Is Not-For-Profit a sustainable objective? As the name suggests, Not-For-Profit organisations (NFPs) such as charities, foundations, institutions, and even political groups, are characterised by the objective of creating ‘social’ rather than ‘material’ value. This raises questions about their sustainability and ability to thrive. What are key drivers for successful governance and management of NFPs? This article examines the main challenges faced by the NFP sector and identifies the success factors of a well-managed charitable organisation. The common thread in NFPs is that they all advocate a social objective which for example promotes religion, education, the alleviation of poverty and other laudable civic goals. Every country has its own statutes which govern NFPs and generally the financing of NFPs is done by donors, international agencies, government institutions, private individuals and the general public. NFPs have to operate with two contrasting disciplines: economics and sociology. These disciplines are at the root of the objective of any NFP and they represent the two longstanding dilemmas at the same time. On one hand, the standard economic model does not apply to a distinctive nonmarket situation which characterises NFPs while, on the other hand, the sociological perspectives offer interesting insight, but fail to develop plans of action for NFPs. Looking at the broader concept, it is worth making a distinction between ‘Non-Profit’ and ‘Not-For-Profit’ organisations which although used similarly do not mean the same thing. While both types of organisations may be advocating a social cause, the Non-Profit organisations would have different memberships, and their objectives may have settings which include scientific research, environmental challenges and the like. People will associate ‘Non-Profit’ status to Social Clubs such as the Rotary, Lions etc. NFPs are driven essentially by the sociological perspectives which make them sustainable in the longer term due to the ever-increasing need to integrate civil society to business, politics, the economy in general and social development. Individuals and groups often perceive the presence of NFPs as being attributed to market or government failure in specific services. However, the importance of human construction and social interaction in the emergence of shared realities make NFPs a sustainable objective.
The main challenges of NFPs
Resource Dependency Resource dependency is one of the biggest challenges of NFPs. The sources of finance which rely on donations, fund-raising activities, direct support from business communities and Government grants in some cases become scarcer in the wake of increasing social needs. Mismanagement Mismanagement is a particular problem with NFPs because the employees are not accountable to anybody who has a direct stake in the organisation. Projects may be started and they are never completed due to wrong forecast of costs and expenses. The recent Oxfam scandal in the UK tend to point out to the lack of ethics by people entrusted to run NFPs. Lack of talent There are reports of major talent shortages in the NFP sector today regarding newly graduated workers. NFPs inevitably face severe competition with private and public sectors in attracting and maintaining talented employees. Remuneration packages are very often not commensurate with the level of responsibilities and work stress employees have to undergo in NFPs. Strategic planning, accounting & auditing shortages As far as NFPs strategic management is concerned, it comes as no surprise, that NFPs experience a significant lack of strategic planning. Accounting and auditing have been not very popular in NPO circles and these disciplines tend to be undermined in the management of NFPs. Financial management Although the techniques of financial management in NFPs do not fundamentally differ from those in profit-oriented enterprises, there are some peculiarities which underpin NFPs. They all pertain to the specific way NFPs are funded, and more specifically the diversity of sources of equity, which is clearly more important than for-profit oriented firms, and its consequences for the financial vulnerability of NPOs Founder’s syndrome Particularly in the case of Foundations, the ‘Founder’s Syndrome’ is an issue organisations experience as they expand. Dynamic founders, who have a strong vision on how to operate the organisation, try to maintain control and this undermines new employees or volunteers who attempt to expand the scope of projects or to change policies. Compliance with legislations Charities have to abide by a lot of legislations to ensure that they are operating correctly and fairly. In the UK it is the Lobbying Act that is one of the biggest challenges facing the sector. In the US, the Trump Administration has brought the largest change in Tax Codes exercising much pressure on NFPs. Embracing new technology As in any sector, technology innovation has made a dramatic impact on the NFP sector. It has significantly changed how charities raise funds and how individuals donate and support charities they care about. Embracing new technology has create huge opportunities for those who managed successfully and left those who haven’t with a big challenge at hands.
Managing NFPs successfully
In the wake of the various challenges NFPs must face, it is essential to identify the success factors and build up models that thrive A charity, for example, is accountable to its patrons and its beneficiaries and it is rightly being challenged more frequently and scrutinised closer than ever before. Transparency and accountability are very high on the agenda and charities need to enhance their channels for communicating their expenditure, strategies, impact and ethics to grow public understanding and instil confidence. They need to show that they are using funds in the best way to support the people on whose behalf they operate. Adopting a proper governance model is another challenge. Governance is an amalgamation of policies, systems, and structures, along with a strategic, operational framework that aligns organisational leadership to take action, so that they can make effective decisions with accountability. A model for governance refers to how those policies, systems, structures, and framework interface with each other and whether the responsibility for them lies with the board as a whole, or with the individual board members. The Australian Institute of Company Directors has enumerated ten important requirements for an effective Governance Model for NFPs:
- Roles and responsibilities
There should be clarity regarding individual director responsibilities, organisational expectations of directors and the role of the board.
- Board composition
A board needs to have the right group of people, having particular regard to each individual’s background, skills and experience, and how the addition of an individual builds the collective capability and effective functioning of the board.
- Purpose and strategy
The board plays an important role in setting the vision, purpose and strategies of the organisation, helping the organisation understand these and adapting the direction or plans as appropriate.
- Risk – recognition and management
By putting in place an appropriate system of risk oversight and internal controls, boards can help increase the likelihood that their organisation will deliver on its purpose.
- Organisational performance
The degree to which an organisation is delivering on its purpose can be difficult to assess, but this can be aided by the board determining and assessing appropriate performance categories and indicators for the organisation.
- Board effectiveness
A board’s effectiveness may be greatly enhanced through: careful forward planning of board-related activities; board meetings being run in an efficient manner; regular assessments of board performance; having a board succession plan; and the effective use of sub-committees, where appropriate.
- Integrity and accountability
It is important that the board have in place a system whereby: there is a flow of information to the board that aids decision-making; there is transparency and accountability to external stakeholders; and the integrity of financial statements and other key information is safeguarded.
- Organisation building
The board has a role to play in enhancing the capacity and capabilities of the organisation they serve.
- Culture and ethics
The board sets the tone for ethical and responsible decision-making throughout the organisation.
- Engagement
The Board should help an NFP to engage with its stakeholders. Some examples of key stakeholders are the people and/or groups served by the NFP, donors, creditors, directors, employees, volunteers, government (and its agencies), members, other related institutions, suppliers.Click here to learn more.
