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Sunday, June 5, 2011

Moving Towards Market Systems, Maybe Not Such a Good Idea - Kevin

In January 2009, the Board of Trustee’s for Brandeis University, located in Waltham Massachusetts, voted to close the universities’ Rose Art Museum. To the great disbelief of the museum’s board and director, the university’s trustees preempted the museum’s 6,000 pieces of art and moved forward with plans to sell it. Brandeis University explained that the sale of the art was necessary because the university was experiencing a 25 percent decline in its endowment, a budgetary deficit of $10 million dollars, and $208 million in outstanding tax-exempt bonds. Unfortunately, many nonprofit organizations have been drawn closer to the financial practices of the for-profit sector in hopes of raising revenue. The consequences for their risky practices have ultimately led to financial distress.

The fact that nonprofit organizations have engaged in what some consider risky financial behavior should be no surprise. Young and Salamon explain that “many nonprofits have enthusiastically embraced the new market impulses and found ways to integrate them creatively into their operations” (Salamon, 2003, p. 423). One such method of raising capital is through the issuance of tax-exempt bonds. Many nonprofits organizations used the revenue raised through the bonds for a variety of reasons which included the purchase of real estate and the construction or improvement of structures. Just as the for-profit sector forecasted that sales of goods would remain high, nonprofit organizations also took gambles. Nonprofits predicted that donations would continue to rise enabling them to cover their debts. Of course no one predicted that a recession would drastically change the economic climate. So the question arises: what factors led nonprofits down the commercialization path which has brought hardships to so many? Young and Salamon provide an answer with the identification of six factors which “propelled” nonprofits toward integration with the market system (Salamon, 2002, p. 424).

First, in what Young and Salamon identify as fiscal squeeze, nonprofit organizations have experienced a decline in traditional methods of financial support. Both private and government support has declined in the last two decades (Salamon, 2002, p. 425). Contributing to this decline was actually the opposite circumstances experienced by nonprofits in the 1960’s and 1970’s. During these years, nonprofits experienced expansive growth as government relied on them to provide a variety of social services. This growth spurt of nonprofits was funded through government subsidies which eventually comprised 30 percent of the nonprofits revenues. However, the 1980’s brought tougher times for nonprofits as government grants and contracts were reduced and replaced with programs such as Medicaid and Medicare.

Second, nonprofits have experienced an increase in demands for their services. The poor and disadvantaged have traditionally been the primary recipients of many of the nonprofits services. However, recent social and demographic changes have created a much broader collection of stakeholders. For example, the aging of the baby boomers has increased demands on health care providers and elderly care organization. (Salamon, 2002, p. 425).

Third, as for-profit organizations have observed the increase in demand of nonprofit services, they have entered arenas such as health care and elderly care. This creates competition between for-profit and nonprofit organizations. For-profits are viewed as having an advantage in the provision of these services because they, unlike nonprofits, can limit their services to those that can pay for the services (Salamon, 2002, p. 426).

Fourth, nonprofits are increasingly competing amongst other nonprofits for money. This competition is inclusive of charitable donations, government grants and contracts, and corporate donations. As the number of nonprofits continues to increase, so too will the competition for these resources.

Fifth, Young and Salamon explain that corporations are increasingly willing to form partnerships with nonprofits (Salamon, 2002, p. 428). Corporations have come to understand the advantages of such partnerships. Such advantages include; the identification of their organization with nonprofits that are viewed as being socially useful, and the retaining of skilled employees, and the attraction of dedicated customers.

Finally, Young and Salamon explain that nonprofits are experiencing increased demands for accountability. (Salamon, 2002, p. 429). As more nonprofit and for-profit organizations enter into partnerships, for-profit organizations will require the nonprofits to demonstrate that they are performing adequately. Nonprofits must also demonstrate results to private donors and government agencies. Nonprofits must understand that technological advances have increased the ability for donors to review pertinent organizational information. Such readily available information can help donors make decisions regarding which organizations are producing results.

The closing of the Brandeis University museum is one example of the dire actions nonprofit organizations have taken to address the repercussions of their involvement in unstable commercial markets. All nonprofit organizations must take notice of the unfortunate circumstances of Brandeis University as a warning against the engagement in such activities. Failure to heed the warnings will certain lead to similar descents into financial turmoil.


Salamon, L. (2002). The state of nonprofit America. Washington D.C. Brookings Institution Press.

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