Leading Strategic Change: New Perspectives on the Nonprofit Sector

1. Jim Phills Centre for Social Innovation Leading Strategic Change: New Perspectives on the Nonprofit Sector

2. Agenda • Nonprofits in Perspective • Purpose • US Growth • Significant Characteristics • Implications • The Importance of Leadership • Social Innovation: Beyond Nonprofit Leadership • Q&A

3. The Purpose of Nonprofits • Why do we need nonprofit organizations? Beauty Knowledge Justice Fairness Healing Faith CompassionVoice Understanding Community The Creation of Social, Environmental, and Aesthetic Value: “A better world”

4. Growth of Nonprofit Sector in the US • Number of 501(c)(3)s (public charities and private foundations) 474,000 in 1989 to 774,000 in 1999 ( increase of 67 %) • Between 1970 and 2000 nonprofits share of gross domestic product (GDP) went from 3.1 % to 4.2 % • Between 1970 and 2000 government spending as a percentage of GDP declined from 13.9 % to 10.8 % • In 1999, Nonprofits (including religious congregations) reported revenues of more than $1.03 trillion, and held assets of more than $1.65 trillion • Source: (Boris & Steuerle , in press)

5. Charitable Giving in the US • Total giving in 2002 was $241 billion • 37 million individuals • $184 B + $18 B in bequests • 400,000 corporate sponsors • $12 B • 60,000 independent foundations • $27 B • ~50% to religious and educational institutions Source: (Meehan et al 2004)

6. Significant Characteristics of Nonprofits • Product Market • Produce public goods • Produce goods or services that are difficult to evaluate • Provides goods or services to those with limited ability to pay • Receive portions of income in the form of donations • High fixed cost as a proportion of total cost

7. Significant Characteristics of Nonprofits • Organization & Management • Lower level of compensation (non-contingent) • Poor incentives for cost minimization • Cross-subsidization • Productive inefficiency

8. Significant Characteristics of Nonprofits • Capital Market • No equity ownership • Providers of capital lack of direct influence over management [governance] • Absence of a market for corporate control • Limited access to capital • High cost of acquiring capital

9. Significant Characteristics of Nonprofits • Legal & Economic • Benefit from public subsidy in the form of tax exemption • Non-distribution constraint “The defining characteristic of non-profit organization is that the persons who control the organization…are forbidden from receiving the organization's net earnings. This does not mean that a nonprofit organization is barred from or in profits; rather, it is the distribution of profits to controlling persons that is forbidden. Thus by definition a nonprofit organization cannot have owners.” • Hansmann, 2000 The Ownership of Enterprise

10. Significant Characteristics of Nonprofits • Nature of Performance • Given the complex non-monetary objectives of nonprofits, operational definitions of “performance” tend to be elusive and contested • Lack of a “single value objective function” (e.g., maximizing shareholder wealth) (Jensen, 2001)

11. Challenges facing the Nonprofit Sector in the US • Increased competition for funding • Growing private and public sector substitutes • Increased pressure from donors to: • Demonstrate and measure efficiency and effectiveness • Achieve sustainability • Establish alliances and partnerships

12. Implications of Characteristics and Challenges • Scarcity of resources • Difficulty making choices & tradeoffs • Questions about accountability • Difficulty ensuring adequate motivation • Difficulty aligning incentives • Confusion and conflict over organizational priorities • Inefficiency in the allocation of resources within and across organizations LEADERSHIP

13. Developing the global leadership capacity of the nonprofit sector • The Need • Globalisation and social change • New social needs and problems • Growing complexity and interdependence of social problems • International conflict • Resource Scarcity

14. Developing the global leadership capacity of the nonprofit sector • The Possibilities • More efficient allocation of resources across organizations to areas of greatest social return • Increased legitimacy and respect accorded sector managers • Increased funding to the sector • Increased innovation, effectiveness, and efficiency within the sector • Progress addressing social needs and problems

15. A Caveat: The problem with leadership • “There are almost as many different definitions of leadership as there are persons who have attempted to define the concept” (Stogdill, 1974) • “Of all the hazy and confounding areas in social psychology, leadership theory undoubtedly contends for the top the nomination... Ironically, probably more as been written and less is known about leadership than any other topic in the behavioural sciences. (Bennis, 1959)

16.   The problem with leadership

17. A Functional Approach to Leadership • “The leaders main job is to do or get done whatever [needs to be done]” (McGrath, 1962) • “The emphasis is not so much on what the leader should do as on what needs to be done for effective performance.... the functional approach leaves room [as to how] to get critical functions accomplished” (Hackman and Walton, 1986)

18.  Key Leadership Functions • "Executive work is not that of the organization, but the specialized work of maintaining the organization in operation" • Direction • “to formulate and define the purpose, objectives, and ends of the organization” • Motivation • “to promote the securing of essential efforts” • Design (organizational architecture) • “to provide the system of communication”    (Barnard, 1938 p. 215)

19. Leadership Functions: Direction, Design, & Motivation Psychological & Emotional Logic Mission Economic Logic Strategy Execution Activities Resource Allocation Policies Source: (Phills, in press)

20. A Multi-level view of Nonprofit Leadership • Organizational • Problem/Need • Sectoral • Societal • Global

21. Social Innovation: Beyond Nonprofit Leadership

22. Social Innovation • The Meaning of Social Innovation • Innovation • The development and implementation of novel and useful solutions to problems • (Burns and Stalker 1961; Kanter 1983; Amabile 1988) • Social • Has a social purpose or benefit • Is in the service of fulfilling a social need or addressing a social problem

23. The Meaning of Social Innovation • The process of inventing, securing support for, and implementing novel and useful solutions to important social needs and problems • That are more effective and/or more efficient

24. Key features of Social Innovation • Alternative focus • Social needs and problems rather than sectors • Education, Poverty, Hunger vs. • Nonprofit, Public, or Private • Inclusive Scope • Individuals and institutions who organize activities and allocate resources in pursuit of a social purpose

25. Paradoxical Assumptions underlying Social Innovation • Sector independence • The legal status of a social purpose organization is a choice • There are multiple possibilities that are viable for any given idea or approach

26. Paradoxical Assumptions underlying Social Innovation • Sector interdependence • Boundaries between sectors are becoming more porous as reflected in the exchange of people, ideas, and capital • Growing emphasis on alliances and partnerships between nonprofit, public, and private sectors • Increasingly efforts to address major social problems will require collaboration of all sectors as well as reconfiguration of traditional roles • Environmental degradation • Global health threats • Educational reform

27. The Centre for Social Innovation (CSI) • History • Founded at Stanford Graduate School of business in 1999 • Mission • To foster innovative solutions solutions to social problems by enhancing the leadership, management, and organizational capacity of individuals and institutions pursuing the creation of social and environmental value

28. The Centre for Social Innovation • Philosophy • Dissolving boundaries: facilitating the exchange of ideas, values, and talent between the private, public and nonprofit sectors. • Increasing sense of accountability and emphasis on performance in nonprofit & public sectors • Increasing sense of responsibility and awareness of social impact in private sector

29. CSI: Activities • Research • Generate knowledge that enhances our collective understanding of social innovation; • Teaching • Facilitate the dissemination and exchange of knowledge • Engagement • Enable and support the implementation of social innovation through community outreach

30. CSI: Programs • Alumni Consulting Team (ACT) • Public Management Program (PMP) • Executive Education for Nonprofit Leaders (EPNL) • Stanford Education Leadership Institute (SELI) • Stanford Social Innovation Review (SSIR) • Stanford Project on Emerging Nonprofits (SPEN)

31. Stanford Social Innovation Review(SSIR)

32. SSIR: A Recurring Theme from the 1st Year • Application of Business Ideas to the Nonprofit Sector • High Engagement (Venture) Philanthropy • Going to Scale: Replication of Social Programs • Alliances and Partnerships • Social Enterprise/Entrepreneurship

33. Stanford Project on Emerging Nonprofits (SPEN) • Research Team • Woody Powell, Denise Gammal, Caroline Simard, & Hokyu Hwang • Research Project • A comprehensive study of the social sector in the San Francisco Bay Area • Quantitative Analysis of the more than 9,000 nonprofits in 10 counties using IRS data on the total population • Qualitative analysis of 200 randomly selected operating charities through a series of in-depth interviews with executive directors or presidents

34. Key motivations for SPEN: 1) Shrinkage of the Welfare State: • What are the consequences of the increasing private provision of public goods? 2) Growing Professionalization of Nonprofits • Is the transfer of managerial practices having an impact? 3) Emergence of Venture Philanthropy & Social Entrepreneurship • What is the impact of these trends?

35. SPEN: Research Questions • What impact do different funding models have on organizational behaviour, development and sustainability? • What are the pressures, mechanisms, and conditions facilitating the circulation of ideas within the sector and across sectors? What are the relationships through which ideas flow? • How have nonprofits fared since the economic downturn?

36. Growing unmet societal need - - health care, mental health, homelessness, social services - - creates pressure to increase scale Accounting, fund-raising scandals prompt demands for transparency Lack of sufficient new revenue triggers search for income-producing opportunities Nonprofit Sector 3rd party provision of government services produces standardization High-engagement philanthropy encourages ‘outcomes’ measures Widespread acceptance of ratio of administrative to total expenses as a benchmark Calls from high profile ‘gurus’ for social entrepreneurship promote cross-sector transfers Pressure on Nonprofits to adopt or develop “business-like” practices

37. Preliminary Insights from SPEN • How does receptivity to transfer of practices vary across nonprofits? • Fiscal Health: inverted U-shaped distribution, with poorest and wealthiest less likely, those in the middle most receptive. • Funding Model: dependence on earned income heightens transfer; diversified funding base lessens transfer. • Activity: Volunteer, Advocacy, and Religious NPs are less receptive. • Professionalization of Staff: more managerial/applied degrees, more receptive; and well compensated professional staff are fertile audience for transfer. • Nature of Board: more heterogeneous and less corporate, then less receptive; more corporate, then more receptive and more direct transfer. • Competition: Nonprofits that are in “mixed” industries that compete with for-profits are much more likely to utilize business practices.

38. Transfers that are counterproductive or superficial: • “Funders are intensifying their reporting requirements, but in a misguided way. They’re training nonprofits to write about what they want to hear, not producing results.” Executive director, large human services organization • “Everybody requires a report and everybody wants their own format and the data collected their own way. They are sympathetic that every funder has their own requirements, but each of them thinks the simple solution is to adopt their method of reporting.” Executive director, large human services organization • “Well, there’s no use doing something if it’s not making you money. We’ve learned that.” Executive director, youth athletic association • “There are so many advisory committees recommending requirements for contracting that don’t really make a lot of sense.” Executive director, parental counselling organization • “Every single funder adds 2 or 3 little changes in their quarterly reports in terms of questions and items for reporting. It seems like every year more and more time goes into the reporting and less time to actually working with people….” Executive director, transitional housing org.

39. Transfers that are deep: • “We’ve seriously taken on the role of creating financial stability. We don’t say we’re like a business, we are a business.” Exec. dir., large human services org. • “Nonprofits need not be ashamed of being businesses. We need best practices benchmarks. Many NPs not only can’t do it, but find the very idea offensive.” Exec. dir., large human services org. • “We are always evaluating our services to see if there are things we need to let go. Some programs that were very successful in the past would just get laughed at by our contemporary clients and funders. So we’ve become pretty ruthless about deep-sixing things when they don’t work well any longer.” Exec. dir., large human services org. • “We use Stanford GSB students to help us do periodic market assessments. With their help, we are creating a database that makes it easier for us to track every person that comes through our doors.” Exec. dir., medium-sized public advocacy org. • “We were founded by a group of business leaders who were concerned about the quality of science and math education in our schools and worried that students were not prepared to be competitive.” Exec. dir., medium-sized educational NP.

40. Transfers that are deep: • “We now measure by units of service, and that means many things - - number of bags of groceries, number of times we talk to a client, different types of services we perform for a client, number of hours we spend with a client, etc. We keep records of all these, it’s a fairly sophisticated process we have to do for our grants.” Executive director, AIDS services org. • “The grant application process is intensive. They evaluate us musically but they also ask: Are you a viable arts organization? Do you charge for tickets? Are your audience numbers growing? Is your Board integrated? Is your organization serving various economic goals?” Executive director, boys choral group • “Government is much more intensive. They really want to know about your constituency, its ethnic breakdown. They want surveys, with age of audience and other demographic info. They want to know who is coming to our shows, is it tourists or locals, so they can evaluate the Hotel Tax Fund for the Arts. It is an intensive amount of work for us to generate all this information for them.” Executive director, arts organization • “We have a social bottom line. We have to report how much we save the city by employing ex-convicts, and estimate how much is saved by not having folks committing crimes and being put back in jail. This is monitored closely.” Executive director, prison gardens program

41. Q&A

42. References • Amabile, T. M. (1996). Creativity and innovation in organizations, Harvard Business School Note:9-396-239. Boston, MA: HBS Publishing. • Bennis, W. G. (1959). Leadership theory and administrative behaviour: The problem of authority. Administrative Science Quarterly, 4, 259-301. • Boris, E. T., & Steuerle, C. E. (in press). Scope & Dimensions of the Nonprofit Sector. In W. W. Powell (Ed.), The Nonprofit sector: A research handbook (2nd ed.). New Haven: Yale University Press. • Burns, T., & Stalker, G. M. (1961). The management of innovation. London: Tavistock. • Jensen, M. C. (2001). Value maximization, stakeholder theory, and the corporate objective function. Journal of Applied Corporate Finance, 14(3), 8-21. • Meehan, W. F., Kilmer, D., & O’Flanagan, M. (2004). Investing in Society: Why we need a more efficient social Capital market - and how we can get there. Stanford Social Innovation Review, 1(4), 35-43. • Mintzberg, H. (1987). The strategy concept I: Five Ps for strategy. California Management Review, 30(3), 11-24. • Mintzberg, H. (1994). The fall and rise of strategic planning. Harvard Business Review, 72(1), 107-115. • Oster, S. (1994). Modern competitive analysis (2nd ed.). New York: Oxford University Press. • Oster, S. M. (1995). Strategic management for nonprofit organizations. New York: Oxford University Press. • Porter, M. E. (1996). What Is strategy? Harvard Business Review, 74(6), 61-78. • Phills, J. A. (in press). Integrating strategy and mission for nonprofit organizations. New York: Oxford University Press. • Saloner, G., Shepard, A., & Podolny, J. (2000). Strategic Management. New York: John Wiley. • Stogdill, R. M. (1974). Handbook of leadership: A survey of theory and research. New York: Free Press.

43. Back-up