources of volunteer motivation.

This chapter explains compensation as a current issue in NPOs and concludes

with a case study that shows the complexity of addressing the issue of sexual orien-
tation in non-profit management.

5.1 Laws and Relevant Legal Issues

Over the years, the federal government has enacted legislation to promote and
ensure anti-discrimination in the workplace and also to advance employee rights.
Note a point of clarification: federal laws consistently use the word employee but
do not specify its characteristics. Thus, courts are making such determination on a
case-by-case basis. Traditionally the courts have held the view that uncompensated
volunteers are not employees and are not protected by federal laws.
However, in Haavistola v. Community Fire Company of Rising Sun (1993), a
federal appeal court ruled that a volunteer firefighter who received benefits from
her membership in a fire company might qualify as an employee if those benefits
represented “significant remuneration.” Haavistola received the following benefits:
a state-funded disability pension, survivor’s benefits for dependents, scholarship for
dependents, scholarship for dependents upon disability or death, benefits under the
Federal Public Safety Officers’ Benefits Act when on duty, group life insurance, and
tax exemption for unreimbursed travel expenses.
In 2003, a federal court used the Americans with Disabilities Act (ADA) in its
deliberations and ruling on a case involving volunteers (Box 5.1).
Non-profits receiving government money (contracts or grants) may also be spe-
cifically prohibited from discriminating volunteers. Considering the legal prece-
dence of using federal legislation in cases involving volunteers, it is only prudent
for NPOs to provide volunteers with the same protection and rights that it would
otherwise provide to its paid staff.
Following are major federal laws that apply to all organizations including NPOs.
 Human Resource Management in Non-Profit Organizations ◾ 135

BOX 5.1 KANSAS MDA (MUSCULAR DYSTROPHY

ASSOCIATION) V. BAUER AND STOLZ (2003)
Two former volunteers (Bauer and Stolz) who worked with the Kansas MDA’s
summer camp, sued them under the ADA. Both have worked in that agency for
several years.
MDA has a national policy that requires camp volunteers to be able to “lift
and carry” campers.
Bauer and Stolz both have neuromuscular conditions and were told that
they cannot volunteer. So, they sued the state MDA chapter under the
Americans with Disabilities Act.
On June 12, 2003, U.S. Senior District Judge Wesley Brown ruled that
MDA’s requirement that volunteer counselors be able to “assist in lifting
campers—on a regular basis and in the rare event of an emergency—is an
essential function of the position. In sum, the court concludes that MDA’s
requirements for its volunteer counselors are based on legitimate and neutral
criteria that are necessary for the safe operation of its summer camps.”

5.1.1 Fair Labor Standards Act (FLSA), 1938

The Fair Labor Standards Act (FLSA), passed in 1938, is administered by the
Department of Labor (DOL). The law covers both private and public-sector (fed-
eral, state, and local government) employers. This law sets the federal minimum
wage (currently $7.25/hr) and the maximum number of hours (40 per week) an
employee must work before receiving overtime (time-and-a-half). It also includes
restrictions on the use of child labor.
Section 553.106(a) of this act provides that volunteers may be paid expenses, rea-
sonable benefits, a nominal fee, or a combination thereof, for their service without
losing their status as volunteers.
If a person is considered to be a volunteer and did not get paid, but later on if
DOL determines that he or she should have been a paid employee, “the employer
could be liable for at least minimum wages for all hours worked (including over-
time at overtime rates) and, depending on the circumstances, liquidates damages
equal to the wages that should have been paid” (Eide, 1995, 345).

5.1.2 The Equal Pay Act (EPA), 1963

The EPA requires that men and women employed in the same organization receive
equal pay and other benefits for jobs that involve substantially equal skills, efforts,
and responsibilities and working conditions. The act has three major exemptions:
(1) merit, (2) seniority, and (3) other factors than sex. Common defenses for this
136 ◾ Effective Non-Profit Management

third exemption “include market factors, negotiation, and other so-called intan-
gibles that may be used in setting initial salaries and later raises and bonuses”
(Zeigler, 2006, 208).

5.1.3 Civil Rights Act (CRA) of 1964

The CRA is the major and the basic anti-discrimination federal law. It has 10 differ-
ent titles or sections. Title VII relates to employment and prohibits discrimination
on the basis of race, color, national origin, religion, or sex in all aspects of employ-
ment and by all organizations with 15 or more employees. According to Title VII,

It shall be an unlawful employment practice for an employer (1) to

fail or refuse to hire or to discharge any individual or otherwise to dis-
criminate against any individual with respect to compensation, terms,
conditions, or privileges of employment because of such individual’s
race, color, religion, sex, or national origin; and (2) to limit, segregate or
classify his employees in any way that would deprive or tend to deprive
any individual of employment opportunities or otherwise adversely
affect his status as an employee because of such individual’s race, color,
religion, sex or national origin.1

Over the years since the passage of the CRA, the Supreme Court in its rulings
on several CRA’s cases developed two distinct types of discrimination situations:
disparate treatment and disparate impact. Disparate treatment occurs when an indi-
vidual is treated differently due to his or her gender, race, ethnicity, religion, or sex.
For example, if a woman, who is otherwise qualified, is denied promotion due to
her gender, that will consist of a situation of disparate treatment. Disparate impact,
on the other hand, “is typically unintentional and involves decision rules that have
unequal racial or gender consequences, so that barriers are erected that appear to be
neutral but have the effect of screening out a disproportionate number of minority
applicants” (Buford and Linder, 2002, 47). An example of disparate impact may be
a test that apparently is neutral but disproportionately fails the minorities.
There are three major exemptions to Title VII:

1. Bona fide occupational qualifications (BFOQ )—BFOQ are essential require-

ments of a job. Employers may discriminate on the basis of sex, age, religion,
or national origin (not race or color) if there is a bona fide occupational quali-
fication (BFOQ) for doing so. An example would be hiring women to work
as janitors in women’s restrooms.
2. Religious organizations—Religious organizations, whose main purpose and
character are religious, are permitted to give employment preference to mem-
bers of their own religion. However, this exception does not allow them to
discriminate based on gender, race, national origin, or color.
 Human Resource Management in Non-Profit Organizations ◾ 137

3. Private clubs—These include private membership clubs that are exempted

from taxation under Section 501(c) of the Internal Revenue Code of 1954.
The club cannot be a labor organization.

5.1.4 The Age Discrimination in Employment

Act (ADEA), 1967
This act prohibits age-based discrimination against individuals over 40 years old
in all aspects of employment. It includes both disparate treatment and disparate
impact. Similar to the other acts, there are some exemptions to this act, too: (1)
BFOQ and (2) reasonable factors including poor job performance, misconduct,
reductions in force, or other job-related reasons.

5.1.5 The Americans with Disabilities Act (ADA), 1990

Title I of this act prohibits employment discrimination against qualified individu-
als with disabilities. An individual with a disability is a person who:

Has a physical or mental impairment that substantially limits one or

more major life activities; has a record of such an impairment; or is
regarded as having such an impairment.2

The Equal Employment Opportunity Commission’s (EEOC) regulations

provide that an impairment includes any physiological disorder or condition or
anatomical loss affecting one or more of several body systems, or any mental or
psychological disorder.
Qualified individuals are defined as those who can perform the essential job
duties with or without reasonable accommodation. “Reasonable accommodation”
may include

Making existing facilities used by employees readily accessible to and

usable by persons with disabilities, job restructuring, modifying work
schedules, reassignment to a vacant position; acquiring or modifying
equipment or devices, adjusting or modifying examinations, training
materials, or policies, and providing qualified readers or interpreters.3

Also, reasonable accommodations include provisions that do not impose a hardship

on the employer.
On September 25, 2008, President Bush signed the Americans with Disabilities
Act Amendments Act of 2008. The act emphasizes that the definition of disability
should be construed in favor of broad coverage of individuals to the maximum extent
permitted by the terms of the ADA and generally shall not require extensive analysis.
138 ◾ Effective Non-Profit Management

The act retains the ADA’s basic definition of “disability” as an impairment that
substantially limits one or more major life activities, a record of such an impair-
ment, or being regarded as having such an impairment. However, it changes the
way that these statutory terms should be interpreted in several ways. Some of the
major changes are as follows:

1. Provides an expanded list of “major life activities,” which includes but is not
limited to caring for oneself; performing manual tasks; everyday activities
(e.g., seeing, walking), standing, lifting, and bending; learning, reading,
thinking, concentrating, and communicating; and working.
It also includes a non-exclusive list of major bodily functions related to
operation of major life activities, such as functions of the immune system and
functions involving the bowel, bladder, neurological, and reproductive systems.
2. Includes several provisions to loosen the “substantially limit” requirement for
the impairment. For example, one of the provisions is that an impairment
that is episodic or in remission is a disability if it would substantially limit a
major life activity when it is active. Another provision states that mitigating
measures other than “ordinary eyeglasses or contact lenses” shall not be con-
sidered in assessing whether an individual has a disability.
3. It changes the definition of “regarded as” so that it no longer requires a show-
ing that the employer perceived the individual to be substantially limited in a
major life activity, and instead says that an applicant or employee is “regarded
as” disabled if he or she is subject to an action prohibited by the ADA (e.g.,
failure to hire or termination) based on an impairment that is not transitory
and minor.

The ADA Amendments Act has been in effect since January 1, 2009.

5.1.6 Sexual Harassment
Sexual harassment is a form of sex discrimination that violates Title VII of the
1964 Civil Rights Act. Sexual harassment includes unwelcome advances, requests
for sexual favors, and other verbal or physical conduct occurring in an employment
context. There are two types of sexual harassment: (1) quid pro quo and (2) hostile
work environment. Quid pro quo is a Latin term meaning “this for that” and occurs
when a supervisor or other person with power demands or coerces an employee for
a sexual favor in exchange for a reward or to avoid an adverse employment action.
Hostile work environment, on the other hand, is more elusive and includes acts,
verbal or nonverbal gestures, or symbols that are offensive or intimidating to a rea-
sonable person. Examples include offensive remarks, dirty jokes, sexually explicit
posters, and unwelcome physical conduct.
According to the EEOC, sexual harassment can occur in a variety of circum-
stances, including but not limited to the following:
 Human Resource Management in Non-Profit Organizations ◾ 139

◾◾ The victim as well as the harasser may be a woman or a man. The victim does
not have to be of the opposite sex.
◾◾ The harasser can be the victim’s supervisor, an agent of the employer, a super-
visor in another area, a co-worker, or a non-employee.
◾◾ The victim does not have to be the person harassed but could be anyone
affected by the offensive conduct.
◾◾ Unlawful sexual harassment may occur without economic injury to or dis-
charge of the victim.
◾◾ The harasser’s conduct must be unwelcome.4

In Faraghar v. City of Boca Raton and Burlington Industries Inc. v. Ellerth the
Supreme Court ruled that (1) an employer is automatically liable for quid pro quo
cases and is vicariously liable for the actions of the supervisor. This is so because the
supervisor’s action in affecting the tangible job benefit is deemed to be the act of
the employer; (2) for hostile work environment cases, employers can use “affirma-
tive defense” to defend themselves. “Affirmative defense” includes the following:

(1) The employer exercised reasonable care to prevent and correct any
sexually harassing behavior, and (2) the plaintiff employee unreason-
ably failed to take advantage of any preventive or corrective opportuni-
ties provided by the employer or to avoid harm otherwise. The employer
must prove both prongs of the affirmative defense by a preponderance
of the evidence (i.e., more likely than not).

5.1.7 Family and Medical Leave Act (FMLA), 1993

The FMLA provides job-protected unpaid leave for up to 12 weeks during any
12-month period for one or more of the following reasons:

◾◾ For the birth and care of the newborn child of the employee.
◾◾ For the placement with the employee of a child for adoption or foster care and
to care for the newly placed child within one year of placement.
◾◾ To care for an immediate family member (spouse, child, or parent) with a
serious health condition.
◾◾ A serious health condition that makes the employee unable to perform the
essential functions of his or her job.
◾◾ Any qualifying exigency arising out of the fact that the employee’s spouse,
son, daughter, or parent is a covered military member on “covered active
duty”; or twenty-six workweeks of leave during a single 12-month period to
care for a covered service member with a serious injury or illness if the eligible
employee is the service member’s spouse, son, daughter, parent, or next of kin
(military caregiver leave). (http://www.dol.gov/whd/fmla/)
140 ◾ Effective Non-Profit Management

FMLA applies to all public agencies, including state, local, and federal employ-
ers, local education agencies (schools), and private-sector employers who employed
50 or more employees in 20 or more workweeks in the current or preceding calen-
dar year, including joint employers and successors of covered employers.
Table 5.1 summarizes the core information of major federal laws.
To be eligible for FMLA benefits, an employee must have worked for the employer
for a total of 12 months and have worked at least 1250 hours and worked at a location
where at least 50 employees are employed by the employer within a radius of 75 miles.
While the 12 months of employment need not be consecutive, employ-
ment periods prior to a break in service of seven years or more need not
be counted unless the break is occasioned by the employee’s fulfillment
of his or her National Guard or Reserve military obligation (as pro-
tected under the Uniformed Services Employment and Reemployment
Rights Act (USERRA)), or a written agreement, including a collective
bargaining agreement, exists concerning the employer’s intention to
rehire the employee after the break in service.5
The National Defense Authorization Act for FY 2008 (NDAA), expanded the
FMLA to allow eligible employees to take up to 12 weeks of job-protected leave
in the applicable 12-month period for any “qualifying exigency” arising out of the
fact that a covered military member is on active duty, or has been notified of an
impending call or order to active duty, in support of a contingency operation. The
NDAA also amended the FMLA to allow a spouse, son, daughter, parent, or next
of kin to take up to 26 weeks of job-protected leave in a “single 12-month period”
to care for a covered service member with a serious injury or illness.

5.2 Volunteer Management
One of the unique human resource management aspects of non-profit organiza-
tions is the volunteers. (See Box 5.2.)
In the beginning there were volunteers. Every human service occupa-
tion or profession has volunteers in its ancestry. The first social workers
were volunteers; the first teachers; the first nurses and other health care
workers. Fire fighters were originally volunteers, and still today, about
80 percent of the fire departments in the U.S. are volunteers. . . . And on
and on. In the beginning there were only volunteers and they pioneered
all the paid positions in human services today. (Scheier, 2001, 339)

5.2.1 Volunteer Management Program

Volunteers are thus an integral part of human resources in non-profit organizations;
however, that also means that similar to managing and developing the paid staff, non-
profits also need to have some processes and policies in place to work with volunteers.
 Human Resource Management in Non-Profit Organizations ◾ 141

Table 5.1 A Snapshot of the Major Federal Legislation

Enforcement
Legislation Scope Coverage Agency

Civil Rights Act Prohibits All Equal

(1964), Title VII discrimination organizations—15 Employment
on the basis of or more Opportunity
gender, race, employees Commission
national origin, (EEOC)
color, and
religion

Age Prohibits For-profits—20 or EEOC

Discrimination age-based more employees;
Act (1967) discrimination all state, federal,
against and local
individuals over government
40 years old agencies

Equal Pay Act Men and women Virtually all EEOC

(1963) working in the employers
same
organization in
substantially
equal jobs must
be given equal
pay

Americans with Prohibits All employers—15 EEOC

Disabilities Act discrimination or more
(1990) against qualified employees
disabled
individuals

Sexual Prohibits quid All employers—15 EEOC

Harassment pro quo or more
harassment and employees
hostile work
environment

Family and Provides job- All employers—50 Department of

Medical Leave protected leave or more Labor (DOL)
Act (1993) for up to 12 employees
weeks during a
year
142 ◾ Effective Non-Profit Management

BOX 5.2 VOLUNTEERING IN AMERICA—

RESEARCH HIGHLIGHTS
Volunteer Rate: The percentage of individuals who responded on the fed-
eral Corporation for National and Community Service (CNCS) Population
Survey’s Volunteer Supplement that they had performed unpaid volunteer
activities for or through an organization at any point during the 12-month
period that preceded the survey.
Number of Volunteers
Year Rate (in millions)
2003 28.8% 63.8
2004 28.8% 64.5
2005 28.8% 65.4
2006 26.7% 61.2
2007 26.2% 60.8
2008 26.4% 61.8
2009 26.8% 63.4
2010 26.3% 62.8
Source: Volunteering in America: http://www.VolunteeringinAmerica.gov
(accessed November 1, 2011).

These policies and processes comprise a NPO’s volunteer management program. This
section discusses the major components of a volunteer management program.

5.2.1.1 Needs Assessment
There are several advantages to having volunteers, including gaining efficiency,
expanding organizational capability (providing services that otherwise they could
not provide), improving community relations, bringing more credibility, and bring-
ing more objectivity. “A volunteer program can also yield substantial benefits to
the community. Citizen participation within an agency can build the job skills
and work experience of volunteers, promote greater awareness of the pressures and
constraints faced by service organizations, and generally improve relations within
the community” (Brudney, 1995, 40). Ellis argued that even though one of the
widely used reasons cited for need or use of volunteers is to save money, “much
more accurate is the recognition that volunteers allow you to spend every dollar you
have—and then do more. Volunteers extend the budget” (1996, 11). While it is true
for most NPOs that there are several advantages of having volunteers, it is nonethe-
less important for each agency to have a clear understanding of its reason for utiliz-
ing volunteers. Before the agency starts recruiting or hiring volunteers or develops
a volunteer program, it needs to determine why it wishes to have volunteers. Such
 Human Resource Management in Non-Profit Organizations ◾ 143

needs assessment will help the NPO realize or understand what their needs are,
determine the types of jobs and responsibilities that their volunteers need to engage
in, provide rationale to their volunteer development program, and conduct assess-
ment of the volunteer development program. “Throughout the volunteer program
design process it is essential to involve all levels of staff. If volunteers are going to
be working in conjunction with paid staff, whether for them, alongside them or in
support of them, it is vital that staff are in agreement about the purpose and worth
of the volunteer job and the volunteer program as a whole” (McCurley and Lynch,
1996, 21). The reason for this is that, as McCurley and Lynch explain, “Staff who
do not want to work with volunteers can destroy a volunteer effort, either through
direct opposition or through indifference” (1996, 21).

5.2.1.2 Organizational Preparation for Volunteers

The NPO leaders need to have realistic expectations about how much volunteers
can contribute, in what areas, and how stable that support could be. Along with
that, they need to have a clear understanding of issues and problems that they may
face with volunteers. It is also important to establish rationale and goals for the vol-
unteer program. Engaging in open discussion among CEOs, board, and NPO staff
on these issues or matters will prepare the organization to effectively manage and
develop their volunteers. As Brudney explained, “The foundation for a successful
volunteer program rests on a serious consideration by the agency of the rationale
for citizen involvement and the development of a philosophy or policy to guide this
effort. The organization should determine the purpose for introducing the new par-
ticipants into the organization” (1995, 44). Prudent NPO leaders will also develop
their mission statements in a way to show their appreciation of volunteers. “In an
exhaustive study of sixteen agencies in four cities, the Points of Light Foundation
found that one of the hallmarks of an effective volunteer program is the way in
which the mission is defined” (McCurley and Lynch, 1996, 11). If budget allows, it
is important to have a staff position (i.e., volunteer director) with overall responsi-
bility to lead, manage, and work with volunteers. (See Box 5.3.)

5.2.1.3 Budget
As Ellis (1996) pointed out, volunteers are not “free” labor; funds, space, supplies,
and other materials must be allocated to support the work of volunteers. For exam-
ple, funds are needed to reimburse volunteers for out-of-pocket expenses, to buy
equipment (e.g., paper and stationery) and furniture, for insurance, and for travel-
ing. Volunteers also need space and other facilities (e.g., for storage). In addition,
paid staff have to put their hours to work or coordinate with volunteers. Therefore,
the organization needs to have a budget category for its volunteer program.

5.2.1.4 Written Job Descriptions

Developing written job descriptions for volunteers is crucial because the essential
volunteer management processes of recruiting, interviewing, placing, supervising,
144 ◾ Effective Non-Profit Management

BOX 5.3 EXAMPLES OF MISSION AND VISION STATEMENTS

APPRECIATING THE VALUE OF VOLUNTEERS

American Red Cross (Mission)

“The American Red Cross, a humanitarian organization led by volunteers
and guided by its Congressional Charter and the Fundamental Principles
of the International Red Cross Movement, will provide relief to victims of
disaster and help people prevent, prepare for, and respond to emergencies”
(www.redcross.org).

American Cancer Society (Vision, Excerpt)

“Together with our more than 3 million volunteers across the country, we’re
working to create a world with more birthdays—where cancer never steals
another year from anyone’s life” (www.cancer.org).

Cottonwood Foundation (Mission Statement)

“Cottonwood Foundation, a charitable, tax-exempt, 501(c)(3) organization, is
dedicated to promoting empowerment of people, protection of the environ-
ment, and respect for cultural diversity. The foundation focuses its funding on
committed, grass roots organizations that rely strongly on volunteer efforts and
where foundation support will make a significant difference. At least 90% of
Cottonwood Foundation’s expenditures will be for grants to other organiza-
tions” (http://www.cottonwoodfdn.org).

training, and evaluating are based on the information contained in the job descrip-
tion. The job descriptions, however, do not have to be very specific or detailed.
Depending on the unique needs of the organizations, some positions could be full
time or part time. Worth (2009) explained that if volunteers are serving episodically,
a supervisor can just assign tasks and duties to those who show up. However, if volun-
teers play an integral role in the operation or the service delivery of the organization,
then it is important to have well-designed job descriptions with clear expectations
and relationship to the mission and goals of the organization (Box 5.4). Another
merit of having such descriptions is that they provide “an organized means of creat-
ing continuity in a job from one volunteer to the next” (McCurley, 2005, 592).

5.2.1.5 Recruitment, Selection, Orientation, and Training

Recruitment is the process to develop a pool of qualified and motivated candi-
dates for positions. (See Box 5.5.) Non-profits that rely on volunteers need to do
recruiting; how much to engage in this process depends on the level of dependency
 Human Resource Management in Non-Profit Organizations ◾ 145

BOX 5.4 VOLUNTEER TUTOR—JOB DESCRIPTION,

LITERACY CENTER WEST (LCW), CINCINNATI, OHIO
Position: Volunteer Tutor for GED Night School
Purpose: To help adults (18 years of age or older) acquire basic reading,
writing and mathematics skills while preparing to take the Ohio GED
examination.
Training: Completion of the Literacy Network of Greater Cincinnati Tutor
Training workshop is required. Call 513-621-READ or visit www.lngc.
org for more info.
Hours: Tutors should plan on volunteering for at least one 3-hour session on
a weekly basis.
Qualifications: LCW tutors help our students develop confidence and a posi-
tive attitude toward learning. They provide academic support by providing
one-on-one instruction to students, and by coordinating with LCW staff to
select materials and methods of instruction that are suitable to the student’s
skill level and needs.
Our tutors should have read and signed the Literacy Center West
Volunteer Policy, and also be:

• Dependable and prompt

• Skilled in the areas that they are offering services
• Interested in relating to a variety of people
• Willing to maintain the confidentiality of the lesson and the student
• Willing to accept advice, feedback, and constructive criticism
• Flexible, friendly, patient, and optimistic

A sense of humor is also helpful.

Source: Literary Center West, Cincinnati, Ohio.

that the organization has on volunteers. The first step in recruitment is to identify
the sources of volunteers. “The inexperienced recruiter prints 5,000 brochures and
then muses ‘where can I distribute these?’ The experienced—and more effective—
recruiter first asks: ‘where might I find the right volunteers for each job’” (Ellis,
2002, 1).
It is important that prospective volunteers fill out an application form. A confi-
dentiality agreement may also be required in some organizations where volunteers
will work with a vulnerable population group, like the disabled or children or the
elderly. Some type of interviewing process to ask some open-ended questions is
recommended for screening and selection of volunteers, especially for volunteer
positions that are significantly involved in directly delivering services to clients.
146 ◾ Effective Non-Profit Management

BOX 5.5 RECRUITING VOLUNTEERS—SOURCES

1. Volunteer centers
2. Online sources (e.g., Volunteer Match, http://www.volunteermatch.org/)
3. Schools, colleges, and university service learning and community
service programs
4. Service clubs (e.g., Rotary, Kiwanis)
5. Corporate, business, and labor volunteer programs
6. Religious groups
7. Professional organizations (e.g., ASPA)
8. Senior or retired groups (e.g., AARP)
9. Alumni groups
10. Volunteer fairs
11. Open houses
12. Past clients
13. Committed donors
14. Recruiting via the Internet
15. Repeated visitors/patrons

Equally important is volunteer orientation. One part of the orientation should be

to sign a contract attesting that the volunteer has completed or received the orienta-
tion or training. “The contract is an important risk management tool” (Bradner,
1995, 74). Orientation could be in small groups or in large groups. A special pack-
age should be prepared for the volunteers which should include a welcoming letter
and other relevant information for the volunteers (e.g., annual report, newsletter,
organizational chart, list of staff and board, and volunteer handbook or manual).
Depending on the work that volunteers would do, they may be required to undergo
some formal training. As an example, volunteers who work in women’s crisis cen-
ter’s hotlines are expected to get the formal training to communicate and work with
distressed callers.

5.2.1.6 Retention
As Bradner pointed out, “One hundred percent of retention of volunteers is an unre-
alistic goal” (1995, 76). There are many valid reasons as to why volunteers might
leave—reasons related to their life or job situation or circumstances. However, the
organization also needs to have programs, strategies, and processes in place to pro-
vide support to its volunteers to grow, learn, and remain motivated.
Best practices in this regard include different types of volunteer recognition
programs, activities and gestures including saying or sending “thank you” notes,
showing sincere appreciation of their work, formal recognition, involving vol-
unteers in decisions that affect them, making sure that volunteers receive equal
 Human Resource Management in Non-Profit Organizations ◾ 147

treatment to that given to staff, and allowing volunteers to increase their skills by
attending training.
Appendix 5.1 contains a list of ideas for volunteer recognition.
It is important to understand what factors motivate volunteers so the NPO
could match volunteers with work and opportunities with their motivators. In a
later section we discuss volunteer motivation in detail.

5.2.1.7 Formal Policies—Volunteer Handbook or Manual

One cannot emphasize enough the importance of having a written volunteer hand-
book or a manual that will codify important policies and processes that pertain
to volunteer management. Speaking on the importance of developing policies for
volunteers, Graff explained that “Such policies can be used to establish continuity
to ensure fairness and equity to clarify values and beliefs, to communicate expecta-
tions, to specify standards, and to state rules” (1995, 126). As she explains, policy
development is a critical component of risk management and provides safeguards
to an agency facing situations as listed here:

1. What is the agency policy regarding volunteers who are tempted to exceed
the limits of their job description?
2. What is the policy of the agency regarding volunteers who encounter a situa-
tion with which they feel they cannot cope or in which they feel uncomfort-
able making decisions?
3. What is the agency policy regarding volunteer backup?
4. What is the agency policy about friendly visiting volunteers driving their
clients? (Graff, 1995, 131).

Both the policies and the processes of their implementation should be devel-
oped in conjunction with staff, particularly if the agency is involving volunteers in
a variety of different types of projects or activities (McCurley and Lynch, 1996, 23).

5.2.1.8 Evaluation
“Many volunteer programs, in truth, cannot even claim to have a process for volun-
teer evaluation, except in a very loose sense” (McCurley and Lynch, 1996, 105). As
the authors pointed out, there are two main reasons to evaluate volunteers: to help
volunteers work closer to their potential, and to help the organization better involve
volunteers (1996, 105). In addition to evaluating volunteers at an individual level,
evaluation should also take place at the program level.
Program evaluation includes evaluation of the entire volunteer program. This could
come from different sources including volunteers’ feedback during their evaluation
period, use of a questionnaire distributed to volunteers, and discussion with different
stakeholders. As Ellis (1996) explained, the evaluation should analyze performance in
148 ◾ Effective Non-Profit Management

BOX 5.6 ESTIMATED PER HOUR VALUE OF VOLUNTEER

TIME (INDEPENDENT SECTOR’S CALCULATION)
2006: Estimated dollar value is $18.77
2007: Estimated dollar value is $19.51
2008: Estimated dollar value is $20.25
2009: Estimated dollar value is $20.85
2010: Estimated dollar value is $21.36
2011: Estimated dollar value is $21.79
This is based on the average hourly earnings of all production and non-
supervisory workers on private nonfarm payrolls (as determined by the Bureau
of Labor Statistics). Independent Sector takes this figure and increases it by
12% to estimate for fringe benefits.
Source: Independent Sector: http://independentsector.org/ (accessed April 9,
2012).

several areas: the actual quantity and quality of work done by volunteers, the accom-
plishments of the volunteer program, the type and degree of services provided by
volunteers, benefits to the organization from volunteer involvement, the demographic
makeup of the volunteer management team, recruiting efforts, and so on.
Box 5.6 shows the estimated value of volunteer time, per hour, for 2006–2011.

5.2.1.9 Risk Management
Through different policies, the NPO needs to focus on risk management. To mini-
mize risk, there should be policies on background check, volunteer safety, client
and staff safety, and confidentiality, among others. It is important for the NPO to
understand that there are several liability issues that organizations endure when
they have volunteers.
There are three specific liability issues that NPOs have to be prepared for when
they use volunteers:
1. The organization is itself liable to third parties for acts performed by the vol-
unteers. As per the doctrine of respondeat superior, the principal (a “master”) is
held liable for the acts of an agent (a “servant”) provided that the agent was
acting negligently and at the time was also acting within the scope of his or her
employment. In a variety of instances, the NPO can thus incur such liability.
2. The organization is liable if a volunteer is injured during the performance of
his or her duties.
3. A volunteer is liable to third parties for his or her actions while working in a
volunteer organization. Some protection exists through insurance; however,
it will not protect gross negligence or willful misconduct.
 Human Resource Management in Non-Profit Organizations ◾ 149

The following are important strategies to limit liabilities issues:

◾◾ Screening, background check

◾◾ Volunteer safety
◾◾ Staff and client safety
◾◾ Clear policy on volunteers working with youth
◾◾ Confidentiality rules
◾◾ Firing volunteers if necessary
◾◾ Clear communication of expectations and responsibilities of both the volun-
teers and the organization

Ellis (1996) emphasized the importance of carefully delineating categories of

work performed by volunteers and employees. She explains that having the same
position filled by some people who are volunteers and others who are paid employ-
ees may raise legal concerns at two levels: (1) if employees in question are union
members, the organization could be in violation of a union contract if it uses vol-
unteers to “replace” union members; (2) the FLSA is designed to prevent exploita-
tion of certain categories of employees by employers, and may prohibit volunteers
and employees do similar tasks in the same organization. Ellis also points out that
the act may further raise questions about employees who wish to volunteer for the
organization on their own time. Her suggestion to employers in this situation is to
ensure that these employees are doing volunteer work that is completely unrelated
to their normal paid work. The federal government provides immunity to volun-
teers within certain parameters (see Box 5.7).
A study conducted by the Urban Institute (Hager and Brudney, 2004) on
3,000 charities’ adoption of nine recommended practices for volunteer manage-
ment found that only one practice, regular supervision and communication with
volunteers, was adopted to a large degree by more than half of the charities. The
study also found that only one-third of charities have adopted to a large degree

BOX 5.7 1997 VOLUNTEER PROTECTION

ACT (FEDERAL LAW)
Provides immunity for volunteers for harms caused by their acts, if
1. He or she was acting within the scope of his or her responsibilities.
2. He or she was properly licensed, certified to act.
3. The harm was not caused by willful, criminal, or reckless miscon-
duct or gross negligence.
4. The harm was not caused by the volunteer operating a motor vehicle,
vessel, or aircraft.
Exceptions: Crime of violence, hate crime, sexual offense, violations of federal laws.
150 ◾ Effective Non-Profit Management

the practice of publicly recognizing the work of their volunteers. Following are the
recommended best practices:

1. Regular supervision and communication with volunteers

2. Liability coverage or insurance protection of volunteers
3. Regular collection of information on volunteer numbers and hours
4. Screening procedures to identify suitable volunteers
5. Written policies and job descriptions for volunteer involvement
6. Recognition activities, such as award ceremonies, for volunteers
7. Annual measurement of the impacts of volunteers
8. Training and professional development opportunities for volunteers
9. Training for paid staff in working with volunteers

5.2.2 Volunteer Motivation
Volunteer motivation is obviously different than that of paid staff. So, what
motivates people to volunteer their services and time? How much different are
the motivators for paid staff versus volunteers? These are important inquiries
for both scholars and practitioners. One can tap into different motivational
theories to understand the similarities and differences between paid staff and
volunteer motivation.

5.2.2.1 Altruism as a Motivator
Altruism has been considered by some as a motivator for volunteers. Altruism
indicates disinterested and selfless concern for the well-being of others (Oxford
Dictionary). Several studies have found that volunteers have mentioned a desire to
help others as at least one of the reasons for choosing to volunteer (Fagan, 1992;
Ross and Shillington, 1989; Story, 1992). However, much of the recent literature
on volunteer motivation raised doubt about the possibility that human beings can
be so altruistic. Current research has thus focused more on establishing the nature
of other important motivators, while maintaining that altruism is at least one com-
ponent in the motivation to volunteer (Meneghetti, 1995).
Scholars have looked into the process theories (mechanisms of how behavior
arises and is sustained) and content theories (specific need factors that give rise to
behavior) of motivation to understand volunteer motivation. Below, we discuss, in
short, two process theories (instrumental, reinforcement) and two content theories
(Maslow, McClelland) as they relate to volunteer motivation.

5.2.2.2 Instrumental Theory
The basic idea of this theory is that people are motivated if they believe that being
so will eventually help them get something that they value. According to the
 Human Resource Management in Non-Profit Organizations ◾ 151

theory, “motivation is a product of three factors: how much one wants a reward
(valence), one’s estimate of the probability that effort will result in successful per-
formance (expectancy), and one’s estimate that performance will result in receiving
the reward (instrumentality)” (Newstrom and Davis, 1993, 148). Clary, Snyder,
and Ridge (1992) developed a volunteer functions inventory (VFI) that grouped
research on reasons for volunteering into six major areas: social, value, career,
understanding, protective, and esteem.
Because different volunteers may have different reasons to volunteer, in prac-
tice this means that the volunteer director or the employee or employees who
work closely with the volunteers have to take the time to know the volunteers
closely to understand their valence (i.e., what motivates them), give them work
assignments or projects that will create the opportunity to provide them that
valued reward, and also make it clear and direct about what they can expect and
cannot expect.

5.2.2.3 Reinforcement Theory
This theory is based on the premise that consequences influence behavior. So, if
positive consequences follow certain behaviors, those behaviors will more likely be
repeated; conversely, behaviors that bring negative consequences will more likely be
avoided. If we relate this theory to volunteer motivations, it underscores the impor-
tance of positive consequences or reinforcers like recognition, praise, feedback, and
appreciation.

5.2.2.4 Maslow’s Need Hierarchy

This is one of the oldest and most widely known theories of motivation. The theory
develops a hierarchy of needs (physiological, safety, social, esteem, and self-actual-
ization). The idea is that we are driven by our unmet needs, and that we will first act
to satisfy basic needs, and then move to higher or complex level of needs. Maslow
later explained that the hierarchy is not that rigid, and that depending on the indi-
vidual circumstances, there could be reversal in order of priority.
In terms of its usefulness to volunteer motivation, it implies the importance of
having a repertoire of different types of rewards and work assignments that will
provide opportunities to volunteers to satisfy their unique needs, whether that
means working on a project that helps them develop social relationships, or offers
leadership roles to satisfy their self-esteem need, and so forth.

5.2.2.5 McClelland’s Needs Theory

According to McClelland, individuals have three types of needs: the need for
achievement (a drive to pursue and attain goals), affiliation (a drive to relate to peo-
ple on a social basis), and power (a drive to influence people and change situations).
152 ◾ Effective Non-Profit Management

He proposed that a person will act to satisfy the need that is strongest at any given
time and that although one need will tend to predominate, the interaction of the
needs will also affect behavior.
For volunteer motivation, this theory implies similar to the other theories to
create opportunities for challenging and meaningful work, for example, for those
who are driven by the achievement need, leadership roles and influence for those
who are driven by the need for power, and to provide assignments that involve
social interactions with others (e.g., task force, recognition event).
Even though the above theories are different in terms of their approaches, they
offer some common ideas and guidance on volunteer motivation:

1. Understand the different motivators that drive volunteers and their

uniqueness.
2. Develop and use a variety of reward systems realizing that different volun-
teers are motivated by different rewards.
3. Develop a diverse set of assignments that will offer opportunities for volun-
teers to satisfy their unique needs.

Helen Little (1999) provides a comprehensive list of motivators. According to

her there are 12 basic needs that must be met to motivate and retain volunteers:

A specific manageable task with a beginning and an end, a task that

matches interests and reasons for volunteering, a good reason for doing
the task, written instructions, a reasonable deadline for completing the
task, written instructions, a reasonable deadline for completing the
task, freedom to complete the task when and where it is most conve-
nient for the volunteer, everything necessary to complete the task with-
out interruption, adequate training, a safe comfortable, and friendly
working environment, follow-up to see that the task is completed, an
opportunity to provide feedback when the task is finished, apprecia-
tion, recognition, and rewards that match the reasons for volunteering.
(Little, 1999, 19)

5.3 Current Issue: NPO Executive Compensation

In 2009, Montgomery County (Maryland) adopted a budget after making a bud-
get cut of $55,000 (along with other cuts)—an amount that was initially pro-
posed for Foods and Friends. Foods and Friends is a non-profit agency located
in Washington, DC, which provides specialized meals and nutrition counseling
to people living with HIV/AIDS and other life-challenging illnesses. The agency
had received county funding for nearly a decade. So, what was different this year
 Human Resource Management in Non-Profit Organizations ◾ 153

that resulted in loss of funding from the county? It was the $357,447 salary of the
executive director (Craig Shniderman) that was noticed by one of the councilmen
during the discretionary grant application process. New to the application process
of 2009 was the inclusion of the executive director’s salary. When the County
Executive proposed $20,000 of the non-profit’s $55,000 service contract as a part of
the county’s base budget, the councilman recommended that the service contract
be eliminated which the council agreed to do (Hrywna, 2009). This concern, exces-
sive executive compensation, has emerged as one of the current issues in non-profit
HRM.
In Chapter 3, the concept of “private inurement” was discussed, which is cen-
tral to any analysis of executive compensation. NPO leaders or staff cannot engage
in any private inurement. With that requirement, if an executive’s salary or com-
pensation is found to be excessive and unreasonable, inurement would result which
would disqualify the organization from being tax exempt.
So, how much salary is reasonable? Consider the following top 10 non-profit
executives’ compensation packages in 20086:

Total
Organization Top Executive Compensation

Partners Healthcare System James Mongan, CEO $3,421,870

Museum of Modern Art Glenn Lowry, director $2,710,607

Children’s Hospital Steven Altschuler, CEO $2,371,282

of Philadelphia

New York University John Sexton, president $1,385,339

Columbia University Lee Bollinger, president $1,380,035

University of Pennsylvania Amy Gutmann, president $1,279,819

Yale University Richard Levin, president $1,200,583

Johns Hopkins University William Brody, president $1,198,964

University of Southern Steven Sample, president $1,161,721

California

Metropolitan Opera Peter Gelb, GM $1,158,296

Association

Now consider the following top five non-profit employee compensation pack-
ages in 2008.
154 ◾ Effective Non-Profit Management

Total
Organization Highest Paid Employee Compensation

Yale University David Swensen, chief investment $4,389,727

officer

University of Southern Pete Carroll, head coach, football $4,386,652

California

Columbia University David Silvers, clinical $3,738,419

dermatology

Duke University Mike Krzyzewski, head coach $3,705,909

Cornell University Zev Rosenwaks, professor, $3,392,417

obstetrics and gynecology

The above salary figures bring astonishment and concern in some quarters.
Some believe that such salaries are unreasonable and actually incur “private inure-
ment.” There are also some assumptions underlying such belief. Common among
these assumptions are the expectations that non-profit’s altruistic mission suggests
a level of sacrifice on the part of the employees, that non-profit work requires fewer
qualifications and skills than work for the for-profit sector, and that non-profits are
not real businesses. However, others argue that none of these assumptions explain
today’s non-profits and their operations. A case in point here is the situation with
the Harvard Management Company. This organization was created by Harvard
University in 1974 as a separate non-profit corporation to manage its endowment.
In year 2002, its senior executive compensation figures were as follows:

Senior vice president for fixed income investments: $17.5 million

Senior vice president for international equity investments: $17.4 million
Senior vice president for international fixed investments: $15.9 million

There was an outcry among the students and alumni of Harvard over these
compensation figures. However, Harvard justified such compensation by arguing
that its endowment grew by 236% between 1992 and 2002 to $17.2 billion.
Thus, one of the main arguments in support of NPO’s executive salary is the
need to have competent and productive executives—executives who deserve rea-
sonable salary based on the market factor. The other argument points to the thou-
sands of small and medium NPOs (comprising the significant majority of NPOs),
where executive salaries are much less than the market price.
So, how can a non-profit assure that its compensation package is reasonable? One
may look into the tax courts to understand the factors that they use to determine
 Human Resource Management in Non-Profit Organizations ◾ 155

whether compensation paid by a non-profit is reasonable or not. Over the years, the
tax courts have used the following major factors in their determination.

Factors related to employees:

1. Qualifications of employees
2. Relevance of undercompensation in prior years
3. Availability of comparable services from third parties
4. Nature of employee duties and responsibilities
5. Employee’s salary history
6. Time and effort devoted to the organization

Factors related to the organization:

1. Salary scales for others in similar organizations with comparable duties

2. Size of the organization and its salary scale
3. Percentage of income devoted to compensation

Factors related to compensation:

1. Criteria for compensation (written policy, clear job description, performance

evaluation)
2. Abrupt increases in compensation
3. Fixing of salary years in advance
4. Importance of contemporaneous records justifying compensation

The test is thus qualitative and not quantitative. Excessive compensation has
caught government’s attention, too. In 2004 through 2006, the IRS reviewed
approximately 2000 NPOs’ compensation. Based on the review, in March 2007,
IRS assessed $21 million excise taxes to 25 non-profits for excessive compensation
packages involving 40 executives. Currently, it is reviewing the pay practices of
20 non-profit hospitals. It also plans to begin a similar review of pay packages at
colleges and universities. Legislators in various states are closely monitoring NPO
executive salaries and are developing a variety of measures to control the situation.
Strom’s (2010) article mentions several such measures. For example, New Jersey’s
recently passed budget included a provision that puts a limit on what non-profit
groups can pay their CEOs if they are working with some state contracts. Strom
also mentions that four senators, in Spring 2010, refused to approve a $425 million
package of federal grants for the Boys and Girls Clubs of America when they real-
ized that the NPO paid its CEO almost $1 million in 2008.
156 ◾ Effective Non-Profit Management

Case Study: Sexual Orientation

and Its Challenges
As Hostetler et al. explained, “One of the defining charac-
teristics of non-profit organizations is their voluntary nature.
Because of this characteristic, which is reinforced by the First
Amendment’s protection of the freedom of association, vol-
untary organizations were often considered exempt from the
application of nondiscrimination laws” (2000, 50). An organi-
zation’s “freedom of association” refers to the right to associate
for the purpose of engaging in those activities protected by the
First Amendment: the right to speech, assembly, petition for the
redress of grievances, and the exercise of religion.
The question is whether the nondiscrimination laws apply
to all volunteer organizations or whether some of them are
exempted from those. As discussed previously, the Civil Rights
Act (1964) exempts most religious organizations and private
membership clubs from its coverage. Whether a NPO is a pri-
vate club or a place of public accommodation lies at the heart
of the issue. In addition, the local orientation of non-profit
adds to the dilemma. “Even nonprofits with an acknowledged
national scope, such as the BSA of the American Red Cross,
operate through local chapters with substantial local discretion
and raise and spend most of their money and employ most of
their staff and volunteers through the local chapters” (Young,
1989, 103).
The situation is more gray when it comes to anti-discrimina-
tion laws related to sexual orientation. Several states have passed
such non-discrimination statutes covering public employment,
private employment, and public accommodation. A number
of cities and counties also have passed ordinances prohibiting
discrimination based on sexual orientation. Examples of public
accommodation include hotels, restaurants, shops, hospitals,
and libraries. Three specific exemptions to public accommoda-
tions in most nondiscrimination laws include organizations that
are distinctively private, religious organizations or an educa-
tional facility operated and maintained by a bona fide religious
organization (Hostetler et al., 2000, 53).
Several court case rulings involving non-profit employee
or volunteers’ sexual orientation have shed lights on the com-
plexity of the issue. On March 23, 1998, the Supreme Court
of California ruled (Curran v. Mount Diablo Council of the
Boy Scouts of America, 1998) that the Boy Scouts of America
may exclude homosexuals from membership because the
Human Resource Management in Non-Profit Organizations ◾ 157

organization is not a “public accommodation” and thus does

not fall under the State’s Civil Rights Act protecting the rights of
gays and lesbians. On August 4, 1999, the New Jersey Supreme
Court upheld the decision made on March 2, 1998, by a New
Jersey appellate court that the Boy Scouts ban on gays violated
the state’s Law against Discrimination (LAD). In a unanimous 7
to 0 decision, the court said that the scouts’ decision to remove
James Dale, an assistant scoutmaster, because he is gay should
be overturned. The court held that the Boy Scouts of America
is a place of “public accommodation” that “emphasize open
membership” and therefore must follow New Jersey’s anti-dis-
crimination laws. The court noted the BSA’s partnership with
various public entities and public service organizations. Local
BSA units are chartered by public schools, parent–teacher
associations, local civic associations, and the U.S. Army, Navy,
Air Force, and National Guard. Many troops meet in public
places. However, in June 2000, the U.S. Supreme Court over-
turned (5 to 4) the unanimous NJ Supreme Court ruling against
the Boy Scouts. It based its reasoning on protecting the Boy
Scouts’ First Amendment Rights.
The Boy Scout Oath includes the boy scout pledging that
he will be “morally straight.”
The Boy Scout handbook defines “morally straight” as

To be a person of strong character, guide your

life with honesty, purity, and justice. Respect and
defend the rights of all people. . . . Be clean in your
speech and actions, and faithful in your religious
beliefs.

In Pedreira v. Kentucky Baptist Homes for Children (2001),

Alicia Pedreira, a lesbian terminated from her job, brought the
case on the ground of violation of the Civil Rights Act (1964)
and the Kentucky Civil Rights Act. In this case, the U.S. District
Court ruled that the agency was not guilty of religious dis-
crimination and reasoned that she was fired due to her sexual
orientation, and that is not religious discrimination. This court
also reasoned that the law does not protect “personal lifestyle
choices.” The fact is that no federal law exists that protects gays
and lesbians from discrimination.
President Clinton’s Executive Order (13087) gave protec-
tion to federal employees. However, they are not eligible
for domestic partnership benefits. The ENDA (Employment
Nondiscrimination Act) was introduced in 1994, and since
158 ◾ Effective Non-Profit Management

then has been introduced almost every year in Congress. On

March 2011, ENDA was reintroduced by Rep. Barney Frank
of Massachusetts and currently is being debated in Congress.
There are two major provisions of the ENDA: (1) does not
extend benefits to partner, (2) forbids both the use of statistics
to establish disparate impact and establishment of quotas or
preferential treatment for homosexuals. Also, the law will not
apply to the armed forces.
The differences in the various courts’ interpretation of
“public accommodation” and “first amendment rights,” and
the lack of federal protection of gays and lesbians leave NPOs
in an uncertain and complex terrain.

Discussion Questions
1. If a non-profit is located in a community that prohibits discrimination in
public accommodation on the basis of sexual orientation, what should be
the organization’s policy toward gays and lesbians when it comes to hiring,
promoting, and retaining staff if the parent organization is opposed to homo-
sexual employees or members?
2. If gays are officially excluded from membership and employment, what
should the organization do when a long-term member or employee “comes
out”?

Web Resources
Energize (http://www.energizeinc.com/): Provides a variety of resources
(research, publications, data) and training and consultancies.
Idealist Volunteer Resource Center (http://www.idealist.org/info/Volunteer-
Mgmt): Publishes research and information on volunteer management, and
provides networking opportunities to volunteers.
Our Shared Resources (http://www.oursharedresources.com/): Practitioners
share their experience and resources with other volunteer managers, includ-
ing posting templates, real-life examples, and case studies.
Volunteer Today (http://www.volunteertoday.com/): Provides a variety of online
resources for volunteers and managers on different aspects of volunteer
management.
 Human Resource Management in Non-Profit Organizations ◾ 159

End-of-Chapter Review of Terms

ADA (Americans with Disabilities Act)
Altruism
Compensation
CRA (Civil Rights Act)
Disability
ENDA (Employment Nondiscrimination Act)
FLSA (Fair Labor Standards Act)
Hostile work environment
Instrumental theory
Need hierarchy theory
Public accommodation
Quid pro quo
Volunteer Protection Act

Appendix 5.1: Ideas for Volunteer Recognition

The following are examples of different levels of recognition activity.

1. Daily means of providing recognition:

◾◾ Saying “Thank you.”
◾◾ Telling them that they did a good job.
◾◾ Suggesting that they join you for coffee.
◾◾ Asking for their opinions.
◾◾ Greeting them when they come in the morning.
◾◾ Showing interest in their personal interests.
◾◾ Smiling when you see them.
◾◾ Bragging about them to your boss (in their presence).
◾◾ Jotting small thank you notes for them.
◾◾ Having a refreshment with them after work.
◾◾ Saying something positive about their personal qualities.
2. Intermediate means of providing recognition:
◾◾ Taking them to lunch.
◾◾ Providing food at volunteer meetings.
◾◾ Letting them put their names on the products they produce.
◾◾ Writing them a letter of recommendation.
◾◾ Getting to a local radio station to mention them.
◾◾ Putting them on important task forces or committees.
◾◾ Giving the best parking space to the “employee of the month.”
◾◾ Having them present their results to higher-ups.
160 ◾ Effective Non-Profit Management

◾◾ Giving permission to go to a seminar, convention, or professional meet-

ing, if possible at the organization’s expense.
◾◾ Writing articles about their performance for newsletter or newspapers.
◾◾ Celebrating major accomplishments.
3. Major means of providing recognition:
◾◾ Making special caps, shirts, belts, buckles, or lapel badges honoring the
group.
◾◾ Encouraging them to write an article about some accomplishment at
work.
◾◾ Giving a plaque, certificate, or trophy for being best employee, best crew,
most improved results, etc.
◾◾ Offering tuition assistance.
◾◾ Getting their picture in the paper for outstanding accomplishment.
◾◾ Renting newspaper space to thank them.
◾◾ Involving them in the annual planning process.

Source: Excerpt from McCurley, S., and R. Lynch, 1996, Volunteer Management:
Mobilizing All the Resources of the Community, Downers Grove, IL: Heritage
Arts Publishing, 124–125. With permission.

References
Bradner, J. H. 1995. Recruitment, Orientation, and Retention. In The Volunteer Management
Handbook, ed. T. C. Connors, 61–81. New York: Wiley.
Brudney, J. L. 1995. Preparing the Organization for Volunteers. In The Volunteer Management
Handbook, ed. T. C. Connors, 36–60. New York: Wiley.
Buford, Jr., J. A., and J. R. Linder. 2002. Human Resource Management in Local Government.
Concepts and Applications for HRM Students and Practitioners. Cincinnati, OH: South-
Western, Thomson Learning.
Clary, E. G., M. Snyder, and R. Ridge. 1992. Volunteers’ Motivations: A Functional Strategy
for the Recruitment, Placement, and Retention of Volunteers. Nonprofit Management
and Leadership 2 (4): 333–350.
Eide, P. J. 1995. Volunteers and Employment Law. In The Volunteer Management Handbook,
ed. T. C. Connors, 339–360. New York: Wiley.
Ellis, S. J. 2002. The Volunteer Recruitment (and Membership Development) Book. Philadelphia,
PA: Energize Inc.
Ellis, S. J. 1996. From the Top Down. The Executive Role in Volunteer Program Success.
Philadelphia, PA: Energize Inc.
Fagan, R. 1992. Characteristics of College Student Volunteering. Journal of Volunteer
Administration 11 (1): 5–19.
Graff, L. L. 1995. Policies for Volunteer Programs. In The Volunteer Management Handbook,
ed. T. C. Connors, 125–155. New York: Wiley.
Hagar, M. A., and J. L. Brudney. 2004. Volunteer Management Practices and Retention of
Volunteers. Washington, DC: Urban Institute.
 Human Resource Management in Non-Profit Organizations ◾ 161

Hostetler, D. W., and J. E. Pynes. 2000. Sexual Orientation Discrimination and Its Challenges
for Nonprofit Managers. Nonprofit Management and Leadership 11 (1): 49–64.
Hrywna, M. 2009. Exec’s Salary Becomes a Funding Problem, http://www.thenonprofit-
times.com/article/detail/exec-s-salary-becomes-a-funding-problem-2417 (accessed March
2, 2010).
Little, H. 1999. Volunteers. How to Get Them. How to Keep Them. Naperville, IL: Panacea Press.
McCurley, S. 2005. Keeping the Community Involved: Recruiting and Retaining Volunteers.
In The Jossey-Bass Handbook of Nonprofit Leadership and Management, ed. David O.
Renz & Associates, 87–622. New York: Wiley.
McCurley, S., and R. Lynch. 1996. Volunteer Management: Mobilizing All the Resources of the
Community. Downers Grove, IL: Heritage Arts.
Meneghetti, M. M. 1995. Motivating People to Volunteer Their Services. In The Volunteer
Management Handbook, ed. T. C. Connors, 12–35. New York: Wiley.
Newstrom, J. W., and K. Davis. 1993. Organizational Behavior. Human Behavior at Work.
Hightstown, NJ: McGraw-Hill.
Ross, D. P., and E. R. Shillington. 1989. A Profile of the Canadian Volunteer. Ottawa, Ontario,
Canada: National Voluntary Organizations.
Scheier, I. H. 2001. Building Staff/Volunteer Relations. Setting the Stage. In Understanding
Nonprofit Organizations. Governance, Leadership, and Management, ed. J. S. Ott, 339–
344. Boulder, CO: Westview Press.
Story, D. C. 1992. Volunteerism: The “Self-Regarding” and “Other-Regarding” Aspects of
the Human Spirit. Nonprofit and Voluntary Sector Quarterly 21: 3–18.
Strom, S. 2010. Lawmakers Seeking Cuts Look at Nonprofit Salaries. New York Times,
July 26, http://www.nytimes.com/2010/07/27/us/27nonprofit.html?pagewanted=all
(accessed November 1, 2011).
Worth, M. J. 2009. Nonprofit Management. Principles and Practice. Thousand Oaks, CA: Sage.
Young, D. 1989. Local Autonomy in a Franchise Age: Structural Change in National
Voluntary Associations. Nonprofit and Voluntary Sector Quarterly 18 (2): 101–117.
Zeigler, S. L. 2006. Litigating Equality: The Limits of the Equal Pay Act. Review of Public
Personnel Administration 26 (3): 199–215.

Endnotes
1. See U.S. Equal Employment Opportunity Commission, Title VII of the Civil Rights
Act of 1964 (http://www.eeoc.gov/laws/statutes/titlevii.cfm).
2. See U.S. Equal Employment Opportunity Commission, Titles I and V of the Americans
with Disabilities Act of 1990 (http://www.eeoc.gov/laws/statutes/ada.cfm).
3. See U.S. Equal Employment Opportunity Commission, Titles I and V of the Americans
with Disabilities Act of 1990 (http://www.eeoc.gov/laws/statutes/ada.cfm).
4. See U.S. Equal Employment Opportunity Commission, Sexual Harassment (http://
www.eeoc.gov/laws/types/sexual_harassment.cfm).
5. See U.S. Department of Labor, Wage and Hour Division, Fact Sheet #28: The Family
and Medical Leave Act of 1993 (http://www.dol.gov/whd/regs/compliance/whdfs28.
pdf ).
6. Del Jones. 2009. Big Non-Profit Organizations Have Highly Paid Leaders, USA Today
(http://www.usatoday.com/money/companies/management/2009-09-27-nonprofit-
executive-compensation_N.htm).
Chapter 6

Resource Acquisition
and Management

Similar to the structures and functions of other organizations, for-profit or gov-

ernment, non-profit organizations (NPOs) have to acquire and secure adequate
resources to achieve their goals and missions. In addition to resource acquisition,
NPOs have to have in place appropriate and strong financial controls to ensure
effective utilization of their resources.
NPOs’ resource acquisition process is significantly different than for-profits
and governments. The former’s revenues or income originate from sales of services
or goods, and the latter’s revenues are mostly coming from the government bud-
get. In comparison, NPOs’ typical revenues come from individuals, philanthropic
foundations, corporations, and government grants and contracts. For each of these
sources, NPOs have to develop unique strategies and processes to be successful
in raising adequate funds. Unlike for-profits, NPOs cannot completely operate as
a business; likewise, unlike government organizations, NPOs cannot depend on
government for their revenues. Thus revenue acquisition becomes a challenging
endeavor for NPOs.
Ensuring effective financial management relates to the issue of trust in NPOs.
Individual donors make donations because they trust that NPOs will effectively
use the money for the intended goal or purpose. Other funders (government and
foundations) also provide resources to NPOs with the assumption that NPOs can
deliver the services effectively and also promote public benefits through their service
provisions. Developing and implementing effective financial management princi-
ples, structures, and processes assist NPOs not only to avoid fraud and unethical
financial practices, but also to garner donor and funder trust and public confidence.

163
164 ◾ Effective Non-Profit Management

This chapter discusses NPOs’ resource acquisition and management and has the
following learning objectives:

1. Analyze the different revenue sources for NPOs and their advantages and
disadvantages.
2. Describe the fundraising process and government regulations of it.
3. Identify the uniqueness of NPO financial reporting and accounting.
4. Understand the major financial statements of NPOs.
5. Develop appreciation of the importance of financial leadership and effective
internal controls.

This chapter also explains the perils of NPO dependency on government funding as
an issue and concludes with a case study on NPOs’ dilemma with “tainted” donation.
Two points of clarification are presented here:

1. Resource acquisition and management are major functions of NPOs. This

chapter is intended only to provide basic information on both. There are excel-
lent books and manuals written on these topics that readers can avail for
additional and more in-depth information.
2. Online fundraising is gaining popularity. This chapter does not discuss this
fundraising phenomenon, because it is included in the following chapter on
Non-Profit Organizations and Information Technology.

6.1 Non-Profit Organization (NPO) Revenue Sources

NPOs have several sources of revenues (Box 6.1). They, however, need to weigh
in the advantages and disadvantages of each before making strategic decisions on
building and developing appropriate revenue sources.

BOX 6.1 SOURCES OF REVENUES

FOR REPORTING PUBLIC CHARITIES, 2008
1. Fees for services and goods from private sources: 45%
2. Fees for services and goods from government: 24.3%
3. Private contributions: 12.4%
4. Government grants: 8%
5. Investment income: 7%
6. Other: 2.8%

Source: Urban Institute, 2008, National Center for Charitable Statistics, Core
Files. With permission.
 Resource Acquisition and Management ◾ 165

Following are the major sources of NPO revenues:

1. Government funding—Box 6.1 shows that government contracts and grants

constitute approximately one-third of NPOs’ funding. As explained in
Chapter 2, government is increasingly relying on this sector for providing
goods and services that it previously delivered. Such funding provides legiti-
macy to NPOs and offers them opportunities to have strategic access to pol-
icy makers. Government funding sometimes also requires NPOs to provide
more services to the low-income group. However, the downsides are that gov-
ernment funding could be unpredictable, especially during harsh economic
situations, and also depend on the priorities of the dominant political ide-
ology. NPOs also may have to incur substantive transaction costs to build
and maintain the required professional skills and competencies to avail and
manage this resource. There is also a risk for NPOs in securing and utilizing
government funds designed for programs which are unrelated to their mis-
sions, thereby leading to probable mission drifting among these NPOs.
2. Private sources—These include individual, corporation, and foundation con-
tributions to NPOs (Box 6.2).
a. Individual donors: Among the private sources, individual donors are the
major source of revenues for NPOs. A variety of reasons and motives
explain donors’ decisions to donate, such as altruism, generosity, the
desire for public recognition, tax benefits, opportunities to develop social
bonding, and a desire to give back to society. It is widely understood
that individuals have complex and multiple reasons to donate. As Jeavons
pointed out, “Mixed motives are the rule, not the exception, of our expe-
riences in philanthropy” (1991, 55).
The advantages of individual donations are that they are usually unre-
stricted. However, such donations also fluctuate with the economic situation.
Individual donations also include deferred giving/planned giving. These are
gifts that are made in the present time, but the NPO will receive those later
on (or are deferred), usually after the donor dies. Examples include bequests

BOX 6.2 2009 CONTRIBUTIONS

FROM PRIVATE SOURCES (IN BILLIONS)
1. Individuals: $227.41 (75%)
2. Foundations: $38.44 (13%)
3. Bequests: $23.80 (8%)
4. Corporations: $14.10 (5%)

Source: Giving USA, 2010, Executive Summary, The Center on Philanthropy,

Indiana University, Giving USA Foundation. With permission.
166 ◾ Effective Non-Profit Management

BOX 6.3 GIVING CIRCLES (GC)

Giving Circles (GC) is one example of the “new philanthropy” that is driven
by individual donors who want to participate in more unconventional and
engaged ways at the grassroot level. GC are groups of donors who pool their
resources (money, in-kind gifts, volunteer time) and then decide together
where to give them away. It is the donors, rather than the professionals, who
decide where to donate the resources. They usually maintain independence
from a single charity. Eikenberry (2006) identified three major types of giving
circles: small group, loose networks, and formal organizations. Eikenberry’s
research found several benefits to NPOs including new source of resources,
new contacts, and new volunteers. However, her research also found that GC
are often not interested in being sought after, so NPOs have to change their
fundraising approach if they want to attract GC. GC also usually funded for
only the short run. One recent survey (Bearman, 2007) of 160 GC found that
they engaged more than 11,700 donors and granted more than $65 million.

(a gift through a will), gift of life insurance, charitable trusts,1 charitable

remainder trust,2 and charitable lead trust.3 (See Box 6.3.)
b. Foundations: As mentioned in Chapter 1, foundations are required to
expend a minimum of an amount equivalent to 5% of the value of their
invested assets each year. The advantages for NPOs are that usually the
foundations will provide clear directions for required paperwork and
applications, and advance listing of decision dates. In addition, this pro-
vides opportunities to NPOs to network with the foundation world. The
downside of foundation revenues is that most foundations usually have
very specific goals and priorities. Thus NPOs have to have operational or
capital needs that match up well with those.
c. Corporate philanthropy: Corporations make contributions directly to NPOs
and indirectly through their corporate foundations. Direct contributions
include grants, sponsorship, gift-in-kind, and providing volunteers. “Since
the mid-1980s, corporate giving has increasingly reflected an approach
known as strategic philanthropy—that is giving according to a plan that
relates to the corporation’s philanthropy to its overall strategic and business
goals. Giving is viewed as an investment and is subject to evaluation based
on how much return it produces—that is, the extent to which it enhances
the corporation’s competitiveness” (Worth, 2009, 237). Corporations’
funding could be a stable source of revenues for NPOs, requires minimal
paperwork, usually are unrestricted funds, and creates opportunities for
the NPO to connect with the corporate circle or elites. However, there
are disadvantages, too, including the transaction costs to search for these
funders, cultivating relationships, completing the evaluation process that
 Resource Acquisition and Management ◾ 167

most corporations would require, and the possibility of negative publicity

in the event of a scandal involving the corporation. Young thus pointed out,
“The trick to securing corporate support is to find a corporate relationship
with the right ‘strategic fit’ wherein the needs of the nonprofit and those of
the corporation are both met” (2010, 493).
3. Fees—Fees (versus full entitlements) are now a dominant source of rev-
enues for NPOs; however, the degree of dependency on fees varies by the
different subsectors. Young explained, “Education, health, and human ser-
vices nonprofits are most heavily dependent on fee revenue, whereas arts,
environmental, and international nonprofits depend more substantially on
charitable contributions” (2010, 483). The advantage of fees is that they are
unrestricted revenues. However, deciding on a fee structure is not an easy
task for NPOs—should they charge the market price, or discount prices, or
should they use sliding scale fees—these are some of the considerations that
the NPO needs to take into account before developing a fee structure. The
NPO also has to be careful not to appear too similar to a for-profit. There are
also transaction costs involved, and at times, imposing fees for services may
also go against the mission of the NPO if a needy population is unable to
avail the service due to the fee.
4. Investment income—This is income generated in the form of interests and
dividends from NPOs’ operating and endowment funds. Such income offers
NPOs another source of unrestricted revenues; however, this could be an
unstable source due to market unpredictability. There are also costs involved
in regard to developing competent staff and having adequate resources
required for prudent investment management. This process traditionally
involves the board’s approval/directing to management and the treasurer.
5. Other sources—These include volunteer contributions, in-kind contribu-
tions, and a variety of enterprise-generating incomes. Cause-related market-
ing (Box 6.4) and licensing are two forms of enterprise-generating income.
Chapter 2 discussed both of these as examples of partnerships between NPOs
and corporations.

To recap, cause-related marketing, as the cases in Box 6.4 show, is a partnership

between a NPO and a for-profit corporation where the goal is to promote a public
interest cause or an issue.
Licensing, in contrast, is a binding agreement of “one party to allow a second
party to use its name, logo, characters, or products” (Massarsky, 1994, 385). An
example is the American Heart Association’s endorsements of products that meet
their standards for heart health.
The advantages are obvious—they bring a win-win case for both parties.
However, as explained in Chapter 2, the NPO needs to ensure that its mission is
aligned with the public brand of the corporation. Before signing on a contract, the
NPO should do a thorough research on the for-profit corporation to ensure that
168 ◾ Effective Non-Profit Management

BOX 6.4 CAUSE-RELATED MARKETING: EXAMPLES

1. Every time customers buy a (Starbucks)RED product or pay with their
(Starbucks)RED Card, the organization makes a contribution to the
Global Fund to help people living with HIV/AIDS in Africa. The
NPO’s Web site mentioned that it has so far generated contributions
equaling more than 18 million daily doses of medicine.
2. Yoplait’s “Save Lids to Save Lives” campaign offers customer the oppor-
tunity to buy specific Yoplait products with a pink lid which they turn
in, and in turn the corporation donates 10 cents for each lid to the
Susan G. Komen for Cure.
3. In 2004, the Lance Armstrong Foundation (LAF) launched the Live
Strong campaign (buying and wearing a yellow wristband), partnering
with Nike, Inc. Nike, Inc. provided the financial resources to under-
write the production and distribution of the first five million wrist-
bands. It also donated a million dollar cash gift to the LAF. Proceeds
from bracelet sales benefit the Lance Armstrong Foundation, which
provides support for people affected by cancer.

they are forming a partnership with a desirable partner. Overton and Frey advise
NPOs to “make sure that the joint venture is not structured or operated in a man-
ner that would constitute an undue benefit to its for-profit partners and other for-
profit entities” (2002, 97).
Recently NPOs have been engaging in a new form of business known as social
business enterprise. Social business enterprise has been defined in different ways. In
essence it basically refers to a NPO’s application of business practices to generate
income in order to serve a social mission. “Social enterprises differ from traditional
voluntary sector businesses in that they are profit-making. However, all profits are
usually ploughed back into the business or towards a social good. What is par-
ticularly attractive about them is that, in theory, they offer a largely market-based
solution that is self-sustaining, once initial seed-fund money has been invested”
(Espinoza, 2011). So, in essence they “seek to align economic and social value cre-
ation” (Nash, 2010, 265). The advantages are obvious—in addition to the NPO
generating revenues, it is also providing some social benefit.
Box 6.5 illustrates one such social business enterprise.

6.2 Fundraising
Fundraising is a major activity that almost all NPOs carry out or will carry out in
the future. Successful fundraising, as several scholars (for example, Fogal, 2010;
Lindahl, 2010; Renz and Associates, 2010; Worth, 2009) explain, include planning
 Resource Acquisition and Management ◾ 169

BOX 6.5 STREETVIBES—A CASE

OF A SOCIAL BUSINESS ENTERPRISE
Streetvibes is a newspaper published by the Greater Cincinnati Coalition for
the Homeless. The mission of the NPO is to end homelessness in Cincinnati,
Ohio, through providing a variety of services, public education, and grass-
roots advocacy.
Started in 1997, Streetvibes covers local social justice issues and topics not
covered in corporate media; it is published twice a month. The writers are
local volunteers. Streetvibes vendors are homeless, formerly homeless, or have
very low income. They purchase the newspaper from the Homeless Coalition
for 25 cents and sell it on the street for a $1 donation. The vendor keeps the 75
cent profit. This program has helped hundreds of people find and maintain
housing. Streetvibes vendors are given an orientation and are required to sign
a code of conduct before being given a Streetvibes Vendor Badge.

Source: Adapted from Greater Cincinnati Coalition for the Homeless, Street-
vibes, http://www.cincihomeless.org/content/streetvibes.html (accessed
October 10, 2011).

and implementation of several organized and thoughtful steps and processes. Fogal
explained, “Classic management practice consists of five activities: analysis, plan-
ning, executing, control and evaluation. Fundraising as a management process uses
all these activities” (2010, 509).
Worth (2009) identified the following six steps in fundraising:

1. Identifying needs and developing a case—The first step is identifying the needs
related to achieving the organizational mission. NPOs at this initial stage
should ask themselves why they would want to raise funds, how important
is fundraising for them, and whether they are ready for that. (See Box 6.6.)
“Fundraising without a purpose is unlikely to elicit support” (Worth, 2009,
241). It is crucial for any NPO to develop specific fundraising objectives
through addressing these and similar other questions. Such objectives will
assist the NPO to develop a strong and thoughtful case for support. The
NPO also has to ask itself this question: When there are so many compet-
ing NPOs, why will donors choose them over other NPOs? They thus need
to make a unique and compelling case and link their fundraising objectives
and goals to a broader social or humanitarian purpose. As Fogal argued, “To
succeed in the long-term development of philanthropic support, nonprofits
must be internally prepared for fundraising. Leaders and managers must fully
understand and be able to articulate the case for support” (2010, 515).
170 ◾ Effective Non-Profit Management

BOX 6.6 CREATIVE FUNDRAISING IDEAS

1. The American Cancer Society (Phoenix, Arizona) during its Jewel Ball
(jewelry auctions) sold 100 glasses of champagne with small bags tied to
them, with a donated pair of diamond earnings in one of the bags, for
$50 each. In addition, they sold little boxes each for $100 with donated
mystery items (e.g., concert tickets) in each box. The outcome: raised
$750,000 from its ticket sales, auctions, and the sales of those items.a
2. Chicago’s After School Matters held its annual gala on an O’Hare
Airport runway. The excitement and hype before the event led to the
gathering of 2,500 guests, and the event raised more than $3 million
for teen programs.a
3. Playing the Flamingo game. Volunteers secretly plant a flock of plastic
flamingos in someone’s yard along with the rules of the game: For $5,
the family can have the flock removed from their yard. For $10, they
can choose the next home to be invaded by the flocks.b

Sources: a Creative Fundraising Ideas, Nonprofit World, 2010, 28 (1): 7.

b Creative Fundraising Ideas, Nonprofit World, 2008, 26 (6): 7.

2. Identifying prospects—To make fundraising efficient and effective, it is crucial

for NPOs to do research on prospective donors (individuals, corporations,
and foundations) and develop a list of prospects that not only have the finan-
cial capacity to donate but will have one or more reasons to possibly donate
to them. (See Box 6.7.) Without a target group to gear for fundraising, NPOs
will be wasting their money and energies. NPOs can locate information on
prospects from several sources including the Who’s Who in America, social
registers, alumni files, and Lexis/Nexus for Development Professionals. There
are also several online sources such as Legacy.com, salary.com, and Zillow.
com. In addition, NPOs can identify prospects based on their connections
(e.g., friends, volunteers, previous clients) and common interests. There are
several methods for prospects research including surveys, focus groups, par-
ticipant observation, prospect information sheets, feasibility studies, elec-
tronic screening, and rating and screening. However, as Lindahl pointed out,
“the most effective method may be the interpersonal aspect of research—
meeting the prospect face to face and through conversation find out about
their philanthropic intentions and relevant background” (2010, 131).
3. Cultivating prospects—Fundraising is not just raising funds; instead it is a
comprehensive and thoughtful process for a NPO to build and maintain rela-
tionships with different stakeholders. The NPO thus has to devote time and
attention to cultivate a trusting relationship with its prospects before solicit-
ing for gifts. There are several strategies for cultivating such a relationship
 Resource Acquisition and Management ◾ 171

BOX 6.7 BEST PROSPECTS

1.Constituents: alumni, patients, member of churches
2.Current/former board members
3.Key volunteers
4.Staff
5.Current donors
6.Lapsed donors
7.Vendors: businesses who sell goods or services to the organization
8.Donors generous to similar organizations
9.Affluent individuals with whom someone in the organization has a peer
relationship
10. Philanthropic foundations that are supportive of the NPO mission
11. Corporations that are supportive of the NPO mission

including face-to-face meetings, direct mail, e-mail blasts, newsletters, and

special events and posting information on their Web sites. For major gifts
(viz., planned giving), it is essential that the NPO understand that such a
relationship has to develop naturally and will take time, and that it involves
implementing a series of planned initiatives and engagements with the pros-
pects. According to Axelrod, for a successful cultivation of a donor prospect,
each contact with the donor must be:
a. Personal
b. Relevant to the donor’s unique interests and needs
c. Timed to the pace and style of the donor
d. Delivered via each donor’s preferred medium (2004, 50)
Podesta advised NPOs to present their cases in a business-like manner. His
suggestions include: (a) one-to-one contact, (b) small luncheon or breakfast
at the organization’s office or at a restaurant, (c) larger luncheon or dinner
meetings, and (d) site tour (1982, 34–35).
4. Soliciting the gift—Soliciting can include different techniques such as face-to-
face contacts, personal phone call, personalized letter or e-mail, telephone solici-
tation, campaigns, special events, and media advertising. Two common types
of fundraising strategies are special events and campaigns. Special events involve
organizing events like walk-a-thons, antique shows, art shows, auctions, book
fairs, fashion shows, benefit luncheons or dinners, and pancake breakfasts. (See
Box 6.8.) These events typically do not generate significant revenues but are good
marketing and publicity venues. They also provide numerous opportunities for
volunteers to become involved and promote a sense of community. However, the
downside is their reliance on volunteers, some of whom may not have the skills
to organize and manage special events, and the unpredictability of revenues.
172 ◾ Effective Non-Profit Management

BOX 6.8 SEVEN FUNDRAISING EVENT STRATEGIES

1. Hold more frequent events, not less, and use a variety of events.
2. Put a system in place so the NPO does not have to reinvent the wheel.
3. Avoid credit card factoring. If needed, then the NPO should have its
own merchant account.
4. Track donations carefully by collecting donor information (viz., donor
contributions over time, best time to call) beyond name and contact
information.
5. Value and appreciate donors who make small contributions.
6. Add fundraising enhancements to events.
7. Appreciate and foster happy donors.

Source: Borning, C., 2010, Seven Fundraising-Event Strategies for Challenging

Times, Nonprofit World 28 (1): 6–7.

Campaigns include both capital and annual. Capital campaigns are con-
ducted to raise revenues for a specific major project (e.g., a new building,
building renovation, equipment, technology upgrades), while annual cam-
paigns, as the name suggests, are for day-to-day or operational purposes. The
annual campaign also “serves to bond a large number of donors to the orga-
nization through recurring gifts” (Seiler, 2003, 57).
Worth (2009) pointed out that the selection of a strategy or strategies
depends on several considerations:

a. It has to be appropriate to the level and type of support. For example,

major gifts will require personal contacts, while a small gift may need a
phone call.
b. It has to be cost efficient.
c. It has to be appropriate to the organizational life cycle. That means that
the solicitation strategies of a new organization that is still working to
make itself visible will be different compared to those of an established
organization (Wolf, 2009, 245–246).

Greenfield offered this suggestion: “Appreciate this hypothesis: No indi-

vidual, corporation, or foundation is likely to make their largest gift to a non-
profit organization, first; but they may make many such gifts over a lifetime if
enjoined in a positive and rewarding relationship by the same NPO” (2001,
393–394). He classified solicitation methods into three tiers or groups, begin-
ning with annual giving at the bottom of the pyramid, then major giving,
then at the peak there is estate or planned giving (2001, 394).
 Resource Acquisition and Management ◾ 173

The cost of fundraising effectiveness is an important issue for NPOs.

Because fundraising costs depend on a variety of factors, there is no one
established specific fundraising standard. However, some scholars and prac-
titioners have provided guidelines on fundraising costs. Fogal (2010, 517)
provided the guidelines shown in the table.

Guidelines on Fundraising Costs Cost per Dollar Raised

New donor acquisition Up to $1.50

Special events Up to $0.50

Donor renewal (general donor programs) Up to $0.25

Major gifts and capital campaign Up to $0.10

Planned giving Up to $0.15a

Corporate and foundation grant seeking Up to $0.20

a After at least 5 years of initial investment.

5. Donor acknowledgement and recognition—Again, fundraising is more than

raising funds, it is a relationship-building process. Thus the importance of
promptly acknowledging gifts (within 48 hours) cannot be overemphasized.
Some common ways to acknowledge gifts include sending a “thank you” note
from the NPO, printing names on the annual report or the Web site, provid-
ing formal receipts (a requirement for cash gifts of $250 or more), displaying
names on walls, and naming a building or a scholarship (for larger gifts) if
that option exists. This process thus includes establishing policies on several
aspects of gift acknowledgement including even that as simple as a policy on
who will send out the “thank you” note.
It is crucial for NPOs to tailor their acknowledgements and recognition to
the level of the gift and the status of the donor. Harbaugh (1998) developed
an interesting model on the effects of three reporting plans of a charity on
prestige and donations. According to the model, when there is no reporting,
donation is the least because there is no prestige benefit. When the exact
amount of a gift is reported, the dollar amount increases to the highest util-
ity values where the value of the prestige equals the value of the donation.
When the reporting is made by categories of gift, with the lowest amount in
a category, “the optimal donation depends on preferences and the bracket. . . .
A person’s optimal donation may be either greater or less than what it would
have been under exact reporting” (Harbaugh, 1998, 278). Harbaugh tested
his model using a prestigious law school, and the overall results confirmed his
model. One interesting point that Harbaugh (1998) raises is that significant
anonymous major gifts are a rarity.
174 ◾ Effective Non-Profit Management

6. Stewardship—This emphasizes the criticality of remaining accountable for the

efficient and effective use of donors’ contributions. “Nonprofits as recipients
of public faith, trust, and resources have a responsibility to manage gifts in a
responsible manner” (Lindahl, 2010, 161). This entails maintaining processes
to keep donors informed and engaged about the use of the contributions, to use
the gift in a way to uphold donors’ intentions, and to exhibit measurable results.
In addition to the above steps, it is important for NPOs to evaluate the
entire fundraising process.

In addition to the above six steps, evaluation is important. As any other orga-
nizational processes, NPOs need to take some time to evaluate their fundraising
experiences. What were the outcomes in relation to the fundraising objectives? Did
board members participate? Were the strategies effective? What lessons did they
learn? These are some of the questions that any evaluation should carefully consider
and address. “By reflecting on its fundraising practice, as well as all its management
and programs, a nonprofit’s leadership determines whether or not resources are max-
imized, constituents’ needs are served, and the mission fulfilled” (Fogal, 2010, 512).
Along with effectively implementing these processes, successful fundraising
depends on several other factors, such as

Board member involvement—Board member involvement demonstrates the

member’s commitment to fundraising. Because members are the leaders of
NPOs, such commitment influences others’ decisions to contribute. As men-
tioned in Chapter 4, fundraising should be one of the major responsibilities
of board members.
Open systems—Scholars (for example, Fogal, 2010; Tempel, 2003) argue that an
organization’s openness to its environment directly affects its fundraising abil-
ity. An organization that works as an open system is better able or prepared to
adapt to changing conditions and also to shape the environment to its benefits.
Some examples of environmental factors that might have impact on a NPO’s
fundraising include new government regulations, increased competition
from similar NPOs, economic fluctuations, and technological developments.
Tempel cautioned NPOs by explaining that “Responding to changes in the
environment is not as simple as meeting current needs. Organizations that
respond to changing needs by making dramatic alterations to their own insti-
tutional value systems also risk their future” (2003, 32).
Awareness of diversity—Changing demographics have effects on fundraising, in
the sense that different cultural groups have different propensities and moti-
vations to give. Millett and Orosz (2001) found some major differences on
different ethnic groups’ propensities and motivations to give. For example,
they found that the majority of African Americans contribute to religious
causes, particularly to church; Latinos tend to give to family, extended family
members, and church; and Asians tend to give more to education and family.
 Resource Acquisition and Management ◾ 175

However, as Lindahl pointed out, “In the arena of American Philanthropy,

various diverse populations have been overlooked in much of the research on
giving” (2010, 223).
In today’s multicultural society and increasing globalization, it is important for
NPOs to be cognizant of the reality that they are working with a diverse
population, and hence the importance of implementing fundraising strate-
gies that are appropriate to reach the targeted groups.
Ethical practices—No matter how open NPOs are with their environments, or
how much the boards are involved in fundraising, effective and sustained
fundraising successes depend on demonstrating ethical behaviors and activi-
ties throughout the fundraising process. A failure to do so will overshadow all
the other safeguards that are in place. Following are some important practices
that NPOs should follow to avoid any issues of fundraising ethics:

◾◾ Provide correct and realistic information to donors, and avoid providing

any misleading information
◾◾ Keep promises committed to donors
◾◾ Protect donors’ and prospects’ wishes for privacy
◾◾ Submit accurate and complete information on fundraising costs
◾◾ Compensate reasonably to fundraisers and avoid percentage-based com-
pensation for them

In addition, it is extremely important for NPOs to have written policies on

the following:

◾◾ Conflict-of-interest situations
◾◾ Contributions/donations from unscrupulous donors
◾◾ Contributions for programs or goals unrelated to the NPO mission.

Many NPOs do not report any fundraising expenses, and some misstate the
information on Form 990 (Krishnan et al., 2005). Keating and her colleagues
reported that “Using a conservative approach that understates the extent to which
nonprofit organizations violate the reporting rules, our study indicates that 74 per-
cent of the regulatory filings from nonprofit organizations fail to properly report
telemarketing expenses” (2008, 417). An Urban Institute (2004) study has a similar
finding and reported that only 41% of NPOs that received contributions report
any fundraising expense on their 990 forms. Even though sometimes instances of
misreporting could be unintentional or due to weak monitoring and accounting
knowledge, they still raise important ethical issues in fundraising.
Appendix 6.1 provides the Code of Ethical Principles developed by the
Association of Fundraising Professionals.
Box 6.9 provides some effective fundraising tips.
176 ◾ Effective Non-Profit Management

BOX 6.9 DIRECT FUNDRAISING:

COMMON SENSE VERSUS REALITIES

Conventional Wisdom Realities as Validated by Live Marketing

1. Mail once a year, otherwise Mail at least four times a year.
lose donors.
2. Make a case in one page. Two-page letters draw the best response.
3. Do not add excess stuff. The response rate increases with extra
stuff like photos, artwork, address
labels, and so forth.
4. Suggesting specific amounts of This is a proven way to upgrade the size
donation will offend people. of the average gift.
5. Avoid putting too much Load the letter with emotion. People
emotion in the letter. follow their hearts.
6. It is better not to directly ask Always directly ask for money.
for money.
7. Use bulk-rate letters for Generous donors deserve first-class
efficiency. mail.
8. Recognizing small donations is A small donation is important for
a waste of time and is not recognition. A small donation may
important. lead to a larger donation.
Source: Adapted from Keller, T. K., 2007, Beyond Common Sense: Proven
Tactics for Direct-Mail Fundraising, Nonprofit World 25 (5): 12–13.

6.2.1 Government Regulations
Registration—State and local regulations of fundraising require NPOs to reg-
ister before they can initiate gift soliciting. National NPOs that raise funds
in different states are required to register in each state where they intend
to solicit gifts. Religious organizations are exempt from this requirement.
Professional fundraisers are also typically required to register in the state
where they are working.
States are increasingly moving toward adopting a standardized registration
form. The Unified Registration Statement (URS) represents a joint effort
by the National Association of State Charities Officials and the National
Association of Attorneys General that provides standardized and simplified
compliance of NPOs under the states’ solicitation laws.
Federal tax law—The federal tax law provides for tax deductible donations. There
are three federal tax deductions: one for income tax, one for estate tax, and one
 Resource Acquisition and Management ◾ 177

for gift tax. When itemizing and deducting cash gifts to public charities, up to
50% of adjusted gross income may be deducted, while gifts of appreciated securi-
ties, only up to 30% of adjusted gross income may be deducted. For gifts donated
to private foundations, the percentage changes to 30% and 20%, respectively.
The law requires NPOs to provide a written disclosure to a donor who received
goods or services in exchange for a single payment in excess of $75. A donor
is also responsible to maintain adequate record for cash contribution of less
than $250. For any single cash contribution of $250 or more, the donor must
obtain a contemporaneous, written acknowledgment of the gift from the
NPO. A donor must obtain an acknowledgment of a noncash contribution
of at least $250 but not more than $500. For noncash contributions over
$500 but not more than $5,000, a donor must obtain an acknowledgment
and written records described above plus records of how the donor got the
property, the approximate date the property was received, and other relevant
information. If the contributed property value is in excess of $5,000, then the
donor must submit a formal and official appraisal.
Federal reporting—As mentioned in Chapter 3, NPOs are required to submit
Form 990 (the annual financial form) to the Internal Revenue Service (IRS).

6.3 Financial Management
There are three financial rule-making agencies in the United States. The Financial
Accounting Standards Board (FASB) develops rules for for-profit and non-profit
organizations; the Government Accounting Standards Board (GASB) develops
rules for state and municipal organizations, and the Federal Accounting Standards
Advisory Board (FASAB) develops rules for federal agencies. The FASB is a private
organization that is overseen by the Financial Accounting Foundation (FAF), itself
a NPO. The FASB has developed the Generally Acceptable Accounting Principles
(GAAP). Most states require that NPOs file annual reports with the state charities
bureau (or its equivalent) and that the annual reports include financial statements
prepared in accordance with GAAP.

6.3.1 NPO Financial Reporting and Accounting Uniqueness

This section identifies some of the uniqueness of NPO financial reporting and
accounting.

1. NPOs’ accounting is similar to that of for-profit organizations with the fol-

lowing exceptions:
a. Volunteer contributions. NPOs in contrast to for-profits, are very much
dependent on volunteer contributions. NPOs can account for volunteers’
contributed services if one of the following conditions is met:
178 ◾ Effective Non-Profit Management

(1) The services create or enhance non-financial assets. Volunteers con-

structing houses is one example of this type of services.
(2) The services require specialized skills, are provided by persons pos-
sessing those skills, and would typically have to be purchased if not
provided by the donation. All three parts have to be met. Volunteers
writing computer programs is one example of this service.
b. Accounting for pledges. NPOs, unlike for-profits, may receive pledges from
donors and are required to account those. FASB Statement of Financial
Accounting Standards No. 116 provides guidance on how to account for
pledges. According to the standard, NPOs are required to report uncon-
ditional pledges as assets and for conditional pledges to report it when the
condition is met. FASB 116 explains that “A promise to give is a written
or oral agreement to contribute cash or other assets to another entity;
however, to be recognized in the financial statements there must be suf-
ficient evidence in the form of verifiable documentation that a promise
was made.”
c. Non-cash contributions. NPOs have to account for these contributions.
According to the FASB guidelines, non-cash contributions (e.g., com-
puters, office equipment) should be recorded at the amount which the
organizations would normally have to pay for similar items.
d. Bargain prices. For items that NPOs buy at a reduced/discount rate due to
their non-profit status, NPOs are required to record them at the market
price and to note the discount amount as a contribution. As an example,
if a charity buys a widget for $50 that normally sells for $80, the purchase
should be recorded at $80, with the $30 difference being reported as a
contribution.

Following are additional requirements for NPO financial reporting:

FASB No. 116 requires NPOs to report transactions in one of three classes:
unrestricted, temporarily restricted, or permanently restricted. Unrestricted
items are resources that can be used for any purpose. A temporarily restricted
revenue fund is one that can be used in a specified future or for a specific
purpose. A permanently restricted revenue item (often called endowment) is
restricted from being used in any time with the exception of the interest or
earned income from that source.
FASB 116 and 117 require NPOs to publish a statement of activities that shows
separately the inflow and outflows for each of the three types of transactions
during the accounting period.
FASB 117 requires NPOs to prepare a balance sheet that shows the assets, liabili-
ties, and equity for the organization as a whole.
 Resource Acquisition and Management ◾ 179

NPOs are required to report most expenses according to GAAP for busi-
nesses—that is, they record expenses when resources are consumed. This method
of accounting is known as accrual accounting. Under this method, revenues are
recognized when they are earned, regardless of when the cash is actually collected.
Some small NPOs use cash accounting. Under this accounting method, transac-
tions are recorded when cash is received or disbursed. There are some NPOs who
use a modified version of cash basis accounting. However, only the accrual basis
accounting is used under the GAAP. “Any auditor’s report accompanying financial
statements prepared using the cash basis of accounting must include a statement
that the financial statements are not prepared in accordance with GAAP” (Ruppel,
2007, 36). The accrual basis presents a better picture of the NPO.

6.3.2 Basic Financial Statements of an NPO

The rules for NPO financial reporting were established by FASB statement No. 117.
The basic financial statements for NPOs include the statement of financial position,
statement of activities, and statement of cash flows.

6.3.2.1 Statement of Financial Position

The balance sheet is the statement of financial position. Following is an example of a
balance sheet. (See Box 6.10.)
The balance sheet includes some terms and concepts that need some clarifica-
tion or description.
Assets—Include cash, cash equivalents (e.g., money market funds), investment
(e.g., stocks), contributions receivable (viz., pledges), accounts receivables,
inventories, property (land, real estate—fixed assets), and prepaid expenses.
Accounts receivable are funds that are owed to the NPO from individuals
or entities due to services provided or goods they sold. For example, let us
assume that a NPO healthcare center has a reduced scale fee for providing
services to its clients. It has provided services to 20 clients and is still wait-
ing to receive the fees from 10 of them. The latter fees will be accounted as
accounts receivable.
It is important to note that all receivables may not be fully collected. GAAP
requires that an estimate of accounts receivable that will not be collected be
made and an “allowance of uncollected accounts receivable be established”
(Ruppel, 2007, 12). This allows NPOs to provide their best estimates of how
much of the receivable balance actually will be collected.
Prepaid expenses—Arise when a NPO has paid for services that will be received
in the future, with the future defined as a time past the fiscal year-end. One
example is a NPO paying its rental fee for 2 years, instead of 1 year. The second-
year rental fee, whatever that amount is, will be included as prepaid expenses.
180 ◾ Effective Non-Profit Management

BOX 6.10 AGENCY XX BALANCE SHEET

2011
ASSETS
Current assets:
Cash and cash equivalents $140,280
Grants and income receivable $164,200
Prepaid expenses $20,000
Total current assets $324,480

Long-term assets:
Investments $140,302
Properties $ 56,000
Total long-term assets $196,302

Total Assets $520,782

LIABILITIES AND NET ASSETS

Current liabilities:
Accounts payable $30,000
Accrued expenses $56,785
Deferred government revenues $10,000
Total liabilities $96,785

Net assets:
Unrestricted $300,000
Temporarily restricted $112,000
Permanently restricted $11,997
Total Net Assets $423,997

Total Liabilities and Net Assets $520,782

Liabilities—These include obligations that the NPO has incurred. Accounts pay-
able, debt, and deferred income are three common types of liabilities. Accounts
payable means unpaid bills for goods and services that have been received by
the NPO prior to the end of its fiscal year. Debt includes short-term or long-
term loans. Deferred income is cash received by a NPO prior to either having
earned the income or the right to keep the income. For example, a NPO sells
a ticket for a concert a month before the concert is actually held.
 Resource Acquisition and Management ◾ 181

Net assets—This is the difference between the assets and liabilities. As per GAAP
guidance, net assets must be reported in three different classifications:

1. Unrestricted net assets: Net assets that are not temporarily or permanently
restricted. These are restrictions placed by donors, and in a few cases by
the board.
2. Temporarily restricted net assets: Their use is limited by either a donor-
imposed time restriction or a donor-imposed purpose restriction. The
former means that the assets could be used during a certain time period
or after a specific point of time. The latter means they could be used only
for a specific purpose.
3. Permanently restricted net assets. An example is endowment, where the
NPO cannot use the amount contributed but can use the income gener-
ated by the endowment fund.

Revenues—These include all the revenues and their sources.

Expenses—There are two important classifications of expenses used by NPOs on
their financial statements: functional (includes program, management and
administrative, and fundraising expenses) and natural (salary, rent, etc.).

6.3.2.2 Statement of Activity
The statement of activity, also known as the income statement, presents the increases
and decreases to a NPO’s net assets over the entire fiscal year. It includes transac-
tions in regard to revenues, expenses, gains and losses, and reclassifications of net
assets. Reclassification involves a situation where after a donor’s restriction is met, a
previously temporary net asset is moved to an unrestricted category.
Box 6.11 presents an example of a sample financial statement activity.
Some NPOs will also develop the Statement of Functional Expenses that provides
information on the distribution of costs between three functional categories and
by natural categories, such as salaries, occupancy costs, and depreciation. If an
organization has several major programs, it can separate each program’s expenses
into several categories.

6.3.2.3 Statement of Cash Flows

Finally, the Statement of Cash Flows reports how the NPO’s cash position changed
during the year. In essence, the statement of cash flows provides information about
cash receipts and cash disbursements of the organization. They are classified into
operating activities, investing activities, and financing activities. This financial doc-
ument provides stakeholders an idea about the ability of an NPO to meet its cash
needs, and how it receives and spends its cash.
182 ◾ Effective Non-Profit Management

BOX 6.11 STATEMENT OF ACTIVITIES,

YEAR ENDED DECEMBER 2011

Temporarily Permanently
Revenues Unrestricted Restricted Restricted Total
Private grants $8,890 $91,340 — $100,230
Government grants $340,012 — — $340,012
Donations $100,009 $34,000 — $134,009
Special events $80,787 $15,217 — $96,004
Fees $19,100 — — $19,100
Investment (loss) ($10,490) — — ($10,490)
Other income $1,000 — — $1,000
Total revenues $539,308 $140,557 — $679,865
Expenses:
Program services $400,023 — — $400,023
Fundraising $75,000 — — $75,000
Management $119,000 — — $119,000
Total Expenses $594,023 — — 594,023
Increase (decrease) ($54,715) $140,557 — $85,842
in net assets

Operating activities include cash receipts from general contribution received

from donors as well as cash received from providing goods and services in
fee-for-service transactions and grants. Cash outflows from operating activi-
ties include disbursements made for program activities; disbursements to
employees, vendors, and contractors; payments of interest and taxes; and
grants made by the organization to other organizations.
Investing activities include acquiring and disposing of debt and equity invest-
ments, making and collecting loans, and acquiring and disposing of property,
plant, and equipment.
Financing activities include cash contribution from donors that is restricted for
long-term purposes, interest and dividends, and short- and long-term bor-
rowing. Cash outflows include repayments of short- and long-term debt and
repayment of capital debt.
Unconditional contribution is unrestricted contributions from donors.
Unconditional contribution will be recorded as revenues. Otherwise it should
not be recorded as revenues, but as deferred revenues.
 Resource Acquisition and Management ◾ 183

6.4 Financial Leadership
“Financial management is about collecting and producing financial data; finan-
cial leadership is about consuming financial data and making good decisions that
strengthen an organization’s financial position” (Bell, 2010, 461). Financial leader-
ship also involves implementing effective internal controls to provide safeguards to
frauds and embezzlements.
Consider the following cases:

1. In 2000, the American Cancer Society was engulfed with a huge scandal,
when it was disclosed that Daniel Wiant, its Chief Administrative Officer,
perpetrated a massive fraud. He stole $7.5 million and wired $6.9 million to
a bank account in Australia. He used different schemes to do so, including
opening fictitious bank accounts and making unauthorized bank transfers.
On June 2, 2000, on his way to Austria Wiant called his wife and told her
that he had embezzled money from the NPO and that he was leaving her. His
wife notified the FBI, who then notified the NPO about this embezzlement
(Gallagher and Radcliffe, 2002). He pleaded guilty and was sentenced to 13
and a half years in prison.
2. In September 2009, Wendy Mansfield, former chief financial officer (CFO) of
the Association of Fish and Wildlife Agencies, pled guilty to wire fraud. She
was a 10-year employee of the organization who worked her way into manage-
ment. She used the organization’s credit card over a period of 4 years to charge
approximately $184,000 in personal expenses, including hair and makeup
expenses, cell phone bills, and casino debts (http://washingtonexaminer.com/
local/2009/09/former-nonprofit-cfo-facing-prison-184k-embezzlement).
3. In September 2009, the former executive director of the Oklahoma CASA
Association was sentenced to 15 years in prison after she pled guilty to
embezzling almost $550,000. She was a longtime employee and had used the
organization’s credit cards for personal expenses such as foreign vacations,
cosmetic surgery, and college tuition.
4. In November 2010, Edward Gerard Payton, former executive director of
Mecklenburg Open Door (MOD) was indicted on charges of embezzling
$147,000 from this mental health non-profit agency. From January 2007
to April 2010, he embezzled funds from MOD by directing employees of
MOD to issue additional unauthorized payments to him through a series
of checks which he characterized as “loans” or “advances” (November
2010) (http://www.wbtv.com/Global/story.asp?S=13520920).
5. In August 2010, Joseph Aksum, formerly the executive director of Guest
House Community Services, Inc., a non-profit entity in Peekskill, New
York, was indicted on charges that he embezzled $300,000 in Medicaid
184 ◾ Effective Non-Profit Management

funds from the organization. According to the indictment, Aksum

obtained more than $300,000 in Medicaid funds belonging to Guest
House during a period from July 2005 through December 2009 by mis-
appropriating Medicaid checks payable to Guest House and by using
Guest House funds for personal expenditures (http://www.nynp.biz/
breaking-news/3135-peekskill-exec-indicted-for-300k-embezzlement).
6. In December 2010, New York State Senator, Pedro Spade, and his son were
indicted of embezzling $500,000 from the Soundview Healthcare Network, a
foundation that he had founded. The Spades are accused of using Soundview
funds to pay for birthday parties for family members, including pony rides
and a petting zoo. The elder Spade is said to have drawn a $49,000 check from
Soundview to put a down payment on a Bentley for himself. He also allegedly used
the company credit cards for personal use, including improvements to his home
and $100,000 of meals (http://personalmoneystore.com/moneyblog/2010/12/14/
pedro-espada/).

These are only a few cases of a growing problem—high-level NPO executives

embezzling funds from their agencies. This is a critical issue and an unfortunate
one for NPOs—these are the people who are supposed to safeguard their agencies’
funds and act as stewards of public trust. (See also Box 6.12.)
The above cases emphasize the importance of creating effective internal control sys-
tems for NPOs. An effective internal control system includes the following components:

1. Board of directors’ stewardship responsibility—Chapter 4 explained the impor-

tance of board’s leadership in ensuring financial stewardship. In regard to
internal controls, the board should have clear and written policies on the
following:
a. Check issuance: Number of signatures required on checks, board approval
or signature above a particular dollar amount, designating individuals
with power to authorize payments.
b. Deposits: Designating individuals to handle cash disbursements and also
develop a process for cash disbursement.
c. Transfers: Designating individuals who can authorize fund transfer and
also have a process to monitor those transactions.
d. Background checks: Conducting background checks of all employees
including all new employees and volunteers is important. They can reveal
undisclosed criminal records and prior instances of fraud.
2. Separation of duties—No single individual should be responsible for receiv-
ing, depositing, recording, and reconciling the receipt of funds. Additionally,
no one person should be responsible for authorizing payments, disbursing
funds, and reconciling bank statements. Again, if the organization does
not have enough staff on hand to segregate these duties, a board director or
 Resource Acquisition and Management ◾ 185

BOX 6.12 MOST COMMON TYPES OF FRAUD IN NPOs

1. Theft of deposits: Depositing checks to a personal bank account.
2. Counterfeit financial documents.
3. Lapping scheme: Altering the accounts receivable section of the balance
sheet when cash that is intended for the payment of a receivable is stolen.
The method involves taking the first receivable collected and using that
to cover the theft, while the second receivable collected is accounted to
the first, the third receivable to the second, and so on.
4. False credits and write-offs: Writing a journal entry or issuing a credit
card memo to get a pledge receivable off the books.
5. Theft of non-cash items.
6. Theft of cash received in direct contact situations.
7. Stealing of investments or diversion of income or gains: Instructing the
broker to divert such income into a personal account.
8. Borrowing of securities for personal use.
9. Recording of phony investments to “window dress” the financial
statements.
10. Misclassifications and misstatements regarding the fair value of securities.

Source: Case, G. L., 2008, Fraud: How to Prevent It in Your Organization,

Nonprofit World, May/June: 26–27.

officer should reconcile the bank and credit card statements. “It is difficult to
carry out fraudulent activities if a different person performs each step of the
accounting process” (Gallagher and Radcliffe, 2002, 322).
3. System of authorizations—For expenditures over a predetermined amount,
the NPO should require two signatures on every check and two authoriza-
tions on every cash disbursement. Because many non-profits are too small
to effectively implement this policy, a board member can act as the second
signatory. It is a good practice to have two people physically open the mail
together and record the incoming checks.
4. Credit card use—If the NPO uses credit cards, the person using the card
should not be same person approving its use and accompanying charges. For
a CEO’s or CFO’s use of credit card, a board member should review the credit
card statements and accompanying expense reports.
5. Audits—External audits will be helpful in ensuring that the fraud prevention
measures are being followed and are effective.
6. Agreements—Board and senior management sign code of conduct, confiden-
tiality agreement and conflict of interest policies.
186 ◾ Effective Non-Profit Management

BOX 6.13 WARNING SIGNS OF FRAUD

1. Budget cutbacks. During cutbacks, other employees and volunteers usu-
ally have to pick up extra work leading to lower morale which increases
the likelihood of fraudulent activities.
2. High turnover. This is a sign of an unhappy work climate and some
employees who are leaving might have witnessed fraud or have partici-
pated in it.
3. Refusal to take legitimate perks. Employees or volunteers engaged in
embezzlements often do not take vacation time or promotions so they
can continue to hide their thefts.
4. Overemphasis on short-term fundraising goals. That may lead to a de-
emphasis on internal controls and accurate financial reporting.
5. Poorly monitored remote event or promotional locations. Opportunities
for frauds increase when there are minimal supervision and control.
6. Bounced checks. Continual bouncing of checks, when NPO has enough
funds, is a red flag.
7. Things do not add up.
8. Anonymous tips.
9. Sudden lifestyle or behavior changes.
10. Inattention to details. This includes not checking account balances and
reconciling expenses on a regular basis, and spot-checking financial
documents and other details.
11. Keeping problems (fraudulent activities) a secret.
12. Failing to investigate and prosecute to the fullest extent of the law.

Source: Midkiff, K. A., 2004, Catch the Warning Signs of Fraud in NPOs,
Journal of Accountancy, January: 28.

7. Whistle-blowers’ programs—It is critical to have a whistle-blower program.

Employees are often aware of thefts, but the NPO may not have a process or
an office for them to submit or report this information confidentially.
8. Warning signs—NPOs should pay attention to warning signs and take appro-
priate steps to investigate those or monitor them closely (Box 6.13).

6.5 Issue: Perils of Government Dependency—The

Recent Funding Issue with Planned Parenthood
Title X of Public Health Service Act was passed in 1970 during Richard Nixon’s
presidency. This is the only federal program that is solely devoted to providing
family planning services. Other federal programs, including Medicaid, as well as
 Resource Acquisition and Management ◾ 187

state and local programs also subsidize family planning. Title X funding largely
goes to services for poor or low-income women who are uninsured but do not
meet Medicaid eligibility requirements. Of the 7,000 or so family planning clinics
nationwide, 4,500 receive Title X funding. About 60% of the clinics receiving the
funding are operated by state, county, or local health departments; 14% are oper-
ated by Planned Parenthood (Rovner, 2011). According to the federal law, Title X
money cannot be used for abortion services.
In 2009, Planned Parenthood received $363.2 million from government grants
and contracts (Planned Parenthood Federation of America, Annual Report). The
total revenue for the agency in 2009 was $1,100.8 million. That means that almost
a third of its revenue is from the government (http://www.plannedparenthood.org/
files/PPFA/PPFA_Annual_Report_08-09-FINAL-12-10-10.pdf).
Nationwide, Planned Parenthood operates 800 health centers. Following are
some statistics of its services:

1. 83% of our clients receive services to prevent unintended pregnancy; services

help prevent more than 612,000 unintended pregnancies each year.
2. Provides nearly 1 million Pap tests and more than 830,000 breast exams each
year.
3. Provides nearly 4 million tests and treatments for sexually transmitted infec-
tions, including HIV.
4. 3% percent of all Planned Parenthood health services are abortion services.
5. Provides educational programs to nearly 1.2 million young people and adults
each year.
Source: Planned Parenthood. Planned Parenthood at a Glance, http://www.
plannedparenthood.org/about-us/who-we-are/planned-parenthood-
glance-5552.htm (accessed April 2, 2011).
Government’s support of Planned Parenthood has remained mostly uncon-
troversial until recently. On February 18, 2011, the new conservative House of
Representatives voted 240 to 185 to defund Title X in the current budget year.
Supporters of defunding have characterized it as an effort to strip funds from
Planned Parenthood and other organizations that use other funds to provide legal
abortions, without singling out any particular group. Even though the bill (Pence
Amendment) was rejected by the Senate on a 44 to 56 vote, the controversy con-
tinues and is expected to continue in a Republican-dominated House. Planned
Parenthood is already prevented by federal law from using federal money for abor-
tion services. The Pence Amendment, if approved, would have taken away almost
one-third of the revenues the agency uses to provide family planning, birth control,
medical, educational, and other preventive services.
During a time of a soaring deficit in federal government budget, economic
recession, and a conservative House of Representatives, NPOs similar to Planned
Parenthood (e.g., AFL-CIO, the Urban League, NPR) which are considered as
“liberal” run the risk of losing government funding. On March 17, 2011, the House
188 ◾ Effective Non-Profit Management

voted (228 to 192) to prohibit federal money from funding National Public Radio
(NPR). It is expected that the Senate will not approve the bill.
The precarious situation that Planned Parenthood currently faces points to
one of the perils of NPOs that are dependent on government funding—the domi-
nant political ideology shapes their funding environment. Even though Planned
Parenthood is barred from using any federal funding for abortion services and that
only 3% of its services are abortion services, the dominant conservative House has
now effectively created a national discourse on the appropriateness of government
funding for this and similar NPOs.

Case Study: Perils of “Tainted” Money

Consider the following situations:

1. Early this year, Sage Nonprofit Solutions (http://www.

sagenonprofit.com/) reported a story on a controversy
regarding a donation by a strip club owner in Florida to a
local school. Joe Rodriguez, owner of Pure Platinum (Ft.
Lauderdale) and Cheetah Gentlemen’s Club (Palm Beach
County) donated $20,000 to an elementary school in
Palm Beach County. Different groups in the community
including the school district officials are asking the school
to return the funds because they came from an entertain-
ment mogul, a business that exploits women. Should the
school have returned the money to Joe Rodriguez?
2. Four years ago, BP donated $1 million to the Aquarium of
the Pacific in Long Beach. In March of 2011, the aquarium
opened a new sea otter exhibit—with BP’s name inscribed
on the wall. BP’s reputation has been severely damaged as
a result of the 2010 massive oil spillage in the Gulf. Should
a sea otter habitat be associated with a polluter that has
caused enormous harm to the aquatic wildlife in the Gulf
of Mexico?
3. In March 2011, the New York Times reported a story on a
chapel in Mexico that was funded by a drug lord, Heriberto
Lazcano, known as “the executioner.” Lazcano’s contri-
bution is recognized by a plaque on the site. Currently
the government is investigating the matter (http://www.
nytimes.com/2011/03/07/world/americas/07church.
html?pagewanted=all).

Some of these issues are related to “tainted money,” money

that was derived illegally or through a socially unacceptable
 Resource Acquisition and Management ◾ 189

manner. NPOs have dealt with issues like these in different

ways. For example, in 2005, Queens University (Kingston,
Ontario) returned the $1 million donation to David Radler
and took his name off its School of Business building after
Radler pleaded guilty in the Hollinger case (U.S. v. Black, et
al., 2005) in the Chicago Court. He was convicted of taking
part in a scheme to divert more than $32 million from the sale
of a number of newspapers that were controlled by Hollinger
International. Another example is the case with John Eleuthere
du Pont (an heir to the du Pont family chemical fortune) and
Villanova University (Pennsylvania). The university had named
its basketball pavilion with his name to honor him for his major
contribution. The university removed his name from the pavil-
ion after he was convicted in 1997 of murdering David Schutz,
the Olympic Gold Medalist wrestler. However, it did not return
the money. In 1996, Leona and Harry Helmsley (real estate bil-
lionaire) contributed $10 million to build and name Greenwich
(Connecticut) hospital’s Medical Building after them, even
though Leona was convicted in 1992 and served 18 months in
prison for tax evasion.
It is reported that Mother Theresa apparently accepted
donations from anyone, no matter how unsavory the donor
was. Her contention was that the money went to a good
cause, helping the poor and destitute in the slums of Calcutta
(Harrison, 2001).

Discussion Questions
1. Review the three situations that the case study starts with. In each case, what
is the most appropriate thing for the NPO to do and why?
2. How can a NPO prepare itself to deal with issues like these? Or can they
prepare themselves for these types of issues?
3. Do you support Mother Theresa’s position? Explain your reasoning.

Web Resources
Council on Foundations (http://www.cof.org/): Includes over 2,000 grant-mak-
ing foundations.
Idealist (http://www.idealist.org/info/Nonprofits): Includes a variety of infor-
mation resources for NPOs including fundraising and accounting.
Nonprofit Accounting Basics (http://www.nonprofitaccountingbasics.org/inter-
nal-reporting-good-management): Offers online resources on NPO accounting.
190 ◾ Effective Non-Profit Management

Nonprofits Assistance Fund (http://www.nonprofitsassistancefund.org/).

The Unified Registration Statement (http://www.multistatefiling.org/): The
Web site for the Uniform Registration Statement, accompanying instruc-
tions, and other relevant information.
USA.gov (http://www.usa.gov/Business/Nonprofit.shtml): A list of the types of
government grants available to NPOs.

End-of-Chapter Review of Terms

Account payable
Accounts receivable
Assets
Cash flow
Deferred giving
Giving circles
Liabilities
Licensing
Open systems
Planned giving
Prepaid expenses
Prospects
Social business enterprise
Unrestricted revenues
 Resource Acquisition and Management ◾ 191

Appendix 6.1: Code of Ethical Principles,

American Fundraising Professionals4

AFP Code of Ethical Principles and Standards

ETHICAL PRINCIPLES • Adopted 1964; amended Sept . 2007
The Association of Fundraising Professionals (AFP) exists to foster the development and growth of fundraising professionals
and the profession, to promote high ethical behavior in the fundraising profession and to preser ve and enhance philanthropy
and volunteerism. Members of AFP are motivated by an inner drive to improve the quality of life through the causes they serve. They serve
the ideal of philanthropy, are committed to the preservation and enhancement of volunteerism; and hold stewardship of these concepts as the
overriding direction of their professional life. They recognize their responsibility to ensure that needed resources are vigorously and ethical-
ly sought and that the intent of the donor is honestly fulfilled. To these ends, AFP members, both individual and business, embrace certain
values that they strive to uphold in performing their responsibilities for generating philanthropic support. AFP business members strive to
promote and protect the work and mission of their client organizations.

AFP members both individual and business aspire to: 9. Members shall refrain from knowingly infringing the intellectual property
• practice their profession with integrity, honesty, truthfulness and adherence rights of other parties at all times. Members shall address and rectify any
to the absolute obligation to safeguard the public trust inadvertent infringement that may occur.
• act according to the highest goals and visions of their organizations, 10. Members shall protect the confidentiality of all privileged information
professions, clients and consciences relating to the provider/client relationships.
• put philanthropic mission above personal gain; 11. Members shall refrain from any activity designed to disparage competitors
• inspire others through their own sense of dedication and high purpose untruthfully.
• improve their professional knowledge and skills, so that their performance
will better serve others SOLICITATION AND USE OF PHILANTHROPIC FUNDS
• demonstrate concern for the interests and well-being of individuals affected 12. Members shall take care to ensure that all solicitation and communication
by their actions materials are accurate and correctly reflect their organizations’ mission and
• value the privacy, freedom of choice and interests of all those affected by use of solicited funds.
their actions 13. Members shall take care to ensure that donors receive informed, accurate
• foster cultural diversity and pluralistic values and treat all people with dignity and ethical advice about the value and tax implications of contributions.
and respect 14. Members shall take care to ensure that contributions are used in
• affirm, through personal giving, a commitment to philanthropy and its role accordance with donors’ intentions.
in society 15. Members shall take care to ensure proper stewardship of all revenue
• adhere to the spirit as well as the letter of all applicable laws and regulations sources, including timely reports on the use and management of such
• advocate within their organizations adherence to all applicable laws and funds.
regulations 16. Members shall obtain explicit consent by donors before altering the
• avoid even the appearance of any criminal offense or professional conditions of financial transactions.
misconduct
• bring credit to the fundraising profession by their public demeanor PRESENTATION OF INFORMATION
• encourage colleagues to embrace and practice these ethical principles and
17. Members shall not disclose privileged or confidential information to
standards
unauthorized parties.
• be aware of the codes of ethics promulgated by other professional
18. Members shall adhere to the principle that all donor and prospect
organizations that serve philanthropy
information created by, or on behalf of, an organization or a client is the
property of that organization or client and shall not be transferred or
ETHICAL STANDARDS utilized except on behalf of that organization or client.
Furthermore, while striving to act according to the above values, 19. Members shall give donors and clients the opportunity to have their names
removed from lists that are sold to, rented to or exchanged with other
AFP members, both individual and business, agree to abide (and
organizations.
to ensure, to the best of their ability, that all members of their staff
20. Members shall, when stating fundraising results, use accurate and
abide) by the AFP standards. Violation of the standards may sub- consistent accounting methods that conform to the appropriate guidelines
ject the member to disciplinary sanctions, including expulsion, as adopted by the American Institute of Certified Public Accountants
provided in the AFP Ethics Enforcement Procedures. (AICPA)* for the type of organization involved. (* In countries outside
of the United States, comparable authority should be utilized.)
MEMBER OBLIGATIONS
1. Members shall not engage in activities that harm the members’ COMPENSATION AND CONTRACTS
organizations, clients or profession. 21. Members shall not accept compensation or enter into a contract that is
2. Members shall not engage in activities that conflict with their fiduciary, based on a percentage of contributions; nor shall members accept finder’s
ethical and legal obligations to their organizations, clients or profession. fees or contingent fees. Business members must refrain from receiving
3. Members shall effectively disclose all potential and actual conflicts of compensation from third parties derived from products or services for a
interest; such disclosure does not preclude or imply ethical impropriety. client without disclosing that third-party compensation to the client
4. Members shall not exploit any relationship with a donor, prospect, (for example, volume rebates from vendors to business members).
volunteer, client or employee for the benefit of the members or the 22. Members may accept performance-based compensation, such as bonuses,
members’ organizations. provided such bonuses are in accord with prevailing practices within the
5. Members shall comply with all applicable local, state, provincial and federal members’ own organizations and are not based on a percentage of
civil and criminal laws. contributions.
6. Members recognize their individual boundaries of competence and are forth- 23. Members shall neither offer nor accept payments or special considerations
coming and truthful about their professional experience and qualifications for the purpose of influencing the selection of products or services.
and will represent their achievements accurately and without exaggeration. 24. Members shall not pay finder’s fees, commissions or percentage
7. Members shall present and supply products and/or services honestly and compensation based on contributions, and shall take care to discourage
without misrepresentation and will clearly identify the details of those their organizations from making such payments.
products, such as availability of the products and/or services and other 25. Any member receiving funds on behalf of a donor or client must meet the
factors that may affect the suitability of the products and/or services for legal requirements for the disbursement of those funds. Any interest or
donors, clients or nonprofit organizations. income earned on the funds should be fully disclosed.
8. Members shall establish the nature and purpose of any contractual
relationship at the outset and will be responsive and available to
organizations and their employing organizations before, during and after
any sale of materials and/or services. Members will comply with all fair
and reasonable obligations created by the contract.
192 ◾ Effective Non-Profit Management

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Endnotes
1. A charitable trust is a trust created for the promotion of education, public health, reli-
gion, and other public benefits.
2. A charitable remainder trust is an arrangement in which a donor makes a substantial
gift but the donor continues to use the property and receive income from it while liv-
ing. The beneficiaries receive the income, and the charity receives the principal after a
specified period of time.
3. A charitable lead trust is a trust that pays an income to a charity for a specific length
of time and then leaves the remainder of the trust to designated beneficiaries, usually
family members.
4. Reprinted with permission of the Association of Fundraising Professionals (AFP).
Chapter 7

Non-Profit
Organizations and
Information Technology

In this twenty-first century, one cannot but notice information technology’s pro-
found impact on work organizations’ structures and functions. Information tech-
nology (IT) basically includes the use of computers and software to manage an
organization’s data or information. Technology has always had an impact in the
workplace in terms of work processes, policies, and strategies. However, the rapid
development of advanced IT during the past few years has impacted work organi-
zations in phenomenal and significant ways, and that is true for all organizations
including non-profit organizations (NPOs). Referring to the application of IT in
NPOs, Ross et al. explained that “From financial management to program delivery
to fundraising, technology is fueling the efficiency, effectiveness, and innovations
in your organization and around the sector” (2009, xix).
Several factors explain the importance and growth of the use of IT in NPOs:

1. The traditional economic and effectiveness rationales of IT that apply to

other organizations, public and private, equally apply to non-profits.
2. The increasing encouragement and sometimes requirements from many state,
county, and federal agencies for NPOs to apply online for government-con-
tracted services or for government funding.
3. The need to have on board the vast generation of young people—Generation
Y or Millennial—whose lifestyle is integrally intertwined with the use of IT.

195
196 ◾ Effective Non-Profit Management

This chapter explains the different applications of IT in NPOs and the chal-
lenges that accompany such uses. The focus here is on the strategic use of IT in
NPOs. NPOs’ ultimate goal is to achieve or promote some social agenda. The stra-
tegic use of IT in NPOs helps them to further enhance their missions. This chapter
has the following learning outcomes:

1. Explain the significance of IT for NPOs.

2. Understand the importance of an IT strategy and its core components.
3. Discuss the different applications of IT in NPOs.
4. Identify a variety of information sources on IT applications.

This chapter also discusses the issue of digital divide in the non-profit sector and
wraps up the discussion with a case study on the panaceas of using social media.

7.1 Why Information Technology (IT)?

Organizations have always used different types of technologies to enhance both
efficiency and effectiveness. However, the current use of IT in this twenty-first cen-
tury and the potentialities of its uses unparalleled that of any of its uses in the past.
In addition to the traditional reasons of efficiency and effectiveness, and mandates
from funders, it is essential for today’s NPOs to incorporate IT as a core component
in their everyday affairs for four significant reasons:

1. The emergence of a growing generation of young people—Generation Y, or some call

them the “Millennials.” These are people who were born approximately between
the years 1987 and 1992, and grew up with the everyday use of technology. As
Kanter and Fine (2010) pointed out, they are the first generation of people born
with no memory of life without World Wide Web. Technology has affected
this generation’s lifestyles, attitudes, and values, and some of these have special
implications for NPOs. For example, in regard to making donations to NPOs,
“Millennials are more likely to retain their passion for causes and giving in
general, and perhaps even particular causes, but also jump from organization to
organization as a particular effort moves them” (Kanter and Fine, 2010, 15).
Specifically speaking, NPOs will have to invest in IT to reach this group
whether it is for requesting donations, recruiting volunteers and paid staff,
organizing an advocacy movement, communicating internally or externally,
or hiring new staff with IT expertise.
2. The leadership crisis—High turnover mostly due to burnouts of executives,
baby boomers retiring, and the current fragile economic condition are major
reasons behind the expected leadership crisis in the non-profit sector in the
near future. In 2009, the Bridgespan Group1 reported that more than 20,000
NPOs would not have senior leadership for significant periods of time that
 Non-Profit Organizations and Information Technology ◾ 197

year. This essentially means that in the near future, these vacancies will be
occupied by the Millennium generation. As Millennials are joining the work-
place and assuming leadership positions, IT is one of the essentials that they
would need not only to function effectively but also to strategically position
the non-profit in this rapidly changing IT world.
3. Demand for more transparency—There has been an increasing demand from
government agencies, foundations, other funders, and the public in general
for more information and transparency from non-profits. Information tech-
nology, if used in good faith, can help the NPO to make itself more transpar-
ent. It is easy for a NPO to post different forms (e.g., Form 990) and other
documents (e.g., budget, work activities) and information on its Web site.
4. Increased interactive communication—IT offers NPOs limitless possibilities
for connecting with their stakeholders. NPOs can tap into the variety of
online medium (e.g., blogs, online meetings, YouTube, Twitter) to commu-
nicate with their different stakeholders and also offer the latter opportunities
to communicate with them, thereby promoting a two-way interactive com-
munication process. Such interactive communication is essential for today’s
NPOs to gain different stakeholders’ support and respect while at the same
time use this process for effective public relations purposes.

7.2 Information Technology and Strategy

The importance of developing an IT strategy integrating with different work pro-
cesses is essential and should be the first step in a NPO’s use of IT. A well-defined
IT strategy should include at least the following minimum components:

1. Align IT strategy with organizational strategy—This will ensure that the selec-
tion and implementation of IT are guided with the goal to achieve the NPO’s
mission. Powell explained, “The reality is that developing an Internet strategy
independent of organizational strategy is essentially treating a Web site as an
end in itself—which is why many nonprofits have a ‘Donate Now’ button
but a disappointing amount of online donations” (2005, 19). In order for any
effective synergy to exist between IT and the NPO’s mission, the online activ-
ities need also complement the other activities within the organization. As
Ross et al. emphasized, “The goal of IT alignment is to use technology to sup-
port and enhance the work that you do to meet your mission. In other words,
IT alignment will help you select and implement technology to achieve your
mission and to avoid the trap of implementing the latest technology because
it’s shiny, or because someone told you to” (2009, 4). Ross et al. (2009) further
explained the three major benefits of aligning IT with the goals, strategies,
and processes of an organization: (1) assist in avoiding common legal and
financial troubles through providing more accurate reporting of information
198 ◾ Effective Non-Profit Management

for funders and government agencies along with help in preventing theft of
confidential and sensitive information of clients or other organizational mem-
bers, (2) streamline operations through elimination of unnecessary or redun-
dant procedures, and (3) enhance efficiency and effectiveness.
2. Develop and maintain adequate budget for IT equipment and software—This is
very important because (a) a significant number of small to medium NPOs
do not have separate line item budgets for IT, (b) funders and donors usually
want to see their money spent on programs and clients and not on admin-
istration or technology, and (c) there is a maintenance cost of technology.
However, as Manzo and Pitkin (2007) explained, investing in IT requires
both education and advocacy. Advocates of non-profits should first work to
encourage funders to provide more flexible funding for IT development and
use. Second, they should help assess the impact or outcomes of various types
of IT uses. Third, NPO technology assistance providers can take a more
active role in helping NPOs make a good case for investing in IT and its
effect on NPO productivity. NPOs, preparing an IT budget for the first time,
may consider reviewing some benchmark data to have an idea of IT budgets
in similar organizations (in regard to size and structure). One tool for small
to medium NPOs is to seek assistance from other NPOs like the NPower
(Box 7.1), in different aspects of IT use and applications.
3. Hire competent staff and develop human resources for effective IT utilization—
This includes not only hiring qualified staff or developing staff with the
needed IT competencies, but also making decisions about leadership in guid-
ing IT use and development, and ensuring senior management’s commitment
and support. It also involves continuous staff training on IT. (See Box 7.2.)

BOX 7.1 NPOWER

A national non-profit, located in New York.
Goal: Helps NPOs to improve their IT capabilities.
Three core programs:

◾◾ IT Professional Services provides infrastructure, solutions, and consult-

ing expertise to non-profits at discounted rates.
◾◾ IT Workforce Development helps disconnected young adults find careers
in IT.
◾◾ The Community Corps engages thousands of corporate IT volunteers in
delivering well-managed, impactful IT solutions to non-profits both
large and small.

Source: See NPower: http://www.npower.org/about.

 Non-Profit Organizations and Information Technology ◾ 199

BOX 7.2 HIRE IT STAFF: WHEN AND TO WHAT EXTENT

1. Conduct a needs assessment.
2. Map these needs across functional roles:
a. Consider part-time versus full-time personnel need
b. Development versus maintenance need
c. User support versus training need
3. Develop needed specific qualifications and competencies.
4. Determine fit of volunteers for some of those needs.
5. Consider outsourcing.
6. Determine tasks that requires hiring of new staff.

Source: Adapted from Weinberg, J. L., and C. Scarano, 2009, Finding and
Keeping the Right People. In Managing Technology to Meet Your Mission: A
Strategic Guide for Nonprofit Leaders, ed. H. Ross, K. Verclas, and A. Levine,
101–131, San Francisco, CA: Jossey-Bass.

4. Make the NPO visible on the Web site—It is very easy for NPOs to have their
Web sites pop up on different search engines. Such pop-ups will undoubtedly
make the NPOs’ presence on the Web more visible (Box 7.3).

BOX 7.3 HOW TO MAKE WEB SITE

POP-UPS ON INTERNET SEARCHES

Google Search Engine

1. Go to Google Crawl URL (www.google.com/addurl)
2. Add the Web site link.
3. Type the two words that appear in the Captcha window.
4. Click “submit request” button.

Yahoo Search Engine

1. Click “More” link at the links above the search keyword section.
2. Select “All Search Services” from the drop-down menu.
3. Click the “For Site Owners” link at the top of the page.
4. Scroll down to the bottom of the page and click on “Submit Your Site”
link. Follow the directions listed there.
200 ◾ Effective Non-Profit Management

7.3 IT Uses and Applications

IT has the potential to affect every aspect of the work organization; hence its use-
fulness does not have any boundary or limit. Furthermore, advancement and prog-
ress in IT have recently taken on a radically different platform with the advent of
social networking. However, none of the IT applications or potentialities will have
any usefulness unless the NPO has an effective and interactive Web site. “Anybody
who believes that it is enough merely to have a website for traffic to grow will be
sorely disappointed. While it is true that anybody with a telephone line and PC can
access any of the world’s millions of websites at any time, that does not mean that
they will. Surfers need not only a Web address but also a reason to visit” (Saxton,
2001, 358).
According to Kenyon, there are four main characteristics of an effective Web
site: credibility, cultivation, clickability, and content (2009, 219). Credibility refers
to valid information about the organization, its operations, staff, finances, and
news—they all should help in developing a perception that it is a credible orga-
nization. The message is to convey openness, authenticity, and trust. For example,
posting the NPO’s financial reports (i.e., budget, audits, balance sheet), Form 990,
and minutes of board meetings will go a long way to lend credibility to a NPO’s
Web site.
Cultivation, in essence, refers to use of statements, words, and pictures/images
that visitors will feel connected to. “Does your website use inviting language that
cultivates relationships and engagement?” (Kenyon, 2009, 219). Having an engag-
ing and authentic vision statement is one of the main attractive features of a Web
site. Use of certain words (e.g., “join us” “we” “us”) will also help build that con-
nection. Pictures and images could be equally powerful.
Clickability includes providing different types of information and interactive ele-
ments that will make the Web site more engaging, appealing, and interesting to a vis-
itor. This includes clear navigation, maps, community discussion areas, and so forth.
Content, according to Kenyon (2009), is the most important element of an
effective Web site. The NPO should carefully choose the content of its Web site,
keep the information brief, and also update it on a regular basis. “Since the website
is a reflection of the organization, if the content is ‘asleep,’ visitors will likely get
impression that the organization itself is not awake” (Kenyon, 2009, 223). It is
important to make the Web site’s address something that people could guess, and
to keep it short so people could easily remember it (Irish, 2005, 71).
In addition, an effective Web site needs to accommodate visitors and clients
of different demographics, especially the physically handicapped population. It
is important to use color contrast, different font sizes, and different languages
(depending on the audience). For example, if the NPO is targeting its communica-
tion to mature adults with vision loss, the web site has to have features to maintain
effective communication with that population.
Following are some of the major IT tools and applications for NPO use.
 Non-Profit Organizations and Information Technology ◾ 201

7.3.1 E-Mail
E-mail is a simple way to connect to different stakeholders both within and
outside the organization. However, NPOs have to be cautious about its uses
and abuses. As Ahmed pointed out, “The number of incidents of e-mail abuse is
on the rise in both the private and public sectors. Abuses range from employees
spending excessive time on personal emails to sending harassing or otherwise
inappropriate messages. Such abuses, at times, have led to difficult personnel
decisions and, at times, public embarrassments” (2008, 1). It is thus essential
for NPOs to have a well-written policy on employees’ and volunteers’ use of
office e-mails.
Ahmed (2008) listed the following components as best practices in a work-
place’s e-mail use policy:

1. Scope of personal use—Clearly stating the agency policy on use of office

e-mail for personal use.
2. Message restrictions—Clarifying messages that are prohibited (e.g., sexually
harassing e-mails) and restricted (e.g., chain letters, advertisements).
3. Privacy—A clear statement emphasizing that there is no expectation of privacy.
4. Confidential and proprietary information—Clear instructions on how to
send confidential information (e.g., using encryption) and to whom.
5. Responsibility—Making it clear that employees are responsible for the con-
tents of their e-mails and should use care when e-mailing to other stakeholders.
6. Software and attachment—Clear statement emphasizing the importance of
opening attachments only from trusted sources.
7. Copyright—Emphasizing the importance of not using e-mails to transmit
copyrighted materials that do not belong to the organization.
8. Public records—A clear statement stressing that e-mails could become a part
of public records.
9. Violations and the disciplinary process—Including a section describing the
disciplinary procedure to address any violations of the agency’s e-mail use
policy.

E-mail, though efficient, is a process that offers a very limited dialogue format.

7.3.2 Online Presentations and Meetings

Online presentations and meetings are becoming common. One common medium of
online presentations are Webinars. Webinars refer to Web-based presentations, lectures,
workshops, or seminars that are transmitted over the Web. A key feature of a Webinar
is its interactive elements—the ability to give, receive, and discuss information.
Online programs, such as GoToMeeting and Microsoft Live Meeting, are
effective online meeting tools. Organizations spend enormous amounts of time in
202 ◾ Effective Non-Profit Management

scheduling meetings. They can reduce scheduling time using free Web-based tools
like Meeting Wizard and Doodle. Skype is another free telecommunications sys-
tem for videoconferencing that can substitute for in-person meetings. Google doc-
uments, Wikis, and Yahoo and Google Groups are all free tools that support and
coordinate online group work. Users of these tools can store documents, create and
share projects’ schedules, and build an e-mail listserv for project participants. There
are free and easy online calendars (Google calendar, as an example) that NPOs can
use to inform members about meeting dates, grant deadlines, fundraising events,
committee meetings, and other events of interest. They can also maintain an online
calendar for managing projects.

7.3.3 Posting Digital Signs

Posting digital signs using electronic billboards by the highway, at the airports, wash-
rooms, on transit buses, in elevators, at check-out lines/aisles, and elsewhere are effec-
tive in catching people’s attention. “The applications are virtually endless because
digital signs take advantage of people’s acceptance of (and fascination with) television.
As a communication medium, digital signs are completely passive—visitors don’t have
to do anything to see them” (Strand, 2007, 24). Beyond marketing and client services,
they are useful for training and employee communications, too. For example, an NPO
can set up TV displays in reception areas to do some or all of the following:

1. Give directions and hours of operation.

2. Outline services.
3. Recognize staff and client achievement.
4. Post job openings and volunteer operations.
5. Show videos of events.
6. Feature public service announcements.
7. Provide news and weather advisories (Strand, 2007).

7.3.4 Using RSS (Really Simple Syndication)

Using RSS to send or share messages to a specific group or list is useful for targeted
communication. RSS is similar to e-mail, but it is sent to a specific list. The dif-
ferences are that recipients opt in and it is delivered via special readers available on
the Internet.

7.3.5 Text Messaging
Text messaging is effective in reaching particular groups, especially the younger
Millennial population. Its effectiveness in fundraising was exemplified during the
2010 earthquake in Haiti. An estimated 6.5 million people used cell phones to
donate in the days following the earthquake, raising more than $50 million. Before
 Non-Profit Organizations and Information Technology ◾ 203

BOX 7.4 MOBILE CAMPAIGN CREATION—FOUR STEPS

1. Apply for an NPO application package from the Mobile Giving
Foundation (MGF) or any other third-party aggregator. The applica-
tion has a list of questions and standards to ensure that the NPO meets
federal and state laws and is transparent. There is a one-time application
fee.
2. Once approved by the MGF, the NPO will be asked to contact any one
of its approved ASPs. MGF currently has nine approved ASPs.
3. When a qualified NPO has selected an approved ASP, two contractual
agreements will be made; one between the NPO and the ASP, and the
other between the NPO and the MGF.
4. Once approved, MGF develops fundraising campaigns in conjunc-
tion with the ASP, and the non-profit. MGF’s messaging platform is
then used by the wireless carrier through their short message service
(SMS) centers. The NPO will be given a short code and keyword for its
campaign.

Note: For more information, visit the Mobile Giving Foundation Web site:
http://mobilegiving.org/ (accessed October 12, 2011).

Haiti’s earthquake, less than $1 million had been raised through mobile fundrais-
ing for a single event (Rogers, 2010a). When an NPO decides to launch a mobile
campaign, it works with a third party (e.g., Mobile Giving Foundation) to create
the system and through an Application Service provider (e.g., Connect2give) that
collects the money (Box 7.4).

7.3.6 Cell Phones and iPhones

Cell phones and iPhones are becoming strategic means of communication in different
fronts (Box 7.5). Their main advantage is that most people have only one number and
the phone is usually always with them. According to a Pew Research Center report,
the prediction is that by 2020, mobile devices will be the primary way in which most
of the world’s citizens will connect to the Internet (reported in Hoye, 2010).

7.3.7 Podcasting
Podcasting is a social networking tool (Box 7.6). Podcasts are audio or video record-
ings—a multimedia form of a blog or other content. Podcasting takes advantage of
the Apple iPod and similar technologies to distribute messages. A growing number
of charities and advocacy groups are using podcasts to discuss issues of interest to
non-profit groups and to get people interested in their causes.
204 ◾ Effective Non-Profit Management

BOX 7.5 MOBILE PHONE DEVICES—APPLICATIONS

1. Human Rights Campaign sent messages encouraging supporters to call
their members of Congress in support of different bills and Acts (e.g.,
the Matthew Shephard Act). The alert included a phone number that
recipients could simply click on the link to place the call.
2. Blue Ocean Institute, a conservation organization in East Norwich,
New York, has a FishPhone mobile service. Individuals about to order
fish at a restaurant or buy it at a grocery can send a text message to the
organization with the name of the fish that he or she is considering and
receive a message with information on the environmental and health
issues related to that species.
3. The Monterey Bay Aquarium (California) has an iPhone application
called Seafood Watch. It allows people with iPhones to carry that infor-
mation with them and to receive regular updates.

BOX 7.6 PODCASTING

The Red Cross Oregon Trail Chapter (based in Portland) podcasts a show
that hosts local and national experts on emergencies and disasters. The
main goal is to empower people to take steps themselves in an emer-
gency situation. It pulls ideas for the show from its blog contents.
U.S. Holocaust Memorial Museum’s Committee on Conscience (Washington,
DC) has a weekly podcast that features commentary from human
rights experts, government officials, journalists, and advocates on the
issue of genocides.

Rogers offered the following advice to NPOs considering podcasting:

1. Plan the show topic and length. Also plan how many episodes there will be
and how often they will be broadcast.
2. Record and edit the audio on a sound-editing program such as Audacity,
which is free, or Garageband.
3. Convert the edited audio to an MP3 format using programs such as LAME
or iTunes with MP3 encoding.
4. Use a file transfer system like libsyn.com to upload the podcast to the Web,
for a monthly subscription.
5. Create a blog or RSS feed to publish the podcast on the Web for free.
6. Continue to update and keep topics new and relevant to build a large audi-
ence base (2010d, 10).
 Non-Profit Organizations and Information Technology ◾ 205

BOX 7.7 POPULAR NPO BLOGS

The Agitator: http://www.theagitator.net
Beneblog: http://www.benetech.org
Charity Governance Consulting: http://charitygovernance.blogs.com
Donor InSite: http://dukesmith.com/donorinsite
Donor Power Blog: http://www.donorpowerblog.com
Don’t Tell the Donor: http://donttellthedonor.blogspot.com
Gift Hub: http://www.gifthub.org
Redeeming Hope: http://www.theharwoodgroup.com/rcharwood/
weblog/index.html
Trent Stamp’s Take: http://www.trentstampstake.org
White Courtesy Telephone: http://www.postcards.typepad.com/
white%5ftelephone
Source: Panepento, Peter, 2006, 10 Nonprofit Blogs That Get Attention,
Chronicles of Higher Education 19 (5): 20. With permission.

7.3.8 Blogging
Blogging has now become another attractive and interesting communication media
that promotes open communication, exchange of different opinions and feelings, and
spread of news and information. Blogs are ongoing commentary presented like a
diary or an online forum. “These blogs are, in many ways, an alternative to traditional
journalism, as their importance in the 2004 elections demonstrated” (McNutt, 2007,
36). Blogs are easy to post, and several NPOs, particularly the larger ones, have more
than one blog (Box 7.7). As an example, a visit to Goodwill’s Web site on November
19, 2010, showed that it had 13 different blogs organized by themes.

7.3.9 Hyperlinks
Using hyperlinks to other Internet sites to educate people about issues that pertain to
an NPO’s mission offers the NPO boundaryless opportunities to connect with dif-
ferent stakeholders. It is very common for large NPOs (e.g., Amnesty International)
to use several hyperlinks, while smaller NPOs may use one or few. As an example,
Brighton Center is a NPO in Northern Kentucky. Its mission is “to create oppor-
tunities for individuals and families to reach self-sufficiency through family sup-
port services, education and leadership throughout the communities of Northern
Kentucky” (http://www.brightoncenter.com/aboutus/about.php). The agency has a
hyperlink on its Web site that will direct individuals to the Safetynet Alliance of
Northern Kentucky. Safetynet Alliance is a collaboration of government, social
services, and funding agencies that work to provide efficient and effective emer-
gency assistance to low-income families.
206 ◾ Effective Non-Profit Management

BOX 7.8 SURVEY MONKEY (ONLINE SURVEY)

1. No software to install. No complicated instruction manuals. NPO can
start building the survey from opening a browser.
2. NPO can choose from over 15 question types (e.g., multiple choice,
matrix choices, and rating scale) that are already configured and ready
to use.
3. There are ready-made survey templates (on fundraising, volunteer
recruitment) that the NPO can use.
4. The NPO can easily customize the survey to include its logo, preferred
color, or any other information.
5. The minute a survey is completed, the responses can be viewed and
reports can be generated. Data can be analyzed using frequency distri-
butions, cross tabulations, and graphs.
Source: SurveyMonkey: http://www.surveymonkey.com/ (accessed October
10, 2011).

7.3.10 Internet Interactive Functions

Through using a variety of the Internet’s interactive functions such as discussion
forums and live chats and online surveys (e.g., SurveyMonkey), the NPO can gain
valuable feedback from its stakeholders (Box 7.8). (Also see Box 7.9.)

7.3.11 Twitter
Twitter, a Web site owned and operated by Twitter Inc., is another social network-
ing tool. It enables users to send and read other users’ messages called tweets. Tweets
are text-based posts of up to 140 characters. “Twitter is no longer just a tool to
announce a charity’s latest news. Instead, the platform is being used in a more inter-
active manner, as a way for organizations to unite with their public following and
get their causes viral” (Rogers, 2010e). According to a survey reported by Hrywna
(2010), approximately 44% of non-profit Tweets were for creating awareness, 18%
were for promotion and press, 15% were for reaching out, and only 3% were dedi-
cated to fundraising (Box 7.10).

7.3.12 YouTube
YouTube is becoming popular among NPOs to broadcast their achievements,
describe their activities, and forward any cause-related information. It could also
be an important tool to use for recruiting. NPOs can search YouTube to find videos
on potential candidates lecturing or being interviewed, or other relevant informa-
tion. (See Box 7.11.)
 Non-Profit Organizations and Information Technology ◾ 207

BOX 7.9 MEDICAL MISSIONS FOR CHILDREN (MMC)

Mission: “transfer medical knowledge from those who have it to those who
need it using the latest in communications technology.”
The MMC has a distance medicine network in over 100 countries called
the Telemedicne Outreach Program (TOP), a global satellite and IP TV net-
work called the Medical Broadcasting Channel (MBC), the Global Video
Library of Medicine (GVLM), and Giggles Children’s Theater.
Its TOP program connects volunteer doctors and a network of 27 tier one
mentoring hospitals in the United States and Europe with doctors and their
pediatric patients in approximately 100 countries to help diagnose and treat
children worldwide. MMC has started using high-definition videoconferenc-
ing equipment, which can be used to view digital images of MRIs, CT scans,
and x-rays without loss of image quality.
Utilizing a combination of satellite broadcast, Internet2 multicast, Internet
streaming, and video-on-demand, MMC is currently able to reach more than
1.7 million healthcare workers spread across more than 100 countries.
Global Video Library of Medicine (GVLM) is the digital repository of
thousands of video-based medical lectures, breaking news programs, sympo-
sia, and training sessions, all of which serve as a research platform for health-
care providers throughout the world.
MMC’s Giggles Children’s Theater broadcasts live performances of laugh-
ter and entertainment for children which are also recorded and shared over
100 children’s hospitals around the world.
Source: Medical Missions for Children: http://www.mmissions.org/index.
html (accessed July 25, 2010).

7.3.13 Social Networking Sites

Social networking sites allow members to share information about their skills, tal-
ents, knowledge, and preferences. Facebook, Myspace, and LinkedIn are the common
social networking sites. LinkedIn is a professional site that NPO staff and volun-
teers can use to form a group and share and distribute information with each other.
Both recruiters and job seekers can benefit from this networking opportunity.
“One of the fastest growing demographics on Facebook in 2009 was women
over fifty” (Kanter and Fine, 2010, viii). Facebook has tremendous power in orga-
nizing and garnering support for a cause. An example is the success of PETA in
using Facebook. “In less than a month, the ‘Skinned Alive’ campaign by the People
for the Ethical Treatment of Animals (PETA) had garnered 98,000 fans almost
entirely through social media, primarily Facebook and Twitter” (Hrywna, 2010,
6). According to a recent survey, 86% of non-profits were on Facebook, compared
with 60% on Twitter, 48% on YouTube, and 33% on LinkedIn (Hrywna 2010).
208 ◾ Effective Non-Profit Management

BOX 7.10 NPO TWEETING

1. Doctors Without Borders launched its “Be There 1st Campaign” on
Twitter in 2009. That gave the donor and its 1,325 followers the option
to tweet a pledge to the campaign or spread the word about the cam-
paign. The effort raised $155,660 for its Emergency Relief Fund.
2. Food for the Poor not only uses Twitter but also retweets. It retweets
messages from its 1,265 followers to make the point that the charity
cares about what they have to say. The non-profit updates its Twitter
page multiple times daily, realizing that not all followers are in the same
time zone.

Source: Rogers, K., 2010, Retweeting Your Followers: Groups Utilizing Social
Media’s Push and Pull, The Nonprofit Times, February 1: 10–11.

BOX 7.11 EVERY COOKIE HAS A MISSION

The Girl Scouts initiated a new online video campaign, “Every Cookie Has a
Mission,” which reminds buyers of the mission of Girl Scout cookies sales. The
video within 30 seconds shows three cookies and the mission behind those:

1. Girls learn how to do CPR

2. To cheer up our troops
3. Girls learn how to set goals and manage finances

The video had more than 20,000 hits during its first 2 weeks (Rogers,
2010b).
The Web site uses Facebook, Twitter, Myspace, and YouTube to forward
the message and also the video.

7.3.14 Microsites
Microsites are newer medium for NPOs to publicize for specific events and cam-
paigns. One example is BRAC USA’s use of a microsite to raise money for one of
its campaigns during Christmas. BRAC, the largest non-profit in the developing
world, started its operation in Bangladesh in 1972 and currently touches the lives
of millions of poor people through its micro-loans, education, health services,
self-employment opportunities, and educational programs. In its microsite (www.
whatIdidnotbuy.com), donors are asked to enter an item they pledged not to buy
during the holiday season and donate that amount to BRAC. The charity thus cre-
ated a destination separate from its home as a way to draw new donors and educate
 Non-Profit Organizations and Information Technology ◾ 209

them about BRAC’s mission. The NPO raised $1,500 via this microsite campaign
(Rogers, 2010c). A visit to that site on November 17, 2010, showed that 2,063 indi-
viduals did not buy and donated the price of their items to BRAC. The microsite
also provides opportunities to visitors to post that campaign on their Facebook
page and to other online communities.

7.4 Specific Uses of IT
7.4.1 Online Fundraising
Online fundraising is of two types: (1) giving electronically through portals such as
a “donate here” button on a Web site, and (2) giving on social media channels like
Facebook. “Causes for Facebook” is an application that enables Facebook users to
make their friends aware of a cause and raise funds for it. NPOs can also use blogs
and YouTube to broadcast stories and engage people in causes or in support of one
or more causes. Of course, the NPO’s Web site should use encryption technology
to ensure appropriate security for online donations and data transmission.
NPOs can list the names of donors (who want to be named) on their sites and
blogs. They can also send them personal e-mails with a “thank you” note. E-mails
are an inexpensive, fast, and efficient way to communicate with donors, prospects,
and other stakeholders. They can also easily put tax-related information on dona-
tion, along with planned giving information on their Web sites.
However, online fundraising will succeed only when integrated into every other
form of communication used by the NPO (e.g., direct mail, brochures, and news-
letter). As an example, the NPO’s newsletter could add its Web site address.
As part of their fundraising process, NPOs can access Internet resources on
prospect research. There are several free and paid access prospect databases avail-
able to NPOs. Examples of prospect databases include Prospect Research Online,
DonorSearch.net, WealthEngine.com, and NOZA, Inc.

7.4.2 Recruitment and Management

Online recruitment (also known as E-recruiting) is now common in most organiza-
tions, including NPOs. Lee (2005) reported that among Fortune 100 corporations,
94% have career Web sites. Ahmed (2010) reported growing use of Web recruiting
in government agencies. Lee (2007) identified six different e-recruiting methods:

1. General-purpose job boards (e.g., Monster.com)—Provide online recruiting

services to both employers and job seekers.
2. Niche job boards (e.g., PublicServiceCareers.com)—Serve specialized professions.
3. E-recruiting application service providers (e.g., Recruit USA)—Offer a variety
of specialized services in recruiting including training.
210 ◾ Effective Non-Profit Management

4. Hybrid recruiting service providers (e.g., Chronicles of Higher Education)—

Offer services to both recruiters and job seekers.
5. E-recruiting consortiums (e.g., DirectEmployers.com)—A partnership with
different association.
6. Corporate Web sites—Posting job announcement and applications.

In addition to recruiting for paid staff, online recruitment allows an NPO to

reach to a population (e.g., seniors, individuals with disabilities, ethnic minori-
ties) who might be in a disadvantageous situation to volunteer. NPOs can post
volunteer opportunities on their Web sites and could access recruits and identify
prospective volunteers using different databases. The two most widely used such
databases are SERVEnet (www.servenet.org) and Volunteer Match (www.volun-
teermatch.com).
An NPO can use e-mails to communicate and manage volunteers, post the vol-
unteer manual and calendar online with important activities and assignments, and
set up blogs or other discussion boards for volunteers to interact among themselves
and with the staff.

7.4.3 Marketing
The prediction is that within the next 5 years, online marketing in all its forms will
account for 40% to 50% of donor solicitation (Rogers, 2010a, 4).
Some private corporations are creating and using Web sites for making donation
decisions. American Express uses http://takepart.com to run its “Members Project”
(www.takepart.com/membersproject) in which its cardholders get to vote on which
charities should receive corporate funds. CITGO has created the program Fueling
Good (www.fuelinggood.com) to give away “fast and lubricant prizes to its most
deserving charities” (Ellis, 2010).
The following chapter on marketing discusses more the applicability and use of
online technology in NPOs.

7.4.4 Disseminating, Affecting, and

Monitoring Public Policy Issues
IT has opened up significant and effective venues for NPOs (including nongovern-
mental organizations [NGOs]) to affect, monitor, and disseminate public policy
issues (e.g., congressional or state legislators’ acts or bills, voting records of Senators,
activists’ platforms and agenda) very effectively to different constituents.
Advocacy NPOs can build an e-mail list of activists and alert them to actions
quickly and very easily.
A visit to the following NPO Web sites, on November 1, 2011, shows how
NPOs are using IT for such purposes:
 Non-Profit Organizations and Information Technology ◾ 211

1. Amnesty International’s Web site has a report on how political prisoners in

Myanmar are held in dog cells and denied water (http://www.amnesty.org/).
2. The National Organization for Women makes an urgent call to all support-
ers to vote “No” to Mississippi November 8 (2011) ballot on Initiative 26
(http://www.now.org/). The goal of the initiative is to amend the Mississippi
Constitution to define personhood as beginning at fertilization or “the func-
tional equivalent thereof.”
3. The National Rifle Association (NRA) reports, under its legislative alerts, that
Wisconsin lawmakers pass a bill protecting homeowners who shoot intruders.
4. Numbers USA (https://www.numbersusa.com/content/) lists U.S. senators
Roll call votes on July 9 (2009) for the DeMint Amendment which required
the completion of at least 700 miles of reinforced fencing along the southwest
border by December 2010.

7.5 Issue—Digital Divide in the Non-Profit Sector

The term digital divide “equals the difference between those who have access to tech-
nology and those who don’t” (Mfuni, 2005). In the world of NPOs, we are seeing a
growing digital divide. On the one hand, there are NPOs where all its paid staff and
most or all of the volunteers use the Internet as part of their core responsibilities—
not just e-mail and Web pages, but also online discussion groups, blogs, podcasting,
video conferencing, and even online social networks, such as Facebook. On the
other hand, there exist thousands of small to medium-sized NPOs across the United
States that have e-mail addresses for staff members and a Web site controlled by just
one or two people—and that is the extent of their use of IT. This divide poses a huge
disadvantage for these small and medium-sized NPOs that cannot compete well
with other IT sophisticated NPOs in fundraising, recruiting of volunteers and staff,
as well as with advocacy efforts. In her study of a small minority-based non-profit in
Kenosha, Wisconsin, Schneider found that “nonprofits that could not effectively use
IT lost out on funding opportunities because they had trouble meeting expectations
for proposal quality and record keeping systems that both private and government
funders now expect” (2003, 385).
A recent study published by the Johns Hopkins University’s Center for Civil
Society Studies also reported that while a majority of non-profits rely on IT for
a variety of uses, a significant proportion of non-profits remain “well behind the
curve.” Specifically, their findings showed:

1. A third of all organizations indicated that they need more computers to meet
their needs.
2. Approximately one out of every five respondents said that he or she still relies
on “basic” technologies.
212 ◾ Effective Non-Profit Management

3. A third of the respondents described their use of IT for program or service

delivery as “limited” (Geller et at., 2009).

In the past (several years ago), the divide was mostly due to the cost factor (the
gap between the haves and the have-nots). However, today the falling technology
prices, donations from computer companies, free and reduced fee support from
several non-profit technology sites—have placed high-tech equipment within the
reach of most non-profits including the smaller ones. So, what could explain this
digital divide in this twenty-first century? Is it actually lack of access to resources or
a lack of will to embrace them?
Experts vary on their observations. Some (for example, Cohen, 2005) believe
that even though NPOs typically have computers, Internet access, e-mail, and basic
software applications, some of them still often lack the training and leadership to
use that technology effectively. Along with that, securing funding to pay for tech-
nology as an ongoing cost of doing business poses a challenge to small NPOs.
Others found a lack of initiative or will to use the available technology. One
study conducted by the Pew Partnership for Civic Change (mentioned in Greene,
2001) found that many NPO leaders found the Internet confusing and difficult to
navigate, and hence used it primarily for e-mails. Greene (2001) mentioned another
study that reported that some of them lack the planning and support needed for
effective utilization of IT. Another study (Nicole, 2007), conducted with non-prof-
its in California, found that small San Francisco grassroots NPOs do not take
advantage of the free or low-cost services offered by NPO technology-assistance
groups, or do not even know that those services are available.
The digital divide in IT in the non-profit sector is only a manifestation of long-
standing social and economic issues that separate rich from the poor. However,
there are some additional constraints that NPOs face, irrespective of their sizes
and resources. Wolpert and Seley (2007) identified the following constraints that
NPOs face:

1. NPOs have limited or unequal access to capital markets, unlike corporations

do, or to special appropriations for equipment as many government agencies
do.
2. There is an unwritten pressure to hold down administrative costs for space
and equipment, because funders and other contributors are deterred by a high
ratio of administrative-to-operating expenditure.
3. Government contracts rarely cover programming costs and seldom are flex-
ible enough to allow for purchase of equipment.
4. Very few foundation grants to non-profits are targeted for office or computer
technology.
5. Non-profits often acquire used equipment through gifts from corporate
donors but generally without accompanying grants for training or technical
support.
 Non-Profit Organizations and Information Technology ◾ 213

No matter how many constraints NPOs face in their use of IT, the reality is
that IT has raised the bar for many kinds of administrative activities, including
funders’ expectations regarding the quality of the proposals (Schneider, 2003).
It is thus essential for those NPOs lagging behind the use of IT to develop and
implement appropriate policies, garner support from donors, and recruit and
develop their human resources to effectively promote their missions and to com-
pete well not only with rival NPOs but also with government and the for-profit
sectors. However, it is also important for NPOs to realize that there is a technol-
ogy curve based on their situation to determine where they ought to be on that
curve. No matter how attractive the various tools and applications of IT are, the
NPOs need to have a good level of comfort regarding its use of IT.

Case Study: The Costs of Social

Media (A Hypothetical Scenario)
Helen, executive director of Caring Hearts, Inc., anxiously
waits in her office for an unscheduled meeting with her vol-
unteer coordinator, Sandy. Sandy had called her last night and
informed her of two separate issues related to their volunteers’
use of Facebook and blogs.
Helen is fortunate to have the support of a dedicated group
of approximately 100 volunteers. The goal of this NPO is to
supply cooked meals to the elderly population in nearby neigh-
borhoods, within a 20-mile radius. The volunteers pick up the
cooked meals from the non-profit’s office and deliver those to
the homes of the elderly population during the weekend. The
non-profit has three paid staff; all its cooks are volunteers.
Two years ago, Helen was excited to receive a technology
grant from a foundation that helped her to network the office,
provide computers not only to her three paid staff but also to
10 of her key volunteers. These 10 highly motivated volunteers
coordinate the other volunteers, organize the schedule for
the other volunteers for cooking and dropping off the meals,
maintain a time schedule for volunteers, and also recruit volun-
teers. Of course, they meet with Helen several times during the
week to update her and coordinate all the activities. Sandy and
Helen have worked together to develop some basic Policies on
the Use of Office Technology.
As Helen waits for Sandy to arrive, she reviews the above
policies and realizes that she needed to include some specific
policies relating to the use of social media by her staff and
volunteers. However, she ponders: What policies could she
214 ◾ Effective Non-Profit Management

include to avoid these situations that Sandy informed her about

last night?

1. One of the volunteers on her Facebook posted a discus-

sion thread criticizing how the key volunteers at Caring
Hearts, Inc. are biased in developing work schedules for
the volunteers. Once the initial comment was posted,
other volunteers have started to share and post their com-
ments, particularly about the attitude of some of the key
volunteers. During the last 5 days, according to Sandy, a
total of 32 comments have already been posted.
2. Another volunteer’s personal blog discussed work-related
issues and identified the NPO and colleagues by name.
Some of these issues are confidential issues.

In her mind, Helen ponders the following related questions:

1. When does an employee’s personal blog become

“work-related”?
2. On social networking sites such as Facebook the line
between work and non-work use can be fuzzy. What poli-
cies can she use which will not violate volunteers’ privacy
rights?

Discussion Question
1. If you were Helen, how would you address the above situations and the two
questions that Helen is pondering?

Web Resources
Gift in Kind International (http://www.giftsinkind.org): Provides donated tech-
nology products to charities.
NetCorps (http://www.netcorps.org/): Offers a variety of technology support and
services to environmental, social justice, and community-based non-profits.
Network for Good (http://www.fundraising123.org): Provides non-profits with free
access to the best available online fundraising and non-profit marketing resources.
Nonprofit Matrix (http://www.nonprofitmatrix.com): Offers a variety of infor-
mation on all non-profit-related ASPs (Application Service Providers) and
other IT information for NPOs.
 Non-Profit Organizations and Information Technology ◾ 215

NTen (http://www.nten.org): This is a membership group of non-profit tech-

nology professionals who facilitate technology information exchanges among
non-profits and connects them to useful resources.
TechSoup (http://home.techsoup.org): Non-profits can use this Web site to
request for technology products donated by TechSoup partners. The site also
offers technology assistance to NPOs through Webinars, relevant literature,
technology updates, and other relevant information.

End-of-Chapter Review of Terms

Digital divide
Generation Y
Information technology
Microsites
Millennials
Podcasting
Really Simple Syndication (RSS)

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(November 1): 1, 42–43.
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213–243. San Francisco, CA: Jossey-Bass.
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Endnotes
1. The Bridgespan Group. 2009. Finding Leaders for America’s Nonprofits, June 30,
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2010).
Chapter 8

Non-Profit Marketing

In May 2011, Amnesty International released a report documenting the Egyptian

authorities’ use of excessive force to repress the anti-government protests (http://
www.amnesty.org/en/news-and-updates/report/egypt-victims-protest-violence-
deserve-justice-2011-05-17). In Spring 2011, the American Red Cross posted a
video on tornados on its Web site for viewers to learn about the non-profit orga-
nization’s (NPO) programs and services for the affected victims. Chicago’s Field
Museum presented an exhibit, The Horse, from February 16 through August 14,
2011. The exhibit included cultural objects, fossils, models, dioramas and hands-on
activities that highlighted the bond between horses and humans and how horses
have affected civilization through their impacts on transportation, trade, warfare,
and sports. Susan G. Komen Race for the Cure has a partnership with Yoplait,
called Save Lids to Save Lives. Every year, during the months of September and
October, for each pink lid that customers mail to Yoplait, Yoplait donates 10 cents
to the Komen Foundation with a minimum guaranteed donation of $500,000 up
to $1.6 million.
The above are examples of activities that NPOs commonly engage in to pro-
mote their missions. However, these are also examples of their marketing activities.
Marketing is not simply selling products to earn profits, rather it also includes
activities and processes that organizations use to promote their missions. Because
marketing theory was developed in the private sector, there were arguments against
its use in the NPO sector and hesitation about its applicability. Traditionally, many
NPO managers “have failed to recognize that marketing is as intrinsic to the non-
profit sector as it is to the business community” (Shapiro, 1973, 123). However,
gradually NPO practitioners have realized that marketing is an essential function,
have developed appreciation of the marketing function, and have been using a vari-
ety of marketing strategies toward their benefits. The uniqueness of NPOs and

217
218 ◾ Effective Non-Profit Management

their complex environments with multiple stakeholders define the scope and the
distinctiveness of NPO marketing.
This chapter provides a basic overview of NPO marketing, its scope and chal-
lenges, and the marketing process. The learning outcomes are as follows:

1. Understand the meaning of marketing and the differences between for-profit

and NPO marketing.
2. Identify the unique challenges in NPO marketing.
3. Explain the strategic marketing process and its different components.

This chapter also discusses the issue of NPO marketing and its possible nega-
tive effects on civil society and concludes with a case study on ethical issues in
NPO advertising.

8.1 Non-Profit Marketing
The conceptualization and understanding of “marketing” have evolved over the
years to address different types of organizations’ marketing needs and operating
contexts. In 1935, the National Association of Marketing Teachers, a predecessor
of the American Marketing Association (AMA), conceived the following original
definition for marketing:

Marketing is the performance of business activities that direct the flow

of goods and services from producers to consumers. (Keefe, 2004)

In 1985, the AMA adopted the following revised definition:

Marketing is the process of planning and executing the conception, pric-

ing, promotion, and distribution of ideas, goods, and services to create
exchange that satisfy individual and organizational goals. (Keefe, 2004)

Most recently, in 2007, the AMA revised the above marketing definition in recog-
nition of the non-profit sector’s use of marketing and its unique context. The new
and current definition is as follows:

Marketing is the activity, set of institutions, and processes for creat-

ing, communicating, delivering, and exchanging offerings that have
value for customers, clients, partners, and society at large. (www.
MarketingPower.com, accessed April 9, 2012)

The new definition includes the role marketing plays within society at large,
and defines marketing as a science, educational process, and philosophy—not just
 Non-Profit Marketing ◾ 219

a management system. It also expands the previous scope of the term to incorporate
the concept that one can market something to “do good.”
This revised marketing conceptualization surfaced very clearly marketing’s rel-
evance to the NPO sector and advanced the idea that non-profit marketing is basi-
cally the use of “marketing tactics to further the goals and objectives of nonprofit
organizations” (Wymer et al., 2006, 4).
While some authors (for example, Bush, 1992) raise some valid concerns that
the traditional business approaches to marketing are not well suited for NPOs and
may go against the altruism value or character of NPOs, it is also important to
realize that the marketing function as currently conceptualized offers a broader
perspective and includes processes and strategies that offer NPOs opportunities to
promote their missions through offering exchange relationships with their differ-
ent stakeholders. Furthermore, a significant portion of NPOs’ environments now
reflects that of the for-profit’s market realm in the sense that they are heavily depen-
dent on revenues generated from fees (e.g., YMCA) and are facing competition
from for-profits, other NPOs, and government organizations. Stater thus pointed
out, “This dichotomy in the resource acquisition process means that business mar-
keting principles may be more useful for some, but not for all, nonprofit organiza-
tions” (2009, 203).
However, one needs to be cognizant that there are significant differences
between NPO and for-profit marketing and that these differences have implica-
tions for developing effective marketing strategies for NPOs.

8.1.1 Difference between For-Profit and

Non-Profit Organization (NPO) Marketing
Following are some of the significant differences between marketing in the NPO
and the for-profit sectors:

1. Service nature of products—The products that NPOs market are very differ-
ent than those of for-profits. As Johnson and Venkatesan (2001) explained,
NPOs’ products are mostly services, which are characterized by their intan-
gibility, perishability, simultaneity, and heterogeneity. Let us take the case of
a non-profit legal aid society that provides free legal aid services to disadvan-
taged women. This service of “providing legal aid” is intangible—once the
service is rendered, we do not see it the way we can see a for-profit’s product
(e.g., computer) in a store. The non-profit cannot store the legal aid service
(perishability); they will have that service ready when there is a demand,
unlike a for-profit who can store its computers in advance of the demand. The
legal aid service is also produced and consumed at the same time, and that
points to their simultaneity feature. Heterogeneity in services basically means
that the quality of legal aid service may vary from one occasion to another,
220 ◾ Effective Non-Profit Management

from one service provider to another, and even from the same service provid-
ers on different days, unlike the uniformity of product quality that for-profits
can deliver or commit to deliver.
2. Multiple stakeholders—For-profits market their products to one group only—
their customers. In contrast, NPOs have four different client groups to deal
with. They include the current and future customers, donors, staff and volun-
teers, and the general public. The latter broader group’s support is important
for NPOs to continue enjoying tax-exempt privileges and favorable legisla-
tion. NPOs to be effective, thus, have to devise marketing strategies to target
these multiple stakeholders.
3. Multiple objectives—While for-profits have one core objective (profit earn-
ing), NPOs, in contrast, have multiple objectives due to their multiple
stakeholders. In addition, at times one or more of these objectives might be
inconsistent with another. For example, in Chapter 6 we discussed Planned
Parenthood’s delicate situation regarding securing government revenues.
Their multiple programs with multiple objectives have contributed to this
delicate situation. The clients of Planned Parenthood are obviously support-
ive of their programs; however, certain groups within the general public are
vehemently opposed to Planned Parenthood’s abortion program.
4. Public scrutiny—Due to the publicness of NPOs and their tax-exempt status,
they are more open to public scrutiny than for-profits. NPOs have to be extra
careful with their marketing processes, messages, and information to ensure
that these do not raise any issue of dishonesty, ethics, or fabrication. NPOs
also have to be efficient in inculcating marketing costs, because one or more
stakeholders may not appreciate such costs.
5. Difficult to evaluate services in advance—NPO services cannot be judged
or evaluated until after they are purchased or consumed because they are
intangible. NPOs’ clients cannot shop around by looking at those services as
they could with tangible products that most for-profits offer. “Thus experience
becomes more important in evaluating services” (Burnett, 2007, 135).

As one can imagine, these distinctive differences make NPO marketing in several
ways more challenging and difficult.
Andreasen and Kotler (2008, 22–24) identified the following special challenges
that NPOs face in their marketing efforts:

1. The nature of the target markets (customers, donors, and volunteers) present
unique challenges for NPO marketing. “An irony is that success on the tradi-
tional metrics by which for-profits are judged—sales and market share—may
or may not affect donations and related funding especially in the short run”
(Andreasen and Kotler, 2008, 22). The existence of multiple target audiences
makes it much harder for NPO managers to develop appropriate marketing
strategies that satisfy all.
 Non-Profit Marketing ◾ 221

2. NPO marketing is also very difficult because of the kinds of behaviors they
target to influence. For example, conducting research to collect data on obe-
sity or drug abuse is not only difficult but also may raise difficult privacy
issues. Thus, lack of research data or inadequate data on sensitive or privacy
issues poses difficulty for NPO marketing.
3. Often benefits resulting from changed behaviors that NPO marketing efforts
seek are invisible, thus making it difficult to promote those behaviors. The
authors explain this using an example with the marketing of oral dehydration
therapy. As they explain, if they are used properly and in time, that is before
the child becomes dehydrated, the mother will not see any benefits due to
the action she took. Such invisible effects pose another challenge to NPO
marketing efforts.
4. Consumers are often asked to undertake behaviors that they are either indiffer-
ent about or for which they do not see any personal benefits. An example is with
a civic NPO’s goal to promote voter participation in elections. It is difficult to
convince the importance of voter participation to individuals who may not see
any personal benefits for doing so and are apathetic to government or politics.
5. The target audience is often asked to make a significant change in their atti-
tudes and behaviors. The authors use an example with convincing someone
to wear a seat belt, who is actively opposed to government intrusion on his or
her privacy, and it is much more challenging than a for-profit trying to attract
clients to buy its products or services.
6. Some for-profits have the option and ability to modify the product to suit the
personal style of a client; however, a NPO traditionally does not have this
option.
7. The target audience for many NPOs, especially in developing countries,
includes often people who are illiterate and unfamiliar with basic scientific
knowledge. Thus NPOs, working with those populations, have to provide
them more information so they can understand the value of the program or
the behaviors.
8. It is difficult to portray or explain through media presentations the social and
psychological benefits of changed behaviors which are intangible.

There are some additional challenges that NPO marketing face, such as:

1. Most NPOs are small agencies with limited budget, and hence they usually
do not have any marketing budget.
2. Small NPOs may also not have marketing skills and competencies.
3. Spending money on marketing may not appeal to donors and other
stakeholders.
4. It is also difficult to measure marketing successes for NPOs. It is easy for for-
profits to measure such success—if all the marketing efforts result in increased
selling and lead to increased profits—that is the ultimate success measure for
222 ◾ Effective Non-Profit Management

for-profits. The profit margin is also something very tangible to measure. In

contrast, it is difficult for NPOs to show the effects of, for example, safe
sex education, voter education, and advocacies to promote minority rights.
Multiple stakeholders who have multiple and at times different goals in mind
pose further challenges to assessing the effectiveness of NPO marketing.

The above discussion thus indicates that marketing in the NPO sector will
take a distinct form compared to for-profits’ marketing. One can reasonably argue
that relationship marketing (building relationships with stakeholders) and ser-
vice marketing (emphasizing the value of intangible services)—two subsectors of
marketing—more accurately define NPO marketing and emphasize its distinc-
tiveness from for-profit marketing. Relationship marketing “assumes that an orga-
nization wants to form long-term relationship with its customers” (Johnson and
Venkatesan, 2001, 130). Service marketing emphasizes the unique characteristics
of service products—intangible, hard to evaluate, no inventories, importance of
contact points, and simultaneous production and consumption.
Considering the distinctiveness of NPO marketing, some scholars argue that this
sector needs a new construct to differentiate its marketing focus from that of busi-
nesses. Sargeant et al. (2002), for example, explain that a new construct like “societal
construct” should “consider the extent to which a non-profit focuses on the needs of its
key stakeholder groups and in addition, on the needs of the wider society of which it
forms part. Indeed it is this latter dimension that perhaps provides the greatest degree
of distinction between societal and market orientation” (Sergeant et al., 2002, 59).

8.1.2 Reasons for Marketing

For-profits engage in marketing to develop new products, understand their custom-
ers’ preferences and their differences, carry on business across countries, and create
effective channels to connect with different stakeholders—in turn they assist these
organizations to meet their ultimate goal—to increase the profit margin. Similarly,
effective marketing in NPOs can serve the same purposes, although the nature of
their ultimate goal is different.
As mentioned before, traditionally marketing was not considered as a valuable
or even as a needed function for NPOs to engage in. However, several recent trends
and developments have changed that understanding and have elevated marketing
to an important function for NPOs.

1. Financial scarcity—As discussed in Chapter 6, NPO funding comes from dif-

ferent sources (e.g., individual donors, foundations, government, service fees).
Effective marketing can assist NPOs to address the financial crunch that they
are currently facing with reduced government funding and private donations.
2. Emphasis on effectiveness and impact—More and more donors and even
the general public are questioning the effectiveness and impact of NPOs.
 Non-Profit Marketing ◾ 223

Marketing gives NPOs opportunities to share their stories and their successes
with different stakeholders.
3. Increased competition—As we discussed in Chapter 6, NPOs are now competing
with for-profits and other NPOs, in some cases for the same clients and for the
same donors. This increases the importance of marketing in the NPO sector.
Burnett pointed out that “The challenges faced by twenty-first century
nonprofits are severe and getting worse. Despite the historical aversion non-
profits have had toward marketing, these new challenges mean that non-
profits must embrace marketing completely and master the principles and
practices that work for them” (2007, Preface).
4. More professionalism—As a sector, NPOs are increasingly using and borrow-
ing a variety of successful management practices and processes from for-prof-
its; marketing is one such practice that NPOs, especially large ones, are using
to develop themselves professionally.
5. Affordability—There are numerous large NPOs (e.g., YMCA) that can now
afford to have a marketing budget, and a marketing department.
6. Exchange relationship—The traditional view that people work and donate to
NPOs due to purely altruistic reasons does not hold anymore. No doubt,
altruism is still one of the main reasons that propels the sector, but it is
increasingly realized (as discussed in Chapter 5) that complex motivations
drive individual behaviors and decisions regarding their support of this sec-
tor. Whether that means a donor feeling satisfied due to giving to a great
cause, a board member’s satisfaction of his or her prestige need, a client
receiving good service, a volunteer obtaining an opportunity to develop a
relationship—these all exhibit exchange relationships, the core of marketing.

8.2 The Strategic Marketing Process

Before a NPO can focus on the processes and strategies of marketing, it needs to
develop a marketing mindset or a conceptual framework. According to Johnson and
Venkatesan, this conceptual framework as applied to NPOs includes three proposi-
tions: client orientation, coordination of all-client-related activities, and goal direction
(2001, 131). Client orientation emphasizes the importance of having a comprehen-
sive and complete understanding of clients’ needs, attitudes, and buying behaviors.
Coordination requires that marketing be closely related to other activities of the agen-
cies, and the goal direction stresses that the only way an organization can achieve its
goals is by satisfying the needs of its clients. That means that the marketing function
and goals have to integrate with the overall goals of the NPO and its programs.
Strategic marketing involves planning and executing the plan through imple-
menting effective strategies and processes. It also involves collecting relevant
information through a systematic study of the NPO’s internal and external envi-
ronments. The following discussion identifies and explains the major and basic
components of this marketing process:
224 ◾ Effective Non-Profit Management

1. Organizational readiness
2. Market research (internal and external)
3. Strategic marketing plan
4. Implementation of marketing strategies
5. Evaluation of the marketing plan and its implementation

8.2.1 Organizational Readiness
Before the NPO starts to work on a marketing plan, it needs to do some assess-
ment on its readiness. Some authors (for example, Johnson and Venkatesan, 2001)
refer to this process as “situational analysis.” This includes assessing the organiza-
tion’s financial resources and competencies to engage in marketing, and analyzing
its internal strengths, weaknesses, and opportunities for marketing. For example,
if the NPO does not have any staff or board members with marketing skills, that
is a weakness. However, it does not mean that they cannot engage in marketing.
Maybe the NPO could seek the assistance of a faculty member who teaches in
the MPA program or in Nonprofit Management at a nearby university, or a board
member who has the marketing skills. On the other hand, if that option is not
available, and the NPO does not have the resources to hire a qualified staff with
marketing skill, then most probably the NPO is not yet ready to engage in mar-
keting. This also provides a signal to the NPO that it needs to focus on processes
and activities to secure resources so it can consider engaging in marketing. These
are some of the analysis that an NPO needs to engage in to assess its readiness for
marketing.

8.2.2 Market Research
Market research (both internal and external) is a very important component
because it provides the NPO with crucial information on the value of its services,
influential stakeholders’ perceptions toward the agency, and preferences of target
markets. External market research can also identity marketing opportunities and
problems, major competitors, trends in service deliveries in similar NPOs, and
pricing. Internal market research provides valuable information to NPOs such as
staff and volunteer perception and readiness for marketing, strengths and weak-
nesses, and their preferences. This is valuable information for NPOs in develop-
ing a marketing plan and strategies. Thus it is important that NPOs conduct
both internal and external market research. Unfortunately, for a variety of rea-
sons, many NPOs choose not to engage in market research. “One is that many
nonprofit organizations are convinced that they already understand their markets
and what they need, a notion that results from the fact that many nonprofits offer
services provided by highly trained and specialized professionals such as social
workers, psychologists, educators, artists, scientists, or medical personnel (Gainer,
2010, 306).
 Non-Profit Marketing ◾ 225

8.2.3 Strategic Marketing Plan

Based on the market research and situational analysis, the NPO will develop a stra-
tegic marketing plan. The marketing plan includes (1) developing marketing goals/
objectives, (2) identifying the target markets, and (3) developing marketing strategies.
Based on the NPO’s assessment of its readiness and market research, the NPO will
develop its marketing objectives. Examples of marketing objectives of the NPO may
include (1) increase in donation, (2) recruiting volunteers, (2) recruiting board mem-
bers, (4) selling a service or a product, and (5) increasing publics’ awareness of their
mission and their effectiveness. As emphasized earlier, it is very important that such
objectives be clearly tied to the program goals and the mission of the organization.
Andreasen and Kotler explained, “Marketing is . . . a means to achieve the organiza-
tion’s goal. It is a tool—really a process and set of tools wrapped in a philosophy—for
helping the organization do what it wants to do. Using marketing and being customer
oriented should never be thought of as goals; they are ways to achieve goals” (2003, 57).
The strategic marketing plan also has to consider a variety of legal issues (Box 8.1).
NPOs’ markets, similar to for-profits, consist of target markets along with the
overall market realm. Target marketing focuses on one segment of the overall mar-
ket realm. For example, in the case of the American Red Cross, the entire United
States with all its population will comprise its overall market realm. However,
within that broad realm the NPO has different market segments such as all adult
females, all hospitals in the Midwest, individuals below poverty level, and high
school children. “Target marketing is the process whereby decisions are made about
which groups an organization will choose to serve within specific markets” (Gainer,
2010, 307). Gainer further explained, “Market segmentation allows nonprofit orga-
nizations to control whom they serve by choosing where they will be most effec-
tive, based on their competencies, or where it is most important for them to act,

BOX 8.1 LEGAL ISSUES IN NPO MARKETING:

QUESTIONS FOR CLARIFICATION
1. Is the marketing activity substantially related to the NPO’s mission?
2. Are the advertising, pricing, and other marketing decisions tainted in
any way to reflect a commercial purpose or interest?
3. Do the marketing activities include “unrelated business activities?”
4. Are these “unrelated business activities” substantial?
5. Are marketing managers earning unreasonable compensation?
6. Are NPOs abiding by copyrighted issues when using pictures, record-
ings, and other materials?
7. Are all the public relations techniques (e.g., media relations, speaking
engagements, trade shows, and related “social media”) abiding by relevant
federal, state, and local laws and NPO internal policies and processes?
226 ◾ Effective Non-Profit Management

according to organizational mandate or mission, and to spend limited resources

efficiently, as opposed to letting the limits of their funding arbitrarily decide which
markets they cannot serve when they run out of funds” (2010, 309).
The most frequently used bases for segmenting consumer markets are demo-
graphic, geographical, behavioral, and purchase volume (usage) characteristics
(Johnson and Venkatesan, 2001, 145).
Once a NPO has developed its marketing objectives and chosen its target mar-
ket, the next step involves developing marketing strategies. Marketing strategies will
vary according to the NPO’s target markets. Some effective marketing strategies
include the following.

8.2.3.1 Marketing Mix
Marketing includes four key variables: product, place, promotion, and price. These
are also called the 4-Ps of marketing. Various combinations of these variables are
called the marketing mix (Worth, 2009, 214). As Worth explained, “a nonprofit
can change its marketing mix in response to information about what customers,
clients, or donors need and want, while remaining faithful to its core purposes. By
doing so, it can differentiate its products from that offered by others, position itself
in a unique market niche, and gain a competitive advantage over others” (2009, 214).
For example, let us take an example with a healthcare NPO that uses volunteers
to provide free medicines to its clients. So, providing free medicines is the service or
the product for this non-profit. The NPO can differentiate its service from similar
non-profits by committing to a minimum waiting period for its clients, training
volunteers to deal in a respectful way with their clients, providing easy-to-read
pamphlets to its clients, conducting follow-up calls with the clients, and so forth.
Place refers to the location of the service offered. So, the healthcare NPO could
differentiate itself by serving only the local clients or regional clients or by operat-
ing more than one office in different locations. There are different strategies for the
NPO to promote its programs and objectives including advertising (newspaper,
outdoor signs), face-to-face selling, press releases, and sales promotions (e.g., games,
coupons). Pricing is the fourth marketing factor, one that NPOs sometimes set in
a more casual way. It is important for NPOs to do some research on pricing and
set price at a reasonable and, if possible, competitive level. Gainer (2010) discussed
that NPOs can set their price based on the following: (a) cost-based pricing, (b)
demand-based pricing, and (c) competitive pricing. Cost-based pricing is basically
pricing a service to recover the cost of its production and delivery. Demand-based
pricing refers to elasticity versus inelasticity of demand which indicates the respon-
siveness of demand to change in price. So, if the NPO wants to increase usage, it
would reduce the price; whereas for inelastic demands, it could increase the price.
Competitive pricing refers to setting pricing by looking into competitors’ (similar
NPOs) pricing of similar services. However, the NPOs need to be careful about
their mission and about the rationale for enjoying tax-exempt status (Box 8.2).
 Non-Profit Marketing ◾ 227

BOX 8.2 NON-PROFIT MARKETING

LESSONS FROM MCDONALD’S

1. Take a franchise model. McDonald’s provides training to each franchise to

ensure that they all adhere to the value propositions offered to the customers.
NPO: Train all staff and volunteers so they share the NPO mission and
message.
2. Provide product consistency. Regardless of location or time of day,
McDonald’s customers receive similar experiences.
NPO: Set expectations and provide training so information on the Web
site, brochures, and other avenues and services are consistent.
3. Act like a retailer and think like a brand. McDonald‘s marketing efforts
focused on increasing sales and on protecting its long-term brand
reputation.
NPO: Should not engage in any marketing strategy that will compromise
its brand, mission, and message.
4. Know your customers. McDonald’s spends millions of dollars each year
on market research to understand customer segments, perceptions, and
expectations.
NPO: Spend time with clients, donors, funders, volunteers, and other
stakeholders on a regular basis to understand their expectations and
perceptions about the agency.
5. Understand product life cycles. McDonald’s regularly evaluates its current
products, eliminates some products, and launches new products based on
customer feedback and demand.
NPO: Evaluate programs and activities to identify and end programs that
are not in demand, and to develop new programs based on needs.
6. Know your competitor. McDonald’s is aware of its competitors, their prod-
ucts, and their uniqueness.
NPO: Need to realize that they are competing with other NPOs for clients,
funds, and support. So, it is crucial for NPOs to know their competi-
tors’ services or products, their differences, and their own uniqueness.
Source: X Factor Consulting: http://info.xfactorllc.com/nonprofit_marketing_
sustainability_board_governance/bid/53622/I-m-Lovin-It-6-Non-
profit-Marketing-Lessons-from-McDonald-s (accessed April 29, 2011).
228 ◾ Effective Non-Profit Management

8.2.3.2 Branding
Branding is a well-devised technique for an agency to establish its identity which
will provide a positive image to the entity while at the same time will differentiate
it from other similar agencies, especially the competitors. For example, Big Brothers
Big Sisters versus YMCA or YWCA versus Boys and Girls Clubs. Brand thus refers
to logo, name, slogan, or symbols that are used to create an image of the agency
among stakeholders. It is a perception or a mental image that stakeholders have or
will have about the agency.
“Nonprofits need to recognize the importance of developing a corporate iden-
tity that focuses on nurturance, or being perceived as caring and compassionate
toward their causes. In addition, nonprofits cannot ignore the importance of integ-
rity” (Venable et al., 2005, 309).
The following table identifies the steps in creating a new brand, auditing an
existing brand, and modifying an existing brand (Box 8.3).

8.2.3.3 Effective Communication
NPOs have to decide on communication strategies to promote their services, their
brands, and their agencies. As Johnson and Venkatesan (2001) explained, promo-
tion involves informing, persuading, and reminding people about their service,
mission, and their programs. (See Box 8.4.)
NPOs can use several strategies to promote themselves, including press releases,
fundraising events, posting signs, speaking engagements, face-to-face selling, public
relations, and sales promotion (e.g., contests). NPOs can use direct marketing that
consists of sending marketing messages to specific individuals through telemarket-
ing, direct mail, or the Internet. According to Holly (2006), more and more charities
are realizing the benefits of “word of mouth” marketing in which employees, donors,
volunteers, and other stakeholders become strong advocates who urge others to sup-
port to the NPO’s cause. This is due to a growing distrust of traditional advertising.
The next step in the marketing process is to implement the marketing plan
and the strategies. NPOs need to have infrastructures to implement the market-
ing strategies. An infrastructure at the minimum includes a marketing budget,
adequate staff with marketing competencies, and a physical space to house some
of the marketing activities. Large NPOs usually have a marketing director and
other supportive staff. Small NPOs that cannot afford to hire a marketing direc-
tor can strategically select one or more of its board members with that compe-
tency, invest time to find funding for their marketing activities, and also take
advantage of resources that are available within their reach (e.g., online resources,
seek help from marketing faculty from nearby universities). The final step in the
marketing process is to assess, at some interval, the effectiveness of the market-
ing plan and identify successes, failures, and opportunities. This is particularly
important due to the growing competition among NPOs and the information
 Non-Profit Marketing ◾ 229

BOX 8.3 A BRANDING EXERCISE

1. Branding concept: __________________________ (that defines it
and differentiates it from others).
2. The audience that values this: ____________________________
3. The need being fulfilled: _________________________ (list for
all—clients, volunteers, donors—as applicable)
4. What does the NPO do to deserve this brand: _________________
(based on what the NPO actually does, has to be an authentic analysis)
5. Evidence on what the NPO actually does:
Facts (verifiable information, statistics): ___________________
Anecdotes (stories): _________________________________
Processes (accessibility): _______________________________
6. The NPO’s main message about this branding concept (how will it
show its effectiveness): __________________________________
7. Secondary message: ___________________________________
8. The organization’s positioning statement (what makes it special): ____
__________________________________________________
9. Collateral materials (booklets, brochures, annual reports, photos, Web
site information): _____________________________________
(all materials should be consistent and convey the same message)
10. The media for delivering the messaging (broadcast, word of mouth,
brochures, etc.): ______________________________ (the mes-
sage needs to reach the target audience)
11. Strategies to strengthen this brand: (is there a need to redesign the Web
site, or train volunteers and staff, etc.)

Source: Zimmerman, J. S., 2008, The Nonprofit Branding, Nonprofit World,

January/February, 26 (1): 17–20.

technology revolution which offer not only new marketing opportunities but may
also require new infrastructure and continuous updating of competencies for suc-
cessful marketing.

8.2.4 Using Social Media in Marketing

The use of social media for marketing has become a popular trend or strategy
among NPOs. For example, a quick visit to the Red Cross’s Web site on May 19,
2011, showed that the NPO had over 90 videos on its YouTube channel.
The common social media tools include blogs, social networking (Facebook,
Twitter, MySpace, and LinkedIn), videos, and other media sharing platforms like
YouTube, and donation-specific platforms. Incorporating social media into the
230 ◾ Effective Non-Profit Management

BOX 8.4 PUBLIC TOURISM/SITE VISITS—

A NEW FORM OF MARKETING
A. Give tours to the public: informs public of the value of their mission
and opens up communication.

Guidance:
1. Solicit questions from the visitors before the tour to identify specific
concerns.
2. Tailor the tour to the audience’s information needs.
3. Make sure that facilities are clean and organized.
4. Confirm that tour guides are trained.
5. Provide hands-on experience.
6. Include multimedia presentations.
7. Provide visual materials (pictures, flowcharts).
8. Contact guests within a week of visit to address any new questions.

B. Create a visitor center.

Suggestions:
1. Make admission free or inexpensive.
2. Provide free literature or give away items (e.g., key rings).
3. Maintain scheduled operating hours.
4. Create a small shop (selling inexpensive snacks and merchandise
related to the NPO’s mission).
5. Give visitors the opportunity to watch a video that tells the NPO’s
story.

C. Hold a virtual tour using photos and videos.

D. Take a tour yourself with other NPO to learn about effective tours.
E. Emulate the for-profit sector. Borrow relevant and applicable touring
strategies from them.

Source: Mitchell, M., and S. Mitchell, Show Off a Little! New Approach
Forges Bonds, Nonprofit World 26 (4): 20–21.

marketing processes and strategies assists NPOs to reach a broader target, to change
the message instantly if needed, and also to monitor on a regular basis different
stakeholders’ perceptions about them. It is easy to forward a video in YouTube or
an article to new audiences. Social media’s success in fundraising was discussed in
Chapter 7. Social media tools are also effective in recruiting new volunteers and
competent board members.
 Non-Profit Marketing ◾ 231

Similar to any other marketing strategy, NPOs need to develop a strategic online
marketing plan before they start using any social media for marketing. Foremost,
they need to collect information on their target markets’ use and preference of
social media types (Facebook, Twitter, or LinkedIn for example). For example, if
the target audience is not using Twitter, then it will be a waste of resources for a
NPO to create a Twitter account. So, this research is important for them to develop
the online marketing plan. The NPO should also have some performance measures
to assess the effectiveness of the social media tools being used. For example, how
many fans have joined their Facebook or have subscribed to their YouTube chan-
nel—information on these performance measures should be collected and used for
future marketing plans (Box 8.5).

8.3 Issue: Will Marketing Put the Civil Society at Risk?

Eikenberry and Kluver (2004) published an interesting and thought-provoking
article titled, “The Marketization of the Nonprofit Sector: Civil Society at Risk?”
The authors discussed how the marketization trend may adversely affect the NPO
sector’s role in creating and maintaining a strong civil society—as value guard-
ians, service providers and advocates, and builders of social capital. For example,
for-profit partnerships and different market-driven entrepreneurship activities may
bring more profits/revenues to NPOs but have the potential to do so at the expense
of their missions (viz., value guardian). NPOs may choose to focus on programs
that yield more revenue even if they do not directly promote their missions. Such
reliance may also discourage NPOs to serve a population that cannot buy their
services, or who do not have the resources (financial and non-financial) to advocate
for their causes. NPOs, traditionally, have played a strong role in creating and sus-
taining “social capital” which “is constituted by the norms, networks, and forms of
trust that make communities work. These ties prepare people to play an active role
in civic life and democracy” (Frumkin, 2002, 24). As the authors pointed out, “In
the past, a nonprofit organization’s long-term survival depended to some degree on
its capacity to sustain relationships with core constituencies, such as private donors,
members, community volunteers, and other community organizations, thereby
creating a network of social trust around the organization” (Frumkin, 2002, 137).
However, with the contract environment and the commercialization, NPOs do not
have that level of need to build this connection, thus reducing civic participation.
While the argument has some merit, it is also important to realize that without
marketing, some NPOs might not be successful to promote their causes to serve
the public interest, whether that means securing resources to maintain a homeless
shelter, gaining support to advance the rights of a minority group, or providing
free education to children in economically struggling neighborhoods. With that
thought in mind, one may even say that marketing is not only an opportunity for
NPOs to promote their mission, but it is actually a responsibility on their part.
232 ◾ Effective Non-Profit Management

BOX 8.5 10 ONLINE MARKETING STRATEGIES FOR NPOs

1. Create a Web site that is eye-catching, dynamically built, and devel-
oped on a strong CMS (content management system) platform.
2. Use social media to share what the organization is doing.
3. Allow brand enthusiasts to become creators. Brand enthusiasts are ded-
icated to the mission, and if they get the proper tools (blogs, RSS feeds)
they will be eager to convey the NPO’s mission and messages easily.
4. Make e-mail newsletter sign-up simple, easy, and prominent.
5. Be consistent and timely. Consistency and timely content are critical
for building trust in the NPO and to demonstrate that it is active and
working hard to serve the community.
6. Simplify the online donation process.
7. Create viral programs. They are a form of marketing in which you use
social media to promote the NPO’s cause by allowing users to easily
replicate their message or carry out the NPO’s requested action, and
prompting others to do the same.
8. Go mobile. The NPO Web site should have a mobile presence that
works on the top mobile platforms such as iPhone, Android, and
Blackberry. In addition to creating a mobile site, text messaging cam-
paigns are becoming the new norm and are, in some cases, slowly
replacing newsletters.
9. Monitor the NPO brand continually. Following social media sites
along with other blogs and Web sites will enable the NPO to keep a
close tab on the organization’s online persona.
10. Track progress. By tracking the NPO visitors’ activities, the NPO will
be able to make better decisions as to where to best spend their time and
direct their online efforts. Put methods in place to track and analyze
traffic. Google Analytics (GA) is a great tool to help the NPO measure the
NPO’s advertising return on investment (ROI) as well as to track video,
social networking sites’ reach, and usage of particular applications.

Source: Applegate, T., 2011, Nonprofit Marketing Lessons from McDonald’s

(the Most Recognized Brand in the World), Blog posting: http://blog.
vistage.com/marketing/10-marketing-strategies-for-non-profit-orga-
nizations-part-1-of-3/ (Author: Nick Damoulakis, accessed May 19,
2011).

The authors raise some thoughtful issues and considerations, but there is no
doubt that NPOs need to engage in marketing, and that more and more NPOs are
engaging in marketing. Numerous universities offer courses on nonprofit market-
ing, and numerous books and articles are being published on this topic. So, the
 Non-Profit Marketing ◾ 233

BOX 8.6 20 WAYS QR CODES WILL

CHANGE NPO MARKETING
A QR code (short for Quick Response) is a specific two-dimensional code,
readable by dedicated QR barcode readers and smart phones. The code con-
sists of black modules arranged in a square pattern on a white background.
The information encoded can be text, URL, or other data. Following is an
example of a QR Code.

1. Use QR codes to drive people to your mailing list.

2. Add QR codes to your campaign materials to sell tickets to events.
3. Link your QR code to your donation page.
4. Use QR codes to gather new Facebook “likes.”
5. Turn your city into a living museum by adding important and exciting
information.
6. Add a QR code to your business card.
7. Reduce the environmental footprint of your conference by swapping
QR codes instead of business cards.
8. Add a QR code to your building signage and turn passersby into
volunteers.
9. Add a QR code to the bottom of your appeal letter.
10. Print stickers with a QR code on them and turn your laptop at the cof-
fee bar into a public education campaign.
11. Selling products to support your cause? Attach a tag with a QR code.
12. Add a QR code with a link to a video to your printed annual report
and watch your most important major donor solicitation tool become
interactive.
13. Add a QR code to your volunteer team’s T-shirts.
14. Design your QR Code to make it more visually appealing to reinforce
the NPO’s visual identity.
15. Add your logo to your QR code, and let people know who you are.
234 ◾ Effective Non-Profit Management

BOX 8.6 (Continued) 20 WAYS QR CODES

WILL CHANGE NPO MARKETING
16. Engage your fans with a targeted appeal by directing them to an event
or cause.
17. Add QR codes to your site tour and let donors hear the voices of those
you serve—even when they are not there.
18. Put a QR code on a table tent at your annual fundraising dinner and
help diners learn more about you.
19. Create a scavenger hunt using QR codes which leads your volunteers
through a training program.
20. Print your organization’s message along with a QR code on bar coasters
and turn bar patrons into advocates for your cause.
Source: Mission Minded, 20 Ways QR Codes Will Change Nonprofit
Marketing, http://mission-minded.com/blog/?p=477 (accessed on
May 15, 2011).

question is not whether NPO should engage in marketing, the more appropriate
question to ask is the following: How can NPOs engage in marketing without put-
ting the civil society at risk?
Box 8.6 lists the various uses of QR (Quick Responses) codes that NPOs use
for marketing purposes.

Case Study: Truth in Advertising

In 2002, the Minnesota Partnership for Action Against Tobacco
(MPAAT) drew criticism with one of its TV commercials. In the
commercial, a bald woman wearing a knit cap cradles a baby
while a home video camera records the scene.
“Mommy is really sick,” she tells the child. “So I wanted to
do this so you’ll always know how much I love you.” She then
sings several lines from “You Are My Sunshine.” The tag line
reads, “Be there tomorrow. Stop smoking today.”
The woman in the commercial is an actor, not a can-
cer victim (http://brainerddispatch.com/stories/012003/sne_​
0120030020.html).
This commercial generated strong reactions from the view-
ers because the MPAAT failed to disclose that the victim was
an actress who did not have cancer. Viewers registered more
than 5,000 complaints when the victim’s status as an actor was
discovered (Jensen, 2004, mentioned in Shanahan et al., 2010).
 Non-Profit Marketing ◾ 235

Let us take another similar issue—the recent controversy

over Greg Mortenson and his widely acclaimed best-seller
Three Cups of Tea. Greg had been considered a very dedi-
cated leader in the non-profit world, and his book had been an
inspirational one to so many other philanthropists, until CBS’s
60 Minutes aired a piece in April 2011. He had delivered inspi-
rational lectures and messages built around a story that forms
the cornerstone of Three Cups of Tea. In his lectures and also
in his book he discussed how, in 1993 he tried and failed to
reach the summit of K2, the world’s second-tallest mountain,
to honor his dead sister, how he got lost and separated from
his party on the descent and stumbled into a tiny village called
Korphe. His efforts have won praises from different groups.
President Obama even donated $100,000 of his Nobel Peace
Prize award to Mortenson’s NPO, the Central Asia Institute.
Altogether, the organization has raised $60 million in a few
short years based on Mortenson’s compelling story (http://
www.hcn.org/wotr/three-cups-of-tea-the-sequel, accessed
May 18, 2011).
The discussion on 60 Minutes basically accused Greg for
fabricating much of the inspirational story that was said to
have been the basis for his building schools in Afghanistan
and Pakistan. Among them, how his plan to build schools in
impoverished countries was hatched, and whether he was kid-
napped by the Taliban as he claimed. Since then, Greg had
been under intense scrutiny from members of the NPO sector,
the media, his readers, and clients, including members of the
general public.
Moreover, he faces allegations that he has mismanaged the
funds of his charitable organization, the Central Asia Institute,
for his own monetary gain.

Discussion Questions
1. The case study on “Truths in Advertising” raises some ethical and maybe
some legal issues in NPO marketing. Using actors or actresses in advertising
is a common practice in all organizations including NPOs. In your assess-
ment, did the MPAAT do anything wrong in hiring an actress for the above
TV commercial? Explain your position.
236 ◾ Effective Non-Profit Management

2. What is your position regarding the issue surrounding Greg Mortenson’s

book? Assuming that all the accusations about his fabricating the story are
valid, would you say that he did something morally wrong?
3. How can a NPO that implements controversial programs, like the Planned
Parenthood, successfully market its programs including its controversial
abortion program to its donors and the general public? Is it really possible to
do so?

Web Resources on NPO Marketing

American Marketing Association (http://www.marketingpower.com/Abou-
tAMA/Pages/default.aspx): The American Marketing Association’s Web site.
American Marketing Association Foundation (http://themarketingfounda-
tion.org/resources.html): The American Marketing Association Foundation
(AMAF) is committed to providing the resources and tools that non-profits
need to enhance their marketing pursuits, so they can accomplish their mis-
sions of helping those who need it most. Provides free resources, access to
Webinars, and expert advice.
National Council of Nonprofits (http://www.councilofnonprofits.org/): Has
free templates and resources on marketing and communication.
Nonprofit Marketing Guide (http://www.nonprofitmarketingguide.com/
resources/articles/): Training and tips for do-it-yourself non-profit marketing
(includes blog, books, and Webinars).
Socialbrite (http://www.socialbrite.org): The site is designed to help NPOs in
designing and implementing social media tools. Experts in social media,
causes, and online philanthropy offer advice and insights on social media
tools and best practices.

End-of-Chapter Review of Terms

Branding
Heterogeneity
Intangibility
Market research
Marketing mix
Perishability
Quick Response (QR)
Simultaneity
Target markets
 Non-Profit Marketing ◾ 237

References
Andreasen, A. R., and P. Kotler. 2008. Strategic Marketing for Nonprofit Organizations. Upper
Saddle River, NJ: Prentice Hall.
Andreasen, A. R., and P. Kotler. 2003. Strategic Marketing for Nonprofit Organizations. Upper
Saddle River, NJ: Prentice Hall.
Burnett, J. J. 2007. Nonprofit Marketing. Best Practices. Hoboken, NJ: Wiley.
Bush, R. 1992. Survival of the Nonprofit Spirit in a For-Profit World. Nonprofit and Voluntary
Sector Quarterly 21 (4): 391–410.
Eikenberry, A. M., and J. D. Kluver. 2004. The Marketization of the Nonprofit Sector: Civil
Society at Risk? Public Administration Review 64 (2): 132–140.
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Nonprofit Leadership and Management, ed. David O. Renz & Associates, 301–328. New
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Holly, H. 2006. Nonprofit-Marketing Experts Outline Hot Trends, Discuss Challenges.
Chronicles of Philanthropy 18 (10): 29.
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Using the Actor Portrayal Label,” paper presented at the Association for Education
in Journalism and Mass Communication Conference, Toronto, August 3. In Kevin
J. Shanahan, Christopher D. Hopkins, and Les Carlson. 2010. The Unintended
Consequences of Using “Posers” in Nonprofit Public Service Announcements and pro-
posed self-regulatory disclosure solutions, Journal of Public Policy and Marketing 29
(2): 219–231.
Johnson, E. M., and M. Venkatesan. 2001. Marketing. In The Nonprofit Handbook, ed. Tracy
D. Connors, 128–161. Hoboken, NJ: Wiley.
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Sargeant, A., S. Foreman, and M. Liao. 2002. Operationalizing the Marketing Concept in
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(5): 123–132.
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Promotion and Place-Marketing in Nonprofit Organizations. Journal of Nonprofit and
Public Sector Marketing 21 (2): 202–224.
Venable, B. T., G. M. Rose, V. D. Bush, and F. W. Gilbert. 2005. The Role of Brand
Personality in Charitable Giving: An Assessment and Validation. Journal of Marketing
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Worth, M. 2009. Nonprofit Management. Principles and Practice. Thousand Oaks, CA: Sage.
Wymer, W. Jr., P. Knowles, and R. Gomes. 2006. Nonprofit Marketing. Marketing Management
for Charitable and Nongovernmental Organizations. Thousand Oaks, CA: Sage.
Chapter 9

Nongovernmental
Organizations (NGOs)—
International Dimension

The internationalization of the nonprofit sector is not a new or recent phenomenon.

Voluntary organizations existed in all societies and countries since civilization’s
early period. “[T]he Roman Catholic Church and Islam have long had transna-
tional aspirations and maintained far-reaching operations for centuries” (Anheier
and Themudo, 2005, 102). The differences between the early and contemporary
periods of this internationalization are in the phenomenal growth, formalization,
impact, and vibrancy of the sector. Speaking about the NPO sector’s recent phe-
nomenal growth, Sfeir-Younis pointed out that “[T]he existence of an organized
and effective civil society, including nongovernmental organizations (NGOs), is
the greatest social phenomenon in the latter part of the twentieth century, and
certainly in this new millennium” (2004, 29).
For a variety of reasons, the internationalization of the nonprofit sector has
gained prominence among scholars, practitioners, governments, activists, and even
the general public. Some of the reasons include the following:

1. The growth of this sector in almost every region of the world during the
last few decades has been monumental, resembling a “global associational
revolution.”1
2. Nonprofits are now considered a major player and stakeholder in international
relations in terms of their work and influence at the global policy-making level.

239
240 ◾ Effective Non-Profit Management

3. They play significant economic and development roles in different parts of the
world.
4. They have become a major centralizing force in mobilizing activists across
regions and cultures.

NPOs operating in different countries and at the international level have been
named in different ways including “non-state actors,” “civil society,” and “nongov-
ernmental organizations” (NGOs). Among all these terms, NGO has a special sig-
nificance in the discourse on NPOs across countries. In most countries, especially
in the developing parts of the world, NGO is the term used to refer to the nonprofit
sector. It is also commonly used to refer to international nonprofit organizations.
This chapter uses the term NGOs to discuss the internationalization of the non-
profit sector.
This chapter gives an overview of some of the important aspects of the interna-
tionalization of this sector, including conceptualization, growth, roles, differences
and similarities across selective countries, and some of the recent issues related to
their operations. The chapter has the following learning outcomes:

1. Comprehend NGOs as a subsector of the non-profit sector.

2. Understand the growth and scope of NGOs.
3. Identify the similarities and differences of NGOs across regions.
4. Analyze the structure and operations of international nongovernmental orga-
nizations (INGOs).
5. Explore the major roles of NGOs.

This chapter discusses three major issues affecting the nonprofit sector at the
international level. It concludes by developing a case study that focuses on the secu-
rity issue of NGO staff working in conflict regions.

9.1 Defining Nongovernmental Organizations (NGOs)

Chapter 1 explained the difficulty of defining or describing NPOs and arriving
at a common definition. Imagine trying to do the same for NGOs that operate,
sometimes under different names, across different cultures and countries. Within
the international realm, sometimes they are referred to as “non-state actors,” “civil
society,” “nonprofit,” or as NGO. The multiplicity of terms and the cross-cultural
understanding of the concept make it a much more difficult task to arrive at a com-
mon definition or description of NGOs.
The terms nonprofit organization (NPO) and nongovernmental organization
(NGO) are nearly synonymous in the United States. Many scholars have used the
term NPO to include both northern and southern NPOs. However, one of the key
differences between these two seems to lie in the geographic focus of activity and
 NGOs—International Dimension ◾ 241

identity. NPOs (at least in the United States) tend to be overwhelmingly local, both
in terms of their activities and the communities that support them through dona-
tions. Their activities are locally oriented, and the financial support is largely local
as well. While there are exceptions (e.g., United Way), Wolpert (1993) estimated
that 85% to 90% of all American NPOs are local. Contrast that with international
NGOs and the numerous northern NPOs that work across national boundaries.
Their targets are people in other countries, and their donations and financial bases
tend to be national at the least. Therefore, when scholars refer to NPOs that work
across different countries, they usually use the term NGOs rather than “NPO”. In
addition, in developing countries NPOs are usually referred to as NGOs. NPOs
in developing countries also tend to be more directly concerned with equity and
economic development compared to the local nonprofits in the North. The term
NGOs is therefore used to emphasize this similarity between these international
NGOs and developing countries’ NGOs. One way to reconcile the difference
between NPOs and NGOs is to make the point that NGOs are an important com-
ponent of the nonprofit sector universe.
The term NGOs has been used in different ways. It was first used in legalistic
fashion by the United Nations in 1950. According to the UN Economic and Social
Council’s (ECOSOC) definition, “[A]ny international organization which is not
established by inter-governmental agreement shall be considered as an NGO.” The
only constraints are that an NGO cannot be profit making; it cannot advocate
the use of violence; it cannot be a school, a university, or a political party; and any
concern with human rights must be general, rather than restricted to a particular
communal group, nationality, or country.
However, the idea of what NGOs mean has changed and has evolved as
NGOs themselves have. But it has not led to a consensus on their meaning and
scope. Scholars have wrestled to provide meaningful and useful definitions of this
entity, but as the following definitions show, they are as varied as one could pos-
sibly imagine:

1. Gorman defined them as “non-governmental (private), tax-exempt, nonprofit

agencies engaged in overseas provision of services for relief and development
purposes. They also derive at least a portion of their funds from private, chari-
table donations” (1984, 2).
2. Historian Iriye defined NGOs as “voluntary and open associations of indi-
viduals outside of the formal apparatus of the state that are neither for profit
nor engage in political activities as their primary objective” (1999, 422).
3. Clarke defined NGOs as “private, non-profit, professional organizations, with
a distinctive legal character, concerned with public welfare goals” (1998).
4. The World Bank’s Operational Directive on NGOs (No. 14.70, 1989) defines
them as “groups and institutions that are entirely or largely independent of
government and characterized primarily or largely by humanitarian or coop-
erative, rather than commercial objectives.”
242 ◾ Effective Non-Profit Management

As inconsistent as the definitions are, there are also differences among NGOs
across the developed and the developing nations. Clarke (1998) explains that
NGOs in the developing world include philanthropic organizations, think-
tanks, and other organizations that focus on human rights, gender (equality),
health, agriculture development, social welfare, the environment, and indigenous
peoples. He also includes people’s organizations, “local, non-profit membership
based associations that organize and mobilize their constituents in support of
collective welfare goals,” as a subset of NGOs that work in the Southern hemi-
sphere. Referring to NGOs in the third-world countries, Fisher noted, “[In] the
Third World, the term NGO generally refers to organizations involved in devel-
opment, broadly defined. Hospitals, charitable organizations, and universities
are usually called nonprofit organizations rather than NGOs. . . In the transi-
tional countries of Europe and the Soviet Union, it tends to mean all charitable
and nonprofit organizations” (1997, 5). Thus, the ambiguity of the definition
derives not only from the different emphases scholars and practitioners prefer
to put on the term, but also on the variety of roles that NGOs play in different
parts of the world.
Recognizing fully the impracticality of giving a standard definition to the
diverse NGOs that operate across the globe, this chapter uses the same six char-
acteristics of NPOs that are used in Chapter 1 to define and discuss NGOs. To
refresh our memory, the six characteristics are that they have formal structures,
are private, do not generate profits to their owners, are self-governing, serve public
purpose or good, and are tax exempt. The discussion in this chapter uses these six
characteristics because they are broad enough to provide a common conceptualiza-
tion of NGOs across the globe, thereby allowing us to have a meaningful discussion
of the sector (Box 9.1).

BOX 9.1 TYPES OF NGOs

Northern NGO (NNGO): Those with headquarters and funding base in
one or several high-income countries. Examples: Oxfam, CANHELP
Thailand.
Southern NGOs (SNGO): Indigenous organizations, in less-developed
countries, engaged mostly in service delivery and several financed
mostly through foreign donors. Examples: Association for Social
Development (ASA), Bangladesh; Kenya Rural Enterprise Program.
International NGO (INGO): Those with branches in several countries.
Examples: Oxfam, Amnesty International.
 NGOs—International Dimension ◾ 243

9.2 Scope and Growth

It is virtually impossible to give an accurate number of NGOs worldwide and the
scope of their operations. As we find in the United States, the problem of recording/
counting all NGOs is a common problem in any other country. One can only use
estimates due to the absence of a comprehensive process of recording all NGOs. In
India, it is estimated that between 1 and 2 million NGOs operate (www.indianngos.
com). According to a 2006 World Bank Report, in Bangladesh there are approxi-
mately 45,000 NGOs registered with the Ministry of Social Welfare, and another
1,882 (those receiving foreign fund) registered with the NGO Affairs Bureau. The
number of internationally operating NGOs is estimated at 40,000 (http://www.
hmceurope.org/2010/program_info/ngo.aspx). Again, these are only estimates.
Since the early 1990s, the Johns Hopkins Comparative Nonprofit Sector
Project has carried out systematic studies to gather information and data on CSOs2
cross-nationally. In the late 1990s, the researchers working on the project collected
data on 35 countries—developed, developing, and transnational (Czech Republic,
Hungary, Poland, Romania, and Slovakia). Box 9.2 presents some summary data/
information on CSOs across these different countries.
As mentioned in Chapter 1, since the 1970s there has been an explosive inter-
national growth of NPOs. Most of the factors that are discussed in Chapter 1 to
explain the growth of NPOs also apply to NGOs growth across the globe. However,
there are some unique factors that provide additional explanation to the explosive
growth of NGOs.
Salamon (1994) discussed three broad reasons for such growth.

BOX 9.2 MAJOR CROSS-NATIONAL

FINDINGS (35 COUNTRIES)
1. Aggregate expenditure of $1.3 trillion.
2. Total aggregate workforce of 45.5 million full-time equivalent workers.
3. 132 million people volunteering.
4. Service is the dominant function (engage an average of 64% of workers).
5. Fees are the dominant source of revenue (an average of 53% of all
CSO’s income source).
6. Public-sector support is the second-largest source of income (an average
of 34% of all CSO’s income source).
7. Private philanthropy is not a significant source of income (approxi-
mately 12% of all CSOs’ income).

Source: Global Civil Society, 2004, Dimension of the Nonprofit Sector, Vol. 2,
ed., L. Salamon, and S. Wojciech Sokolowski & Associates, Bloomfield,
CT: Kumarian Press.
244 ◾ Effective Non-Profit Management

1. Global communications revolution:

The sophisticated development in transportation and the Internet has brought
the world closer to all and, in particular, has made it significantly easier for
individuals to associate among themselves and work as a group. Due to this
ease of communication, it is now easy for individuals to join NGOs, volun-
teer online, conduct meetings online, travel to different conventions and in
essence help promote civic engagement among citizens in different countries
and across countries.
Technology has also facilitated the emergence of newer organizational
forms in the nonprofit sector; “dot causes” (Clark and Themudo, 2003) is
one such form of organizing. Dot causes are social networks that mobilize
support for a particular policy campaign, primarily through a Web site.
Examples include the networks waging campaigns against McDonald’s in
various countries.

2. State retreat worldwide:

Due to a combination of economic and political reasons, governments in
different countries are scaling back their service provisions and creating
opportunities and need for NGOs to intervene and function. The theory of
“government failure” that Chapter 1 discussed partially explains this real-
ity. Another factor that contributes to this is the growing perception that
NGOs are more effective and efficient compared to large-scale government
bureaucracies. Economic failure in the developing countries has also pro-
pelled the need to find other ways and actors to achieve economic develop-
ment. “A new emphasis on channeling aid through private organizations,
referred to in some circles as the new Policy Agenda, reinforces the retreat of
the state from welfare provision” (Ahmed and Potter, 2006, 24). This is espe-
cially true when one tries to understand the growth of INGOs. The rise of
INGOs (such as CARE) is a consequence of both successful local and volun-
tary actions and the increasing popularity that they enjoy with governments
and donors (Edwards and Hulme, 1995). Clarke (1998) argued that since the
1980s, the political environment has favored INGOs as agents of develop-
ment. Conservatives, neoliberals, and radicals all saw INGOs as a solution
to problems with the states. Conservatives viewed INGOs as more efficient,
flexible, and innovative. Neoliberals saw INGOs as providing a necessary bal-
ance to state power. They viewed INGOs as bringing greater pluralism and
democratization in the development process. Finally, radicals saw INGOs
as bottom-up initiatives capable of promoting social change and addressing
inequalities of power. INGOs therefore became the favorite instrument—
some even suggested them as the “Magic Bullet” (Edwards and Hulme,
1995)—of development policy.
 NGOs—International Dimension ◾ 245

Most SNGOs are financed by INGOs or foreign donors with the idea that
direct aid to NGOs is supposed to reduce corruption that governments in
these countries would otherwise engage in with such aid. As an example, in
2008, 48% of WFP’s (World Food Program) global food aid was channeled
through NGOs (WFP, 2009). Thus the availability of foreign funds further
explains the rise of NGOs in developing countries.

3. General economic growth:

As Salamon (1994) pointed out, the general growth in material well-being
has led to the development of new attitudes and priorities among citizens.
Material affluence has created values that are beyond satisfying the basic level
needs (among the middle and upper classes). These values generally relate to
social justice, equity, public interest, environmental rights, human rights, and
so forth. Such development has prompted the growth of NGOs focusing on
promoting those rights and interests.

Besides the above three reasons, there are additional reasons for the increasing
growth of NGOs as discussed by other scholars. Reimann pointed out that “[R]
ather than simply emerging as a result of bottom-up sociological and technologi-
cal forces, INGOs and NGOs have also emerged and grown in large part because
of top-down processes of political globalization, i.e., the globalization of political
structures, institutions, and Western liberal democratic values” (2006, 46). Citing
“political opportunity structure” (POS), Reimann makes the claim that the two
components of POS—expanding opportunities for resource mobilization and
political success—are crucial variables that have spurred the growth of NGOs. As
international institutions and regimes have expanded to handle new global issues,
they have increasingly promoted NGOs as their service providers and advocates.
He argues that in the past two decades, an explosion of new international opportu-
nities for funding and participation of NGOs has created a structural environment
highly conducive to NGO growth.
The rise of intergovernmental organizations such as the World Bank and the
WTO (World Trade Organization) is another major factor that has stimulated
the growth of NGOs. These organizations have provided new political opportuni-
ties at the international level, including access to new arenas for political action,
international elite allies, and other resources as legitimacy and international media
attention (Passy, 1999; Smith, 2000). Boli and Thomas (1999) explained that the
creation of new international institutions and their rapid growth in the postwar
period have stimulated NGO growth worldwide by providing new political oppor-
tunities and incentives to organize. “More specifically, as the international system
has expanded over time it has increasingly offered two types of international oppor-
tunities that are also crucial factors for the growth of citizen groups at the national
level: (1) resources in the form of grants, contracts, and other kinds of institutional
246 ◾ Effective Non-Profit Management

support (food aid, transportation costs, etc.) and (2) political access to decision-
making bodies and agenda-setting arenas” (Boli and Thomas, 1999, 48).
New political opportunities also explain the striking rise of INGOs. For exam-
ple, the end of the Cold War has reduced the barriers to INGO action, facilitat-
ing their internationalization. INGOs could now move into countries previously
under Soviet influence, and the end of many regional conflicts formerly fueled by
the Cold War allowed INGOs broader access across the globe. There are also now
greater opportunities for NGOs to participate in global governance. For example,
since the 1972 Stockholm Conference,3 NGOs and INGOs have been gaining
access and influence in UN-organized global summits on various social issues such
as the environment, women rights, and development.

9.3 Differences across Countries

NGO practices and processes across the different countries are as divergent as the
countries themselves. The following discussion uses examples from different coun-
tries and regions to illustrate some of the major differences.

9.3.1 Formation and Legal Structure

Let us start with some of the Middle Eastern countries’ experiences, one of the
least-known regions of NGO work. McFarquhar pointed out, “[T]he Middle East
is not monolithic: there are a wide variety of laws and practices throughout the
region, and there are enormous differences between a country such as Egypt, with
16,000 registered NGOs and a country such as Saudi Arabia, which bans almost
all forms of private associations” (quoted in Elbayar, 2005, 4).
NGOs in Algeria, for example, operate under very restrictive laws. The main
law governing NGOs (Association Act of 1990) is a highly restrictive law adopted
shortly before the military coup that followed Algeria’s long decade of violence and
terrorism. The act requires a nonprofit to obtain a license from the government
(governor of the province where they will have the headquarters) prior to forming
the organization. This goes against the vast majority of NGOs which are informal
organizations. As Elbayar noted, “Mandatory licensing is common in the Middle
East, typically justified by government’s fear of Islamic fundamentalist and terror-
ist groups” (1995, 5). Foreign NGOs that want to establish offices have to get their
licenses approved by the Ministry of Interior regardless of the geographic scope
of their operation. Furthermore, foreign donation must be pre-approved by the
Ministry of Interior. In Algeria, NGOs do not enjoy tax exempt status. Elbayar
(2005) further pointed out that Egypt exemplifies a country where the Ministry
of Insurance and Social Affairs (MOSA) requires mandatory licensing. Foreign
NGOs are not allowed to operate in Egypt without securing the permission of the
Ministry of Foreign Affairs. MOSA has the authority to dissolve any NGO at any
 NGOs—International Dimension ◾ 247

time if it finds that the organization is “threatening national unity” or “violating

public order or morals.” Although the agency can appeal it to an administrative
court, an appeal can take several years in the Egyptian’s backlogged court. The
law further imposes severe penalty for non-compliance with the law. The penalties
include up to one year in prison and a fine of up to 10,000 Egyptian pounds for
establishing an association that threatens “national unity” or “violates public order
or morals” (Elbayar, 2005, 10). The Egyptian government prohibits NGOs from
receiving funds without its permission, which is rarely granted (Abdalla, 2008, 27).
Libya stands in sharp contrast to these countries in the sense that the Libyan
constitution provides no guarantee of a right to association. The sole statutory right
of association comes from Law 71 of 1972, which grants individuals the right to
associate only through institutions run by government. Any NGO or otherwise
independent organization is “contrary to the revolution” and therefore illegal;
members are subject to extreme punishments, including execution. “Libya along
with Saudi Arabia, has the dubious distinction of having the most extreme and
restrictive NGO law in the Middle East and perhaps in the entire world” (Elbayar,
2005, 18). The 2011 Libyan revolution, death of Colonel Gaddafi and the new tran-
sitional government give the country an opportunity to visit these highly restrictive
laws; but one has to wait and see what the future lies ahead for Libya. In contrast
to Libya, Palestine’s NGO law places virtually no limitations on the rights of an
NGO. As Elbayar (2005) pointed out, they are free to engage in public policy
debates, raise funds from foreign and domestic sources, and merge and dissolve
without government interference. They can affiliate with foreign or domestic orga-
nizations without seeking government permission, and foreign NGOs are free to
establish branches as long as approval is given by the Minister of Interior and the
Ministry of Planning and International Cooperation.
In several African countries, similar to these Middle Eastern countries, NGOs
are required to register. As an example, the legal and regulatory framework in
Kenya for NGOs is the NGOs Co-ordination Act of 1990 and its Regulations of
1992. The Act provides for mandatory registration of NGOs. It outlaws any activity
for unregistered NGOs (Jillo and Kisinga, 2009).
NPOs in Central and Eastern Europe (CEE) resemble more of what we have
here in North America. Included in this region are countries like the Czech
Republic, Hungary, Kosovo, and Macedonia, Romania, Montenegro, Estonia,
Slovakia, and Croatia. Every country in Central and Eastern Europe guarantees
the freedom of association; usually the source is the constitution. All these coun-
tries require NGOs to register before they can become legal persons. To qualify for
the “public benefit status,” a NGO must be principally dedicated to public benefit
purposes and activities.
The principal regulatory authority over NGOs varies from country to country
in the CEE region. For Bulgaria and Hungary, it is the public prosecutor of the
district where the NGO is registered, whereas for Estonia and Slovakia, it is the
Ministry of Interior (Rutzen et al., 2009).
248 ◾ Effective Non-Profit Management

Foreign organizations that want to register a branch office are usually required
to submit the following documents: proof that the organization is registered in
another country; governing documents that show the goals and activities; an offi-
cial decision to establish a branch in a given country; and the address of the branch
office and name of the representative.
Canadian NGOs resemble closely that of U.S. NPOs. The Canada Customs
and Revenue Agency (CCRA) is the government department responsible for grant-
ing organizations charitable tax status. The process routinely takes 6 months to 18
months and requires applicants to fulfill a number of requirements. Similar to the
U.S. nonprofits, charitable organizations can issue receipts to donors for income tax
purposes. Other nonprofits that are not charitable (e.g., a club, or society) but are
organized and operated exclusively for social welfare, civic improvement, pleasure,
or for any other purposes except for profit, and follow the non-distribution con-
straints also have exempt status but cannot issue a tax deductible receipt.
Similar to in the United States, in France, a non-profit association can func-
tion without being declared. In this case it does not exist as a legal entity and falls
under the collective ownership of all its members. However, the association must be
declared if a bank account is needed, if it collects membership fees or arranges fund-
raising, or if the members undertake any legal action or buy or sell on its behalf.
Declaration requires the following: Declaration with the Préfecture (territorial
subdivision of the Ministry of Interior), and Declaration of the association’s cre-
ation in the Official Journal (Journal Officiel). The Official Journal is a daily paper
edited by the French government containing legal information, official declara-
tions, and information concerning new associations.
The declaration must contain the following information:

◾◾ The exact name of the association followed by its abbreviation if there is one.
◾◾ The object or aim of the association.
◾◾ The address of the main office (a physical address, not post box).
◾◾ The full names, addresses, birth dates, and birthplaces of the people in charge
of the administration.
◾◾ A copy of its statute dated and certified by at least two people or by the
founder members (standard statutes are available from the Préfecture, they
may be adapted).

South Asia is rich in terms of the NGO sector. Several countries in that region
are well-known for their prominent NGO sector. In Bangladesh, NGOs can
take different forms: unincorporated associations, societies (under the Societies
Registration Act of 1860), trusts (under the Trusts Act of 1882), or Cooperatives
(under the Cooperatives Act of 1940), and as private limited companies (under the
Companies Act of 1913). All NGOs engaged in welfare activities and dependent on
resource from public, government aid, or intend to obtain foreign aid must register
with the Directorate of Social Welfare. Any NGO that receives foreign funding
 NGOs—International Dimension ◾ 249

must also register with the NGO Affairs Bureau (NGOAB). The Bureau provides
a one-stop service for the registration of NGOs, approval of their projects and dis-
bursement of funds, appointment and tenure of service of expatriate officials and
consultants. It also reviews reports submitted by NGOs; monitors, inspects, and
evaluates NGOs’ programs and budgets; and maintains liaison with NGOs and
donor agencies. Similarly in India, NGOs in order to receive foreign funding must
register with the Ministry of Home Affairs and have its permission to receive grants
from foreign donors.

9.3.2 Political Activity
The term “political activity” is subject to multiple interpretations and meanings.
In one sense, most NGO activities have some political dimension. When NGOs
engage in activities such as supporting or opposing candidates for public office,
supporting particular political parties, lobbying against specific laws, engaging in
public advocacy and in policy debate, they are participating in political activities.
NGOs across the regions vary in regard to the freedom they have to engage in one
or more of these political activities.
As reported by Rutzen et al. (2009), in Bosnia and Herzegovina registered asso-
ciations cannot engage in electioneering, fundraising of candidates or financing of
candidates or political parties. But in Estonia, NGOs can lobby, and in sharp con-
trast, in Slovakia they can endorse candidates, lobby or even contribute to campaign.
Similarly, Poland law explicitly gives NGOs the right to public expression; they can
engage in almost any political activity even participation in electoral campaigns.
NGOs that are classified as charitable in common-law4 countries tend to restrict
their ability to engage in public policy or political activities, due to their inher-
ently partisan character. For example, in England as in Canada (both common-law
countries), a charity can never be formed for the primary purpose of engaging in
political activities (International Center for Not-for-Profit Law, 2009, 8).
Civil law countries5 in contrast follow a more relaxed regulatory approach
regarding NGOs political activities. France, Holland, Italy, Spain, and Germany,
for example, do not place any restraints upon the public policy activities of NGOs.
“In fact, some civil law countries actively encourage NGOs’ political activities. In
Belgium, for example, there is an explicit right entitled—droit de critique (right to
criticize), which permits associations to use all legal means to defend interests and
ideas of organizational objectives” (International Center for Not-for-Profit Law,
2009, 9). In Germany, political parties set up foundations specifically for the pur-
pose of channeling resources into partisan activities. However, tax-exempt organi-
zations in Germany are not allowed to engage in campaign activities.
In England and Wales, charitable NGOs cannot have a political purpose. A
charity cannot set up to pursue purposes that are party-political or aimed at a
change in the law of government. French law recognizes two forms of NGOs:
associations and foundations. Associations could be “public benefits” or “private.”
250 ◾ Effective Non-Profit Management

All foundations must serve a public benefit purpose. Public benefit status has two
forms: general interest, in which the organization’s donors are eligible for tax bene-
fits; and pubic utility that entitles the organization to the benefits of general interest
status as well as additional tax and fiscal preferences. The extent NGOs can engage
in political activities depends on their legal and public benefit status. Public util-
ity associations and public utility foundations may not engage primarily in politi-
cal activities. However, “[C]ampaigning, lobbying, and advocacy are not expressly
regulated with regard to general interest status” (Suplisson, 2009, 28).
In Bangladesh, NGOs are increasingly seen as political entities. According to
Khan, “some of the big NGOs have taken sides in recent years either in favor or
against major political parties and have tried to influence voter choices in local and
national elections” (2003, 269). However, there are currently no provisions in law
clearly dealing with the issue of political activities by NGOs in Bangladesh (Irish
and Simon, 2005). NPOs in India may not engage in political campaign activi-
ties or legislative activities. Indian NPOs may “lobby” for non-political causes,
however, provided that such activity promotes the “general public utility” and is
incidental to the attainment of the charity’s objects. Similar to Bangladeshi NGOs,
Indian NGOs receiving foreign funding are prohibited from activities associated
with any political party.

9.4 International Non-Governmental Organization

(INGO) Structure and Organization
As mentioned earlier, International Non-governmental Organizations (INGOs),
NGOs with operations in two or more countries, are a significant component of
the NGO world. In order to maintain their international operations, they usually
have an international secretariat or council, national chapters, and local offices to
coordinate activities between the international and national/local levels.
Following are three examples that explain the common/usual structures and
operations of INGOs.

9.4.1 Doctors Without Borders

Doctors Without Borders/Médecins Sans Frontières (MSF)6 is an international
medical humanitarian organization created by doctors and journalists in France
in 1971. The goal of this organization is to provide quality medical care to people
faced with health crisis due to factors including violence, armed conflict, natural
disasters, epidemics, lack of healthcare, and malnutrition. Along with providing
direct medical assistance, it advocates attention to promote better healthcare and
challenges inadequacies or abuse of the aid system. Currently, it provides aid to
people in approximately 60 countries.
 NGOs—International Dimension ◾ 251

MSF has offices in 19 countries (known as associative associations): Australia,

Austria, Belgium, Canada, Denmark, France, Germany, Greece, Holland, Hong
Kong, Italy, Japan, Luxembourg, Norway, Spain, Sweden, Switzerland, the United
Kingdom, and the United States. Each association is responsible to a board of direc-
tors elected by its members (MSF’s current and former field staff members) during
an annual general assembly.
In addition, MSF has an international office (coordinates international activities
common to the operational centers) in Geneva, an Access to Essential Medicines
Campaign office in Geneva, and two UN liaison offices, one in Geneva and one in
New York City.
There is an International Council where each of the 19 national offices are
represented. The International Council makes common policies on core issues.
Operational decisions of this INGO are made, largely independently, by the five
operational centers in Amsterdam, Barcelona, Brussels, Geneva, and Paris.

9.4.2 Amnesty International 7
Amnesty International’s (AI) main goal is to campaign for the protection and
respect of internationally recognized human rights.
Its membership is based on a worldwide voluntary membership and consists
of national branches (sections and structures) in over 80 countries, international
networks, affiliated groups, and international members. There is an International
Council that has the statutory authority to conduct the agency’s affairs. Its main
functions include developing strategies, visions, missions, and strategic plans, con-
ducting a performance assessment, establishing governing bodies and their func-
tions, electing members to those bodies, and maintaining accountability of the
different structural components of the agency. The International Council elects an
International Executive Committee that provides leadership to AI and carries on
the following functions:

1. Make international decisions.

2. Ensure that there is sound financial policy and that the financial policy is
consistently implemented across the international organization.
3. Ensure implementation of the Integrated Strategic Plan.
4. Make any necessary adjustments to the Integrated Strategic Plan and other
decisions of the International Council.
5. Ensure compliance with the statute.
6. Ensure human resources development.
7. Hold national sections, structures, and other bodies of AI accountable for
their functioning by presenting reports to the International Council.
8. Perform other functions conferred on it by the statute.
252 ◾ Effective Non-Profit Management

The day-to-day affairs of AI are conducted by the International Secretariat

(based in London) headed by a Secretary General under the direction of the
International Executive Committee.

9.4.3 Transparency International
Transparency International (TI)8 is a global network that includes more than 90
national chapters and chapters-in-formation. These bodies fight corruption in the
national arena in a number of ways. They bring together relevant players from
government, civil society, business, and the media to promote transparency in elec-
tions, in public administration, in procurement, and in business. Its mission is to
“create change towards a world free of corruption.” TI’s global network of chapters
and contacts also use advocacy campaigns to lobby governments to implement anti-
corruption reforms.
Its organizational structure includes the national chapters, an international sec-
retariat, a board of directors, a group of senior advisors, and millions of volunteers
across the globe.
The board of directors is the central governing body and is elected at the
annual membership meeting by accredited national chapters and individual
members. National chapters are independent, locally established organizations
who actively address corruption in their respective countries, implementing
their own national programs as well as agreed global and regional strategies. TI
national chapters are also instrumental in shaping the movement’s strategy and
policies, and often work together on regional priorities. There is an accreditation
process that a prospective chapter has to go through in order to become a partner
of TI.
The national chapters work closely with the International Secretariat which also
coordinates initiatives across the regions. TI is governed by its charter. Its ulti-
mate decision-making body is an annual membership meeting that brings together
accredited national chapters and individual members.
It also has an advisory council consisting of prominent individuals and
appointed by the board of directors to advise the board and to support the work of
the organization.

9.5 NGO Roles
Traditionally most NGOs started as relief organizations, however, over the years,
their roles have evolved and significantly expanded into other major realms includ-
ing development, advocacy, and political. What follows here is an overview of some
of these major roles.
 NGOs—International Dimension ◾ 253

9.5.1 Relief
Until the 1970s, NGOs and the prominent INGOs were mostly seen as playing an
active role during emergency situations in terms of providing relief to affected indi-
viduals, groups, and countries. INGOs have roots in Christian missionary orga-
nizations that date back, in some cases, to the sixteenth century (of course, they
were not called NGOs at the time). During the colonial period, missionary orga-
nizations combined religious work with education, provided relief to famine and
disaster, and introduced Western medicine in indigenous societies across the globe.
The modern secular NGOs got their start with the creation of the Red Cross
in the 1860s. Like the Red Cross, several of today’s best-known NGOs grew out of
war. Save the Children was founded in 1920 during the dislocations that followed
World War I, Foster Parents Plan during the Spanish Civil War, Oxfam and CARE
during or just after World War II, and World Vision during the Korean War. Like
their religious counterparts, the early work of these organizations tended to focus
on short-term relief, an emphasis that was understandable given the circumstances
in which they were founded.
Charity and relief aids remain key NNGO roles today. Today thousands of
NGOs, some very well known (e.g., Doctors Without Borders, World Vision,
Red Cross Society, Relief International) and others less known (MADRE, Mercy
Corps) are still mostly engaged in relief aid.
We see a similar pattern of focus for SNGOs. Considering the reality that most
southern countries are developing and poor, providing relief service during natu-
ral disasters (e.g., flood, famine, drought) or man-made disaster (e.g., civil war,
tribal clash, industrial accidents) is a main function of SNGOs. As an example,
at the aftermath of the 2007 Cyclone Sidr9 in Bangladesh, several NGOs includ-
ing Bangladesh Rural Advancement Committee (BRAC) actively provided relief
services to affected areas and individuals. Similarly, during the 2004 Tsunami in
south Asia, local and international NGOs played a very important role during the
relief and recovery activities. (See Box 9.3.)

9.5.2 Social and Economic Development

Numerous NGOs, both Northern and Southern, provide services, intangibles (e.g.,
technical), as well as more tangible resources for development and other purposes.
Several of them operate their own development programs. Over the years, some
relief organizations have combined development assistance as a major part of their
mission. For example, CARE (Cooperative for Assistance and Relief Everywhere)
has a major component of development assistance that includes supporting a vari-
ety of agricultural projects such as building irrigation systems, establishing farmer
cooperatives, and fighting deforestation. Similarly, Catholic Relief Services (CRS)
offers loans for small businesses, builds water projects, and promotes new farming
technologies in addition to its relief work.
254 ◾ Effective Non-Profit Management

BOX 9.3 HAITI EARTHQUAKE—

HUMANITARIAN RESPONSES BY NGOs
January 12, 2010, a massive earthquake struck Haiti, killing an estimated
230,000 people and leaving millions homeless.
The Chronicle of Philanthropy announced on May 12 (2010) that over
$1.1 billion had been donated to support relief efforts in Haiti. The largest
recipients include the American Red Cross ($444 million), Catholic Relief
Services ($135.7 million) and Oxfam International (over $100 million) (http://
philanthropy.com/article/11-Billion-Donated-for-Haiti/65479/?sid=andutm_
source=andutm_medium=en).
Following are some specific examples of the types of relief aids that some
NGOs provided:

1. Oxfam: Delivered essential aids (water, latrines, plastic sheeting, other

relief materials along with cash payments for work and small business
grants) to more than 300,000 people, most of whom were living in
temporary camps.
2. Doctors Without Borders: As of April 1, 2010, it has spent or commit-
ted to spend 40 million pounds on its medical humanitarian work in
post-earthquake Haiti (http://www.doctorswithoutborders.org/news/
article.cfm?id=4365andcat=field-news). Its work includes treating burn
victims, providing psychological care, providing maternity and emer-
gency obstetric care, donating dialysis machines to care for crush inju-
ries and chronic diseases, and different types of postoperative care.
3. Direct Relief International: Distributed $34.8 million to support the
injured and to secure warehouse outside of Port-au-Prince. The agency
also committed $2 million cash to disability programs in Haiti (http://
www.directrelief.org/EmergencyResponse/2010/EarthquakeHaiti.
aspx?gclid=CO7bhOHE2qECFYd-5Qod6WrwKw).
4. Catholic Relief Services: Distributed 10.6 million rations of food, pro-
vided emergency shelter materials to approximately 90,000 people.
The agency in collaboration with the University of Maryland, has
healthcare teams including 20-plus doctors, nurses, and aides work-
ing in 10 camps, settlements, and hospitals, treating an average of 350
patients a day. Medical personnel have conducted a total of 59,246
outpatient consultations (http://crs-blog.org/is-haiti-aid-money-being-
spent-quickly-​enough/).

Enterprise support activities and income-generation support projects are wide-

spread among the SNGO population. Some have developed their enterprise activi-
ties to such an extent that they are seen as specialists in this area, particularly
 NGOs—International Dimension ◾ 255

BOX 9.4 BRAC (BANGLADESH RURAL

ADVANCEMENT COMMITTEE)
Mission: To empower people and communities in situations of poverty,
illiteracy, disease, and social injustice (http://brac.net).
Programs: A variety of economic and social programs including micro-
finance, non-formal and primary education, health programs, human
rights and legal services, agriculture programs, and promoting solar
energy.
BRAC currently has operations in 10 other countries including the United
States and United Kingdom.

Selected Achievements/Outcomes
1. MicroFinance: Approximately 8 million members (i.e., loanees),
total loan disbursement $5.2 million; 93% recovery rate.
2. Health: Successfully treated 56,865 cases of malaria.
3. Education: Serving more than 700,000 students, and provided
training to over 3,500 teachers.
4. Human Rights and Legal Services: Provided legal education to
138,194 poor women, and assisted 23,335 community members in
taking legal action to secure their rights.
Note: In 2009, Fazle H. Abed (BRAC’s founder) received the first ever
“Entrepreneur for the World Award,” by the World Entrepreneurship
Forum.
Source: BRAC’s 2008 Annual Report.

those focusing on the provision of microfinance. Organizations such as the Kenya

Rural Enterprise Program (K-Rep) and Kenya Women’s Finance Trust (KWFT);
Independent Business Enrichment Centres (IBEC) and Get Ahead in South Africa;
AMKA (Export Marketing Enterprise Agency) in Tanzania, and Zambuko in
Zimbabwe are recognized internationally in this respect. Other NGOs have incor-
porated enterprise-oriented activities into their portfolio of development work.
Examples include Bangladesh Rural Advancement Committee (BRAC) (Box 9.4),
PROSHIKA, and Association for Social Advancement (ASA) in Bangladesh; and
Self-Employed Women’s Association (SEWA) in India.

9.5.3 Political
While traditional NGO roles of relief and development remain prominent, another
major role is significantly defining the sector, and that is their political role and
256 ◾ Effective Non-Profit Management

BOX 9.5 GREENPEACE: A GLOBAL

ENVIRONMENTAL ORGANIZATION

Structure: Greenpeace International (in Amsterdam) and 28 national and

regional offices in over 40 countries.
Mission: Selective recent positive impacts due to its advocacy.

1. February 2010: Indian computer manufacturer Wipro announces

the launch of a new PVC (Polyvinyl Chloride) and BFR (Brominated
Flame Retardant)-free computer, after several years of pressure by
Greenpeace on tech companies to provide toxic-free electronics.
2. November 2009: Household chemical giant Clorox announces a
phase out of the use and transport of dangerous chlorine gas in the
United States, bowing to years of pressure on the industry from
Greenpeace.
3. October 2009: Apple clears the last hurdle to removing toxic PVC
plastic in its new Macbook and iMac, capping the “Green my
Apple” campaign with a win and making Apple products safer,
easier to recycle, and causing less pollution at the end of their life.
4. August 2009: In a tremendous victory for ancient forests, Kimberly-
Clark, the company known for its popular brands like Kleenex,
Scott, and Cottonelle announces a policy that places it among the
industry leaders in sustainability. The announcement brings the
5-year Greenpeace campaign to a successful completion.
5. March 2009: The Great Bear Rainforest protection agreement
comes into force in Canada, capping one of Greenpeace’s longest-
running campaigns by protecting an area half the size of Switzerland
from logging.

Source: Greenpeace International: http://www.greenpeace.org/international/

(accessed May 17, 2010).

related activities. There is a growing realization that numerous NGOs (both

Northern and Southern) are actively engaged in a variety of advocacy, lobbying,
and agenda-shaping activities—all inherently political.
Advocacy has become a prominent role of many NGOs. Examples of advocacy
work include AI’s activities to protect internationally recognized human rights,
the different environmental NGOs’ (e.g., Greenpeace) (Box 9.5) efforts to protect
the environment, and women NGOs’ goal to promote the rights of women. These
are carried on by individual NGOs, by coalitions of NGOs, and oftentimes by
 NGOs—International Dimension ◾ 257

global advocacy networks. Keck and Sikkink (1998) observed that a new type
of NGO actor, the transnational advocacy network, has emerged in the global
arena. They explained, “[N]etworks are forms of organization characterized by
voluntary, reciprocal, and horizontal patterns of communication and exchange…
(W)e call them advocacy networks because advocates plead the causes of others
or defend a cause or proposition. Advocacy captures what is unique about these
transnational networks: they are organized to promote causes, principled ideas,
and norms, and they often involve individuals advocating policy changes that
cannot be easily linked to a rationalist understanding of their ‘interests’” (Keck
and Sikkink (1998, 8–9).
Closely related to NGOs’ advocacy role are their lobbying activities. It is no sur-
prise that NGOs lobby their governments, other governments, and different power-
ful international organizations. Environmental protection represents an important
issue area in which NGOs are very active. Various prominent NGOs, including
Greenpeace, World Wildlife Fund, and Friends of the Earth, actively lobby govern-
ments to protect the environment. According to Porter and Brown (1996), NGO
negotiations on Antarctic minerals with key government officials, which eventu-
ally led to the development of The Protocol on Environmental Protection to the
Antarctic Treaty, is an exemplary one in this respect. The Protocol on Environmental
Protection to the Antarctic Treaty was signed in 1991, banning all mining activities
including prospecting, exploration, and development in the Antarctic region for
50 years. It is widely acknowledged that the treaty became a reality due to years of
NGOs’ advocacy and lobbying of government officials.
Public education and consciousness raising are two related activities with politi-
cal implications. Lacking many of the tools of influence used by states and mul-
tinational corporations, NGOs often rely on the presentation of information to
make their case. NGO mandates cover a broad spectrum of activities, and usually
include outreach activities to educate local, national, or international governments
and institutions (Maran, 1998). Indeed, NGOs’ most important work may lie in
the area of political socialization. For example, one of the strategies of Greenpeace
is to bring instances of environmental abuse to the attention of people throughout
the world. It does so through television, radio, newspapers, and magazine stories.
Monitoring national and transnational actors has become another major goal of
various NGOs. Toward that end, NGOs engage in a wide range of activities designed
to ensure that states comply with the laws they have made and international treaties
they have signed. As examples, the International Union for the Conservation of
Nature and Natural Resources (IUCN) oversees the implementation of the World
Heritage Convention; the Women’s Environment and Development Organization
(WEDO) monitors women’s status and violation of rights; and AI monitors the
treatment of political prisoners.
NGOs monitor multinational corporations and intergovernmental organiza-
tions as well. For more than a decade, nongovernmental environmental and devel-
opment organizations have formed diverse transnational advocacy coalitions, both
258 ◾ Effective Non-Profit Management

within the Northern industrial countries and across the developing South, to pres-
sure different multilateral banks to be more transparent and accountable. As Uvin
explained, “NGOs have been faster and more active in lobbying international orga-
nizations than governments. These institutions are relatively easy to influence, and
pose no danger: they have no power to imprison or torture NGO staff” (2000, 19).
Many NGOs are now actively involved in agenda setting at the global decision-
making arena. Thousands of NGOs attend different conferences and present infor-
mation to different UN agencies, commissions, and field offices. Furthermore,
international agencies like the IFAD (International Fund for Agricultural
Development), UNDP (United Nations Development Programme), WHO (World
Health Organization), UNCHR, (United Nations Commission on Human Rights),
and World Bank all have regular NGO consultation meetings. Often NGOs play a
leading role in promoting the various dedications of “days,” “years,” and “decades”
that the UN system regularly proclaims.
NGO agenda setting now occurs at the international level, particularly in the
deliberations that take place at the United Nations. UN Charter article 71, issued
in 1945, empowered the Economic and Social Council (ECOSOC) to “make suit-
able arrangements for consultation with non-governmental organizations which
are concerned with matters within its competence.” Since then, their influence has
grown steadily, to cover all the work of the Economic and Social Council, along
with operational programs in developing countries, the specialized agencies, and
the UN conferences. They have access to all UN documents, once they are officially
released. In addition, they are able to attend different meetings and proceedings.
This means that they can gain high levels of information about the political pro-
cess. NGOs with consultative status have security passes that give them access to all
the buildings, including the lounges, bars, and restaurants used by the diplomats.
This gives them access to the delegates, which in turn gives them the opportunity
to obtain more information through informal discussion, including hearing about
what happened at the private meetings. Box 9.6 provides information on the eligi-
bility and the process for NGOs to attain such consultative status.
Finally, being awarded consultative status gives NGOs a legitimate place within
the political system. This means that the NGO activist is seen as having a right to
be involved in the process. As a result, in the informal contacts with delegates, it
is possible to express views about issues on the agenda and to lobby for particular
decisions to be taken.
The above exposure to information gives NGOs the opportunity to influence
agenda-setting processes at the United Nations. There are wide-ranging policy areas
(protection of the environment, women’s rights, individual rights) where the main
issues have been seriously considered because of the work of different NGOs at dif-
ferent UN conferences.
As of November 9, 2011, there are 3,534 NGOs in consultative status with the
UN (http://esango.un.org/civilsociety/displayConsultativeStatusSearch.do?metho
d=searchandsessionCheck=false).
 NGOs—International Dimension ◾ 259

BOX 9.6 GAINING CONSULTATIVE

STATUS WITH THE ECOSOC

Who grants the Consultative status?

ECOSOC upon recommendation of the ECOSOC Committee on NGOs,
which is composed of 19 Member States.

Who is eligible?
An NGO which is in existence (officially registered with the appropriate
government authorities as an NGO/non-profit) for at least 2 years, has an
established headquarters, a democratically adopted constitution, democratic
structure and processes, and its work directly relates to the aims and purposes
of the United Nations.

What is the application process?

1. Online registration with the UN Department of Economic and Social
Affairs (DESA).
2. Online application and submitting of supportive documents (viz., orga-
nization’s charter, evidence of registration, recent financial statement,
organizational chart).
3. NGO branch, DESA, review of application for completion and
eligibility.
4. NGO Committee reviews and forwards recommendations to the UN
ECOSOC.
5. ECOSOC makes the final decision.

9.6 Issues
There is no doubt that NGOs are now prominent in world affairs, socioeconomic
development, national economies, and in national and international politics. Their
contributions have been acknowledged by international fame and recognition as
manifested in their receiving the Nobel Peace prize several times (Box 9.7).
The growth and visibility of NGOs have brought into surface several issues/
challenges that the sector needs to address to continue its viability and maintain its
image of a “positive” player in world affairs. Following are some major challenges.

9.6.1 Strategy
Over the recent years, some of the strategies that NGOs have pursued in their
advocacy efforts have been criticized severely by the media and other stakeholders.
260 ◾ Effective Non-Profit Management

BOX 9.7 NGOS AWARDED THE NOBEL PEACE PRIZE

Organization/Person Year of Award

Henri Dunant 1901
Institute of International Law 1904
Permanent International Peace Bureau 1910
International Committee of the Red Cross 1917
International Committee of the Red Cross 1944
Friends Service Committee (UK) 1947
American Friends Service Committee 1947
International Committee of the Red Cross 1963
Amnesty International 1977
International Physicians for the Prevention of Nuclear War 1985
International Campaign to Ban Landmines/ Jody Williams 1997
Medecins Sans Frontieres 1999
Grameen Bank/Professor Yunus 2006
Source: Ahmed, S., and D. Potter, 2006, NGOs in International Politics, West
Hartford, CT: Kumarian. Reprinted with permission of Kumarian/
Stylus.

An example is the case with the 2008 Olympic torch journey. By hosting the
Olympic games in Beijing in August 2008, the Chinese government had hoped to
provide a showcase for the country’s economic boom and to celebrate its new role
on the world stage. The games were prepared with great professionalism. However,
in March 2008, a few weeks before the launch of the Olympic torch relay, that
would visit 21 countries over 130 days, protest demonstrations were held in Tibet
in demand for greater freedom in the country. The rioters were violently repressed
by Chinese officials, resulting in more than 100 deaths. Tibet was closed to the
international media. At the end of March, the flame-lighting ceremony in Greece
was hit by protesters from “Reporters sans Frontie`res” (reporters without borders)
who breached heavy security to unfurl a banner behind the Chinese official who
was giving a speech. One week later, thousands of French police struggled to allow
the Olympic torch to move through the crowd. Protesters objected to China’s poli-
cies in Tibet and to its human rights shortcomings, leading to chaotic scenes and
protesters scaling the Eiffel Tower. The Chinese, who had hoped to promote the
event as a “journey of harmony” and of understanding between China and the
West, were indignant. A few days later, demonstrators also organized to block the
torch’s route in London and in San Francisco, where the route had to be changed
(Fassin, 2009).
 NGOs—International Dimension ◾ 261

Take another case that occurred more than a decade ago, the 1999 protests (also
known as N30) in Seattle against the World Bank and the International Monetary
Fund (IMF). On November 30, 1999, the WTO (World Trade Organization)
Ministerial Conference was convened for three days, in Seattle, Washington.
The negotiations were quickly overshadowed by massive and controversial street
protests by different groups of activists against globalization.10 Among the most
notable participants were national and international NGOs (especially those con-
cerned with labor issues, the environment, and consumer protection), labor unions
(including the AFL-CIO), student groups, religious-based groups, and anarchists.
Over the course of 3 days, protesters blocked delegates’ entrance to WTO meet-
ings in Seattle. The protests forced the cancellation of the opening ceremonies and
lasted the length of the meeting until December 3. There was a large, permitted
march by members of the AFL-CIO, and other unauthorized marches by assorted
affinity groups who converged around the Convention Center. The protesters and
Seattle riot police clashed in the streets after police fired tear gas at demonstrators
who blocked the streets and refused to disperse. Over 600 protesters were arrested
and thousands were injured. Three policemen were injured by friendly fire, and
one by a thrown rock. Some protesters destroyed the windows of storefronts of
businesses owned or franchised by targeted corporations such as a large Nike shop
and many Starbucks windows. The mayor of Seattle put the city under the munici-
pal equivalent of martial law and declared a curfew. By 2002, the city of Seattle
had paid over $200,000 in settlements of lawsuits filed against the Seattle Police
Department for assault and wrongful arrest, with a class action lawsuit still pend-
ing. The protest was criticized by some as the work of some scattered activists with
no focus (Klein, 2000).

9.6.2 Accountability
A major emerging criticism of NGOs is that they are not sufficiently accountable.
Unlike the for-profits, NGOs do not have shareholders, and unlike government,
they are not elected bodies. Especially for INGOs, most of their work takes place
outside their country of origin, which raises a different level of accountability issue.
While INGOs obtain funds from various sources (private fundraising through
the Internet, intergovernmental organizations, or country donors), those funds do
not require approval, for activities undertaken by INGOs, by the communities in
which they work. As Szporluk (2009) argued, the individual communities in the
“Global South” have little or no influence over which INGO works there and on
what sort of project. Thus, there is good reason for caution. The other problem
is that NGOs have diverse stakeholders: donors, clients, the general public, and
governments (both where the NGO is headquartered and also for INGOs where
they work). When there are multiple stakeholders such as these, NGOs’ account-
ability becomes very convoluted. Should they be foremost accountable to donors or
to the clients? What if donors’ expectations do not match what clients’ needs are?
262 ◾ Effective Non-Profit Management

What about NGOs who are operating across national boundaries, like the INGOs?
Should they be accountable to their host countries or to their home country? All
these different stakeholders have different accountability criteria. As Koppel (2004)
explained, by trying to be too accountable to all its stakeholders about too many
ill-defined issues, a NGO’s ability to be accountable to anyone is reduced.

9.6.3 Legitimacy
Increasingly NGOs’ legitimacy is questioned. The main issue here is whether NGOs
represent the clients that they purport to serve. Questions like who elected Amnesty
International’s core members? Or, is there an unequal partnership between SNGO
and NNGO? Who shapes global agenda issues are becoming common debates in
NGO discourse.
NNGOs and INGOS are undoubtedly more powerful and have more resources
than most SNGOs. They also have easier access to the governments of developed
countries and the major IGOs (e.g., World Bank, International Monetary Fund).
Thus there is a common belief that they do influence the shape of major global
agenda or issues (e.g., global warming, AIDs).
Local NGOs are often financially dependent on partnerships with INGOs
or intergovernmental organizations. For example, in Kenya, CSOs receive more
than 90% of their operational and capital expenses from abroad (Szporluk, 2009,
347). This level of dependence means, first and foremost, that the local CSOs are
accountable to international donors rather than their home communities or local
institutions. Many CSOs may pursue projects that are not in fact the top priority
within their communities. CSOs will do this as long as foreign donor interest and
resources are available. This can thus delegitimize the CSO in the eyes of the com-
munity (Szporluk, 2009).

Case Study: NGO Security in Conflict Zones

In 2009, several international NGO workers were killed or
abducted. Following are snapshots of these tragic events.

1. On January 15, Jiri Zivny, a Canadian aid worker with

International Humanitarian Hope Society, died from inju-
ries sustained in a mugging over the previous week.
2. Four aid workers with the French-based medical char-
ity Medecins Sans Frontieres (MSF) were kidnapped in
Sudan’s Darfur region and later were released.
3. Three female aid workers from Dutch World Wide
Services Foundation were killed in June in Yemen.
 NGOs—International Dimension ◾ 263

4. In March, three Red Cross staff were killed by angry

mobs in Mozambique. The attacks on Red Cross staff
began when a rumor spread that the Red Cross and
local authorities were infecting wells and fountains with
cholera (http://www.charityandsecurity.org/background/
Aid_Workers_Killed_Abducted_World_2009).
5. On August 13, three International Rescue Committee work-
ers (a Canadian, a British-Canadian, and a Trinidadian-
American) along with the driver were killed near
Afghanistan’s capital, Kabul. Five gunmen carried on the
ambush. The Taliban spokesperson later on claimed that
they were spies. The three women and their two Afghan
colleagues were travelling from Gardez in the southeast to
Kabul in two clearly marked IRC vehicles when they were
attacked. Stunned by this tragedy, the agency announced
that it had suspended all its humanitarian aid programs in
the country—after 20 years of operating in Afghanistan
(http://news.bbc.co.uk/2/hi/south_asia/7558076.stm).

Today, as I am writing this chapter, I watch the news about

the recent (March 10, 2010), attack on World Vision’s office in
a remote village in Pakistan. Several gunmen threw grenades
killing six NGO workers.
As NGOs and INGOs are spreading their work in different
parts of the world and in some cases in regions engulfed with
conflicts, the issue of how to provide security to NGO workers,
both national and international, has become a delicate one.
The above incidents are not isolated ones. We are observing
a heightened risk of NGO workers everywhere. An example is
with Afghanistan. In 2003, 12 NGO staff were killed. In 2004
that figure doubled to 24 NGO fatalities (NGO Insecurity in
Afghanistan, Afghanistan NGO Security Office [ANSO] and
CARE, May 2005, http://www.care.org/newsroom/specialre-
ports/afghanistan/20050505_ansocare.pdf).
According to Aid Worker Security Database, in 2008, 260
humanitarian aid workers were killed, kidnapped, or seri-
ously injured in violent attacks. This toll is the highest on
record. Of the 260 victims in 2008, 185 were working with
NGOs (65 worked for the United Nations, five were work-
ing with the Federation of the Red Cross and Red Crescent
or the International Committee of the Red Cross, and the
remainder were donors or others) (http://ochaonline.un.org/
OchaLinkClick.aspx?link=ochaanddocId=1112615).
264 ◾ Effective Non-Profit Management

Today, whether it is in Pakistan, Afghanistan, Somalia,

Chechnya, Nepal, or Indonesia, to name but a few of the
world’s “hot spots,” humanitarian aid workers and other NGO
workers are increasingly coming under fire and facing risks
unimagined only a decade ago. Even a few years ago, the inde-
pendence and nonpartisanship of NGOs, their humanitarian
mandates, the universal respect for noncombatants delivering
aid, and an accepted sense of common decency gave them the
protection; however, these do not apply anymore.
Different reasons explain the increased risk for NGO
workers:

1. Increase in number and duration of conflicts.

2. Aid agencies often are perceived as soft targets that can be
attacked with impunity due to their lack of communal or
diplomatic ties with the combatant.
3. Perceived erosion of neutrality and legitimacy of NGOs.

NGOs are now undertaking measures and policies to pro-

tect their employees, including conducting risk assessment,
security training, and sophisticated communication tools and
building strong relationships with the population. Several
NGOs have now security managers including the International
Red Cross’s (IRC) global security advisor, and the American
Refugee Committee’s on site security manager. An emerging
area of debate in the NGO community today is the use of
armed guards or private security firms to protect NGO staff and
operations in areas of conflict. It is not uncommon for NGOs
to use unarmed guards hired locally for both their private resi-
dences and service centers, but these usually amount to noth-
ing more than first alert gatekeepers. But given the widespread
increase in violence in different conflict regions (e.g., sub-Saha-
ran Africa), many are now considering the use of armed guards.
This raises some profound ethical questions, as pointed out by
Charles Rogers, director of corporate security for World Vision.
He raised several questions including the following:

1. Does the use of armed guards give the perception that

NGOs are just another faction in the fighting, either by
other factions or by the local military? As an example, in
many areas of sub-Saharan Africa, NGOs operate with
either the overt or tacit consent of local authorities. These
authorities vary from clan leaders to legitimate govern-
ment officials. Does the use of armed guards jeopardize
that consent?
 NGOs—International Dimension ◾ 265

2. Does the use of armed guards make NGOs a target and

thus heighten the risk to staff members?
3. Does it send mixed and conflicting messages to the peo-
ple when NGOs publicly call for peace, justice, reconcili-
ation, and a negotiated settlement to conflict, while at the
same time hiring armed guards to protect their staff and
property? Hence, do our actions contradict our words,
and make us no better than the participants in the armed
conflict themselves?
4. A few agencies are actively considering the use of pri-
vate security firms to provide protection for their staff and
operations. But this raises other issues. The first is cost.
Private security firms are expensive, and NGOs lack the
resources of the multinationals to pay for these services.
Because NGOs are non-profit and depend on grants
and private funding for their programs, are donors will-
ing to absorb these costs? (http://www.worldvision.org/
worldvision/pr.nsf/stable/NGOsecurity).

Discussion Questions
1. In a remote conflict zone, where private security guards are unavailable, what
can NGOs do to provide safety and security for their staff?
2. Save the Children, an INGO, has offices and activities in Bangladesh. Its
central office is in London. In terms of their accountability, to whom are they
accountable, and for what?
3. How would you answer the four questions raised by Charles Rogers as listed
in our case study?
4. In terms of the future, do you think that NGO growth will be consistent, or
will it slow? Provide a rationale for your answer. In your discussion, consider
the factors that have prompted NGO growth and the new emerging factors
(e.g., economic factors, demographic diversity, security threats) that may have
some effect on the future growth of this sector.
5. What are the key differences in the accountability challenges between gov-
ernmental and NGOs?
266 ◾ Effective Non-Profit Management

Web Resources
Global Forum on NGO Governance (www.ngoboards.org): Provides an online
forum for NGO board members to share and exchange resources and ideas.
It is sponsored by boardsource.com.
INTRAC (International NGO Training Research Center) (www.intrac.org):
Conducts research on NGOs, provides training, and offers consultancies.
WANGO (World Association of Non-Government Organizations) (www.
wango.org): An international association that provides opportunities for
NGOs to network, publishes the worldwide NGO director, relevant resources,
and documents.

End-of-Chapter Review of Terms

Accountability
Civil law countries
Civil society
Common law countries
ECOSOC
INGO
Legitimacy
NGO
NNGO
Political opportunity structure
SNGO
WTO

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Endnotes
1. Salamon, 1994. The Rise of the Nonprofit Sector. Foreign Affairs 73 (4): 109–122.
2. The researchers used CSOs to refer to a broad array of organizations that are essentially
private (i.e., outside the institutional structures of government); that are not primarily
commercial and do not exist primarily to distribute profits to their directors or “own-
ers”; that are self-governing; and that people are free to join or support voluntarily.
3. The 1972 UN Conference on the Human Environment in Stockholm was a major turning
point for NGOs. Because only government officials were invited to the conference, NGOs
gathered around the conference site to debate their own positions. To help clarify confusion
surrounding conference issues, NGOs published a newspaper which they delivered to the
media, embassy, and hotels where attendees were staying.
4. Common law is the body of law based on judicial decisions and custom, as distinct
from statute law.
5. Civil law countries use a legal system derived from Roman law and based on fixed rules
and statutes rather than on a court’s interpretation of broad principles.
6. Information on this INGO is based on an excerpt from its home page, http://www.
doctorswithoutborders.org/ (accessed May 19, 2010).
7. Information on this INGO are based on an excerpt from its home page, http://www.
amnesty.org/ (accessed May 2, 2010).
8. Information on this INGO are based on an excerpt from its home page, http://www.
transparency.org/ (accessed June 1, 2010).
9. Cyclone Sidr killed approximately 4,000 people and affected nearly 7 million people.
10. The anti-globalization movement is critical of the globalization of corporate capitalism.
Chapter 10

Non-Profit Effectiveness
and Accountability

The growth and work of non-profit organizations (NPOs) have received attention
not only in terms of acclamations but also scrutiny. Two major areas of recent scru-
tiny are their accountability and effectiveness. Accountability seeks to ensure that
NPOs are responsible to stakeholders for their activities and for making progress
toward their mission. Effectiveness, on the other hand, refers to the quality and
results or impacts of NPOs’ services and programs.
As Weisbrod pointed out, “Until now, the sector has benefited from being
small and largely out of sight. Success has changed this, with growing demands for
accountability. Success has its price! For the nonprofit sector, the price is increased
scrutiny and demand for evidence that its social contribution is not merely positive
but great enough to justify its privileged status” (2001, 287). Demonstrating or
documenting effectiveness is thus a significant component of NPO accountability.
Beyond the demand for accountability, there are other important reasons as to why
NPO effectiveness has become an important issue among practitioners and scholars.
This chapter discusses the scope, methods, and challenges that NPOs face to
demonstrate effectiveness and accountability. Specifically, the discussion has the
following learning objectives:

1. Understand the scope and challenges of NPO accountability.

2. Identify different processes for NPO accountability.
3. Explain NPO effectiveness and the challenges.
4. Discuss different methods and approaches to measure NPO effectiveness.
5. Describe different charity rating agencies’ use of performance criteria for the
ratings.

269
270 ◾ Effective Non-Profit Management

This chapter discusses the issue of assessing NPO effectiveness at the societal
level, that is, their social impact. It concludes with a case study on how some NPOs
are using misleading or fake numbers to prove their effectiveness.

10.1 NPO Accountability: Scope and Challenges

Accountability basically means to account or to answer for one’s actions or behav-
iors. NPO accountability is one of the emerging issues in the field. However, as
Kearns (2001) pointed out, “It would be a mistake to conclude that widespread
public concern about nonprofit accountability is a recent or merely temporary phe-
nomenon. In fact, a kind of simmering controversy over the appropriate role of
the nonprofit sector and how it should be regulated has existed for more than two
hundred years—ever since the emergence of charitable organizations in the United
States” (2001, 352).
There are valid reasons as to why NPO accountability is so important. The
main reason is to provide legitimacy to their privileged position in receiving sub-
stantial tax benefits from the government. As Jeavons explained, “[I]n accepting the
privilege of tax exemption and the right to solicit tax deductible contribution, the
public benefit agencies and philanthropic organizations also accept an obligation
to be ready to answer not only to their membership but to the broader public as
well, for the way they use resources that would otherwise have gone into the public
treasury” (1994, 197).
There are other reasons behind the recent interest and demand for NPO
accountability. First, the blurring of the public and the NPO sectors has escalated
the need for NPO accountability to a level similar to that of government account-
ability. Chapters 1 and 2 discussed the NPO sector’s extensive role in delivering
important public services. In several service delivery areas (e.g., healthcare), it is
now difficult to separate the two (NPOs and government). NPOs are not only
receiving special government tax privileges, but they also receive substantial con-
tracts and grants from them. So, for both the public and the government, NPO
accountability has assumed a higher level of significance.
Second, during the recent decades, the NPO sector has been engulfed with sev-
eral issues that have challenged different stakeholders’ taken-for-granted assump-
tion about the “do-gooders” and their trustworthiness. Issues include excessive
executive compensation, scandals of corruption and unethical practices in numer-
ous high-profile NPOs (e.g., United Way, American Cancer Society). All of these
have shaken public trust of NPOs. Considering the reality that “trust” is the main
source of public support for NPOs’ tax benefits, donations, and volunteer support,
it is no surprise that the erosion of trust among different stakeholders has led to a
higher demand for NPO accountability.
 Non-Profit Effectiveness and Accountability ◾ 271

Third, the increased commercialization of NPOs has added another surge to this
demand. As mentioned in Chapter 1, there is a growing concern among different
stakeholders that the NPO sector is increasingly resembling the for-profit sector as
they emphasize more and more on revenue-generating strategies (e.g., fee for ser-
vices, marketing) than on service delivery. For the concerned stakeholders, NPO
accountability provides an assurance to the sector’s commitment to public service.
There is no doubt that NPOs must be accountable. However, it is easier said
than done because NPOs have to address three difficult questions regarding
accountability: to whom are they accountable, for what, and how?

10.1.1 Accountability to Whom, for What and How?

NPOs have multiple stakeholders, externally (viz., government, funders, clients,
public) and internally (viz., staff, volunteers); so technically they are or should be
accountable to all. Multiple stakeholders lead to a situation of multiple accountabil-
ities with different and sometimes contradictory expectations. For example, funders
may emphasize financial accountability, while the general public may emphasize
more the performance accountability. Furthermore, unlike the clients of a member-
ship NPO (e.g., members of American Society for Public Administration), clients
of a service NPO (e.g., Legal Aid Society) do not have any structure/processes to
exert real control over the NPO. ASPA members have a voting right to choose the
key leaders of the association or they can choose not to renew their membership if
they are not satisfied with their services. However, clients of a legal aid society do
not have these options. This also points to another reality—the power differences
that various groups of stakeholders have over NPOs. This does not mean though
that NPOs cannot create processes or structures to provide opportunities to clients
to exercise their voices. Examples of such structures and processes include conduct-
ing clients’ needs assessments or satisfaction surveys, and reviewing/redesigning
programs and services based on the findings. However, as Ebrahim pointed out, “is
it feasible, or even desirable, for nonprofit organizations to be accountable to every-
one for everything?” (2010, 101). This is a challenge that NPOs have to address
through reviewing their own unique situations.
The NPO stakeholders, in general, also have less control over NPOs than the
stakeholders of government and for-profit sectors. Frumkin explained that the
“nonprofit and voluntary organizations must serve many masters, none of which is
ultimately able to exert complete control over these organizations” (2002, 5). The
main reason as he points out is that “none of these parties can be clearly identified
as the key ownership group” (2002, 5).
Multiple accountabilities essentially mean that NPO accountability is also mul-
tidimensional. Based on the works by Romzek and Dubnick (1994) and Dwivedi
and Jabbra (1988), Dicke and Ott (1999) developed the following multidimen-
sional framework of NPO accountability:
272 ◾ Effective Non-Profit Management

1. Bureaucratic—Hierarchical process of accountability involving answerabil-

ity, for example, to boards and the funders.
2. Legal—Following the laws, regulations, and contractual obligations.
3. Professional—Implementing the professional code of ethics, norms, and
expectations.
4. Political—Responsiveness to the stakeholders.
5. Moral/ethical—Pursuing/promoting the general welfare or public interest
and upholding ethics.

The challenge for NPOs is to develop or implement a variety of accountability

structures and processes to fully address this multidimensionality.
Bureaucratic accountability focuses on internal control. Some of the pro-
cesses for bureaucratic accountability include preparing and submitting different
reports and documents (e.g., balance sheet, audit, program performance) to dem-
onstrate both efficiency and effectiveness. The legal dimension emphasizes the
importance of NPOs to abide by federal, state, and local laws along with deliver-
ing the contractual obligations to the government agencies. It also includes, for
example, submitting Form 990 with valid information to IRS, avoiding instances
of private inurement, paying unrelated business income tax if applicable, pro-
viding equal employment opportunities to all groups, and delivering services to
clients as per contractual provisions. NPOs maintain their professional account-
ability through remaining faithful to their professional norms and expectations
especially when faced with situations involving issues of ethics and discretion.
There are numerous ways that NPOs can promote their political accountability,
which, as mentioned before, means being responsive to different stakeholders.
One of the major processes is public reporting that involves delivering on regu-
lar basis authentic information about their operations, effectiveness, challenges,
financial sustainability, and other relevant information that is useful to stake-
holders. Most of this information could be posted on their Web sites. In this era
of communication and technology revolutions, blogs have become an important
two-way channel of communication between NPOs and different stakeholders.
Public reporting and blogs go a long way to promote NPOs’ transparency, too.
Responsiveness also includes NPOs remaining truthful to their mission and their
obligation to fulfill donors’ expectations. From the clients’ perspective, respon-
siveness not only means to serve their needs but also to treat them in a profes-
sional way (see Box 10.1).
The moral/ethical dimension of NPO accountability separates the sector from
the private and to some extent from the public sector. The overriding mission of
any NPO is to promote the welfare of one or more segments of the society. The
core of NPOs’ moral/ethical accountability thus is to demonstrate that they are
promoting such welfare with the utmost sincerity and ethics. Although this dimen-
sion of accountability is more of a voluntary nature, this is nonetheless the most
important aspect or dimension of NPO accountability due to the reality that the
 Non-Profit Effectiveness and Accountability ◾ 273

BOX 10.1 BARRIERS TO USE OF NPO SERVICES

Rebecca J. Kissane conducted interesting field research with a small sample
of poor women in Philadelphia. The objectives of her research were to under-
stand the informants’ experiences of using NPO services. One of her signifi-
cant findings was that respondents used very few of those services, compared
to their use of government aid. The major reasons for such limited use were
as follows:

1. Information barriers: Lack of knowledge about area NPOs and their

services
2. Location: Lack of public transportation and NPO location in an unsafe
neighborhood
3. Stigma: Self-respect and avoiding embarrassment
4. Administrative nightmare: Long waits and elaborate paperwork
5. Perception of need: Perception that others are in more disadvantageous
situations and deserve those services more than they do
6. Other reasons: Conflict with work schedule, child care issues, costs of
some services, and pregnancy-related complications

Source: Kissane, R. J., 2003, What’s Need Got to Do with It? Barriers to Use
of Nonprofit Social Services, Journal of Sociology and Social Welfare 30
(2): 127–147.

other dimensions have limited capacities and effects. For example, the effective-
ness of bureaucratic accountability, to a large extent, depends on an informed and
motivated board; however, as we mentioned in Chapter 4, sometimes NPO boards
are not well-trained and may become dependent on the CEOs. Legal accountabil-
ity is also limited because the enforcement is quite low from the federal and state
government due mostly to inadequate resources. Professional accountability is also
weak in terms of its enforcement power. Political responsiveness, a very impor-
tant dimension of NPO accountability, can be complicated and less effective due
to lack of consensus among multiple stakeholders on the expectations/criteria of
effectiveness.
There are additional inherent limitations of NPO stakeholders’ control/power
over NPOs. In contrast to the for-profit sector, NPOs do not have shareholders
with strong motivation and self-interest to monitor the organization’s operations.
Donors, clients, the general public, and volunteers do not have the privilege to
make an impact on the NPOs through voting as they could when it concerns the
government and its policies.
Considering the limitations of the other dimensions of accountability, increasing
concerns over NPO commercialization, and the scandals that engulfed them, the
274 ◾ Effective Non-Profit Management

support and hence the legitimacy of this sector depend essentially on their demon-
strating moral/ethical accountability. This basically entails NPOs’ “doing the right
thing,” being transparent, ethical, and engaging in two-way open communications
so different groups can engage in a fruitful dialogue regarding their operations,
their future, their constraints, and their limitations.
Ebrahim (2010) mentioned a new form of NPO accountability—“adaptive learn-
ing.” He describes it as NPOs creating “regular opportunities for critical reflection
and analysis in order to make progress toward achieving their missions” (Ebrahim,
2010, 113). This constitutes another form of voluntary accountability. Examples of
processes of “adaptive learning” include staff members’ experimentation with new
processes, dialogue with other similar NPOs to address common issues and to learn
from each other, and preparation and development of staff to face new challenges
and development in the field. Peer review is another example of a process that NPOs
can use to work toward this accountability. It is “a review by others of equivalent sta-
tus or standing, involving one or more elements of an organization being evaluated
by someone from outside the organization who understand its operational environ-
ment, challenges, and opportunities” (Purcell and Hawtin, 2010, 358).
A big part of NPO accountability is to demonstrate its effectiveness. While
most NPOs conduct assessment of their effectiveness, it is a complex and difficult
process, as explained in the following section.

10.2 NPO Effectiveness
It is now a widespread practice among NPOs to measure the effectiveness of their
programs and services. A recent (Salamon et al., 2010) study conducted by the
Johns Hopkins Nonprofit Listening Post Project, with a nationwide sample of 417
NPOs, found that 85% of all respondents reported measuring the effectiveness of at
least a portion of their programs/services on at least an annual basis, and two-thirds
did so for at least half of their programs or services.
As mentioned earlier, one of the main reasons for NPOs to do program and
organizational effectiveness assessment is to address the demand for account-
ability. There is a growing interest among donors, the government, and even the
general public to understand NPOs’ contributions toward their clients and to soci-
ety. Different funders (e.g., United Way, government) are now requiring NPOs
to conduct effectiveness studies. In 2010, the Department of Health and Human
Services, proposed regulations that would require the bottom 25% of Head Start
Organizations to reapply for grants. The proposed regulation would impose man-
agement, health and safety, and financial accountability.
There are other important reasons for NPOs to assess their effectiveness. One
reason is that the findings of such assessments provide valuable information to
NPOs to clarify the purposes behind their programs and missions. Such informa-
tion is important feedback to NPOs to re-evaluate and revisit their understandings
 Non-Profit Effectiveness and Accountability ◾ 275

and perceptions of the connection between their missions and their programs and
activities. The findings could also provide crucial information to NPOs in regard
to the feasibility and need to add new programs, redesign existing programs, and
even to revisit their original missions. In short, it is to their own benefit that NPOs,
periodically conduct effectiveness assessment.
Another important reason for NPOs to measure their effectiveness and docu-
menting the findings is to promote transparency, which assist in developing donors
and other stakeholders’ confidence over the sector and provides reinforcement to
their support of the sector.

10.2.1 Challenges of Measuring NPO Effectiveness

Measuring effectiveness is not an easy task for NPOs. There are several challenges
that NPOs face, some of which pose as constraints and limit the scope of their
efforts to measure effectiveness.
First, one of the biggest challenges in measuring effectiveness is the reality that
“effectiveness,” particularly in the NPO sector, is a subjective phenomenon; it is
not an objective “thing” that one can see and measure. In the for-profit sector, mar-
ket forces serve as the indicator of their effectiveness. Businesses that do well are
rewarded in the market in the form of more clients and profits (quantifiable indica-
tors); those that do not do well cannot survive the market. So, their performance
effectiveness is easy to quantify. The market forces do not have a similar impact on
the NPO sector; instead it is their missions which drive their clients, and resources
and hence their effectiveness. However, NPOs in most cases are not easily ame-
nable to quantification as the following two examples illustrate:

1. Big Brothers Big Sisters (a large well-known national NPO)—Mission:

Provide children facing adversity with strong and enduring, professionally
supported one-to-one relationships that change their lives for the better,
forever (http://www.bbbs.org).
2. Brighton Center (a local NPO in Newport, Kentucky)—Mission: To create
opportunities for individuals and families to reach self-sufficiency through
support services, education, and leadership (http://www.brightoncenter.com/
aboutus/about.php).

The above mission statements are well-written; the problem however lies in
identifying criteria to measure their effectiveness against those missions. For exam-
ple, how would one quantify or identify objective indicators to measure “strong and
enduring professionally supported one-to-one relationship that change their lives,”
or “to reach self-sufficiency”? No doubt, both these NPOs, as most NPOs, have to
address and deal with this challenge.
Second, because NPOs have multiple stakeholders and oftentimes multiple proj-
ects and funders, identifying and prioritizing effectiveness criteria become not only
276 ◾ Effective Non-Profit Management

a challenging endeavor but also a very time-consuming one. Clients may view effec-
tiveness as the quality of services, while the NPO board members may consider
sustainability as the main criterion of effectiveness. Even among the same group of
stakeholders, there may be disagreement or differences on the criteria of effectiveness.
For example, some funders may emphasize financial efficiency, while others may
emphasize quality of service. Multiple projects with multiple stakeholders also mean
that NPOs have to collect data/information to track a variety of indicators to mea-
sure effectiveness, making the process a highly time- and resource-consuming one.
Third, NPOs have to be careful in maintaining a distinction between mea-
suring program effectiveness versus organizational effectiveness, and effectiveness
versus efficiency. As Herman and Renz pointed out, “[I]s program effectiveness the
same as or an acceptable substitute for organizational effectiveness?” (2004, 694).
They also have to realize that effectiveness is not the same as efficiency. While the
latter measures the costs of offering the service, the former measures the quality and
the impact of the service. Some NPOs may also find that while they are effective,
they are not efficient, and vice versa, which adds another challenge to NPOs’ efforts
to demonstrate effectiveness.
Fourth, lack of resources and technical competencies to measure effectiveness
are especially a challenge for small NPOs. One of the findings of the 2010 Johns
Hopkins Nonprofit Listening Post Project is that only a minority of the respon-
dents used effective evaluation measures such as random assignment comparisons
and social rate of return estimates. Respondents in that study mentioned resource
constraints as a major barrier to good evaluation.
While these challenges affect more or less all NPOs, some of them face addi-
tional challenges due to the nature of the missions. One example includes the faith-
based organizations (FBOs). Grettenberger et al. explained, “Transformation is an
especially important outcome construct in comparisons of secular and faith-based
programs because a central assumption often advanced in the discourse on faith-
based organizations is that a key difference between FBOs and secular organiza-
tions is the focus of FBOs on spiritual and emotional transformation” (2006, 228).
However, how does one assesses such transformation among FBOs’ clients? What
does “transformation” mean?
Another example of NPO groups that face this challenge are advocacy and pol-
icy organizations. How does one measure the effectiveness of advocacy work, whose
goal for example, is to promote the rights of the physically handicapped group? It
is difficult to measure effectiveness here because these are also social and politi-
cal issues, different environmental factors influence these issues, and any progress
toward the outcome (e.g., promoting rights) is a long-term journey. This is further
complicated because the key players (e.g., policy makers) are frequently changing.
In response to these challenges, some NPOs have taken the leadership role in
developing a framework of outcome assessment that other NPOs could use. One
example is the Anne E. Casey Foundation that developed a list of broad outcomes
for measuring the effectiveness of advocacy and policy work (Box 10.2).
 Non-Profit Effectiveness and Accountability ◾ 277

BOX 10.2 BROAD OUTCOME CATEGORIES

FOR ADVOCACY AND POLICY WORK
1. Shift in social norms: Knowledge, values, and behaviors
Examples: Changes in awareness and values

2. Strengthening organizational capacity: Skills, financial, leadership

Example: Improved capacity to communicate the message

3. Strengthened alliances: Collaboration, coordination among community

and other partners
Example: Increased number of partners supporting the issue

4. Strengthened base of support: Level of support among public, interest

groups, and key players
Example: Increased public support

5. Improved policies: Stages in policy making and implementation process

Example: Policy development

6. Changes in impact: Ultimate change in social and physical lives and

conditions
Example: Improvement in one or more areas in life (relates to the mission)

Source: Measuring Advocacy and Policy. Prepared for the Annie E. Casey
Foundation by Organizational Research Services. Researched and writ-
ten by Jane Reisman, Anne Gienapp, and Sarah Stachowiak, 2007.

The Urban Institute and the Center for What Works developed a common out-
come assessment framework for health and human services NPOs (see Appendix 10.1).
The challenges that NPOs face in their efforts to measure their effectiveness
clearly point out the importance of leadership’s commitment to this process.

10.2.2 Measurement Methods and Approaches

The above discussion provides several important perspectives on NPO effectiveness:

1. It is subjective.
2. It is challenging.
3. Multiple approaches may provide more valid and comprehensive informa-
tion on effectiveness.
278 ◾ Effective Non-Profit Management

4. Measuring effectiveness is undoubtedly important, but NPOs should not

take their efforts to an extreme because there is no such thing as a “perfect”
approach or process of NPO effectiveness.

Keeping these perspectives in the forefront, the following discussion explains

some of the major approaches that NPOs can use to measure their effectiveness.

10.2.2.1 Goal Approach
This is the earliest approach to assess organizational effectiveness. The idea is sim-
ple and rational—to measure a NPO’s effectiveness by identifying its mission and
goals and measuring its progress toward accomplishment of those goals and mis-
sion (Mohr, 1982).
Even though the idea seems simple, there are several challenges or problems with
the goal approach. One major problem lies in the difficulty to measure effectiveness
using the mission statement as the criterion, because mission statements in most
NPOs are purposefully written in a vague and comprehensive way. Thus, “[T]he pri-
mary challenge of measuring the performance of not-for-profit organizations is to
articulate their missions in a concise and precise way” (CMA Management, 2009, 17).
Goals that try to provide specifics to mission statements are also often vague.
Furthermore, most NPOs have multiple goals and in some cases there may be a
lack of consensus among multiple stakeholders on the important goals. Goals may
also change during the program implementation phase, and sometimes there are
unofficial goals that are different than the official goals. However, this approach
undoubtedly has merits as it attempts to make NPOs accountable for their mission
accomplishment—the very reasons of their existence.

10.2.2.2 System Approach
The system approach focuses on an organization’s resource acquisition capability
and uses that as the measure of its effectiveness (Yuchtman and Seashore, 1967).
This approach, based on the open system model of organization, views organizations
as a part of a broader system and as dependent on resources from the external envi-
ronment of which they are a part. Yuchtman and Seashore emphasized one criterion
as particularly important in organizational resource acquisition capability and that
is their “bargaining position, as reflected in the ability of the organization, in either
absolute or relative terms, to exploit its environment in the acquisition of scarce
and valued resources” (1967, 898). Other important resources include information
acquisition, flexible and adaptable structures and processes, and political support.
There is no doubt that resource acquisition is an important indicator of organi-
zational effectiveness and provides valuable information on organizational sustain-
ability. However, this approach’s major limitation is its neglect of organizational
 Non-Profit Effectiveness and Accountability ◾ 279

BOX 10.3 THE FAMILY VAN AND ITS BIG IMPACT

Roxbury (a small neighborhood in Boston, Massachusetts) has a mobile
health clinic called the Family Van, which provides preventive healthcare
to the needy population. It is affiliated with the Harvard Medical School. It
provides free preventive healthcare and also medicines to those who do not
have any insurance.
For every dollar in the van’s operation, it is reported that an estimated
$36 (in avoided ER visits, in prevention of diseases, and in the management
of chronic illnesses) has been saved, with a small budget of half a million
dollars. When the Family Van was launched, on Martin Luther King Day
(January 15) 1992, the core focus was to address health disparities in those
Boston neighborhoods that had least access to prenatal care, and hence high
incidences of infant mortality and low birth weights. Over time their mission
has broadened to include prevention of stroke, hypertension, obesity, diabe-
tes, and cholesterol.
The Family Van’s cost effectiveness is due to several factors:

1. Using cheap and portable screening tools and questionnaires for diabe-
tes, obesity, high cholesterol, and so forth.
2. Hiring people with certifications, rather than doctors, and training them
to provide every medical service it offers. For complex medical care, they
make referrals.
3. Being conveniently located near the local McDonald’s, where clients
can drop in based on their convenience.
4. Emphasizing meaningful conversations between patients and health-
care providers.

The Family Van’s professional staff works with the medical education
institutions to provide medical and allied health students with supervised
rotations aboard the Van, thereby helping train the next generation of family
healthcare providers.

Sources: The Family Van: http://www.familyvan.org/ (accessed January 4, 2011);

Carmichael, M., 2010, A Little Van with a Big Impact: This RV
Could Change the Face of Healthcare in America, Newsweek, July 12,
155: 52.

missions or goals as important indicators of effectiveness. A NPO’s effectiveness in

resource acquisition does not necessarily imply that resources are utilized effectively
or efficiently toward its goals or missions. (See Box 10.3.)
280 ◾ Effective Non-Profit Management

10.2.2.3 Multi-Constituency Approach
The multi-constituency approach emphasizes that NPOs have many constituen-
cies or stakeholders and that each of them are likely to evaluate their effectiveness
based on the criteria that they believe are important to use (for example, Kanter and
Brinkerhoff, 1981). As Kanter and Brinkerhoff explained, organizational effective-
ness “is not a single reality, but a more complicated matter of differing interests and
expectations” (1981, 615). This approach is based on the social construction theory
that argues that social realities are constructed by individuals’ beliefs, actions, and
perceptions, and that they are not objective realities. This approach does not pro-
vide any practical guidance on how to measure effectiveness; instead it explains
what happens during the process of measuring effectiveness and emphasizes that it
is a subjective phenomenon. This approach also emphasizes that the subjectivity of
the evaluation process inevitably leads to politics. As Murray explained, “All evalu-
ation processes go through four distinct stages and, at each, decisions are required
that evaluators, evaluatees, and other interested stakeholders may often disagree
about, giving rise to political behavior” (2010, 436).

10.2.2.4 Multidimensional Approach
The multidimensional approach emphasizes the different dimensions and compo-
nents of effectiveness. Following are some techniques or examples of this approach.

10.2.2.4.1 Balanced Scorecard
Balanced scorecard, developed by Kaplan and Norton (1992) primarily for busi-
nesses, offers a balanced perspective to organizational performances by includ-
ing both financial and non-financial indicators. It thus provides a more holistic
approach to measuring organizational effectiveness. Balanced scorecard usually
uses the following components: financial (measures various financial performance
indicators); internal business perspective (measures internal efficiency and quality),
customer perspective (measures customer satisfaction), and innovation and learn-
ing (ability to adapt to changes required by a changing environment). “In the case
of nonprofit organizations, their mission statement, rather than the profit state-
ment, becomes the endpoint to be reached through these perspectives” (Murray,
2010, 446).
Zimmerman (2009) recommended that NPOs expand these four components
into six categories:

1. Revenue and funding including fundraising approaches, investment strate-

gies, fundraising costs, use of fundraising consultant, and related aspects.
2. Resource allocation including both financial and non-financial resources
(e.g., human resources).
 Non-Profit Effectiveness and Accountability ◾ 281

3. Product and service recipients’ satisfactions.

4. Donors and board members’ satisfactions.
5. Internal operations relating to the efficiency of internal operations.
6. Staff development including processes that provide opportunities for staff to
grow and develop.

Balanced scorecard thus uses a variety of indicators and offers a more com-
prehensive assessment of a NPO’s performance. NPOs can add more indicators
appropriate to their situations. Murray however points out that “To date, in spite
of considerable reported use of the BSC in nonprofit organizations, there is little
in the way of systematically designed empirical research into its long-term value”
(2010, 447).

10.2.2.4.2 Benchmarking
Benchmarking is a technique that compares the NPO’s practices with those of
peer NPOs who are doing similar activities with similar missions. There are two
approaches to benchmarking: (1) comparing the NPO’s performance indicators
(e.g., net cost per client) with other similar NPOs, and (2) identifying best prac-
tices and comparing oneself to those who are following those best practices. The
process of benchmarking could be very time consuming. Also, it might not be easy
for a NPO to find a comparable NPO. Furthermore, best practices that worked in
one may not work in another organization. Nonetheless, benchmarking has merits
and not only provides valuable comparative information but also offers NPOs an
opportunity to learn from other peers and assists them to develop and use perfor-
mance standards with more confidence.

10.2.2.4.3 Multidimensional and Integrated Model

of Non-Profit Organizational Effectiveness
Sowa and her colleagues (2004) developed the MIMNPO (Multidimensional
Integrated Model of Nonprofit Organizational Effectiveness) which assesses
NPOs’ effectiveness on both management and program dimensions. Each of these
is further categorized into two sub-dimensions: capacity (structures, operating
processes) and outcomes (results). For each of these sub-dimensions, the authors
emphasized that researchers should collect information on both objective and per-
ceptual measures to fully understand the construct. As they explain, “By including
perceptual measures alongside objective measures of the indicators of effectiveness,
scholars may examine the degree to which these structures, processes, and out-
comes align with the perceptions of those that participate in the organization on a
day-to-day basis and develop a more comprehensive understanding of any possible
organizational dysfunctions that may be reducing the effectiveness of the organi-
zation” (Sowa et al., 2004, 716). Examples of objective measures of management
282 ◾ Effective Non-Profit Management

capacity include mission statement and technology, while an example of a percep-

tual measure of management capacity will be staff’s perception of how mission
statement is actually used. An example of an objective measure of management
outcome is the stability of revenue acquisition; whereas an example of a perceptual
measure of this outcome indicator will be management’s perception of the NPO’s
financial health.
The model assumes that certain management structures and processes tran-
scend all organizations’ operated programs, but that the program level structures
and processes may vary between programs. The major contribution of this model is
its emphasis on the importance of perception on defining effectiveness. However,
its major disadvantage is the enormous amount of information and data needed to
complete assessment of NPO effectiveness.

10.2.2.5 Outcome Assessment
Outcome assessment has recently become a widely used approach to measure effec-
tiveness in the NPO sector. The 2010 Johns Hopkins Nonprofit Listening Project,
mentioned before, found that although output measures are the most common
measurement techniques (used by 95% of the group doing any type of measure-
ment), nearly 70% reported using outcome measures. Outcome assessment, basi-
cally, focuses on measuring the impact or effect of NPO programs and activities.
The outcome assessment approach views the NPO’s performance as a whole
system and thus views the assessment process as including inputs (e.g., resources),
activities/programs (e.g., job training program), outputs (e.g., number of trainees
who completed the program), and outcomes (e.g., number of trainees who suc-
cessfully landed on a job). Outcomes are thus “events, occurrences, or changes in
conditions, behaviors, or attitudes that indicate progress toward achievement of the
mission and objectives of the program” (Hatry, 1999, 15).
The United Way’s (UW) output assessment model is the most commonly
known outcome assessment approach. It is also known as the logic model because
it requires NPOs to develop a logical model (i.e., a rational explanation) showing
links among the inputs, activities, outputs, and outcomes. The model is supposed to
explain the organization’s understanding/belief of how the process works. “The pro-
gram outcome model offers a significant advantage over some other approaches to
measuring effectiveness . . ., since it does not suggest arbitrary standards but permits
each organization to develop its own in relation to its mission” (Worth, 2009,133).
Hendricks et al. (2008) discussed three major forces that prompted the UW to
require local agencies to measure the outcomes of UW-funded programs. One rea-
son was UW’s intention to ensure that they could direct money to programs which
are demonstrably effective. A second reason was that outcome measurement was a
logical evolution of performance measurement in the NPO sector. Finally, the issue
of accountability was a dominant factor for UW’s focus on performance assessment
(Hendricks et al., 2008, 14).
 Non-Profit Effectiveness and Accountability ◾ 283

The UW’s approach to measuring NPO effectiveness emphasizes the following:

1. Outcome assessments
2. Quantitative indicators to measure outcomes
3. Accumulation of longitudinal data
4. Measurement as a way to track outcomes, not to establish causality
5. Program improvement as the primary reason for measuring program
outcomes
6. Importance of measuring and demonstrating effectiveness at the local level
(Hendricks et al., 2008, 15–17)

There is no doubt that outcome assessment, for most NPOs, is the most valid
approach of assessing effectiveness. It requires NPOs to measures the impacts or
effects of their programs and services on their clients and other affected stakeholders,
rather than measuring the quantity or quality of the services or programs. For exam-
ple, while output assessment will give a count of number of clients who complete a
job training program, outcome assessment will measure the effects that the train-
ing has on the clients’ lives in terms of, for example, their success in getting a job,
increase in their self confidence and so forth. Thus, for most NPOs, outcome assess-
ment is a better approach than output assessment. However, there are several chal-
lenges in implementing outcome assessment. One major challenge is identifying
meaningful outcomes. Zimmerman and Stevens in their research found that “[M]
any organizations indicated that the need to outcome measurement has added to
their workload and that they struggle with finding ways to get meaningful measures
without becoming buried in paperwork” (2006, 325). Particularly for small NPOs,
implementing outcome assessment could be a very challenging endeavor. Box 10.4
shows the use of outcome assessment software by a non-profit organization.
Wing made a critical observation on the recent push for outcome assessment: “It
is not enough for a community-development group to build houses and help low-
income families buy them. There has to be an outcome beyond that. Whether that
outcome is the revitalization of the neighborhood, the increased wealth of the families,
or something else is less important than the mischievous assumption that another end
always lies beyond whatever work a nonprofit is doing” (2006, 63). He thus argues that
evaluators need to conduct moderate assessment of NPOs because this leads to good
management and financial stewardship, but that it should not be taken to an extreme.

10.3 Charity Rating Agencies and Watchdogs

There are several NPOs who rate NPOs on a variety of performance criteria.
Following are some of the well-known ones:
◾◾ Charity Navigator: This NPO rates charities on two broad financial mea-
sures—organizational efficiency and organizational capacity. Organizational
efficiency includes four indicators:
284 ◾ Effective Non-Profit Management

BOX 10.4 LATIN AMERICAN YOUTH CENTER (LAYC)

USE OF SOFTWARE FOR OUTCOME ASSESSMENT
LAYC is a multicultural community-based organization in Washington, DC,
whose “mission is to support youth and their families to live, work, and study
with dignity, hope, and joy” (http://www.layc-dc.org/index.php/about-us-intro/
mission.html). One of their programs is the Independent Living Program (ILP).
This program supports youth coming out of the foster care system and helps
them to become self-sufficient while living in a group home.
Developing housekeeping skills is one of the program’s 18 outcome measures.
LAYC uses a software called ETO (Efforts to Outcomes) from Social Solutions
(www.socialsolutions.com) to track progress on outcome measures. Following is
their outcome measures for Housekeeping Skills.
Measures of Housekeeping Skills Development
Basic—Must Know Three of Four
Washes dishes adequately using soap and hot water
Can change a lightbulb
Makes bed regularly
Regularly disposes of garbage
Intermediate—Must Know Three of Five
Can use vacuum cleaner properly and change bags
Changes bed linen on a regular basis
Knows how to prevent sinks and toilets from clogging
Knows how to sweep floors and stairs, wash floors and windows
Knows appropriate cleaning products for different cleaning jobs
Advanced—Must Know Five of Seven
Knows how to stop a toilet from running
Knows how to use a plunger
Can defrost the refrigerator
Can clean the stove
Knows how to conserve energy and water
Performs routine house cleaning
Uses drawers and closets appropriately for storage
Exceptional—Must Know at Least Three
Knows what repairs a landlord should perform
Can do minor household repairs
Is able to contact the landlord and request repairs
Can change a fuse or reset a circuit breaker
Can measure a window for shades or curtains
Knows how to get rid of and avoid roaches, ants, mice, and so forth
Source: Castillo, I. D., 2009, Measuring Outcomes in the Real World, Nonprofit
World 27 (6): 6–7.
 Non-Profit Effectiveness and Accountability ◾ 285

1. Program expense
2. Administrative expense
3. Fundraising expense
4. Fundraising efficiency (i.e., fundraising expenses divided by total
contributions)

Organizational capacity assesses the NPO’s sustainability over time, and

includes three indicators:

1. Primary revenue growth

2. Program expense growth
3. Working capital ratio (i.e., working capital divided by total expenses)

Charity Navigator uses Form 990 to gather and analyze information on these
criteria and to compare a charity’s performance with the performances of simi-
lar charities. The charity is then assigned a converted score ranging from zero to
ten in all seven performance categories, as well as three ratings for the charity’s
organizational efficiency, organizational capacity, and overall financial health.1

◾◾ Better Business Bureau (BBB) Wise Giving Alliance: Better Business Bureau
(BBB) Wise Giving Alliance undertakes investigations of an organization
based on complaints or inquiries from the public. While it does not rate orga-
nizations, it does report whether they meet or do not meet their Standards for
Charity Accountability. These standards were developed by BBB Wise Giving
Alliance after extensive consultation with representatives of small and large
NPOs, accountants, grant-making foundations, regulatory agencies, and var-
ious research organizations. The standards seek to encourage fair and honest
solicitation practices, promote ethical conduct by charitable organizations,
and to advance support of philanthropy.
The standards focus on governance and oversight (viz., board composition,
meeting, and conflict of interest policy), finances (fundraising costs, mini-
mum spending on program expenses), fundraising and informational mate-
rials (viz., accurate fundraising materials, annual report available, address
privacy concerns of donors), and measuring effectiveness (assess organiza-
tional performance and effectiveness at least once in two years).2
◾◾ GreatNonprofits and GiveWell are two other new NPOs who also provide
reviews of NPOs. GreatNonprofits partners with GuideStar and creates pro-
files of every non-profit listed on GuideStar. Interested individuals can visit
their site to find, review and share information about non-profits that they
have experiences with as volunteers, clients, parents, or in other capacities.
GiveWell collects information about NPOs through (a) reviewing materi-
als posted on their Web sites, (b) contacting NPOs directly, or (c) conduct-
ing application for direct grants which provides them information about the
286 ◾ Effective Non-Profit Management

NPO applicants. They analyze this information and rank NPOs based on
effectiveness, cost effectiveness, scalability (i.e., ability to use more funds),
transparency, and ongoing monitoring.3 GiveWell rates international and
national charities and also charities by cause (Box 10.5).

10.4 Issue: Measuring NPOs’ Impact on Society

This chapter discussed different methods to assess NPO effectiveness. It also iden-
tified several challenges that NPOs face in their efforts to do so. The focus of the
discussion has been measuring NPO effectiveness mostly at the individual organi-
zational level.
However, recently the conversation on NPO effectiveness has added a new
dimension—the need or importance to measure the overall societal impact of this
sector instead of focusing only at the individual or organizational level. There are
some valid arguments in support of this broader level of inquiry. One main rea-
son is that such information is essential for public policy making. As mentioned
in Chapter 2, government’s use and support of NPOs reflect public policies, and
similar to any other policy evaluations, it is important to evaluate the impacts and
effects of these public policies. As Wyszomirski explained, “[I]mpact analysis takes
a step beyond assessment and evaluation. It also speaks to a different, and predomi-
nantly external, audience. Essentially, impact analysis concerns political and policy
purposes. It focuses on questions such as which activities merit public attention and
resources and why, or on how effectively, efficiently, and equitably public interests
are being addressed” (2001, 200).
Weisbrod pointed out another reason for this interest:

The pressure to evaluate the nonprofit sector has no counterpart in the

private enterprise sector. Why is it important to evaluate the contribu-
tion to nonprofits but not private enterprise? The answer, I suggest, is
that there is both an extensive foundation of economic theory justifying
a decentralized privately owned economic system and an enormous
body of experience with it. In the case of the nonprofit sector, the expe-
rience is long but far less extensive, and the theoretic justification is
newer and has generated less consensus; the intellectual base for private
enterprise, as initially set forth by Adam Smith in 1776, does not yet
have a well-accepted counterpart for nonprofits. (2001, 276)

Polonsky and Grau identified other justifications for such assessment:

1. The increasing similarities between NPOs and businesses (e.g., marketing,

alliance with for-profits, fees for services) raise the question as to whether they
all translate to improved societal impact.
 BOX 10.5 GIVEWELL’S RATINGS: TOP U.S. CHARITIES

Evidence of Cost Ongoing

NPO Rating Effectiveness Effectiveness Funding Gap Transparency Monitoring
1. Nurse–Family Partnership Gold Strong Limited Only long term Above average Excellent
2. KIPP Silver Above average Limited Probable Above average Strong
3. Invest in Kids Silver Above average Limited Moderate Strong Strong
Source: GiveWell: http://www.givewell.org/charities/top-charities (accessed June 27, 2011).
Non-Profit Effectiveness and Accountability
◾
287
288 ◾ Effective Non-Profit Management

2. NPOs have an obligation to ensure that donors’ money is being spent effec-
tively on programs.
3. Regardless of popularity, it is important to know whether NPOs (both popu-
lar and lesser known/popular NPOs) are contributing to society.
4. There are several other benefits of measuring social impact including enhanced
donor satisfaction, improved NPOs’ service delivery, and donor confidence
(2011, 197–198).

Social impact can be defined as the total impact that the NPO sector has on all
the stakeholders. However, there are several challenges to assess such impact. First,
the concept of social impact is vague; it means different things to different people.
Furthermore, “One of the primary problems facing charities when assessing social
impact is that different donors will assess different performance measures in a dif-
ferent way” (Polonsky and Grau, 2011, 196).
Second, similar to the organizational-level assessment, social impact assessment
is also a multidimensional phenomenon. Wyszomirski explained, “Comprehensive
impact analysis (like policy evaluation) is likely to have many dimensions. It may:
involve substantive, procedural, and political standards of measurement, calculate
both benefits and costs, concern both direct and indirect effects, allow for the pos-
sibility of negative as well as positive effects, and recognize both intended and unin-
tended consequences” (2001, 200–201). One technique that NPOs can use is the
Social Return on Investment (SRI), a process that evolved from cost benefit analy-
sis. The advantage is that it produces a ratio that can be used to compare programs
against programs. But putting a dollar value on social benefits, especially the less
tangible ones, undoubtedly will be a challenge.
Weisbrod (2001) argues that such cost benefit analysis also needs to calculate
other types of indirect costs, for example, like opportunity costs. NPOs do not pay
property taxes and that is an example of an opportunity cost for the government
and society.
Another challenge for NPOs is to identify indicators that will demonstrate the
connections between NPO outcomes measures for individual programs and activi-
ties and community- and societal-level outcomes (e.g., economic, political, social).
However, as Campbell explained,

In this context, nonprofit organizations face a fundamental paradox of

political accountability. Few nonprofit projects have sufficient scope to
be held accountable for changing communitywide indicators, such as
the unemployment rate. On the other hand, the project level outcomes
for which they can be held accountable are typically so narrow that the
public has no compelling accountability interest (for example, training
dozen women in home business skills or restoring an old ship in hopes
of attracting tourists). (2002, 245)
 Non-Profit Effectiveness and Accountability ◾ 289

Case Study: Charities Faking Numbers to

Enhance/Fabricate Performance Record
Flowers (2007) reported a story on The Source Weekly about
the Humane Society of Central Oregon’s (HSCO) documen-
tation of their adoption numbers which the report said was
“misleading.” The agency has a policy requiring owners to sign
euthanasia requests if the animal is considered unadoptable.
The story reported that in one case, the owner (Ed Zimmerman)
was told by the shelter intake worker that his dog had a small
tumor and that she would have to be put to sleep, but that
no decision would be made until the vet looked at her on
Monday. When Zimmerman called them back over the week-
end because he had second thoughts, he found out that the
shelter staff had already put the dog to sleep within hours after
she was left in their care.
Flowers reported that according to the NPO’s own esti-
mate, in 2006, it had a 92% adoption rate for dogs and cats.
However, she pointed out that these were inflated numbers
because the agency did not count the number of animals that
they put to sleep, when owners signed the required euthanasia
request form, against this number. She also referred to one of
the volunteers who pointed out that this policy or approach
provided no incentive for shelters to treat sick animals.
In another story, Kathy Kristof (2009) discussed how Feed
the Children (an Oklahoma NPO) was faking their numbers
to look good. This information came out of a report from the
American Institute of Philanthropy (AIP) which examined the
finances of approximately 500 large national charities. The
report accused the NPO of its misleading claim of spending
91% of its donations on programs that would undoubtedly
make donors happy. According to the AIP, this charity actu-
ally spent less than 25 cents of every donated dollar feeding
children, and that roughly 66 cents of every dollar was spent
on raising money. The report also accused the charity for vastly
overvaluing the “in-kind” gifts thus giving the impression that
the charity was receiving more in donations. In 2009, the AIP
called the agency the “most outrageous charity in America”
(http://www.charitywatch.org/articles/feedchildren.html,
accessed April 5, 2011).
290 ◾ Effective Non-Profit Management

Discussion Questions
1. One of the unintended effects of demand for NPO assessment is the choice
of some NPOs (as the above case study shows) to deliberately inflate their
performance record. Could such a situation be avoided? If so, how?
2. Considering the above discussion regarding the difficulty of assessing the
social impact of NPOs, is there any positive outcome of continuing this
dialogue?
3. In a situation where a NPO has to choose between being “effective” and
being “efficient,” which is more important to them to choose? Explain.

Web Resources
Innovation Network (http://www.innonet.org/): Online resource materials on
NPO evaluation, planning, and research.
Live United (www.liveunited.org/outcomes): United Way’s resources on non-
profit outcome assessment.
WhatWorks (http://www.whatworks.org/displaycommon.cfm?an=4): Various
documents, reports, and resources on NPO outcome assessment.
W.K. Kellogg Foundation (www.wkkf.org/knowledge-center/publications-and-
resources.aspx). W.K. Kellogg Foundation resources on program evaluation,
logic models, and theories of change. Click on Evaluation Handbook and
Logic Model Guide.

End-of-Chapter Review of Terms

Accountability
Balanced scorecard
Benchmarking
Effectiveness
Goal approach
Logic model
Multidimensional approach
Outcome assessment
Social impact
System approach
 Non-Profit Effectiveness and Accountability ◾ 291

Appendix 10.1: Common Outcome Framework

for Health and Human Services
Based on a review of 14 separate programs (mostly health and human services), mis-
sions, and outcome indicators, The Urban Institute and the Center for What Works
developed a common outcome framework for NPOs to use. The framework includes
several indicators focusing on program-, client-, community-, and organization-cen-
tered outcomes. Following is an outline of the framework with examples of indicators:
1. Knowledge/learning/attitude
a. Skills (knowledge, learning)
Common Indicators: percent increase in scores on knowledge after attend-
ing; percent that believe skills were increased after attending
b. Attitude
Common Indicators: Percent improvement as reported by client, parent,
teacher, and others
c. Readiness (qualification)
Common Indicators: Percent feeling well-prepared for a particular undertak-
ing; percent meeting minimum qualifications for next level/undertaking
2. Behavior
a. Incidence of bad behavior
Common Indicators: Incidence rate; relapse/recidivism rate: percent reduc-
tion in reported behavior frequency
b. Incidence of desirable activity
Common Indicators: Success rate; percent that achieve goal; rate of
improvement
c. Maintenance of new business
Common Indicators: Number weeks/months/years continued; percent
change over time
3. Condition/status
a. Participant social status
Common Indicators: Percent with improved relationships; percent who
avoid undesirable course of action/behavior
b. Participant economic condition
Common Indicators: Percent who establish employment; percent who
retain employment; percent with increased earnings
c. Participant health condition
Common Indicators: Percent with reduced incidence of health problem;
percent with immediate positive response
Source: Building a Common Outcome Framework to Measure Nonprofit Perfor-
mance, December 2006, The Center for Nonprofits and Philanthropy, The
Urban Institute, Washington, DC. A full version of the report can be found
at http://www.urban.org/UploadedPDF/411404_Nonprofit_Performance.
pdf (accessed April 10, 2012).
292 ◾ Effective Non-Profit Management

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Endnotes
1. For a complete review of the rating, visit the Charity Navigator Web site at: http://
www.charitynavigator.org/index.cfm/bay/content.view/cpid/48.htm.
2. For a complete review of their rating, visit the Better Business Bureau Web site at:
http://www.bbb.org/us/Charity-Standards/.
3. For more information on these criteria, visit the GiveWell agency’s Web site at:
http://www.givewell.org/criteria.
Chapter 11

In Conclusion

Lester Salamon in an article published 15 years ago identified the following four
challenges for non-profit organizations (NPOs), which according to him “constitute
an emerging crisis of American nonprofit sector”: fiscal, economic, effectiveness, and
legitimacy crises (1997, 420). However, considering the steady growth of NPOs and
their growing salience in almost all aspects of our lives, one cannot but agree that this
sector is as strong if not stronger than what it was 14 years ago. Salamon, realizing the
growth and maturity of the section, more recently pointed out that, “In fact, however,
the nonprofit America has responded with amazing resilience” (2010, 89).
The different chapters of this book explained the various aspects of managing
NPOs effectively. Of course, the discussion is based on this author’s strong belief
that the sector will continue to play significant roles in our lives, in society, and at
both the national and international levels. Having said that, there are several issues
that NPOs have to address (e.g., accountability, effectiveness, ethics) to maintain
the momentum of their growth and contributions—different chapters of the book
have identified several of those major issues.
This concluding chapter examines four major developments/trends (social, eco-
nomic, professional, and leadership) in the environment that also have implica-
tions for the future of this sector. The sector’s ability to proactively deal with these
developments and take advantage of the opportunities that they present will play a
significant role in shaping the future debate on NPO effectiveness and legitimacy.

11.1 Social: Demographic Changes

Society is now more diverse, in terms of race, gender, religion, age, and lifestyles,
than ever. This trend is expected to continue as projected by several sources.

295
296 ◾ Effective Non-Profit Management

According to the U.S. Census Bureau, “The nation’s Hispanic and Asian popu-
lations would triple over the next half century and non-Hispanic whites would
represent about one-half of the total population by 2050” (http://www.imdiver-
sity.com/villages/asian/reference/census_2050_asian_projections.asp). USA Today
estimated that “in 2050, the working-age population will be 30% Hispanic, 12%
non-Hispanic Black and 8% non-Hispanic Asian. Today, the breakdown is 15%
Hispanic, 12% Black, and 5% Asian” (http://www.usatoday.com/news/nation/
census/2008-08-13-censusinside_N.htm).
There is a growing number of the population with a different lifestyle. The 2010
U.S. Census also estimated that “there were 565,000 same-sex partner households
in 2008. They represented 9 percent of the 6.2 million unmarried households over-
all in 2008. It is estimated that 3.5 percent of the adult population has identified
themselves as LGBT” (Keen, 2011).
Another important population diversity is the growing number of millennials
(individuals born approximately between 1987 and 1992). There are about 80 mil-
lion of them (CBS News, 2009), and they are becoming a growing component of
the current workforce.
Since it is only a matter of time that the workforce will reflect the demograph-
ics of the broader society, this reality (the increasing diverse population) has several
implications for any organizations including the NPOs. First, NPOs have to prepare
themselves to work with an increasingly diverse workforce and to utilize its immense
potentialities. The sector needs to fully comprehend the reality that while a diverse
workforce brings enrichment, it also presents certain challenges. Second, the millen-
nial generation will soon dominate the workforce, and their work styles, philosophies,
and expectations are different than the baby boomers who currently dominate the
NPO sector especially in leadership positions. It is important that the current NPO
leadership understands the millennial generation and vice versa, otherwise misun-
derstanding and misperception may lead to inefficiency and job satisfaction for both.
NPOs, similar to any other organizations, have to prepare themselves to fully
utilize this diverse workforce. In one sense, it will be easier for today’s organizations
to integrate this diversity in their work cultures, because the millennial generation
grew up in a more multicultural society than the previous generations. However,
compared to the other two sectors (government and for-profits), NPOs have to
take a more proactive and planned role in developing and implementing strategies
to integrate these two generations in the workplace. For-profits see diversity as an
asset, and it is their business imperative to nurture and flourish workforce diversity;
for government organizations, a plethora of anti-discrimination laws indirectly pro-
mote or encourage a diverse workforce. For NPOs in general, neither has played a
strong role in actively recruiting and engaging a diverse workforce.
Considering the imperative of workforce diversity, it is of utmost importance
that NPOs develop and implement strategies to effectively incorporate, manage,
and also utilize the opportunities that such diversity presents. Such strategies will
depend on each NPO’s unique circumstances including availability of resources,
 In Conclusion ◾ 297

BOX 11.1 BEST PRACTICES OF INCLUSION

1. Identify diversity as a core value.
2. Perform organizational assessment to assess diversity and attitudes
toward it.
3. Focus on changing behaviors, not beliefs, through training, regular
meetings, and discussion.
4. Help board members see the benefits of inclusion.
5. Think about inclusiveness during hiring staff, recruiting board mem-
bers, choosing speakers, and so forth.
6. Create an organizational culture of transparency and open
communication.
7. Include people of different generations (e.g., baby boomers, Generation
Y) in leadership positions and committees.
8. Create a written policy emphasizing commitment to diversity, inclu-
sion, and anti-discrimination.
9. Use theories of change to make changes in people’s behavior and toler-
ance for difference.
10. Be a visible advocate for embracing diversity and inclusion.
11. Develop a written compliant policy and procedure to address discrimi-
natory behaviors.
12. Use teams and mentoring to appreciate and encourage diversity.

Source: Newborn, T., 2011, Diversity and Inclusion—Why Now? Nonprofit

World 29 (1): 20–21.

current experience with diversity, clients’ demographics, and other environmental

factors (e.g., location). To ensure positive results or impacts of any such strategies,
it is foremost for NPOs to develop and nourish a culture of inclusion and not just
give lip service to managing diversity.
Nielsen and Huang explained, “Philanthropy is moving to a new stage. This
transition is to move from diversity to inclusion. We understand diversity to be
the fact of difference within an organization or group. We define inclusion as the
intentional act on the part of diverse members of an organization to make this dif-
ference as part of the group’s status quo of effectiveness” (2009, 4). (See Box 11.1.)

11.2 Economic: Financial Distress or Recession

The current recession is affecting all organizations, not just NPOs. However, as
Mesch pointed out, “Perhaps more than organizations in the private or public
sector, nonprofits must address the economic and sustainability challenges that
298 ◾ Effective Non-Profit Management

ultimately will change the way they do business in order to ensure their survival”
(2010, 173). This is due to the differences in the opportunities and constraints that
NPOs face when it comes to resource acquisition. In contrast to NPOs, govern-
ment organizations and for-profits have more flexibility to adopt and implement
strategies and policies to adjust/address to recession. For example, when faced with
recession, government organizations have the discretion to cut back their service
provisions and to increase taxes—both will bring strong opposition, but if needed,
government has the political authority to do both. For-profits can venture into new
markets/investments, adopt a variety of cost-cutting strategies (e.g., layoffs), and
choose to pass the increased production costs to clients. NPOs, however, due to
their core mission to serve are faced with more constraints and challenges during a
time of recession when the demand for their services usually takes a surge.
During a time of recession, NPOs cannot continue to rely on government
grants and contracts as a stable source of revenues, nor can they rely on private
donations. They cannot rely on investment income either, as Kennedy pointed out,
“Not-for-profits that rely on monthly donor support are faring much better than
organizations that rely on investment income. Harvard University, for instance,
registered an $8 billion (22 percent) quarterly decline in endowment value in 2008,
the worst drop in the school’s modern history. Harvard has responded by cutting
its budget significantly” (2009, 25).
It is thus crucial for NPOs to diversify their revenue sources. NPOs, depending
on their resources and competencies, do have some options here such as engaging
in different entrepreneurial activities including social business enterprises, form-
ing partnerships with for-profits, establishing for-profit subsidiaries, and increasing
their use of fees for services. However, there is a risk here—the more NPOs engage
in these entrepreneurial activities, the more they may appear like for-profits and
hence the issue of their unique identity becomes more salient. Thus, the challenge
for NPOs is to diversify their revenue sources in ways that will not only provide
them financial security to support their missions but will also secure and enhance
the sector’s distinct identity.
One of the new strategies among NPOs during recession is to explore the oppor-
tunities to merge with other similar NPOs and outsource. “Mergers are defined
as the combining of two or more organizations to create one new organization
using friendly, rather than hostile, strategies. In contrast, acquisitions are defined as
occurring when one organization is subsumed or acquired by another organization,
irrespective of friendly or hostile intent” (Benton and Austin, 2010, 461). Merger,
if successful, could provide more financial stability to a NPO, visibility and oppor-
tunities to grow and serve more clients. However, finding a compatible partner to
merge with is not always easy. Furthermore, to successfully address the issues dur-
ing the transitional process of merging requires a particular set of competency on
the part of the NPO. Competencies such as business skills, emotional intelligence,
understanding of the cultural differences, stress management, and good communi-
cation skills are essential in any successful merger effort.
 In Conclusion ◾ 299

Outsourcing is another possibility. However, as Archibald argued, “Outsourcing

functions is not a new concept. However, it is a management approach that has not
been fully embraced in the nonprofit sector” (2009, 17).
In an era of increased financial stress, NPOs’ effectiveness to deliver their goals
or missions will depend significantly in their embracing of new competencies (such
as outsourcing skills) and engaging in entrepreneurial activities while at the same
time their ability to remain truthful to their mission and identity. This may be the
biggest challenge facing NPOs in this twenty-first century.

11.3 Professional: Increasing Need and

Opportunities for Professionalism
Several factors are prompting an increased need for professional education among
staffs and managers in NPOs. First, a sizable proportion of current non-profit man-
agers are nearing retirement. A 2006 Compass Point Survey of non-profit execu-
tives revealed that three-quarters of this group planned to leave their current jobs
within 5 years (Bell et al., 2006). Second, similar to any other organizational sec-
tor, effectiveness in this sector also depends on the competency of its workforce.
Competency essentially requires that NPO staff and managers are well-equipped
with the knowledge, skills, and abilities that are relevant to the sector. While pas-
sion to serve is an important value that non-profit staff should possess, acquiring
and developing professional competency is equally important for them to effec-
tively deliver their services and serve their missions. Third, increased competition
with for-profits, government organizations, and with other NPOs, and the increas-
ing financial uncertainty are also prompting NPOs to learn new competencies and
skills (e.g., social enterprises, grant writing, business, program evaluation skills).
The emphasis on professionalism is also reflected in the growth of non-profit edu-
cational programs, research, publications, and professional conferences. Mirabella
in her research found that in 1996 there were approximately 284 programs at 179
universities which offered undergraduate courses (66), graduate courses (128), and
non-credit or continuing education courses (90). By 2006, this number grew to 426
programs at 238 institutions of higher education (Mirabella, 2007).
The scholarship (viz., research and publications) focusing on the non-profit
sector is yet in its infancy, but the trend shows a significant growth in scholarly
publications and outlets in recent years. There are now several scholarly journals
dedicated to publishing research on the non-profit sector such as the International
Journal of Nonprofit and Voluntary Sector Marketing, Nonprofit Management and
Leadership, Voluntas, and Nonprofit and Voluntary Sector Quarterly. In addition,
there are publications like the Nonprofit Times, Nonprofit World, and Chronicles of
Philanthropy which provide up-to-date data (e.g., salary data) and current develop-
ments and practices on the sector (e.g., legal issues, best practices). There are now
300 ◾ Effective Non-Profit Management

several conferences on the non-profit sector for non-profit practitioners, research-

ers, and educators including the ARNOVA (Research on Nonprofit Organization
and Voluntary Action) annual conference and the International Society for Third
Sector Research (ISTR).
All of these developments provide a strong signal that non-profit management
is gradually developing into a mature discipline and a profession.

11.4 Changing Nature of Non-Profit Leadership—

A Unique Style of Leadership
There is no doubt that the responsibilities and the work environments of non-
profit leaders are now more complex and demanding. Today’s NPO leaders not
only have to lead their agencies in regard to strategic planning, mission develop-
ment and assessment, fundraising, and public relations, they also have to actively
address the issues of accountability and legitimacy. Furthermore, as leaders they
are also responsible to create and maintain a culture of ethics and inclusion. All
of these clearly point to the changing nature of non-profit leadership in the sense
that some of these responsibilities involve management functions such as finan-
cial management (viz., financial accountability) and human resource management
(inclusion of diversity). While it is true that leaders in most small NPOs have
always been involved in both managerial and leadership responsibilities and func-
tions, the current complex environment of NPOs and the increasing public scru-
tiny they face, require today’s leaders in all NPOs (large and small) to focus on
both leadership and management aspects of NPOs. Effective NPO leadership thus
requires skills and competencies in NPO human resource management, finance,
entrepreneurship, strategic planning, program evaluation, and strong emotional
intelligence to work with NPO boards and different stakeholders. They also need
to have current knowledge on the developments and trends in the environment
and the sector such as information technology, workforce diversity, financial
trends, and legal issues.
As Crawford commented, “The term ‘managerial leadership’ may be a hybrid but
it is the most appropriate for capturing the complementary and even contradictory,
role that nonprofit leaders have to play, namely that of a Manager-Leader” (2010).
In conclusion, the future of the NPO sector depends not only on the sector’s
ability to address these and other future challenges, but also on their ability to
pro-actively develop or construct a supportive environment through increasing
their transparency, demonstrating effectiveness, forging strong connection with the
broader community, and making the right decisions that will promote the ultimate
missions of the sector. After all, similar to adults making difficult decisions and
facing the consequences of those decisions, the decisions that NPO leaders make
today, will consequentially shape the future of the sector to a large extent.
 In Conclusion ◾ 301

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The Author

Shamima Ahmed is a professor and chair in the Department of Political Science

and Criminal Justice at Northern Kentucky University (Highland Heights,
Kentucky). Her research and teaching interests are in human resource manage-
ment, nongovernmental organizations (NGOs), and non-profit management.
She has numerous publications in peer-reviewed journals including Public
Personnel Management; Journal of Public Affairs Education; State and Local
Government Review; Public Performance and Management Review; International
Journal of Public Administration; and the Journal of Management Development.
She also coauthored a book, NGOs in International Politics (Kumarian Press,
2006). Ahmed is actively involved in a variety of community and civic engage-
ment activities, including serving on different non-profit boards and writing a
variety of technical reports for government and non-profit agencies.

303
Public Administration and Management

In an environment of increased interdependency and collaborations among non-

profits, for-profits, and governmental organizations, researchers and practitioners have
begun to identify the need for a distinctive set of values, skills, and competencies
for effective non-profit management. Underlining the relationship between these two
sectors, Effective Non-Profit Management: Context, Concepts, and Competencies
clarifies the emerging links between the public and non-profit sectors at the local,
national, and global levels.

Each chapter concludes with a discussion of a recent issue and a case study. They
include discussion questions, a listing of Web resources, and a review of terms at
the end of each chapter. The introductory chapter discusses non-profit organizations,
their phenomenal growth, the different categories of non-profits, and the scope and
significance of this sector. The second chapter focuses on explaining the linkages among
non-profits, for-profits, and government organizations. The next couple of chapters
provide a detailed discussion of essential non-profit law, non-profit governance, human
resource management, resource acquisition and management, marketing, technology,
nongovernmental organizations (NGOs), and effectiveness. The concluding chapter
discusses four major developments in the non-profit environment that have implications
for the future of this sector.

Features
• Covers all major topics in non-profit management including recent issues
that affect such management
• Provides up-to-date information on emerging issues in non-profit management,
including transparency, technology, legal, and other socio-political issues
• Includes input from an advisory group of leading non-profit executives
• Details best practices, practical tips and examples, and lists of Internet resources

Going beyond the usual coverage of government contracting with non-profits, the book
provides a focused discussion on the linkages between public administration and the
non-profit sector. In an approach that balances theory and application, the book is a
guide to the practical art of forming, managing, and leading non-profit organizations.

American Society for Public Administration

Series in Public Administration and Public Policy
K10795
ISBN: 978-1-4398-1548-9
90000

www.crcpress.com
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