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What Business Execs Don’t Know -- but Should -- About Nonprofits

Business leaders play vital roles in the nonprofit sector – as board members, donors, partners, and even executives. Yet all too often they underestimate the unique challenges of managing nonprofit organizations. In this article, 11 executives who have played leadership roles in both for-profits and nonprofits reveal the critical differences between the two, and suggest ways that business and nonprofit leaders can use this information to create a more effective social sector.

Ask William Novelli, the CEO of AARP,
if business executives underestimate the
complexities of running a nonprofit
organization, and his head starts nodding. The
former Unilever marketer built Porter Novelli
into a public relations powerhouse before
embarking on his current career. Twelve years
deep into the nonprofit sector, Novelli can attest
that navigating Washington, D.C.’s land mines
while running his sprawling $800 million operation
is hardly the laid-back retirement farm
that many businesspeople imagine.

Too many business CEOs just don’t get it,
says Novelli. “It goes beyond underappreciated.
CEOs are often disdainful of not-for-profit management.
They think it’s undisciplined, non-quantified.”
But in fact, “it’s harder to succeed in
the nonprofit world.” For starters, nonprofits’
goals are both more complex and more intangible.
“It may be hard to compete in the field of
consumer packaged goods or electronics or high
finance,” he says, “but it’s harder to achieve goals
in the nonprofit world because these goals tend
to be behavioral. If you set out to do something
about breast cancer in this country, or about
Social Security solvency, it’s a hell of a lot harder
to pull that off.” And “it’s also harder to measure,”
he adds.

It’s not always easy to persuade business
leaders of what Novelli knows in his bones to be
true. Yet our experience at McKinsey & Company
advising hundreds of nonprofits in recent years suggests that it must be done. Business executives need to understand the leadership challenges faced by their
nonprofit counterparts if they are to cross the border
between the two worlds gracefully. And nonprofit leaders,
for their part, need to have a firm grasp of these
issues so that they can help the business leaders they
work with be more effective.

The gap in understanding between the two worlds has
wide repercussions. Too many business leaders take their
nonprofit board membership less seriously than they do
their corporate board membership. Too many donors
only half heartedly use their financial clout. Too many
cross-sector partnerships fail because business leaders
can’t accommodate the nonprofit sector’s different culture
and demands. And too many well-meaning businesspeople
who move into nonprofit leadership roles end up frustrated
and ineffective because they don’t fully appreciate
how uniquely hard their jobs will be. These underestimations
of what it takes to lead nonprofits not only erode
individual organizations’ effectiveness, but also hurt the
nonprofit sector’s overall performance.

For these reasons and more, leaders who have served
in both sectors agree that top business executives need to
better understand what makes the nonprofit world tick.
Says Robert Higgins, who ran the Robert Sterling Clark,
John A. Hartford, and Florence V. Burden foundations
before co-founding the venture capital firm Highland
Capital Partners, “The nonprofit sector is such a big part
of the economy that you almost cannot let someone run
a company who doesn’t appreciate [it].”

To find out what exactly business executives don’t
understand about nonprofit leadership, we conducted a
virtual conversation among 11 nonprofit executives who
have also held senior positions in the for-profit world – that
is, crossover leaders. Although some of our interviewees
noted that the gap in understanding between nonprofit
and for-profit leaders is narrowing, on the whole they
agreed that most business leaders sorely underestimate
how tough nonprofit leadership can be.

Our interviewees identified five challenges that most
business leaders fail to appreciate. First, nonprofit CEOs
wield less authority and control than their for-profit counterparts.
At the same time, they must answer to a wider
range of stakeholders. Nonprofits also lack straightforward
performance measures – there are no analogs to profit in
social change – and yet they are under greater scrutiny
from politicians and the press. Finally, compared to the corporate
world, the nonprofit sector is underfunded, understaffed,
under-resourced, and undertrained. Below we
discuss each of the five commonly underappreciated
challenges of nonprofit leadership, as well as how our
crossover leaders deal with them.

Little Control or Respect

For business executives who are used to being the boss, the
nonprofit setting harbors a rude awakening. “In the world
of nonprofits, deference to the CEO is rare,” says Reynold
Levy, president of Lincoln Center for the Performing Arts
and a former AT&T executive. “You really need to earn
that respect. It doesn’t come by virtue of your title.”

Philip Lader, chairman of the communications services
firm WPP Group and former White House deputy chief
of staff, says the lack of respect can be exasperating to
those who don’t understand the sector. “When I was a college
president,” Lader says, “I sought to initiate curriculum
reform, establish certain cultural requirements, and
apply for admission to the NCAA, all of which required
faculty consent. Contrary to a corporate setting, I would
stand before the faculty senate and plead for their support.
Yet the board and media would ascribe to me the credit
or blame for the institution’s progress.

“It reminds me of what someone said life as an ambassador
is like,” adds Lader, who also served as U.S. ambassador
to the United Kingdom from 1997 to 2001. “There
you are at the helm of the great ship, with everyone scurrying
about. Only after about four months of steering the
wheel do you realize that it is not connected to the rudder.
Everyone is saluting you and saying ‘aye aye,’ [and
then] they go below to steer the ship themselves. In many
nonprofits, that genuinely is the case.”

“I’ve seen some people try to move over to the nonprofit
sector from the private sector,” says Richard Schlosberg,
who was CEO and publisher of the Los Angeles
Times before serving five years as president of the David
and Lucile Packard Foundation. “Their time frame, their
command-and-control orientation, and their view of the
employee/employer relationship just don’t translate as easily.
It’s like they don’t quite get it.”

So Many Stakeholders! So Much Consensus Building!

Nonprofit leaders generally have less authority than their for-profit counterparts partly because they have to honor the disparate concerns of many more groups, each with
a legitimate stake in the organization’s mission and activities.
This diversity starts with the board of directors.

“In most for-profit organizations,” explains Higgins,
“people arrive with common goals. The board of directors
may have different viewpoints, but shareholder value
as a fundamental goal is something shared by the board,
by the CEO, and by senior management. You start off differently
in the not-for-profit world, with each board member
arriving with a different set of goals and often different
agendas. To manage that as a CEO is much more
complex.”

“You have to have a much more consultative, inclusive
decision-making style,” adds Peter Goldmark, who was
president of the Rockefeller Foundation for nine years in
between publishing stints at the Times Mirror Company
and the International Herald Tribune. He now directs the
Climate and Air program at Environmental Defense.
Asked to comment on the implications of having to
work with so many different stakeholders, Novelli rattles
off a few: “Eternal consensus building, slow decision
making, slow to act.” When he first took the helm of
AARP, Novelli brought in a business school professor to
help him think about the organization’s processes. “Around
here it’s ready, aim, aim, aim,” the consultant told him.

“There’s nothing wrong with consensus building,”
Novelli is quick to add. “It’s just that it shouldn’t be 100
percent consensus. It’s not like the mailroom guy has to
weigh in. There has to be an end to it.”

Schlosberg has seen this dynamic at work. “In the
for-profit sector you often had to make decisions with
incomplete information. In the foundation world, the
time it took to make decisions was uncomfortably long
at first.”

“You have to lead by consensus and by influence as
opposed to by pure management,” explains David Chernow
of JA Worldwide (Junior Achievement). Chernow,
who ran numerous for-profit cancer treatment centers and
practices before leading JA Worldwide, says
this lesson was seared into him when Junior
Achievement merged its international and U.S.
operations. “You can’t just come in here and
wield a stick and make things happen.”

Harold Williams, who was chairman and
CEO of business conglomerate Norton Simon
before becoming dean of UCLA Anderson
School of Management, chairman of the Securities
and Exchange Commission, and founding
CEO of J. Paul Getty Trust, counsels
crossover executives to be clear-eyed about
how their authority will change. “You will have little
opportunity to lead by making decisions,” Williams says.
“You’ll have the power of the budget to some extent, but
if you have a vision or you want to make any changes,
you’re going to do it by leadership and by inspiration and
not by direction. You’ve got to be a Pied Piper.”

The Elusive Art of Nonprofit Measurement

Measuring performance in nonprofits is notoriously difficult.
“You don’t have a simple financial metric that is
really central,” says Goldmark. “You are dealing with
more squishy and intangible issues of social change or public
attitudes and behavior.” In spite of the challenge, our
crossover leaders agreed that it is important to develop
meaningful metrics, however imperfect.

“The lack of having a bottom line is truly underappreciated,”
explains Schlosberg, “as is its importance in
enabling an organization to have focus and come together.
It becomes much more of a challenge to evaluate not only
the organization, but individuals and their performance
as well.”

“How do you do this in artistic organizations?” asks
Levy. “My director of festivals will say, ‘I want every festival
I do to be the best, better than the year before.’
‘Well,’ I say, ‘what do you mean by that?’ Translating a better
festival into results that are measurable and that you
can gauge over time is a major effort in an artistic organization
and in most nonprofits.”

Most crossover leaders agree that the drive to measure
performance often goes against the nonprofit grain.
“Bringing that tough-minded, analytical decision-making
process is difficult given the cultural differences,” says Judy
Vredenburgh, a former fashion executive who spent six
years as senior vice president of the March of Dimes, and
another five and a half years as CEO of Big Brothers Big
Sisters. In her for-profit life, Vredenburgh was almost
obsessively focused on speed and results, but she found
the nonprofit world was decidedly not. “I remember not achieving a number that I said I would achieve early on,” she recalls, “and I thought, ‘Oh my goodness!’ But no one
even noticed.”

Catherine Meloy, who was a senior executive at
Clear Channel Communications before taking over the
Washington, D.C., region of Goodwill Industries, found
that even bringing what she felt were basic budget practices
to Goodwill involved true culture shock. “I said,
‘Let’s benchmark.’ It became a joke. People said: ‘Does
she have to question everything? Doesn’t she trust what
we’re doing?’”

Communications in a Fishbowl

Communication is central to effective leadership
in any setting, but our crossover leaders say it is
much more so in nonprofit organizations. “It’s
extraordinarily more important in nonprofits as
a means of influencing and motivating,” says
Vredenburgh. “In the end, the CEO of a nonprofit
has to be the external communicator and
external relationship builder, and that means
he or she has to be the chief fundraiser. In a for-profit,
you have investor relations – but it’s on
the side. It’s not a core function.”

A related challenge – one that trips up even
seasoned for-profit leaders – is the public and the
press’s unblinking scrutiny of nonprofits. A few
regulated for-profit industries, such as healthcare, may
understand what it feels like in the fishbowl. But in general,
“people in the for-profit world don’t really think of
themselves as operating in the public view,” says Richard
Leone, who ran the New York Mercantile Exchange and
the investment bank Dillon, Read & Company before taking
the helm at the Century Foundation. “People in the
nonprofit world tend to deal with that much more than
people in the for-profit world because they tend to have
broader constituencies. They have to fundraise, they have
a community they’re trying to serve, and they have the
kind of goals that get spelled out in public ways.”

Novelli agrees. “Many for-profit CEOs and high-level
executives don’t understand politics. Politics is almost
always present in not-for-profit worlds. You’re essentially
using advocacy as one of your tools.”

Doing More With Less

Our crossover leaders all agreed that the nonprofit sector’s
funding shortages and lack of training make building
strong organizations especially hard. “For-profit executives
don’t understand how difficult our jobs are,” says
Vredenburgh. “Every time we in nonprofits satisfy customers,
we drain resources, and every time for-profits satisfy
a customer, they get resources back. That sounds very
simple, but it has huge implications, and I don’t think the
for-profit people really get that.”

“They’re [nonprofits] difficult to run,” adds Williams,
“in part because they are more hand-to-mouth, and
because the quality and amount of staff is thinner than
it is in a typical corporate environment. In many respects
the typical nonprofit leader is much more entrepreneurial
than the typical chief executive in the corporate world.
You have fewer resources, fewer staff, and less certainty.

“Many of the managers of nonprofits have come up
what I call ‘the substantive side,’ without management
training,” says Williams. “It really limits the ability of
people in the nonprofit sector to scale up. It also contributes
to the tendency of the for-profit people on boards
to say, ‘This guy doesn’t know what he’s doing.’”

“I had to become more of a teacher than I had been
before,” says Schlosberg of his foundation stint. “I spent
a lot of time blocking and tackling. I put a management
committee together, upgraded human resources, got a
planner in here, named a chief financial officer.”

Schlosberg, who also observed many smaller nonprofits
from his perch at the Packard Foundation, came
away convinced that “in the nonprofit sector there’s
much more reliance on the leader, and less developed
teams and talent underneath. I see undercapacity all over
the nonprofit sector.” Many good managers in the nonprofit
sector would agree on the need for capacity building,
but simply can’t get donors to support it. “In the for-profit
business,” says Chernow, “you spend an enormous
amount of money on that training. Here, if we went out
to corporations and foundations to give us money to
develop capacity in our organization and to build leadership,
it’s not as readily accepted. It’s hard to get that kind
of investment.”

Beyond training a management team, even hiring the
right people is harder in nonprofits. Salaries in the nonprofit
sector are typically not competitive with those in the commercial
sector, yet the need for management talent is just
as great. “I come from a Wall Street environment where
if you really wanted somebody you just threw a huge
amount of money on the table,” says Leone. “The nonprofit
world is obviously different.” Intense donor pressure
to keep administrative overhead low further hobbles many
organizations’ ability to hire good management.

Despite all their drawbacks, nonprofits have one clear
advantage when it comes to attracting and retaining staff: their inspiring missions. “The missions are so powerful
that you can attract really good people,” says Novelli.
“There was a guy from Levi Strauss who said, ‘I don’t want
it to say on my tombstone that I shipped a million pair
of jeans.’ That’s powerful.”

How to Be a Better Crossover Leader

Whether serving as nonprofit board members, donors,
partners, or executives, business leaders can play their nonprofit
roles better by understanding the differences
between nonprofit and for-profit organizations. Below, we
suggest how both business and nonprofit leaders can
help one another excel.

Board members. Too often, business executives who
sit on nonprofit boards don’t take their role as seriously
as they do their corporate board role. Many consider it
a hobby or a “do-good” contribution, rather than a real
responsibility, and so they don’t invest enough time or
energy into understanding the organization. “When it
comes to a nonprofit board,” says Vredenburgh, echoing
the sentiment of many in our group, “the sophisticated,
smart, for-profit people sometimes leave their
heads at the door.”

On the performance side, many for-profit executives
on nonprofit boards come to understand that measuring
social change is challenging and costly. But rather
than developing performance measures that are both
meaningful and doable, they often throw in the towel
on measurement, deeming it nearly impossible. Or they
simply focus on keeping administrative costs low without
a careful consideration of what is needed to ensure
program quality and impact. As a result, they too often
wind up starving nonprofits of much-needed managers,
even though they would never consider running their
own businesses without, say, a COO just to keep overhead
low.

Instead of abandoning performance measurement,
Levy suggests that board members spend more time
applying for-profit pragmatism and creativity to the
problem of nonprofit performance measurement. For
their part, nonprofit leaders must help business leaders
recognize that nonprofits also need to invest in management
and capacity, instead of minimizing administrative
costs.

Board members from the business sector are often
impatient with the pace of change at nonprofits because
they underestimate how long it takes to build consensus
among the many stakeholders. To counter this, nonprofit
CEOs should be clear – and unapologetic – about
the need to consult with board members, staff (and not
just the senior team), important donors, and sometimes
partners and policymakers before making major changes
in how the organization operates. Instead of being
bogged down by frustration, for-profit board members
should offer to participate in discussions with other
board members, donors, and staff. By helping with
some of the political heavy lifting, business leaders can
accelerate the pace of change.

Donors. Many donors fail to use their considerable
influence to push for better performance at the nonprofits
that they fund. Or when they do demand results,
they focus on the wrong metrics, such as low administrative
overhead, which only hinders the building of a
strong organization. To counteract this, nonprofit
leaders can teach donors about useful,
even if imperfect, measures of impact. As for
overhead, nonprofits must inform donors that
an organization’s programs are only as good
as its management, and that they should be
willing to fund administrative overhead.

Some donors advocate for their pet programs,
or insist that the organization take on
activities peripheral to the current focus, leaving
nonprofits unable to direct their resources
to the highest impact activities. Donors should
make sure that they are not distracting the
organization from its primary mission. Meanwhile,
nonprofit leaders should push back on
their donors – difficult as that might be –
rather than venturing off-mission.

Donors often demand a tremendous
amount of attention from the executive director, in some cases seeing it as a return for their generous gift. Donors should understand that the executive
director is juggling many stakeholders, and so should
minimize their demands on the executive director’s
time.

Partners. Corporate partners often don’t realize that
nonprofits lack management, marketing, and communications
expertise and personnel. Because funding is
often restricted to programs and services, nonprofits simply
lack the resources to develop these capacities. Unfortunately,
these are precisely the areas often needed for
corporate partnerships. Or when nonprofits do have
the personnel, they are usually stretched thin from running
day-to-day operations. These people can’t free
themselves up quickly to work on a corporate partnership
without leaving the organization dangerously undermanaged.

As a result, corporate partners often grow impatient
with nonprofits’ inability to meet their commitments,
and walk away from the partnership. Instead of
giving up, or complaining about the nonprofit’s lack of
capacity or sophistication, business partners should
invest their time and resources into helping the nonprofit
build capacity. Although not all corporate partners will
be persuaded to do this, our experience suggests that if
nonprofits are clear about their management limitations,
some business leaders will be responsive.

Executives. All too frequently, for-profit executives who
venture into nonprofit leadership expect to implement
big changes as quickly as they did in the for-profit world.
They often fail to consult with key stakeholders before
making important decisions. They don’t give the organization
time to get to know and trust them. And they
don’t take the time to get to know the organization’s culture,
informal power structures, and ways of working.
As a result, their big plans are often rejected
by the staff and board, and the executives
end up quitting in exasperation.

The remedy to this problem may be
obvious, but that doesn’t mean it is easy to
implement. Nonprofit neophytes need to
get to know the organization before
proposing any changes. They need to take
the time to talk with all stakeholders about
any new ideas before suggesting them.
And they should avoid unilateral decisions,
and instead should involve their board,
staff, and stakeholders as appropriate. (For
more thoughts from our crossover leaders
on transitions, see “Crossing Over” on p.
40.) Their new nonprofit colleagues should
alert the new boss to these needs and help
him or her make the necessary time and contacts.

Building Bridges

Two messages linger from our conversations with
crossover leaders. They agree that nonprofit work has been
the most challenging and rewarding of their careers. And
they emphasize that everyone has a stake in creating a
high-performing nonprofit sector, because the solution of
so many of society’s problems depends on it.

“These misunderstandings matter,” says Leone. “The
business side’s failure to understand the complexity,
nuance, and criteria for judging success on the nonprofit
side has tremendous effects, both on fundraising
[and on people’s] understanding of how we’re going to
address certain problems effectively.” That is why it is
important for business and nonprofit leaders alike to
engage in frank discussions about the differences between
the two sectors and how executives can overcome them.

“The true measure of making all this work,” concludes
Novelli, “is to get the talent flowing in both directions.
Make not-for-profit managers better so that they
can be accepted on the other side of the bridge. And
make for-profit people more understanding so they see
the value of people from the not-for-profit sector. Not
just value them because they know they can run a piece
of business, but value them because they understand missions,
they understand social change, and they understand
social values.”

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LES SILVERMAN and LYNN TALIENTO were co-founders of McKinsey & Company’s Global Nonprofit Practice in 2000. Silverman led the practice until his
retirement from McKinsey in 2004. He is now an adjunct lecturer at Georgetown
University’s McDonough School of Business and also serves several nonprofit and
for-profit organizations as a board member and strategic adviser. Taliento is a
partner in McKinsey’s Washington, D.C., office, where she co-leads the Global
Nonprofit Practice.