Saturday, November 2, 2013

When Is the Nonprofit Sector Big Enough?

I had the opportunity to read two opinion papers back-to-back that presented very different views of private philanthropy. The implications of their ideas raise big-picture questions about the purpose of the nonprofit sector. In her article “Plutocrats at Work,” Joanne Barkan described today’s philanthropic sector as contributing to an era of plutocracy—rule by the wealthy.

Mega-foundations are more powerful now than in the twentieth century—not only because of their greater number, but also because of the context in which they operate: dwindling government resources for public goods and services, the drive to privatize what remains of the public sector, an increased concentration of wealth in the top 1 percent, celebration of the rich for nothing more than their accumulation of money, virtually unlimited private financing of political campaigns. . . . In this context, big philanthropy has too much clout.

What troubled Barkan is that a minority of wealthy elites is tremendously influential in addressing large-scale social problems with no mechanism for them to be accountable to the populace. Consequently, decisions about how to resolve critical issues, such as in education, are not made democratically, but by those with money and concomitant power. Informal channels for accountability have been ineffective: The court of public opinion does not attend to the charitable activities of the wealthy, and journalists are unwilling to critically question private foundations (Feldman, 2007). Basically, there is no direct mechanism for the public—let alone the poor, the disenfranchised, and the underserved—to shape how the wealthy spend their money on issues that affect them. In short, there is no democratic say in how private philanthropists set or enact their agendas. Furthermore, what particularly galled Barkan is that taxpayers subsidize this undemocratic approach. Through tax deductions for charitable giving and tax exemptions for private foundations, we all enable a minority of wealthy individuals and their philanthropic institutions to become powerful in determining how our nation’s social issues are addressed without any accountability to the larger public.

Rob Reich’s[i] article “Philanthropy and Caring for the Needs of Strangers” presented a very different view, arguing that the American philanthropic sector actually performs, not undercuts, democracy. In prefacing his argument, Reich acknowledged that the nonprofit sector, including private philanthropy, is not effective in supporting or solving the needs of the poor. “Philanthropy appears to be more about the pursuit of one’s own projects, a mechanism for the expression of one's values or preferences rather than a mechanism for redistribution or relief for the poor.” He cited a Google-commissioned study by Indiana University’s Center for Philanthropy, which not only found that the minority of all charitable giving goes to those in need (only approximately one-third of all giving) but also that the wealthier the donor, the less they donate to issues concerning the poor. Given these findings, Reich concluded, “philanthropy is not much about caring for the needs of strangers.” But, Reich argued that the charitable sector was not intended to be a place to solve social problems and help the poor and, thus, these should not be the measuring stick against which to judge philanthropy. Rather, philanthropy and the subsidies to promote charitable giving are meant to encourage the wealthy to express freely their charitable impulses, not to solve social problems.

As I read Barkan and Reich's positions, the mantra ‘to do no harm’ was a constraint refrain in my head. No surprise as it has remained fixed after a decade of working at private foundations. This adage is the only explicit mechanism (albeit a voluntary and subjectively interpretable one) to invoke democratic accountability among grant making decision makers. Does one worldview—Barkan or Reich’s—result in more harm than the other? In considering this question, I thought of an article that has long been influential among arts funders—John Kreidler’s “Leverage Lost: The Nonprofit Arts in the Post-Ford Era.”

In this seminal essay, Kreidler described the birth of today’s nonprofit institutional model of support as it developed out of the arts. The arts in the United States looked very different up until the mid-twentieth century when modern-day forms of public charities and private foundations began to emerge. Before then, there were two kinds of ‘arts’—the high arts supported by the wealthy, such as museums and classical music, and the low, popular arts that competed in the commercial marketplace, such as vaudeville and comedy shows, radio programs, and dance halls.
Beginning in 1957, the Ford Foundation invented a new method of proliferating the high arts throughout the country. The foundation introduced the concept of short-term grants (commitments of no more than five years) that required a match of their funds. Not only did this proliferate the establishment and expansion of institutions of high art forms, but also the lure of Ford Foundation’s matching support transformed locally based people of means to become philanthropists and enjoy the prestige that came with it. In this way, Ford Foundation’s grant design introduced an institutional support model based on decentralization of support to local levels with resource dependency on no one funder, leveraging of dollars, and establishing, growing, and expanding non-commercial institutions.

If there’s any question of the success of this institutional support model, take a look around. In 1940, there were but 12,500 charitable organizations registered with the Internal Revenue Service (Hall, 2010). In 2010, there were nearly 1 million 501(c)(3) public charities out of over 1.5 million nonprofit organizations registered with the I.R.S. (Blackwood, Roeger, & Pettijohn, 2012). Public charities had revenues of $1.5 trillion and held assets of $2.7 trillion as of 2010 (Blackwood, Roeger, & Pettijohn, 2012). (For those curious about the arts, this sector accounts for about 10% of the total number of public charities.)

Before the mid-twentieth century, the institutionally based nonprofit model basically did not exist. Certainly there have always been charitable, voluntary, association-based efforts since the time of the Puritans, but these were a far cry from the complex, interconnected, and multi-faceted system that we now call the nonprofit sector. Consider that the annual revenues of U.S. public charities, in aggregate, is larger than the budgets of most governments around the world—larger than Spain, Russia, South Korea, India, and Hong Kong (if Wikipedia is to be believed).

So why am I recalling Kreidler to talk about Barkan and Reich? Taken together, these three essays paint a troubling picture of the nonprofit sector. The nonprofit sector, according to Kreidler, was designed to focus on institution building, with roots in elitist notions of the kinds of institutions that should be supported—arts, universities, specialized medicine. Also, the data tells us (Center on Philanthropy at Indiana University, & Google, 2007) and Reich acknowledged that what’s been built so effectively since the mid-twentieth century is a charitable institutional complex that better serves the interests of the wealthy than the basic needs of the poor. Moreover, as Barkan pointed out, taxpayers are underwriting the costs of avoiding solutions by subsidizing financiers of the nonprofit sector who are both undemocratic in their lack of accountability and ineffective at addressing non-elitist issues.

Having worked at and with a number of private foundations that are trying, truly trying, their damndest to make a positive difference, it’s hard to see this unflattering macro-picture. But, whenever foundation leaders defend the philanthropic sector, such as its tax exemption or its payout rate, they are reinforcing the very structures that have been, at its root, about realizing the interests of wealthy elites. And, same too of charitable organization leaders who, in their mission-driven focus on their own sector-specific issues, lose sight that the more money that flows into their sector at the expense of bolstering public coffers, the more resources stay within a sector that data and anecdote agree is unaccountable, not redistributive, and ineffective at realizing large-scale solutions. In other words, our shortsighted trust of our own nonprofit sectors has blinded us to the significant flaws that undermine addressing social and environmental problems. After all, each one of us is so good-hearted, how can we possibly be contributing to a system that reinforces inequities and undermines social change?

Most modern-day nonprofit institutions are less than 60 years old and federally recognized private foundations have been around for only 44 years. When will we assess the nonprofit sector’s limitations in solving social problems relative to other sectors’ abilities (i.e., public governments or private enterprise)? The nonprofit subsectors have regularly taken a protectionist stance in maintaining the status quo on charitable tax exemption levels, foundation payout, and estate taxes rather than give government more money. Certainly, such defense was necessary in order to develop this sector. But, are we at a point now when growing the nonprofit sector does more harm than good? Does continuing to fight for the nonprofit sector’s growth make sense today if we acknowledge that this sector is not effective at solving social problems, especially those that affect the most disadvantaged?

In no way am I saying we should dismantle the nonprofit sector or private foundations; after all, they provide a safety net and an essential infrastructure for charitable work to occur. Not only that, but public charities and foundations do exceptionally wonderful work. Consider that Rockefeller Foundation funding helped in the founding of historically black colleges and that Ford Foundation supported the establishment of the Urban Institute and the Center on Budget and Policy Priorities to cite three of innumerable examples of this sector's public good. I am merely questioning when is enough enough? Recent efforts in the commercial sector to develop their own structures to solve social problems, such as state-recognized benefit corporations, B Corp certification, and new investment classes of triple bottom-line businesses are examples of how the nonprofit sector is not being seen as a place to realize solutions. In addition, some private funders are becoming increasingly interested in funding non-501(c)(3)s, which is another indication that there are limitations to this sector. So I leave you with these questions. In what ways is the nonprofit sector now harming, rather than helping, us reach our mission-related goals? Should it still be our priority to preserve and grow the charitable institution complex? How can we align wealthy donors’ freedoms with meeting the needs of the poor? And, when should nonprofit workers and leaders channel resources to the best sectors able to solve social problems, no matter if it is in the nonprofit or not?

Works Cited

Blackwood, A., Roeger, K. L., & Pettijohn, S. L. (2012). The nonprofit sector in brief: Public charities, giving, and volunteering, 2012. Washington, DC: Urban Institute Press.

The Center on Philanthropy at Indiana University, & Google. (2007). Patterns of household charitable giving by income group, 2005. Indianapolis, IN: The Center on Philanthropy at Indiana University.

Feldman, B. (2007). Report from the field: Left media and left think tanks--Foundation-managed protest? Critical Sociology, 33(3), 427–446.

Hall, P. D. (2010). Historical perspectives on nonprofit organizations in the United States. In D. O. Renz (Ed.), The Jossey-Bass handbook of nonprofit leadership and management (3rd ed.) (pp. 3-41). San Francisco, CA: Jossey-Bass.

Kreidler, J. (1996). Leverage lost: The nonprofit arts in the post-Ford era. The Journal of Arts Management, Law, and Society, 26(2), 79–100.

Reich, R. (2013). Philanthropy and caring for the needs of strangers. Social Research, 80(2), 517–538.

[i] Rob Reich often gets confused with another sharing a similar name, but the two could not be more different in their views of the nonprofit sector. This Rob Reich teaches political science at Stanford University where he co-directs the Center for Philanthropy and Civil Society. The other is political economist Robert Reich, who was former Secretary of Labor under President Clinton and now teaches at UC Berkeley.


  1. Having worked in all three sectors: Government, For-Profit, and Non-Profit - I don't think the question is whether the non-profit sector is too big (or if some of the work done in Non-profit should go to government). I can tell you that non-profit plays an important role in the make up of the community and the effectiveness of services. Non-profits are able to tackle issues faster and with fewer barriers than government and more cost-consciously than for-profit entities (because its not about return to the board of directors -its about return on the mission). Also, I think it is important to note that you are really talking about a sect within the non-profit sector - the Foundations.

    I also think the question runs much deeper and is harder to answer. Are the community non-profit foundations making themselves responsible for engaging the whole (local, state, national and/or international) community and getting quality feedback on the outcomes, operations, and really answering for the quality of the product they are producing? Further, regardless of Reich's astute reality of what the non-profit foundation sector was intended to be and what it has become, we in the Non-Profit Sector, like all industries, are subject to evolution and change. We are not immune to the tide - we must be willing to change with the needs of the community or some organizations and some foundations will have to come to an end. Further, we, as non profits service organizations need to tell the Foundation that change is necessary - but we seem to be struggling to take our place at the table and declare what we need to make our sector work best. And, its not easy to tell the Foundations what we need- particularly because we fear the retribution might be exile if they don't like what we say. Further, we don't know if the foundations are ready for what we have to say - particularly the board members. It takes great leadership and maturity within the elite institutional foundations of each community (Greater Phoenix, LA, Cleveland, Boston, New York, Chicago, Atlanta, etc) where the staff and board of the foundation will take the betterment of the community, immediately and well into the future, seriously. And that seriousness takes planning, partnerships, and forethought. Community Leaders (non-profit executives of all service industries, neighborhood leaders, local elected officials), Business Leaders (large, medium, small and emerging industries), and EDUCATION leaders (universities, local public schools, private schools, early education) all need to be together at a table determining the short-term and long-term best interests of the community. The interests might be the poor, it might be education, it might be transportation, it might be may be a priority list of all of these. But, the donors and the leaders in the community should be encouraged (from all sides) to participate in these solutions - and they should be held accountable to the community (publicly if necessary) if they don't participate. So, I don't think its about the Non-Profit sector getting smaller - I think its about the non-profit foundations sector building REAL partnerships that bring everyone to the table, partnerships that encourage participation in solving problems instead of using band-aids of funding on a year-to-year (ever shrinking) basis to fund the wants of the few instead of the real needs of the community. So, I don't think the Non-Profit sector is "big enough" I think our tent has to get organized and new organizations will emerge and others will wane to meet the needs of our ever changing communities.

  2. Hi Anonymous,

    Thanks for your response and engagement in this topic. There is no question of the value of the nonprofit sector; on many levels, this sector is breathtakingly productive, powerful, and useful. The nonprofit sector—both public charities and private foundations alike—have contributed positively to our daily lives. But the single reason I wrote this particular essay was to ask the following question: If the nonprofit sector was developed and structurally designed for voluntary action to respond to needs at a localized level, then aren’t there just some things that this sector is not capable of realizing (which a retrospective look anecdotally and empirically confirms), such as ending homelessness, fighting climate change, ensuring a sense of security and well-being, and so on and so forth that make continuing to grow this sector with the false hope that it can do all these things a disingenuous proposition? The nonprofit sector, on the macro level, is not the place to realize the redistribution of wealthy and opportunity, which is fundamental to realizing many nonprofits’ missions. A greater realization of the strengths and weaknesses of the nonprofit sector will help in improving strategically this sector as well as channeling energy and resources appropriately across all three sectors—enterprise, public, and private nonprofit—toward addressing seemingly intractable problems. Growing the nonprofit sector (i.e., increasing the number and size of its institutions) for the simple sake of growth is not the answer to positive social change, yet that has been the track this sector has been on for over forty years.

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