Warren Buffett is known to warn investors away from companies who have fallen prey to the Institutional Imperative. The Institutional Imperative is the phrase Buffett uses to describe the way that many management teams, generally for reasons of greed, manage their company to the benefit of the institution rather than for shareholders.
The Institutional Imperative leads to companies making acquisitions of other companies which increase the size of the institution, but do not increase shareholder value. It leads to companies following what other companies are doing so that they do not risk looking bad instead of charting the course that would best lead to enhanced shareholder profits.
In short, the Institutional Imperative describes how many management teams manage their organization for the sake of the organization instead of recognizing that they should be managing their organization for the sake of shareholders.
I believe that many nonprofit organizations are in the grips of a variant of the Institutional Imperative.
The for-profit Institutional Imperative is driven by greed (management teams that want to run bigger organizations) and a desire to not look bad (management teams that follow the herd, even during periods of irrationality such as the dot-com boom and the period leading up to the financial crisis). The nonprofit Institutional Imperative is driven by fear, the fear created by running an organization which is constantly fighting for survival.
Nonprofits, even large ones, rarely have enough money. Even when their revenue is high, they frequently do not have the philanthropic equity on their balance sheet that would give them the ability to invest in the future. When an organization, or an organism, is in survival mode, it must shut down nonessential functions. It must operate so as to preserve itself. In the case of a nonprofit, this means focusing on fundraising and executing existing programs.
The nonprofit Institutional Imperative is responsible for the fact that so few nonprofit measure their performance, track the outcomes of their work or make the resources available to share information about what works (and what does not) with the field.
The nonprofit Institutional Imperative leads nonprofit management teams to run their organization for the sake of the organization rather than for the sake of stakeholders.
Warren Buffett believes that simple human nature is responsible for the Institutional Imperative. Observing that many for-profit and nonprofit organizations fall prey to the Institutional Imperative is not a criticism so much as a recognition that the normal human emotions of greed and fear lead management teams of both for-profits and nonprofits to run their organizations in ways that do not maximize benefits to shareholders and stakeholders.
But great organizations are led by teams who refuse to succumb to the Institutional Imperative. They recognize that the organization they lead is not itself an entity to preserve so much as a vehicle for delivering value to shareholders and stakeholders. The gifted executive is one who realizes that they have been entrusted with stewarding this value creating vehicle. They have been given the responsibility of maximizing the value that their organization creates, not simply tending to the care and feeding of the organization.
Before making every decision an executive team should be able to answer “Yes” to the question, “Does this action enhance value to our shareholders or stakeholders?” NOT “Does this action benefit our organization?”
By throwing off the shackles of the Institutional Imperative, you can align all of your resources towards your true goal. You can do more with less because you are putting every ounce of effort into creating value.
You can truly make a difference.
Great post – love Warren Buffet’s Institutional Imperative myself and interesting to see it applied to the nonprofit sector.
A question though: for the nonprofit, who are the stakeholders?
Pretty straightforward in the forprofit sector: the folks who put in the money. But in nonprofits, (leaving aside the capital models you’ve been discussing) these are the donors. Serving in the interests of the donors gets murky. I’m thinking of big donors dictating policy/programming over the staff who may have the expertise in that area. Though donors seeking accountability or evaluation of effectiveness is fine.
Is the stakeholder the nonprofit staff? They likewise are usually deeply invested, but also the ones who fall prey to the Institutional Imperative.
I’m guessing it’s the people served by the organization, then, those receiving their services. But if a nonprofit does end up running for the sake of the organization rather than the stakeholders, it’s not like the people served can pull out their investment money the way that shareholders can. It’s the donors who perform this function.
The forprofit is straightforward in that the stakeholders are the ones with the investment ability, It’s a two-way relationship between them and the company. But in nonprofits there’s a tricky monetary triangle between the organization, donor with the investment, and stakeholders being served.
My Social Venture Partners and I believe that $1 given to an ineffective organization is $1 wasted, and should only be given to effective organizatons whose actions always benefit their clients.
As always, well said, Sean!
But is it really the management that’s to blame?
I remember an old Woody Allen joke:
“A guy comes in to the shrink and says ‘My brother, he thinks he’s a chicken.’ The shrink says, ‘Well that sounds crazy! Why don’t you bring him in to see me?’ The guy replies, ‘I can’t… We need the eggs!'”
In other words, good people often put up with crazy behaviors because, well, they need the eggs! Or, in the case of nonprofit managers, they need to make payroll.
They don’t spend time on collecting and sharing information because no one will pay them to do that… and they need to make payroll.
They don’t squirrel away philanthropic equity because… the government contracts only pay 90 cents on the dollar and they need to make payroll.
I am quibbling with language, but maybe, for nonprofits, a better Institutional Imperative is precisely what’s needed most!
As a field, our job is to exploit nonprofit institutions for the good of the communities we seek to help: “Here’s $10,000. ” We say to the afterschool tutoring organization. “How many tutoring sessions does that get me? Why not more? And you had better lower your overheads, too, or I won’t write the check!”
It is, of course, a good thing that we try to drive a hard bargain with the organizations from which we purchase program execution. But who is there to push back?
In the for-profit world, there are owners (equity stakeholders) who push back: “No. We won’t increase the number of tutoring sessions without more money. That would weaken the company. And if you walk away, we will use our equity to make payroll, until we come up with a less expensive (or higher quality) product.”
But in the nonprofit world, there are no owners to push back. Even the boards, who are supposed to keep an eye on the long term, are often the nonprofit’s biggest customers, as well as being the nonprofit’s sales force. As customers, they want to squeeze the enterprise, not protect it. And as sales people, they have an incentive to say yes to funder propositions that may weaken the institution (so they can get credit for making a “sale”.)
I believe deeply that we need to formalize the nonprofit philanthropic equity stakeholder role. These are the stakeholders (currently absent) who have an unambiguous incentive to protect the long-term health of the institution. They measure their philanthropy based on how much good is done by the organization not this year, but across all time. Thus, they are unwilling to over-exploit the institution this year, if that means next year will be weaker. They are the ones who push back against unhealthy funder propositions, and who, while pushing back, provide the equity funds that help the institutions make payroll nevertheless.
Thanks for giving this sharing barrier for nonprofits a name. As we have worked on building a network of nonprofit knowledge sharing for the past year, we have found that the barriers to sharing can perhaps best be summarized in three words: time, turf, trust. We have also found that nonprofits do share but it is often an informal, when-we-have-time-to-do-it process where friends share with friends. Many if not most nonprofits do not organize their knowledge and materials so that they can even be shared internally.
Perhaps a way to make sharing a more common and visible process would be for grantmakers , donors to require that a small portion of their grant or contribution be used to put the knowledge and tools developed by their grants and contributions into a formate others can use and to then post the information on easily accessible sites.
Foundations and others have encouraged or required evaluation and measurement so they can determine if a program has been successful. I believe most groups do understand the value and importance of measuring results but it is also very difficult to get funding for the time and energy it takes to do evaluation.
Sharing is probably not going to grow much until funders provide financial incentives (or require???) that pay for more sharing. Sharing the tools and ideas developed through foundation and government dollars could also leverage their investment so that more nonprofit and communities benefited. And if nonprofit could build more on the work others have done, could we not save lots of time and money that could be invested in the programs and services nonprofits provide.
There are papers and publications that catalogue best practices by nonprofits. We have found a very few documents that outline best practices for knowledge sharing by nonprofits. So like the issue of evaluation and measurement, we need better understanding of what it is and how we can use it to better serve our clients or improve our programs. Without some good “how tos” most of the groups that are now providing libraries and information sites – often with broken links and old information – will continue to think they are doing knowledge sharing.
We grow as a society by building on what others have already done. The nonprofit proclivity to “do it ourselves” may not actually build the kind of strength and power that collaboration and sharing could build. Clearly the sector needs a larger, more visible conversation about the benefits of knowledge and information sharing. The discussion today is a nice movement in that direction.
I definitely believe that their are structural reasons for the nonprofit Institutional Imperative. But even without philanthropic equity and better funders, nonprofits still can focus all of their efforts on delivering value to stakeholders.
So what are stakeholders? When I first wrote this, I used the word beneficiaries (the people the nonprofit is trying to help), but changed it to stakeholders at the last minute. The fact is, nonprofits are set up to serve the public good, not specifically their beneficiaries. For instance, an organization working to end homelessness is not just set up to help homeless people but to increase the quality of life of everyone. So I think that stakeholders is a better term, but I generally think that the core beneficiaries are the key target for delivering value.