Each Monday I post the next section of my 2001 book, which was originally called (by the publisher) Hoover’s Vision but which I have now retitled The Art of Enterprise. I have posted over half of it already; click on the “Monday” column to see all the prior sections. The entire book can be downloaded as a PDF for $10 at http://www.scribd.com/doc/25085990/The-Art-of-Enterprise-by-Gary-Hoover-January-2010
37 Beyond the Corporation: The Coming Boom in Non-Profit Entrepreneurship
The twenty-first century is likely to see dramatic growth in the industries which were, in the twentieth century, known collectively as the non-profit sector. This growth will be particularly dramatic in education, museums, and the arts. Meanwhile, in non-profit areas that may remain stable or even decline in relative size, such as government, we can expect significant changes. Even in religion, which has been among the most tradition-bound of all “industries.” Thus, for leaders with dreams – non-profit entrepreneurs – I believe we are entering a golden era. For some partisans of the established way of doing things, this will not be taken as good news. For society as a whole, it is the best of news. Let’s explore some of the issues and dynamics that will help shape the world of non-profit and government organizations in the years ahead.
Breaking Down Old Walls
The starting point should be to examine how we define “for-profit” and “not-for-profit.” The boundary between these regions has been the subject of surprising acrimony in recent years. Too often, heated debate devolves to simplistic slogans like, “We cannot turn our school children (or patients, or national parks) into dollar signs on a profit and loss statement,” or “Education (or government, or health care) is a business and should be run like a business.” The reality is that, in pursuing our shared goals, we have at our disposal a great diversity of organizational structures.
For example, look at American broadcasting today. We have advertiser-supported networks, which are “free to the viewer.” They give us popular schlock like Survivor, but they also give us high-quality dramas like The West Wing. We have pay subscription services like HBO and CNN, which earn profits from both viewer fees and advertiser monies. We also have pay-per-view, which lets us watch the latest movies, boxing matches, and other special events, paying for one program at a time. And we have PBS, which is funded primarily by viewer donations and the support of sponsoring corporations. (When General Motors sponsors Ken Burns, is that a charitable contribution or is that advertising?) We don’t have to watch ads on PBS, but we do have to sit through multiple weeks of begging – I mean fund-raising.
Even this list doesn’t exhaust the possibilities. In some cities, broadcasting stations are owned by universities, which are either government-funded or independent non-profit organizations. And, of course, in many nations around the world, government-sponsored networks dominate the airwaves, sometimes competing with private for-profit broadcasters for viewers.
All of these different types of organizations bring us the same category of product – broadcast video entertainment and information. They even share the same basic technology. But their forms of ownership, management, and accountability are widely varied.
The net result of all this diversity is a huge number of greatly differing programs to choose from, which most people would agree is a great thing. And as I flip from the History Channel to VH1, from The Jim Lehrer News Hour to CNN, from re-runs of The Flintstones to the Nightly Business Report, from WWF wrestling to Congressional hearings on C-SPAN, I do not stop and say, “This channel is good because no one is making a profit off of it,” or “This channel is bad because some do-gooder charity supports it.” I like some shows, I find others stupid or boring or even offensive, and I’m glad to have them all available to choose from.
The truth is that even what we think of as the corporate world includes many different types of organizations. When you buy auto insurance from industry leader State Farm, you are buying from a mutual company, which in effect means a co-op jointly owned by its customers. By contrast, if you buy from Allstate or Progressive, you are buying from a company owned by its stockholders. And if you buy from Metropolitan Life or Prudential, you are buying from a company that was formerly a mutual company but has converted into a stockholder-owned company. Both approaches are viable and have a place in our free-enterprise system.
Of course our government at all levels is involved in many industries, from gambling to reference book publishing, from delivering packages to running schools. And both in the United States and around the globe there are many mixed industries that include both stockholder-owned entities and governments. Examples include airlines, trash collection, telecommunications, electric utilities, and hospitals.
Our society will be best served if we break down the boundaries and biases about organizational form, and use all the forms available to achieve our goals. For the study of all types of enterprises indicates that the qualities that lead to success – especially a clear, consistent, unique, serving vision – are required no matter what type of organizational structure is involved. The fundamental qualities that lead to greatness at Southwest Airlines are the same ones that lead to greatness at Harvard, at Home Depot, at the Salvation Army, and at the Smithsonian Institution.
This is why, in looking at enterprises, it is more important to understand what industry they are in than to focus on their organizational structure or their for-profit or non-profit status. PBS may be a not-for-profit organization, but it has more in common with A&E than it does with the Girl Scouts. The Post Office (a government operation) has more to learn from UPS than from the Army. And the YMCA may have more in common with World Gym than it does with the Sloan-Kettering Cancer Institute.
For-Profit or Not?
Of course, there are differences between types of organizational structures. The two that matter most have to do with governance and financing methods. Stockholder-owned corporations are ultimately run by a board of directors that is elected by stockholders. As long as things go reasonably smoothly, this board is often self-perpetuating (the group picks a new member when one retires). However, when the company stumbles, outside stockholders may take over and dismiss the board, or another company may acquire the whole company, and the board members will all be out on the street.
Most non-profit organizations are also run by boards of directors, but these are usually purely self-perpetuating. In many cases, the directors serve mainly as fund-raisers and cheerleaders for the organization. It would take a pretty massive scandal for the board of trustees at Yale or Massachusetts General Hospital to be kicked out en masse.
In both for-profit and not-for-profit organizations, the board has the ultimate responsibility to set the organization’s goals, select the management team, make sure that financial and other resources are managed responsibly and ethically, and that all the constituencies of the enterprise are well-served.
The financing differences are a little more complex and perhaps more significant. There are four ways to get the capital to build any enterprise:
All four of these ways of financing are valid, generally accepted ways of raising money to achieve the aims of society at large or of a sub-group of people within society. Three of these financing methods rely exclusively on voluntary actions, while the fourth does not. In every case, the money starts in the pocket of workers – from you and me to Bill Gates – and then moves through one of more of these four channels to places where it is put to use.
Once an enterprise is up and running, it also generates current revenues and current expenses. If the former exceeds the latter, the difference between the two is called a profit (by for-profit organizations) or a surplus (the term used by most non-profits). If the latter exceeds the former, the difference is called a loss.
If an enterprise is financed via debt, one of the largest of its expenses may be interest payments. At the present time, this is true of the US government. On the other hand, enterprises funded exclusively by stock, donations, and taxation do not have such required repayments.
These different financing methods have different levels of appeal for different tasks. In the past, when utility companies seemed as stable and timeless as rocks, with predictable costs and revenues, debt financing seemed an eminently reasonable way to build power plants.
Financing an enterprise through the issuance of stock is especially appropriate for a risky or experimental venture. Amazon.com, for example, has yet to earn a profit. Its entire existence is owed to equity investors’ willingness to fund its growth. Virtually every for-profit enterprise discussed in this book was initially funded this way, whether the original equity investors were founding partners charging $1,000 against their Amex cards or Wall Street firms raising a billion dollars in capital from huge institutional investors. The nature of equity financing is that, if it works out, the investors are paid (sometimes handsomely) for their willingness to assume risk, to try something new. If the new idea doesn’t work, their money’s gone. What we call “profit” is simply the return to these risk investors.
The critical insight is that there is no better way to finance innovation than through equity capital. It is equity capital that has given us Microsoft, Dell, Home Depot, and FedEx. Innovation can be financed in other ways. Much fundamental research has been done at places like MIT, Rand Corporation, and other non-profit or governmental entities. But the process of moving innovation from conception to actual use in the real world – “commercialization” – usually requires equity financing at some stage. Even the Dutch and British explorations of the world beginning the sixteenth century were at least partially financed by private equity capital. And the power of equity financing is amplified when employees are allowed to share in the value of the enterprise they create through stock options or similar programs.
Government, financed through taxation and debt, can be great at reacting to social needs, whether by fighting wars, building dams and highways, or funding clinics. And sometimes technological breakthroughs emerge as a by-product of government programs, particularly in the military sphere. For example, the Internet originated as a Defense Department program for linking military research facilities. Nonetheless, innovations and technological breakthroughs are generally developed most quickly and effectively under private rather than government sponsorship.
Whether financed through taxes, donations, stock, or debt, all enterprises can learn to think more entrepreneurially. Increasingly, governments and non-profits are adopting for-profit techniques that work, and for-profit entities are entering fields once reserved for non-profits or government. Both trends will do much to improve our lives. Let’s consider some examples.
The Coming Boom in Cultural Enterprises
The early years of the twenty-first century are a great time to be in the museum or orchestra “business” – or even the historic landmark preservation “industry.” These and other cultural enterprises are already booming industry, with further enormous growth in the near future. This is because of growing demand. For example, the museum and historical site business currently generates over $7 billion in revenues annually in the US. Between 1990 and 1998, this industry grew by 128%, over twice as fast as the overall economy (which grew by 51%). The Metropolitan Museum of Art is a $340 million business and New York’s number one tourist attraction, drawing over five million visitors a year. The Metropolitan Opera is doing $206 million a year. These organizations have the potential to become much much bigger in the next fifty to one hundred years with the right kind of entrepreneurial leadership.
This increased demand is a direct result of population trends. The American and foreign citizens and tourists who support culture are steadily growing healthier, longer-lived, and better educated, and they have more money in their pockets. As the “first world” nations continue to increase in wealth, and as other nations follow them up the wealth curve, the demand for “high culture” will increase dramatically.
This growth in demand will be accompanied by two other big trends: the rise of philanthropy by an aging (and ultimately dying) population, and the increased availability of volunteer and leisure hours. In his thought-provoking book, The Fourth Great Awakening and the Future of Egalitarianism, Nobel-prize-winning economist Robert Fogel points out that “first world” residents have increased their lifespans while simultaneously reducing the number of lifetime hours devoted to earning a living. The table below shows his projection of these trends into the future.
Average lifetime hours available for selected activities
If Fogel is anywhere near correct, there will likely be an enormous increase in the total volunteer labor pool available for museums, symphony orchestras, social programs like the Salvation Army, and other organizations. Increased funding and increased volunteer help will make the best-run cultural enterprises far more resource-rich than in the past.
At the same time, it will be more important than ever for these enterprises to adopt an entrepreneurial viewpoint and management style. All those new donations and volunteer hours are as valuable as any stockholder capital ever raised, and must be used effectively and innovatively to serve customers.
Recent trends in the non-profit world are promising. Many of the cultural industries boast great leadership. The Smithsonian Institution is a $485 million business which offers captivating exhibitions, sponsors fine programs for education and research, and sells attractive merchandise through well-run shops and catalogs and over the Internet. Like for-profit Disney, the Smithsonian knows how to handle crowds and deliver a great experience to young and old alike.
When I was growing up, museums were quiet, dusty places where kids went only when their teachers or parents dragged them there. Today, all around the globe and in every subject area from science to modern art, museums have become dynamic and innovative centers of entertainment, education, and fun. And some of our performing arts organizations are not far behind. In terms of clarity, consistency, and service, I would rate these industries among the world’s best. And, particularly in contrast with other non-profit enterprises, these businesses are great at differentiation – at branding. People around the world know and respect the great cultural brand names – the Museum of Modern Art, the San Diego Zoo, the Bolshoi Ballet, the Tanglewood summer music festival, the Prado, the Rock and Roll Hall of Fame, and many others.
In the future, driven by the increasing diversity of interests in a wealthier world, many new and exciting kinds of cultural enterprises will emerge. There will be more museums about subjects ranging from travel to business history, textiles to movies, pinball to tractors. There will be more video art performance centers, modern dance festivals, musical theatres, and public art and sculpture.
I am hopeful that we will also see innovations in the financing and structuring of non-profit enterprises. As an example, look at the National Geographic Society. One part of this enterprise is a giant magazine publisher, one part is a television and video producer, one part is a research arm. Another example: Goodwill Enterprises operates a chain of retail stores which produces $1.35 billion of their $1.65 billion in annual revenue. These enterprises could be organized as for-profit companies, as non-profits, or as for-profit/non-profit hybrids. Hybrid? Carlsberg Brewery Company in Denmark is the world’s fifth largest brewer in a recent ranking. Fifty-five percent of its shares are owned by the Carlsberg Foundation, which in turn operates the Museum of National History at Frederiksborg Castle and supports the arts. The founders set it up that way.
I can imagine a non-profit enterprise – an art museum, for example – publicly selling stock in its retail operations, its video sales, and its website. If successful, retention by the non-profit entity of even half ownership might generate enough dividends or capital gains to finance the acquisition of new works of art. Perhaps the building which houses a museum could be owned by a publicly-held real estate investment trust (REIT) that buys the building from the museum and leases it back, allowing the museum to spend more on current programs and acquisitions for the collections. Perhaps a symphony orchestra could create a record company in a joint venture with Sony. Maybe a library could sell memberships and go public.
In exploring possibilities like these, it’s important not to let stereotypes about “for profit” enterprises stifle creativity. A library that charges me $100 a year may want to provide free memberships to school kids, the elderly, or the needy. A for-profit museum may want to open its doors for free on Thursday. Integrating equity financing with more traditional ways of funding the arts and social causes doesn’t have to mean giving up on the ideals that have always inspired leaders in the non-profit sector.
The same types of innovative thinking will become more prevalent throughout the other parts of the non-profit sector, from healthcare to social services. Today the American Cancer Society, the Nature Conservancy, the Girl Scouts, and Habitat for Humanity are all $400 million-plus enterprises. In this century, both their global mission and their support will grow, and innovative ways of serving diverse groups of customers will take their place alongside clear, consistent, unique visions in determining the ultimate success of these entities.
The upside potential for financial innovation in these fields is very significant. In my hometown of Austin, caring venture capitalists have already started a fund (the Austin Enterprise Foundation) to which they contribute stock options. If the startup companies, mostly high tech, take off, the gains will benefit local charities. There is even talk of giving the city government stock options. Look for lots of developments along these lines spurred by visionary leaders in the arts and other non-profit fields.
Gateways to More Information about Non-Profits
America’s Nonprofit Sector: A Primer by Lester M. Salamon contains basic data and information. Individual and Social Responsibility: Child Care, Education, Medical Care, and Long-Term Care in America, edited by Victor R. Fuchs, is from the National Bureau of Economic Research, the ultimate source of balanced objective economic analysis. Serious studies for people who seriously care about these issues. Who Shall Live? by Victor R. Fuchs covers issues confronting healthcare in America. The Ownership of Enterprise by Henry Hansmann – the only person I have been able to find who thinks about the different forms of enterprise organization (co-op, non-profit, etc.) and their pros and cons.