At Work Newswire

By D. Quinn Mills

Leadership is different in not-for-profit organizations than it is in business firms. It is in some respects more challenging, for the leader of a not-for-profit organization must always seek to keep people dedicated to its mission, and measuring results is not as simple as seeing how much money has been made.

The not-for-profit sector is large, including private organizations such as museums, hospitals, social service organizations, charitable foundations, clubs, and very large business enterprises such as the New York Stock Exchange and large regulators such as the National Association of Securities Dealers. Some not-for-profits have a mission that is for the public good; others simply serve private or social interest, like a private golf or yachting club.

For-profit firms exist primarily to earn a financial return for shareholders – profit is that return. Not-for-profits have no such objective; in fact, they explicitly reject profit-making as their goal. Instead, many not-for-profit organizations have a mission which is intended to contribute in some way to the public good: a museum is to preserve and display artwork or historical artifacts for the benefit of the public; a not-for-profit hospital is to provide health care for the public; the Red Cross seeks to provide emergency medical and other assistance to people in times of disaster. Mission-centered non-profits are chartered by state governments to pursue these public purposes. There is a different type of commitment involved in not-for-profit organizations than what is expected for a business.

People often assume that not-for-profits are composed of well-intentioned people trying to do good. While this is the case, it’s not the whole story. Some people are disappointed to discover that not-for-profits are managed like for-profit firms, with a close attention to financial and operating performance (although some are poorly or sloppily managed). Not-for-profits have a responsibility to their donors to make honest use of financial resources, so that the organizations adopt business-like methods. It’s an important challenge for leaders in not-for-profit organizations to get others in the organizations to see the need for business-like discipline.

Not-for-profit organizations have managerial positions just as do for-profit firms. They use planning and budgets; often have strategic plans; have compensation and personnel systems—in fact, increasingly not-for-profit organizations appear very much like for-profit organizations except, and it’s a very big exception, not-for-profits have a different function in our society.

There are three major differences between a not-for-profit and a for-profit organization, and in America two of the three are declining in importance:

• Mission: a not-for-profit has a public service purpose of some nature which is what its trustees must pursue with the resources—financial, human and physical—it has. A for-profit has the objective of earning profits for its shareholders which is the responsibility of both the board of directors of the corporation and its executives. But even this is less a difference than it seems, because many not-for-profits try to generate a surplus (which would be called a profit in the for-profit world), and many for-profits have missions to better the world (such as to bring medical devices to the people who are ill, to provide safe and reliable transportation in the form of automobiles, etc.) that could serve as missions for a not-for-profit.

  The difference is, therefore, not that a not-for-profit has a public mission and a for-profit doesn’t. It’s that a not-for-profit is legally required to give first priority to its public mission, and a for-profit to the financial interests of its shareholders. In practice, these distinctions often slip away—not-for-profits must pay attention to their finances even if their missions suffer; and for-profits often put the interests of their executives, customers and employees above those of their shareholders. So not-for-profits and for-profit organizations come increasingly to appear similar.

• Culture: The culture of not-for-profits is expected to be different than in for-profit firms. The expectation is that there is a concern for the public welfare in a not-for-profit that exceeds that in a for profit firm. People working in not-for-profits see themselves as focusing on the public good; and those in working in for-profits as focusing on making money. This remains generally the case.
• Competitiveness: Not-for-profits are thought not to be able to succeed financially without gifts, and so are presumed to be unable to survive in the highly competitive for-profit world. But this is less obvious than before. Many parts of our economy that traditionally have been the exclusive preserve of not-for-profits now find for-profit firms entering and competing with not-for-profits, including higher education, hospitals, and, at a lesser scale, museums. The result is that not-for-profits are competing head-on with for-profits in the same industries, and to survive must be increasingly competitive.

A well-led not-for-profit organization is more mission-oriented, more concerned about the public welfare, and more fragile economically (meaning that it doesn’t earn its way by sales to the public, but must rely to a large or small degree on charitable gifts) than is a for-profit firm. These differences provide the key differences in the leadership challenge between the not-for-profit and the for-profit sectors of an economy.

D. Quinn Mills is the Alfred J. Weatherhead Jr. Professor of Business Administration at Harvard Business School. He consults with major corporations and teaches at Harvard on subjects of leadership, strategy, and financial investments.

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Copyright © 2007 D. Quinn Mills

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