HSP435 Ch. 2-3 PDF

2. THEORIES Learning Objectives After reading this chapter, you should be able to: Understand why the nonpro:t sector is seen to exist. De:ne and understand the main theories applicable to the nonpro:t sector. Consider why no...

2. THEORIES Learning Objectives After reading this chapter, you should be able to: Understand why the nonpro:t sector is seen to exist. De:ne and understand the main theories applicable to the nonpro:t sector. Consider why nonpro:t organizations and their roles vary around the world.  THEORIES | 23 Image: “USAID/Georgia’s Disability Advocacy Project” by USAID_IMAGES is licensed under CC BY-NC 2.0. 2.1 Chapter Introduction As discussed in the previous chapter, the nonpro2t sector in the United States is incredibly large, with over 1.5 million registered organizations and another estimated 1 million informal groups. How did this come to be? Why does the nonpro2t sector look the way that it does? And, perhaps more signi2cantly, why does the nonpro2t sector exist in the 2rst place? Over the last 2fty years, nonpro2t scholars have been developing theories that describe, de2ne and shape the nonpro2t sector, as well as explain its roles, responsibilities and 24 | THEORIES behaviors. This chapter will present the main theories of the nonpro2t sector and relate them to actual organizations. 2.2 The “Four Failures” Compared to for-pro2t businesses or government agencies, nonpro2t organizations have their own strengths and weaknesses. Nonpro2ts are distinct organizational forms that are seen to exist for many reasons, with the leading theories sometimes described as the “Four Failures”: Market Failure. Government Failure. Contract Failure. Voluntary Failure. Market Failure Market Failure is a broad term often used in economics, political science, public administration and nonpro2t studies. It de2nes a situation in which the market (business sector) fails to produce demanded goods and services. This failure leads to an ineTcient distribution of goods and services by the  THEORIES | 25 “free market.” Richard Steinberg 1 argues that businesses may: fail to produce goods or provide services demanded by the public; over-restrict access to certain goods (such as by pricing too high); or fail to meet consumer expectations around the quantity or quality of the good/service. In the case of the nonpro2t sector, market failure is particularly relevant when goods or services for critical needs – such as health care, education, food or job training – aren’t available to those that can’t a\ord “market prices.” While it may seem that market failure happens simply because businesses can’t “make a pro2t,” there are other reasons the market may fail. Di\erent types2 of market failure include: Information asymmetries, which occur when the parties to any transaction have di\erent levels of information about the quality of the product/service. This can lead to exploitation, such as when someone selling a car knows there is a signi2cant issue with the engine and fails to provide this information while encouraging you to buy it. Government often intervenes 1. Richard Steinberg, “Economic Theories of Nonpro2t Organizations,” in The Non-ProNt Sector: A Research Handbook, ed. Walter W. Powell and Richard Steinberg, Second Edition (New Haven, CT: Yale University Press, 2006), 117–39. 2. Lueken, “De2ning Market Failure (with Examples),” EdChoice, May 24, 2018, https://www.edchoice.org/engage/de2ning-market-failure-with-examples/. 26 | THEORIES to prevent information asymmetries through regulations that protect consumers, such as requiring certain disclosures by the seller or by establishing “lemon laws.” Externalities, also called “spillover e\ects,” which occur when bene2ts (positive) or costs (negative) impact someone who is not directly involved in a transaction. For example, a 2rm exposes the community to pollution while making its product. Government may also intervene in these cases through regulation (such as regulating or 2ning polluters), but nonpro2t organizations may also get involved by holding organizations accountable to the law, either through political pressure or through litigation. Activity An Oregon based nonpro:t, Beyond Toxics works to limit the impact of pesticides and other toxins in communities across the state. They  THEORIES | 27 recognize the role of pollution on communities, and their climate justice initiative recognizes that “Frontline communities historically and presently bear the brunt of health, economic and ecological impacts that are the consequences of climate change.” They engage in advocacy and education efforts to reduce pollution and protect communities from harm. Review the Beyond Toxics website. What type of externalities do they try to prevent or reduce? How does the organization link the externalities of pollution to the ideas of climate justice? What IS climate justice? Free-Rider problem, where individuals will not participate in the provision of (pay for) a good or service unless they are compelled to do so. This is especially the case when they can receive the good without having to pay for it (for example, driving down a road, enjoying a park or listening to public radio).3 Government intervenes in this case by compelling people to pay for  28 | THEORIES the good or service through taxation. These types of goods are called non-excludable public goods and make up many of the goods and services government and nonpro2t organizations provide. However, students know about the free-rider problem personally when they are working on a team project and one group member chooses not to contribute but expects to receive the same grade! Monopolies, where the market is concentrated on one provider, often allowing the provider to charge whatever they would like for a product. Monopolies can be particularly problematic if they are providing goods or services that are needed by the public, such as medical care or electricity. Government often regulates monopolies by placing a cap on what they can charge, or may even break them up into smaller organizations. Traditionally, market failures are one of the main reasons government intervenes with taxes and regulations. If people won’t voluntarily provide funds for a public good (free-rider problem), government will tax the public in order to provide them, such as collecting taxes to 2ll potholes in the road or 3. Lester M. Salamon, “Of Market Failure, Voluntary Failure, and Third-Party Government: Toward a Theory of Government-Nonpro2t Relations in the Modern Welfare State,” NonproNt and Voluntary Sector Quarterly 16, no. 1–2 (January 1, 1987): 29–49, https://doi.org/10.1177/089976408701600104.  THEORIES | 29 build a new bridge. If buying a car is risky because you don’t know about the maintenance history (information asymmetries), states might pass a “lemon law” to protect your rights in the event the car breaks down shortly after purchase, allowing you a full refund. Government may 2ne polluters for dumping into a local river (externalities). Government may also set price caps for public goods provided by a monopoly, such as a public utility. Government Failure Yet, sometimes government failure also impacts the availability of public goods and services. Government failure may exist because government is unwilling or unable to provide that public good or service. One theory to explain government failure asserts government is only interested in producing goods that are desired by the majority of the public (also called the median voter theorem).4 This leaves some goods and services under-provided by both market and government.5 In the nonpro2t context, this might include 4. Alec Wreford and Ian Clark, “Median Voter Theorem – Atlas of Public Management,” 2018, https://www.atlas101.ca/pm/concepts/median-voter- theorem/. 5. Salamon, “Of Market Failure, Voluntary Failure, and Third-Party Government.”  30 | THEORIES goods and services as diverse as arts organizations or mental health services. More broadly, it could include advocacy organizations working to protect public goods like forests, parks, clean air and public waterways. Image: “Median Voter Theorem,” Chegg.com, In both market and government failure, the public cannot access goods and services. This is where nonpro2ts step in, “@lling the gaps” left behind by the inability of government and the market to provide for the public.6 6. Peter Frumkin, On Being NonproNt: A Conceptual And Policy Primer (Cambridge, MA: Harvard University Press, 2005).  THEORIES | 31 Activity Explore the websites for the below organizations. Do you think they are responding to market failure? Government failure? Why or why not? White Bird Clinic Greenhill Animal Sanctuary Civil Liberties Defense Center Centro Latino Americano Image: Getty Images/StockPhoto  32 | THEORIES Contract Failure Contract Failure, on the other hand, is a distinct form of market failure that relates to information asymmetries. The public recognizes that a nonpro2t organization is mission driven, not pro2t driven, and therefore may expect a better service than one provided by a for-pro2t business or government agency.7 In this case, the public is more willing to select a nonpro2t provider over other types of organizations because nonpro2ts are considered more trustworthy by the public. Voluntary Failure The last of the “four failures” is called Voluntary Failure. That is, no matter how much money is donated, or time given by volunteers, the nonpro2t sector is insuTcient to solve problems on its own. This failure requires that the public sector (government) shore up the nonpro2t sector through 2nancial support. Lester Salamon8 considers four reasons for voluntary failure: Philanthropic InsuEciency: Simply put, the nonpro2t 7. Salamon, “Of Market Failure, Voluntary Failure, and Third-Party Government.” 8. Salamon.  THEORIES | 33 sector is not, on its own, able to generate or organize the resources necessary to “get to scale” and be large enough to solve society’s problems. This is partially due to the free-rider problem, but also relates to how private donations are simply not adequate to provide for all desired public goods and services. Philanthropic Particularism: This is the criticism that nonpro2t organizations select only sub-groups to serve rather than the wider public. For example, groups may only serve individuals of a particular religion or ethnic group, or may serve only the people in a particular neighborhood, or their speci2c interests or profession. This can lead to favoritism or, in worst case scenarios, bias and discrimination. Philanthropic Paternalism: Traditionally, those who run nonpro2t organizations and other community groups tend to be those who already have access to a community’s resources. This can leave a power imbalance between those who are serving and those who are being served, which may lead to organizations believing they “know what’s best” for bene2ciaries and giving bene2ciaries no control over resources spent on their behalf. This may also mean that those in charge choose programs, activities and services that they personally perceive as valuable (from a position of relative privilege), while potentially ignoring the real needs of those they mean to serve. 34 | THEORIES Philanthropic Amateurism: Many organizations are led by individuals who do not have management expertise or experience. This is partly due to paternalism, where good intentions and outdated assumptions lead to ill-managed programs. It’s also due to the lack of training and development in the nonpro2t sector as a profession where speci2c skills and expertise are needed. Critical Conversation Read the following article by Davarian Baldwin in Nonpro:t Quarterly: “Universities and Cities: Why We Must End the Nonpro:t Path to Wealth Hoarding” and consider the following questions:  THEORIES | 35 1. Would you consider Baldwin’s description of the role of universities as voluntary failure? Why or why not? 2. If you did, which of Salamon’s four dimensions of voluntary failure seem to relate most closely to what Baldwin is discussing? 3. Do you agree with the potential policy solutions recommended by Baldwin? Which one resonates with you the most? Image: “Critical Practice logo” by neil cummings is licensed under CC BY-SA 2.0 2.2 Interdependence Theory Due to the Four Failures, nonpro2t organizations and government are mutually dependent on each other for providing services that the public needs and demands. Nonpro2t organizations (due to voluntary failure) are dependent upon government for the 2nancial resources necessary to do their work, and the government (due to 36 | THEORIES government failure) is dependent on the nonpro2t sector to “2ll the gaps” left by its own limitations and constraints. Sometimes the government may not directly produce a service, but rather they provide for one through the allocation of funds through grants and contracts to the nonpro2t sector. This can be called interdependency theory. 2.3 Social Origins Theory Image: “Sepak Takraw from Schagen’s World Map (1689)” by oschene is licensed under a CC BY-NC-SA 2.0 license. One 2nal theory that I’d like to include in this chapter (there  THEORIES | 37 are many others) is Social Origins Theory9. This theory provides a good framework to understand the variation in nonpro2t sectors in di\erent countries. For example, most higher-income countries have a substantial social safety net for citizens in need. In these countries, the nonpro2t sector doesn’t have as many human services organizations as we do in the United States. In countries that lack basic services, such as schools and medical care, the nonpro2t sector may be focused on those activities. In countries that limit free speech or advocacy, there may be few, if any, organizations engaged in advocacy or activism. Discussion Questions De:ne the four failures. Why does the nonpro:t sector get involved in 9. Lester M. Salamon and Helmut K. Anheier, “Social Origins of Civil Society: Explaining the Nonpro2t Sector Cross-Nationally,” Voluntas: International Journal of Voluntary and NonproNt Organizations 9, no. 3 (1998): 213–48, https://doi.org/10.1023/A:1022058200985. 38 | THEORIES responding to market failure or government failure? What is their role? Why do the types of nonpro:t organizations and their roles in society differ around the globe? How do these differences re`ect on the nonpro:t sector in various parts of the world? 3. MISSION, ETHICS AND ACCOUNTABILITY IN THE NONPROFIT SECTOR Learning Objectives After reading this chapter, you should be able to: De:ne a nonpro:t’s mission and vision statements. Explore some of the ethical issues and obligations facing nonpro:t organizations and the nonpro:t sector. Link nonpro:t accountability to ethical  40 | MISSION, ETHICS AND ACCOUNTABILITY IN THE NONPROFIT SECTOR behavior. 3.1 Chapter Introduction Nonpro2t organizations are both similar to and di\erent from for-pro2t businesses and government agencies, and they also have unique attributes. Due to their tax-exempt status and requirement to behave in the public interest, one of the unique attributes of the nonpro2t sector is that it is often held to a very high standard of behavior.1 They have important ethical and legal responsibilities that they must pay attention to, lest they end up on the front page of the newspaper or harm people. Nonpro2t organizations have serious obligations to the public that should always be front-of-mind, from maintaining the public trust to protecting and acting in the best interests of their constituents, clients and bene2ciaries. In this chapter, we will discuss the role of a nonpro2t’s mission statement and vision in guiding their behavior, the 1. Alnoor Ebrahim, “The Many Faces of Nonpro2t Accountability,” in The Jossey- Bass Handbook of NonproNt Leadership and Management, ed. David O. Renz (John Wiley & Sons, 2010).  MISSION, ETHICS AND ACCOUNTABILITY IN THE NONPROFIT SECTOR | 41 expectations for accountability nonpro2ts have to meet and the ethical dilemmas they must avoid. One or more interactive elements has been excluded from this version of the text. You can view them online here: https://opentext.uoregon.edu/ intrononpro:t/?p=62#oembed-1 3.2 The nonproBt mission All nonpro2t organizations have a mission statement: a “succinct description of the basic purpose of the organization.”2 A mission statement helps to de2ne and guide the organization’s activities. Usually only a couple of sentences long, a good mission statement should include: The nature of the work. The reason the organization exists. 2. Gary M. Grobman, An Introduction to the NonproNt Sector, 4th edition (Harrisburg, Pennsylvania: White Hat Communications, 2015). 42 | MISSION, ETHICS AND ACCOUNTABILITY IN THE NONPROFIT SECTOR The clients/constituencies they serve. The organization’s principles and values. Additionally, a good mission statement should be broad enough to allow the organization to grow, adapt and add new programs and activities. However, it shouldn’t be too broad, as the community needs a good idea of what the organization’s purpose is. Activity In groups, look up four different types of nonpro:t organizations and :nd their mission statements on their websites. MISSION, ETHICS AND ACCOUNTABILITY IN THE NONPROFIT SECTOR | 43 A community garden organization An international humanitarian organization A civil rights organization A local ballet company or symphony 1. Discuss their differences and similarities. Do they discuss their: Purpose? Reason for existing? Who they serve? Their principles and values? 2. Review their websites. If you were to re- write their mission statements, what would you include? As a group, write a :rst draft of a new mission statement for one organization. Image: “Ballet” by Rodrigo Denubila licensed under a CC BY SA 2.0 license  44 | MISSION, ETHICS AND ACCOUNTABILITY IN THE NONPROFIT SECTOR 3.3 NonproBt Accountability To be accountable is “to answer to one’s behavior.”3 Calls for accountability in nonpro2t organizations have been increasing over the past several decades, particularly when there is a scandal involving a nonpro2t organization or the people who work for one (see the examples in the introduction). Nonpro2ts fail to be accountable when they: Fail to follow their mission statement. Misappropriate funds (spending money on something di\erent than what was said). Steal money. Mislead the public about what they are doing. Discriminate against their sta\, their clients, volunteers or members of the public. Are wasteful. Fail to share 2nancial information when asked. Can you think of others? 3. Helmut K. Anheier, NonproNt Organizations: Theory, Management, Policy, 2nd ed. (New York: Routledge, 2014), http://books.google.com/ books?hl=en&lr=&id=FCpc6YdSAT0C&oi=fnd&pg=PP1&dq="edition published in the Taylor and Francis e-Library," "purchase your own copy of this or any of Taylor & Francis or" "2005 Helmut K." "known or hereafter invented, including photocopying and" &ots=XwI7vdB88A&sig=SK_snvwMXOI0aEPXu2Kj0Q3O73U.  MISSION, ETHICS AND ACCOUNTABILITY IN THE NONPROFIT SECTOR | 45 Nonpro2ts are also unique from other types of organizations because they are accountable to a wide variety of stakeholders. Stakeholders are those individuals or groups who are interested in what your organization is doing and whether or not it is meeting its mission. Nonpro2t stakeholders are di\erent from those of businesses, which are most concerned about their owners or shareholders. They are also di\erent from those of government, which is most accountable to citizens and voters. Nonpro2t organizations have stakeholders both internally (volunteers, sta\, board) and externally (the public, media, regulators). Additionally, they are accountable “upwards” to key stakeholders, as well as “downwards” to others. 4 The following table illustrates who these stakeholders might be: 4. Ebrahim, “The Many Faces of Nonpro2t Accountability.”  46 | MISSION, ETHICS AND ACCOUNTABILITY IN THE NONPROFIT SECTOR Nonpro2ts are accountable for activities that they are expected to engage in (based on their mission), as well as the organization’s performance, 2nances and legal compliance. Helmut Anheier5 argues that accountability includes transparency of the organization’s activities along with the behavior of their board members and employees. He argues that it’s crucial for nonpro2t managers to have a “culture of transparency” to help ensure accountability. Transparency can include: 5. Anheier, NonproNt Organizations.  MISSION, ETHICS AND ACCOUNTABILITY IN THE NONPROFIT SECTOR | 47 Honesty in fundraising. Clear communication with donors and supporters. Fiscal accountability (who is responsible for what when it comes to managing the organization’s money and its accounting practices). Posting 2nancial information on the organization’s website. Some organizations, such as CharityNavigator or GuideStar, have set up websites where individuals can review available public information about organizations, including their most recent 2nancial 2lings and other documents submitted to provide transparency. 3.4 NonproBt Ethics Running an ethical organization should be a top priority for nonpro2t managers. Ethics are “well-based standards of right and wrong that prescribe what humans ought to do, usually in terms of duties, principles, speci2c virtues, or bene2ts to society.”6 Although this de2nition applies to individuals, 6. Craig E. Johnson, Meeting the Ethical Challenges of Leadership: Casting Light Or Shadow (SAGE Publications, 2007), 10. 48 | MISSION, ETHICS AND ACCOUNTABILITY IN THE NONPROFIT SECTOR organizations can also act ethically or unethically. If organizations act unethically, they can do harm, fail to meet their missions or face scandals that can lead to signi2cant public embarrassment, lawsuits or even being forced to close down. Activity Individuals and organizations generally know what clear lines are drawn in their organizations (for example, don’t steal), but staff, volunteers and board members can “get in trouble” when there is no clear distinction between right and wrong. Consider the following short scenarios. Are they potential ethical issues? Why or why not? What would you do in these situations? 1. You are an organization that works on child health. Your local fast food chain would like to make a large contribution in support of your “Activate Child Health” MISSION, ETHICS AND ACCOUNTABILITY IN THE NONPROFIT SECTOR | 49 day at the local elementary school. 2. Your sports organization is offered a contribution that will double your annual budget, but you are told you can’t accept clientele who are transgender or gender non-conforming unless they are willing to participate as their “assigned gender at birth.” 3. Your staff have worked very hard over the last year, particularly in recovering from the Covid-19 pandemic. You want to acknowledge their great and hard work by providing a signi:cant bonus and throwing a party at a local country club. 4. A board member suggests their company, an accounting :rm, should be hired by your organization to complete and :le the annual :nancial reports. 5. Your organization is having trouble paying rent this month because donations are down. There are some leftover funds from a grant you received from a big local foundation. Your board chair suggests you use that leftover money to pay the rent. 50 | MISSION, ETHICS AND ACCOUNTABILITY IN THE NONPROFIT SECTOR Image: “Ethics” by masondan is licensed under CC BY-NC-SA 2.0 Unethical behavior by nonpro2t organizations can include the following: Violation of your mission (what you say you are going to do). Discrimination. Fraud or embezzlement. Inappropriate fundraising practices. Failing to 2le your annual 2nancial statements and forms on time. Accumulating too much pro2t and not spending it on the mission. Issues with salaries and bene2ts inside the organization. A lack of diversity among sta\ or board members. Self-dealing or self-interested behavior by board members or sta\ (called a conKict of interest). MISSION, ETHICS AND ACCOUNTABILITY IN THE NONPROFIT SECTOR | 51 Read the assigned case study, “Standards for Child Sponsorship Agencies: Part A” (2002) by Esther Scott and Dave Brown. Before you come to class, consider the following questions: Based on the information provided in the case, who are child sponsorship agencies accountable to? Who are they most worried about offending? How do you feel about their fundraising program? Do you think they are being transparent with donors about where their money is going? Why or why not? Make a list of the potential ethical problems you see in this case. Why did you add them to your list? 52 | MISSION, ETHICS AND ACCOUNTABILITY IN THE NONPROFIT SECTOR Image: “Critical Practice logo” by neil cummings is licensed under CC BY-SA 2.0