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.