In my work with historic sites, financially sustainability is one of the major challenges, and many are seeking advice from business leaders to increase their earned income. It’s often an awkward situation because business owners don’t share the same values for preservation and history, and non-profits are uncomfortable with the risks associated with entrepreneurship. Much time is spent explaining and defending various practices, and making decisions is incredibly slow. But there may be an answer. This month’s issue of the Harvard Business Review predicts that the growing desire to meld non-profit mission and for-profit entrepreneurship will create a new form of organizational structure: the for-benefit enterprise.
For-benefits are a new class of organization. Like non-profits, they can pursue a wide range of social missions. Like for-profits, they can generate a broad range of products and services that improve quality of life for consumers, create jobs, and contribute to the economy. Combining social and commercial ends is not new–think of hospitals, universities, arts organizations, Goodwill. But the for-benefit model does much more than that. It redefines fiduciary duty, governance, ownership, and stakeholder relationships in fundamental ways.
Author Heerad Sabeti calls this a fourth sector of the economy, distinct from government, non-profits, and commercial businesses, with the following characteristics:
- Embedded purpose (commitment to mission and fiduciary duty)
- Earned income (sales of goods and services generate most of the income)
- Inclusive ownership (ownership is allocated among stakeholders, not shareholders)
- Stakeholder governance (shared decision-making)
- Fair compensation for employees
- Reasonable returns (ensures the organization’s ability to succeed and achieve its mission)
- Social or environmental responsibility
- Transparency (performance and impact are fully and accurately reported)
- Protected assets (social-purpose assets are preserved upon dissolution, conversion, or ownership transfer)
Intrigued? The major challenge is that our current legal and tax structures don’t allow for this hybrid–is income taxable? are donations tax-deductible? can you obtain business loans for new ventures? who owns the organization? But changes in this direction are already happening in health insurance and some jurisdictions are beginning to formally recognize them as “flexible purpose corporations” or “community interest companies”. It may be the solution that historic sites and history organizations are seeking as they move towards more economically sustainable models.
For more details, see “The For-Benefit Enterprise” by Heerad Sabeti, Harvard Business Review (November 2011), pp. 99-104.
I don’t think much of the for benefit enterprise. All organizations have to make money, whether or not they pay taxes on the profits. You run an organization to be successful and to have positive returns. Maybe a for benefit enterprise allows you to mix donations and revenues–to be a business but to get donations?
I just don’t see much benefit. Too much focus on the organizational structure and maintaining it is a form of “mission creep” that probably keeps you from focusing on managing and operating the organization.
Thanks, Richard! Yes, this is a murky area but a few organizations are currently pushing the boundaries to pursue both mission and profit. The National Trust for Historic Preservation, for example, has several wholly-owned for-profit subsidiaries such as the National Trust Community Investment Corporation. NTCIC acts as a bank with its own board to provide loans to support commercial preservation projects but also has annual income targets to upstream funds to the National Trust, the non-profit. Would a “for benefit” form allow all this work to happen within one organization and reduce expenses, increase efficiency, and better align strategy? I’m not sure but I bet large non-profits and start-up “socially responsible” entrepreneurs will be increasingly looking at this option.
BTW, the HBR article includes the following “for-benefit” companies as examples:
I-GO, a commercial car-sharing service in Chicago that’s structured as a non-profit
Qifang, an online platform dedicated to giving low-income students in China a way to pay for their education, which is structured as a for-profit
Freelancers Union, a New York-based nonprofit dedicated to developing a safety net for independent workers that has its own independent health insurance program
Does this concept anticipate that museum collections must be collateralized as a asset?
Great observation! The HBR article doesn’t address that issue (it’s just a general overview of the trend) but that’s something that would need to be addressed in the law before a “for benefit” form of corporation could be appropriate for most museums.
That is a major hurdle!
Thinking about this a bit more, the capitalization of collections is probably the domain of Financial Accounting Standards Board (FASB), not state or federal law, because they establish the standards of financial accounting that govern the preparation of financial reports by nongovernmental entities. For more details, see http://www.aam-us.org/pubs/mn/MN_JF04_LawEthics.cfm.
The governance of many small historical societies is that of a “club”. The “Board” is simply chosen from among the most popular members, and since there are few financial obligations, dues and casual donations are sufficient for survival. If mission success leads to growth, and the “club” is suddenly acknowledged to be a “community asset”, financial planning becomes both a necessity and an expectation from the larger community that now expects the organization to continue to provide the “benefit” demonstrated.
It’s not only the surrounding tax structure that needs to change. It’s the entire governance model of the group. They’ve now become responsible for the financial future of a benefit-delivering organization whose audience expects long-term continuation.
It may still be all-volunteer, friendly, accessible, and local, but it’s now more than just a “club” (operated for the benefit of it’s members). It’s an ” organizational institution”, operated for the benefit of a larger community.
Making a change in governance without losing the organizational personality can be a huge challenge.
The “for benefit” form of governance is an attempt (in part) to overcome the weaknesses and emphasis the strengths of the typical non-profit boards. Ideally, good oversight of a non-profit organization is not only the responsibility of the board but the community as a whole, but often the community has little understanding of an organization’s mission, programs, or decisions to make a reasonable assessment of performance. Congress has worked to revise the IRS Form 990 to provide additional transparency and GuideStar is placing them online to help inform donors and beneficiaries, but it’ll only work if the forms are prepared accurately and consistently. Time will tell.
Unfortunately, I mis-typed our website when entering my last post. My apologies.