The Dysfunction of Non-Profit Organizations

Nov 16, 2011 by



Jay Greene – I have almost always worked for non-profit organizations. They’ve generally been great jobs, but I can’t say that I’m impressed by how they operate. I understand that all organizations are flawed and inefficient, multiplying the flaws and inefficiencies of the people working for them. But non-profit organizations strike me as particularly flawed and inefficient.

At the heart of the problem is that non-profit organizations lack the discipline of the profit motive. There are no shareholders seeking to maximize the return on their investments. Instead non-profit organization are answerable only to a board, who must ensure that the organization has sufficient resources to work toward a mission or set of missions that the board designates.

The need to raise finds can provide discipline to a non-profit organization, but if the non-profit receives government funds or has an endowment, the financial discipline of getting donors to voluntarily pay for operations is lacking. The only source of accountability for endowed or government-supported non-profits is from the supervision of the board. But we all understand that monitoring costs are very high for boards that are determined to exercise an accountability function. And over time board are quite often captured by the employees of non-profit organizations, so they rarely attempt to exercise real supervision.

Without much financial accountability what do senior managers of non-profits tend to pursue? There are limits to their salaries, so once they have obtained as much compensation as they can reasonably expect they tend to use their autonomy to build empires. They tend to increase the size of their organization to employ more people, have more buildings, and have their hands in more activities. Bigness increases the status and power of the non-profit managers since they have a larger patronage machine, shiny facilities to impress others, and can intervene in more arenas.

There has been insufficient attention to the problem of gigantism in non-profit organizations. When for-profit organizations become too large they are either broken-up by regulators with tools like anti-trust or they are divided by shareholders who recognize that the parts are worth more than the whole. The conglomerates of the 1970s fell victim to corporate raiders who made a fortune by breaking up overly large and inefficient profit-seeking organizations.

But where are the raiders in the non-profit world? They don’t exist. So nothing stops government funded or endowed non-profits from getting way too big.

I’m not talking about non-profits getting so big that they possess too much power or influence. That’s a discussion for another post. I’m simply talking here about non-profits getting too big to efficiently pursue their mission anymore.

I’m not sure what if anything should be done about this problem. If donors endow a non-profit understanding that they can easily suffer from gigantism, then why should anyone else care if they are wasteful with their money? Some might say that the government should care because it granted non-profits a tax-advantage for which it should expect the efficient pursuit of the public good. But that perspective assumes that not having your money taxed is a privilege because all money ultimately belongs to the government. I don’t believe that. Besides, the government is almost certainly less capable of ensuring organizational efficiency than non-profit boards and would likely be even more wasteful if it received the money instead of the non-profit.

But I can’t help being bothered by the clear dysfunction of non-profit organizations. I just hate waste. Perhaps the real problem is that gigantism among non-profits crowds out the possibility of more efficient operations by profit-seeking organizations. An overly large non-profit sector grabs more talented people who could instead be working more efficiently in the private sector. Big non-profits also compete with services provided by profit-seeking organizations but their tax-advantage allows them to do so more inefficiently.

Perhaps all organizations, non-profit or profit-seeking, should be taxed in the same way and at the same level. If the tax burden were spread across all types of organizations, the tax rate could be lower. And as the Al Copeland Humanitarian Award has taught us, profit-seeking individuals and organizations often do far more good in the world than do non-profits who claim to exist for the public good.

And perhaps wealthy individuals should have a clearer understanding of the tendency of non-profits toward gigantism before they endow them. They could address this problem with spend-down requirements so that non-profit managers cannot build a permanent empire for themselves. They could also address this by investing more of their money in profit-seeing organizations rather than giving it away, since those profit seeking organizations may end up doing more good.

It’s true that wealthy individuals can’t take it with them when they die, but they don’t have to permanently endow self-serving non-profit empires. If they can’t think of any better way to control gigantism in non-profits, they could always just give their money to their fellow shareholders. Yes, there are no tax-advantages for that way of disposing of one’s assets after death, but at least those wealthy individuals could know that the money was going to their business partners and hope that it would be reinvested in new, profit seeking enterprises that might make the world a better place.

via The Dysfunction of Non-Profit Organizations « Jay P. Greene’s Blog.

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