Foolanthropy

How Charities Do Good

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By Dan Caplinger (TMF Galagan)
November 1, 2006

Nonprofit organizations are an integral part of American society. While most businesses focus on generating income for employees and maximizing profits for shareholders, charities help to redistribute and deconcentrate wealth, drawing financial resources from those with extra money and directing those funds to people in need. Although government programs provide some needy people with the things they need to survive, charitable organizations fill in those programs' gaps, providing assistance that can help the needy work their way toward self-sufficiency.

The workings of nonprofits are amazing; strong charities can accomplish a great deal with limited financial resources. Yesterday's Post of the Day discussed an article originally published in the July 1989 issue of the Harvard Business Review, in which management guru Peter Drucker examined how charities operate and pointed out the ways in which charities do things more effectively than for-profit businesses. His conclusions still hold true for many charities today.

Focus on the mission
For-profit businesses are always pulled in two directions. They seek to provide customers with the most innovative, highest-quality products, but they also have fiduciary duties to generate profits for shareholders. These competing interests often create difficult conflicts between customers' and shareholders' needs. In large businesses, low-level employees, who have contact with customers every day, tend to be less concerned about shareholder profits. They'll work to ensure customers' satifaction, even if the organization profits less. But high-level corporate management rarely has direct contact with individual customers, so they're more likely to try to create profits for shareholders, even at customers' expense.

Charities have no such competing interests. From the occasional volunteer to the current president of the organization, everyone serves a single mission. The variety of responsibilities assumed by volunteers and staff members lets them see how all of the charity's work fits together to serve a common goal. For instance, if you've been involved in fundraising, you know how difficult it is, so you'll be more likely to take steps to conserve that hard-earned money when considering new expenses. Whether you are an employee, volunteer, or donor, working with a charity gives you the satisfaction of knowing that your efforts are making a difference for people in your community.

Better management
Charities also excel in the general structure of their management. On its face, the organizational structure of a typical charity is similar to that of a for-profit business. A board of directors elects leaders and works directly with upper-level staff members, like the charity's chief executive officer, to determine the strategic direction for the organization.

In practice, charitable board members often participate directly in several distinct yet important areas of their charities. Like directors of a for-profit business, they attend board meetings and help to govern the organization as a whole. However, charitable directors usually receive no compensation, serving because of a personal commitment to the charity's mission. They often supplement their board duties with personal financial contributions, and volunteer even more of their time to help with special events, fundraising campaigns and other labor-intensive activities. Their connections to other community members are often essential in garnering additional donations as well. As a result, members of charitable boards gain a detailed understanding of the way their charity works, and they can hold others accountable for the good of the charity's mission.

In contrast, being a director of a for-profit business takes on a much different flavor. Business directors often receive lavish compensation for minimal commitments of time, including base salaries, stock grants, and even stock options. For the most part, business boards have the primary responsibility of choosing executives who will effectively manage the day-to-day operations of the business. Once the management team has been chosen, the board of directors generally delegates most of the responsibility for the business to the managers. In theory, business boards are composed of knowledgeable executives both from within and from outside the company, whose expertise can benefit the business as a whole.

In practice, however, the huge amounts of compensation involved with both directors and upper-level management are a major distraction from discussions of concrete aspects of business operations. Rather than taking a hands-on approach to understanding their business, many directors of for-profit businesses choose instead to focus on ensuring that they avoid any personal liability if something goes wrong with the company. Recent news of questionable activities at Ceradyne (Nasdaq: CRDN) is just the latest example of a plague of misconduct that has led many companies, including Chiquita Brands (NYSE: CQB) and IBM (NYSE: IBM), to name special corporate responsibility officers to oversee compliance and ethics practices.

Success brings more success
To gauge a nonprofit's success, look no further than its people. Volunteers happily dedicate themselves to the cause with no thought of financial compensation. Staff members often earn far less than they could make doing similar work in the business sector. Yet even in a money-conscious world, charities thrive. Economists would argue that charitable employees and volunteers must get some sort of benefit outweighing the value of the time and money they give up. For most people, the intangible benefits keep them coming back to help, and their happiness and satisfaction in their work encourages others to participate as well. It's a lesson many for-profit businesses would do well to learn.

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The Motley Fool's annual Foolanthropy campaign has begun! Every year, discussion board participants gather to nominate and support worthy charities with diverse missions. To learn more, take a look at the opening remarks from fellow Fools David Gardner and Carrie Crockett.

Fool contributor Dan Caplinger remembers his past charitable board experiences fondly. He doesn't own shares of any of the companies mentioned in this article. The Fool's disclosure policy gives back to you.