In the Spotlight

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Make Change, Not Money
Part 7: What Makes it a Nonprofit?
By American RadioWorks
September 3, 1998

Clearly, nonprofits do a lot of good. We expect that. Perhaps we expect too much. Like other sectors of the economy, abuses and controversy happen, but the shock somehow seems bigger when it involves a nonprofit. In 1995, William Aramony, the former chief executive of the United Way, rocked the nonprofit world when he was convicted of various misdeeds during his tenure.

MORE RECENTLY, THE AMERICAN MEDICAL ASSOCIATION caused a stir when it agreed to put its seal of approval on a line of home-health products made by Sunbeam in return for a share of sales. Eventually, several executives of the AMA lost their jobs, the nonprofit backed out of the deal, and the AMA settled a lawsuit for nearly $10 million.

People are wondering what is the difference between a for-profit and a nonprofit today? Sometimes, economists can't find much of a clear distinction in the data. It's easy to see why the Salvation Army is a nonprofit, but why is the National Football League?

Stacy Palmer, editor of the Chronicle of Philanthropy, says these issues raise a fundamental public policy dilemma.

Palmer: I think people are going to start saying, "What is it that makes a nonprofit special and what is it that makes it deserve certain tax privileges?" So I think that at some point, especially if the economy sours and people start looking for tax revenue, they might start looking at charities and try to cut off those organizations that seem too much like businesses. Say, "Go off and be a business if that's what you want to be." So I think what we might have at some point is a shakeout so that fewer businesses will be considered a charity.
With this kind of scrutiny, it's no surprise this kind of accountability is now a mandate for many nonprofits. Peter Drucker, the management philosopher, captured the idea well when he said that in the social sector, as in business and government, performance is the ultimate test of an organization.

Foundation president Karl Stauber: If the nonprofit community is to maintain and expand its credibility, it must be accountable. It must be able to demonstrate results for dollars invested. Now, many of the problems the nonprofit community takes on are very, very difficult. To use the kind of standards of a for-profit world ... You don't have a quarterly return on investment if you're talking about working with gangs in inner cities. The old cliché, "Those problems did not emerge overnight, and they won't be solved overnight."
Like for-profit public corporations and like government, nonprofits are now subject to closer examination. After all, at more than $600 dollars the sector is no longer a tributary of American society, but a vital current in the economic mainstream.