What Makes Nonprofit Finances a Beautiful Thing?

Logic asks, “How can this situation be met?” Ethics asks, “How ought it be met?” 

What ethical questions have you recently addressed in your organization’s finances?

There are many factors that make the finances of nonprofits different from those of for-profits. Part of what we will be doing at the Financial Commons is exploring those differences and what they mean for practice. But among those who comment on nonprofits, it’s traditional to portray these differences as problematic, as weaknesses rather than strengths. This is by no means true; in fact, increasing numbers of people —perhaps in large part pushed by climate change — see the nonprofit form as the financial go-to form of the future.

The expectation is that for-profits work to benefit those individuals who own, or act on behalf of those who own, the corporation. Nonprofit financial systems have a different set of design principles because they have a different purpose: collective action toward a greater social good. Nonprofits work both on behalf of their primary beneficiaries and also for the public more broadly. This enormous difference is memorialized in nonprofit regulations that guard against individual enrichment at the expense of that public good, both real and potential.

Most nonprofits observe the implications of this core difference between a for-profit business and a nonprofit organization, but do not celebrate it as a design principle that needs to be actively and publicly worked.

The occasion for this particular reminder to celebrate that difference is the recently announced conversion of the highly profitable clothing retailer Patagonia into a nonprofit. The $3 billion corporation will become a trust that will donate the entirety of its $100 million in annual profits to climate change and land conservation.

And so, the scrutiny begins, with various commentators raising questions regarding motive and ethical intention. Make no mistake, there will be oversight, even if it’s driven primarily by the press. This accountability for devotion to the public good is also a legitimate by-product of nonprofitness. How you spend, and who gets paid what, and whether or not anyone is using their positions in the organization to enrich themselves will all be fair game, because all of these and more are financial expressions of your commitment to mission, and therefore your competence.

Patagonia is only the latest for-profit to make this transition as it moved ever closer to a public benefit ethic. We have also seen a trend among even relatively large news organizations to convert to nonprofit status. Sometimes these conversions are portrayed as being made for financial viability, but that obfuscates the more basic mutual accountability principle that is chosen through and implied by the shift.

In this 2017 interview, Douglas Rushkoff, who was once named by MIT as one of the world’s 10 most influential thinkers (taking into account the Western bias of that list), is a big advocate of embracing nonprofit status in many types of enterprise. Here, he talks about this nonprofit difference as a commitment to the sustainability of the planet, or “the commons.”

A commons is a managed common resource, and a real commons has very strict rules about it. So, if there’s a pond in our town that we all fish from, we’re going to have to make rules about this commonly used resource. We’ll say, okay, if you want to use this, you can only have 10 fish a day or 20 fish a week from this; you can only use this kind of bait because this other kind is going to pollute the water. And then, as the managers of this common resource, we have the ability to penalize or exclude those who don’t follow the rules that we’ve established to maintain that commons.

I mean, it seems like simple logic, but it’s looking at a resource as something that we want to maintain over time. We want to maximize the value that everybody can create, as opposed to… well, the way a short-term company looks at something. The ideal scenario for them, I guess, is when you go to someone else’s country, you mine for things, and you mine for things in such polluting ways that you make it impossible for the local community to do subsistence farming anymore. So now everybody has to work for your company if they want to have an income, and then even after you’re gone, they don’t have a way to sustain themselves, so they become utterly dependent on you and the World Bank or foreign lenders in order to buy chemicals or whatever they need to try to grow on their polluted topsoil. It’s the anti-commons view.

And this is what makes nonprofit status so demanding. Disciplining oneself to discern the practices that flow from this simple logic is not straightforward, implying as it does high ethical vigilance, and that’s this newsletter’s launching point as we review some of the discussions we had in our forums during the BETA testing period.

Takeaways: Nonprofit financial management is built upon an entirely different set of principles than for-profits. These principles are the same ones being explored by environmentalists as necessary for global sustainability. Nonprofits also face different complications — more levers for each dollar raised; more scrutiny and expectations for integrity and accountability. The package is all there for the financial leaders of nonprofits, and as we will hear later, there is huge satisfaction and a little miracle-making in learning to do it well.