When Nonprofits Act Like Businesses, Transparency Improves


When Nonprofits Act Like Businesses, Transparency Improves

A 12-year study reveals that charities that adopt modern strategies are more likely to share and collaborate.
A homeless man reads a paper saying "You are beautiful, you are valuable, you are loved"
Over the past decade, nonprofit have placed increasing emphasis on internal performance and financial acumen. | Reuters/Brian Snyder

For most of the 20th century, nonprofit organizations had a reputation, for better or worse, of being slow to adapt to shifting demands and reluctant to adopt practices typically associated with for-profit corporations. Then, in the 1990s, donors and consultants started urging charities to become more efficient and businesslike.

What were the consequences?

Stanford Graduate School of Business professor Walter W. Powell, along with a team of graduate students, set out to answer that question. Tracking a random sample of 200 nonprofit organizations from the San Francisco Bay Area for over a decade, Powell and colleagues found that organizations that were early adopters of managerial practices have been able to change relatively quickly to become more transparent and collaborative.

Beginning in 2002, the original research team began a three-year process of studying and interviewing the directors of 200 nonprofits representing a wide range of activities, including human services, education, religion, the environment, and the arts.

“In the early part of study, we saw the growing adoption of managerial processes commonly associated with business,” says Powell. Many organizations, for example, had already started using auditors to perform internal financial reviews. Others hired outside consultants to develop and evaluate programs and to assist with strategic planning.

They also employed a form of self-assessment common among businesses: the widely used SWOT analysis, which evaluates an organization’s strengths, weakness, opportunities, and threats. A new emphasis on internal performance and financial acumen led some organizations to change their hiring practices and recruit staff and executive directors holding MBA degrees.

More than a decade later, in 2016, the research team, which includes Christof Brandtner and Aaron Horvath, both graduate students in sociology at Stanford University, revisited the same nonprofits. More than 175 were still active, despite the roller-coaster experience of the Great Recession. Some had left the Bay Area because of the costs, and a few had changed form, becoming for-profits, public agencies, and in one case, a foundation.

Organizations are becoming more porous and open to more people.
Walter W. Powell

This time, the team made use of online surveys and examined tax documents, web pages, and social media profiles. They found that the organizations, especially those that were early adopters of business-oriented practices, had become less insular by actively collaborating with other organizations and soliciting input from constituents through online channels.

These early adopters of management practices devoted more attention to strategic planning, pursuing operational efficiencies, and measuring their progress, says Powell. “This is what, in part, has helped them to reach out to their constituents through the web and share data on the impact of their work.” Younger donors, in particular, are interested in “high-impact philanthropy” and want nonprofits to use metrics from the business realm to measure the impact of their efforts.

Nearly all the nonprofits in the study had become savvier in using websites and social media to interact with clients and the public. A youth choir, for example, uses its website to sell recordings to broaden its audience. An organization that distributes meals to homebound people now allows clients to schedule deliveries online and to have video conferences with staff and volunteers. Formerly shut-in seniors are now able to have more human contact. Many nonprofits use social media to solicit input and “to get members of the community to participate in decision-making,” Powell says.

“Part of what we’re seeing is greater openness and transparency and more engagement in working with constituents,” says Powell. He cites, for instance, a child services organization that now actively asks clients for evaluations and ideas.

Some business practices were even repurposed in ways that are unlikely to ever be used by businesses themselves. A homeless services organization, for instance, uses strategic planning sessions to ask whether it should continue to exist, soliciting input for the homeless about the quality of its services and involving them in organizational changes. Airlines might take note, Powell suggests.

The researchers found that nonprofits are also increasingly inclined to view like-minded organizations as collaborators rather than as competitors, and thus are more willing to work together. Accountability and transparency are enhanced by holding more public meetings and posting tax filings, annual reports, and other documents online.

“Organizations are becoming more porous and open to more people,” Powell says. “And it is precisely those organizations that were focused on building up their internal capacity in 2005 that now orient their activities outward most distinctively.”

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