Assessing Changing Accountability Structures Created by Emerging Equity Markets in the Nonprofit Sector

By Grizzle, Cleopatra; Sloan, Margaret F. | Public Administration Quarterly, Summer 2016 | Go to article overview

Assessing Changing Accountability Structures Created by Emerging Equity Markets in the Nonprofit Sector


Grizzle, Cleopatra, Sloan, Margaret F., Public Administration Quarterly


INTRODUCTION

Tackling large-scale social problems requires innovation, strategic thinking, and collaboration across community groups, the private sector, and government. Social entrepreneurs are creating permeable boundaries between sectors through creative financing options to boost the firepower of organizational responses as well as the scope of solutions. In recent years governmental and private funding as a percentage of overall nonprofit income has been steadily declining resulting in a slow change in the funding structures of nonprofit organizations. To compensate for declining revenue streams many nonprofits have been seeking to increase fee for services, and this revenue stream is the fastest growth area for nonprofit revenues (Salamon, 2012), yet slightly less familiar waters are also being tested.

In fact, almost 40% of nonprofit organizations are seeking to alter the way they generate revenue over the next twelve months, according to a Nonprofit Finance Fund survey (NFF Survey 2013). Another "23% will seek funding other than grants or contracts, such as loans or investments" (NFF Survey, 2013) to meet the demands for alternative financing, including venture philanthropy (Hero, 2001) and other financing options more analogous to traditional financing in the for-profit world. For instance, The Nonprofit Finance Fund, Third Sector Capital Partners, Edna McConnell Clark Foundation's capital financing arm, (Bornstein, 2012) and a handful of others are providing loans, tax-exempt capital financing options, and financial advising services for nonprofit organizations deemed capable of having high impact in their fields. These new donors are focused and strategic philanthropists who use the word invest, not contribute, to define their involvement with a nonprofit (Hero, 2001, p. 51). How might these new investors change the behavior of funded organizations?

One inevitable result from these changes in financial structures and philanthropic equity investments is an accompanying change in accountability structures for organizations accessing such capital. On the one hand, an infusion of philanthropic equity can encourage greater accountability and help organizations define internal controls and evaluation mechanisms, yet on the other it can also pose threats including mission creep and corporate mimicry. Venture philanthropists, also called engaged grant-makers and impact investors, are hands-on donors, demanding accountability from the programs that they support and expecting agreed-upon performance measures from nonprofit managers (Wagner, 2002). Many venture philanthropists also plan to stay involved over several years as a participant, often serving on the board of directors and getting personally involved in the decision-making processes of organizations.

While donors have, at least in theory, always desired accountability from nonprofits, for these new investors accountability will not be theoretical and may ultimately require shifts to more business-based accountability structures. This paper will examine these emerging financing mechanisms and forecast the potential accountability impacts from a nonprofit's managerial and governance perspective. Finally, the paper will also contribute to our knowledge of how nonprofit leaders can respond to emerging capitalization markets for organizations engaging with these nontraditional financing vehicles.

EMERGING FINANCING MECHANISMS FOR NONPROFIT ORGANIZATIONS

Rising costs within the economy, increased competition for donations and grants, and rivalry from for-profit companies entering the third sector in greater numbers means that nonprofits are increasingly turning to innovative foundations and the for-profit world to leverage and/or replace their traditional sources of funding. Each source brings particular merits and potential pitfalls for organizations and their missions.

Venture Philanthropy/Philanthropic Equity

One emerging source of revenue is venture philanthropy. …

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