The Power of Three Words: ‘Not-for-Profit’
A business model built for meeting human needs, combining the efficient aspects of for-profit businesses and the mission-driven nature of traditional non-profits.
Co-written with Jen Hinton
Ever since we started writing and speaking about our current book project, How on Earth: Flourishing in a Not-for-Profit World by 2050, we have been amazed by one phenomenon in particular. When we have a chance to explain to people what not-for-profit (NFP) enterprise actually is, we get an incredible response from all sectors and political spheres to the proposition that not-for-profit business lies at the heart of our future global economy. Yet when we mention our work without first explaining not-for-profit enterprise, we receive a good deal of resistance to the notion of a not-for-profit world by 2050. In this article we seek to clear up the misunderstandings we see repeatedly arising.
In our experience, when people hear the term ‘not-for-profit’ they mostly think of charity-dependent organizations like Amnesty International, the Sierra Club, Save the Children, Greenpeace, and Médecins sans Frontières. It’s well-known that these organizations rely on donations, philanthropy and grants to support the good work they do. This is the way not-for-profit organizations have traditionally operated, such that in the U.S. it’s common to speak of ‘non-profit organizations’ and, in the U.K., the term ‘not-for-profit’ is synonymous with ‘charity’. Most people assume that dependence on the financial benevolence of others is the only way a not-for-profit can operate.
Stemming from this misunderstanding, ‘not-for-profit’ is often thought to be distinct from social enterprise, sustainable business or cooperative business. Many people feel they must choose between starting a social enterprise or a not-for-profit. Entrepreneurs often feel that running a sustainable business means that it must be for-profit. In fact, the term ‘for-profit’ hardly ever enters our business lexicon, as it is widely seen as the only way of doing business.
Yet the almost universal legal interpretation of ‘not-for-profit’ allows for much more than charity. Formed to fulfil social purposes, not-for-profit entities can make as much profit as they are able or would like, as long as this profit is used according to the organization’s stated goals, rather than being distributed to individuals for private gain. Indeed, NFP organizations such as Bupa and Mozilla have made (and redistributed) incredible profits in recent years, highlighting that not-for-profit really just means ‘not-for-private-profit’ or ‘not-for-personal-profit’. If incorporated, a not-for-profit entity can own and trade assets, it’s just that these assets and the company itself cannot be owned by any individual (in the sense of possession with intention and possibility for private gain). The organization’s finances and any assets are governed and run by a committee or board and people can be financially remunerated for the work they contribute, but no individual can receive a share of any of assets (beyond the returning of any capital they originally loaned in), should a NFP entity be dissolved.
So, while the non-profit model may be receding in prominence, the not-for-profit enterprise model is on the rise, with activity across sectors as diverse as telecommunications to retail, to manufacturing, to healthcare and the food industry.
What is a NFP Enterprise?
Not-for-profit enterprise is an ideal hybrid between the innovative, efficient aspects of for-profit businesses and the mission-driven nature of traditional non-profits. In essence, it’s a business model built for purpose; the purpose being ‘meeting human needs’. Not-for-profit enterprises don’t face the pressure to sacrifice social and environmental well-being in the name of private profit that most for-profits are confronted with. After all, they exist primarily to contribute to social and environmental well-being. Not-for-profit enterprises are also more likely to avoid the cut-throat competition for grants and donations that exist in the non-profit world, and the drain on resources that such competition creates. Without obligations to shareholders and with minimal dependency on donors, NFP enterprises have the freedom and ability to get their work done in a way that maximizes social, environmental and economic outcomes.
Not-for-profit enterprises come in many forms, such as: Incorporated Associations; Companies Limited by Guarantee; Non-Distributing Co-operatives (including certain ‘producer’ and ‘consumer’ coops); Social Enterprises (in many European countries this model is NFP by default); and Type 1 Social Businesses (coined by Muhammad Yunus).
Why Not-for-Profit rather than For-Benefit or For-Purpose?
We are often asked, “Why are you calling your model the Not-for-Profit World? Why don’t you say the For-Benefit or For-Purpose World? Not-for-profit sounds negative and defines something by what it isn’t!”, and: “What about B Corps? They offer exactly the hybrid you’re talking about!”
We are deeply committed to the term ‘not-for-profit’, and what it represents as an ethic and business framework, for two main reasons. Firstly, the term ‘not-for-profit’ is fundamentally immune from co-option. Around the world, its near universal legal meaning consistently distinguishes entities that can privatize profit from those that can’t, and, given the near universality of definition, it’s a distinction that is unlikely to change. This is important because history shows that those in power often seek to co-opt language in ways that maintain their vested interests. This is clear when you look at the wide variety of interpretations of ‘sustainable development’, ‘green’, ‘eco-friendly’ and ‘sustainability’. This trend is extending to business, where for-profits have been using language that blurs the lines between FP and NFP activities: ‘profit-for-purpose’; ‘hybrids’; ‘shared value’; and ‘mission-driven organizations’, yet all the time promoting activities that continue to privatize profit. At the end of the day, however, even attempts by NFPs to blur the lines can’t change the legal ramifications of something being ‘not-for-profit’. For example, Harvard University says on its website that it is “a private, not-for-profit institution”, as if to infer it is privately owned. Yet, no one owns Harvard University, as it’s a NFP, albeit a not-for-profit enterprise, generating over 30% of its revenue from business activities in 2012.
Secondly, the not-for-profit business model is precisely what the world needs right now. It’s a smart, humanitarian model that recognizes the value of financial sustainability through financial independence. But it’s a model that also recognizes that, in a world where 85 people control as much wealth as the ‘bottom’ 3.5 billion, financial redistribution needs to be built into the way we do business (because taxation and philanthropy will never be enough to create the level of equality needed for a society that works for us all).
In our experience, understanding ‘not-for-profit’ in this powerful light opens up a whole new world of possibilities. All the ingredients to build an entire economy on not-for-profit enterprise exist. And the best part is that it’s already well underway.
Originally published in January 2014 on the Post growth institute (PGI) blog. Find out more about the PGI here.