Many people who hope to see the social sector perform at a higher level talk about the need for a more “business-like” approach to nonprofit work and philanthropy. The phrase is odd because nonprofits are businesses and so there’s no other way for them to act but to be business-like. So what the phrase really means is that the social sector should behave more like for-profit businesses.
The problem is lots of for-profits are run really poorly. Jim Collins, the renowned business researcher, said in his book Good to Great and the Social Sector:
“Most businesses – like most of anything in life – fall somewhere between mediocre and good. Few are great. When you compare great companies with good ones, many widely practiced business norms turn our to correlate with mediocrity, not greatness. So, then, why would we want to import the practices of mediocrity into the social sector?
…The critical distinction is not between business and social, but between great and good. We need to reject the naïve imposition of the “language of business” on the social sector, and instead jointly embrace a language of greatness.”
I completely agree with Collins, but for the sake of argument, let’s set aside the semantics for a moment so that we can reflect on this comment from Benjamin Graham, the author of the groundbreaking book The Intelligent Investor and the most critical mentor to a young Warren Buffett:
“Investment is most intelligent when it is most business-like.”
What Graham was saying is that most for-profit investors do not really consider the core characteristics of the organizations in which they seek to invest. Instead, many investors in the stock market consider a whole range of other inputs (has the market been hot lately? what’s the price of oil doing? what will the next new thing be in the tech sector?).
According to the book Buffettology, Graham taught Buffett that the key questions to ask when making an investment were 1) In what enterprise? and 2) On what terms is the commitment proposed?
I think that this concept, can be translated to the nonprofit sector. Business-like investing means focusing in on the likelihood that an investment in a company will be rewarded by financial profits out of the company that are attractive relative to the investment made. If we simply replace “financial profits” with “social impact” we have a recipe for a a successful approach to philanthropy.
It seems to me that so much of the discussion around good philanthropy skirts this core issue. Sure ideas like being transparent, engaging in collaboration, providing assistance beyond the grant and the whole host of “good philanthropy” practices are important. But at the end of the day, I think philanthropy is most intelligent when grantmaking decisions are driven primarily by the questions “In what enterprise?” and “On what terms is the commitment proposed?”
“In what enterprise?” means that you don’t make a grant “to support education” but instead focus your attention at the nonprofit enterprise level.
“On what terms is the commitment proposed?” means that you make a grant if, and only if, you believe that the social impact generated by the nonprofit enterprise will be attractive relative to the grant that you’ve made.
This is what I mean when I write about “tactical philanthropy”. This is what George Overholser means when he talks about “builders”. This is the argument being made by Susan Ditkoff and William Foster in their recent Harvard Business Review article laying out a strategy for becoming an effective philanthropist. This is the premise of those organizations that seek to “invest in nonprofits”.
But this is not the premise of strategic philanthropy.
The strategic philanthropist sees themselves not as an investor, but as an entrepreneur. A strategic philanthropist believes that they can solve the worlds problems. They are problem solvers, not investors.
That is not to say that strategic philanthropy is not effective. But it is important we understand that there is a great divide in philanthropy that is not recognized for the incredibly important distinction that it is. The investment approach to philanthropy is wholly different from the problem solving approach to philanthropy. This recognition is critical because the two approaches require entirely different methods of implementation.
This then becomes the first question that any philanthropist must ask. “Do I seek to be a philanthropic investor or am I a social problem solver?”
The question is a giant fork in the road. The tools, approaches, people and conversations you will have will be completely different depending on which fork you take. This issue is not one of semantics, it is a distinction that completely and utterly changes the very essence of the philanthropic act.