When it’s not good for nonprofits to emulate for profits

Behind as always in my reading, I just caught an amazing statistic in the March 30 edition of Newsweek. I was scanning the article, as I confess to being quite bored with the debate as to whether Washington or Wall Street is to blame for the current economic situation.

The Newsweek story featured both sides of the debate.  Skimming each short snippet on the writer’s opinion,  I came across one from Jim Chanos,  “In 1998 Business Week put out a survey, after canvassing the chief financial officers [of the S&P 500 companies] anonymously.  They were asked if they were ever asked by their superiors to materially falsify financial results.  And the answer was stunning.  Forty-five percent said they were asked to do so, but didn’t, 12 percent said they were asked, and did, and 33 percent said they were never asked.”  Stunning?    

Given how appalling I found the data to be, my first reaction was:   for real?   Not that I doubted Mr. Chanos, but never having heard of him, I thought it best to make sure that he was reporting accurately a real survey.   And though I never did locate the original survey (I confess, I didn’t dig really, really hard), I found enough additional references to the survey and the exact same data points used by Mr. Chanos, in serious academic—and other—sources, that I’m confident it is the real deal.

My second reaction, however, was:  is this that different from nonprofits?  I think nonprofits cook the books a lot more than is publicly admitted.  Not cook as in manufacturer numbers or falsify results.  But cook as in taking some administrative costs and, “Poof!, they are now programmatic costs.”  Phew!  Now that ratio of programmatic costs to administrative costs will pass muster?  Does it matter that passing is a lie?  But if we are honest with ourselves, this happens a lot in nonprofits?  How do I know?  Have I read studies?  No.  But I have too often heard the uncomfortable laughter , seen the squirming in the seat when I bring up this topic, and fielded the question of “What is the right ratio?” not to know that the behavior happens far more than it doesn’t.    Is this any different than what the Business Week survey found more than 10 years ago?

I don’t think so.  Each is done for the same purpose:  to win investors.  For profits want to look healthy and strong so people will continue to invest in their companies.  And nonprofits want to look like they aren’t overly spending on administrative costs—even when the administrative costs are not excessive—but using the bulk of dollars received so for programmatic purposes so that people will continue to invest in their missions.  Both are playing the same game.

To stop this need to lie, the nonprofit sector must start educating others about the real costs of running a sustainable nonprofit business that offers great services.  If we pretend that we can run that business using only 10, 12 or 20 cents of every dollar raised, then investors will accept that as truth.  But if we expose those investors to the true reality of our operations, help them understand that sometimes we can do it on $.12, but at other times, it might cost us $.17—or, oh my, $.25—and that that does not make us a suspect nonprofit, an untrustworthy nonprofit, a wasteful nonprofit, we will be doing everyone a huge service.  Investors will come to understand the reality of nonprofits and let go of the urban myths; and nonprofits will get to stop fudging.  No, let’s be honest:  they will get to stop lying.

It is easy to get caught up in the blame game, as Newsweek’s article epitomized.  Who is to blame:  did Wall Street get too greedy or did Washington fail to regulate sufficiently the appetites?  Do donors and the general public rely on a false expectation or are nonprofits too scared and too eager to please to dispel pie-in-the sky thinking?   Who cares?  If ever there was a time to correct this vicious cycle of false expectations and lying to meet them, it is now.  Now, in these times when boards are laying off executive directors as a cost saving mechanism while still having the organization run programs, is the time to stop fudging the books and live the reality.