Understanding the Social Economy of the United States 9781442663947

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UNDERSTANDING THE SOCIAL ECONOMY OF THE UNITED STATES

Understanding the Social Economy of the United States is a comprehensive ­introduction to the operation and study of organizations with social goals – public sector nonprofits, civil society organizations, social enterprises, cooperatives, and other organizations with a social mission – under the rubric of the social economy. Rich in examples and case studies, this book not only highlights the differences between these organizations and traditional businesses, but also provides applied chapters on organizational development, strategic management and leadership, human resources, finance, and social accounting and accountability in social economy organizations. The perfect introduction to the social economy framework for students of nonprofit management, business, social entrepreneurship, and public policy,  Understanding the Social Economy of the United States is an invaluable resource for the classroom and for practitioners working in the social economy sector. laurie mook is an assistant professor in the School of Community Resources and Development at Arizona State University. john r. whitman is a visiting assistant professor of Entrepreneurship and Leadership in the College of Business Administration at The University of Alabama in Huntsville. jack quarter is a professor and co-director of the Social Economy Centre at the Ontario Institute for Studies in Education, University of Toronto. ann armstrong is a lecturer and the academic director of the Business Edge program at the Rotman School of Management, University of Toronto.

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LAURIE MOOK, JOHN R. WHITMAN, JACK QUARTER, AND ANN ARMSTRONG

Understanding the Social Economy of the United States

UNIVERSITY OF TORONTO PRESS Toronto Buffalo London

© University of Toronto Press 2015 Toronto Buffalo London www.utppublishing.com Printed in the U.S.A. ISBN 978-1-4426-4590-5 (cloth) ISBN 978-1-4426-1411-6 (paper)

Printed on acid-free, 100% post-consumer recycled paper with vegetablebased inks. _________________________________________________________________________ Library and Archives Canada Cataloguing in Publication Mook, Laurie, author Understanding the social economy of the United States / Laurie Mook, John R. Whitman, Jack Quarter, and Ann Armstrong. Includes bibliographical references and index. ISBN 978-1-4426-4590-5 (bound). – ISBN 978-1-4426-1411-6 (pbk.) 1.  Community development – United States.  2.  Cooperative societies – United States.  3.  Nonprofit organizations – United States.  4.  United States – Social policy.  5.  Economics – United States – Sociological aspects.  6.  Business enterprises – United States – Case studies.  I.  Whitman, John Roswell, 1949–, author  II.  Quarter, Jack, 1941–, author  III.  Armstrong, Ann, 1951–, author  IV.  Title. HD2769.2.U6M65 2015   306.30973   C2014-906882-4 _________________________________________________________________________ University of Toronto Press acknowledges the financial assistance to its publishing program of the Canada Council for the Arts and the Ontario Arts Council, an agency of the Government of Ontario.

University of Toronto Press acknowledges the financial support of the Government of Canada through the Canada Book Fund for its publishing activities.

Contents

Foreword vii Preface ix Acknowledgments xiii Cases for Analysis xv A Closer Look (Mini Case Studies) xvii List of Tables and Figures xix Part 1: An Overview of the Social Economy 1  Introducing the Social Economy  3 Part 2: The Components of the Social Economy 2  Social Economy Businesses  37 3  Local Development Enterprises  67 4  Public Sector Nonprofits  97 5  Civil Society Organizations  124 Part 3: Critical Issues 6  Organizational Design and Governance Strategies  161 7  Leadership and Strategic Management  192

vi Contents

  8  Human Resources Management  221  9 Financing  252 10  Social Accounting  284 Part 4: Conclusions 11  Concluding Thoughts  323 References  329 Index  379

Foreword

Where does social good come from? This volume, Understanding the Social Economy of the United States, makes clear that the answer to this question is more complicated than some might think. The general notion that nonprofit organizations produce social good has dominated our thinking, but belied our reality, for too long. As the authors note, the categories of public, private, and philanthropic enterprises are neither static nor impermeable. The social economy of the United States, like in many other countries around the world, involves a diversity of organizations arrayed along several vectors of financial and social purpose. Businesses with social purposes and social organizations funded by earned revenue exist in far greater numbers than we see if we limit our understanding to the categories provided by the tax code. The social economy framework is important for all of us to understand. The heterogeneity of enterprises that seeks to produce social goods is a strength of our economy although it is certainly more complicated than previous models centered around nonprofits and philanthropy. The social economy provides tremendous opportunities for people seeking services, employment, or entrepreneurial opportunities. It offers a range of options for people looking to put their money to work for social causes – either through charitable donations, philanthropic investments, investment funds, consumer choices, or political contributions. Understanding the full landscape of organizational forms, financing opportunities, and revenue models working on any given issue enables each of us to make wiser decisions about how we deploy our resources. Of course, the heterogeneity is also challenging. We don’t know if there are particular forms of enterprise that are well suited to producing

viii Foreword

and providing certain goods. There are opportunity costs, and real costs, to underwriting or subsidizing poorly performing organizations of any kind. Determining which organizations do good work, when the definitions of good are so varied and the institutional means so different, is difficult enough as to make it tempting to default to available, yet dubious, measures. Some organizations are no doubt better than others at encouraging creativity, participation, or belonging – social goods that defy most quantifiable measures anyway. The framework is also important for policy makers and scholars. It makes clear that the relevant policy domains for considering social good extend beyond the corporate and tax codes. Investment laws and practices, consumer protection rules, labor law, intellectual property rights, and telecommunications regulation, in an age when everything analog has a digital counterpart, are all implicated in the social economy. There is a world of research to be done to better understand what relationships might exist between form and function. For policy makers, the reality of multiple forms should encourage greater creativity in thinking about incentives for social benefits, the menu of public/ private partnerships, and the distinctive value of each enterprise form. The authors do us all a service in introducing the variety and the richness of the social economy. I am hopeful that this book will serve as a basis upon which future volumes will build. Lucy Bernholz Senior Researcher Stanford University Center on Philanthropy and Civil Society Digital Civil Society Lab

Preface

The economy of the United States is often classified into three sectors: the public sector, the private sector, and the third sector.1 These sectors typically differentiate organizations according to whether they are supported respectively by the government to carry out its designated responsibilities to serve the public; by private sources to serve private interests through the market; or by other sources, including philanthropic grants, volunteer labor, and donated materials, to serve needs that are not otherwise being met by the family, the government, or the market (Anheier, 2004). We build upon the sectoral approach by characterizing the social economy as a space that situates different self-governing organizational forms that prioritize their social objectives. Common organizational models include nonprofit organizations and associations, and cooperatives; however, new corporate forms with social priorities are emerging, including benefit corporations and low profit, limited liability companies, all of which will be duly considered. In our framework, the social economy wholly encompasses what others label as the third sector but also includes parts of the public and private sectors for reasons that will be explained. We emphasize an interactive approach, meaning that we look at how the organizations within the social economy space interact with organizations in other sectors. Implicit in our framework is the idea that the sectors are part of one society, often referred to as a mixed economy. Within that mixed

1 Other terms often used by social scientists and policy makers in place of the third  sector include the nonprofit sector, independent sector, social sector, voluntary sector, and civil society.

x Preface

economy, organizations interact in many ways. To visualize this vibrant arrangement of organizations, in the first chapter we will present the social economy framework using a Venn diagram. Within our interactive approach, the most important principles are that the organizations of the social economy – their purpose, structure, and function – are meant to serve needs not met fully elsewhere; that different social objectives are best served by different organizational models; that organizations often overlap sectors, blend sectoral elements, or even defy conventional private or public sectoral placement, depending on how they go about pursuing their social objectives; and that organizations can migrate between and across sectors over time, depending on their changing operational strategies. Thus, the social economy framework does the following: 1. focuses on prioritizing social objectives; 2. explains how different organizational models serve different needs in different ways; 3. recognizes that many social economy organizations straddle sectors by combining public and private elements and dynamically move in and out of specific sectors depending on how they shift their strategies; and 4. reveals the underlying survival value of a society that allows a multitude of organizational forms to flourish, for different societal needs require different organizational forms to be effective, and as societal needs evolve so must the organizational models to serve them, in what Douglass North refers to as “adaptive efficiency” (North, 1990, p. 80). Highlighting the dynamic and interactive arrangement between organizations and sectors has profound implications for the management of social economy organizations in terms of their leadership, governance, finance, accountability, asset management, human resources management, organizational development, and many other dimensions. Understanding these implications is crucial for such organizations to flourish and even to survive in difficult political and economic times. The book is divided into four parts. Part 1 introduces in the first chapter the social economy framework, elaborates upon the concepts of purpose and organization as noted above, and provides an overview of the different and overlapping components of the social economy. Part 2 consists of four chapters, each offering an in-depth discussion of one of

Preface xi

the four components of the social economy – Chapter 2: social economy businesses; Chapter 3: local development enterprises; Chapter 4: public sector nonprofits; and Chapter 5: civil society organizations. Part 3 includes five chapters that explain how various dimensions of management must address achieving the organization's social objectives in ways that are different from traditional business administration. Chapter 6 discusses organizational design and governance strategies; Chapter 7, leadership and strategic management; Chapter 8, human resources management; Chapter 9, financing; and Chapter 10, social accounting. Part 4 completes the book with concluding thoughts and a discussion of key issues for the future. Within each chapter is a set of mini case studies, labeled “A Closer Look,” which highlights innovative organizations related to the issues being addressed. Each chapter is followed by a set of discussion questions to focus student reflection on the issues, and concludes with a major case study that explores the various organizational types in greater detail and brings out specific issues – for example, challenges in starting a social economy organization, raising finances, business planning, and evaluation issues. The case studies are followed by a short list of discussion questions pertinent to the case. The case studies can stand alone, independent of the chapter context, and thus be used in a variety of courses.

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Acknowledgments

We are grateful to the many people who have made this work possible. While we cannot name them all, we would like to acknowledge Jennifer DiDomenico, acquisitions editor for business and economics at University of Toronto Press, for her unending support of our work and her always valuable suggestions. We also thank the University of Toronto Press staff who have assisted us at various stages and our copy editor, Chérie Turner, for her extraordinary attention to detail, and Jo Anne Tacorda for her careful work on the index. For our case studies we are indebted to many individuals who provided us with information and ideas. In particular, we thank Marc Abshire, Steven Deller, Rink Dickinson, Robert Egger, Rob Everts, Peggy Grimes, Ann Hoyt, Brent Hueth, David Jackson, Jeanine Jacokes, Katharine Kagel, Marsha Krassner, Lillian Kuri, Robert Lang, Erica Mackie, Crystal Mario, Molly McCabe, Rodney North, Derwin Overton, Jonathan Rosenthal, Michael Rozyne, Norman Scribner, Tim Sears, Kathryn Strickland, Woody Tasch, and Martha Whitman. The research for this work was generously supported by the ASULodestar Center for Philanthropy and Social Innovation, and the Social Sciences and Humanities Council of Canada. We also would like to thank our families and friends for their support and encouragement. We dedicate this book to the many organizations of the US social economy whose dedication and contributions add immensely to the quality of life of the American people and people all over the world, and to the entrepreneurs who continuously strive to shape organizations to meet the evolving needs of society. Laurie Mook John R. Whitman Ann Armstrong Jack Quarter

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Cases for Analysis

Chapter 1 La Montañita Food Cooperative  27 Chapter 2 Equal Exchange  61 Chapter 3 Red Feather Development Group  91 Chapter 4 Corporation for Public Broadcasting  116 Chapter 5 Mary Reynolds Babcock Foundation  152 Chapter 6 The American Red Cross  187 Chapter 7 Girl Scouts of the United States of America (Girl Scouts)  215 Chapter 8 ENCORE.org 245

xvi  Cases for Analysis

Chapter 9 Self-Help 279 Chapter 10 GRID Alternatives  312

A Closer Look (Mini Case Studies)

Chapter 1 DC Central Kitchen  6 Chapter 2 The Harvard Cooperative Society  42 The Avalon Theatre  52 Newman's Own  54 Endless Sky  56 Rivanna Natural Designs  58 Chapter 3 The Massachusetts Association of Community Development Corporations 72 Partners for the Common Good  74 The Georgetown Business Improvement District  75 Workforce Development in the District of Columbia  78 Choral Expression in Washington, DC  83 National Rural Electrical Cooperative (NREC)  85 ROC USA, Resident-Owned Communities  89 Chapter 4 Community Health & Social Service Center in Detroit  104 NeighborWorks America  109 DC Rape Crisis Center  112

xviii  A Closer Look (Mini Case Studies)

Chapter 5 American Federation of Labor/Congress of Industrial Organizations (AFL-CIO) 132 Better Business Bureau  136 Alcoholics Anonymous  143 Wikipedia 149 Chapter 6 United Way of America  162 www.Kiva.org (Kiva)  168 Girls Inc.  169 BoardSource 174 Recreational Equipment, Inc. (REI)  182 Chapter 7 Nancy Brinker, CEO, Susan G. Komen for the Cure (Komen)  192 Dr Govindappa Venkataswamy (Dr V) of the Aravind Hospital  198 Cleveland Clinic  200 The Oakland Symphony  207 Roca (Rock in Spanish)  209 Good Shepherd Services  213 Chapter 8 The United Nations Global Compact  226 Pets on Wheels of Scottsdale  234 Arizmendi Association of Cooperatives  237 Cabot Creamery Cooperative  239 marketumbrella.org 242 Chapter 9 Tucson Botanical Gardens  255 W.K. Kellogg Foundation  264 United Parcel Service, Inc. (UPS)  270 CROPP Cooperative  275 The Nonprofit Finance Fund (a CDFI)  277 Chapter 10 Assigning Proxy Values  292 Social Return on Investment Principles  303 The Fulbright Academy for Science & Technology  306 Organically Grown Company  308

Tables and Figures

Tables   1.1  Classification by Funding Source and Orientation  22   7.1  Leadership Behaviors by Preferred Frame  205   7.2  Examples of Managerial Competencies  212   8.1 Number of Firms, Average Membership and Average Number of FTE Employees of Cooperatives in the US  222   8.2  Engagement Across Selected Industries in US Companies  232   8.3  Social Economy Workforce Required Skills  242   9.1 Breakdown of Revenues for 501(c)(3) Organizations Filing Form 990, by Asset Size  253   9.2 Breakdown of Revenues for Organizations Filing Form 990, by Organization Type  254   9.3 Breakdown of Revenues for Organizations Filing Form 990-EZ, by Organization Type  254   9.4 Resources of Tucson Botanical Gardens for the Year Ended 30 June 2013  256 10.1 Expanded Value Added Statement (Partial) for OAR Fairfax for the Period Ended 30 June 2011  297 10.2 Monetary Revenues and Expenditures for OAR Fairfax, for the Period Ended 30 June 2011, per Form 990  298 10.3 Selected Information from GRID Alternative’s Form 990, 2008 to 2012  314 Figures   1.1  The Social Economy: An Interactive Approach  14   2.1  The Social Economy: Social Economy Businesses  38

xx  Tables and Figures

  2.2    3.1    4.1    5.1    7.1    9.1    9.2    9.3  11.1 

Equal Exchange Sales, 1986–2013  61 The Social Economy: Local Development Enterprises  68 The Social Economy: Public Sector Nonprofits  99 The Social Economy: Civil Society Organizations  128 Servant Leadership Model  202 Expected Returns on Investment Rates  259 Sources of Capital  260 Structure of Self-Help  282 The Social Economy: An Interactive Approach  324

PART 1 An Overview of the Social Economy

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1 Introducing the Social Economy

This book presents a framework for understanding the impressive array of organizations in the United States economy that prioritize their social objectives over their economic ones – or what we call the social economy. The conventional sectors – private, public, and third – are useful in attempting to classify and differentiate organizations on a mutually exclusive basis. However, presenting such sectors as distinct spheres does little to convey the reality that many such organizations actually contain blended sectoral elements, and that this blending phenomenon appears to be increasing, further obscuring the clarity once presented by distinctly separate sectors. Consider a tax-exempt charitable organization that delivers social services to the indigent, paid under contract by the federal government, but at the same time collects user fees for attending skills-building workshops from individuals with the means to pay. Or consider the tax-exempt, private university that receives foundation and government grants for research, tuition fees from students, and charitable donations from alumni. Or consider the for-profit, privately held corporation selling its products in a competitive market yet donating 100 percent of its earnings to charity. As you will see, the social economy, functioning within the capitalist economy of the United States, includes many types of organizations such as nonprofits, cooperatives and credit unions, and new organizational forms like low-profit limited liability companies (L3Cs) and benefit corporations. For our purposes, we are examining organizations in the formal economy, not in either the informal economy or the underground or illegal economy. Even though the organizations within the social economy vary, they share the common characteristic of prioritizing their social objectives over economic ones: The social economy bridges the many different

4  Understanding the Social Economy of the United States

types of self-governing organizations whose focus is fulfilling social objectives and, in balance, whose social objectives assume priority over their economic purposes. There are two central concepts in this definition: social objectives and economic purposes. The social and economic pertain to every form of organization within the economy, but the balance between them varies. For organizations in the social economy, their social objectives are paramount; indeed their social objectives are the reason that they were initiated. Social economy organizations participate in the capitalist economy and may even earn a profit, but their social objectives are most important. The primacy of social objectives has important implications for how an organization functions in contrast to private sector firms that are expected to maximize profits for private investors. For example, inclusive and democratic decision making is often preferred to hierarchical, autocratic decision making. Surplus revenues (also referred to as profits) are normally plowed back into the enterprise rather than passed to private investors, and where some form of distribution occurs – as in some cooperatives – it is according to use of the service, not capital invested; furthermore, in the event of dissolution, assets are often transferred to similar organizations rather than distributed to private investors. Public sector organizations, it could be argued, also prioritize their social objectives – for example, in delivering programs for social security and other retirement benefits, medical assistance such as Medicare and Medicaid, unemployment insurance, and veterans’ benefits. Social economy organizations, by comparison, not only prioritize their social objectives, but are self-governing (with their own board of directors). They are totally or partially independent from the government. In addition to making major social contributions, organizations in the social economy make significant economic contributions to s­ ociety – they employ people, purchase and sell goods and services, and work with organizations in the private and public sectors. To underscore the economic significance of social economy organizations, consider the following statistics: • According to the National Center for Charitable Statistics (2012), the Internal Revenue Service granted 1.57 million nonprofit organizations a tax exemption in 2011. Of that group, 959,698 were public charities, 100,337 were private foundations, and 514,639

Introducing the Social Economy  5

were other types of nonprofit organizations, including chambers of commerce, fraternal organizations, and civic leagues. In addition, there are also an estimated 327,000 religious congregations (NCCS, n.d.). • For the year 2009, nonprofit organizations accounted for 9 percent of all wages and salaries paid in the United States and represented 5.4 percent of the gross domestic product (GDP). • Some of the funds flowing to nonprofit organizations are tied to the proportional increase in spending by the US government on social needs, including health, education, and welfare (Steuerle & Hodgkinson, 2006). Programs such as Social Security, Medicare, Medicaid, CHIP, and other safety net programs that provide aid to needy families accounted for 57 percent, or $1.98 trillion, of the government budget of $3.5 trillion in 2013, representing about 12 percent of the $16.8 trillion gross domestic product for that year (Bureau of Economic Analysis, 2014; Center on Budget and Policy Priorities, 2014). Many of these programs involve nonprofits partnering with state as well as federal government programs to deliver services. • Charitable contributions in 2013 from individuals, foundations, and corporations reached $335.20 billion, about 2 percent of GDP ($240.60 billion from individuals) (Giving USA Foundation, 2014). • According to the Corporation for National & Community Service (a federal agency), 62.8 million adults volunteered almost 8.1 billion hours in local and national organizations in 2010. This contribution is the equivalent of almost 4 million full-time jobs and valued at $173 billion. • Commercial revenues of nonprofits are significant and growing. Program service revenue (fee-for-service, including college tuitions), net income from the sale of goods, net income from special events and activities, and membership dues all added together accounted for 48.1 percent of nonprofit revenues in 1982 and 57.6 percent in 2002 (Kerlin & Pollak, 2011). • The United States has nearly 30,000 organizations operating as cooperatives (including credit unions but not including housing cooperatives), which amounts to about $515 billion in revenues, over 856,000 million jobs, and more than $25 billion in wages and benefits. Americans hold 350 million memberships in cooperatives of all sorts, including mutual insurers (Deller, Hoyt, Hueth, & Sundaram-Stukel, 2009).

6  Understanding the Social Economy of the United States

• As of mid-2014, there were 1,072 low-profit limited liability companies (L3Cs), 1,121 benefit corporations, and 746 Certified B Corporations in the United States (B Lab, 2014a, 2014b, 2014c). The following example takes a closer look at how one exemplary public charity pursues its social objectives in ways that have a very positive and significant economic outcome. A CLOSER LOOK: DC CENTRAL KITCHEN DC Central Kitchen (DCCK), based in the heart of the nation’s capital, is a nonprofit organization that operates as a social enterprise – in this case, a business with a social mission – to feed the poor, educate the homeless and unemployed in the culinary arts, and employ culinary arts graduates in preparing catered meals for area schools, ranging from public elementary schools to the University of the District of Columbia. The social need is compelling. In a city of over 600,000 residents, 17.6 percent or 106,000 individuals live below the poverty line (US Census Bureau, 2012). DCCK was founded in 1989 by Robert Egger, after an early career as a nightclub manager. Egger was a quintessential social entrepreneur even before the term was widely known. Egger has little more than disdain for the hand-out, begging mentality and is exasperated by those who refer to his enterprise as a “soup kitchen … a Depression-era term that evokes a million outdated stereotypes of charity” (Egger, 2004, p. xvi). As he argues in his book, Begging for Change, nonprofits should not be begging for money, they should be hustling for social change. Egger exemplifies a new breed of nonprofit executive cum social change entrepreneur who leverages an organization’s status as a charity to achieve systemic change. DCCK is a standout social enterprise because it goes beyond ameliorating poverty by empowering the disenfranchised with the means to escape their condition, thus creating social change. According to its 2010 annual report, • DCCK delivered 1.77 million meals to 88 agencies, including shelters, rehabilitation clinics for addicts and those leaving incarceration, and other nonprofit organizations saving them $5 million in expenses they would have paid at market value;

Introducing the Social Economy  7

• some 92 individuals graduated from DCCK’s Culinary Job Training program, 90 percent of whom became fully employed, earned $2.275 million in salaries, and paid $285,000 in payroll taxes; and • over 14,000 volunteers, including 5,200 students, worked at DCCK in 2010. Using an average shift of three hours per volunteer, this represents some forty-two thousand hours in donated time, which, using $21.36 as the imputed value of volunteer time, equals nearly $900,000 million in value. According to its 2010 Form 990 – the Internal Revenue Service reporting form required of organizations exempt from income taxes – DCCK had total revenues of $7,444,443, about evenly divided between donations/grants and income from services; employed 145 individuals on a payroll of $3,884,174; and paid its chief operating officer $111,878. Egger, as president, chief executive change-maker, and champion of the poor, was paid $81,089. Based on the success of DCCK, Egger plans to open up a similar kitchen in Los Angeles in partnership with the AARP Foundation (AARP, 2013).

DCCK has strong social objectives, but it clearly makes an economic contribution. The DCCK case also signifies how organizations in the social economy interact with the private and public sectors. DCCK receives some of its funding from government, and many of the people whom it trains end up working in the private sector. These points illustrate some of the blended interactions with the private and public sectors typical of a social economy organization and underscore Egger’s caution against thinking categorically in either dot-com or dot-org spheres. In addition, DCCK illustrates how organizations within the social economy are in a process of change in response to pressure from funders to earn a greater portion of revenues from the market. DCCK has embraced the culture of social entrepreneurship, as it seeks to make the organization thrive in changing times. Egger (2004, p. 100) highlights the culture of change with which organizations like DCCK must cope: Change is constant in the nonprofit world. Populations shift, problems mutate like viruses. A nonprofit has to go with the flow, constantly adapting its mission to meet the needs of the cause and the clients,

8  Understanding the Social Economy of the United States constantly pushing the organization, the employees, and the constituents to be able to adjust to these changes. Every step of the way, an organization has to think about being more resourceful.

Social Objectives Organizations in the social economy prioritize their social objectives. These objectives are designed to serve social needs that may be unmet by either public or private sectors. These social objectives are often asserted within a mission statement that may be written into the organization’s charter. The social objectives are not a secondary consideration, as when a conventional business decides to embrace corporate social responsibility while in pursuit of profit, but are central to the organization’s purpose from its inception. The social objectives take on a different form, depending on whether the organization is pursuing charitable objectives, meeting the needs of a membership group, or operating in the market. charitable objectives for public benefit A charitable objective is one form of social objective. Charitable organizations in Western nations have a long, historical tradition of social giving. Religious charity stems from at least as far back as the Old Testament (Loewenberg, 2001; Robbins, 2006), and the evolution of the legal status of charity in the Western world gained traction in the Middle Ages in England (Hopkins, 1987). As charitable activities broadened from their narrow religious base to become more secular, English society attempted to codify the purposes of charitable gifts in the preamble of the Statute of Charitable Uses (or Statute of Elizabeth) of 1601. The list is lengthy but includes “some for aged, impotent and poor people, some for maintenance of sick and maimed soldiers and mariners, schools of learning, free schools, and scholars in universities, some for repair of bridges, ports, havens, causeways, churches …” (as cited in FremontSmith, 2004, p. 29). That statute launched the gradual broadening of the concept of charity in Anglo nations from its religious roots and a strict focus on the relief of poverty. The secularization of charity took on a new urgency during and as a result of the Industrial Revolution. As we see in a history of charity in the United States (Watson, 1922), in the early nineteenth century a progressive movement began to rationalize and professionalize the expression and delivery of charity as it moved out of the church and into secular organizations. A profound

Introducing the Social Economy  9

shift from individual almsgiving to increasingly organized, planned, and managed charitable strategies occurred, and the term “scientific charity” was coined (Crooker, 1889). One of the early architects of scientific charity was the wealthy industrialist Andrew Carnegie, who through his influential writing The Gospel of Wealth (1998) urged the wealthy to abandon “indiscriminate charity” and ensure that their donations were employed for enduring social benefit. He did this by creating opportunities for the able poor to improve themselves, leaving the hopelessly indigent to the care of the state. Carnegie exemplified the modern philosophy of strategic philanthropy and was also a paragon of generosity, making it his mission to give away all of his vast wealth according to his preferences before he died. In that regard he established a pattern in the United States that others have followed, not always with the same passion and commitment as Carnegie but nevertheless with generosity. Recently, Warren Buffet and Bill Gates have challenged their fellow billionaires to give away at least 50 percent of their wealth through the Giving Pledge (Loomis, 2010). Today charitable objectives in the country constitute a broad and heterogeneous mix and must serve a public benefit purpose such as relieving the poor; advancing religion, education, or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government and neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency (Internal Revenue Service, 2011). Therefore, a distinction can be made between charity as a community’s response to those in dire need and organizations with broader charitable objectives as defined by federal taxation laws. Although modern charities are of both types, organizations meeting the broader criteria are more commonplace. As noted, charitable purposes under current law receive favorable tax treatment, and statutes at both the state and federal levels allow an organization exemption from taxation. The exemption, granted to nonprofit organizations, comes at a price, however. Tax-exempt organizations are for public benefit only, and their assets are not the property of their members, officers, or employees. If a nonprofit organization is to be closed or perhaps converted into a for-profit entity, its assets should in principle be transferred to another nonprofit organization (Needleman, Chollet, & Lamphere, 1997). The fact that nonprofit organizations prohibit private accumulation of profits and assets suggests that those who control such organizations and who have a fiduciary responsibility to the public (i.e., an ethical duty or relationship of trust) lack an incentive

10  Understanding the Social Economy of the United States

to operate the organization for private gain. As a result, volunteers are far more likely to give their time to nonprofit than for-profit entities, and similarly, donors prefer to give money to nonprofits. The bylaws of cooperatives may also provide for the transfer of assets to other cooperatives upon the condition that the cooperative demutualizes, which is to say that it ceases to operate as a cooperative owned in common and controlled equally by its members for their benefit. Similarly, when a social economy organization has a year-end surplus, the use of that income is guided by its primary objective of improving and broadening the availability of the service to meet social needs. For nonprofit organizations, unlike how a business corporation pays dividends to shareholders, it is not possible to distribute a yearend surplus (also referred to as a profit) in the form of dividends to members, employees, and officers. This is often referred to as a “profitdistribution constraint” (Hansmann, 1980, 1996; Salamon & Anheier, 1997). This constraint does not prohibit nonprofit organizations from paying top executives large amounts, but it does prohibit dividend payments. Typically, however, such surpluses allow such organizations to invest in improving or expanding their services. meeting member needs through mutual aid/self-help Mutual associations such as nonprofits serving a membership and cooperatives are based on the principle of mutual aid or self-help, a form of social objective intended to meet member needs. The members of these organizations share a common bond of association (e.g., a common heritage, occupation, or location) and a common need that they attempt to meet through a service delivered to themselves and to each other. While no single definition of a cooperative encompasses the diversity of forms of cooperation (Autry & Hall, 2009), the International Co-operative Alliance, the umbrella organization for cooperatives and credit unions worldwide, states: “A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise” (International Co-operative Alliance, 2012a). This definition indicates that a cooperative balances economic, social, and cultural goals; it is a form of business but one that is jointly owned and democratically controlled to benefit its members – different from other types of businesses. Self-help organizations have their roots among exploited groups in society (MacPherson, 1979) and notably among African Americans

Introducing the Social Economy  11

(Butler, 2005); they have attempted to muster sufficient strength to help themselves. Some of the oldest associations in the New World were mutual benefit societies in which people, often of common religion, ethno-cultural heritage, or geographical origin (e.g., a city from which they emigrated), arranged services such as insurance and burials for their members. For example, in 1752 Benjamin Franklin inspired the creation of the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, deemed the first cooperative in what would become the United States (Shaffer, 1999). Franklin’s creation endures today; it is nearly 160 years older than IBM.1 In the 1800s farmers, particularly in New England, were starting organizations with cooperative practices (Autry & Hall, 2009). In 1909 the pioneers of credit unions in Quebec, Alphonse and Dorimène Desjardins, helped French American Catholics in Manchester, New Hampshire, establish the first credit union in the United States, the St. Mary’s Cooperative Credit Association (now named St. Mary’s Bank) (Pierce, 2011). Over the years, people with common bonds such as a place of work, profession, business, religion, or ethnic identity have formed nonprofit mutual associations and cooperatives. While some of these adhere to the tradition of being organized around exploited groups (a union local or workplace association), others simply involve a common social interest (a historical society), a shared experience (the members of a legion club who have fought in a war), a profession (graphic artists), or some other commonality, including a privileged status such as the members of a golf club or a business association. The bonds of association might differ, but such organizations are set up to meet social needs expressed through their shared social and cultural objectives. Increasingly, they interact through the Internet. Member needs are also met through forms of governance unique to social economy organizations in that voting rights are accorded on the basis of membership rather than according to property holdings as in profit-oriented businesses (Ellerman, 1990). Basing voting rights upon membership is similar to according voting rights to citizenship, as in a political democracy – that is, one citizen, one vote. In the social economy, governance is also based on one member, one vote. This is the general rule for social economy organizations, but there are some exceptions that we will discuss.

1 See http://www.contributionship.com/.

12  Understanding the Social Economy of the United States

operating in the market with social objectives A third form of social objective is exemplified by organizations operating in the market but with a principal social mission that is not compromised by seeking profits for investors. While it could be argued that profit-oriented businesses, by satisfying their customers, also have social objectives, to qualify as a social economy business those social objectives must outweigh the economic motive of creating a financial return to shareholders. Thus, a for-profit hospital would not qualify as a social economy business because it delivers healthcare in a way intended to create a financial return on investment. Moreover, capital invested in profit-oriented businesses, and especially in mature companies, typically has a very weak social commitment in comparison to the financial imperative to increase shareholder returns. With the exception of small owner-operated enterprises that are tied to a neighborhood or some larger firms that depend on a particular location for their products (e.g., resource extraction), profit-oriented businesses remain loyal to a community only as long as they obtain a competitive rate of return. When a greater return is possible from other investments or from manufacturing products elsewhere, profit-oriented businesses will shift their loyalties. By comparison, social economy organizations not only regard their social objectives as their priority, but also they have loyalties to either a defined community or a defined membership. Cooperatives, owned and controlled by their members, are less likely to make speculative investments with their own assets. They are also more likely to preserve employment in difficult economic times, thus buffering themselves from the risk and market downturns that take a toll on for-profit firms (Birchall & Ketilson, 2009). There is also an increasingly keen interest in pursuing social objectives through for-profit organizational models. This is evident in the burgeoning membership in Net Impact, including over thirty thousand students who wish to use their business skills to tackle pressing global problems.2 Similarly, an increasing number of investment firms are beginning to focus on strengthening ventures that create both social and economic value. A small but growing number of philanthropic foundations are also beginning to invest in for-profit ventures through program-related investments. Indeed, state legislatures are passing laws allowing the incorporation of hybrid forms of enterprise such as benefit corporations and low-profit limited liabilities companies.

2 See https://netimpact.org/.

Introducing the Social Economy  13

The pursuit of social objectives by private businesses should be ­ ifferentiated from former social economy businesses that have been d reorganized to become for-profit businesses, often in pursuit of government-secured funding. Such organizations have decided that their best ­interest is served by making the profit motive primary. Many nonprofit hospitals, for example, were converted to for-profit hospitals following the creation of Medicare and the expansion of private health insurance. This provided a lucrative market for health services and a corresponding opportunity for investors to make money (Goddeeris & Weisbrod, 2006; Starr, 1982). In addition to healthcare, other service areas are seeing growing entries among profit-driven enterprises including K–12 schools (e.g., Edison Learning), higher education (e.g., Kaplan, Inc. and Apollo Group), and welfare assistance (e.g., America Works). Conversely, there are initiatives to bring private sector businesses into the social economy that have been successful. An outstanding example is Newman’s Own, which donates to charitable causes all of its after-tax profits – that is, over $400 million since 1982 (Newman’s Own Foundation, 2014). By foregoing all of its profits, Newman’s Own has forsworn one of the basic rights of ownership and reoriented the company from private interest to public good. The social business model initiated by Muhammad Yunus (Yunus, 2007), which has made microloans available without collateral to the poor of Bangladesh, is another example, as it is helping to lift impoverished persons out of poverty. New technology is also emerging as a factor creating new, competitive markets for achieving social objectives (Bernholz, 2013). Activities like crowdsourcing (putting out an open call for solutions to a problem to an unknown group of people) and crowdfunding (the pooling of resources of individuals, such as on Kiva.org) for social good might never have emerged without the Internet. Such technologies expand and extend the comparative advantages of social economy organizations. Changing generational values, new types of organizational models, and emerging technologies to achieve social objectives all combine to create a vibrant and dynamic social economy that is likely to become even more so in the coming years. The concept of the social economy can be summarized as follows: the social economy bridges the many different types of self-governing organizations whose focus is fulfilling social objectives, and in balance whose social objectives assume priority over their economic purposes. Some aspects that might be considered in determining this balance are the following: • The primary focus of the organization’s use of assets, income, and human resources (paid and unpaid) is to meet social objectives.

14  Understanding the Social Economy of the United States

• The organization’s governance functions democratically (e.g., elected by members according to either one member, one vote or something similar such as an equal partnership). • The organization’s decision making is relatively independent from government in determining its policies. • There is a constraint upon distributing profits or surplus for individual gain, excepting a rebate for patronage or use of services. Visualizing the Social Economy Rather than focusing on the social economy as a unique entity that is separate from the private and public sectors, we view the three together as a mixed economy within the capitalist system. This can be represented in the Venn diagram in Figure 1.1. Although the components appear as the same size in the diagram, in reality their size varies across time and context. For instance, the size of each of the components will be different at different historical stages in the same country (Hall, P.D., 1992b, 2005; Martin, 1985) and in different countries under different political and economic regimes (Salamon et al., 1999).

Figure 1.1  The Social Economy: An Interactive Approach

PUBLIC SECTOR

Local Development Enterprises Public Sector Nonprofits

Social Economy Businesses

Civil Society Organizations

SOCIAL ECONOMY

PRIVATE SECTOR

Introducing the Social Economy  15

The overlaps are as crucial to understand as the components. These also will vary in size at different times and in different contexts, and it is in these overlaps that we see organizations that have characteristics of multiple sectors. Indeed, within the social economy, organizations perform many different functions in society and have different forms of interactions with the private and public sectors. However, to be in the social economy, it is important to remember that the organizations must preference social objectives. Looking specifically at the social economy in the Venn, you will see four subcomponents – social economy businesses, local development enterprises, public sector nonprofits, and civil society organizations. The first three subcomponents – social economy businesses, local development enterprises, and public sector nonprofits – are based upon differing forms of integral interaction with the private and public sectors; civil society organizations may have less overlap with the public and private sectors – however, as discussed in chapter 5, civil society organizations interact with these other sectors in important ways. As will be become apparent in chapters 2 to 5, the largest group of organizations is within the section of civil society organizations. The Venn, which has been used by other researchers in this field (e.g., Billis, 2010; Bouchard, 2009; Pestoff, 1998; Quarter, Mook, & Armstrong, 2009), is useful because it signifies dynamic interaction. The social economy, albeit containing organizations with distinct characteristics, is an integral and fluid part of society, and the organizations within the social economy interact with the private and public sectors in many ways. It is unimaginable to think of a modern, pluralistic society without the cultural, educational, professional, social, and economic organizations that are central to the social economy. This is even more so since the advent of the Internet, which has vastly enlarged what counts as a community and facilitated communication. Therefore, we refer to our framework as an interactive approach. The four components of the social economy presented in the Venn not only have differing forms of interaction with the private and public sectors but also within themselves. Within civil society, for example, there are sharp debates upon issues such as abortion, restrictions on smoking in public, and the right of same-sex couples to marry that spark conflicting views among participating organizations. There are environmental groups that often criticize the behavior of the private and public sectors about their environmental policies. The Venn also can help to understand that the interactions among the three components are not static and that they are constantly changing.

16  Understanding the Social Economy of the United States

Given the rapid pace of social change in the United States, we might expect a similarly high rate of change in the types of organizations that emerge in the social economy. The country’s social economy is very dynamic, and the boundaries between it and the private and public sectors are fluid. To illustrate this fluidity, we can see the influence of the private sector in putting pressures on nonprofit organizations to operate more efficiently, like businesses. Many nonprofit organizations are employing more businesslike models, though not without concern that adopting business practices might compromise social commitments (Eikenberry & Kluver, 2004; Hall, P.D., 1992a). The wealthy are also engaging in forms of charitable practice that have more of a business bent – for example, venture philanthropy. Similarly, there is pressure from civil society on for-profit corporations to act in more socially responsible ways. Companies can incur criticism for disregarding the externalized costs of their operations such as those resulting from environmental pollution, hazardous workplaces, tobacco smoke, unhealthy foods, wasteful packaging, excessive energy consumption, unsafe product design, premature product obsolescence, and unnecessary promotion of consumption. Due to competitive pressures and enlightened leadership, some corporations are attempting to integrate within a profit-modulating model practices that reflect greater social responsibility. Moreover, new “hybrid” organizations (Billis, 2010; Rifkin, 2014) are being created to combine business expertise with social entrepreneurs from civil society in order to extend markets deeper into impoverished communities, by lowering prices or by selling smaller portions in order to be more affordable to those previously excluded from the market (Drayton & Budinich, 2010; Prahalad & Hammond, 2002). There is also an increase in “digital civil society” (Bernholz, 2013, p. 4). In an age of heightened competition and globalization, we can likely expect more, not less, fluidity at the boundaries of the public, private, and social economy sectors. Of interest to many students is that one of the greatest challenges to entrepreneurs in our time, regardless of sector, is how to initiate change in order to serve social needs with even greater effectiveness. This challenge may well require modifying existing organizational models or creating new ones; for example, the new low-profit limited liability companies and benefit corporations. Introducing the Components of the Social Economy Clearly, within the social economy there are many different types of organizations. These can appear in various places in the social economy sector in the Venn diagram and are categorized within four components:

Introducing the Social Economy  17

social economy businesses, local development enterprises, public sector nonprofits, and civil society organizations. These four components reveal crucial ways in which organizations differ from each other in purpose, structure, finance, and governance. Understanding these differences is essential to aligning resources, including personal efforts, to achieving social objectives through the most effective organizational model. The four components and their differences are introduced briefly below and are the focus of chapters 2 to 5, where we examine in greater detail their composition and their forms of interaction with the private and public sectors. Chapters 6 to 10 present specific governance and management issues and practices as they flow from the social economy framework: organizational design and governance strategies, leadership and strategic management, human resource management, financing, and social accounting and accountability. Chapter 11 presents some concluding thoughts and discusses key issues for the future. It is important to remember that the Venn is a means to visualize how different types of organizations in the social economy may be situated according to characteristics that make them effective in achieving their objectives. It is not a perfect taxonomy, nor should it detract from the organization itself and how each variation in the organizational model meets social needs through a different configuration of ownership, governance, and funding. In effect, the Venn provides a mapping function, while the organization is the unit of analysis. 1. Social Economy Businesses • cooperatives •  nonprofit organizations •  social businesses • L3Cs •  benefit corporations In the Venn diagram, social economy businesses are in the overlap between the social economy and the private sector (see chapter 2). These organizations represent a hybrid arrangement with one foot in the private sector and another in the social economy. Like private sector businesses in general, they earn either all or a sizable portion of their revenues from the marketplace, but they prioritize their social objectives rather than profit and shareholder value. The bulk of social economy businesses are cooperatives that earn their revenues from the market – for example, credit unions, marketing

18  Understanding the Social Economy of the United States

cooperatives (largely in farming but in other endeavors as well), and consumer cooperatives such as goods retailing or grocery cooperatives. Other examples of social economy businesses include nonprofit associations such as the American Automobile Association and Blue Cross Blue Shield Association, as well as recreational organizations such as the YMCA. All of these organizations operate within the realm of market-like businesses, but they differ in that they strive to meet social objectives, including meeting the needs of their members. In addition to cooperatives and nonprofits that overlap with the private sector, there are some emerging forms of private sector businesses that have taken on characteristics associated with the social economy. These include some innovative models: social businesses, as noted above; low-profit limited liability companies, businesses that are required to have social objectives in compliance with Internal Revenue Service standards for program-related investments; and benefit corporations, which are incorporated as such in the growing number of states that have passed legislation allowing statutory registration of such corporations. The emergence of these new types of business exemplifies the dynamic relationship between the social economy and other sectors and the fluid boundaries between them. 2. Local Development Enterprises •  community development corporations •  community development financial institutions •  business improvement districts •  workforce development organizations •  workforce enterprises for marginal social groups •  performing arts organizations •  rural infrastructure development organizations •  affordable home ownership organizations Local development enterprises (see chapter 3) are a hybrid arrangement in the overlap in the Venn diagram between the social economy and private and public sectors. The principal characteristic of local development enterprises is that they combine public and private resources to build or strengthen community assets for social benefit. Like other organizations in the social economy, local development enterprises prioritize their social objectives. In this case, they contribute to the development of their local communities, and like social economy businesses,

Introducing the Social Economy  19

local development enterprises sell their services in the market. But unlike social economy businesses, they rely upon external supports from government programs and foundations that share their objectives. This dependence upon external supports occurs for differing reasons: location in impoverished parts of the country or disadvantaged communities such as those that are primarily populated by minority groups or recent immigrants is one such reason; also, many local development enterprises employ persons with disabilities (psychiatric, intellectual, physical), who rely upon pensions and other supports. 3. Public Sector Nonprofits •  healthcare nonprofits •  nonmarket housing organizations •  rape crisis centers Organizations shown in the overlap between the social economy and the public sector are labeled as public sector nonprofits because they have one foot in the social economy and one foot in the public sector. This is because they receive funding through government programs and are guided by government policies (see chapter 4). The principal characteristic of public sector nonprofits is that they are independently governed, nongovernmental organizations that address public welfare and resource protection needs with support from the government. Typically public sector nonprofits, another hybrid arrangement, are in service areas such as healthcare, nonprofit housing, and centers for sexual assault victims. Public sector nonprofits interact with government in differing ways, some being very closely aligned (as a service delivery extension of government) and others having greater independence. Public sector nonprofits may also earn revenues from the market, but they are providing a public service and receive at least some guidance from government policy. Some argue that the arrangement between public sector nonprofits and government is a productive partnership with each party undertaking what it does best: government provides a portion of the funding and policy direction, and nonprofits, which are more in touch with local communities, provide the service (Salamon, 1987, 1995; Salamon & Anheier, 1997). Others view the relationship more critically and suggest that government is intruding on the management of nonprofits (Akingbola, 2004; Smith & Lipsky, 1993). In part these concerns

20  Understanding the Social Economy of the United States

arise because governments, in response to criticism of government waste, have moved away from grants and core funding to contracts that are of a shorter term with more onerous reporting than has existed in the past. Both of these viewpoints have merit. Although the partnership between government and public sector nonprofits appears to be productive, more stringent funding arrangements are challenging for many public sector nonprofits. This has forced them to consider funding alternatives apart from government. The growth of public sector nonprofits reflects the dynamism of American society and the constant tension between the need to provide for the general welfare of society while limiting the size of government. Increasingly, governments at the federal and state levels have outsourced the provision of services to for-profit and nonprofit ­organizations – in particular, public sector nonprofits – and we can expect this trend to continue. 4. Civil Society Organizations •  nonprofit mutual associations relating to the economy ° unions °  other workplace associations °  professional associations °  consumer associations •  nonprofit mutual associations focusing on social needs °  religious congregations and orders °  associations of gender, race, and ethnicity °  social clubs °  self-help groups •  civil society organizations serving the public °  sociopolitical organizations °  public service organizations •  foundations and other fund-raising mechanisms serving the public Civil society organizations are neither public nor private sector organizations but may interact with these sectors (see chapter 5). Civil society organizations include three broad groupings: (1) nonprofit mutual associations such as unions, religious groups, associations of race and ethnicity, and self-help groups which serve a defined membership having a mutual or shared interest that they seek to satisfy through the organization; (2) member-based organizations that serve the public, either at-large or specific groups of people in need such as

Introducing the Social Economy  21

the many healthcare foundations that raise funds for medical research and ­advocacy groups; and (3) different forms of foundations and fundraising mechanisms serving the public, such as the United Way and the private foundation of Bill and Melinda Gates, as well as community foundations such as the Maine Community Foundation. Bringing It All Together: Why the Social Economy? The approach presented in this text differs in significant ways from others in this field. First, the usual emphasis is on one organizational form – nonprofits, cooperatives, social businesses, and so on. Our emphasis, by comparison, is on all organizations that prioritize their social objectives over their economic purposes, not just one form of organization type. This represents a huge array of organizations, and we view the social economy as a bridging framework for them. The organizations within the social economy differ from each other, but they share the common denominator of prioritizing their social objectives over their economic purposes. Second, our classification system or typology recognizes that the organizations within the social economy are diverse and multifunctional. We use a classification system to underline that certain organizations have common functions. These common functions transcend their incorporation; for example, some organizations earn their income from selling their services in the market, much like a business. They can be nonprofits, cooperatives, or social businesses. Our classification system is imperfect, especially since our world is in such rapid flux, and organizational forms are changing before our eyes. However, as might be surmised from our presentation to this point, we are using two primary dimensions – the source of the organization’s funding and the organization’s orientation or the characteristics of the groups that they are serving. Let us briefly go through these for each of the categories in the Venn (Table 1.1): • Social economy businesses, as noted, earn their revenues from the market, much like other businesses in that regard, but some serve the public at large (anyone who wants to purchase their services); other serve a membership, as is the case for some cooperatives and nonprofit mutual associations. • Local development enterprises, too, are oriented to a market for a portion of their revenues, but they typically receive revenues from other sources: government programs, foundations, and donors, and

22  Understanding the Social Economy of the United States

they benefit financially from volunteer contributions. Some local development enterprises have a membership, but in all cases, their orientation is to a local community, and for that reason they are thought of as engaging in community development. • Public sector nonprofits obtain a substantial portion of their revenues from government agencies supplemented by grants from foundations, donors, and some sale of services. As their name implies, public sector nonprofits offer a service to the public – in particular, a specific public such as sex assault victims or people with low incomes. • Civil society organizations, the most diverse of our classifications, usually derive their revenues from many sources – donations, membership fees, foundations, sale of services, and government grants and contracts. Many civil society associations are oriented to serving their membership: unions, professional associations, religious congregations, social clubs, and so on. Others are oriented to serving the public: sociopolitical groups, public service organizations. And still others are foundations serving either specific or diverse publics.

Table 1.1  Classification by Funding Source and Orientation

Characteristic

Market-based organizations

Funding sources

• Nonprofits: revenue from clients • Coops: revenue from members

Orientation

• Nonprofits: public at large • Coops: members

Local ­development enterprises

Public sector nonprofits

Civil society organizations

• Mixture of government, market, and donors

• Primarily government • Secondarily donors

• Mutual associations: members’ fees • Volunteer organizations: primarily donors

• Either public at large or particular publics in need

• Mutual associations: members • Volunteer organizations: public

Introducing the Social Economy  23

Some organizations such as private nonprofit universities are ­ ifficult to classify. They yield a large part of their income from fees d that students are charged (the market) and from their endowments (donations). They also may receive research funds from the government, as well as tax benefits from the government of foregone revenues on donations to their endowment. Business associations are another form of organization difficult to classify: on the surface they have the characteristics of a nonprofit mutual association, but they are largely a voice for private sector businesses. Should they be viewed as social economy businesses or civil society organizations, as they do participate vigorously in the debates of civil society? We leave it for you to consider. We have emphasized two distinctive features of our conceptual framework: it embraces all organizations that prioritize social objectives over economic purposes independent of incorporation, and it utilizes a multidimensional classification system based upon source of revenues and orientation that leads to four broad classifications. There is, however, a third feature that we turn to at this point: the emphasis on interaction with the private and public sectors. As stated above, the social economy is not an entity unto itself but a vital part of a mixed economy. Recognizing this, our conceptual framework emphasizes interaction between organizations in the social economy and the private and public sectors. We discuss these differing forms of interaction in the following chapters of this textbook and have introduced them briefly in this chapter. Although we highlight this feature of our conceptual framework, it should be emphasized that we are not the only theorists in this field who discuss interaction. Salamon (1987, 1995) discusses the interaction between nonprofit organizations and government and refers to it as a partnership. Others (Akingbola, 2004; Smith & Lipsky, 1993) are more critical and view it as a form of government domination. However, all of these researchers are discussing interaction. Similarly, market failure theory (Ben-Ner, 1986; Hansmann, 1980; Weisbrod, 1975, 1977), widely used by economists, presents explanations as to how nonprofit organizations interact with the market, suggesting that nonprofits assume roles in which business markets fail. Like these other theorists, our conceptual framework emphasizes interaction but differing forms of interaction – not just one. The interaction for social economy businesses differs from that of public sector nonprofits or civil society organizations. In fact, even though this text discusses many different forms of interaction, we feel that our text is just scratching the surface.

24  Understanding the Social Economy of the United States

Conclusion The social economy framework is an interactive and systemic concept for understanding the extraordinary varieties and dynamism of organizations that prioritize their social over economic purposes and can blend across sectors in the capitalist economic system of the United States. The social economy highlights similarities among organizations with social objectives – nonprofits, cooperatives, and social businesses. These social objectives can be expressed in differing ways, depending upon the form of incorporation. For instance, the priority that they give to their social objectives affects how the organization functions; it places constraints upon how the organization’s property can be used, the disposition of surplus, and who can benefit from the assets. In contrast to a private sector business, the assets of a social economy organization are to be used to create social wealth for members or the public, not for increasing an individual investor’s economic wealth. We use a Venn diagram to highlight three additional features of the social economy: a method for classifying these organizations, the differing forms of interactions with the private and public sectors, and its dynamic and changing nature. In looking at the different components of the social economy – social economy businesses, local development enterprises, public sector nonprofits, and civil society organizations – we analyze the many different forms of interactions. The social economy is an integral part of a mixed economy that serves in many ways as its social infrastructure. Our approach is dynamic in that the boundaries between social economy and private and public sectors are in flux. Different points in time and different contexts will result in different balances among different organizational models that will come and go, and we can expect that such change will continue well into the future. VX DISCUSSION QUESTIONS 1. Does it make sense to say that an organization that prioritizes its social objectives has an economic purpose? 2. Create a continuum of organizations ranging from those that strongly prioritize their social objectives to those that weakly do so. Where do your personal values lie when you consider starting a venture or being employed by one? Might your position on this continuum change over time, and if so, why?

Introducing the Social Economy  25 3. What are the main components of the social economy identified in this chapter? Identify at least one example of an organization in each of these components that is active in your community, and share your results in class. Are any organizations difficult to place in the framework? 4. Using the Venn diagram in Figure 1.1, classify the following organizations: (1) United Way; (2) Anacostia Economic Development Corporation; (3) REI Cooperative; and (4) The Society of Jesus in the United States.3 Explain your reasoning. Provide additional examples from your own experiences. 5. The emphasis in the Venn diagram is on how organizations of the social economy interact with the rest of society. Please discuss the interactions of your university or college and the chamber of commerce in your community. 6. Our society is changing rapidly due to factors such as technology, immigration, aging, resource depletion, and globalization. How is social change affecting the interactions between the various components of the Venn diagram? 7. The United States, like any country, faces policy options that are both created and constrained by its history. What are some of the historically influenced opportunities and constraints that you think have shaped the evolution of organizations in the US economy since the time of the American Revolution? How have organizations in the economy evolved differently in other countries?

VX COMING TO TERMS: KEY CONCEPTS IN A NUTSHELL

Benefit corporation: A form of organization that can be registered with any state with appropriate legislation as a company with a social purpose rather than for the purpose of maximizing shareholder financial returns. Certified B Corporation: An organization that has been certified by the nonprofit B Lab. Charity: A nonprofit organization that meets a public benefit test, as determined by the Internal Revenue Service for such criteria as relief for the poor; advancement of religion, education, or science; erection or maintenance of public buildings, monuments, or works; lessening

3 For URLs, see, respectively: http://www.unitedway.org; http://anacostiacdc.com; http://www.rei.com/; and http://www.jesuit.org/.

26  Understanding the Social Economy of the United States

the burdens of government and neighborhood tensions; elimination of prejudice and discrimination; defense of human and civil rights secured by law; and combating community deterioration and juvenile delinquency (Internal Revenue Service, 2011). Also known as a 501(c)(3). Civil society organizations: A voluntary association through which members of a society engage with each other around mutual interests, either serving their membership or the public. Cooperative: “A cooperative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democraticallycontrolled enterprise” (International Co-operative Alliance, 2012a). Note that some forms of cooperatives have organizations as members, not “persons” as in the ICA definition above. These are referred to as second-tier cooperatives; third-tier cooperatives have second-tier cooperative as members. Local development enterprise: A hybrid arrangement involving a social economy business that sells its services in the market but because of various factors such as serving an impoverished area or clientele with disabilities relies upon external financial supports from government programs and foundations. Local economic development: This “is achieved when a community’s standard of living can be preserved and increased through a process of human and physical development that is based on principles of equity and sustainability” (Blakely & Leigh, 2010, p. 75). Low-profit limited liability company (L3C): A form of limited liability company designed to harness the profit-generating power of a for-profit company but with a social mission as its principal purpose, as would be found in a nonprofit. The key differentiating feature of the L3C is that it is required to have social objective in compliance with Internal Revenue Service standards for program-related investments (PRI). As with benefit corporations, states must have L3C statutes of incorporation. Nonprofit mutual association: An association of members who share a common need or interest that is met through their organization, which qualifies as a nonprofit organization. Nonprofit or not-for-profit organization: A self-governing organization that is formed to serve the public or a membership (Salamon, 1996). It is barred from distributing net earnings to those individuals who control the organization (Hansmann, 1980), and many are classified by the IRS as tax exempt.

Introducing the Social Economy  27

Public sector nonprofits: A hybrid arrangement involving a social economy organization that overlaps with the public sector in that it provides a public good or service that is guided in part by government policy and relies to some extent upon government funding. Social economy business: A hybrid arrangement involving a social economy organization that sells its services and goods in the private market, much like a private sector business, but still prioritizes its social objectives. Social economy organization: An organization that prioritizes its social objectives over its economic purposes. Social economy: The social economy bridges the many different types of self-governing organizations whose focus is fulfilling social objectives and in balance whose social objectives assume priority over economic purposes. Tax-exempt organization: To be considered for tax-exempt status by the IRS, an organization must be organized as a trust, corporation, or association. It also must have an exempt purpose that fits into one of these eight categories: “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals” (IRS, 2013a). It cannot engage in political activity or lobbying and must not distribute assets or income to individuals beyond what is considered fair compensation for their services (IRS, 2010a, 2010b, 2013b). Examples of tax-exempt organizations are charities (including churches and public foundations) and private foundations [501(c)(3)], civic leagues and social welfare organizations [501(c)(4)], business leagues and chambers of commerce [501(c)(6)], social and recreation clubs [501(c)(7)], state chartered credit unions [501(c)(14)], and federal credit unions [501(c)(1)]. Donors who contribute to 501(c)(3) organizations can claim their donations as a tax deduction. VX CASE FOR ANALYSIS: LA MONTAÑITA FOOD COOPERATIVE

In 1976, three hundred families living in Albuquerque, New Mexico, came together with the shared need to start a convenient way to purchase natural and organic foods. With one thousand square feet of floor space, La Montañita Food Cooperative at first operated as a collective and in 1980 shifted management to a three-member team of volunteers.

28  Understanding the Social Economy of the United States

To further increase accountability, management hired its first paid staff in 1984. La Montañita opened its second store in 1999 and expanded from eight thousand members to over ten thousand members by 2004. The cooperative then acquired Wild Sage Food Coop in Gallup and The Marketplace Natural Food Market in Santa Fe, serving fourteen thousand members with sales of over $20 million. Today, according to cooperative board president Martha Whitman (no relation to the authors), the cooperative has five stores and sales approaching $30 million. Since 1990, La Montañita has returned over $2 million in rebates (also referred to as patronage dividends) to its members. The Cooperative Difference According to the National Cooperative Grocers Association, which is a business services cooperative for retail food cooperatives in the United States, La Montañita is one of 121 member and associate cooperatives in 34 states, with combined sales of about $1.4 billion annually (National Grocers Cooperative Association, 2012). To convey the spirit of this cooperative’s business, we draw the following statement from its 2011 (1) annual report: Who We Are: A cooperative community based on the shared benefits of health food, sound environmental practices and a strong local economy with results that justify the resources used. What We Do: We work to create: 1. A thriving sustainable economy that benefits our members and the communities we serve 2. A local economy that fosters a cooperative sector 3. A community based on trust, and mutually beneficial relationships 4. A broader understanding of the health value of our products Why We Do It: • To demonstrate the value and impact of working together in a cooperative model • To promote coop values and principles • To connect communities for the mutual benefit of all • To support like minded initiatives

Introducing the Social Economy  29

Rather than emphasizing financial returns to investors, as is the case in profit-oriented supermarkets, La Montañita’s statement conveys the deliberative management of economic principles through a cooperative model to serve the well-being of the cooperative members and their community. Serving Member Needs Cooperatives must meet the imperative of economic survival, but they do this by focusing on the needs of their members. Anyone may patronize La Montañita, but only members receive certain privileges, including, at the time of this writing, the right to vote in the annual general meeting and to elect the board of directors of the cooperative; ownership of the cooperative; discounts of up to 40 percent on certain items; additional discounts up to 18 percent based on the hours volunteered on community service programs organized by the cooperative; patronage refunds (annual cash refunds in proportion to the amount spent the previous year) as distinct from shareholder dividends paid in proportion to the number of shares owned; and membership in the New Mexico Educators Federal Credit Union. The annual membership fee is $15 for up to three adults sharing the same kitchen; alternatively there is a one-time fee of $200 for a lifetime membership. Cooperatives are self-governing associations and as such the members, each with one vote, elect a board of directors, the official governance, at the annual general meeting. La Montañita has a nine-person board of directors representing a range of skills to oversee the affairs of the association and to work with senior management. Cooperative board president Whitman indicates that a cooperative board is typically made up of cooperative members, though its bylaws may also allow employees and outside directors to serve. The original need that justified establishing La Montañita in the mid-1970s was that people in Albuquerque were concerned about the quality of their food and wanted in particular a source for organically grown produce. They had become alarmed by the proliferation of processed and pesticide-laden foods, and many of them who had come of age in the 1960s shared an ethos of social justice and sought to support a workplace different from the mainstream corporations. Since that time, the co-op has been successful in sustaining a cohesive sense of community among members, who share La Montañita’s values of putting members ahead of profit and of treating people fairly. Whitman

30  Understanding the Social Economy of the United States

stresses that understanding member needs and values is a continuous process, and thus the co-op has a vital membership engagement committee that is always seeking new and different ways to connect with members. For example, members take advantage of suggestion boards to register their thoughts, concerns, and questions, to which the staff posts responses for all to read. A newsletter lists contact information for senior management and the board, and members do not hesitate to voice concerns or requests. An annual membership survey elicited a less-than-desired response, and when the annual patronage rebate dropped following a less profitable year, members made their concern heard. Whitman also noted the need to balance economic efficiency and effectiveness in meeting member needs. Although putting people before profit is the operating principle, Whitman and the board are committed to being a profitable enterprise. According to Whitman (personal communication, 10 January 2012): We would see more money fall to the bottom line if we ran our business in the traditional corporate model … We invest heavily in our staff through pay scale, training, and benefits. Consequently they are well educated and able to answer complex member questions … We have a vigorous member volunteer program whereby members receive an 18 percent discount for their time. It’s costly to the co-op because the program benefits the community, not La Montañita itself. The State doesn’t allow volunteers to work in the stores; instead they are involved in various community projects, working in our schools, delivering food to the housebound, etc. But the Cooperative Principle 7 is Concern for Community and our volunteer program is one manifestation of this principle.

The cooperative has had to evolve over time to meet member needs. As Whitman noted above, volunteers are not allowed to work in the store, but this was not always the case. Until the early 1990s, members were allowed to volunteer time in the store and receive a discount. Subsequent to the new restrictive law, the emphasis on volunteering shifted to the community. The cooperative has also responded to growing member interest in knowing more about the food than is required by law. Thus, La Montañita’s produce department indicates if the food is local, organic, pesticide free, where it came from, and so forth. In addition, the co-op has created a fund that allows members to place some of their savings into a group money market account that serves as collateral

Introducing the Social Economy  31

for producer loans. This is a tangible way for members to show their support for the local food system. La Montañita is even further evolving its commitment to the regional food system through its FoodShed project, discussed below. These are examples of how La Montañita engages in community economic development, and there are others. More than Groceries According to the La Montañita’s board’s only employee, general manager Terry Bowling, “The cooperative prides itself as being more than a grocery store” (personal communication, 20 January 2012). Bowling himself, also a member of the board of directors of the National Cooperative Grocers Association, arrived at La Montañita with significant corporate experience in food distribution and has been able to leverage his knowledge to benefit the cooperative. In addition to food sales, the cooperative operates La Montañita Fund to support local agriculture by providing loans to local farmers, ranchers, and value-added food producers. Exercising its commitment to cooperative principle 6 – Cooperation among cooperatives – La Montañita directly supported and provided technical assistance for the creation of a new cooperative, the Sweetgrass Cooperative of grassfed beef producers, who now distribute their product through La Montañita. The cooperative also partners with other organizations to provide healthy food to Native American communities, along with education on health and nutrition, as well as the benefits of using available land for farming. Moreover, those who visit the cooperative can learn more about the cooperative business model. The cooperative sponsors extensive engagement of volunteers to serve the community, adding an estimated $219,720 in value to the local economy in 2011. Specifically, 1,017 volunteer hours were spent to serve special needs and senior deliveries; 2,790 hours were donated to local nonprofits; 506 volunteer hours were given to public schools; and 477 hours were invested in staff wellness and other activities to reduce stress and promote wellness. Diversification The cooperative has increased sales of local and regional food from 16 percent to over 20 percent in the period from 2003 to 2006. The membership of La Montañita has long shown a preference for locally grown

32  Understanding the Social Economy of the United States

and produced food. After studying food distribution models around the country and consulting with regional food producers, the cooperative decided to undertake a Regional FoodShed Project, designed to develop supply and demand for local products within the radius around Albuquerque. New Mexico is a sparsely populated state, with only 17 people per square mile, compared to an average for the country of 87.4. The population was 1,819,046 in 2000 and grew 13 percent to 2,059,179 by 2010. New Mexico is the fifth largest state in land size, with 121,298 square miles, and about 26 percent of the population (535,239) is concentrated in Albuquerque alone. The next largest city, Las Cruces, has just under 100,000 residents, less than one-fifth of Albuquerque’s population. Low-population centers are less attractive to conventional corporations and are often served through small, private sector businesses, such as corner grocery stores and, sometimes, consumer cooperatives. Given these characteristics, it is not surprising that an effective food distribution system had not emerged until La Montañita created one. La Montañita now defines its food shed as a three-hundred-mile radius around Albuquerque. Within this territory, La Montañita organized a distribution center to provide a service to local farmers, ranchers, and producers, transporting products to a central warehouse for short-term storage and redistribution to food retailers in Albuquerque. In December 2011, the cooperative upgraded its storage and distribution facility from seven thousand square feet to eighteen thousand square feet. La Montañita exemplifies many of the distinctive characteristics of cooperatives: putting member needs first, proactively listening and responding to member concerns, engaging with and supporting the local community, and helping other cooperatives, in addition to sustaining itself in a competitive economic environment. According to Whitman, “Our relevancy is our commitment to community and I believe that resonates with our members” (personal communication, 10 January 2012). VX CASE QUESTIONS 1. According to its 2011 annual report (La Montañita, 2011), La Montañita Food Cooperative appears to be thriving. How do you think the

Introducing the Social Economy  33 cooperative can continue to flourish with such superstores as Costco and Walmart in town? 2. In a cooperative model, why do you think it is necessary to meet member needs in addition to demonstrating economic viability? Which objective do you feel is more crucial? If you were a member, why might you instead start patronizing another grocery store? 3. How can a cooperative grocery store like La Montañita best serve lowincome populations? How can such a cooperative accommodate the various preferences among different food cultures? 4. If you were a stakeholder in La Montañita Food Cooperative, how would you evaluate its performance?

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2 Social Economy Businesses

Social economy businesses are situated at the intersection of the social economy and the private sector (see Figure 2.1). These organizations earn either all or a sizable portion of their revenues from the marketplace and may compete with private sector businesses, but they are driven by social objectives. Although a private sector business might argue that it meets a social need and contributes to the community in various ways such as through charitable donations, it is still primarily guided by a profit motive. Thus, a defining criterion for social economy businesses, as distinct from private sector businesses, is that the prerogatives of capital (e.g., return on investment, capital valuation) do not dominate over the social objectives in the organization’s decision making. In this chapter, we will take a closer look at different types of social economy businesses: some forms of cooperatives and nonprofit organizations, and emerging forms such as social businesses, low-profit limited liability companies (L3Cs), and benefit corporations. Cooperatives Of all the types of social economy businesses addressed in this chapter, the cooperative is the oldest and most numerous, not only in the United States but also worldwide. The early proponents of cooperatives in the United States were from both labor and business. The National Labor Union and the Knights of Labor, influential labor confederations, were active in organizing worker cooperatives from the late 1860s to the end of the century. The Knights of Labor also developed several cooperative communities, two near Birmingham, Alabama, one in Missouri, and another in Minnesota (Curl, 2012). Leland Stanford, the late nineteenthcentury railroad tycoon, governor of California, and US senator, was

38  Understanding the Social Economy of the United States Figure 2.1  The Social Economy: Social Economy Businesses

PUBLIC SECTOR

Local Development Enterprises Public Sector Nonprofits

Social Economy Businesses

PRIVATE SECTOR

Civil Society Organizations

SOCIAL ECONOMY

an ardent proponent of cooperatives. He unsuccessfully put forward a Senate bill in 1886 to create a legal framework and make available financial credit for incorporating worker cooperatives (Altenberg, 1990; Stanford, 1887). Stanford also dedicated Stanford University, which he and his wife endowed and named in the memory of their deceased son, Leland Stanford Jr, to the promotion of cooperatives and worker ownership of industry. At the opening ceremonies, in 1891, Stanford stated: “We have also provided that the benefits resulting from cooperation shall be freely taught … Cooperative societies bring forth the best capacities, the best influences of the individual for the benefit of the whole” (as cited in Altenberg, 1990). Stanford died shortly afterward, and his vision for the university was quickly forgotten. The only remnant is the Stanford Bookstore, incorporated as a cooperative; founded in 1891, it was originally the Students Cooperative Association. There are different definitions of a cooperative (Zeuli & Cropp, 2004). The definition used by the US Department of Agriculture states, “A cooperative is a business that is owned and controlled by the people who use its services and whose benefits (services received and earnings allocations) are shared by the users on the basis of use. Only an enterprise conforming to the spirit and intent of this definition

Social Economy Businesses  39

should be labeled a cooperative” (Dunn, Crooks, Frederick, Kennedy, & Wadsworth, 2002, p. 1). The most widely used definition of a cooperative comes from the International Co-operative Alliance (ICA), the umbrella organization for the national associations of ninety-five countries across the globe, including the United States. Founded in 1895, the ICA, headquartered in Geneva, Switzerland, offers the following definition: “A cooperative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise” (International Co-operative Alliance, 2012a). The ICA definition is reinforced by a set of principles, originally conceived in 1844 in Rochdale, England, and therefore referred to as the Rochdale Principles. The principles were revised in 1937, 1966, and most recently 1995 in Manchester, England. The current principles are 1. voluntary and open membership without discrimination; 2. democratic member control in establishing policies and making decisions; 3. member economic participation in order to control the capital of the cooperative; 4. autonomy and independence from any other organization, including the government; 5. education, training, and information provided to members, employees, and the public in order to ensure a knowledgeable membership and supporting public; 6. cooperation among cooperatives to strengthen the cooperative movement at the local, national, regional and international levels; and 7. concern for community and the sustainable development of communities through member-approved policies. (International Co-operative Alliance, 2012a) A cooperative is an association of members, each with one vote in the affairs of the organization, much like a political democracy. The members are responsible for the cooperative, both directly and through the directors that they elect to govern the association. The purpose of the organization is to meet its members’ needs. The needs may vary according to the differing forms of cooperatives. Individuals are eligible for membership typically because of a common bond such as a

40  Understanding the Social Economy of the United States

place of work or where they live. The community that defines eligibility is called the “field of membership” (Credit Union National Association, 2000). Although there are some similarities between cooperatives and private sector businesses in that both types of organization operate in the market and derive their revenues from the sale of products or services, there are some fundamental differences. In contrast to cooperatives, private sector businesses are owned by financial investors, often external shareholders, and their primary purpose is creating financial returns for their investors – that is, meeting investor needs. Cooperatives with surplus earnings may decide to pay a dividend to their members, but the dividend is normally based upon patronage or use of the cooperative’s services and can be viewed as a rebate on purchases. This practice differs from a private sector corporation, which pays dividends based upon investment. The three essential elements of a cooperative – member owned, member controlled, and member benefit – can be included in any statutory form of incorporation. However, some states have specific statutory requirements for incorporating as a cooperative. These vary from state to state. It is also not uncommon for cooperatives to be incorporated as a limited liability corporation (LLC), with bylaws that specify how the entity is to be run as a cooperative. Economic Impact of Cooperatives Even though cooperatives in the United States are not the economic mainstream, their impact should not be underestimated. According to a comprehensive survey by the University of Wisconsin Center for Cooperatives, there are over twenty-nine thousand cooperatives in the United States (excluding Puerto Rico, and also excluding housing cooperatives) operating at seventy-three thousand locations. These cooperatives own $3 trillion of assets, have revenues of over $650 billion, and pay almost $75 billion in wages to over 2.1 million employees (Deller, Hoyt, Hueth, & Sundaram-Stukel, 2009, p. 11, p. 15). The United States has an estimated 350 million memberships in cooperatives of all sorts, including 233 million in mutual insurance companies, a form of cooperative in which the policyholders are members (Deller et al., 2009). The number of cooperative memberships in the United States is more than the total American population and the highest of any country in the world (International Co-operative

Social Economy Businesses  41

Alliance, 2012b).1 Not all Americans belong to a cooperative, but some belong to more than one (e.g., a credit union, a mutual insurance company, and a food cooperative). Among the largest cooperatives in terms of revenue are such household names as Land O’Lakes, Ace Hardware Corp., True Value Company, REI, Organic Valley, Ocean Spray, Sunkist, Sun-Maid, Welch’s, Blue Diamond Growers, and Cabot Creamery. For the Global 300 of cooperative corporations selected according to their annual revenues, sixty-two (about 20%) – the greatest number of any country – are from the United States (International Co-operative Alliance, 2012b). The National Cooperative Business Association is the apex organization representing the interests of all forms of cooperatives in the United States.2 In 2002 the NCBA launched the .coop designation on the Internet (Rivin, 2012).3 NCBA’s CLUSA International Program division is responsible for promoting the cooperative model in developing countries, principally supported by the United States Agency for International Develdopment (USAID). With a budget of $31 million, CLUSA manages twenty-two projects in fifteen countries in Africa, Southeast Asia, and Latin America. Despite the large membership of cooperatives in the United States, many Americans are not aware of what a cooperative is. Even members of credit unions can be surprised to learn that these organizations are, in fact, cooperatives. To some extent, ignorance regarding cooperatives may be due to the fact that information about such organizations is omitted from standard educational curricula, notably in professional schools and high schools. The neglect of cooperatives in business school education has been discussed elsewhere (Whitman, 2012). This same neglect occurs in law schools (Autry & Hall, 2009, p. 1): Most business law courses in universities and law schools touch lightly, if at all, on the cooperative business form. Students learn about the intricacies of corporations, partnerships, limited liability companies, and other more exotic business forms, but they are rarely exposed to the cooperative form, even though a substantial number of business transactions are conducted by or with businesses organized as cooperatives.

1 The International Co-operative Alliance (2012a) estimates the number of memberships of cooperatives in the United States at 305.6 million. 2 See http://www.ncba.coop/. 3 See http://www.nic.coop/.

42  Understanding the Social Economy of the United States

The United Nations designated 2012 as the International Year of Cooperatives specifically to raise public awareness of how cooperatives help countries advance both social and economic development (United Nations, 2012), and the NCBA used the opportunity to convene awareness-raising programs at the White House and elsewhere across the country. Different Cooperative Types The most prevalent type of cooperative in the United States is the consumer cooperative (92% of all cooperatives), followed by producer cooperative (5%), purchasing cooperative (2%), and worker cooperative (1%) (Deller, Hoyt, Hueth, & Sundaram-Stukel, 2009). Each of these organizational forms is now explored in more detail. Consumer Cooperatives By far, the bulk of cooperative members are consumers of particular products and services, representing 98 percent of total cooperative members (Deller et al., 2009). The term applied to this group is consumer cooperative, and it was originally used in reference to cooperative stores in which the members purchased goods and services. The term has since been broadened to include credit unions and various other forms of cooperatives for services such as housing, childcare, and healthcare. Like cooperatives in general, consumer cooperatives are associations (sometimes referred to as mutual associations) that meet the needs of their members, who purchase a service from the cooperative. The consumer cooperative is the archetype and the one that is most often associated with cooperatives. A CLOSER LOOK: THE HARVARD COOPERATIVE SOCIETY Founded in 1882 and incorporated in 1903, the Harvard Cooperative Society, locally known as the Coop (rhymes with loop), is a consumer cooperative that serves the Harvard and Massachusetts Institute of Technology (MIT) communities. The Coop sells products and services to its members, and prior to 2014 the profits either were returned to members as a rebate or contributed to a capital budget to ensure

Social Economy Businesses  43

sustainability (Harvard Cooperative Society, 2012), but since July 2014 the rebate program was replaced by a 10 percent discount for members. Students at Harvard originally organized the cooperative to provide their own community with books, school supplies, coal, and wood in a way that would reduce their cost of living by distributing rebates (or patronage dividends) based on the volume purchased by each member. When MIT moved from Boston across the Charles River to Cambridge in 1916, the school invited the Coop to open a branch store on their campus. Today the Coop is a full-service department store with an extensive collection of retail services and textbooks and has grown to be one of the largest college bookstores in the United States. To become a member of the Coop, identification must be provided that shows a student, alumni, or employment affiliation with either Harvard or MIT. The membership fee has remained $1 since the Coop was founded 130 years ago. A nominal fee is not unusual for consumer cooperatives. The goal, as stated in the first of the cooperative principles, is to keep membership open.

There are many types of consumer cooperatives in such areas as farm supplies and machinery, food retailing and wholesaling, financial services, childcare, healthcare, housing, electrification, water supply, transportation (automobile sharing), and even funeral services. Almost all of the Americans who belong to a cooperative are members of a consumer cooperative, with credit unions and mutual insurance being predominant. Deller et al. report that there are 26,844 consumer cooperatives in the United States, representing 92 percent of total cooperative memberships and generating over $291 billion in revenue, nearly 57 percent of total cooperative dollars (Deller et al., 2009). credit unions Credit unions are another form of consumer cooperative and in 2012 had 96 million members in the United States (CUNA, 2012). Credit unions may be chartered at the federal or state level, and most are chartered at the federal level. Federally chartered credit unions are

44  Understanding the Social Economy of the United States

regulated by the National Credit Union Administration (NCUA), a federal agency.4 The Credit Union National Association (CUNA) is the apex organization representing 90 percent of the credit unions in the United States.5 Credit unions provide their members with the full range of financial services typically offered by other financial institutions, including savings and checking accounts, money market funds, certificates of deposit, car loans, and home mortgages. Credit unions are not-for-profit, 501(c)(14) organizations that are tax exempt because they benefit their members rather than investors seeking a financial return, as is typical in banks and other financial institutions. Credit unions consist of people in a field of membership, as defined in the credit union’s charter, who share a common affiliation or bond. This could be due to an employer (General Mills Federal Credit Union) or location (Houston Federal Credit Union). Members of credit unions may benefit from lower rates and fees and earn more competitive returns on savings than at banks that operate to generate a profit for their investors. Moreover (subject to their bylaws), credit unions may invest in their local communities by making loans to consumers and small business owners who are members. Like many other forms of cooperatives, credit unions normally pay a dividend to their members based upon patronage or use of the services offered by the credit union. Credit unions, like many forms of cooperatives, are structured around tiers. Credit unions consisting of members who are persons are considered first-tier cooperatives (e.g., Miami Firefighters Federal Credit Union). First-tier credit unions then form second-tier cooperatives (e.g., the Florida Credit Union League or the Indiana Credit Union League) and second-tier organizations can form a third tier (Credit Union National Association). This tiering arrangement represents a type of functional integration in which cooperatives with common needs cooperate with each other through an apex organization that helps them with their service provisions. Often, apex organizations serve as the voice of the sector (its members) to government, seeking to represent the sector’s needs. Sometimes they provide practical services to member organizations such as assistance with loans, loan guarantees, and information.

4 See http://www.ncua.gov/. 5 See http://www.cuna.org/.

Social Economy Businesses  45

Credit unions found their way to the United States from Germany via Canada. In 1850, a judge named Hermann Schulze-Delitzsch founded the first credit cooperative in Delitzsch, Germany, for purposes of making loans on fair terms to craft workers. In 1900, a Canadian journalist and court reporter named Alphonse Desjardins and his wife, Dorimène, created La Caisse Populaire, the first credit union in North America, in Lévis, Quebec, principally to serve the working class who were being exploited by usurious loan sharks (Pierce, 2011). In 1909, Desjardins helped Franco-American Catholics to organize St. Mary’s Cooperative Credit Association in Manchester, New Hampshire, and inspired Edward Filene and Roy Bergengren to launch the credit union movement in the United States (Bergengren, 1973). In the 1980s, a number of industrial plant closings caused affiliated credit unions to fail. In response, many credit unions reduced their dependence upon one employer and expanded to include communitywide groups of people and multiple employers, thus broadening their membership base. This change didn’t go unnoticed by the banks as credit unions, like banks, compete in the market for revenues. Subsequently, the American Bankers Association joined with five North Carolina banks to sue the National Credit Union Administration, challenging its interpretation of “common bond” as a basis for prescribing membership. The Supreme Court sided with the banks, and credit unions then launched a campaign to pass the Credit Union Membership Access Act, which Congress ultimately approved following a long fight with the American Bankers Association. Today the public benefits from not only the competition between traditional banks and credit unions but also from competition among the credit unions themselves (Pierce, 2011). In late 2011, a minor populist revolt against big commercial banks was triggered when Kristen Christian, a twenty-seven-year-old small business owner in Los Angeles, launched a Facebook page called, Bank Transfer Day, calling for other depositors to transfer their funds to community banks and credit unions by 5 November as a protest against the Bank of America’s plan to charge a $5 monthly debit card fee (Choi, 2011). An undercurrent of anti-bank sentiment among the public may have spurred this initiative because of the financial industry’s role in the subprime mortgage crisis and the sharp economic recession that followed. Over 650,000 consumers joined credit unions within three months of the day that Bank of America announced its debit card fee, and $4.5 billion entered new savings accounts in credit unions during the same period (CUNA, 2011). In 2012, the total assets of US credit

46  Understanding the Social Economy of the United States

unions was just over $1 trillion, compared with over $13 trillion owned by commercial banks; each of the four largest commercial banks was larger than the entire credit union segment (CUNA, 2012). Still, it is important to bear in mind that in 2012, 96 million people belonged to credit unions in the United States, about 37 percent of the total population and even more of the adult population. In other words, they have a substantial presence in the financial services market. This discussion illustrates that even though credit unions have the distinct features of a social economy organization that prioritizes its social objectives, by selling services in the market credit unions interact with banks and other financial institutions. Being part of the social economy does not create a wall between them and investor-owned financial institutions. They compete and interact with them in many ways. insurance cooperatives Insurance cooperatives are another example in which the members – in this case, policyholders – are consumers of a service. Beginning with Benjamin Franklin’s initiative to create the first cooperative in the country in 1752, the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire (Shaffer, 1999), cooperatives and variations referred to as mutual insurers have thrived in the insurance industry. Many of the early mutual insurers were formed in rural communities where farmers had to organize against fire and natural disasters. The first mutual life insurance company that served the general public was established in 1843. These insurance cooperatives, or mutuals, shifted policies from being relatively short-term to being lifelong. Beginning in 1849, states began regulating the insurance industry to ensure that companies had sufficient reserves to pay out for losses. This government policy reassured the public of the safety of purchasing life insurance from investor-owned firms, which after 1866 began to outnumber mutuals. Yet, according to Hansmann (1996), even though the number of proprietary life insurance companies is greater, mutuals are nevertheless larger in size and write a disproportionate amount of the policies. The situation among property and liability insurance firms is the opposite. The survey of cooperatives by Deller et al. (2009) indicates that the 264 mutual insurers surveyed had 233 million memberships, $840 ­ billion in assets, $140 billion in sales revenues, and paid $2 ­billion in salaries and benefits to 122,000 employees. Some of

Social Economy Businesses  47

these are large corporations – Mutual of Omaha, Liberty Mutual, and Illinois Mutual. housing cooperatives Housing cooperatives, another arrangement in which members are consumers of a service, are a form of home ownership in which people own or control the housing and related community facilities in which they live by purchasing a share, called a member certificate, in the corporation that owns or leases the land, building, and any common areas (Sullivan, 2011). Housing cooperatives are similar to condominiums; however, in a condominium, the member owns an individual living unit in the complex and shares ownership of common areas, while in a cooperative, the member owns a share in the corporation and thus has a vote on decisions related to the corporation such as accepting new members. In both cases, residents typically pay a monthly fee to cover operating expenses and contribute to reserve capital funds. Imported from Europe, the housing cooperative model was first established in the United States in New York City in the mid- to late 1800s, many decades before the introduction of the condominium model. Today, about 2.2 percent of all multi-dwelling facilities are cooperatives, which is less than the more popular condominium model, which represents some 5 percent of housing in the country (Deller et al., 2009). Some of the early housing cooperatives in New York were sponsored for their members by the Amalgamated Clothing Workers of America. Other early housing cooperatives in different parts of the United States were set up for war veterans and their families during the Second World War. Madison, Wisconsin, is another major center for housing cooperatives. It is estimated that there are nearly ninety-five hundred housing cooperatives throughout the United States (Deller et al., 2009). Often these are tied to government legislation that enables them and may provide for subsidies. other consumer cooperatives As noted above, there are many more services in which consumers come together to participate in a cooperative. Some sizable ones are as follows: 900 rural electrification cooperatives that deliver power to an estimated 42 million people in forty-seven states and own 42 percent of the US power lines; 158 rural telephone cooperatives with nearly 1 million members; about 2,200 water cooperatives with more than 2 million members. Childcare is another major form of service in which

48  Understanding the Social Economy of the United States

consumers come together, with an estimated 563 cooperatives serving about 50,000 families (Deller et al., 2009). Many Americans participate in food cooperatives, which tend to have a niche around organics and bulk foods and include both sales and distribution. La Montañita, the case study at the end of chapter 1, is an example of a food cooperative, with the National Cooperative Grocers Association serving as an umbrella association with affiliates throughout the United States. Although most forms of consumer cooperatives are classified as social economy businesses because they earn their revenues from the sale of services to their members or the market, some in services such as healthcare or rural electrification are dependent upon government programs and are discussed in subsequent chapters. Producer Cooperatives In the producer model, members are often self-employed and establish a cooperative for a common purpose, such as to secure better prices for what they produce. Some may question whether such cooperatives have a social mission because they help their members make money. They do, like other cooperatives, serve the interests of their members and do so in a way that collectively protects members from otherwise less beneficial treatment in the market economy. It has been claimed that the competition that producer cooperatives bring to the marketplace attenuates pricing and exploitative excesses, the so-called “yardstick effect,” which emerged from the economic research of E.G. Nourse (1922). Moreover, such cooperatives do exercise a democratic form of governance, and so the combination of governance and collective cooperation to counter exploitation in order to produce goods places producer cooperatives in the social economy, though arguably at the border. The roots of the producer cooperative are in farming, but producer cooperatives are also found in other forms of primary production such as fishing, as well as in other services such as transportation (taxi, airport limousine, and trucking services), arts and crafts (artisanship), and professional consulting. However, the strength of producer cooperatives both in the United States and internationally remains predominantly in agriculture. Farm producer cooperatives began forming in the latter half of the nineteenth and early twentieth centuries, when farmers organized to obtain greater control over the price of their products and the basic

Social Economy Businesses  49

purchases that they required. The objective was for farmers who became members of the cooperative to collectively obtain a fair price for their products rather than compete with each other to sell to a single buyer, in what is called a monopsony. Surplus earnings not reinvested in the cooperative are rebated to the farmer members as a patronage dividend based on the sales volume of their contributed product rather than shares, as in an investor-owned business. Cooperatives have played a significant role among African Americans, dating from the postbellum era to the present (Gordon Nembhard, 2004). The civil rights movement encouraged Black farmers to join cooperatives (Reynolds, 2002), and today the leading advocate for Black cooperatives is the Federation of Southern Cooperatives, based in East Point, Georgia.6 In general, producer cooperatives have had great success with farm products, but the application of this model to other services is limited. Deller et al. estimate there are 1,494 producer cooperatives in the United States representing 5 percent of cooperatives in the nation and producing $65.4 billion in revenue (Deller et al., 2009). Many of the cooperatives mentioned earlier in this chapter – for example, Ocean Spray, Sunkist, Sun-Maid, Welch’s – are labels used by large producer cooperatives. Some farm-marketing cooperatives are huge corporations; for example, Fortune 500 companies CHS Inc. and Land O’Lakes are two of Minnesota’s largest employers, with combined revenues of more than $54 billion nationally (CNN Money, 2013). Purchasing Cooperatives In most forms of cooperatives, the members are individuals. For purchasing cooperatives, the members are typically other businesses, which collectively purchase needed supplies in order to benefit from lower, bulk prices. This model is widespread in healthcare where coalitions of employer-sponsored groups purchase services for their members. Other examples of purchasing cooperatives include Ace Hardware, True Value, and Carpet One, a 720-member cooperative that purchases flooring products to be resold through over a thousand retail stores in the United States, New Zealand, Australia, and Canada (Clamp & Alhamis, 2005). Deller et al. report that 724 purchasing cooperatives,

6 See http://www.federationsoutherncoop.com/.

50  Understanding the Social Economy of the United States

2 percent of cooperatives, generated about $158 billion in revenue (Deller et al., 2009). Worker Cooperatives In a worker cooperative, the employees are the members. The purpose of the cooperative is to meet the needs of these workers, primarily for employment, but in other ways as well. Examples of worker cooperatives include bakeries (Arizmendi Bakery, CA), bookstores (Monkeywrench Books, TX), sewing and textile services (Opportunity Threads, NC), grocery stores (Mariposa Food Coop, PA), bicycle shops (The Hub Bike Co-op, MN), cleaning services (Apple Eco-Friendly Cleaning, NY), consulting services (ICA-Group, MA), engineering services (Isthmus Engineering and Manufacturing, WI), transportation (Union Cab, WI), restaurants (Red and Black Cafe, OR), catering services (Local Sprouts, ME), and many others where workers cooperate to be fully compensated for their labor. Worker cooperatives are an ideal expression of workplace democracy in that each member has one vote in electing representatives from among the membership to the board of directors (Ellerman, 1990). Although the practice of one member, one vote is found in most forms of cooperatives, the distinctive feature of a worker cooperative is that the members are the employees of the cooperative. In other cooperative models, the employees of the cooperative generally are not part of the membership. (In a consumer cooperative, the employees could be members as service consumers but not as workers.) Because workers both own and control the cooperative, decision making can require a large time commitment for both education and deliberation and, in capital-intensive types of work, often a substantial financial investment from members in lieu of outside investors. When a member decides to leave a worker cooperative requiring a substantial investment, the cooperative may not be in a position to reimburse the member immediately upon departure. In a worker cooperative, the members benefit from ownership and control but also experience a form of double jeopardy: both their jobs and their investment are tied to the success of the business. With some notable exceptions, most worker cooperatives tend to remain small, and their workers are engaged in jobs with similar skill levels (e.g., taxi cooperatives, bicycle sales cooperatives, and housecleaning cooperatives),

Social Economy Businesses  51

minimizing the likelihood that members’ interests will diverge over time (Hansmann, 1996). Worker cooperatives have by far the lowest percentage of employees among cooperatives: only 2,380 workers in worker cooperatives out of 856,310 employed in all types of cooperatives. They produce the lowest volume of revenues, $219 million per year, very small relative to other types of cooperatives (Deller et al., 2009). Some US worker cooperatives are affiliated with the United States Federation of Worker Cooperatives, a grassroots organization of over seventy members dedicated to building worker cooperatives in the nation.7 In spite of the currently small number of worker cooperatives in the United States – 223, or about 1 percent of total cooperatives according to an attempted census (Deller et al., 2009) – the US Federation of Worker Cooperatives is recruiting new members, and other organizations such as Cooperation Works!8 and the Democracy At Work Network9 are providing technical assistance and training consultants to mentor new worker cooperatives and help existing cooperatives grow. Internationally, there are some strikingly successful examples of large worker cooperatives. The one most cited is the Mondragón Cooperative Corporation in the Basque region of Spain, an experiment in democratic worker ownership that has evolved since 1956 to become an international corporation with subsidiaries in eighteen countries including India and China (Whyte & Whyte, 1991). The Mondragón Cooperative Corporation in Spain operates 289 businesses and cooperatives, with 2012 sales of about $19 billion and a workforce of close to eighty thousand (Mondragón Cooperative Corporation, 2012). Nonprofits as Social Economy Businesses As noted in chapter 1, nonprofit organizations can be differentiated by their sources of support. Nonprofit organizations that generate their income from the sales of goods and services in the market, much like for-profit businesses, are situated in the social economy business

7 See http://www.usworker.coop/. 8 See http://www.cooperationworks.coop. 9 See http://www.dawn.coop.

52  Understanding the Social Economy of the United States

section of the Venn diagram (see Figure 2.1). Nonprofit organizations that derive their revenues predominantly from the market and do not depend significantly on either donations or government funding would include nonprofit savings banks and youth service associations such as the YMCA and YWCA (Hansmann, 1996, p. 234). It is challenging to obtain a complete portrait of nonprofit social economy businesses from government records. Excepting private foundations, only charitable nonprofits that earn over $50,000 in revenues per year must report detailed information to the Internal Revenue Service, and religious organizations are completely exempt from reporting requirements. Thus, a comprehensive picture of nonprofits operating as social economy businesses is not possible. Nevertheless, of the over 360,000 organizations designated as 501(c)(3) public charities that reported in 2009, 52.4 percent reported fees for services and goods from private sources (Roeger, Blackwood, & Pettijohn, 2011). Those organizations that earn either all or a predominant portion of their revenues from the sale of services and goods would be classified as social economy businesses. They serve the public interest in a way that qualifies them for federal tax exemption as long as the business income is related to their mission. They do not depend on charity or public funds to serve the public; rather, just as a business, they are paid to deliver their goods or services by those who benefit. As an example, we can look at the Avalon Theatre, a movie theatre that not only shows movies but also engages audiences in educational discussions of film, often led by filmmakers. Revenues are generated from a combination of ticket sales and memberships typically paid by people who live in the neighborhood. Note that such a theatre may have depended on donations and even charity from a philanthropic foundation to get started, but its goal, and thus its appeal to benefactors, was to become self-sufficient based on user fees. A CLOSER LOOK: THE AVALON THEATRE Located in a leafy residential community in northwest Washington, DC, within sight of the border with Maryland, the Avalon Theatre attracts a committed audience of neighborhood filmgoers so dedicated that they

Social Economy Businesses  53

resurrected the theatre as a nonprofit organization when it faced doom as a private enterprise. The theatre opened in 1923 as the Chevy Chase Theatre, featuring silent movies of the era accompanied by a pipe organ for sound effects. When the “talkies” emerged, only six years after opening, the theatre was upgraded with sound, and at the same time the theatre changed its name to the Avalon. Over the next eighty years, owners came and went. But in 2001, when the last commercial owners declared bankruptcy, residents incorporated the Avalon Theatre Project as a nonprofit organization and raised funds from foundations, the District of Columbia government, and supportive residents; the Avalon Theatre reopened in 2003. The Avalon has been sustained under the nonprofit arrangement and shows a mix of commercial films and productions from film festivals. In 2009, it opened the Avalon Café. According to the organization’s 2012 Form 990, the theatre brought in $1.48 million in revenues and had a surplus of $36,783. In the prior year, the Avalon had a net loss of $10,745.

Emerging Social Economy Businesses A newer class of social economy businesses is emerging driven by the belief that the for-profit, investor-owned model can effectively prioritize social objectives. There is a growing variety of such social economy businesses in the United States, and we look more closely at three models: social businesses, low-profit limited liability companies (L3Cs), and benefit corporations. Social Businesses The social business, as defined and promoted by Muhammad Yunus, is a private sector enterprise that primarily serves the public, though at no loss to investors (Yunus, Moingeon, & Lehmann-Ortega, 2010, p. 311): A social business is designed and operated just like a “regular” business enterprise, with products, services, customers, markets, expenses, and revenues. It is a no-loss, no-dividend, self-sustaining company that sells

54  Understanding the Social Economy of the United States goods or services and repays investments to its owners, but whose primary purpose is to serve society and improve the lot of the poor.

Although it is fair to assume that the purpose of starting a for-profit corporation would be to make a profit (and to attract investors from the capital markets), not all founders, or for that matter investors, may regard such a corporation as a vehicle solely designed for self-­ enrichment. How such a profit, if any, should be used is up to the owners of the business, and in the case of social businesses all of the profits are used to further advance the social objectives of the venture after investors are compensated for start-up costs. An example of a social business associated with the Grameen network in Bangladesh is Grameen Danone Foods, Ltd. This is a partnership between Group Danone (Dannon in the United States), a huge French multinational corporation, and Grameen that has led to the production of Shakti Do, a fortified yogurt with nutrients that children in rural Bangladesh are deficient in. This yogurt is sold for a very cheap price that makes it affordable to poor families but still allows Grameen Danone to recoup its investment costs. Yunus’s brand of social business is often associated with his own ventures in Bangladesh, including the Grameen Bank, for which he and the bank received the Nobel Peace Prize in 2006. There are examples of other social businesses (with no connection to Yunus) in the United States; one such well-known social business is Newman’s Own. A CLOSER LOOK: NEWMAN’S OWN One of the prerogatives of business is to utilize the profits or net income for the benefit of the owners. While this is the norm, there are exceptions to every rule, and Newman’s Own is one – an outstanding example of a social business before the term was used. Newman’s Own – started in 1982 by actor Paul Newman and friend A.E. Hotchner – like businesses in general, produces and markets products. Newman and Hotchner started with their homemade salad dressing, which at the time was innovative because it didn’t contain the chemicals and preservatives found in competing products. Gradually the firm has broadened its line of products to include pasta sauce, salsa, marinades, frozen pizzas, and wines, among other items.

Social Economy Businesses  55

While Newman’s Own products bring in the income, the hallmark of this unusual firm is that it donates all of its after-tax profits, an impressive $330 million in thirty years, to education and charitable causes both in the United States and internationally. Newman and Hotchner’s memoir of their work is aptly titled Shameless Exploitation in Pursuit of the Common Good. Newman’s Own is not the only business that donates profits to charitable causes. Successful businesses are expected to do this. However, the gold standard is usually in the range of 1 percent to 10 percent of its aftertax profits, as is the case for the Mondragón Cooperative Corporation, so Newman’s Own is off the charts at 100 percent! But Newman’s Own was never just a business; rather, to paraphrase a well-known idiom, it is a charity in business clothing. Newman’s Own has spawned other social businesses such as Give Something Back Products, an Oakland-based company. Following Newman’s death in 2008, the Newman’s Own Foundation was created to signal the company’s continued commitment to its founders’ mission and to support its charitable causes including the international network of Hole in the Wall Gang Camps, residential summer camps for seriously ill children, which Newman cofounded in 1988. (Newman’s Own Foundation, 2014).

Newman’s Own clearly illustrates how an organization that is incorporated as a business can take on the characteristics of a social economy organization and how these organizational forms can blend into each other. Low-Profit Limited Liability Companies (L3C) A new organizational form of incorporation emerging in state statutes is the low-profit limited liability company, or L3C.10 This type of company was inaugurated in Vermont in 2008 (Minnigh, 2009). The L3C is a form of limited liability company (LLC) designed to harness the profit-generating power of a for-profit company but with a social

10  See http://www.americansforcommunitydevelopment.org/.

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mission as its principal purpose, as would be found in a nonprofit. This model emerged as a way to lower investment risk for private foundations seeking to invest a portion of their assets in profit-generating companies that are aligned with the mission of the foundation. Such foundation investments are called program-related investments, or PRIs (see chapter 9). These investments support community development and affordable housing, while some also provide for repairing churches, preserving historic buildings, and protecting open space and wildlife habitats (Minnigh, 2009). By establishing a statutory form of organization, like the LLC, but with an explicit public benefit imperative rather than a profit imperative, it was hoped that such L3C companies would avoid being held as illegal investments by the Internal Revenue Service. The L3C form was conceived by Robert Lang. In 2006, he, Marcus Owens, and Arthur Wood met at the Aspen Institute’s Nonprofit Sector and Philanthropy Program and began to work out how to apply this new business model to attract long-term capital to social enterprise within the constraints of federal tax law (Davis & Woodrow, 2009). The most important concept underlying the L3C is that despite the legal form of incorporation as a business, with the presumed purpose of maximizing shareholder wealth, there are both business founders and shareholders who would prefer that their enterprises earn profits in a manner consistent with a social mission. To date, the nine states and two Indian nations that have adopted bills authoring L3Cs are Vermont (2008), Michigan (2009), the Crow Indian Nation (2009), Wyoming (2009), Utah (2009), the Oglala Sioux (2009), Illinois (2009), Maine (2010), Louisiana (2010), North Carolina (2010), and Rhode Island (2011) (Americans for Community Development, 2011). The L3C model is not without controversy, and current developments in state statutes are being tracked to assist the legal community in advising clients concerning the nuances of these new legal forms (Bishop, 2010). A CLOSER LOOK: ENDLESS SKY Peggy Grimes is executive director of the Montana Food Bank Network, a nonprofit organization that collects and redistributes food to retail centers that feed the hungry throughout the state of Montana. Her food bank is one node in a network of some two

Social Economy Businesses  57

hundred food banks coordinated by Feeding America, whose challenge it is to provide daily food to 37 million Americans, or one in six of the population, who would otherwise go hungry (Feeding America, 2012). The charitable purpose of a food bank is indeed compelling and inspiring, but Peggy thought her food bank could go further than charity. Beyond the daily charitable purpose of the food bank, Grimes wanted to create social change – to remedy the root cause of hunger, at least for some of the population. So in collaboration with the Montana Department of Corrections, she organized a food cannery that employs inmates of a state prison as part of a job training and reentry program (Davis & Woodrow, 2009). Toward this end Robert Lang’s firm, L3C Advisors, created a new venture, Endless Sky, an L3C (registered in Vermont pending L3C legislation in Montana) purposely structured to attract foundation PRI funding as an opening to then bring in other investor groups. Endless Sky is up and running but has yet to close its funding needs. Ostensibly foundations are hesitant to invest their funds in low-yielding instruments during challenging economic times, yet as this case shows, such times are exactly when ventures such as Endless Sky are most in need, not only of charity but also socially aligned investments.

Benefit Corporations The benefit corporation is another emerging form of organization that could be considered a social economy business.11 This form of incorporation allows management to attend to social and environmental concerns, even if that involves some sacrifice of earnings. The rationale for this statutory form of organization was to allow those with fiduciary responsibility to allocate corporate funds for public benefit, regardless of the profit consequences, and also make it so they could not be held liable for not maximizing shareholder financial returns. Benefit corporations should not be confused with so-called B Corporations, B Corps, or Certified B Corporations, which are firms that are accredited by

11  See http://benefitcorp.net/.

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B Lab Company, a nonprofit organization that encourages companies to solve social and environmental problems.12 Benefit corporations are incorporated as such by statute; B Corps are firms that are accredited by an independent nonprofit organization. The first state to pass benefit corporation legislation was Maryland in 2011. Other states that have followed suit are Arizona, Arkansas, California, Colorado, Delaware, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, Nevada, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, and Virginia, as well as Washington, DC. Legislation has also been introduced in Alaska, Alabama, Florida, and Michigan, as well as a number of other states (Benefit Corp., 2014). Examples of benefit corporations include Patagonia (California), Clean Currents (Maryland), Clean Yield (Vermont), and Rivanna Natural Designs (Virginia). Because benefit corporations must be vetted by a third party for meeting social and environmental standards, this requirement is likely to provide an independent source of information of interest to social investors. A CLOSER LOOK: RIVANNA NATURAL DESIGNS Based in Charlottesville, Virginia, Rivanna Natural Designs is in the business of manufacturing environmentally friendly plaques, awards, and gifts that are made from Forest Stewardship Council certified wood, recycled glass, and other green materials (Rivanna Natural Designs, 2012). The firm, founded by Crystal Mario in 2001 in order to “create green jobs for refugees and others in our community who needed safe, meaningful, and rewarding employment” (C. Mario, personal communication, 16 April 2012), is a B Lab Certified B Corporation and became a benefit corporation in July 2011, the day that Virginia enacted its benefit corporation legislation. As Mario recounts (personal communication, 16 April 2012): Since I am Rivanna’s sole shareholder, I obviously did not need to create a benefit corporation to limit my liability as CEO, if I am not maximizing profits for myself. However, I was delighted to become a benefit corporation and also get certified as a B Corp

12  See http://www.bcorporation.net/.

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by B Lab. The certification process is rigorous and provides a great ­opportunity to acknowledge the progress your business has made on social and environmental issues. More importantly, it gives you a clear indication of areas for improvement and a network of like-minded businesses with which to share best practices. We have won new business directly attributable to being in the B Lab network. The benefit corporation legislation actually makes it easier to think about changes in ownership and introduce new shareholders, because it gives me more confidence that Rivanna’s social and environmental goals would continue to be met even if ownership changed. But as long as I love what I do, I see no reason to make any changes. Mario began her venture first by learning about the workplace needs of the refugee clients of the International Rescue Committee. She identified the opportunity to start a small manufacturing company located near public transportation that would also offer training for non-­English speakers and flexible hours as well as living wages and decent benefits. Because she also wanted to create green products, Mario turned to the Forest Stewardship Council (FSC) for guidance on how to earn a chainof-custody certification.13 Today the firm designs and manufactures ecofriendly products for organizations in forty-eight states and Canada. As Mario notes on her website, “We believe products that express gratitude, reward performance, and celebrate excellence should harm neither the planet nor the people who create, purchase, or receive them … we’re unique in that we make our own products and sell them to end users” (Rivanna Natural Designs, 2012).

Conclusion Social economy businesses earn their revenues from the market, much like a private sector business, but their social objectives are paramount. In other words, they blend qualities of the social economy and the private sector. As illustrated in this chapter, social economy businesses come in many forms: cooperatives and nonprofits, and emerging forms

13  See https://us.fsc.org/chain-of-custody-certification.201.htm.

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such as social businesses, low-profit limited liability companies, and benefit corporations. This intersection of the private sector and the social economy exemplifies how new variations of existing organizational forms develop, each designed to meet different social needs. Participants in these organizations interact with each other and learn from each other. The hallmarks of social economy businesses are that they meet their member and key stakeholder needs and achieve a sustainable economic model. Achieving both of these objectives is a formidable challenge. For this reason, it is critical that the principals in a social economy business listen to and respond appropriately to the voices of their stakeholders. Many of the emerging forms of social economy businesses represent relatively novel approaches to solving critical social problems. It is incumbent on educational institutions, particularly business schools and law schools, to acquaint their students with these new organizational tools and how they are designed to effectively meet different and evolving social needs. VX DISCUSSION QUESTIONS 1. Take an informal poll of your peers (outside of class), and ask them if they know what cooperatives are. Can they name any? Do they know that credit unions are cooperatives? If most are unaware of cooperatives, why is this so? 2. Is it accurate to use the term profit to describe the surplus revenues generated by a cooperative after deducting expenses? Is surplus revenues a better term? 3. Under what circumstances would it be more appropriate to form a cooperative rather than an investor-owned social business? And vice versa? 4. If cooperatives serve stakeholder needs better than investor-owned firms, why aren’t there more cooperatives than investor-owned businesses? 5. Are the various forms of social economy businesses described here adequate to address the entire range of social needs in society today? If not, what new type of organization would be needed, and why? How would you go about establishing a statutory basis for forming such an organization? 6. What are the costs and benefits of financing social economy businesses? Is it realistic to expect any monetary return on investment? 7. If you wanted to start a new enterprise, would you consider any of the models discussed in this chapter? Is so, which ones, and why?

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VX CASE FOR ANALYSIS: EQUAL EXCHANGE14

Equal Exchange is a fair trade worker cooperative headquartered in West Bridgewater, Massachusetts, that sources coffee from cooperative growers in Africa, Asia, Latin America, and the United States. The cooperative roasts the beans at its own facilities and distributes a variety of blends to such retailers as Whole Foods and cooperative grocery stores throughout the United States. The cooperative also deals in tea, almonds, chocolate, bananas, and other commodities, all transacted through the principles of fair trade.15 Figure 2.2  Equal Exchange Sales, 1986–2013 Sales $60,000,000

$50,000,000

$40,000,000

$30,000,000

$20,000,000

$10,000,000

$0

Source: Equal Exchange (J.R. Whitman, personal communication, 2 May 2014).

14 This case was based on original material in “The Worker Cooperative Life Cycle” (Whitman, 2011). 15  See http://www.equalexchange.coop/fair-trade.

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Since its founding in 1986, Equal Exchange has grown to include over 110 members, with 2013 sales of over $56 million (see Figure 2.2). These members are the workers in the cooperative, and they own and control the enterprise. New applicants for membership work for the cooperative as employees for a designated probationary period and then request election to membership among the existing members. For the three cofounders, Rink Dickinson, Jonathan Rosenthal, and Michael Rozyne, the process of building the business exemplifies several distinct stages in the life cycle of a cooperative (Cook & Burress, 2009). The Early Years Back in the mid-1980s, Ronald Reagan was president of the United States, and he was working hard to reduce the size of government and dismantle components of the progressive policies and regulations previously put in place by Franklin Delano Roosevelt and succeeding Democratic administrations. The Reagan administration focused on promoting the interests of business, the free market, and individual responsibility. Reagan, as the leader of the Western powers, was pitched in the protracted Cold War struggle against communism led by the Soviet Union, which he cast as the “evil empire.” In that era, large corporate agribusinesses were buying out struggling family farms in a process of farm industrialization that created giant agricultural corporations. According to Woody Tasch, founder of the Slow Money movement, “In 1950 there were 25 million U.S. farmers; today, there are 2 million; 163,000 ‘mega-farms’ produce 60 percent of the nation’s food” (Tasch, 2008, p. 17). Corn and corn derivatives, notably high fructose corn syrup, are now ingredients that permeate American food products. At the same time, hippies and countercultural elements of the public were yearning for organic and locally produced food, creating a movement to patronize small-scale organic grocery stores. The mid-1970s heralded the inception of the food cooperative movement. Among the earliest food coops were The Wedge, founded in 1974 in Minneapolis, Minnesota, and La Montañita (see the case study at the end of chapter 1), founded in 1976 in New Mexico. Dickinson, Rosenthal, and Rozyne were themselves coming of age at a cooperative food distributor called Northeast Cooperative, based in Somerville, Massachusetts. As a purchasing cooperative, Northeast was owned by the firms that purchased and resold its wholesale goods. In this case, the members were food retail cooperatives, independent grocers, and buying clubs. As Rosenthal and Rozyne saw it, Northeast was buying commodities from poor farmers in developing countries to sell to grocery

Social Economy Businesses  63

stores and other outlets in affluent towns. The cooperative, representing the interests of its member-firms, attempted to drive down the prices it paid to farmers in order to ensure an appealing margin for themselves. This arrangement was particularly problematic for Rosenthal and Rozyne; they were sympathetic to the farmers and wanted Northeast Cooperative to do more on behalf of these agricultural producers. As Carlo Petrini, founder of the Slow Food movement, would later describe the situation: “Trade or commerce performed by middlemen is not an outright evil, but it is hard to find a trader, outside the world of fair trade, who does not look exclusively after his own interests” (Petrini, 2009, p. 104). This arrangement proved untenable for Rosenthal, Rozyne, and Dickinson. Their first instinct was to work through the Northeast Cooperative to seek a better balance of interests, but the board of directors did not support their initiatives. It was this divergence that led the three to leave the warehouse cooperative to start their own and to seek social justice on behalf of the economic interests of suppliers. It is not unusual for new ventures to emerge from employees who decide to leave their prior employer. The process is called “spawning” (Burress & Cook, 2009), and in this case, Northeast Cooperative inadvertently spawned a new cooperative. Starting in 1983, the group met on weekends for three years. While Dickinson worked on a master’s degree in urban planning from the Massachusetts Institute of Technology, Rozyne remained behind to work in the Northeast Cooperative warehouse. Rosenthal left the cooperative to work unpaid at home, writing a business plan for what would become Equal Exchange. During this preincorporation phase, there was considerable debate over whether to operate as a for-profit or nonprofit enterprise. According to Rosenthal, Dickinson was concerned that their concept to promote fair trade could never survive in the capitalist marketplace; Rozyne and Dickinson were both concerned that if they started a cooperative, then eventually the members might throw them out, as a cooperative is a democratic structure and members can have disagreements. Start-Up Ultimately they formed a cooperative among themselves with $100,000 from family, friends, and wealthy individuals, and later formalized the worker cooperative structure. Their goal, according to the Equal Exchange website, was to create an enterprise that would be • a social change organization that would help farmers and their families gain more control over their economic futures;

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• a group that would educate consumers about trade issues affecting farmers; • a provider of high-quality foods that would nourish the body and the soul; • a company that would be controlled by the people who did the actual work; and • a community of dedicated individuals who believed that honesty, respect, and mutual benefit are integral to any worthwhile endeavor. (Equal Exchange, 2010a, 1) The start-up years, from 1986 to 1990, were difficult but exhilarating for the three cofounders. According to Rozyne (personal communication, 27 August 2010), We had an organization that was completely founder dominated and it was really all about the three of us as a couple of key early employees who had a very unique and unusual circumstance … We had a couple of periods that were really difficult but on the whole it was great. We played to each other’s strengths and weaknesses, our communication was reasonably good most of the time, and I think on the success side our commitment was equally strong. We had three people who were all about making a crazy idea work; crazy idea because in those days fair trade was not commonly understood or even accepted by progressive business people.

Early Growth The cooperative formalized its structure as a worker cooperative in 1990, just as sales began to hit the $1 million level. Rozyne decided to leave the cooperative to start a new nonprofit venture, Red Tomato, in 1994, and while he never returned full time, he continued to serve on the board of directors. Rosenthal had been serving as the CEO/executive director, and Dickinson was running sales. Rosenthal referred to the cooperative as “family run” (personal communication, 18 July 2010): “We had democratic worker by-laws … [But] don’t say it’s a totally democratically run co-op if in fact the family is running it. And since the family doesn’t have formal authority, it’s just up to personalities to just take power. But it really undermines the whole sense of democracy and empowerment.” Rosenthal had been having misgivings about the board’s competence to shepherd the cooperative at the same time that the board wanted

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more decisive leadership. Tensions built between Rosenthal and the board, and by 1999 the board voted Rosenthal out of the cooperative, signaling one of the key strategic challenges facing cooperatives: how to sustain the alignment of founder and member interests through the growth process. Substantial Growth In 1999, Dickinson and Rob Everts assumed leadership roles as co-executive directors and the board approved the cooperative’s first strategic plan. From this point, the cooperative began to see significant growth, from some $6 million in 1999 to $56 million in 2013. On 29 June 2006, twenty years after its founding, the workerowners of Equal Exchange approved its Vision for Equal Exchange. Through its ongoing business practices combined with the leveraging of 7 percent of pre-tax revenues to advance its mission, Equal Exchange challenges everyone within the organization to achieve its vision within twenty years. The Vision for Equal Exchange (2010b, ii) states, There will be … A vibrant mutually cooperative community of two million committed participants trading fairly one billion dollars a year in a way that transforms the world.

Thus, by 2026 Equal Exchange, including new product lines and ­usiness affiliates, aspires to build a nationally collaborative comb munity of customers, workers, producers, merchants, and investors with a shared vision to transform the world through fair trade, while meeting or exceeding $1 billion in exchange. Toward this end, Equal Exchange has launched a new initiative to promote intercooperative collaboration, called Principle 6; it is named after the ICA Cooperative Principle 6, “cooperation among cooperatives.” As sales revenues appear to be topping out, Dickinson, Everts, and the rest of the members confront several options. They may be facing the need to tinker with the cooperative’s existing business model, reinvent the organization, or perhaps spawn one or more separate entities as a means of consolidation (Cook & Burress, 2009).

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VX CASE QUESTIONS 1. Was the cooperative model the best choice for Equal Exchange? Should it have operated instead as a nonprofit organization? An investor-owned firm? Why or why not? 2. Two of the three cofounders exited the cooperative well before it achieved $10 million in revenues. Reflecting on Hirschman’s treatment of “exit, voice, and loyalty” (Hirschman, 1970), what do you think should be the role of voice in sustaining membership in a cooperative? Do you think Rozyne and Rosenthal would have been more or less likely to depart in a different type of organizational model? Why or why not? 3. After reading this case, would you be more inclined to start a cooperative or another form of organization? Could you start the venture as an investor-owned model and later convert to a worker cooperative? What would be the costs and benefits of this approach? 4. If you are a member of a cooperative, how active are you in its governance? What does your cooperative do to listen to the voices of its members? What contributes to your own loyalty to the cooperative? If it could do more to promote member loyalty, have you offered your suggestions?

3 Local Development Enterprises

Local development enterprises are in the overlap among the social economy, private sector, and public sector. Local development enterprises embrace the distinctive characteristics of the social economy such as prioritizing their social objectives but also earn revenues from the market and require ongoing external supports, often from the government. They serve as a vehicle for generating local economic and social development. One feature of local development enterprises is their orientation toward a community, typically within a geographical locale, but also they can be structured around a common interest (e.g., the performing arts). Types of local development enterprises include community development corporations, community development financial institutions, and business improvement districts. Other local development enterprises provide workforce training for marginalized social groups, community development through the performing arts, or rural infrastructure development. Local development enterprises are related to the field of local economic development. According to a World Bank–sponsored primer on the topic (Swinburn, Goga, & Murphy, 2006, p. 1): The purpose of local economic development (LED) is to build up the economic capacity of a local area to improve its economic future and the quality of life for all. It is a process by which public, business and nongovernmental sector partners work collectively to create better conditions for economic growth and employment generation.

This definition reflects the fact that modern economies are mixed and not only have a private sector but also a robust public sector and

68  Understanding the Social Economy of the United States Figure 3.1  The Social Economy: Local Development Enterprises

PUBLIC SECTOR

Local Development Enterprises Public Sector Nonprofits

Social Economy Businesses

PRIVATE SECTOR

Civil Society Organizations

SOCIAL ECONOMY

social economy. Therefore, local economic development requires a ­collective effort among “public, business and non-governmental sector partners,” something that will be reflected in many of the forms of local development enterprises that are discussed in this chapter. Although the World Bank definition’s emphasis is on building “economic capacity,” it implies that improved quality of life, more broadly speaking, is the ultimate goal. A definition that goes beyond economic values and appropriately addresses human development and social values comes from Blakely and Leigh, who view local economic development as “a process of human and physical development that is based on principles of equity and sustainability” (2010, p. 75). The values that Blakely and Leigh put forward more directly exemplify how local economic development fits within a social economy framework. As will be seen in the examples below, even policies meant to create new, for-profit businesses may contribute to meeting community needs for economic development by providing jobs and access to markets for goods and services, which, in turn, can generate tax revenues that further strengthen the social fabric of the community.

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However, local economic development within a social economy framework is more than creating jobs within a locality; rather, it focuses upon the social dimensions of economic development, or what is referred to as quality of life indicators – something that is increasingly crucial to attracting desirable businesses to localities (Dissart & Deller, 2000) As noted in chapter 1, we have separated local development enterprises from social economy businesses, although the line between these two areas of the social economy can blur. Nevertheless, we make this distinction because local development enterprises are commonly associated with economic and social needs that are addressed only partially through the market. Many local development projects are in regions that have a below average standard of living or involve groups that experience extraordinary challenges such as disabilities and racism, and a multigenerational history of impoverishment. Therefore, appropriate arrangements are created by government, foundations, or some other sponsoring organizations to support local economic and social development initiatives. Differing Models of Local Development Enterprises Community Development Corporations Community development corporations, or CDCs, represent a significant initiative in local development enterprise and exemplify a social economy approach to local economic development. CDCs originated as part of the American civil rights movement of the 1960s and the desire to overcome the poverty experienced by Blacks living in ghettos of decaying cities. At that time, Attorney General Robert Kennedy sought ways, where feasible, for communities to take charge of their own destinies, which in turn created community action agencies as part of the 1964 Economic Opportunity Act (Erickson, 2009). Many of these evolved into nonprofit community development corporations, mostly funded by a federal Special Impact Program or the Ford Foundation (Erickson, 2009). CDCs take a holistic approach to local development and house a broad array of services. The Wheeler Creek Community Development Corporation in Washington, DC, for example, offers such assistance as job development and training; housing, health, and social services; small business development; financial literacy; and youth services

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(Wheeler Creek, 2010). It is a highly comprehensive multiservice agency. Lakeside Community Development Corporation in Chicago is more focused on housing, but even so it offers an array of services related to housing: “rental education and counseling; landlord tenant rights and responsibilities; credit and budget counseling; pre-purchase education and counseling; mortgage delinquency counseling; post-purchase non-delinquency education and counseling; condominium association management” (Lakeside Community Development Corporation, 2012). Although CDCs vary in their organization and programs, they have the common feature of a support system for related social enterprises and other nonprofit organizations. In some cases, a CDC may plan local development and control the assets, either directly or through subsidiary corporations. Community development corporations, which are found in lowincome communities across the United States, are generally named after their community, be that local – for example, Toledo Community Development Corporation – regional, as with Central Florida Community Development Corporation, or statewide, as in the case of New Jersey Community Development Corporation. Some CDCs have a more distinctive or generic name – for example, Noah’s Ark Community Development Corporation Inc. in Orlando or Avenue Community Development Corporation in Houston. Others focus upon an ethnocultural group such as Latino Community Development Agency in Oklahoma City or Midlands Latino Community Development Corporation in Omaha. One of the challenges for CDCs is that community per se need not be clearly defined, and can be based more on personal networks, often online, that span the globe. Often the membership of a CDC is ad hoc, and the governance may lack the representative structure of cooperatives or nonprofit mutual or member-based associations. Another challenge is that their reliance upon government, for grants or contracts, and foundation grants can constrain their community empowerment efforts, a point that is raised by CDC critics (Stoecker, 1997). The intent of CDCs is to achieve some independence from government and foundations by exchanging services in the market. Although this can work to some extent, the fact that their clientele often cannot afford to pay for their services means that CDCs can remain in a financially dependent state.

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Locally based community development corporations are attuned to local issues. This as well as their flexibility and ability to attract both public and private resources can make them more effective in dealing with market failures in low-income areas than efforts that are exclusively conducted by government or the private sector. However, CDCs rely on federal government programs that funnel resources that they can utilize to work at the local level. The bridge between CDCs and government is the National Community Development Association (NCDA). NCDA is a national nonprofit representing 550 local governments across the United States that “administer federally-supported community and economic development, housing and human service programs, including programs of the U.S. Department of Housing and Urban Development (HUD), Community Development Block Grant (CDBG), and the HOME Investment Partnerships (HOME) programs” (NCDA, 2012). Within our framework presented in this book, the NCDA is a public sector nonprofit – an arm’s length organization that helps to funnel government-funded services to organizations in the community, such as community development corporations. The NCDA also serves as a feedback loop between the members of CDCs and government. A second source for information on CDCs engaging at the national level is the National Alliance of Community Economic Development Associations.1 The arrangement at the national level is replicated at the state level. For example, the North Carolina Association of Community Development Corporations (NCACDC) is an umbrella organization that was created in 1989 and designed to assist that state’s CDCs to strengthen their capacity. In Texas, the comparable association is the Texas Association of Community Development Corporations. Hawaii differs from the norm and utilizes a state agency, the Hawaii Community Development Authority, rather than a nonprofit organization for this function. In brief, CDCs are central social economy organizations engaged in local economic development and assisted in that endeavor by intermediary organizations that help with the transfer of funds from government programs.

1  See http://www.naceda.org/.

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A CLOSER LOOK: THE MASSACHUSETTS ASSOCIATION OF COMMUNITY DEVELOPMENT CORPORATIONS Founded in 1982, the Massachusetts Association of Community Development Corporations has eighty-six full member organizations, including sixty community development corporations that are nonprofit organizations whose primary purpose is to advance community development. The association is accountable to and governed by the constituency it serves – sixty community development corporations and twenty-six associate members, which are nonprofit organizations engaged in one or more aspects of community development but do not meet the requirements of a full member (Massachusetts Association of Community Development Corporations, 2012). The association’s mission is “to create places of opportunity where people of diverse incomes and backgrounds access housing that is affordable, benefit from economic opportunities and fully participate in the civic life of their community” (Massachusetts Association of Community Development Corporations, 2012). According to its website, the association advocates and organizes for public and private sector support, develops resources for community development, conducts educational and capacity building programs for members, and educates policy makers, the media, and the public about the work of CDCs in Massachusetts. Between 2005 and 2008, members of the association have annually worked with nearly two thousand volunteer community leaders, built or improved thirty-eight hundred homes, supported three thousand locally owned businesses, supported forty-three thousand families, and brought in $630 million in public and private investment to member communities (Massachusetts Association of Community Development Corporations, 2012). To highlight the work of one associate member, nonprofit Harborlight Community Partners bought Pigeon Cove Ledges, an affordable housing complex built in the 1980s that was due to revert to market-rate apartments if no nonprofit was able to take ownership after the thirty-year term required for affordable housing. According to town administrator Linda Sanders (Bergman, 2011),

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It is very important to many of us in Rockport to maintain, as well as develop, affordable housing in order to keep our senior citizens who are on fixed incomes in the place they love, to make it possible for young people just starting out in their careers to be able to live in the same town as their parents, to maintain the rich diversity of esteemed members of our local society from all walks of life and to offer affordable housing options for those who fall in love with this beautiful coastal village and want to move here. According to the reporter covering the story for a local newspaper, Harborlight Community Partners raised the necessary $5 million, including funds provided by the town, to buy out the owners and meet other financial requirements, and keep Pigeon Cover Ledges affordable.

Community Development Financial Institutions Community development financial institutions (CDFIs) are a recent form of local development enterprise emerging from a long tradition of self-help credit in the United States. CDFIs are organizations that raise capital from both public and private sources, including corporations, private foundations, religious institutions, and individuals (CDFI Coalition, 2012). Unlike community development corporations, which offer a broad range of services to the community, CDFIs, as the name suggests, are financial institutions (both regulated and unregulated) and take the form of community development banks, community development credit unions, community development loan funds, community development venture capital funds, and microenterprise development loan funds; while they can take equity positions – ownership of the company shares – their principal function is to make loans. The Community Reinvestment Act of 1977 required financial institutions to attend to local credit needs in their communities. In 1994, under the Clinton administration, the Community Development Banking and Financial Institutions Act was passed to create CDFIs, which are funded by the US Treasury Department CDFI Fund (Erickson, 2009).2 In 1995,

2 See http://www.cdfifund.gov.

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a revised Community Reinvestment Act explicitly recognized loans and investments in CDFIs as a qualified Community Reinvestment Act activity, energizing growth in the CDFI field (CDFI Coalition, 2012). Exemplary CDFIs include NCB Capital Impact, a national nonprofit with offices in Arlington, Virginia, and Oakland, California, that leads in the development of best practices for the industry; the Low Income Investment Fund, based in San Francisco, which addresses issues around affordable housing, charter schools, health, and provisions of fresh food; the Reinvestment Fund of Philadelphia, which has created a GIS mapping device for use by the industry; and the Illinois Facilities Fund, based in Chicago, which is a leader in the provision of technical assistance programs, in addition to being a lender. A CLOSER LOOK: PARTNERS FOR THE COMMON GOOD Partners for the Common Good, founded in 2000 in Washington, DC, is a nonprofit community development loan fund certified by the US Treasury Department as a CDFI. Partners for the Common Good defines its mission as “to advance economic justice for low income people and communities” (Opportunity Finance Network, 2012). The organization is unique in that it acts as a wholesale loan participant, partnering with some thirty local CDFIs otherwise constrained by risk or because they can’t provide the full loan on their own. Partners for the Common Good finances up to 50 percent of the total loan. Through its Loan Advisory Committee, Partners for the Common Good makes retail loans to facilitate affordable housing, undertake neighborhood revitalization, promote entrepreneurship, and strengthen the quality of community services (Partners for the Common Good, 2012). Between 2002 and 2011, Partners for the Common Good made over 125 loans totaling $34 million, and from 2004 to 2011, it participated in 80 partnership loans totaling $25 million. Between 2008 and 2011, the CDFI created or retained 1,079 jobs, served 1,370 low-income people through community services, served over 600,000 entrepreneurs, and financed $536,656 in community facility and commercial real estate (Opportunity Finance Network, 2012).

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Business Improvement Districts Business improvement districts (BIDs) are voluntary, nonprofit, memberbased associations in which local businesses get together to plan needed local improvements to be paid for by a voluntary increase in their taxes (Mitchell, 2008). These local development enterprises are self-help associations set up, not only for the benefit of the member businesses but also for the broader community. Most often, BIDs are financially selfsufficient, but sometimes they can be supplemented with public funds. Examples of improvements can be adding police patrols, upgrading building facades, improving pedestrian flows, cleaning up of the area, and so forth. Undertaken in major cities, BIDs have had remarkable success in reducing crime and vandalism, and the increase in business has more than compensated for higher assessments (Blakely & Leigh, 2010). A variation of the model is the community benefit district, a nonprofit arrangement in which property owners, not businesses, come together to pay a supplemental tax assessment for services not already provided through their municipality such as street cleaning, security, and enhancements to the street. To establish a business improvement district, business owners require the approval of their local government. Once that approval is obtained, all the businesses within that district are obliged to pay, as they all benefit from the service. However, the levy paid by BIDs may be a financial burden to smaller enterprises with less income. Business improvement districts can be found throughout the United States. Wisconsin alone has eighty-four BIDs with many in Milwaukee (Wisconsin BIDs, 2009). In brief, business improvement districts are excellent examples of applying the principle of self-help and of how local businesses that might compete with each other in the market can come together for the purpose of community betterment. A CLOSER LOOK: THE GEORGETOWN BUSINESS IMPROVEMENT DISTRICT The White House, Capitol Hill, the Pentagon, and the Supreme Court immediately come to mind when considering the major spheres of influence in the nation’s capital, but the true seat of power

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in Washington, DC, may well be Georgetown, a tiny, p ­ icturesque, ­eighteenth-century village cozily nestled in the oldest section of the city. Lyndon Baines Johnson, while serving in the Oval office, noted that “every student of Washington’s political process ought to know that the business of government is often transacted during evening hours, sometimes over a drink and sometimes over a meal – but almost always in Georgetown.” (Heymann, 2003, p. ix) So opens C. David Heymann’s exposé of the most powerful women in the nation’s capital, known as The Georgetown Ladies’ Social Club. Perhaps most fashionable in the promising days of Camelot in the early 1960s when hippies, the hoi polloi, and the hoity-toity alike rubbed shoulders passing on its cobbled streets, Georgetown thereafter gradually sank into a state of shabby decline for an abbreviated dark period. Then in 1999, a number of property owners and merchants established and funded the Georgetown Business Improvement District (GBID), nurturing the community back to charming prominence. GBID, a 501(c)(6) nonprofit entity, is governed by a twentyeight-member board of directors, including sixteen commercial property owners, eight tenant members, and four nonvoting representatives from the Citizen’s Association of Georgetown, the Georgetown Business and Professional Association, the Advisory Neighborhood Commission, and the embassy community (Georgetown Business Improvement District, 2012). The standing committees of the board indicate the organization’s priority areas of concern: transportation, governance, street services, streetscape, finance, public safety/public health, and marketing. With 2008 revenues of nearly $3.78 million, over $2 million of which were generated from self-imposed assessments, GBID has undertaken major community improvements in providing public transportation access to the area, decorating streets with floral displays, pruning trees, reducing crime, and putting on a culinary event that now draws nearly fifteen thousand people (Georgetown Business Improvement District, 2009). Not only does this example convey the effectiveness of BIDs as local development enterprises, it also exemplifies the collaborative role that local citizens and business can play in transforming their own communities.

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Workforce Development Organizations workforce training Essential to building an equitable society is to make sure that all people have the skills and education – what economist Gary Becker called “human capital” (1993) – necessary to achieve their full potential. Building such intellectual capital is a major opportunity for local development enterprises. The role of workforce development and, starting earlier, of early childhood development both represent key pillars of local social and economic development. These days, training and retraining to compete in a global economy is more important than ever, and some assessments conclude that the United States is woefully unprepared: “American workers are undertrained for their current jobs and not prepared for future opportunities” (Blakely & Leigh, 2010, p. 298). While policies that focus on providing income support take precedence over investing in job training in the United States, other countries, notably Sweden, have made job skill training a priority. Traditionally, public education has provided the population with the fundamental skills essential to reading, writing, and arithmetic, while specific, occupationally related skills have been taught on the job. Basic trade skills – wood shop or metal shop for the boys and home economics for girls – once taught in public schools have largely been dropped from the curriculum, and young people more interested in trades than classical education enroll in vocational schools to learn specific trades. Such vocational schools can either be publicly supported or, increasingly, for-profit businesses. Workforce development programs can be classified into two groups: sector-based and place-based approaches (Giloth, 2000). Sector-based approaches focus upon the needs of a particular form of industry, or industry cluster, in an effort to better match the skills of the workforce with the needs of industry. Commonwealth Corporation in Boston and its related charitable foundation have coordinated a sector-based approach in Massachusetts. A sector approach is often coordinated through Workforce Investment Boards, formerly Private Industry Councils. Workforce Investment Boards team with nonprofit community groups that work with local businesses and local economic development programs to create an integrated approach to workforce development. This approach often includes such programs as first-source or targeted hiring agreements, in which firms give priority to hiring local residents and hard-to-place

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people. The approach can also include providing skills banks based on local community surveys of residents, various training programs, opportunities for self-employment, youth enterprise promotion, and skills development for disabled persons (Conway, Blair, Dawson, & Dworak-Muñoz, 2007). Place-based approaches are often targeted to areas with populations on the margins of the workforce and in special need of skills that will enhance the chances of workforce integration. Innovative examples of place-based approaches are undertaken by the Instituto del Progreso Latino (Instituto) in Chicago, set up to help first-generation Latinos develop skills that will enhance their opportunities for gainful employment. Per Scholas in New York, a registered charity, also targets residents of low-income communities, but its strategy focuses on preparing them for careers related to the computer industry – software and hardware. A CLOSER LOOK: WORKFORCE DEVELOPMENT IN THE DISTRICT OF COLUMBIA3 The District of Columbia was founded on 16 July 1790. The population census of 1800 indicated a total population of 8,144, of which 30.4 percent were Black; of these, 16.2 percent (400) were free and 83.8 percent (2,072) were slaves.4 Slavery was abolished in the District in 1862, seventy-two years after its founding, when President Lincoln signed the DC Emancipation Act. Since then the Black population in the District grew in every census decade until 1970, both in numbers and as a percentage of the total population, exceeding 50 percent of the population in the 1960 census and reaching a peak of 71.1 percent (537,712) in 1970. The Black population has been declining in numbers and proportion since but is nevertheless high compared to the United States as a whole. With a 2012 population of 632,323 in the District of Columbia, 50.6 percent are Black, as compared to 13.1 percent Black in the US population.

3 Unless otherwise cited, demographic statistics in this section are taken from the US Census Bureau (2012). 4 See http://www.census.gov/population/www/documentation/twps0056/ twps0056.html.

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While it has been 150 years since the end of the Civil War and the signing of the Emancipation Proclamation, and 50 years since the Civil Rights March on Washington, the first Black president in the White House notwithstanding, the persistence of social and economic disparities in the nation’s capital – particularly after Congress recently committed $4 to $6 trillion of public dollars to export democracy to other countries through war (Bilmes, 2013) – is astonishing and deplorable. Some 18.2 percent of the capital’s population, or 115,082 people, mostly Black, are living below the poverty level, as compared to 14.3 percent of the US population. In 2012, there were 31,645 people unemployed, or 8.6 percent of the 366,020 people in the workforce.5 The city – which, 223 years after its founding, has yet to be represented by voting members in Congress – is divided into eight wards, each represented in the DC City Council by an elected council member and counseled by advisory neighborhood commissions.6 The resources available to these wards are highly unequal. Wards 3 and 4, for example, containing respectively zip codes 20016 and 20015, have an average annual median household income of $136,468 and are mostly White, while Wards 7 and 8, consisting of zip codes 20019, 20020, and 20032, have an annual median household income of only $34,665 and are predominantly Black, with less than one-quarter of the income in the richest zip codes.7 This disparity in income underlies and feeds vast differences in the quality of education, housing, health, public safety, and, of course, employment. While the number of jobs in the District – 735,500 in 2012 – actually exceeds its population, the requirements of many positions are beyond the qualifications of those who are in the unemployment rolls; indeed, “in five of eight wards in the city, more than 40 percent of the adult population fell into the lowest literacy levels” (DC Department of Employment Services & DC Workforce Investment Council, 2012). Consequently, hundreds of thousands of residents of Maryland and Virginia commute daily to jobs in the District and take home salaries – many from federal government jobs – representing a massive wealth drain from the city and ­leaving over 232,000 residents of

5 See http://does.dc.gov/page/unemployment-data-dc-wards. 6 See http://anc.dc.gov. 7 See 2008–2012 American Community Survey 5-Year Estimate, http://factfinder2. census.gov/faces/nav/jsf/pages/community_facts.xhtml.

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DC (nearly 37% of its population) dependent on public assistance (DC Department of Employment Services & DC Workforce Investment Council, 2012). According to the Greater Washington Workforce Development Collaborative, an initiative of the Community Foundation for the National Capital Region, in 2010 over thirty programs and services provided workforce development to DC residents; these were delivered through twelve DC municipal agencies (DC Fiscal Policy Institute, 2012). DC expenditures on these programs totaled $112,369,000. Some programs are general in nature, while others are targeted to special needs. Services include literacy education and other types of adult education, job readiness training, occupationally specific skills training, and onthe-job training, as well as assistance for employers (DC Fiscal Policy Institute, 2012). The number of participants is not reported for all programs; however, of those for which data are available, the range is from fifteen participants (Career and Technical Training in the Department of Youth Rehabilitation Services) to twenty-two thousand (DC Works! Career Centers of the Department of Employment Services) (DC Fiscal Policy Institute, 2012). Despite the revenues expended and the numbers of unemployed processed, high unemployment persists. There may yet be significant opportunities to explore cooperatives and other social businesses as innovative approaches to workforce development in the social economy in Washington, DC.

Workforce Enterprises for Marginal Social Groups In addition to training approaches, there are also local development enterprises that create employment, either transitional or permanent, for people on the social margins – that is to say, those who are excluded from the mainstream. This includes those with disabilities (physical, psychiatric, developmental, and emotional), people in social categories who have experienced a history of oppression, youth who have missed out on formal schooling, and people who have been incarcerated. These enterprises, most often housed within nonprofits that start and support them, employ individuals who otherwise are likely to be unemployed or on social assistance.

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The idea of nonprofits starting enterprises is often viewed as a relatively recent trend, becoming widespread in the 1980s and 1990s. However, there is a longer history of this – for example, the thrift stores set up by the Salvation Army to subsidize the cost of its many social services to the indigent within urban communities, gift shops in hospitals, or the annual cookie sale by the Girl Scouts. The purpose of those forms of enterprises – including newer variants, such as ReStore, which finances Habitat for Humanity’s housing for the working poor – is to support the parent or founding organization’s services. The enterprises referred to in this category are founded and often supported in an ongoing way by the parent organization, through such means as helping with marketing and management, and serving on the board; however, some are also free standing. There are also various forms of support from the government and foundations and in some cases from the private sector. There are thousands of such enterprises across the United States, including DC Central Kitchen discussed in chapter 1 and the Delancey Street Foundation in San Francisco. While it is not possible to do them justice in such a brief account, a scan of social enterprises in the nonprofit sector highlights some interesting examples (Social Enterprise Alliance, 2010). Below is a selection of some such organizations and the issues they focus on: • Psychiatric disabilities – Harbor City, a nonprofit enterprise started in 1987 through the University of Maryland Medical System to employ and train people with psychiatric disabilities in such fields as shredding, moving, warehousing, and records management of hospitals in the system (Harbor City, 2012). • Physical and intellectual disabilities – Positive Vibe Café, in Richmond, Virginia, a nonprofit that employs and trains people with physical and intellectual disabilities. It was founded in 2002 as a 501(c)(3) nonprofit organization by the Positive Vibe Foundation (formerly the Get Lost MD Foundation) and has trained more than 400 people since 2004 (Positive Vibe, 2012). • At-risk youth – Pedal Revolution, a nonprofit bike shop, and Ashbury Images, which started in t-shirt printing and moved into screen printing, were founded by New Door Ventures in San Francisco. These enterprises plus New Door’s Ally program serve youth, 16 to 21, often homeless. The Ally program creates 200 job

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placements annually with local business partners (New Door Ventures, 2012). • Former inmates – RecycleForce, a nonprofit enterprise with a 501(c)(3) charitable registration based in Indianapolis, collects and recycles materials and sells the scrap and other reusable materials to pay for job training and employment that facilitates the participants’ re-entry into society. In five years, RecycleForce has placed 360 ex-offender workers into full-time paid employment (RecycleForce, 2012). • Addictions – TROSA or the Triangle Residential Options for Substance Abusers, founded in 1994, is a state-licensed residential treatment facility in Durham, North Carolina, that operates businesses for services such as moving, contract labor, and lawn care for residents in an effort to help them employ and support themselves (Triangle Residential Options, 2012). Performing Arts Organizations While it may seem unusual to characterize the performing arts as a form of local development enterprise, these activities are vital to the communities within which they operate, and they contribute economically and socially to well-being by increasing the quality of life in the community. It is unimaginable to think of a community without theatre, music, and dance, both amateur and professional. Performing arts organizations fit the criteria of local development enterprises in that if they are formally incorporated, they are usually nonprofits that earn a portion of their revenues from the market but also rely on external supports from government and foundations, which are facilitated through their charitable registration. Even small, unincorporated amateur performing arts organizations that are part of the informal economy purchase goods and services and may draw tourists to a community. The performing arts are part of a broader category of culture. While the organizational arrangements for culture in general are varied and involve a combination of private businesses, self-employment, government corporations, and nonprofit organizations, the performing arts such as theatre, opera, and symphony, as well as cultural institutions such as museums and heritage centers, have a concentration of nonprofit organizations supported by government, foundations, and private interests. Some performing arts groups such as small theatres

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in the informal economy are supported by donations from viewers and staffed by volunteers who participate for personal satisfaction. Nevertheless, as noted, such organizations bring tangible benefits to their communities. Nonprofit arts organizations make significant economic contributions, which are in a series of reports by Americans for the Arts. Its report for the year 2010 included data from 9,721 nonprofit arts and culture organizations and 151,802 attendees from all states in the United States (Americans for the Arts, 2011). Its main findings were that the nonprofit arts and culture industry generated $135.2 billion in economic activity of which $74.1 billion was in event-related spending by the audiences. These organizations had 4.1 million full-time equivalent jobs that led to $86.7 billion in household income; they paid $6.1 billion in local government tax revenues, $6.7 billion in state government tax revenues, and $9.6 billion in federal income tax revenues. In other words, they not only make an important contribution to the cultural life of their communities but also make an important economic contribution. A CLOSER LOOK: CHORAL EXPRESSION IN WASHINGTON, DC When Norman Orville Scribner was three years old, the Daughters of the American Revolution and proud owners of Constitution Hall – then the nation’s preeminent venue for the performing arts in Washington, DC – refused to allow Marian Anderson, one of the most celebrated singers of her time, to sing to an integrated audience. Anderson, of course, was Black and segregation, though illegal in the nation’s capital, imbued cultural affairs into the 1960s. Scribner attended the Peabody Conservatory of Music in Baltimore, and there founded the Baltimore Choral Society, which performed for two seasons. In 1960, he moved to Washington, DC, serving as an assistant organist at the Washington National Cathedral and staff keyboard artist for the National Symphony Orchestra, then performing at Constitution Hall. The conductor, Howard Mitchell, invited Scribner to conduct the annual performance of Handel’s Messiah in 1963 and 1964, using volunteer church choirs. In 1965, Scribner suggested open auditions to recruit a new, intact choir. It was this ensemble that became the Choral Arts Society of Washington, formally

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incorporated in 1966. Today, Scribner refers to the Society’s 180-member chorus as “a child of the Symphony” (personal communication, 6 May 2013). Aside from his work with the Choral Arts Society, Scribner also led The Norman Scribner Choir in singing Leonard Bernstein’s MASS, which was commissioned by Jackie Kennedy to open the John F. Kennedy Center for the Performing Arts, debuting in the Opera House on 8 September 1971. Another important engagement by the Norman Scribner Choir was its performance with Leonard Bernstein of Haydn’s Mass in Time of War as part of the Concert for Peace held at the National Cathedral on the eve of Richard Nixon’s second inauguration, in 1973. While these examples are not of the Choral Arts Society of Washington, they exemplify how the performing arts can serve social needs even by engaging in politically charged expression, an activity that would likely jeopardize the tax-exempt status of any charitable organization. Nevertheless, the Kennedy Center has long served as the peoples’ national center for the performing arts, and the CD by The Norman Scribner Choir’s National Cathedral performance was nominated for a Grammy Award. “Impressing people is never as strong, important, or long lasting as moving people,” says Scribner. “And without even touching people, much less holding them, air waves can profoundly move their soul and spirit” (personal communication, 6 May 2013). That is the kind of value proposition offered by the arts that ensures expression a popular and productive place in the social economy. Today, with annual revenues of almost $2 million and an endowment campaign underway, the Choral Arts Society of Washington produces CDs, undertakes international tours, sings under famous conductors from around the world, performs at renowned music festivals, and engages the local community through its annual choral celebration of Dr. Martin Luther King Jr.

Rural Infrastructure Development Organizations An important part of local development enterprise is infrastructure – roads, highways, bridges, utilities (power, water), dams, and communication facilities (telephone, radio, television, Internet), as well as

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waste removal and processing. Infrastructure facilities rely heavily upon public investment, sometimes in partnership with the private sector. However, in rural areas with lower population densities and vast distances, infrastructure development is less attractive to the private sector because the costs per capita are higher and the return on investment may not be profitable. Therefore, within rural communities it is common for infrastructure to be undertaken by the public sector. For some forms of infrastructure – electrical production and distribution, water, and telephone – cooperatives have had a significant role. Unlike many of the cooperatives discussed in chapter 2, these cooperatives are nonprofits or cooperatives without shareholders. The members have voting rights in the organization, but the property of the cooperative is owned collectively by the cooperative as a whole, and the members have no individual entitlement. Cooperatives have had a significant presence in rural areas for three forms of infrastructure: electricity transmission and generation; water supply; and telephone services. For electrical services, in particular, there are 864 distribution cooperatives and 66 generation and transmission cooperatives (Deller et al., 2009). These participate in a second-tier organization called the National Rural Electric Cooperative Association. A CLOSER LOOK: NATIONAL RURAL ELECTRICAL COOPERATIVE ASSOCIATION National Rural Electric Cooperative Association (NRECA) is a powerful force within the United States because through it 42 ­million Americans in forty-seven states receive the electricity that they rely upon. This is about 12 percent of the population and 10 percent of the US power supply. The NRECA was formed in 1942, and it employs seventy thousand people. This cooperative owns and maintains 2.5 million miles, or 42 percent, of the nation’s electric distribution lines. It is also a boon to government because it contributes $1.4 billion in state and local taxes paid by consumers (NRECA, 2012). Rural electrical cooperatives such as the NRECA came about because in the 1930s, there was almost no electrical power distribution in rural parts of America. When Franklin Delano Roosevelt became president, he brought in enabling legislation (the Tennessee Valley Authority Act, Rural Electrification Act) that allowed rural communities to borrow

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funds to build an electrical distribution system. Farmers and other residents of rural communities started forming electric cooperatives to build power distribution systems. This is one example of how organizations within the social economy interact with other sectors of the economy. NRECA is interesting, not only because of its social and economic importance to communities across the United States but also because of its distinct structure. It is a cooperative, and because of its services, farmers, businesses, individuals, and community organizations across the United States are able to count upon electricity. Unlike most cooperatives, its members are not individuals but other cooperatives, 906 in total – for example, Golden State Power Cooperative in California, established in 1999; and Central Florida Electric Cooperative, Inc., formed in 1939. A cooperative consisting of cooperatives as members is referred to as a second-tier cooperative. These rural electrical cooperatives often engage in other services to develop their communities – “small business development and jobs creation, improvement of water and sewer systems, and assistance in delivery of health care and educational services” (NRECA, 2012). In addition, this cooperative is a nonprofit association. The members neither hold shares nor have any claim on the cooperative’s vast wealth ($112 billion of assets), only the right to benefit from its service. Cooperatives that are also nonprofits are common for services such as childcare and healthcare.

It is important to emphasize that the interaction between the National Rural Electric Cooperative Association members and government is not simply historical but is current and is essential for the survival and development of these organizations. Originally, electric cooperatives worked with the Rural Electrification Administration and received low-interest and long-term loans as well as technical assistance. In 1994, Congress replaced the Rural Electrification Administration with the Rural Utilities Service, which the NRECA and its members continue to work with to develop infrastructure and to improve services to their members. Rural electrification cooperatives receive approximately 40 percent of their loans through the Rural Utilities Service and receive

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preference to excess power from federal water generation projects (Deller et al., 2009). Rural electrification cooperatives are independent from the public sector and generate their revenues from their members’ payment for the service, but they work in partnership with agencies of the government. Like other forms of local development enterprise, they are players in the market with an organizational structure typical of the social economy, but they interact with government for important forms of support. Affordable Home Ownership Organizations A primary activity for local development enterprises is assistance with the development of affordable housing for those who cannot afford the private housing market. Two innovative models are community land trusts and manufactured home cooperatives for residents of mobile home parks. community land trusts It is generally accepted that home ownership has a positive impact on communities, and that for many Americans it is their most important investment and an asset that can be passed down to their family members. However, for Americans with low and moderate incomes, home ownership can be but a distant dream that is beyond their financial means; in order to obtain that dream, they may burden themselves with mortgages that they cannot afford, a practice that was widespread during the subprime lending crisis because of the manipulative practices of predatory lenders. A community land trust, a nonprofit organization that holds the land, is one method to make house ownership affordable. Most people are familiar with the many conservation land trusts set up to preserve a natural habitat; another familiar type is the Indian reserve in which lands are held in trust. However, community land trusts are less well-known but not because they are unimportant. The National Community Land Trusts directory includes 242 community land trusts found throughout the United States. The reason why a community land trust reduces the cost of housing is that the trust owns the land and leases it to the home owners (Thaden, 2012); therefore, the purchaser is paying for the cost of the dwelling only, not the land. The residents own their dwellings and may have equity in improvements to the land, but they are not burdened with the cost of the land,

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a major factor in the purchase price of housing. Normally, residents of the community pay a nominal monthly fee to the community land trust for the land and have a long-term lease. As part of the arrangement, home owners have resale restrictions “that limit the future resale price of their homes in order to keep them affordable for the next generation of lower income buyers” (Thaden, 2012, p. 1). These sale restrictions are set out in the contract between the trust and the home purchaser, and they specify what the homeowner is eligible to retain upon sale of the dwelling (e.g., a percentage of the difference between the appraised value at the time of purchase and that at the time of sale). In essence, the community land trust serves as a steward or overseer to ensure that this valuable asset continues to serve lower-income families but also creates an opportunity for its owners, who normally would be unable to afford home ownership, to pay down a mortgage, gain equity, and possibly see a limited increase in their investment. Housing on land trusts can come in a variety of forms such as mobile homes, cooperatives, single-family dwellings, condominiums, and townhouses. Communities also may have some rental dwellings. The Champlain Housing Trust in Burlington, Vermont, started in 1984, is the largest in the United States, with five thousand members. Community land trusts have a strong presence on the West Coast in Washington and California, in New England, and in Florida, including two that are operated by Habitat for Humanity (Habitat for Humanity of Key West & Lower Florida Keys and Habitat for Humanity of South Palm Beach County). Community land trusts are a relatively recent phenomenon, having been around only since the mid-1980s, but they show promise as a model for bringing home ownership to lower-income Americans, as delinquency rates for mortgages in community land trust arrangements are a fraction of the national average. This is understandable because the residents are buying into an arrangement that is financially manageable for them. manufactured home cooperatives A second arrangement that is growing in popularity in bringing home ownership to people with lower incomes is limited equity cooperatives for residents of mobile home parks or manufactured housing communities. In this arrangement the cooperative owns the land and common amenities, which are jointly managed by members. The members

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also own and manage their home. It is ­estimated that there are about fifty thousand trailer parks in the United States of which one thousand are resident-owned housing cooperatives (NHPR, 2012). These haven’t just come about by chance but have been assisted by a major organizing effort by ROC USA, Resident-Owned Communities, a nonprofit community development corporation. A CLOSER LOOK: ROC USA, RESIDENT-OWNED COMMUNITIES Since its launch in 2008, ROC has helped twenty-two hundred homeowners in thirty-five communities purchase their parks. ROC’s website states its mission clearly and simply: “When a manufactured home community or ‘mobile home park’ is for sale, ROC USA® seeks to provide homeowners who are working together as a democratic organization with the opportunity to purchase their community” (2012). The forerunner to ROC was the New Hampshire Community Loan Fund, which has led to 20 percent of manufactured home communities in New Hampshire being resident owned (ROC USA, 2012). In 2008, the New Hampshire Community Loan Fund joined with the Corporation for Enterprise Development (CFED), NCB Capital Impact, and NeighborWorks America to create ROC USA and to bring the success in New Hampshire to the rest of the United States. To get started, ROC received funding primarily from the Ford Foundation, but since then others have joined including the Bank of America, Ford Foundation, Calvert Foundation, Deutsche Bank, Fannie Mae, and Cooperative Development Foundation. ROC USA is a 501(c)(3) nonprofit tax-exempt organization. Its ten-person board is a mix of its members and funders and also the president of Park Plaza Cooperative, Minnesota’s fifth cooperative manufactured-home park. Manufactured home cooperatives are now found throughout the United States; to cite a few examples, Sarasota has thirty-two; San Diego has twenty-four; Santa Cruz has twenty-one (ROC USA, 2012). ROC is an organization with a mission and with a track record to suggest that it can accomplish its mission. ROC USA president Paul Bradley states: “I want resident ownership to be available to every

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homeowner group in the country that wants to buy their community” (as cited in NHPR, 2012). He is bullish, not simply because of idealism but because resident-owned communities are good investments: “On over $200 million worth of total lending to communities, not a single lender has lost a single dollar over the course of the last 30 years” (as cited in NHPR, 2012).

Conclusion Local development enterprises, as discussed in this chapter, involve collaborative arrangements among nonprofit, community organizations, government agencies, and private sector businesses. This chapter views local development enterprises as vehicles for local economic and social development, which we characterize as a collaborative arrangement among organizations from the social economy, government agencies, and the private sector. Traditionally, local economic development has been concerned with bringing wealth to a community through enticing business development to promote economic output and job creation, and constructing infrastructure and facilities for business and housing, particularly low-income housing. This supply-side economic focus has expanded to include the development of human capital through training and early childhood education, a point emphasized by Bartik (2011). Indeed, workforce development has become one of the leading strategies for local economic development. The examples discussed in this chapter – community development corporations, community development financial institutions, business improvement districts, workforce development, the performing arts, rural infrastructure development, and affordable housing communities – all combine economic and social development. The social dimensions of local development have assumed greater importance, as local planners are becoming more attentive to the indicators of quality of life as necessary ingredients for attractive and sustainable communities. VX DISCUSSION QUESTIONS 1. Can you envision innovative ways for public, community and private sources to collaborate as local development enterprises in your community?

Local Development Enterprises  91 2. If you were to research the impact of a community development corporation or a community development financial institution, what criteria would you utilize? Take an example from your community, and visualize a simple study you could undertake to assess impact. 3. Is it appropriate for business improvement districts to secure local improvements that may take resources away from the larger community? In your assessment, what makes the BID process legitimate? 4. If you had the power, would you invest more heavily in workforce development in lower-income communities? If so, what specific strategies would you adopt? Given the history of slavery in the United States and its impact upon communities such the District of Columbia, what specific policies would you introduce to create greater equity? Do you feel that people who work in DC and who live elsewhere should pay a special tax that contributes to the welfare of those in need? 5. Workforce enterprises for marginalized social groups require an investment from government, foundations, and others. How do you decide whether this investment is worth it? 6. Is it appropriate to label the performing arts as a local development enterprise? Why? 7. Identify and examine several initiatives in your community that represent local development enterprises. Can you envision yourself initiating a local development enterprise?

VX CASE FOR ANALYSIS: RED FEATHER DEVELOPMENT GROUP Red Feather is a small, grassroots organization making a big difference to a few people. – Robert Redford, Sundance8

In 1995, an article that appeared in a publication of Indian Country Today described how several elders living on the South Dakota Pine Ridge Reservation froze to death because of inadequate housing.9 Robert Young was a clothing entrepreneur living in Bellevue, Washington, when he read the article while visiting a client at a New Mexico ski resort. This provided an igniting epiphany that propelled him to depart 8 See https://www.redfeather.org/about/history/. 9 See http://indiancountrytodaymedianetwork.com/.

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a life of sartorial entrepreneurship to enter one of sheltering Native Americans through a rural community development venture. Overview Thus began Young’s inquiry into the many issues facing Native Americans, an investigation that introduced him to Katherine Red Feather, a seventy-five-year-old Pine Ridge elder (Seldon, 2004). Red Feather, he discovered, was living in a trailer without water, having endured for years on a federal waiting list for tribal housing. Rather than simply send her a check, Young, after selling his interest in the clothing company, organized a project to build her a home out of bales of straw (Seldon, 2004). Red Feather Development Group, founded in 1995, is a 501(c)(3) public charity based in Bozeman, Montana; the organization partners with American Indian nations to develop and implement sustainable solutions to the housing needs within their communities.10 According to its website, the organization’s vision is “a world where safe, affordable homes are available to all.” The commitment to affordability and sustainability explains the use of straw bales. Bales of straw are low in cost and high in durability and insulation. The bales are load-bearing, so there is no need for a frame; for stability, the bales are covered with concrete stucco. Red Feather Development Group has similarities to the community development corporation, as discussed in this chapter. CDCs typically are a hub for a broad array of services and take a holistic approach to community development. Red Feather is more specialized, focusing on housing, a dire need in many Native American communities, particularly in those that it serves. In order to engage its services, Red Feather has had to form partnerships with Indian reservations. The organization is currently focusing on partnerships with the Hopi Reservation in northern Arizona and the Northern Cheyenne Reservation in eastern Montana. According to its 2012 annual report, since 1995 Red Feather has constructed seventeen new homes, built four community structures, renovated sixteen dwellings, and conducted fourteen educational programs (Red Feather Development Group, 2013).

10  See https://www.redfeather.org/about/.

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During 2012–13, with funding from a renewable energy investment fund provided by the Grand Canyon Trust, Red Feather installed photovoltaic and solar thermal units, as well as produced one hundred weatherization kits for distribution. The solar initiative represents a significant opportunity for both training and building. Citing the 1990 US Census data, Red Feather notes that “over 14 percent of American Indian households on reservations have no access to electricity, compared to 1.2 percent of all US households” (Red Feather Development Group, 2013). With funding from the M.J. Murdock Charitable Trust, Red Feather created a course curriculum on construction fundamentals, featuring straw bale construction, to be taught at Chief Dull Knife College. Through a partnership with Montana State University, architectural students have been working with Red Feather to study the role of straw bale construction in meeting global housing challenges, as well as conducting an energy-efficiency study and homeowner survey. In another innovative program, Red Feather engaged youth in a “juvenile detention diversion program” to study the relationship between Red Feather constructions and the community and to create their own design for a vacant structure, which achieved approval from the Tribal Land Authority. In addition to new construction, Red Feather also engages in home renovation, providing energy-efficiency retrofits and home health and safety repairs for homes in critical need of attention. With a sister organization named Kii’ Nat Wan Lalwa, Red Feather volunteers engage in the traditional, manual re-mudding of homes, using a mixture of clay, sand, and water. This mudding, or plastering, called Palwitota, represents a muchneeded service for the elderly and others unable to mud their own homes. Background and Governance According to Red Feather’s website, the US Department of Housing and Urban Development notes that there are about 2.5 million tribal members living on reservations, and over 60 percent lack adequate housing.11 In the United States, tribes are treated as sovereign nations and, as such, are the direct recipients of federal funds from the US Department of Housing and Urban Development.12 According to this

11  See https://www.redfeather.org/about/philosophy/. 12 See http://portal.hud.gov/hudportal/HUD?src=/program_offices/public_indian_ housing/ih/codetalk/triballeaders.

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HUD website, a tribe establishes its Tribally Designated Housing Entity (TDHE) as a department, housing authority with a separate board of commissioners, or nonprofit organization, and this TDHE receives an Indian Housing Block Grant and determines the plan, design, construction, and maintenance of affordable housing on Indian reservations and in Native American communities. Thus the law provides financial assistance in a way suitable for tribal self-governance. The federal government as a source for housing funding might be an obvious financial target for Red Feather, but it was not until 2012 that the organization received its first federal grant – from the Department of Agriculture. This grant funded a solar workshop for the Hopi. As federal housing funds are distributed directly to the tribes, Red Feather, as an independent, private nonprofit organization, is not directly eligible for such money and instead has followed traditional means to secure funding (see the “Financials” section below). Molly McCabe serves as executive director of the organization, supported by a grants/marketing coordinator, a construction program director, a volunteer coordinator/bookkeeper/administrative assistant, a Northern Cheyenne program coordinator, a program manager for the Hopi, an education program director fellow, and a marketing intern. The board of directors consists of seven members, chaired by Terry Wynkoop, a long-time volunteer on the building teams. Other members have had considerable experience in transportation and distribution management, media productions, building materials management, finance and operations, culinary arts, and the law. An advisory board includes seven members with skills in the areas of architecture, management consulting, natural resource management, education, oral history production, Indian affairs, and strategic relations with tribal nations. The voice of Native Americans is represented by Lucretia Bird in Ground, a member of the Crow Tribe; Charles Blackwell, a member of the Chickasaw Nation; and Corinne Skye Kills Pretty Enemy Yellow Dawn Woman, a member of the Standing Rock Lakota Nation. Financials Total revenue for 2012 was $415,733 (Red Feather Development Group, 2013), down significantly from the prior year’s revenue of $661,784 reported on the Form 990. The organization raises most of its funds from individual, corporate, and private foundation donations (57%) and a significant proportion from homeowner contributions, the equivalent of user fees (34%).

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Red Feather operates an intriguing revenue-raising approach that provides both income and volunteer labor by charging fees to individuals who wish to participate in home building activities. These fees generate another 8 percent of revenues. Finally, $12,000 was raised through the annual Boots ‘n’ Bales fundraising event, which included a silent auction, held at Rockin’ TJ, a ranch west of Bozeman. Construction costs and payroll dominate expenses of $280,075; following deduction for support services, Red Feather suffered an operating loss for the third year in a row. To underscore the deplorable living reality for Native Americans, a project called The Trail of Hope for Indian Housing trucked a two-­ bedroom, one-bathroom structure that formerly housed thirteen members of the Oglala Sioux people to the National Mall in Washington, DC, so that Congress could “understand how we live,” said Paul Iron Cloud, executive director of the Oglala Sioux Housing Authority, as reported in an article posted by the Huffington Post (Ludwig, 2013): According to Iron Cloud, the Pine Ridge Reservation needs about 4,000 homes to provide adequate shelter for its current population. Today they have about 1,100. And at current levels of support from the federal government, the community can realistically build about 10 homes per year.

Taking Wing With the departure of Robert Young in 2011, Red Feather has begun to undertake what executive director Molly McCabe describes as “soul searching” to consider how to expand reach; the fit between mission and current programs; the adequacy of current construction techniques; the sufficiency of community economic impact; the sustainability of the organization’s building technology; and the sustainability of the organization itself (Red Feather Development Group, 2013, p. 4). Reasserting a commitment to the “three pillars of true sustainability” – environmental, social/cultural, and economic – McCabe is hopeful the organization can soar even higher. Although Red Feather’s mission is unique, like many other local development enterprises, it operates in a space that can be construed in different ways. It is a nonprofit with a charitable status that relies on donors of various sorts to offer a service to Indian reservations that

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already receive some funding for housing from the federal ­government. Government funding doesn’t adequately meet the need, opening a space for Red Feather’s services, offered in partnership with the reservations it serves. VX CASE QUESTIONS 1. Red Feather is similar to a community development corporation (CDC). Are there CDCs in your neighborhood? If so, what do they have in common with Red Feather, and how are they different? 2. What do you think are the most pressing challenges currently facing Red Feather’s board of directors? Do you think the board, as currently composed, could be augmented by additional skills or abilities? If so, what would they be? 3. Red Feather’s approach to building new homes consists of bringing together prospective homeowners on the Native American reservations with volunteer builders from elsewhere around the country. What, then, do you think are some of the nonfinancial ways in which this organization contributes to the social economy? 4. If you were a Native American living on a reservation, what might be your attitude toward Red Feather?

4 Public Sector Nonprofits

In chapter 1, we defined a public sector nonprofit as a hybrid arrangement involving a social economy organization that overlaps with the public sector in that it provides a public good or service that is guided in part by government policy and relies to some extent upon government funding. In this chapter we discuss various manifestations of this interaction between the social economy and the public sector including community health centers, nonprofit housing organizations, and rape crisis centers. This chapter is principally concerned with 501(c)(3) charitable nonprofit organizations, typically referred to as charities. Since the Second World War, such nonprofit organizations have grown to serve public needs that have increasingly become the concern of the federal government. For example, caring for the poor was considered in early times the responsibility of local towns, and in New England, town leaders were officially designated as Overseers of the Poor. Responsibility for the poor gradually shifted from the local level to the state level, and then to the federal level. Today, the largest portion of the federal budget is designated to serve social welfare needs. However, rather than deliver services to the people directly, the government has contracted with third parties, notably nonprofit organizations, for such services. Salamon (1987, 1995) labels this relationship with government as a “partnership” because nonprofit organizations provide services to the public in general, or specific parts of the public that are financed substantially by government and operate within a policy framework created by government. For government, it is advantageous to have nonprofit agencies offer the services because they are located in the communities of the recipients and are more in

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touch with recipients’ needs; therefore, nonprofit agencies can deliver the services better than government administrators. Also, having nonprofits on the front lines may shelter the government from criticism, if any is forthcoming. While the concept of a partnership that Salamon presents does capture the interdependence of government and public sector nonprofits, partnerships can range from being relatively equal to being grossly imbalanced, with one partner dominating the other. Most often for public sector nonprofits, government is the dominant partner because, to borrow an oft-used saying, “He who pays the piper, calls the tune.” Put simply, without proper financing, nonprofit service organizations would either fold or be fundamentally transformed. This relationship with government plays out in different ways among public sector nonprofits; however, financial dependency and to some degree policy dependency are the norms. Government does not formulate its policies in isolation; it is influenced by nonprofit community groups that deliver services in fields to which government contributes substantial funding. To influence government, nonprofit service delivery organizations form associations or networks to lobby on their behalf. This influence might be viewed as a feedback loop, with government agencies not obliged to accept the feedback, but they would be considered undemocratic if they ignored it completely. Arguably, the influence of nonprofit community groups is less than ideal, but government’s reliance on them to deliver services suggests that interdependent, not simply dependent, is the best descriptor of the relationship. Between government and public sector nonprofits delivering a service to the community are intermediary organizations that serve as a bridge. As will be seen, these intermediary organizations usually come about when government sets up a program and designates an agency or a set of agencies operating within a government department to create criteria for funding and mechanisms by which nonprofits in the field can access the funding. Sometimes these intermediary organizations are congressionally legislated nonprofits. Therefore, the links between a government program and the recipients of the service in a local community can be complex and involve many agencies interacting with each other. Also, this relationship can be dynamic and change over time, partly in response to a changing political climate. This set of links will be illustrated in detail in the cases that are discussed below in this chapter.

Public Sector Nonprofits  99 Figure 4.1  The Social Economy: Public Sector Nonprofits

PUBLIC SECTOR

Local Development Enterprises Public Sector Nonprofits

Social Economy Businesses

PRIVATE SECTOR

Civil Society Organizations

SOCIAL ECONOMY

There is much concern about this relationship between government and nonprofit groups delivering a service to a community. This concern takes different forms, but a primary one is that government has too much influence and is meddling in the management of nonprofits, and this relationship is causing nonprofit organizations to drift from their primary mission (Smith & Lipsky, 1993). Figure 4.1 situates public sector nonprofits within the overall framework of the social economy. Historical Context for Public Sector Nonprofits Predecessor organizations to public sector nonprofits in the United States have a lengthy history that goes back to the early settlements prior to the American Revolution. However, such organizations until the Great Depression and the resulting response of the New Deal were predominantly mutual or voluntary associations designed to serve a membership (Putnam, 2000; Skocpol, 2002). The growth of public sector nonprofits is tied to what is often labeled as “big government” and the development of government social programs (Hall, P.D., 2005).

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In response to horrific social conditions and massive unemployment resulting from the Great Depression, president Franklin Delano Roosevelt (1933–45) initiated a series of social programs that were intended to support the millions of Americans without gainful employment and to stimulate a stagnant economy. These included the Civilian Conservation Corps, Civil Works Administration, Works Progress Administration, and Public Works Administration, which provided temporary jobs for unemployed Americans; the Federal Housing Administration and Home Owner’s Loan Corporation, which was designed to assist Americans in preserving their homes; the Federal Security Agency, which was initially responsible for social security, federal education funding, and food and drug safety; and the Tennessee Valley Authority, which was created to stimulate development of rural electrification. This pattern was encouraged further by the Second World War, which witnessed major public expenditures for the war effort and then, following the war, the G.I. Bill, which was designed to help returning veterans reintegrate into society and enroll in college. The expansion of government programs continued, in particular through the presidencies of John F. Kennedy (1961–3), whose New Frontier promised the increase of federal funding for education, medical care for the elderly, and rural development (Dallek, 2003), and President Johnson (1963–9), who introduced the Great Society program and subsequently the War on Poverty, both of which involved not only additional government assistance but also impressive legislation on civil rights, Medicare, Medicaid, environmental protection, aid to education, and public broadcasting (Caro, 1982). Universal programs such as social security, Medicare, and Medicaid became fixtures of American society, and government social agencies such as the National Institutes for Health, National Science Foundation, National Endowment for the Arts, and National Endowment for the Humanities became major funders. In response to these programs, there was a meteoric growth in nonprofit organizations that were tied to government programs (Salamon, 1987; Salamon & Abramson, 1982). In 1940, there were only 12,500 nonprofit organizations in the United States that were registered with the Internal Revenue Service as charitable (Hall, P.D., 2010). By 2011, there were 959,698 public charities; similarly, foundations took off from only 203 in 1929 (Hall, P.D., 2010) to 100,337 in 2011 (National Center for Charitable Statistics, 2012), an astounding growth.

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Big government was challenged by a strong conservative movement in the 1980s, led politically by President Reagan (1981–9). The intent was to reduce the size of government and to change the pattern of government funding to short-term contracts. These arrangements forced nonprofit organizations to become more like businesses and to diversify their funding by relying to a greater extent upon service fees and other revenues earned from the market, or what is often labeled as social enterprise. Nevertheless, government expenditures on social programs in the United States remain substantial, and as a result of government legislation public sector nonprofits continue to work with government agencies to deliver social programs. According to the Center on Budget and Policy Priorities (2014), the federal government spent $3.5 trillion in 2013, amounting to 21 percent of the nation’s gross domestic product (GDP). Of that amount, major social program expenditures consisted of social security (24%); Medicare, Medicaid, and Children’s Health Insurance Program (CHIP) (22%); and safety net programs (12%); as well as other programs such as veterans and retirees benefits (8%); science (2%); education (1%), and international aid (1%). To put government expenditure on social programs in perspective, charitable donations of all sorts – from individuals and c­ orporations – equaled about 2 percent of GDP (Giving USA Foundation, 2014). In other words, government expenditures on social programs dwarf what nonprofits receive through donations, even if volunteer hours are monetized. Not all government expenditures end up with nonprofits, but enough do that they represent an important revenue flow, particularly for the subgroup of nonprofits that we classify as public sector nonprofits. In the remainder of this chapter, we illustrate this relationship by discussing differing forms of public sector nonprofit organizations: community health centers, nonprofit housing, and rape crisis centers. In addition to being engaged in different services, these organizations also differ in their relationship to government. Community Health Centers Healthcare is an essential need, and excepting for seniors and others with chronic conditions, associated costs tend to be episodic but expensive when they arise, and in times of crisis, they outstrip the financial resources of all but the wealthy. Therefore, insurance is needed for protection against financial catastrophe. The insurance can come

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about in different ways: from a for-profit firm, a mutual or nonprofit arrangement, or a public plan sponsored by a government agency. From when it was first considered, government-financed healthcare has been controversial and politically contentious in the United States. When the Roosevelt administration initiated a social security program during the Great Depression, it considered a national health insurance program, as had been introduced in other countries, but abandoned it due to fierce opposition from the American Medical Association (Schlesinger, 1966). Near the end of his career, Roosevelt expressed an interest in reviving the idea of a national healthcare plan, but he died before being able to do so. President Truman, Roosevelt’s successor, took up the idea, suggesting that it could be voluntary, in order to placate opponents, but he too dropped it under pressure from the American Medical Association, the American Hospital Association, and business interests such as the Chamber of Commerce (Corning, 1969). However, federal policies did stimulate employer-sponsored healthcare plans during the Second World War by declaring that such benefits did not count as wages and therefore could be implemented in spite of the wage control regimen of that period (Corning, 1969). It was not until 1965, under President Johnson, that a national form of health insurance was introduced: Medicare for senior citizens and Medicaid for persons on social assistance and disability insurance. These groups were relatively high risk and less attractive to private insurers. There were additional efforts, without success, at creating a national healthcare insurance plan: by senator Ted Kennedy in the 1970s and by President Clinton in 1993. Rather than a universal approach, as in so many other wealthy nations, public insurance of healthcare in the United States has been piecemeal – that is, an effort to fill gaps in the social safety net. As a result, government health insurance has continued to expand alongside private insurance programs. The growth of public insurance has included expanding Medicare and Medicaid to cover additional illnesses; introducing the Child Healthcare Insurance Program (CHIP) in 1997; expanding veterans’ healthcare benefits through the TRICARE program introduced in 1993; insuring federal employees; funding clinics and hospitals through the Indian Health Service; and covering the bills for uncompensated care for persons without insurance – this is generally covered through Medicaid and Medicare, but some states have special coverage. This tradition of filling the gaps was continued by President Obama through the Patient Protection and Affordable Care Act, signed into law in 2010, which is intended to ensure that nearly all Americans eventually have ­healthcare coverage.

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This patchwork of programs is very expensive: in 2010, the United States spent 17.6 percent of its GDP (more than $1 of every $6) on healthcare, a greater percentage than any other country, the next highest being the Netherlands at 12 percent and the OECD (Organization for Economic Co-operation and Development) average being 9.5% (OECD, 2012a). Even though the United States has opted not to have a comprehensive public insurance program for healthcare (Vermont being the exception), the government picks up nearly half of the total healthcare bill and spends more per capita on healthcare than all countries in the world other than the Netherlands and Luxembourg (OECD, 2012a). In addition to its direct outlays on healthcare, an additional cost that is picked up by the American government is the lost tax revenue on employer-sponsored health benefits. In the United States, unlike other OECD countries, these benefits are not considered taxable income. The US healthcare system can best be described as market driven with health providers (doctors, hospitals, both nonprofit and for-profit) either billing independently or contracting with intermediaries such as health maintenance organizations (HMOs). Of nongovernment hospitals, 58 percent are nonprofit as are 69 percent of hospital beds (AHA, 2012; Alliance for Advancing Nonprofit Healthcare, 2012). Payments for services come from a combination of private insurance plans, users of the service, and government programs, as described above, particularly for seniors and people on social assistance. A small number of insurance programs are organized as cooperatives – for example, HealthPartners in Minnesota, a nonprofit member-based association, and Group Health Cooperative in Seattle (Davis, 2009). However, these are the exceptions. This market-based approach is challenged by circumstances in which people are uninsured. In response, government has stepped in and created a network of community health centers. Community health centers are a prime example of public sector nonprofits, as they are independently incorporated entities that work closely with government agencies for accreditation and for funding. There are about twelve hundred community health centers across the United States with about eighty-five hundred sites that serve about 20 million Americans, some examples being Yakima Neighborhood Health Services in the state of Washington and Community Health & Social Service Center in Detroit. These centers are affiliated with the National Association of Community Health Centers (NACHC), organized in 1971, and that organization advocates to government on behalf of community health centers across the nation (NACHC, 2012).

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A CLOSER LOOK: COMMUNITY HEALTH & SOCIAL SERVICE CENTER IN DETROIT This community health center in southwest Detroit was organized in 1970 in response to economic deterioration resulting in the closure of hospitals in the area and the flight of physicians to the suburbs (CHASS, 2013). Initially, Hispanic leaders negotiated a “joint venture” with local and state public health officials to offer medical services to the uninsured and underinsured population of Detroit. In 1993, Community Health & Social Service Center (CHASS) became a federally qualified health center (FQHC) under the Health Resource Services Administration’s Bureau of Primary Health Care. CHASS’s website defines its mission as “to develop, promote and provide comprehensive, accessible and affordable quality primary health care and support services to all residents – with emphasis on the underserved African American and Latino populations” (CHASS, 2013). CHASS offers all of its services in English and Spanish and even arranges transportation to the health center for those who require it. CHASS now has two centers, the original one in southwest Detroit and another in Midtown. Its services include primary health and dental care and a variety of community education classes and nutrition counseling. CHASS partners with Henry Ford Health System for specialized services. CHASS’s ten-person board of directors consists of users of the services and other community members and stakeholders who can monitor the center’s progress and assist the center to develop. In the context of the US healthcare system, CHASS and other community health centers fill an important niche.

Community health centers are structured differently than most other healthcare facilities because their physicians and other healthcare providers are on staff rather than billing users for services, and the users can participate in the board of directors either through electing representatives or becoming a representative. In other words, community health centers have the structure of a nonprofit mutual association. Community health centers operate in areas designated as “medically underserved.” This designation comes from the Health Resources

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and Services Administration (HRSA), a federal agency that is part of the US Department of Health and Human Services. According to the HRSA, medically underserved means “too few primary care providers, high infant mortality, high poverty and/or high elderly population” (HRSA, 2012). A shortage of health professionals speaks to there being not only too few medical doctors but also dental and mental health professionals. A medically underserved populace consists primarily of underserved people and also either uninsured or underinsured people, generally migrant workers and noncitizens. Underserved areas are relatively unattractive to profit-oriented medical care but may be served by a nonprofit community-based system in cooperation with agencies of the public sector. This is the context that community health centers operate within. The funding for community health centers comes from various government insurance programs such as Medicare and Medicaid; they also fit the designation of the Health Center Consolidation Act of 1996, which is part of the Public Health Service Act of 1944. In addition to community health centers that focus upon medically underserved areas and populations, federally qualified assistance includes migrant health centers, programs for homeless persons, and primary care for public housing residents (NACHC, 2012). There are several parts of the Affordable Care Act (so-called Obamacare) that should enhance community health centers: the creation of a Community Health Centers Trust Fund of $11 billion (over five years) including $9.5 billion for the expansion of community health centers to serve nearly 20 million new patients; $1.5 billion for expansion and renovation of existing facilities; $1.5 billion for a National Health Service Corps Trust Fund for placing an estimated sixteen thousand primary care providers in healthcare-professional shortage areas; and the expansion of Medicaid funding to ensure that community health centers are paid in full for their service. In other words, even though the Affordable Care Act aspires to insure the entire American populace, it has sought to expand, rather than diminish, the role of community health centers. Nonprofit Housing Organizations The United States has had a good standard of housing with about twothirds of Americans owning a home, but housing affordability can be

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a problem for people with low and moderate incomes. Poverty affects people in many ways, affordable housing being one. The problem of housing affordability goes beyond poverty, however, as in some urban centers housing prices are high relative to residents’ ability to pay, even if their income is good. Housing prices have risen faster than the average income, in spite of the sharp deflation in prices during the recession of 2008 to 2009. A study by the Joint Center for Housing Studies of Harvard University (2012) estimates that in 2010, a total of 20.2 million American households paid more than half of their income for housing costs. This was an increase of 2.3 million in three years and 6.3 million since 2001. Renters or tenants, often persons with lower incomes than homeowners, made up most of the group, but there were also sharp increases among owners who were locked into expensive mortgages. Families in this circumstance have to cut their expenditures on other necessities such as food, clothes, and healthcare. If 30 percent of income is used as a standard of affordability – a standard that many housing agencies utilize – nearly half of Americans are spending that much, about double what it was in 1960 (Lubin, 2011). Homelessness is the most extreme manifestation of poverty and housing affordability. The US Department of Housing and Urban Development (HUD) collects data on this problem and reports annually to Congress. HUD’s (2010) Annual Homeless Assessment Report (AHAR), the sixth in the series, found that more than 1.59 million people spent at least one night in an emergency shelter or transitional housing during the year, a 2.2 percent increase from 2009. HUD also reported that 649,917 people experienced homelessness on a single night in January 2010, a 1.1 increase from the previous year, and that group included 79,446 households comprising 241,951 persons. There has been some improvement, however, in reducing the number of chronically homeless – persons with severe disabilities and long homeless histories – a 1 percent reduction from 2009 and an 11 percent reduction since 2007, to 109,812 in 2010, a reflection of greater public investment in “supportive housing.” These data are a context for understanding the development of nonprofit housing and its various forms. In response to the affordability gap, federal and state governments have created an infrastructure of agencies and financial programs to address the problem. As in the case of healthcare financing, addressing the housing affordability gap has involved a mixture of approaches – private sector, nonprofits, and

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government. The private housing market functions well for households with high incomes or for people with substantial equity from existing housing ownership, inheritance, or other forms of good fortune. It is less effective for persons with middle to low incomes, especially in expensive urban centers, unless government intervenes with incentives for housing developers. Given these economic factors, most developers are not meeting the need for a new stock of rental accommodations for households of modest means and instead have diverted their resources to housing at the higher end of market, where greater profits can be earned. To fill the gap, government has intervened with various agencies and funding programs, and nonprofit development agencies have emerged (e.g., the Non-Profit Housing Association of Northern California). Some development has proceeded without government support – Habitat for Humanity, which relies heavily upon volunteers, church donations, and ReStore revenues (home improvement sales), is the best-known example. (It is designated as a civil society organization; see chapter 5.) However, in general government has been an important player in partnership with nonprofit organizations. Government Involvement It is beyond the scope of this section to detail the elaborate network of organizations that has been created in the public sector to assist with affordable housing. Suffice it to say that it is extensive and at all levels of government – federal, state, and municipal – and it has a long history. The government presence in the American housing market goes back until at least the Great Depression and President Roosevelt’s New Deal. The initial steps were the National Housing Act of 1934, which led to the Federal Housing Administration and the Housing Act of 1937, which created the United States Housing Authority to authorize payments to local housing agencies designed to assist low-income families (Hunt, 2005; Vale, 2000). Following the Second World War, President Truman built upon the tradition of his predecessor with the Housing Act of 1949, which led to public housing projects mainly in large urban centers. In 1965, the agencies administering public housing were reorganized into the United States Department of Housing and Urban Development (HUD); that organization remains the lead federal housing agency to this day. In parallel with the federal government’s

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infrastructure, similar agencies have been developed at the state and local level (e.g., the Chicago Housing Authority, the New York City Housing Authority). The initial response to the challenge of housing affordability was large-scale public housing, administered directly by a government agency. The critique of these developments, led by urban reformer Jane Jacobs (see, for example, Jacobs, 1992), generated a variety of programs, often referred to as social housing, which involved greater integration within the broader community. Some of the government supports were rent subsidies in the private market, but there were many innovations involving nonprofit developers. The first nonprofit developers were community development corporations (see chapter 3 on local development enterprises), but gradually a nationwide network of more specialized developers emerged that by 2007 were responsible for about 1.5 million units of nonprofit housing (Bratt, 2007). Tenants in nonprofit housing have greater security of tenure than in private rentals and tend to have greater protection against rent increases because owners’ profits are not a consideration (Bratt, 2007). Nonprofit housing comes in many forms: a stand-alone development; a scattered development where houses are located within a broader community; supportive housing for people with disabilities or who are homeless; housing for Indian reserves; and housing for lowincome seniors. Usually, the developments are under the management of a sponsoring group – a religious congregation, ethno-cultural association, union, local government agency, nonprofit development agency – whose representatives form the board of directors and are responsible for the project. Some cooperative housing (nonshare cooperatives) can be nonprofits – for example, the network of student housing cooperatives associated with the North American Students for Cooperation (NASCO) (Deller et al., 2009). Their distinctive feature is that like cooperatives in general, they operate according to the principle of one member (or tenant), one vote. The more specialized nonprofit housing developers could be viewed as intermediaries between government funding programs and communities in relatively low-income areas. These developers formed networks – for example, the Housing Partnership Network, a nationwide network of ninety-seven organizations, and the Stewards of Affordable Housing for the Future. Financing for nonprofit housing is more complex than for market-based housing and often requires multiple sources including government programs. To help with arrangements, a network

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of national intermediary organizations have evolved such as the Local Initiatives Support Coalition (LISC), Enterprise Community Partners, NeighborWorks America, and the Housing Assistance Council (HAC) that focuses on rural communities. A CLOSER LOOK: NEIGHBORWORKS AMERICA NeighborWorks America, the business name for the Neighborhood Reinvestment Corporation, was legislated by Congress in 1978 as a nonprofit that mediates between government and local communities in an effort to develop affordable housing. In our terms, it is a public sector nonprofit, with one foot in the social economy and another in the public sector. It differs from community-initiated nonprofits both in its origin and its board structure. NeighborWorks could be described as a closely held nonprofit in that its board members are from various government financial regulatory agencies (e.g., a member of the Board of Governors of the Federal Reserve System; a member of the Federal Deposit Insurance Corporation; and a member of the board of the National Credit Union Administration); also, one member is the deputy secretary of the Department of Housing and Urban Development. NeighborWorks has many functions including helping financially stressed homeowners fight against foreclosures. This organization, as its name implies, works with the network of nonprofit housing developers in low-income communities. Its 2010 annual report highlights this point: “Many of our community-focused programs and services are delivered through 237 independent, community-based nonprofit organizations that make up the national NeighborWorks network. These chartered member organizations serve more than 4,500 suburban, urban and rural communities nationwide. NeighborWorks members own or manage 80,000 affordable rental units and in 2010 assisted 270,000 families with their housing needs. NeighborWorks America is the leading trainer and certifier in the nonprofit community development field. NeighborWorks America provides training and education annually for upwards of 13,000 community development and housing professionals, representing over 3,600 community development organizations and municipalities nationwide” (NeighborWorks, 2012).

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In other words, it is an important support to the network on nonprofit housing developers; among its duties is funneling federal government funds for that purpose. The NeighborWorks 2010 annual report states that it and its network “generated $3.03 billion in public and private investments, and assisted 270,000 low- and moderate-income families with their housing needs” (NeighborWorks, 2012). NeighborWorks is the government’s arm in working with homeowners facing foreclosure, as mentioned above. Through its National Foreclosure Mitigation Counseling Program, it has served more than 1 million families facing foreclosure. The organization also trains and certifies foreclosure counselors.

As federal and state governments come under political pressure from conservative groups to reduce their budgets, nonprofit housing for lowincome communities is an easy target. Unlike those in wealthy groups, people in need of housing are not a strong political lobby. Some of the advocacy is done through the National NeighborWorks Association, a civil society organization uniting housing and community development practitioners in support of affordable housing. Nevertheless, there have been cutbacks that have limited the work of intermediary organizations that either are closely tied to government or rely heavily upon government programs to finance their development. For example, the 2011 annual report of Eden Housing, a California nonprofit developer, is forthright about the impact of government cutbacks in California upon its work (Eden Housing, 2012): 2011 was an especially difficult year for affordable housing. With the elimination of California’s Redevelopment Agencies, which provided $1 billion for affordable housing, and $3.8 billion in cuts to federal programs for our work, there will be far fewer new units of affordable housing in a State that desperately needs them. 100% of our work is supported by local, state and federal funding. 100% of the residents in our housing have access to affordable housing because of these programs. How will these cuts help the 7,000 families who are currently on our waiting lists?

However, as long as there is social need, it is unlikely that this form of housing will disappear. Eventually, even conservatives who promote

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cuts in government expenditures and programs may recognize that the private market has its limitations when addressing the needs of ­persons with low incomes and that having people living on the streets is of benefit to no one. Rape Crisis Centers An important form of organization that has evolved from the feminist movement of the 1960s and 1970s is centers to assist victims of sexual assault. These centers are often called rape crisis centers, but they go by other names such as sexual assault centers, women’s shelters, sexual abuse centers, and abused women’s services. The names differ, but the common denominator is that they are a response to sexual assaults, usually by men on women. Knowing the prevalence of sexual assault is challenging because often it goes unreported out of shame by the victims or fear of reprisals, especially if the perpetrator is a family member. Data from Violence Against Women Survey (NVAWS), with a sample of sixteen thousand adults evenly divided between females and males, led to estimates that 17.7 million women and 2.8 million men were either forcibly raped or the object of an attempted rape at some point in their lives (Tjaden & Thoennes, 2006). Knowing the perpetrator adds to the complexity of reporting to the police because there can be interdependencies, emotional and financial, that make it difficult to end violent relationships. Moreover, there is evidence that attempting to end such a relationship can precipitate additional violence (Tjaden & Thoennes, 2006). Other studies of sexual trauma experienced by veterans during military service indicate prevalence rates among women ranging from 15 to 22 percent and about 1 percent among males (Kimerling, Gima, Smith, Street, & Frayne, 2007; Kimerling et al., 2010). In other words, sexual assault is a serious problem, in particular for women in military service. These data underline the need for services for the victims of sexual violence. The need is longstanding, but the network of service centers that evolved is primarily the result of grassroots organizing by feminist groups starting in the 1960s and 1970s and the eventual response by government, both in the form of legislation and funding programs (Bevacqua, 2000; Martin, 2005). One of the pioneers in this service area was the DC Rape Crisis Center, founded in 1972.

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A CLOSER LOOK: DC RAPE CRISIS CENTER The DC Rape Crisis Center was a pioneer in what today is a nationwide network of more than eleven hundred organizations with subnetworks in each state. The DC Rape Crisis Center was not only one of the first but also an educator and organizer for other groups wanting to start such centers. One of its important contributions was the booklet How to Start a Rape Crisis Center (DCRCC, 1972). The document was very practical; among other things, it included the concept of a hotline, which has since become the norm, and a script for people working the hotline. The DC Rape Crisis Center defines its goal simply as being “dedicated to creating a world free of sexual violence” (DCRCC, 2012a). Its 2011 annual report indicates that its hotline handled 2,923 calls; that the center’s staff accompanied 223 survivors to the hospital for medical examinations; that 229 survivors received intensive counseling; and that 94 survivors participated in support groups and classes. The center’s staff members are educators and actively engaged in workshops in schools and community centers through their Good Touch, Bad Touch presentations and in conducting discussion groups in high schools on good relationships. The center actively engages the community in organizing events during April, Sexual Assault Awareness Month, and in mobilizing volunteers and donors to assist with its ongoing work (DCRCC, 2012b). The center’s services are without charge to the recipients. Therefore, it has had to scramble to make ends meet. Of its modest $1.3 million budget for 2011, 66 percent is from government grants, not unusual for organizations serving clients without charge. This figure does not include the center’s volunteer contributions of more than thirteen thousand hours monetized at over $495,000 (DCRCC, 2012b). Like NeighborWorks, the DC Rape Crisis Center is a public sector nonprofit that is heavily reliant upon government. However, the center has an independent board that operates at arm’s length from government.

The DC Rape Crisis Center is part of a nationwide network, Rape, Abuse and Incest National Network (RAINN), also headquartered in Washington; with more than eleven hundred organizations, RAINN

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extends into every state (RAINN, 2012a). This impressive network, started in 1994, operates the National Sexual Assault Hotline1 and the DoD Safe Helpline for the Department of Defense. The hotline has helped more than 1.5 million people since it began in 1994. The RAINN network affiliates also take an important role in education and policy development in their region. Like the DC Rape Crisis Center, RAINN relies upon government grants to sustain its services; government provides just under half of its revenues (RAINN, 2012b). Not every organization that serves people whose financial means are limited relies upon government programs. Rosie’s, for example, serving as a shelter for homeless women in Boston since 1974, makes it a point of policy not to accept funding from any level of government (Rosie’s Place, 2012). (In our framework, it would be classified as a civil society organization.) However, for organizations serving economically deprived clients, this type of policy is unusual and very demanding on staff time to raise funds. An important stimulus to the development of RAINN’s network was the Violence Against Women Act, federal legislation sponsored by Senator Biden of Delaware and signed in 1994 by President Clinton; it has been reauthorized ever since. The act came as a result of the political pressure from the coalition of feminist organization associated with the National Organization for Women and National Council of Women’s Organizations and the political groundwork that they undertook in the decades leading to the legislation, as well as from legislation and policies in some states and communities. The volume of this activity and its importance should not be underestimated. The activity included grassroots initiatives in communities and organizations – for example, the University of Connecticut Violence Against Women Prevention Program, formed in 1980 by three undergraduate students following a rape on campus, and subsequently a men’s project in which male students can earn a credit by working with male groups to raise consciousness about male violence against women (University of Connecticut, 2012). As part of the Violence Against Women Act, the Office on Violence Against Women (OVW) was created. This is an agency within the Department of Justice that serves as a mechanism for funneling financial and technical assistance to organizations such as RAINN and the

1 800.656.HOPE; https://www.rainn.org/get-help/national-sexual-assault-hotline and https://ohl.rainn.org/online/.

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DC Rape Crisis Center. The OVW’s mission “is to provide federal leadership in developing the nation’s capacity to reduce violence against women and administer justice for and strengthen services to victims of domestic violence, dating violence, sexual assault, and stalking” (Office on Violence Against Women, 2012). The OVW’s role is analogous to NeighborWorks, as it is the intermediary between the federal government and local community organizations. However, rather than being a federally legislated nonprofit, it is an agency within government. Since its inception, OVW programs have funneled $4.7 billion to community organizations (Office on Violence Against Women, 2012), funds that frontline service centers need to deliver services to their clients. The organizations to which OVW funnels grants are nonprofits providing a public service, or in our terms, public sector nonprofits. Discussion This chapter has discussed different cases of public sector nonprofits: community health centers, nonprofit housing, and rape crisis centers. All of these cases differ, but there are some commonalities in the pattern. First, an important impetus to their development is federal government legislation. (State or local government initiatives are also a stimulus.) Second, as a result of this legislation, the federal government creates agencies or organizations that are part of a government department. These agencies often work in partnership with state agencies that participate in the program. Most of the agencies created through the legislation are within government, but some are public sector nonprofits. The distinction between a government agency delivering a service to the community and a congressionally legislated nonprofit doing the same is not always clear. In addition to delivering a service to a clientele, these public sector nonprofit organizations are a hub for civil society organizations, some of which advocate to government to strengthen programs or modify legislation. These civil society organizations can represent the agencies that deliver the service (National Association of Community Health Centers). Such civil society organizations are dynamic and operate with determination. They have an interest for which they are willing to fight. Let us review the sequence from government to service delivery using rape crisis centers as an example, in part because the sequence is simpler than in some other cases. Prior to 1994, feminist civil society organizations led by the National Organization for Women and the

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National Council of Women’s Organizations organized an intense lobbying effort to respond to the problem of rape. As a result of this effort, a network of rape crisis and sexual assault centers emerged, but funding arrangements were haphazard. The Violence Against Women Act, signed by President Clinton in 1994, was a major stimulus to the development of rape crisis centers. This act created an intermediary organization, the Office on Violence Against Women, within the Department of Justice. Its functions include funneling funds to rape crisis centers, such as the DC Rape Crisis Center; working in local communities; engaging state governments in its programs such Services Training Officers Prosecutors (STOP) Violence Against Women; and interacting with the nationwide civil society network, the Rape, Abuse, and Incest National Network (RAINN), which lobbies for its members’ interests. This sequence of agitation by civil society organizations, followed by legislation to provide funding, followed by rationalizing the funding processes, followed by lobbying activities to sustain support for interest groups, with some variation, is similar for all of the service areas discussed in this chapter. Conclusion Public sector nonprofits rely to a substantial degree upon government funding and are influenced in varying degrees by government policy. Some public sector nonprofits come about from grassroots initiatives (e.g., rape crisis centers); others are legislated directly by government (NeighborWorks America). However, their relationship to government can change over time, and organizations legislated by government can become less dependent. Conversely, organizations rooted in the community, because their clientele lacks financial means, may become more dependent on government. Many public sector nonprofits are drawn into government’s orbit because they serve clientele with low incomes who cannot sustain the cost of a basic service (housing). The costs may even be beyond the means of people with high incomes such as for some healthcare treatments. In response, these organizations attempt to generate more government support either directly or through intermediary organizations. Public sector nonprofits serve another function in that they can act as hubs for networks of nonprofit mutual associations that we characterize as civil society organizations. We turn to this group in the next chapter.

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VX DISCUSSION QUESTIONS 1. Public sector nonprofits, such as those discussed in this chapter, are part of the social economy. Can you find examples of public sector nonprofits operating in your community? Does situating such organizations in the social economy add to your understanding of how they operate, and if so, how? 2. What criteria are most important in defining a public sector nonprofit? From a policy perspective, could you argue that such organizations would be more efficient as government agencies rather than nonprofit organizations? Explain your analysis, using examples, if possible. 3. Viewed historically, government financing has increased in importance for delivering many types of services. Give examples for which you think that this is appropriate and others for which it is not? Explain your reasoning. 4. Would you label nonprofit hospitals and community health centers as public sector nonprofits? Why? 5. Nonprofit housing relies heavily upon government. How is this nevertheless different from a government service? 6. The delivery of the services discussed in this chapter involves a complex set of organizations: a government department; a government agency (or more than one) that works specifically on the program; nonprofit intermediaries that work with the government agency; and nonprofits in the field that deliver the program. Discuss this chain for the differing services presented in this chapter. Is this an efficient approach to service delivery? Can this chain be simplified? 7. Are there other services than those discussed in this chapter that should be included as public sector nonprofits?

VX CASE FOR ANALYSIS: THE CORPORATION FOR PUBLIC BROADCASTING

Public sector nonprofits typically provide public goods in a way that is funded in large part by government in order to fulfill certain obligations to social well-being but are usually governed through boards of directors independent of government. The Corporation for Public Broadcasting (CPB) is one example of a public sector nonprofit. It was set up in 1967 through the Public Broadcasting Act and was intended

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to fund local stations to ensure commercial-free public media in local communities. The Corporation for Public Broadcasting can be viewed as an intermediary between the government, which transfers a block of funds, and some fourteen hundred public broadcasters at the local level that are the ultimate recipients of the funds. Public broadcasting is highly diverse in the nation, consisting of well over thirty public broadcasting organizations such as American Public Media, Latino Public Broadcasting, the National Association of Broadcasters, the Native American Public Telecommunications Association, and Public Radio International; many of these consist of independently operated stations.2 Perhaps the best-known public media organizations are National Public Radio (NPR), founded in 1970 by some ninety individual stations, and Public Broadcasting Service (PBS), founded in late 1970 as a successor to National Educational Television. Federal government funds channeled through the CPB represent only about 16 percent of the overall funding of PBS and NPR (a greater percentage for public television and less for public radio), but they nevertheless are of importance. For 2014, $445,000,000 was to be transferred from Congress to public broadcasting in the United States (CPB, 2013). However, sequestration subsequently cut nearly $24 million from this amount. Of the remainder, about 67 percent was transferred for public television and about 22 percent allocated to public radio. In addition to transferring funds to public media, the CPB attempts to represent the interests of public broadcasting to government and endeavors to ensure that public broadcasters make the best use of the funds transferred from government. A Brief History Before there was radio and television broadcasting, there were the pony express and the telegraph. The Associated Press, a news reporting cooperative, emerged from the initiative of Moses Yale Beach, publisher of The New York Sun, who in 1846 set up a pony express to speed news of the Mexican War to readership on the East Coast. By 1900, his assembly of press associations incorporated as a not-for-profit c­ ooperative in New York. The telegraph further speeded the news, then radio. According to the National Public Radio website, in the 1940s the Federal Communications

2 See http://www.cpb.org/stations/pborganizations.html.

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Commission designated the lower part of the FM band, a newly defined spectrum to supplement the familiar AM band, to noncommercial, educational stations. This part of the FM band is where many NPR stations can be found today. Television entered the picture in the 1950s, and in 1967 President Johnson signed the Public Broadcasting Act, which created the Corporation for Public Broadcasting. The CPB was designated by Congress to promote the “growth and development of non-­ commercial radio” and develop “programming that will be responsive to the interests of the people” (as cited in NPR, n.d., p. 4). But the CPB didn’t just happen. According to an account by PBS, John Gardner, president of the Carnegie Corporation, and Alan Pifer, the vice president, established the Carnegie Commission on Educational Television following passage of the Education Television Facilities Act of 1962 in order to determine how to improve public television, resulting in a proposal to set up a Corporation for Public Television that would expand federal funding for the purpose.3 Then, when John Gardner became secretary of Health, Education, and Welfare (HEW) in the Johnson administration, Congress passed the Public Broadcasting Act, inspired by the Carnegie Commission and funded by Congress through the Department of Health, Education, and Welfare. Within the framework presented in this textbook, both PBS and NPR could be characterized as civil society organizations that serve a broad public and derive the majority of their funding from a combination of memberships, donations, and foundation grants (NPR, 2012), as well as from the CPB, a public sector nonprofit. Governance The Corporation for Public Broadcasting is an example of what Salamon (1987, 1995) conceptualizes as a “partnership” between a nonprofit organization and government. Within this partnership arrangement, there are differing degrees of independence. The Corporation for Public Broadcasting, although incorporated independently, is tightly aligned with government, relying in total upon its funding and ­legislative ­guidance and having political appointees on its board of directors.

3 See http://www.pbs.org/johngardner/chapters/4d.html.

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According to legislation, a nine-member board representative of the country is appointed by the president and approved by the Senate for six-year terms, with no more than five members who are members of the president’s political party. The board is required to provide Congress with an annual report and to seek an annual appropriation from Congress, though the appropriation is made two years in advance in order to create some buffer from political influence, to help leverage other funds, and to give projects in progress sufficient time to be completed (Subpart D – Corporation for Public Broadcasting Sec. 396 [47 U.S.C. 396] Corporation for Public Broadcasting). Thus, the 2013 budget was actually appropriated in 2011.4 The chair of the board in 2014 is Patricia Cahill of Kansas, appointed by President Obama; she has worked in public radio for over forty years. The vice chair is Elizabeth Sembler, an educator from Florida appointed by president George W. Bush. A third member of the board is David Pryor, a former state legislator, congressman, governor, and state senator from Arkansas, also appointed by president G.W. Bush. At the time of this writing, President Obama had nominated three candidates to replace those whose terms expired in December 2012, and these nominations were pending Senate approval. The president and CEO of the CPB, currently Patricia de Stacy Harrison, is supported by twenty-one executive vice presidents, senior vice presidents, and vice presidents, as well as over one hundred staff members. Controversies The composition of the board including presidentially appointed Democrats and Republicans, combined with the need for an annual appropriation from Congress, can create tensions both within the board and among the board, the administration, and Congress. These tensions are hardly independent of strongly held partisan preferences and feelings of political propriety. When it comes to educating and informing (or influencing) the public in a democracy, the stakes are high. As stated by Bill Kovach and Tom Rosenstiel in Blur (2010, p. 197):

4 See http://www.cpb.org/appropriation/purpose.html.

120  Understanding the Social Economy of the United States Democracy stakes everything on a continuing dialogue of informed citizens. And that dialogue rises or falls on whether the discussion is based on propaganda and deceit or on facts and verification pursued with a mind willing to learn.

How does our democracy manage public media, and is there room for improvement? NPR’s website claims, “On-air and online, NPR presents fact-based, independent journalism that examines and airs diverse perspectives. Our journalists strive for mastery of the narrative form, telling stories in ways that transport the audience to the places where news is happening and introducing the people affected” (NPR, n.d., p. 1). According to the PBS website, “Public television is America’s largest classroom, the nation’s largest stage for the arts and a trusted window on the world” (PBS, 2013, p. 1). Thus, public media in the United States not only feed a mind willing to learn, such as through NPR news, but also help shape learning minds, such as through PBS programming for preschoolers in shows like Sesame Street. As vital as public media might seem, the CPB has not been immune to controversy, beginning at the outset with funding (International Directory of Company Histories, 1996 as cited on FundingUniverse. com). Congress originally intended the CPB to be funded by levying a tax on television sets, but opposition from manufacturers led Congress to appropriate its own funds on an annual basis. Annual funding, though two years in advance from Congress, places the CPB in budgetary battles fraught with competing political interests. Political controversy began in the Nixon administration, which complained about a perceived anti-administration bias in CBP-funded programming. Congressional disgruntlement followed a documentary on banking and the poor, which identified members of the House and Senate with ties to the banking industry. Nixon’s vice president, Spiro Agnew, who relished in berating academics as “an effete corps of impudent snobs who characterize themselves as intellectuals,” served as Nixon’s hatchet man against the CPB. Nixon vetoed its budget in 1973, and eventually the CPB felt forced to accommodate political pressures, and subsequently the CPB president and top aides resigned. The CPB now reviews controversial programs to ensure they are balanced and fair and allows member stations to raise independent funding. Later political pressure was placed on the CPB for not being ­sufficiently diverse, and the Reagan administration engaged in cutting

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social programs and reduced the appropriation for the CPB, resulting in layoffs. Reagan’s appointees to the CPB were accused of politicizing the organization, and by the 1990s members of Congress were calling for privatizing the CPB, funding it with advertising, and generating sales revenues from Sesame Street characters. When the Republicans gained control of both the House and Senate, Congress directed the CPB to determine how to support itself without any federal funds. A financial firm was hired to explore independent funding and concluded that federal funding could never be completely replaced. The predominance of digital communications in multiple formats inspired Ernest Wilson, the CPB chairman in 2009, to propose that the organization’s name be changed to the Corporation for Public Media.5 A Comparative Analysis The challenge of funding public media in a way that ensures both political and commercial independence is not, of course, unique to the United States. In 2011, two members of the Department of Media, Culture, and Communication of New York University funded by a grant from the Foundation to Promote Open Society (created by George Soros), released a comparative analysis of public media in fourteen other countries – Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Japan, the Netherlands, New Zealand, Norway, Sweden, and the United Kingdom (Benson & Powers, 2011) – and it found the following: • Per capita public funding of the media in the United States was $3.75 in 2008, a relatively small amount when compared to other wealthy countries. The next higher level of funding was $29.63 per capita in New Zealand, and the highest public funding per capita among these countries was $133.57 in Norway. Comparing total revenues (from public and nonpublic funding) for public media, Ireland provided the greatest per capita amount $157.13, followed by Germany at $152.23, and the United States provided the lowest per capita amount, at $9.37.

5 See http://www.cpb.org/annualreports/2009/about/chairsremarks.html.

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• Public media programming in the Western European countries attracted one-third or more of the television audience than in Canada, Australia, New Zealand, and the United States. • The best funded public media broadcasters are largely funded through license fees, as in the United Kingdom’s BBC, Germany’s ARD/ZDF, and the Scandinavian broadcasters. The license fee is seen as the best guarantor of autonomy and represents a direct link between the public and the broadcasters by insulating broadcasters against changes in government as well as providing accountability to the public. • When compared to the British Broadcasting Corporation (BBC), government support for public broadcasting in the United States is minimal. The BBC, including its international service, is a huge corporation with twenty-three thousand staff and with the equivalent of about $7.4 billion in revenues in 2010 (BBC, 2010). About 79 percent of the BBC’s revenues come from the taxpayers, either through a special levy (the equivalent of $225 per household per year in 2010) or through direct government grants (BBC, 2012). The remainder is from commercial sales, including its international service. This is a very different funding arrangement than for public broadcasters in the United States. • Multiyear funding was found to be beneficial and preferable to annual appropriations. • Public media are strongest when accountable to citizens rather than to politicians or commercial entities. • Legal and administrative charters provide mandates for programming that is representative of the diversity in the population; at the same time, they limit the ability of politicians to engage in partisan influence. • Finally, independent organizations serve as a buffer between the broadcasters and the government in power. An important difference remains between the United States and those countries included in the above study. Rather than funding a single, national program for public media, the primary intent of Congress has been to fund through the CPB multiple public media stations at the local, community level. The CPB story speaks to the complex, ideologically fueled drama of contemporary politics, yet it may also remind some of the words attributed to Sophocles in Antigone: “Don’t kill the messenger.”

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VX CASE QUESTIONS 1. The United States takes pride in its role as a democracy and has also been an undisputed leader in developing new communications technologies and innovative programming based on such new technologies. Yet the Benson and Powers report suggests that many other leading economic democracies with budgets far smaller than the US federal budget more effectively promote and protect public media. How would you explain the factors that challenge support for public media in the United States, and what do you think should be done about them, if anything? In particular, compare public broadcasting in the United States to the BBC in the United Kingdom. 2. Along the same lines, do you feel the current organizational structure of the CPB is best for its role to support public media? What, if any, changes might you suggest? Would your changes result in the CPB remaining as a public sector nonprofit, or would your reorganization place it in a different section of the social economy? 3. Is there evidence of CPB funding in your community? To what extent do people in your community take advantage of and support public media? Is public media an important part of your personal vision of the country you want? 4. Public sector nonprofits such as the Corporation for Public Broadcasting are funded substantially by government. Yet in times of a struggling economy, a political mood opposing taxes, and a large national debt, it is reasonable to expect cutbacks in social programs. In such an environment, how would you propose to find alternative funding to compensate public sector nonprofits for possible losses of federal money? How will such losses affect you personally?

5 Civil Society Organizations

The role of civil society organizations in a democracy was part of the discourse of the Founding Fathers of the United States. Scholars of that era conceived of civil society as a social space that was distinct from the state; they also believed civil society could serve to counteract despotism (Keane, 1998). But the role of factions in civil society, as public interest groups were then called, could also challenge legitimate, democratic government. This concern is brilliantly discussed by James Madison, known as the Father of the Constitution and the Bill of Rights, in Federalist Number 10, in which he argued that representative democracy in a union of states constituting a large rather than small republic is best suited to counteract the “mortal disease” of faction (Hamilton, Jay, & Madison, 2000). And indeed, the First Amendment of the Constitution – freedom of speech, freedom of the press, religious freedom, freedom of assembly, and right to petition – speaks directly to the interest of many civil society organizations. Among political theorists of the nineteenth century, Alexis de Tocqueville, the French political thinker and author of the book Democracy in America, published in 1835, is most often associated with the role of voluntary associations in democracy. In his travels to the United States, de Tocqueville was impressed with the voluntary associations he observed and their role in sustaining political democracy (de Tocqueville, 2000). He viewed voluntary associations, or people coming together around a shared or mutual need, as a way of controlling individualism and offsetting the state’s potential for despotism. Others have refined this notion – for example, Almond and Verba (1989) argued that civil society organizations help prepare people to participate better in a political democracy by making more informed choices. The role of civil

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society was broadened by influential sociologist Robert Putnam, who viewed its organizations as building social capital, meaning that they lead their members to engage with each other, cooperate, and build trust, important prerequisites for a democratic and productive society (Putnam, 1993, 2000). The perspective taken in this chapter follows from Putnam’s writings. Like Putnam, we view civil society not simply as a space for political associations but rather for voluntary associations in general, ranging from religious congregations to sociopolitical associations, as articulated in greater detail in the remainder of this chapter. Put simply, civil society organizations are voluntary associations, broadly speaking, through which members of a society engage with each other around mutual interests, either serving their membership or the public. The types of organizations included here relate to the economy, such as unions and professional and consumer associations; focus on social needs, such as religious groups, associations of race and ethnicity, social clubs, and self-help groups; and serve the public, such as sociopolitical organizations, public service organizations, and foundations. The above conception is not without its limitations because some mutual interests can be unlawful, such as criminal associations, and others can be highly self-interested, such as business associations lobbying for policies that favor the businesses that form their membership. Civil society organizations should not be equated with virtue. However, the challenge in drawing boundaries is that laws and what is viewed as virtue can change. Slavery was legal in parts of the United States prior to the Civil War; today it is viewed as abhorrent and criminal. In parts of the United States, segregation within schools, restaurants, and workplaces was within the law and widely accepted, even until the 1960s. When George Wallace was elected governor of Alabama in 1962, in his inaugural address he proclaimed: “I draw the line in the dust and toss the gauntlet before the feet of tyranny, and I say, Segregation now! Segregation tomorrow! Segregation forever!” (McWhorter, 2001, p. 311). By tyranny, Wallace was referring to federally imposed racial integration in the schools and other institutions, a stance that, despite prevailing federal power, has never entirely disappeared as the contest between federal and states’ rights continues. Wallace was best known for his opposition to the integration of the University of Alabama in June of 1963, defiantly standing at the entrance in the path of federal marshals and the National Guard who were escorting African American students to attend classes and to

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protect them from abuse and violence. Governor Wallace’s popularity was not limited to Alabama, where he was elected governor four times; he drew strong support as a candidate for president both in democratic primaries and as a third-party candidate (Lesher, 1994). However, Wallace was not insensitive to changing social norms, and by his last term as governor, he recanted his segregationist views, apologized to civil rights leaders, and appointed African Americans to government positions. Wallace did not live long enough to see an African American elected as president of the United States in 2008, an event that epitomized how much social norms have changed. In essence, Wallace and other segregationists were placed in a minority position within the United States through the efforts of many civil society organizations such as the National Association for the Advancement of Colored People working on a range of issues related to racial equality, widely referred to as the civil rights movement. What was once an accepted social norm, supported by the law, was rendered illegal. The struggle for racial equality has not yet ended: civil society organizations throughout the United States continue to pressure for improved policies to end stubbornly enduring disparities in health, housing, education, employment, and income. Moreover, it is likely that social norms will continue to change, again through the efforts of civil society organizations. This same point could be repeated for other social issues for which there have been a change of social norms – women’s suffrage being an excellent example. Universal suffrage for women was achieved in 1920, when the Constitution was amended to prohibit governments from denying the vote based upon sex (Dubois, 1978). This change came about after intensive campaigns and lobbying efforts by civil society organizations such as the National American Woman Suffrage Association, campaigns that lasted many decades. But the achievement of women’s suffrage did not end the struggle for greater equality between the sexes. A powerful feminist movement involving thousands of civil society organizations led by organizations such as the National Organization for Women has continued to address a range of issues standing in the path of greater equality between the sexes. Given the ample evidence that social norms and laws change over time, our conception of civil society organizations utilizes broad boundaries and accepts that there can be sharp differences of opinion about what is right and wrong, and what is legal at one point in time may be illegal at another. We interpret civil society as a space where

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these differences are played out. The ways that they are played out often does not involve a level playing field: some organizations have much greater power, finances, and influence than others, a point made by the critics of civil society. Wealthy organizations can expend large sums both on advertisements that influence public opinion and on lobbyists who can sway politicians. Moreover, the state, including elected governments, is not a neutral arbiter between differing civil society organizations. The state can be an extension of social class relations in a society and more responsive to the influence of wealthy interests. These relations between the state and the people are further compounded in the United States because government power can be dispersed across different levels (e.g., federal and state). As the Tenth Amendment of the Constitution states, “The powers not delegated to the United States by the Constitution, nor prohibited by the States, are reserved to the States respectively, or to the people.” However, specific laws, like social norms, can change, in part because of the initiatives of civil society organizations. Where Does Civil Society Fit within the Social Economy? Unlike the components of the social economy discussed in chapters 2 to 4, in our Venn diagram, Figure 5.1, civil society organizations are portrayed as not overlapping with either the public or private sectors. We do this because, unlike social economy businesses and local development enterprises, civil society organizations do not compete in the market to sell their services, and unlike public sector nonprofits, they do not rely upon government programs for their funding and upon government policies for the direction of their work. However, the independence from the private and public sectors that we portray for civil society organizations within the Venn should be viewed as one of degree because civil society organizations interact with the public and private sectors in many ways: first, most civil society organizations are nonprofit mutual associations whose members and volunteers work in either the private or public sectors. They have one foot in civil society but another in either the private or public sectors (perhaps both). Second, revenues for civil society organizations could include such sources as membership fees, foundation grants, and other forms of charitable donations. The members who pay the fees generally earn their income in either the private or public sectors, and the contributions

128  Understanding the Social Economy of the United States Figure 5.1  The Social Economy: Civil Society Organizations

PUBLIC SECTOR

Local Development Enterprises Public Sector Nonprofits

Social Economy Businesses

PRIVATE SECTOR

Civil Society Organizations

SOCIAL ECONOMY

from foundations and other forms of donations are usually earned ­originally in those sectors of the economy as well. Another form of interaction is that foundations may invest a portion of their capital in the stock market – that is, publicly traded private sector businesses – or perhaps purchase government bonds. In other words, the money that flows into civil society organizations may originate in the private or public sectors, and civil society organizations may become investors in those sectors. Third, civil society organizations offer services that contribute to a broad social infrastructure that supports society. This point will be illustrated in greater detail in the remainder of the chapter, but its importance must be stressed. It is difficult to imagine a diverse, democratic society without the array of associations that form civil ­society – ­religious congregations, ethno-cultural groups, social clubs, trade unions and other workplace associations, professional associations, self-help groups, social-political associations mobilizing support around the environment, women’s issues, and so on, as well as foundations. These associations are not an add-on; they are integral to any vibrant society and support the activities of the private sector through enhancing productivity (Putnam, 1993, 2000) and the activities of the

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public sector through strengthening democracy. Without those organizations, society, as we know it, would not exist. Civil society represents more organizations than the other groupings we have discussed in the preceding chapters. Therefore, in presenting the vast array of civil society organizations, we use three broad groupings: nonprofit mutual associations that serve a membership; civil society organizations that serve the public, either at large or specific groups in need; and different forms of foundations and fundraising mechanisms that serve the public. Nonprofit Mutual Associations Nonprofit mutual associations that serve their members’ needs are the predominant group of civil society organizations. Mutual, meaning shared in common, is a form of association in which the members have common bonds, and they work together to achieve goals of mutual interest or engage in what is sometimes labeled as mutual aid. Mutual associations embody the principle of self-help, and for the founders the organizing exercise can literally involve a self-help process. For members who follow, the self-help process that led to the organization’s creation may not be as evident because the structure is already in place. They become beneficiaries of the organization and may be viewed as partaking of a social dividend resulting from the organization’s creation. Nevertheless, mutual associations evolve from the contributions of second and subsequent generations, as organizations continue to develop and change over time. Mutual associations are financed primarily by fees or dues paid by members to cover the cost of the service; they normally operate independently from government assistance, though members may benefit from tax deductions if their contributions to the organization are eligible. In that sense, government can be seen as a contributor to civil society because the tax benefit to individuals is foregone tax revenue. Some mutual associations are strictly voluntary and are sustained by volunteer contributions or unpaid labor contributions of their members. Most often service costs are covered through a combination of fees that, if sufficient, pay for the cost of employees, as well as volunteer contributions of time from members for such services as being on the board of directors (if the organization is incorporated) and committees of the organization. The mutual associations to be discussed in this chapter are not operating in competitive markets as do social economy businesses, but are

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set up to meet the social needs of members within a nonprofit value system. Members, each with one vote, are responsible for the governance of the association, ensuring that its financial obligations are met and that it is responsive to the members’ shared or mutual needs. Within civil society, there are many different forms of nonprofit mutual associations, each serving different member needs. In the following discussion, we subdivide mutual associations into two groups: those that relate primarily to the economy and those that are primarily social. Nonprofit Mutual Associations Relating to the Economy The obvious group that comes to mind here is business associations. These are nonprofit member-based associations, financed through membership fees, which promote the interests of the businesses that form them, both to the public and to government, through such activities as hiring lobbyists, contributing to the campaigns of people running for election, funding third-party issue campaigns, and so on. Organizations such as the Chamber of Commerce and the American Petroleum Institute are major players in US political campaigns. The positions that business associations support are often those that many civil society organizations lobby against. However, even though business associations take on some of the characteristics of civil society organizations, their interests are so tightly aligned with the private sector businesses that form them that we view them primarily as the outreach from the private sector to government and to the public, rather than genuine players in civil society. The civil society organizations that best fit our conception of a nonprofit mutual association relating to the economy are trade unions and other workplace associations, as well as professional and consumer associations. unions Unions are organized around locals, of which there are more than eighteen thousand in the United States, typically within a workplace, industry, or profession (Unions.org, 2013). Union locals are formally structured nonprofit mutual associations representing the interests of the workers who are their members. They are a classic example of mutual aid in that members pay for services through dues, usually deducted from their paychecks, and operate according to the democratic principle of one member, one vote in electing an executive to represent them. Like other

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civil society organizations, unions rely on volunteers or unpaid labor contributions from members who assist the paid staff through partici­ pating in executive boards, committees, and other activities. Union locals are typically part of a larger union body – for example, the American Postal Workers Union and the American Federation of Teachers. Like business interest groups, unions also form political action committees to promote their own political interests. Unions, like many other civil society organizations, interact with the public and private sectors, as often that is where their members work. Although unions began in the nineteenth century, collective bargaining was not legitimized as a general right until 1935, when president Franklin Delano Roosevelt signed the National Labor Relations Act (also referred to as the Wagner Act, after its sponsor, New York senator Robert Wagner). This act granted workers the freedom to associate and organize and to designate a bargaining agent to negotiate on their behalf with their employer (Atleson, 1983). The primary function of unions is to meet the needs of their members in contract negotiations (collective bargaining) with their employer on pay, benefits, and conditions of work, including disputes with management over contract provisions, and to organize nonunionized workers into bargaining units that can represent their interests. This emphasis on contract negotiation is sometimes referred to as business unionism or Gomperism, after the founder and first president of the American Federation of Labor, Samuel Gompers (Gompers, 1925). In the first part of the twentieth century, business unionism set itself in opposition to social unionism, which in its early inception focused upon the overthrow of capitalism. The Industrial Workers of the World (IWW) or the Wobblies, as they were often referred to, sought a nonwage economy (Dubofsky, 2000). Business unionism, or negotiating improved working conditions for members, won out, but unions, as noted, have been active in broader social issues including campaigning for the politicians who are most likely to support their interests. Unions are active participants in civil society, though often with differing perspectives from business associations. Unions, as is their interest, have attempted to make it easier for workers to join, arguing that when 50 percent of the people in a bargaining unit sign a card, that should be sufficient for certification; the US Chamber of Commerce is strongly opposed to this and wants an official vote held later, as is the current practice. Unions have been strong supporters of extending healthcare to the entire population; the US Chamber of Commerce and

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the National Federation of Independent Business have been strongly opposed. Unions have strongly supported maintaining and strengthening the benefits in social programs such as Medicare, Medicaid, and Social Security; the US Chamber of Commerce wants to reduce benefits.

A CLOSER LOOK: AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS (AFL-CIO) Prior to the formation of the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), the United States had a lengthy history of labor organizing including the general strike for a ten-hour workday in Philadelphia in 1835 and the formation of earlier labor federations: the National Labor Union in 1866; the Knights of Labor in 1869; and the Federation of Organized Trades and Labor Unions in 1881 (AFL-CIO, 2012). However, the major stimulus for the labor movement was the creation of the American Federation of Labor (AFL) in 1886 and then the AFL-CIO (American Federation of Labor and Congress of Industrial Organizations) in 1955, which represents 12.5 million members, mainly in the United States but also in Canada (AFL-CIO, 2012). The AFL-CIO represents fifty-six unions that are affiliated with the federation, some huge in their own right: the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial & Service Workers International Union (USW); the United Automobile, Aerospace & Agricultural Implement Workers of America International Union (UAW); and the Transportation Communications Union/ International Association of Machinists and Aerospace Workers (TCU/ IAM). Many of these might be viewed as traditional unions, though perhaps renamed, but others would be surprising – for example, the NFL Players Association (NFLPA) and the Guild of Italian American Actors (GIAA). The primary function of the unions affiliated with the AFL-CIO is collective bargaining to improve the pay, benefits, and working conditions of the members in their locals. However, unions, from their inception, have been political players in civil society, attempting to represent the interests of their members in electing politicians who can

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best represent them and supporting legislation that is in the interest of their members. One of the earliest issues that unions throughout the world became involved in was the eight-hour workday. This issue was taken on by the forerunners to the AFL and in 1888 by the AFL formally. Some unions succeeded in achieving the eight-hour workday before it became national law, the Fair Labor Standards Act, as part of the New Deal in 1937. The AFL-CIO often finds itself at loggerheads with business lobbyists. One issue that the AFL-CIO has taken on is excessive executive compensation. Its representatives sponsor shareholder resolutions at corporate meetings attempting to limit excessive compensation, a practice that the US Chamber of Commerce has attempted to stop the AFL-CIO from undertaking.

The United States labor movement has had a strong history in support of workers’ rights, but in relation to the size of the workforce, its membership has been in a downward spiral since the 1950s. In 2010, only 11.4 percent of US workers were unionized; that statistic drops to fewer than 7 percent for the private sector (OECD, 2012b). The OECD (2012b) norm in 2010 for unionization was 18.1 percent. Compared to many other countries, US union density (the proportion of the workforce that is unionized) is very low: Germany, 18.6 percent; Canada, 27.5 percent; Sweden, 68.4 percent. Since unions often are able to realize significantly higher pay and benefits for their members than nonunionized workers achieve with comparable jobs (Mayer, 2004), low union density may be one reason why the United States has such extremes in income and wealth inequality. Unions in the United States have had their greatest success in organizing public sector workers in such professions as teachers, police, and government employees, and their greatest strength is in the Northeast, Midwest, and West Coast. A major change for unions in the past thirty years is the extent to which they have been drawn into issues that were typically the domain of business. This was not so much by design but due to at least three changing conditions. The first change was the growth of pension funds, vast pools of capital under the aegis of the labor movement that required investment. With some concern, Peter Drucker (1976) coined the term “pension fund socialism” in referring to this phenomenon.

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As an example, CalPERS, the California Public Employees’ Retirement System, manages retirement benefits for more than 1.6 million California public employees and retirees, and their families; as of 2011, CalPERS had an investment portfolio of $237.6 billion (CalPERS, 2012). Another example is the AFL-CIO Building Investment Trust, whose investors include major pension funds in the United States. This trust had $4.79 billion of assets in 2014 targeted at creating affordable housing (AFL-CIO Housing Investment Trust, 2014). A second change was the growth of employee stock ownership plans (ESOPs) – a trust fund that is similar to a defined contribution pension plan (Kruse, Freeman, & Blasi, 2010). Retiring owners gain tax advantages from selling their company to an ESOP, and as a result this form of ownership has become widespread, currently embracing about 10 percent of the private sector workforce, including union members (ESOP Association, 2011). A third and related change has been the decline of major unionized industries such as the steel and auto industries, and the growth of employee buyouts in steel, often using ESOP legislation (Quarter, 1995). In an effort to encourage democratic employee ownership, in 2009 the United Steelworkers of America signed a collaboration agreement with the highly successful Mondragón Corporation, a federation of worker cooperatives in the Basque region of Spain (United Steelworkers, 2009). other mutual associations relating to the economy In addition to unions, employee groups can assemble through workplace associations, which may be accepted and even encouraged by employers as they can simplify communication processes and establish appropriate pay scales. Noncertified workplace associations usually lack the bargaining power of unions but give their members a collective voice in discussions with management around shared concerns. Sometimes workplace associations decide to become certified bargaining units. For example, in March 2011, faculty on several campuses associated with the University of Wisconsin voted to become locals of the American Federation of Teachers-Wisconsin (Schmidt, 2011). In addition to mutual associations representing rights within their workplace, employees belong to a professional association, sometimes several, which bring together members who share a common profession. Professional associations usually engage a membership from many ­different workplaces – and may be nationwide (e.g., American

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Institute of Architects, American Polygraph Association) – but they may also be specific to one employer; for example, the Arizona State University Faculty Women’s Association (2012), which refers to itself as “an active advocate for increasing the status and participation of women on the ASU campus since 1954.” At minimum, professional associations are set up to promote social engagement and information dissemination among their members. Associations of that sort (e.g., American Philosophical Association, American Helicopter Society) will typically have an annual conference and publications (newsletter or journal) and host awards to honor contributions from their members. They build social capital by helping their members to engage with each other, and they strengthen their body of expertise by disseminating knowledge, often through continuing education, which is required by professions such as lawyers, physicians, nurses, and librarians. Such professional organizations rely heavily on volunteers for their activities, but the larger ones usually have a mix of employees and volunteers. Professional associations are not simply for employee groups but are also set up for management professionals – for example, the American Association of Airport Executives, American Association of School Administrators, National Association of Chiefs of Police, and Golf Course Superintendents Association of America. In addition to the basic functions of social engagement and information dissemination, professional associations may set standards for their profession. The American Guild of Organists (2012), founded in 1896 in New York City, serves the public by creating standards for organists and by certifying applicants who meet them, and assists religious congregations that rely upon organists and choral arrangements. Similarly, professional educational standards can be sustained through accreditation organizations such as the Association to Advance Collegiate Schools of Business. Advocacy is another function of some professional associations. Large and powerful associations such as the American Medical Association and the American Bar Association participate in public debates and lobby politicians to support their professional interest. The American Medical Association undertakes a multiplicity of functions including being the political voice of the profession (AMA, 2012). When the US Supreme Court agreed that Obamacare was constitutional, the AMA released a statement from its president, Jeremy Lazarus, stating

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unequivocally, “The American Medical Association has long supported health insurance coverage for all, and we are pleased that this decision means millions of Americans can look forward to the coverage they need to get healthy and stay healthy” (Lazarus, 2012). It is unusual for people to belong to more than one workplace association, but membership in several professional associations is more common because professions can be multidimensional (e.g., an engineer might also be a manager and have an ethno-cultural identification, and therefore belong to associations for each of these connections). In addition, people can join professional associations based upon an avocation (e.g., the National Railway Historical Society). Professional associations are an example of what Mark Granovetter (1973) referred to as the “strength of weak ties” – that is, they may be comprised of members who, even though they may not relate to each other in any other way, can benefit from common professional ties. Where government policies may bear upon them or where they have an active interest in shaping government policies, they may also attempt to engage in advocacy and in public education to win support for mutual interests. Consumer associations are another form of civil society organization related to the economy. Consumer protection in the United States comes from a combination of government agencies (e.g., Federal Food and Drug Administration, United States Consumer Product Safety Commission, United States Department of Justice), industry self-­ regulation (Better Business Bureau), and civil society organizations, which are formed by consumers and represent mutual concerns, some general and others product specific.

A CLOSER LOOK: THE BETTER BUSINESS BUREAU The Better Business Bureau (BBB), formed in 1912, is an example of a consumer association serving the business and charity community. The Council of Better Business Bureaus is a 501(c)(6) nonprofit located in Arlington, Virginia; it is the apex organization for 114 BBBs across the United States (Council of Better Business Bureaus, 2012). “BBB’s mission is to be the leader in advancing marketplace trust. BBB accomplishes this mission by: creating a community of trustworthy

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businesses; setting standards for m ­ arketplace trust; encouraging and supporting best practices; celebrating marketplace role models; and denouncing substandard marketplace behavior” (Council of Better Business Bureaus, 2014). The Better Business Bureau finances itself from fees that businesses pay for becoming members, sponsorships by its national partners, dispute resolution fees, and other program-related revenues. One such program is the Charity Seal program, which is used to accredit charities. The annual report of the Council of Better Business Bureaus (2012) states that it provided “more than 180 million instances of service” and that it processed almost 985,000 complaints from consumers. In 2012, the BBB network accredited over 375,000 businesses and revoked 1,679 accreditations. The BBB attempts to build trust between businesses and consumers and to mediate disputes between consumers and businesses that haven’t already gone to court. Doing so is in the interest of the business community as is building awareness of business scams. Another practice of the BBB network is its Scam Alerts, which warn consumers of fraudulent practices in the market. While the BBB’s processes are not beyond criticism (see Tugend, 2013), the BBB is a classic example of a civil society mutual association, with businesses as members.

The Better Business Bureau is an example of a consumer association set up by the business community. In contrast, most consumer associations are set up by consumer advocates, or organizations representing consumer concerns, and either are grassroots associations or have that feel to them. The difference between consumer associations and sociopolitical groups that take on particular issues can be difficult to discern. For example, the AARP (formerly, the American Association for Retired Persons) defines one of its functions as “consumer protection” for older Americans (AARP, 2012), but its mandate is much broader. There are many important civil society organizations that define their role specifically as representing consumer interests. For example, there is the Consumer Federation of America (CFA), a nonprofit association founded in 1968 with about three hundred organizations as members, including a mix of social economy and public sector organizations

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(CFA, 2012). The CFA tackles a wide array of consumer issues, many in partnership with other consumer organizations and with government agencies – for example, a Do-Not-Track Mechanism to protect the privacy of Internet users. Consumer Reports, published by the Consumers Union since 1936, has become the gold standard for information when consumers are deciding whether to make a purchase. Consumer issues are often addressed by broad coalitions of ­organizations – civil society organizations and government agencies working in partnership. The campaigns to curtail cigarette smoking in public places and to limit tobacco advertising have involved government agencies such as the Centers for Disease Control and Prevention and broadly constituted nonprofit organizations such as the American Medical Association, the American Cancer Society, and the American Lung Association, as well as more issue-specific organizations such as Tobaccofree.org and The Foundation for a Smoke-Free America, which was founded by a grandson of the founder of the R.J. Reynolds Tobacco Company. There is, of course, opposition, as for all issues in civil society. For smoking, tobacco corporations organized the Advancement of Sound Science Coalition, to dispute the evidence against the habit (Ong & Glantz, 2001). Consumer associations respond to issues that are not of their own making. The issues differ, but in general terms they involve the functioning of the private and public sectors. In response to these problems, civil society organizations have an important role in informing consumers of their choices and creating greater public awareness. Consumer associations are a countervailing force within civil society to corporate economic power and government agencies. Nonprofit Mutual Associations Focusing on Social Needs There are civil society associations that primarily meet social needs; economic needs are a by-product. We now discuss some of the more prominent forms of nonprofit mutual associations focused on social needs. religious congregations and orders A religious congregation is a classic mutual association that brings together people sharing a common faith and those who want to engage socially with members of the congregation. There are varying estimates of the number of religious congregations in the United

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States: 330,000 (Hadaway & Marler, 2005); 278,772 (National Center for Charitable Statistics, 2012). The 2011 Yearbook of American & Canadian Churches reports that there were 227 national church bodies accounting for the religious affiliation of 163 million Americans (Lindner, 2011). According to the Pew Forum on Religion & Public Life (2012), 78.4 percent of Americans view themselves as Christian; 51.3 percent as from a Protestant denomination; 23.9 percent as Catholic; 4.7 ­percent as belonging to other religions, with Judaism being the largest; and 16.1 percent as unaffiliated, of which 10.3 percent are nonreligious (atheist, agnostic, secular). Among Americans thirty and under, doubt about the existence of God is greater than at any time in the past (Pew Research Center, 2012). Nevertheless, religion appears to be of greater importance in American than in other wealthy nations (Pew Research Center, 2002). Fifty-nine percent of Americans say that religion is of importance to them, a much greater percentage than the British (33%), Canadians (30%), Italians (27%), Germans (21%), or French (11%), for example. However, the need to congregate is not limited to people who place importance in religion. For nonreligious people, there are many options – American Atheists, American Humanist Association, American Secular Union, to name but a few. Religious congregations engage their members in various forms of observance that are intended to meet spiritual needs. Congregations also engage their members in contributions to the community – local, national, and international. Of the $290.89 billion in charitable contributions in 2010, 35 percent were received by religious congregations (National Center for Charitable Statistics, 2012). Of the 64.3 million Americans who volunteered in 2011, one-third did so through a religious organization, more than any other type of organization (Bureau of Labor Statistics, 2012). Activities that were prevalent for volunteers included mentoring, tutoring, teaching, fundraising, transportation, and general labor, as well as food preparation, collection, and distribution (Corporation for National & Community Service, 2012). Both in their donations and volunteering, members of religious congregations may be helping to build their own group. However, a portion of giving and volunteering benefits the broader community, although it may be difficult to separate the two. Catholic Scholars for Worker Justice (2014) has been a strong advocate for unions and workers’ rights to collective bargaining. The Jesuits, a Catholic order founded in 1534 to minister to human souls principally through education, have established and run twenty-eight colleges and universities

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in the United States, beginning with Georgetown University, founded in 1879.1 Unitarian Universalist congregations urge their members to “put faith into action through social justice work locally, statewide, nationally and internationally” (Unitarian Universalist Association of Congregations, 2012). Of all of the religious organizations, perhaps the one that is most synonymous with community service is The Salvation Army, operating in five thousand communities across the United States and as part of an international movement that was founded in Britain in the mid-nineteenth century; it had its US beginnings in Philadelphia in 1880. The Salvation Army’s services include providing food for the hungry, disaster relief, and clothing and shelter to the homeless, as well as assistance for the disabled, elderly, ill, and underprivileged children (Salvation Army, 2012). The Salvation Army undertakes its activities with funds raised through its Red Kettle campaign and its thrift shops plus the service of volunteers. Therefore, like civil society organizations in general, religious congregations can have a self-transcending impact upon their community. Much of the social engagement of religious congregations is in the form of community service, but some of it could be characterized as explicitly political. Historically, the Quakers (also known as the Religious Society of Friends or just Friends), with strong roots in the states of Pennsylvania and Rhode Island, were leaders in the movement to abolish the slave trade, and some of their campaign techniques were used by subsequent social movements (Davis, 1966). Following President Obama’s announcement in May 2012 that gay couples should be allowed to marry, the Southern Baptist Convention in New Orleans voted in favor of a resolution stating that marriage is “the exclusive union of one man and one woman” (Ingram, 2012). Kairos USA is a branch of an international movement of Christians that views itself as providing “a home for U.S. Christians … to take a bold, prophetic stand against the unjust policies that oppress Palestinians and sicken Israeli society” (Kairos USA, 2012). Therefore, religious congregations could be viewed as a mutual association with multiple functions: they engage their members spiritually and socially; they contribute to the broader community in many ways, including donations from their members’ funds for that purpose; and they take positions on political issues, much like business associations,

1 See http://www.ajcunet.edu/.

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trade unions, and consumer associations, even though they weren’t set up specifically for that purpose. associations of race and ethnicity As is often stated, the United States is a nation of immigrants who have settled in waves since the sixteenth century alongside communities of American Indians. In the 2000 census, only 20.2 million people reported that they were without any ancestry other than being American (Grieko & Cassidy, 2001). In other words, the vast majority of Americans have an identity based upon various combinations of ethnicity and race. Immigrants are heavily concentrated in cosmopolitan cities such as Miami, San Jose, Los Angeles, San Francisco, New York, Chicago, Dallas, and Las Vegas as well as Washington, DC (Grieko & Cassidy, 2001). Newcomers are attracted to these centers because they are more likely to be with family members and others from the same country of origin, people who share their mother tongue and customs. Also, within these urban centers, there is a supportive infrastructure of organizations to help newcomers to settle. After the first generation, newcomers tend to move outside of their ethnic enclaves, but many continue to identify with and maintain ties with their culture of origin and turn to mutual associations that help members relate to each other and provide services that they require. The social infrastructure created by racial and ethnic groups can involve an elaborate network of services, and among the larger immigrant groups there are hundreds of mutual associations that deliver these services. This support system of associations involves education, culture, civil rights, social, professional, political, and labor activities. They represent the members of their communities, but their interactions with the overall society are paramount. Some examples of such organizations are the National Association of Latino Arts and Culture (NALAC), a second-tier nonprofit association of more than three hundred Latino arts organizations within Latino communities in the United States “exclusively dedicated to the promotion, advancement, development, and cultivation of the Latino arts field” (NALAC, 2012), and the National Association for the Advancement of Colored People (NAACP), perhaps the most storied civil rights organization of the twentieth century and a leader in the American civil rights movement: it was instrumental in the outlawing of segregation in public schools, the racial integration of the US armed forces in 1948, and the passage of the Civil Rights Acts of 1957, 1964, and 1968, as well as the Voting Rights Act of 1965 (NAACP, 2012).

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social clubs Social clubs are formed around interests that their members share in common. The human imagination is the only limitation on the range of social clubs – they number in the thousands, and the variation is broad. Some social clubs are based on ethnicity and religion or some other social dimension that intersects with the primary purpose of the club; others such as service clubs and some fraternal orders serve a dual function of meeting their members’ needs and public service – they are discussed later in this chapter. Many social clubs are incorporated and may include a charitable status as well, but others are not and range from those that are duly constituted (with by-laws and an executive elected by the membership) to those that are less formal, like a neighborhood baseball team or book club. Our discussion, though brief, portrays their varying interactions with the rest of society. Clubs for competitive activities include the USA Track & Field (USTF), the umbrella organization for fifty-seven associations across the United States that promote “competitive excellence and popular engagement in our sport” (USTF, 2012). Similar federations exist with nationwide networks for just about every competitive sport: USA Swimming, USA Cycling, and USA Basketball, and for specialized needs, Disabled Sports USA. These federations are not only for the well-known sports but also for those that have been imported by immigrant groups – USA Boccia and United States of America Cricket Association – and others that are less popular – USA Broomball and USA Ringette. The clubs for these sports are nonprofit mutual associations supported through a combination of fees paid by the participants and their parents, and they are heavily assisted by volunteer contributions from team coaches and organizers. They enhance fitness and help their participants to be functioning members of society. The elite sports, in particular, enhance public pride and nationalism. Federations also exist for activities that are intellectual: for example, the American Contract Bridge League; in an average month, it sees forty thousand tables in play (ACBL, 2012). In addition to clubs for competitive activities, there are clubs for recreational interests. The best known and largest such organization is the American Legion, founded in 1919, after the First World War, for veterans and their families. The American Legion has 2.4 million members in nearly fourteen thousand “posts” or clubs (American Legion, 2012). Its services include advocating on behalf of veterans to the federal government for better healthcare benefits and improved veterans’ legislation; organizing youth clubs; and giving grants to nonprofits through the American Legion Child Welfare Foundation.

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There are clubs, including federations, for nearly every imaginable activity – some select examples being Mystery Readers International, the American Association of Nude Recreation, the American Philatelic Society, the American Birding Association, and the American Hiking Society. These clubs are reflective of mutual aid: people coming together to meet shared needs and in so doing enhancing their well-being and their ability to function in society. Most clubs are supported by their members; others rely upon corporate sponsors and foundations; some may obtain government grants. self-help groups All nonprofit mutual associations are based on mutual aid, or groups of people with a shared need helping each other, but some organizations are specifically referred to as “self-help” groups (also commonly referred to as support groups). The self-help tradition involves people suffering from an addiction or other health problem or a social challenge coming together to share their common concerns and supporting each other to improve their lives. In a self-help group, the members identify with and find common cause with peers who are living with similar challenges (Borkman, 1999). Trust is important to the success of self-help groups in that the members not only identify with each other but also feel comfortable discussing concerns that can be quite personal (Ryan, 2005). Many self-help groups supplement professional services – for example, women with breast cancer are encouraged to join a support group with others suffering from a similar plight so that they can share their experiences and learn from each other. Among the best known of self-help groups is Alcoholics Anonymous, an international organization that has spawned other organizations using a similar approach. A CLOSER LOOK: ALCOHOLICS ANONYMOUS Alcoholics Anonymous (AA) was started in 1935 by a New York businessman and an Ohio surgeon who were alcoholics. AA operates internationally; the organization does not keep formal membership lists, but it estimates 2.1 million members in more than 115,000 groups of which about half are in the United States (AA,

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2012a). The AA website describes its purpose in very simple terms: Alcoholics Anonymous® is a fellowship of men and women who share their experience, strength and hope with each other that they may solve their common problem and help others to recover from alcoholism. The only requirement for membership is a desire to stop drinking. There are no dues or fees for AA membership; we are self-supporting through our own contributions. (AA, 2012b) AA local groups have a simple structure of a steering committee with a membership that is expected to rotate among the group's participants. In addition, there is a general service office in New York that keeps in contact with local groups, including those in incarceration facilities, and organizes an annual conference, and AA Grapevine publishes the organization’s journal. There is a board of trustees, predominantly AA members, and a General Services Conference, consisting of delegates from the AA areas in the United States and Canada. AA groups are organized around a twelve-step process that utilizes a combination of self-confession, group support, and religion (though AA disavows the latter). A key feature of the process is participants acknowledging in front of their group that they are alcoholics and also accepting that even if they are able to overcome their problem they remain vulnerable to reverting to alcoholism; hence, the label “recovered alcoholics” is suggested for those who have their drinking under control. Participation in AA is limited to alcoholics, but two spin-off self-help groups are Al-Anon, for the families of alcoholics, and Alateen, for teenagers who have alcoholic parents, both of which allow their members to share their experience and learn from each other. AA also has online groups,2 some using meetings that are limited to recovering alcoholics and others in which nonalcoholics can observe.

The twelve-step approach has been applied to many other addictions and currently there are more than thirty organizations ­

2 See http://www.aa-intergroup.org/directory.php.

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using similar approaches (e.g., Gamblers Anonymous, Overeaters Anonymous, Clutterers Anonymous, Smokers Anonymous). Again, the imagination is the only limitation. Many self-help initiatives are related to social challenges rather than addictions and health concerns – for example, Parents without Partners; Parents, Families, and Friends of Lesbians and Gays (PFLAG); and Little People of America. Increasingly, people are turning to the Internet for self-help groups, for many social concerns. Online groups allow for greater anonymity than face-to-face groups and therefore might be a better way for some people to begin to get help. In addition, they are more practical for people in isolated locations and for people who have other commitments that may not allow them to meet face-to-face regularly (Cooper, 2004). There are websites devoted to helping people with health challenges to find compatible support groups (e.g., patientslikeme: http://www. patientslikeme.com). All of these approaches address different problems, but they share a systematic process of self-help that is voluntary and nonprofessional. To the extent that they succeed, even in part, they save the broader society the large healthcare costs that professionals would charge, and they prepare people to function better in the workforce and in their personal lives. Civil Society Organizations Serving the Public In the introduction to this chapter, we indicated that our discussion of civil society organizations would proceed within three broad groupings: nonprofit mutual associations that serve members’ needs; civil society organizations that serve the public; and different forms of foundations and fund-raising mechanisms that serve the public. Most of the chapter has been devoted to the first group, but in this second section we turn to civil society organizations that serve the public. The line between these first two groups is not always clear; for example, religious congregations, whose primary function is to serve their members’ spiritual needs, also engage in public service and political advocacy. Similarly, within civil society organizations whose primary function is to serve the public, their members may derive some personal benefit from their service, or what Andreoni (1990) has called “warmglow giving.” That said, our focus is on a group’s primary intent, taken at face value. We subdivide the category civil society organizations that serve the public into two: sociopolitical organizations that address

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issues of public concern and public service organizations that mobilize their membership to create public goods, usually for persons with major social needs. Sociopolitical Organizations By sociopolitical organizations we mean associations that advocate for a particular issue or set of concerns of public interest and that mobilize a membership around the advocacy strategy. Many such groups have a limited agenda and focus on issues that are of direct concern to themselves and a specific public. These would include ratepayer associations, tenants associations, parent-teacher associations, or home and school associations. Other sociopolitical associations prefer to speak for a broader public (e.g., “the American people”). Political parties are an example: they have members who pay a fee and within that broader group a cadre of activists who serve as executive members of local and state associations and as volunteers during election campaigns, but their primary purpose is to mobilize public support during elections. In addition to mobilizing volunteers, political parties organize financial support – in particular from members of the public who can give large amounts. In addition to donations directly to a candidate, fundraising is done through civil society organizations called political action committees (PACs), which allow outside organizations to have financial contributions directed to candidates and issues of their choosing. Most PACs are set up by business corporations, labor unions, business associations, and healthcare organizations. A well-known PAC that supports liberal candidates is MoveOn.org, founded in 1998. Major judicial rulings in 2010 led to the creation of Super PACs, 501(c)(4) nonprofit organizations to which corporations, unions, other organizations, as well as individuals, are able to give unlimited funds for expenditures independent of a particular candidate or election. Technically, Super PACs are prevented from transferring funds to particular candidates, but they have become a mechanism through which wealth from private sector corporations and wealthy individuals is transferred through civil society to influence the choice of president and elected officials more generally. A small countervailing force to the influence of money on politics is the civil society organization called the Center for Responsive Politics; on its website opensecrets.com, the organization attempts to maintain a public record of financial contributions to political candidates.

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In addition to electoral politics, sociopolitical organizations mobilize to shift social norms on issues such as the environment, the role of women in society, gay and lesbian rights, disability issues, fair trade, and smoking. There are many more. Civil society is the space for associations that mobilize around social issues, not necessarily in agreement with each other. The mobilization can transcend civil ­society – for example, environmental groups have succeeded in putting together coalitions with private sector corporate interests (Climate Action Partnership), resulting in some successes such as the Clean Air Act and Clean Water Act, the Toxic Substances Control Act, and the Endangered Species Act, to name but a few. The Kyoto Accord could be viewed as an outcome of the international environmental lobby. In spite of the slow legislative progress, it appears that the environmental coalition is influencing public opinion. A 2011 Pew Research Center report on energy and environment indicates that 71 percent of Americans support the statement: “This country should do whatever it takes to protect the environment” (Pew Research Center, 2011). The debate between civil society organizations is as sharp for other issues. For example, the role of women in society places the National Organization for Women (NOW) against conservative organizations such as Concerned Women for America (CWA). Americans also participate in international human rights organizations – for example, Amnesty International – either through the head office of Amnesty International USA in New York or through the US regional offices (Amnesty International USA, 2012). One method of mobilization used by Amnesty and by sociopolitical organizations more generally is the Internet, with organizations such as aavaz.org, which has 40 million members around the world and regularly circulates petitions and pressures governments on a range of human rights and political issues (Avaaz.org, 2014). Public Service Organizations There are many different types of public service organizations funded by donors – individuals including their members, corporations, and foundations – whose primary function is to serve a segment of the public in great need. A traditional form of public service organization is the fraternal or service club. Most fraternal organizations are international. Among the earlier fraternal clubs in the United States was Freemasonry or the Masons, which has roots that reach back to before the American Revolution and

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counts George Washington among its first members. Among the larger international clubs are the Lions Clubs, with an original focus on programs to prevent blindness but broadened to a range of humanitarian concerns (Lions Clubs International, 2012); the Kiwanis, with an emphasis on service to children and youth through special programs and youth clubs (Kiwanis, 2012); the Rotary Club (2012), with an emphasis on attempting to eradicate polio worldwide. These organizations each have distinct features, but they share in common a modest transfer of wealth from better off elements in society to those in greater need. This is usually done by a combination of fund-raising through a related foundation (Lions Clubs International Foundation; Kiwanis International Foundation) plus volunteer service associated with membership. Among the more recently formed public service organizations is Habitat for Humanity (2012), renowned for its work in building housing for the working poor. Since its founding in 1976 by a devout Christian family, Linda and Millard Fuller, Habitat, which is headquartered in Atlanta and Americus, Georgia, has built more than five hundred thousand houses, sheltering more than 2.5 million people in about three thousand communities worldwide. Habitat has a remarkable legacy of mobilizing volunteers and donors to build its dwellings for families with low incomes. Much of the volunteer labor comes from home recipients. Habitat is financed in part by its ReStore chain, which sells donated new and gently used building materials and household goods. Many civil society organizations in public service focus on very specific health problems. The large organizations are household names: the American Cancer Society, the American Heart Association, and the Alzheimer’s Foundation of America. In addition, there are organizations for afflictions that are less well-known such as the American Lyme Disease Foundation and the ALS Association. Civil society organizations serve the public in other ways as well. People suffering from food insecurity – families on social assistance and disability pensions, and the working poor and their children – have access to a network of community-based food pantries and soup kitchens across the country supplied by 202 food banks affiliated with Feeding America, the umbrella organization for this network (Feeding America, 2012). This network is supported by a combination of corporate food donations, financial donations from corporations and individuals, and generous labor contributions from volunteers. Feeding America estimates that this network of food banks supplies food to more than 37 million Americans per year, including 14 million children and 3 ­million seniors.

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A CLOSER LOOK: WIKIPEDIA A fascinating, relatively recent example of a nonprofit public service organization that operates online is Wikipedia, the international encyclopedia. It was founded largely by Jimmy Wales, its current chairman emeritus, who transferred this public service from a corporation, Bomis Inc., which he mostly owned, to Wikimedia, a charitable foundation, initiated in St Petersburg, Florida, in 2003; it currently operates in San Francisco (Wikipedia, 2012). Wikimedia receives its funding from donors. The foundation is also responsible for related products such as Wiktionary, Wikibooks, Wikisource, Wikispecies, Wikinews, and Wikiversity. Wikipedia and the related products are produced by MediaWiki, opensource software created by the Wikimedia Foundation. The foundation functions with ninety-five employees, but its main product, Wikipedia, is produced largely by volunteers, seventy-seven thousand active contributors, who have authored about 3.9 million articles in English; in total, Wikipedia operates in 280 languages, and 13 million articles have been produced. The website is accessed by people around the world. Wikipedia is a remarkable example of grassroots mobilization through a civil society organization serving the public – in this case a very broad, international public.

Collective Campaigns and Philanthropic Foundations From late in the nineteenth century, communities and religious organizations started organizing collective campaigns to raise funds in support of local services. The forerunner to the United Way of America was Charity Organizations Society, founded in Denver in 1887 (United Way of America, 2012). In 1913, the Community Chest was started in Cleveland, modeled after the Jewish Federation, which had started in Boston in 1895. The National Conference of Catholic Charities (Catholic Charities USA) was started in 1910 in Washington, DC. All of these organizations collectivized fundraising and used the funds to support organizations within the social economy that were offering services to groups in need; this is a model that has been followed by the United Way.

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The United Way campaign is the lifeblood of many community organizations and receives support – financial and volunteer labor – from individuals, corporations, and foundations. For the year 2010, the United Way of America, now part of the United Way Worldwide campaign, collected $4.02 billion for its twelve hundred local affiliates (United Way Worldwide, 2012). These funds represent a transfer from society at large into the social economy sector, and the services funded through the United Way form an important social infrastructure for society as a whole. Far larger than these collective campaigns is the vast infrastructure of foundations that make grants to social economy organizations. These philanthropic organizations, emerging in the late nineteenth century, have come about in different ways, but they represent a transfer of some income from individuals and corporations to the broader society through organizations in the social economy. In total, there were 76,545 foundations in the United States in 2009, and their grants totaled $45.7 billion from assets of $590.1 billion (Foundation Center, 2011). The largest group was classified as “independent,” and these were set up mostly by super wealthy individuals, a tradition started by Andrew Carnegie, the wealthy steel magnate, who in The Gospel of Wealth (1998) argued that it was the obligation of the wealthy to return their wealth to society in their own lifetimes. Carnegie was true to his word and gave away his vast fortune. He, John D. Rockefeller, and Mrs. Russell Sage (Olivia née Slocum) were pioneers in creating the modern foundation. Today, the largest independent grant-making foundations are the Bill & Melinda Gates, Ford, J. Paul Getty, Robert Wood Johnson, W.K. Kellogg (Foundation Center, 2012a). These grants are not limited to organizations in the United States. The Bill & Melinda Gates Foundation, for example, focuses upon economically poorer countries, investing in vaccines and treatment for malaria as well as family planning (Gates Foundation, 2012). In 2012, it, together with governments from the wealthy and developing countries, other foundations, and corporations, assembled a funding package of $4.3 billion to bring family planning tools to women in poorer parts of the world. The Gates Foundation pledged $140 million per year for eight years (Doughton, 2012). Foundations established by corporations are generally not as large, but they represented $4.7 billion of giving in 2009; community foundations represented another $4.1 billion (Foundation Center, 2011). Unlike independent and corporate foundations, community foundations tend to represent many donors who want to see their funds contribute to the well-being of a geographically defined space. The largest community

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foundations in the United States are in Tulsa, Cleveland, New York, the Silicon Valley, and Chicago (Foundation Center, 2012b). These differing collective campaigns and grant-making organizations as well as other instruments such as giving circles and donoradvised funds are vital to the effectiveness of the social economy and to civil society organizations in particular. They and individual donors represent an important part of the financial resources, and volunteers represent an important part of the human resources. Conclusion Civil society organizations are a broad phenomenon covering many different types of organizations that do not overlap with the public or private sectors. We have used three general categories – nonprofit mutual associations serving members’ needs; civil society organizations serving the public; and foundations and other fundraising mechanisms serving the public. We have also subdivided these groupings: for mutual associations, we used two broad categories of economic and social; for civil society organizations serving the public, we subdivided them between sociopolitical organizations and public service groups; and for foundations and other fundraising mechanisms, we considered the various forms. As is the case in many socioeconomic activities, this classification system is overlapping; some mutual groups such as religious congregations engage in public service and take on sociopolitical functions. As discussed throughout the chapter, civil society organizations interact with other parts of society in many ways to advance the interests of their members. Sociopolitical associations attempt to mobilize public opinion, not simply within civil society but also in an effort to change social policies and to shift social norms. Many of the associations to which we have referred have been quite successful in this endeavor. VX DISCUSSION QUESTIONS 1. The authors of the Federalist Papers were concerned that factions could threaten democracy, yet they could find no certain way of preventing this from occurring. Have there been examples that would justify their concerns? Rereading Federalist 10 might provide insights for discussion. 2. This chapter covers a broad range of civil society organizations. Are there any we have included that you would exclude? Are there any that we have excluded that should be included? Would you include business associations in civil society?

152  Understanding the Social Economy of the United States 3. Can you start a list of all the civil society organizations in your community? Are there any in the informal economy that could be considered civil society organizations? 4. Could civil society organizations be subdivided differently than is done in this chapter? 5. Religious organizations are exempted from reporting their revenues to the Internal Revenue Service. Has this arrangement contributed to social well-being? Has it been abused? Can you identify examples? 6. Should private country clubs enjoy tax-exempt status, even though their members can be seen as being a part of the economic elite? Is this good public policy? Why or why not? 7. Most contemporary private foundations have been established as the result of the private accumulation of wealth by successful business people. Foundations are expected to make donations equivalent to a minimum of 5 percent of their assets. Is this sufficient? In your view, what should the minimum be? What would be an ideal minimum?

VX CASE FOR ANALYSIS: MARY REYNOLDS BABCOCK FOUNDATION

“The Mary Reynolds Babcock Foundation assists people in the Southeastern US to build just and caring communities that nurture people, spur enterprise, bridge differences and foster fairness”(Mary Reynolds Babcock Foundation, 2014). Thus opens the foundation’s mission statement, and one can hardly imagine a better opportunity for enjoyable work than to invest assets worth nearly $152 million in ways that effectively achieve its mission “to help people and places to move out of poverty and achieve greater social and economic justice. We support organizations and networks that work across race, ethnic, economic and political differences to make possible a brighter future for all” (Mary Reynolds Babcock Foundation, 2014). Taking stock of its performance halfway through its most recent ten-year plan, 2005 to 2015 (Mary Reynolds Babcock Foundation, 2010), the board of directors found the evidence of progress to be promising. Overview Over these five years the foundation invested nearly $35 million in grants and program-related investments to help move people and

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communities out of poverty in the twelve Southeastern states of the country. According to a retrospective progress report, the results have included the following: “900 new homeowners, 500 people placed or advanced in jobs, 1,600 new or retained businesses, and over 9,000 jobs created or retained. [Policy work has resulted in] $4.7 billion in funding for education and community development … [and] tax reform and minimum wage have put at least $215.4 million in the pockets of lowwealth people” (Mary Reynolds Babcock Foundation, 2010, p. 1). The Mary Reynolds Babcock Foundation (MRBF) is significant in size but not among the largest private foundations. The largest foundations have many billions of dollars in assets. Nevertheless, the key is not only asset size but also how assets can most effectively be leveraged through means available to the foundation. While most people understand foundation grant making as the provision of the foundation to donate money to a qualified 501(c)(3) public charity, less is known about two other funding options available to foundations: program-related investments (PRIs) and mission-related investments (MRIs). Program-related investments are a tool for loaning money to a nonprofit that has a business model that produces an income stream to repay the foundation for the loan. While typical grants provide organizations with funds for capacity building or undertaking projects that do not produce income, PRIs make sense only when there is income generated in order to repay the investment, though typically at below-market rates of return. However, the organization’s mission must align with the foundation’s. PRIs can be particularly useful to help a nonprofit achieve a track record to make it a stronger candidate for subsequent lines of credit and loans from commercial banks. The Mary Reynolds Babcock Foundation has a goal of putting $6 million in PRIs. For example, the foundation has made PRI investments in community development financial institutions (CDFIs), such as the Lowcountry Housing Trust in South Carolina, which is growing its capacity as a CDFI, financing hundreds of units of affordable housing and leading an effort to build CDFI capacity across the state (Mary Reynolds Babcock Foundation, 2010). Mission-related investments are those financial investments made by the foundation in capital market funds that are aligned with the mission, purpose, and values of the foundation. The foundation can expect market-rate returns from MRIs. MRIs represent a relatively new tool, and the foundation is still studying how best to deploy its investments.

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Some examples of this foundation’s grant investments resulting in large-scale impact are as follows: a gift to the Oasis Center of Nashville is supporting youth organizing and development, and a gift to the Jeremiah Group of New Orleans is building a structure for connecting low-wealth homeowners to $75 million to rebuild their homes following Hurricane Katrina. The foundation has also supported tax and constitutional reform in Alabama, community economic development in South Carolina, and the minimum wage increase from $5.85 to $7.25 in Kentucky, as well as educational reform in Arkansas, Mississippi, North Carolina, and Virginia. Background and Governance As recounted in the 1992 Board Members Handbook (Mary Reynolds Babcock Foundation, 2010): Mary Reynolds Babcock was one of the daughters of R.J. Reynolds and an heiress of the founder of the R.J. Reynolds Tobacco Company. She established the foundation with $12 million in 1953. Her husband, Charlie Babcock, born in Lafayette, Indiana, directed the foundation until he died in 1967. Educated at the Wharton Business School, he was a broker by profession and ran a successful brokerage partnership. Mary predeceased him in 1953 (at age forty-four), by which time she had raised four children and, as an early environmentalist, created a deer park and a bird sanctuary. The foundation’s early grant making was eclectic but focused on the South, mindful of whether its resources could make a difference. Following Charlie Babcock’s death, the board of directors guided the foundation’s evolving focus, settling in 1994 on its current recommitment to the Southeast region and support of individuals and organizations to improve lives in local communities. According to the foundation’s history, several themes became central to its work at the turn of the century (Mary Reynolds Babcock Foundation, 2005): • helping people and places build assets for their families and communities • supporting civic engagement on public policy and community building related to addressing poverty • connecting grassroots, community-led activism with key institutions for larger-scale impact • supporting networks of likely and unlikely allies to achieve greater impact

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• nurturing the next generation of leadership in social and economic justice work in the South • investing more of the foundation’s corpus in mission-related investments According to the foundation’s website, the fourteen-member board of directors consists of prominent individuals from the Southeastern states with a variety of skills and perspectives. David Jackson, the executive director, was formerly CEO of the Center for Working Families in Atlanta. Assisting him is a skilled staff. Financials According to the Foundation’s 2011 Form 990-PF, the market value of the foundation’s assets at the end of 2011 was $151,748,278. The foundation earned $9,788,122 on its investments that year, or 6.4 percent of its asset value. The foundation disbursed $8,434,948 for charitable purposes, or 5.6 percent of its assets – just over the required minimum of 5 percent. Local, Regional, or National? The foundation has many of the same features seen in community foundations, which are typically composed of people living in a particular area who raise funds and allocate them to solve what are considered priority social problems in their community. The key differences are (1) that the Mary Reynolds Babcock Foundation is self-funding, and thus a private family foundation, not a community foundation; and (2) that it has a regional scope of interest – twelve states – rather than a community-specific focus. It is reasonable to ask why the foundation does not aim its policy efforts, such as tax reform, at the national level to achieve equitable and social justice outcomes for all US citizens. After all, the issues – for example, a living wage, immigration reform, incarceration reform, early childhood education – and policy solutions might be the same at the national level as at the regional level. To best explain its geographic focus, the foundation states (e-mail correspondence, 29 May 2013): The Mary Reynolds Babcock Foundation focuses on supporting organizations helping to move people and places out of poverty in the Southeastern United States. Our geographic focus reflects our origins as

156  Understanding the Social Economy of the United States a Southern foundation and a deep commitment to the region. As part of our theory of change, we believe that societal advantages like asset ownership, access to excellent education, social networks that connect people to work and society, living-wage jobs, affordable housing, and fair financial institutions are needed to help move people out of poverty. These basic societal advantages require a solid infrastructure and consistent investment. In order to secure these advantages in lowwealth communities, changes in systems and policies – local, state and/ or national – are almost always necessary. We believe that people most affected by public policies should be engaged in the democratic process, and that the best opportunity for such engagement is at the local and state levels, where policy issues have direct impact on low-wealth people and communities. In addition, due to relatively low investment in the South by national funders and a lack of local philanthropic infrastructure compared to other parts of the country, we believe our investments in the Southeast go further, create greater impact, and build needed nonprofit capacity in the region for long-term social change.

There is also evidence that states can move faster than Congress to address critical issues. For example, states such as Alabama and Arizona have already been taking the initiative to address immigration issues well in advance of any federal policy change, so the prospect of crafting good policy at the state level may be the most effective approach to influencing eventual federal legislation. Moreover, to address the foundation’s commitment to social justice, working to create avenues for local participation in policy debates, such as tax reform to support public schools, may be far more effective than waiting for directives in a top-down policy emerging from Congress. The foundation is identifying ways for people at the grassroots level to be engaged and by facilitating debate is thus pushing for more socially just policies. Such a regional scope also opens opportunities to collaborate with other organizations concerned with similar issues. Such collaboration is key to gaining leverage. As noted in its progress report, “While not included in our long-term goals, leveraging MRBF resources through partnerships is a priority” (Mary Reynolds Babcock Foundation, 2005, p. 17). VX CASE QUESTIONS 1. Private foundations are typically endowed by a substantial fund accumulated by successful business people. Community foundations, in

Civil Society Organizations  157 contrast, must raise the funds they wish to grant, typically from members of the community who are not inclined to establish their own foundations. How do you think the grant-making outcomes might differ, if at all, between these two forms of philanthropic foundations? 2. Which foundations are most active in funding organizations in your community? Which of these foundations are local and which are based in other areas? Are they addressing similar or different problems? 3. Refresh your understanding of the new organizational entity called the low-profit limited liability company (L3C), described in chapter 2. Justifications for choosing this form of organization are that it would be eligible for program-related investment funding from foundations and also promise a financial return to its other investors. This is fundamentally different from a nonprofit charitable organization, which cannot have financial investors at all. Do you think an L3C organization would be attractive to the Mary Reynolds Babcock Foundation? Why or why not? 4. Foundations such as the Mary Reynolds Babcock Foundation have amassed great wealth, which mostly or entirely escapes taxation. Would you argue for or against the belief that private foundations make better decisions on how to use money for social purposes than the government?

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6 Organizational Design and Governance Strategies

Introduction The chapter has two main objectives: (1) to highlight the range of organizational strategies and design choices in the social economy and (2) to present the current thinking and practice of governance in the social economy. As governance crises shook the for-profit sector, there was an associated concern about the governance practices of the social economy – in particular, the effectiveness of nonprofit boards. Wellpublicized scandals at the American Red Cross (discussed in the endof-chapter case), the fraud scandal involving the leader of the United Way of America (see the following A Closer Look), and negative publicity about the administrative costs of some other charities have focused more attention on the governance practices of the sector. Public trust in charities and their governance has been eroded. Robert Egger, founder of the DC Central Kitchen (see chapter 1), notes: “Nonprofits always had a safe warm spot in the public’s heart, … Now that is in real jeopardy” (as cited in Hoffman, 2006). Trust and confidence in the US nonprofit sector remains low. Schlesinger, Mitchell, and Gray (2004) attribute the decline to a lack of the public’s understanding of the nonprofit sector. According to Light (2008, pp. 1–2), there are four key conclusions about the public’s lack of trust in the sector: (1) charitable confidence has not risen significantly since it hit bottom in 2003; (2) Americans remain skeptical of charitable performance; (3) the considerable drop in the ratings of the sector’s ability to help people poses a serious challenge to the sector’s distinctiveness as a destination for giving and volunteering; and (4) estimates of charitable waste remain disturbingly high. The decline in public trust

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and confidence in the sector was acute right after 9/11. Between 2001 and 2002, public confidence in the nonprofit sector dropped from 25 to 13 percent, and over one-third of American society now has “not too much” or “no confidence at all” in nonprofits (Sargeant & Shang, 2010). A CLOSER LOOK: UNITED WAY OF AMERICA William Aramony, who was the United Way of America’s president for twenty years, died recently. His legacy is twofold: (1) he created a stronger organization, and (2) he was a convicted felon for fraud. Aramony ran the United Way from 1970 to 1992, and in that time period donations rose from $787 million to $3 billion. He restructured the United Way; he prevented its demise and was considered a visionary in the nonprofit sector. Aramony was extremely well paid, earning close to $500,000. Aramony’s lavish lifestyle was exposed by The Washington Post and Regardie’s magazine. Aramony defended himself by arguing that he needed to have a lifestyle that matched that of the executives from whom he was trying to get sizeable donations. He defended his $90,000 bill for limousines by stating that he did not have time to wait for taxi cabs (Shapiro, 2011). He bought an apartment and a condominium with United Way monies and travelled on the Concorde. He had various mistresses and used United Way monies to pay for presents and holidays. Once The Washington Post stories came out, he resigned from the United Way and divorced. He was tried in 1995 and was sentenced to seven years in a federal penitentiary on twenty-three counts including conspiracy, fraud, and filing false tax returns. Aramony left another legacy, too. The scandal at the United Way of America forced American nonprofits to review their operating and governance practices (Shapiro, 2011).

Types of Organizational Designs The chapter rests on a contingency view of organization design, which in short asserts that form follows function. In other words, there is no one best way to design an organization. “Contingency means that one

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thing depends on other things, and for organizations to be effective, there must be a goodness of fit between their structure and the conditions in their external environment [and other factors such as strategy and age]” (Daft & Armstrong, 2012, p. 27). To illustrate, organizations that operate in turbulent environments require a structure that enables flexible and nimble responses to the demands of the environment – they are often team-based structures. By comparison, organizations that operate in static environments are appropriately bureaucratic in their design. Many social economy organizations operate in institutional environments that are dynamic, if not turbulent. They are often profoundly dependent on government funding, which can and does change as governments change. The government represents the second largest source of funding for US nonprofits. According to Giving USA’s 2010 report, Americans gave about $291 billion to charities, an increase of 3.8 ­percent. Individuals gave $211.77 billion, which represents 73 ­percent of funding from nongovernmental sources. Foundations gave $41 billion, and corporations gave $15.3 billion, an increase of 10.6 percent (Giving USA, 2012). While Giving USA does not measure government grants, it notes that much of the government support is in the form of payments for services such as medical care; contracts for specific services, such as to human services organizations; and research funding to universities working in medicine, science, and the humanities (Giving USA, 2012). Further, the environment is characterized by the presence of multiple stakeholders and multiple goals and metrics, as well as increased competition for limited sources of funds. As a result, strategic choices may change over time, and organizations have to change their designs to fit their evolving strategies. Strategic Choices While there are various typologies of strategic choices, the one developed by Miles and Snow (1978, 1984) seems to have the most explanatory value for social economy organizations. They argue that there are four strategic types. 1. Prospector – an innovating risk-taking strategy. Vital Bridges is an example of an organization that resulted from several organizations coming together and following a prospector strategy. In 2002, there were two hundred organizations in Chicago serving HIV/AIDS needs.

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It became clear that some sort of innovative response was needed to address the fragmentation. To that end, three HIV/AIDS organizations merged and became Vital Bridges, with a budget of $4.6 million serving twenty-four hundred individuals. The new organization offered new services such as providing fresh fruit and meat, transitional housing, and mental health programs (Butzen, 2009). 2. Defender – a stability-seeking strategy. Back-office collaboration among nonprofits illustrates a defender strategy. Nonprofits can work together to gain efficiency gains for common business requirements such as paying rent and utilities, providing employee benefits, and using software, as well as other similar back-office activities (Cohen, 2008). 3. Analyzer – one that combines the prospector and defender strategies by trying to maintain a stable focus while innovating at the edges. Free the Children is an example of a global nonprofit that follows an analyzer strategy. Its principal mission is to provide education to empower youth to learn and to effect change. Recently it has started a social enterprise that produces clothing, jewelry, and books, and organizes trips. Free the Children continues with its core strategy – school and village building – while developing innovative businesses whose proceeds are to fund the organization’s mission of building schools and villages. 4. Reactor – a reactive response to the exigencies of the environment. The reactor strategy is not really a strategy – it more an after-thefact response! The response of the American Red Cross during the Katrina crisis illustrates a reactor (non)strategy. The problems of the American Red Cross are discussed in the end-of-chapter case. Social economy organizations have been found to change their strategies depending on the demands of their environments. Of the four strategic choice types, Akingbola (2006a) found that the analyzer and the prospector strategies were most often used in the seventy-nine diverse Canadian social economy organizations he studied. He notes that organizations were not just reacting to changes in government funding but were managing their strategic choices purposefully. He notes further that “[more] than ever, nonprofit organizations are adept at being strategic and at aligning their strategies with changes in [their environmental domain]” (Akingbola, 2006a, p. 265). The different strategic choices require different design choices, if the strategies are to be successfully implemented. The prospector

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type requires a flexible structure with strong research capacities; the defender type requires a bureaucratic design with an efficiency orientation and with close employee supervision; and the analyzer type requires a design that has both flexibility and tight control (Daft & Armstrong, 2012). However, the correct design choice – that is, the one that fits – does not guarantee that the organization will be successful. Appropriate organizational design choices are therefore necessary but not sufficient for successful strategy implementation. While structure should follow strategy, it’s important to note that existing structures can constrain an organization’s ability to see strategic choices, and therefore structure can limit strategizing in organizations. What are the options in selecting an organizational design? While the human imagination is the only limitation, there are two overarching organizational types – those that are bureaucratic and those that are organic. Bureaucratic organizations are characterized by specialization and division of labor, a hierarchy of authority, standard operating procedures, and a clear separation of the person and the position (Daft & Armstrong, 2012). Organic organizations, on the other hand, are characterized by the decentralization of authority to the lower organizational levels and as such are nimble. Organic organizations are often teambased. It is important to note that the terms bureaucratic and organic are simply descriptions of organizations and do not suggest that one is preferable to the other. The design choice needs to be made on the basis of fit, not personal preference. Organizations are often hybrids of the two. Many organizations in the social economy are becoming “hybridized.” As Rathgeb Smith (2010, p. 219) notes, this trend of “hybridization of nonprofit organizations is part of a broader movement within nonprofit and public management reflected in many diverse public–private partnerships, networks and collaborations.” This trend creates challenges both for the management and governance of such organizations as their designs are evolving. Mintzberg (1981), a thought leader on strategy and design, has developed a typology comprising the following designs. Organizational Design Choices Organization theorists have long recognized the importance and impact of organization design. Proper design choices can provide organizations with strategic advantages in executing their mission.

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Organizations can and do suffer if their design does not support the achievement of the mission. Mintzberg (1981) has identified some key organizational configurations or types of organizations, each of which forms a gestalt that needs to be internally consistent. He first identified five configurations – simple structure, machine bureaucracy, professional bureaucracy, ­ adhocracy, and divisionalized form – and then later identified the missionary form of organization. Each is described briefly and illustrated with organizations from the social economy. Simple Structure As the name suggests, the structure is simple with one large unit and one or two managers. Little is formalized, and there is little or no planning. Most organizations start as simple structures, and those that operate in simple, dynamic environments retain their simple structure. Small community-based organizations such as children’s sports leagues are often simple structures. Machine Bureaucracy The machine bureaucracy, as the name suggests, has an elaborate administration with many rules and standard operating procedures. Machine bureaucracy is a rigid structure that fits best with mass production activities. Some would argue that organizations like the United Nations fit many of the characteristics of the machine bureaucracy. Professional Bureaucracy A professional bureaucracy uses the standardization of skills rather than the standardization of work processes or outputs for its coordination. That is the fundamental difference between the professional and machine bureaucracy configurations. As well, power accrues to the professionals whose expertise is used to accomplish the work of the organization. While the world-renowned Hospital for Sick Children is a typical professional bureaucracy, interestingly, its emergency department was redesigned and now resembles an adhocracy. Adhocracy The adhocracy is essentially a project-focused organization of teams of multidisciplinary experts. Adhocracies are designed to foster

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innovation in complex ways: “It is tremendously fluid structure, in which power is shifting and coordination and control are by mutual adjustment” (Mintzberg, 1981, p. 10). One of the best-known adhocracies is NASA, an organization that is flexible by design. Divisionalized Form The divisionalized form is a group of independent units joined together by a loose administrative overlay. Its primary difference from the four forms described above is “it is not a complete form, but a partial structure, superimposed on others” (Mintzberg, 1981, p. 9). Lehigh Valley Health Network, in Allentown, Pennsylvania, consisting of various care centers and two hospitals, each a professional bureaucracy, is an example of a divisionalized form. Missionary Form The norms and values of missionary organization are used to coordinate and control the behavior of the organizational members. Many religious organizations use the missionary form in their design. (The missionary form emerged later in Mintzberg’s research.) Hegelsen (1995), based on her work at the Village Voice newspaper in New York City, identified another organizational type that she called the web of inclusion. It is more circular than hierarchical and builds from the center out, spinning new threads of connection and reinforcing existing strands. Any weakness at the center or the periphery hurts the web. Wei-Skillern and Marciano (2008) have researched networked nonprofits such as Habitat for Humanity Egypt and Guide Dogs for the Blind Association in the United Kingdom. They conclude that “… nonprofits that pursue their missions through networks of longterm, trust-based partnerships consistently achieve more sustainable mission impact with fewer resources than do monolithic organizations that try to do everything by themselves” (Wei-Skillern & Marciano, 2008, p. 43). While Hegelsen’s work is based on a bricks-and-mortar organization, it seems to fit virtual organizations as well. Social economy organizations are becoming more virtual, creating content-rich websites to support their work. In some social economy organizations, participants interact only online (Ryan, 2005) – for example, www.Kiva.org, which is perhaps the best known, and a good example of a virtual missionary organization.

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A CLOSER LOOK: WWW.KIVA.ORG Kiva.org (Kiva), an innovative Web-based organization, has had a meteoric rise since its conception by the current CEO, Matt Flannery, and Jessica Jackley, in 2004, and its official founding as a nonprofit, which happened a year later (Kiva, 2011). Kiva is both a local and global (sometimes termed glocal) community economic development enterprise. Kiva’s mission is “to connect people through lending for the sake of alleviating poverty” (Kiva, 2008). Kiva is a person-to-­person microlending website that works through a four-stage process (Kiva, 2008): 1. Lenders browse profiles of entrepreneurs in need and choose someone to lend to. When they lend, using PayPal or their credit cards, Kiva collects the funds and then passes them along to one of its micro-finance partners worldwide. 2. Kiva’s micro-finance partners distribute the loan funds to the selected entrepreneur. Often, its partners also provide training and other assistance to maximize the entrepreneur’s chances of success. 3. Over time, the entrepreneurs repay their loans. Repayment and other updates are posted on Kiva’s website and emailed to lenders who wish to receive them. 4. When lenders get their money back, they can re-lend to someone else in need, donate their funds to Kiva (to cover operational expenses), or withdraw their funds. Kiva reports that by 2011, it had provided $289,993,350 in loans funded by 694,901 lenders to 736,779 entrepreneurs in 217 ­countries, and 80 percent of loan recipients are women. In 2010, Kiva partnered with Visa to expand micro-lending opportunities for US small businesses and expanded its reach to the Gulf Coast (Kiva, 2011).

It is important to reinforce the point that design choices matter and that an organization’s design choice that is out of sync with its environment, its mission, and its strategy will make it difficult to be effective. The design choices that work for organizations in one environment do not work for another with completely different functions. The design

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choice for Kiva.org, while highly innovative, is inappropriate for, say, little league baseball teams. As well, it is important to distinguish between effectiveness and efficiency. The two terms are often used interchangeably and their meanings are obscured. Effectiveness means “doing the right thing” while efficiency means “doing things right.” As a result, it is possible for an organization to be effective and not survive, just as it is possible for an organization to be efficient but not have its desired impact. Frumkin and André-Clark (2000) provide a useful alert to the perils of the efficiency trap whereby an organization works to become efficient but does so at the cost of its mission. They argue that non­ profit organizations therefore need “… strategy grounded in values …” (Frumkin & André-Clark, 2000, p. 157). Nonprofit organizations are prone to mission creep when they face demands from their funders for greater accountability and other external pressures, and must fight that tendency (Alexander, 2000). Board Design and Governance An important component of design choice is the board of directors and governance. The next A Closer Look, featuring Girls Inc.®, describes an organization that uses an effective dual governance organizational design to reflect its mission and its geographic reach. A CLOSER LOOK: GIRLS INC. Girls Inc. was founded in 1864, is headquartered in New York City, and First Lady Michelle Obama is the chair of the Honorary Board. Its programs focus on leadership experiences, athletic skills, economic literacy, self-reliance, and life skills, and science, math, and technology. Its mission is to inspire all girls to be strong, smart, and bold. Girls Inc. achieves its mission by running gender-specific programs for girls, ages four to eighteen years, that promote awareness and self-discovery in such critical areas as self-esteem development, sexuality, career choices, peer pressure, and body image. Girls Inc. works in civil society to address ­particular social challenges faced by girls.

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It created a girls’ bill of rights that still serves as its primary educational tool. Girls Inc. engages in frequent program design, redesign, and most notably, program evaluation. In 2011, Philanthropedia (now part of Guidestar) ranked Girls Inc. as one of nine outstanding nonprofits that work with at-risk youth (Philanthropedia, 2011). The experts’ assessment noted the extent of Girls Inc.’s commitment to ongoing program evaluation. The organization uses a dual governance structure of a national council and a national board. According to its website, The National Council for Girls Incorporated is a body whose delegates represent the member organizations. Each Girls Incorporated member organization is entitled to three votes at any meeting of the National Council … The Girls Incorporated bylaws require that the National Board have at least twenty members but no more than forty members. The members of the National Board include the five officers of the council, eight regional representatives and up to twenty-seven atlarge board members. The President/CEO serves as a voting member of the board. (Girls Inc., 2008, p. 1, p. 2)

As the Girls Inc. example illustrates, organization design choices can make a difference in organizational effectiveness. The chapter now focuses on issues of board design and governance, first for nonprofit organizations serving the public and then for member-based organizations such as cooperatives and nonprofit mutual associations. The board of directors is the official governance of social economy organizations, as it is the board’s responsibility to ensure mission success. There are three significant differences between for-profit and nonprofit boards: (1) for-profit boards are a collection of people who are peers of the CEO in terms of stature, income, and prestige, but that is not the case in nonprofit boards; (2) CEOs of for-profit boards serve as the board chair, but the executive director does not do so on nonprofit boards; and (3) for-profit boards use established and relatively straightforward metrics such as profit growth to monitor performance, but nonprofit boards have less defined metrics (Salls, 2005). The next section looks at the key attributes of nonprofit boards. It highlights that various organizational designs and strategies that

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nonprofit boards pursue. Like the typology of the six organizational types that Mintzberg discovered (as discussed above), researchers have found that there are distinct types of boards. Nonprofit Boards Brown and Iverson (2004) found that nonprofit organizations that followed a prospector strategy (innovating risk-taking) sought to have boards that were expansive, inclusive, and involved nonboard members in committees. In other words, such organizations tried to make their board structures flexible so that they could carry out their mission. Their research demonstrated that “… strategically different nonprofit organizations (prospectors and defenders) exhibited predictable structural patterns” (Brown & Iverson, 2004, pp. 394–5). It is important to remember that the patterns are predictable. Gill (2005) has identified nine main types of nonprofit board designs of which we focus on three: (1) traditional – the board governs and oversees operations through committees, and management is delegated to staff through the executive director; (2) policy governance – the board governs through policies designed to achieve the organization’s mission; and (3) results-based – the board sets a direction and is focused on achieving performance targets.1 The three are described in more detail, as they are common in practice and in aspiration. In a traditional type, the board oversees operations, but it delegates management activities to the executive director (ED). The ED does much of the organizational planning, and then the board vets and approves the plans. The board committees are functionally designed to mirror the key management functions. Policy governance boards, by comparison, govern through organizational goals (or ends), and the ED has the power to determine the means

1 The other types of boards, according to Gill (2005), are (1) operational – the board both governs and manages the organization; (2) collective – the board and staff together make decisions about the organization; (3) management – the board manages the operations with the help of staff; (4) constituent representational – board members represent their constituencies; (5) fundraising – the board, essentially a foundation, serves at an arm’s length from the nonprofit organization; and (6) advisory – the board, often selected and dominated by the executive director, governs nominally.

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that are to be used for achieving the ends. Task forces are e­ stablished to support the board’s work. The board’s principal role is to monitor pol­ icy compliance. (Later in the chapter, the Carver Policy Governance model, which has had considerable impact in the field of organizational governance, is described.) A results-based board is focused on setting a clear direction for the organization and for ensuring that the organization gets a good “return” on its investment. The board and the ED work in partnership while taking on different aspects of the organizational planning process. In a results-based board, the board is dominant: it sets direction and assesses the extent to which the organization has achieved its results. There seems to be a relationship between organizational size and board type (Gill, 2005). Simple structures are likely to have operational, collective, or management board types, while machine and professional bureaucracies are likely to have traditional, constituent representational or governance board types. Further, those social economy organizations that are operated exclusively by volunteers are likely to have operational boards where the roles of managing and governing blur. In designing a suitable board, there are two central design questions that need to be answered: (1) What will be the decision-making scope of the board? and (2) How closely will the board be linked to and involved in operational and staffing issues? It is worth noting that “[no] single approach to governance has proven suitable for every organization” (Gill, 2005, p. 42). Board design is therefore a structural choice that is contingent on the mission and the age of a particular nonprofit organization. As well, many boards are hybrid designs using structures and processes that evolve over time to fit the needs of the organization (Gill, 2002). Nonprofit Governance There is a burgeoning amount of literature about good governance for organizations in the social economy. The chapter highlights some of the current thinking. A recent far-ranging study (Bugg & Dalhoff, 2006) provides some useful insight about current trends in board governance and identifies eight trends: 1.  Increased focus on governance 2.  Increased demand for – but reduced supply of – qualified directors 3.  Rising expectations and requirements for nonprofit directors 4.  Increased demand for efficiency and effectiveness 5.  More emphasis on process and organizational culture

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6.  Increased demand for accountability and transparency 7.  Increased emphasis on performance measurement 8.  Increased attention to risk management These trends will have an impact on the organizational design of boards and the development of good governance practices. For example, Bugg and Dalhoff (2006) note that changing demographics require boards to become more diverse to represent better their stakeholders and the community at large. This is particularly important for boards that are not elected by a broad membership. For boards of this sort, often public sector nonprofits such as hospitals and universities, it is important for the members to reflect the diversity of the surrounding community and the primary stakeholders for their organization. They also note that a change in the funding environment, such as greater demands for accountability and transparency from donors, will require boards to engage in governance practices with high degrees of transparency and accountability. In addition to these challenges, the design of boards can be adversely affected by the very types of board members who are often recruited. According to Chait, “Nonprofits do not pay enough attention to the capacity of individual trustees to be effective members of the orchestra. They tend to look for talented musicians, so they get a lot of soloists” (Chait as cited in Salls, 2005, p. 2). In addition, there are specialized organizations designed to educate both the for-profit and nonprofit sectors and are also increasingly important to help board members to design effective strategies to respond to the trends. Education is essential for boards to be effective because in the social economy board members are volunteers who require training for their role. For some types of service, this training and ongoing support comes from umbrella organizations to which other organizations providing service belong (see the discussion in the earlier chapters on second- and third-tier organizations). Member education is one of the cooperative principles, and generally this is applied through apex organizations (e.g., California Credit Union League, Credit Union National Association) that make available training for board members. The United Way organizations also carry out this function to a degree through specialized workshops that they offer. Brown’s (2007) research underscores the importance of choosing board members who have the needed competencies for the organization. He found that “board development practices lead to stronger board members, and stronger board members are a significant predictor of board performance” (Brown, 2007, p. 312).

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The next A Closer Look describes one organization that is working to increase board effectiveness through education and knowledge creation. BoardSource serves a valuable purpose as it provides the capacity to counter Drucker’s provocative observation that “[all] nonprofit boards have one thing in common. They do not work” (Drucker as cited in Laughlin & Andringa, 2007, p. 1).

A CLOSER LOOK: BOARDSOURCE BoardSource, located in Washington, DC, is a 501(c)(3) organization whose mandate is to advance the public good through the development of exceptional nonprofit boards and by inspiring board service. Its work is guided by four core values: (1) leadership – it champions the importance of effective board leadership and action; (2) integrity – it expects accountability from nonprofit leaders and from itself; (3) excellence – it strives to deliver high-quality content and strategies; and (4) impact – it is committed to generating positive change and approaching problems in a practical, creative, and flexible manner (BoardSource, 2010). BoardSource offers print and Web-based resources, and training and consulting services. It has a budget of $9 million, employs more than forty employees, and works with seventeen associates to deliver its governance guidance. BoardSource also engages in partnerships with several large nonprofits such as Habitat for Humanity and the American Association of Museums to provide guidance on good governance practice. Its own growth mirrors the public’s and the sector’s concern with the importance of good governance in the social economy. BoardSource was founded in 1988 as the National Center for Nonprofit Boards. In its first year of operations, it produced three books, had a modest budget, served fourteen clients, and had three staff members.

Nonprofit Governance Models In this section, two current nonprofit governance models are discussed: Carver’s Policy Governance model and the Governance as

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Leadership model. These are selected because they are widely used by social economy organizations and are much discussed in the governance literature. Carver’s Policy Governance Model (the Carver Model) The Carver model, developed in 1990, has received much support and, more recently, some criticism. While its initial focus was on the for-profit sector, it has been refined for nonprofit organizations. It is described, perhaps immodestly, on the Carver’s Policy Governance model website as “the world’s most complete theoretical foundation for the board’s governance role in business, nonprofit (NGO), and government organizations” (Carver & Carver, 2001). The Carver model is a universal set of prescriptions of good governance. The model begins with the view that ultimate organizational authority rests with its board, which is to ensure that the organization accomplishes its mission. In other words, “… the organization … accomplishes the intended results for the intended people at the intended cost or priority …” (Carver & Carver, 2001). According to the model, “[policy governance] demands that the board’s primary relationship be outside the organization – that is, with owners” (Carver & Carver, 2001). In the case of nonprofit organizations, the owners are seen as the community, although ownership in this case would be more of a metaphor than a proprietary right, and perhaps stakeholders would be a more appropriate term. The board, therefore, is to serve as both the servant of the community as well as the leader of the nonprofit organization. Carver also suggests that boards should act as a surrogate for external market forces by setting the organization’s mission and services (Brown & Iverson, 2004). The Carver model recommends that a position be created to which the board can delegate the management of the organization. The model’s preferred term for the single point of delegation is CEO but is more typically among nonprofit organizations the executive director. In this model, “[the] board creates the CEO; the CEO does not create the Board” (Carver & Carver, 2001). However, the board also delegates to the organization’s leader the responsibility to manage the organization and to execute board policy. At the core of the Carver model is the means/ends distinction. It defines purpose narrowly – the board defines which social needs are to be met, for whom, and at what cost. Or, as Carver puts it, “(1) what results for which (2) recipient at what (3) worth” (Carver &

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Carver, 2001). These three types of decisions are called ends. The ends are essentially the mission and vision of the organization. All other decisions are called means. Therefore, “… [policy governance] boards develop policies which describe their values about ends, executive limitations, governance policies, and board-staff linkage. Each policy type is developed from the broadest, most inclusive level to more defined levels…” (Carver & Carver, 2001). Carver’s ends/means distinction is designed to enable boards to have the necessary oversight for good governance while allowing the organization to execute its mission flexibly. The Carver model also puts significant emphasis on the importance of board self-evaluation and recommends a self-audit activity at every board meeting. The Carver model has been challenged for its rigidity and its “one size fits all” universalist approach, which does not account for the contingencies of organizational age and size (Armstrong, 1998). Armstrong also criticizes the model for ignoring human nature. Another critique (Institute on Governance, 2008) of the Carver model argues that Carver makes high demands of the people in the system. Critics have pointed out that the model needs ideal board members to function, ones that truly know the organization and possess exceptional understanding of the organization’s strengths and weaknesses. Board members of this caliber might be difficult to find.

As well, the empirical evidence does not indicate that the Carver model is any more effective than other models of governance (Brudney & Murray, 1998). Further, the Carver model is not applicable for the many social economy organizations that are staffed entirely by volunteers. Governance as Leadership Model (Leadership Model) The Leadership model argues that there are three types of governance: fiduciary, strategic, and generative (Chait, Ryan, & Taylor, 2005). Each type is necessary but alone is not sufficient for good governance. Fiduciary Type Fiduciary governance requires the board to behave with due diligence and to serve as the sentinel of an organization. It is designed to prevent

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the misuse of resources, to ensure that the resources are used appropriately, to keep the organization on mission, and to ensure that the members of the board act in the interests of the organization. Acts of fiduciary governance include budgeting, auditing, investment, and program review. The board’s work is operational and uses financial and other metrics to address and/or prevent problems. In short, fiduciary governance asks, “What’s wrong?” Strategic Type Strategic governance goes beyond the compliance requirements of the fiduciary type. It involves discovering and setting strategic direction: “… [The] board’s attention shifts from conformance to performance, and the [board members’] perspective changes from inside out to outside in” (Chait, Ryan, & Taylor, 2005, p. 51). The board and the ED work in partnership to shape strategy and to review the strategy’s implementation and results. This form of governance uses strategic indicators and competitive analysis as its metrics. In short, strategic governance asks, “What’s the plan?” Generative Type Generative governance, the most complex and ambiguous of the three types, is a process of reflective leadership practice. It is particularly important in complex, risky, and ambiguous situations where there is the potential for significant conflict but where the desire for consensus is high and the board is making a decision that is not readily reversed. Its work is to discover issues and to make sense of them for the organization. It uses organizational learning as its success indicator. In short, generative governance asks, “What’s the question?” The Leadership model is trying to use a “triple-helix” approach to governance. Chait, Ryan, and Taylor (2005) present a helpful example that highlights the use of the three types of governance in practice. What follows is an abbreviated version of their example. Imagine you are on the board of an arts museum and have decided to lend a significant number of your organization’s Impressionist paintings collection to another museum. In your sentinel (or fiduciary) role, you need to address such issues as the travel-worthiness and the security arrangements for the art, as well as the costs and benefits of the plan to your organization. In your strategist (strategic) role, you need

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to address such issues as how the absence of your paintings will affect your visitor rate, how your museum’s reputation will be affected, and what partnerships might your museum consider. In your sense-maker (generative) role, you need to address such issues as what you will do if the financial arrangements are not acceptable; if you will lend art to the highest bidder, what sort of museum (traditional or avant-garde) do you want to be. The Leadership model, by focusing on the importance of generative type of governance, adds a significant emphasis on a board’s role to learn and to develop further the organization’s mission. The generative role requires a different mindset. In brief, Chait, Ryan, and Taylor (2005, p. 123, p. 131) urge board members to pose “catalytic questions”: 1.  Have we clarified (or muddled) organizational values and beliefs? 2.  Have we clarified (or muddled) the organization’s vision? 3.  Have we discovered new ends as we have modified the means? 4.  Have we reframed important problems? 5. What do we know now about governing that we didn’t know before? 6. What did we once know about the organization that is no longer true? 7. What did we once know not to be true about the organization that is now true? The Leadership model sets the bar high, and a concern often expressed is if the generative element of the model is both too demanding and impractical to achieve. While the Leadership and Carver models are complex, and perhaps even daunting, it is important to remember that good governance is achievable. According to Murray and Harrison (2012), nonprofit boards that have a practical – rather than an i­ deological –­ function tend to operate more effectively. This view implies that nonprofit boards will have to strive to find a balance between passion for the mission, which can become ideological, and the achievement of the mission, which requires a focus on dispassionate execution. Such a balance can be tricky to achieve. According to Plumtree and Laskin (2003), moving to a formal approach to governance is facilitated by several key success factors including the following: the recognition that there will be growing pains and that the process takes time; a clear understanding of the board’s rights and responsibilities and those of the executive director; and ongoing communication between the board chair and the

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e­ xecutive director. They go on to note that “… most organizations find that a collaborative board-staff relationships yield positive results. But occasional difficulties should be expected and should be managed constructively by both board and staff” (Plumtree & Laskin, 2003, p. 6). Board Design and Governance for Member-Based Associations Many organizations in the social economy are set up to serve a membership and therefore embody the principle of mutual aid (Kropotkin, 1989; MacPherson, 1979). These would include cooperatives and credit unions as well as the many forms of nonprofit mutual associations – for example, social clubs, religious congregations, and ethno-cultural associations, and professional, labor, management, and consumer groups. The list is extensive, and these are discussed in chapters 1 to 5, with chapter 5 in particular focusing upon civil society organizations (see Figure 1.1). Most organizations of this sort derive their revenues from membership fees, but some, such as some forms of cooperatives and credit unions, sell their services in the market, often competing with private sector businesses, and are therefore classified as social economy businesses. The board design of member-based associations can be classified using the (Gill, 2005) typology described earlier in the chapter. Smaller organizations will tend use a collective board design in which the board and staff together make decisions about the organization. They may also use a management board design in which the board manages the operations with the help of staff. Larger organizations will tend to use more elaborated designs such as a constituent representational design through which board members represent their constituencies. They may use a traditional design in which the board governs and oversees operations through committees, and management is delegated to staff through the executive director. Larger organizations may also use a results-based design in which the board sets a direction and is focused on achieving performance targets. It is important to note that the board design choices are a function of two related organizational ­contingencies – size and age. Chaves and Sajardo-Moreno (2004) further note that as organizations in the social economy grow in size and complexity, the managers of the organizations play an increasingly prominent role in their governance. In addition, when designing the right kind of board, member-based associations need “to face the challenge of the integration of values with

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value, and vice versa” (Malo & Vézina, 2004, p. 132). In other words, organizations must ensure that the social and economic values work together. Many of the organizations described in chapters 1 to 5 seek an appropriate balance of their democratic values with the economic value that they are trying to achieve for their members. For example, feminist organizations have historically attempted to use a collective board, at times to the detriment of economic value (Rothschild-Whitt, 1982). Governance for Member-Based Associations All organizations face a particular governance challenge in that they must attempt to meet the needs of their members, who much like the citizens in a democratic society are entitled to one vote at the annual general meetings and in committees. Cooperatives, as noted in chapter 2, embrace seven principles, and a key one is “democratic member control.” While members may choose not to participate in the governance, they are entitled to and often exercise this entitlement when they are displeased with decisions undertaken by the organization. People who belong to a union or other form of labor association have likely experienced that the typical meeting is poorly attended, but when there are contract negotiations and the contract is less than expected, members will participate – with much energy. While there is no rule of thumb for member participation, a key consideration is the importance of the issue to them. Associations that address issues related to work, housing, and childcare will often have an active membership, as these are an important part of the human lifespace (Lewin, 1935). Put more simply, these are issues that people feel strongly about. Similarly, there tend to be high rates of participation in some second-tier organizations in which the members are other organizations (e.g., a credit union central) because the stakes are very high and could involve important financial and policy decisions. For associations through which consumers purchase products like banking services and food, most members are inactive, save for an activist group that acts as a proxy for the larger group’s interests. If this proxy breaks down, the less active group may vote with their feet to take their purchases elsewhere, that is, exit the organization (Hirschman, 1970). Therefore, governance in member-based associations is very challenging in that the board and management must be in tune with member aspirations, even those who limit their participation to using the services. Spear (2004) argues that members do not exert much influence over the boards of member-based associations. In his view, “The low level of

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membership activity in consumer/user cooperatives and mutuals raises questions about the extent to which board members may be considered representative, and the extent to which the democratic process gives a mandate to the elected board” (Spear, 2004, p. 55). Member-based associations differ from conventional businesses in four important ways: 1. As noted, the primary purpose of member-based associations is to meet the common needs of their members, whereas the primary purpose of most investor-owned businesses is to maximize profit for shareholders. Arguably, in order to meet shareholder needs, they must also satisfy consumers, but shareholder interest is salient. In effect, a conventional business is a piece of property owned by private interests often in the form of shareholders. A member-based association may own property, but it is in the service of its mission to meet its members’ needs. 2. Member-based associations use the one-member/one-vote system, not the one-vote-per-share system used by most businesses. This difference is fundamental and underlines the point that democratic governance is the lynchpin of a member-based association. 3. Member-based associations may share surplus earnings among their members on the basis of how much they use the services (i.e., patronage). In a conventional business, surplus earnings are referred to as profits, and they belong to the owners, often based upon the number of shares they hold. 4. Member-based associations are embedded within a community, and their membership is a proxy of that community. As noted in chapter 2, another of the principles embraced by cooperatives is “concern for community.” This principle can be extended to the large majority member-based associations. By comparison, excepting for small businesses, conventional businesses have weak links to communities and increasingly so as commerce becomes less place based and relies upon international markets. While the issues vary by organization, the common denominator is that the members, each bearing one vote like the citizens of a democracy, elect the board, or official governance, from among their group. This right is fundamental to a member-based association and underlines its difference from a conventional business, as illustrated by Recreational Equipment, Inc. (REI), a member-based retail store that specializes in outdoor clothing and equipment.

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A CLOSER LOOK: RECREATIONAL EQUIPMENT, INC. Founded in the 1938 by twenty-three mountain climbing friends, Recreational Equipment, Inc. (REI), headquartered in Kent, Washington, is the nation’s largest consumer cooperative with more than 5.1 million active members. Its 2012 revenues were $1.93 billion, and its 2012 patronage refunds were $104.6 million. It had 130 stores in thirty-two states in 2012 and employs more than eleven thousand people (REI, 2012a). According to its strategic plan, its mission is “to serve our members by selling great gear and promoting an outdoor lifestyle: to help people have fun, appreciate nature, and becomes stewards for the environment” (REI, 2012b). REI has been recognized as one of the 100 Best Companies to Work for by Fortune magazine every year since the initial rankings in 1998 (REI, 2012a). In 2012, it ranked eighth. REI donates monies to support conservation efforts through its charitable foundation. As well, its employees participate in local clean-up activities. Members are entitled to 10 percent discounts on certain items as well as a patronage dividend. Every March, active REI members receive a member refund in the form of an annual dividend notice. The refund is typically 10 percent back on eligible REI purchases.

To participate meaningfully, members need to become knowledgeable about their association so that they can contribute ideas and make informed decisions. There has been increasing attention on how better to engage association members in exercising their rights as well as their responsibilities. For example, the Cooperative Development Institute in Shelburne Falls, Massachusetts, offers in-depth training on such issues as the tyranny of structurelessness; and identifying, addressing, and dealing with informal power dynamics in cooperatives and coopera­ tive dialogue; and decision making: practices, purposes, and techniques (CDI, 2011). Fairbairn (2004), whose research focuses on cooperatives, identifies different forms of participation; for example, attending and voting at meetings, participating in education and training, investing and patronage, and interacting with staff and fellow members. He goes on to

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suggest that “relying on elections is too easy: people are not excited by formal democratic processes … the onus is on the cooperative to show it understand its members” (Fairbairn, 2004, p. 31). Côté and Fairbairn (n.d.) have developed a useful tool to assess and to improve democratic functioning in cooperatives. They have developed measures to audit what they call cooperative cohesion and associative practices as well as the type of environment in which a cooperative competes. To assess cooperative cohesion, the audit looks at the degree to which members share values and understand the business, and the extent to which the organization’s strategies are effective. To assess associative practices, the audit looks at the extent of member education as well as the degree of communication with and information for members; additionally, it looks at the degree of member consultation and the type of decisionmaking processes utilized. To understand a cooperative’s competitive environment, the audit requires a SWOT analysis, which identifies the organization’s strengths, weaknesses, opportunities, and threats. Once the audit is completed, a cooperative is able to determine its degree of democratic functioning and then use the findings to improve its democratic decision making. This audit can be extended to member-based associations more generally, as they embody the same structure as a cooperative. Employee Participation in Governance Social economy organizations, like conventional businesses and government agencies, have employees that generally operate outside of the governance body. Increasingly, organizations are striving for socalled “flatter structures,” which give greater decision-making latitude to employees (Benet, 2006; Bernstein, 1982). For organizations with unions or other forms of workplace associations, employee rights are negotiated by the bargaining unit with management. While the forprofit sector in the United States is largely opposed to unionization, the nonprofit sector is more accepting of it (Berkshire, 2002). In addition, there are some interesting examples of democratic governance in the social economy that include employees, not simply in the various forms of workplace participation that are becoming more commonplace in conventional business but also in the formal governance – the board of directors. The two forms that bear special mention are the worker cooperative (see chapter 2) in which the members are the employees, not the users

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of the service, as in most cooperatives, and the collective, as found in some nonprofits – for example, feminist collectives. As noted in chapter 2, worker cooperatives are an anomaly among cooperatives, as in most cases members are consumers or users of the service. Excepting the worker cooperative, employees have a conventional relationship with management, as is found in businesses in general. Some may participate in the governance as consumers of the service, but they have no special rights as an employee other than those that may be negotiated through a collective agreement by a union or another workplace association that represents them. In a worker cooperative, employees do have membership rights, a primary one being one vote each to participate in the governance and to elect a board of directors that will represent them (Ellerman, 1990). This form of governance also raises issues about participation by employees who are not on the board. When employees are also owners in common, there is an expectation that their views are taken seriously. As a result, organizations of this sort often experiment with structures because striking a balance between employee participation and management’s ability to function is important. H. Barclay (personal communication, 23 February 2009), office manager of a large member-owned cooperative, highlights the challenge when she notes, “There always seems to be a constant “pull” between the necessity for a hierarchical system to run the business and the need for the “equality” of the membership. In members meetings, we are all equal but as soon as we go downstairs our roles shift. This can and often has led to some conflict, especially for those members that do not hold managerial positions.” In a nutshell, Barclay presents the fundamental governance dilemma for worker cooperatives and other democratic workplaces – an appropriate balance between sufficient hierarchy that allows management to make business decisions and opportunities for employees to participate to a degree that management is representing their aspirations. There does not appear to be an ideal solution to this dilemma, but the fact that such organizations can compete effectively in the market is noteworthy. The collective, as found among feminist nonprofits, is a variation of a worker cooperative. The difference is that such organizations are small by intent and generally do not aspire to expand (Bordt, 1997; Rothschild-Whitt, 1982). Feminist collectives tend to be small service organizations (e.g., rape crisis centers) and attempt to engage all members in decision making. Management under such circumstances is challenging, and conflict can be commonplace (Mansbridge, 1982). Arguably, conflict may be viewed as a byproduct of democracy, but

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unlike their politics, organizations functioning in the market have to make timely decisions. Nevertheless, through employee participation, workplace collectives attempt to obtain a buy-in so that when a decision is made there will be greater commitment among the employees. Employee participation in the governance of an organization is by no means mainstream; however, it is leading edge and therefore deserves discussion. These examples are not limited to the social economy, as isolated cases can be found in the private sector as well (see chapter 2), as well as in a small number of democratic employee stock ownership plans (ESOPs) in the United States (Kruse, Freeman, & Blasi, 2010). However, worker cooperatives and feminist collectives are outstanding examples of this model. In this regard, organizations in the social economy can also be viewed as a laboratory for innovation and experimentation. Other Issues in Governance There are many other issues related to governance that could be discussed, but we would be remiss to omit two in particular – board succession and selection of the executive director (ED). Boards of social economy organizations may experience significant turnover as the members are volunteers, who may experience burnout or who may simply decide that after one term they want to move on to other activities. In addition, the organization’s stakeholders (or their relative power) may change, and this could affect how board members perceive their involvement. Due to a stakeholder change, the organization can change its emphasis, and this could affect whether some board members want to continue. Board members of social economy organizations are expected to put in much time and insight in their roles. They have significant responsibilities: as directors, they are responsible for the good governance of the organizations and can be liable for any significant organization problems. Increasingly, boards in the social economy are developing formal nominating committees to plan for board succession. As well, they work with organizations to recruit and to attract potential board members. A common practice in the board of social economy organizations is to stagger the term so that only part of the board’s membership changes over at the annual meeting. Otherwise, continuity between policies could be adversely affected. As the board is responsible for hiring the executive director, it needs to develop a succession plan to ensure that the organization has a

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smooth transition. Boards often avoid succession planning as they do not want to offend the executive director, and the executive director avoids raising the issue lest the board becomes concerned that he or she is about to leave (Gottlieb, 2006). The challenge of executive director succession may be even greater than that of board succession. Many EDs are expected to retire in the near future, and there are not enough Generation Xers to replace them (Hall, H., 2006). Additionally, it is well recognized that being an ED is a tough job that may not appeal to many: “The growing complexity of managing … and the long hours that many, if not most, executives are required to put in turn off many staffers who otherwise might be recruited to the position” (Hall, H., 2006, p. 2). Conclusion The chapter has described a range of organizational designs in the social economy. It has emphasized the importance of organizations having the right design to fit the demands of their environment and mission. The chapter then delved into the designs of nonprofit boards to highlight their critical role in social economy organizations. Again, there is a range of designs, and there is no one best way to design. The chapter then presented two current models for board ­governance – the Carver model and the Leadership model – both of which require more empirical examination in order to determine their impact. It concluded with a discussion of the requirement for and the actual use of democratic decision-making processes in member-based associations, including cooperatives and nonprofit mutual associations, and with a discussion of employee participation in the governance. VX DISCUSSION QUESTIONS 1.  In your view, is one board type more effective than another? 2.  What are the strengths and weaknesses of the Carver model? 3.  What are the strengths and weaknesses of the Leadership model? 4.  What can board members do to become generative thinkers? 5. How are member-based associations different from other organizational types in their governance practices? 6. What can member-based associations do to enhance membership participation in the democratic decision-making processes? 7. Is democratic governance practical in a modern economy? Why or why not?

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VX CASE FOR ANALYSIS: THE AMERICAN RED CROSS

The International Red Cross was founded in 1863 in Geneva, Switzerland, and the next year, the first Geneva Convention was issued to protect the war-wounded (see Appendix 1 for the principles of the International Red Cross and Red Crescent movement). Clara Barton founded the American Red Cross in 1881. Its first disaster relief mission, which took place that same year, was to help victims of forest fires in Michigan. The following year, the United States ratified the Geneva Convention. The history of the American Red Cross has many examples of excellence in its relief efforts (American Red Cross, n.d.). It received its first congressional charter in 1900 and another in 1905, which describes the fundamental mission of the Red Cross. It now has an annual budget of $3 billion, employs thirty-four thousand people, and has a board of eighteen members. Its stated purpose is “to provide relief to victims of disaster and help people prevent, prepare for, and respond to emergencies” (Give.org, 2010). Its recent history, however, is notable for its poor responses to humanitarian crises as well as for its own governance crises. The American Red Cross was resoundingly criticized for its response to Hurricane Katrina. According to colleagues from the International Red Cross, who came to help with the relief work, “[The] American Red Cross response to Hurricane Katrina was poorly planned, relied too heavily on inexperienced managers, and often failed to meet the needs of victims …” (Strom, 2006). While the volunteers were praised, their lack of knowledge and training was highlighted as one of the many problems that contributed to the poor response to the Hurricane Katrina crisis. For example, one volunteer who was in charge of one hundred vehicles did not know where they were or where they were to go. Five years after Katrina, the American Red Cross claims it has become better able to respond to such disasters as it has (1) increased the number of trained volunteers; (2) established a nationwide warehouse system that can provide supplies for 350,000 people; (3) developed partnerships with 150 organizations; (4) improved coordination across levels of government; and (5) implemented the National Shelter System, which lists fifty-six thousand shelters, and (6) improved its website2 (American Red Cross, 2010). 2 See https://safeandwell.communityos.org/cms/index.php.

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To add to its woes, the American Red Cross was sued in 2007 by the international pharmaceutical corporation Johnson & Johnson over the rights to the organizations’ shared symbol. Both organizations had used the same symbol for one hundred years amicably. Mark Everson, CEO of the American Red Cross, was enraged by the suit. He commented, “I hope that the courts and Congress will not allow Johnson & Johnson to bully the American Red Cross” (Saul, 2007). Johnson & Johnson argued that it was suing because the American Red Cross had moved beyond using the symbol in its relief work, having licensed the symbol for many non-relief items, and therefore had gone beyond the partnership. According to Johnson & Johnson, What we’re talking about here is their deviation from a longstanding partnership and collaboration around the use of this trademark and their push to commercialize this trademark in the for-profit arena … We deeply regret that it has become necessary to file this complaint. The company has the highest regard for the American Red Cross and its mission. (Saul, 2007)

The American Red Cross has also had to address the issue of tainted blood supplies. In early 2012, the American Red Cross was fined more than $9.6 million by the Federal Drug Agency for violations in blood safety, having already been fined $47 million for violations in the previous ten years (McKarney, 2012). The public’s distrust of the American Red Cross has been exacerbated by the revolving door of CEOs. Soon after 9/11, Dr Bernadine Healy, then head of the American Red Cross, was ousted by her board. Four years later, her successor, Marsha Marty Evans, a retired rear admiral in the Navy, was also ousted. Mark Everson, formerly with the IRS, was hired by the American Red Cross after a long search in 2007. He was touted as someone who could address the various ills of the American Red Cross. Everson was ousted within six months for having an extramarital affair with a fellow employee. In 2008, the American Red Cross appointed its seventh CEO since 2002, Gail McGovern, a professor at the Harvard Business School, and also laid off one thousand employees (Epstein, 2009). In 2006, under the presidency of McGovern, the Red Cross released its Governance for the 21st Century Report. The purpose of the report was to address the many criticism the board had faced such as lax oversight, its unwieldy size, and its disengaged board membership, to name a few. While the American Red Cross has been often criticized (e.g., as early as 1906 for its response to the fires in San Francisco) (Epstein, 2009), it became

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clear that it needed a significant governance overhaul. The American Red Cross Board of Governors mandated its Governance Committee to conduct a comprehensive review and analysis of the Board’s role, composition, size, relationship with management, governance relationship with Red Cross chartered units, and whistleblower and audit function. Embracing the best practices of governance in both the nonprofit and forprofit sectors, this effort was designed to determine how the Red Cross’s governance structure and practices could be enhanced. (American Red Cross, 2006, p. 28)

Further, the American Red Cross recognized that going forward, the operations and governance practices of nonprofit organizations are likely to face continued examination from regulators, donors and the public. To maintain public trust, the Board recognizes that large, high-visibility organizations should focus on maintaining effective governance practices that meet evolving best practices. (American Red Cross, 2006, p. 28)

To that end, an independent governance audit was performed; it resulted in the 163-page report that was both detailed and far-­ranging in its recommendations. The Board of Governors unanimously approved all the recommendations. The president of the American Red Cross signed the changes into law in 2007. Many of the recommendations address issues of board design. The Governance Committee found that there was a blurring of the roles of the functions of the board and management. As a result, the committee recommended that the board focus on governance and strategic oversight of management, as suggested in the Carver model. The board of the American Red Cross had ballooned to fifty members, and so it was recommended that the board be downsized to twenty-five by 31 March 2009. The Governance Committee also recommended that the board nominations process be changed. It recommended that the Governance and Board Development Committee, in consultation with the chair and the CEO, should be responsible for identifying, recruiting, evaluating, and selecting an inclusive and diverse pool of board candidates. It was to look for possible candidates with the following characteristics: (1) proven leadership ability; (2) previous experience serving on boards (either for-profit or nonprofit); (3) diversity, including, but not limited to,

190  Understanding the Social Economy of the United States gender, ethnicity, race, age, disabilities and geography; (4) experience with large and complex organizations; (5) current or prior chief executive officer, chief operating officer, or chief financial officer level experience (either forprofit or nonprofit); (6) knowledge and experience regarding nonprofit and volunteer organizations (not limited to Red Cross experience); (7) specific skills such as finance, audit, legal, international, information technology, diversity awareness, governmental affairs, public relations, marketing, leadership development, disaster relief, medical, biomedical, regulated industries and pharmaceutical; and (8) community experience and knowledge in local Red Cross services. (American Red Cross, 2006, p. 65)

The Governance Committee recommended that the typical nonprofit practice continue of the CEO not being a board member. However, it included a proviso that the board would have the flexibility to change the practice should circumstances warrant it. The report further addresses such issues as the number of board committees, the whistleblower policy, the chapters’ structure, and website redesign. Even though the Board of Governors adopted all the recommendations, the public continues to be skeptical of the American Red Cross. The public has become less trusting of the organization, and the American Red Cross faces a significant challenge rebuilding its reputation. The actions taken in 2006 have helped, but much needs to be done. As Kathleen McCarthy, director of the Center for the Study of Philanthropy at the City University of New York, notes, “There’s a deep vein of cynicism in society now. With scandals like the Red Cross and what the United Way have gone through, there’s a lot of concern about maintaining trust in the nonprofit sector. If people don’t trust, they don’t give” (as cited in Epstein, 2009, p. 7). According to Charity Navigator, the American Red Cross scored quite well on its financial and transparency indicators with an overall score of 56.46/70 (Charity Navigator, 2012). Even so, the question remains if the remedies at the American Red Cross are sufficient. VX CASE QUESTIONS 1. What explains the American Red Cross’s inadequate response to the Hurricane Katrina disaster? 2. Do you think that a smaller board will help the American Red Cross better achieve its mission? Why?

Organizational Design and Governance Strategies  191 3. What actions might large nonprofit organizations take to address the distrust about the nonprofit sector? 4. Are the remedies sufficient in your view? Why or why not?

VX APPENDIX 1* Fundamental Principles of the International Red Cross and Red Crescent Movement Humanity – The International Red Cross and Red Crescent Movement, born of a desire to bring assistance without discrimination to the wounded on the battlefield, endeavors, in its international and national capacity, to prevent and alleviate human suffering wherever it may be found. Its purpose is to protect life and health and to ensure respect for the human being. It promotes mutual understanding, friendship, cooperation, and lasting peace among all peoples. Impartiality – It makes no discrimination as to nationality, race, religious beliefs, class, or political opinions. It endeavors to relieve the suffering of individuals, being guided solely by their needs, and to give priority to the most urgent cases of distress. Neutrality – In order to continue to enjoy the confidence of all, the Movement may not take sides in hostilities or engage at any time in controversies of a political, racial, religious, or ideological nature. Independence – The Movement is independent. The National Societies, while auxiliaries in the humanitarian services of their governments and subject to the laws of their respective countries, must always maintain their autonomy so that they may be able at all times to act in accordance with the principles of the Movement. Voluntary Service – It is a voluntary relief movement not prompted in any manner by desire for gain. Unity – There can be only one Red Cross or one Red Crescent Society in any one country. It must be open to all. It must carry on its humanitarian work throughout its territory. Universality – The International Red Cross and Red Crescent Movement, in which all Societies have equal status and share equal responsibilities and duties in helping each other, is worldwide. * Source: The Fundamental Principles of the International Red Cross and Red Crescent Movement, retrieved 23 August 2014 from http://www.icrc.org/eng/resources/ documents/red-cross-crescent-movement/fundamental-principles-movement1986-10-31.htm.

7 Leadership and Strategic Management

In this chapter, we look at two key aspects of organizations – leadership and strategic management. In part one of the chapter, various theories of leadership are presented but the focus is on servant leadership, as it seems to have resonance for social economy organizations. In part two of the chapter, we discuss strategic management and strategic planning as techniques that have been adopted from the private sector for use in the social economy. The chapter concludes with a case on the Girl Scouts of America, an organization that, in its long history, has faced both crises of leadership and strategy. A CLOSER LOOK: NANCY BRINKER, CEO, SUSAN G. KOMEN FOR THE CURE Susan G. Komen for the Cure (Komen) was founded in 1982 by Nancy Brinker and has since then invested $685 million in research. It is supported by one hundred thousand volunteers, who work to help fund breast cancer education, screening, and treatment programs. Its total gross 2011 revenues from contributions, the Komen Race for the Cure and 3-Day Event, and other sources was $471,750,000 (Komen, 2011). Komen has faced some significant leadership issues recently. While Nancy Brinker has led Komen for thirty years and is responsible for Komen’s astonishing growth, Komen’s decision to de-fund and then refund Planned Parenthood raised some issues about Brinker’s leadership abilities (Pesta, 2012a, 2012b).

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Brinker herself became the object of criticism – she was criticized for her management style, her expenses, and her salary. Concerns were raised about her first class travel and other expenses, and questions were asked about why the charity was not using the expense monies for mammograms. Brinker earns about $450,000 a year – a salary that is not out of line for a CEO of a charity with a budget of Komen’s size. One former Komen board member commented, “It has all become a diversion. It has itself become cancerous” (Pesta, 2012b, p. 2). Calls for Brinker’s resignation became frequent. Her detractors want her to leave Komen for the sake of the charity while her allies consider her to be Komen. Brinker has survived the storm and remains the chief executive officer of Komen.

Leadership There are many leadership models, in both the academic and popular press. In this chapter, we describe and illustrate some of the current theories on leadership. The aim is not to be comprehensive but rather to highlight those that seem to have particular resonance for the social economy. Leadership has been well studied, yet many questions remain. Some go as far as saying that it is a field that has generated little (or no) rigorous insight. Hackman (2010, p. 9) asks, “So what is the ‘it’ that master leaders have that the rest of us do not? How did they get it? And what might we do to help others develop it?” He goes on to note there is still much to know. In this section, we highlight some current leadership models from the field of organizational behavior. Some distinguish, at the outset, leadership and management. Leadership is seen as a visionary activity while managership (or management) is seen more as an implementation activity. According to Kotter (1990), leaders are agents of change while managers control and manage daily complexity in organizations. Organizations need both leaders and managers to be effective in achieving their vision and mission. The distinction between leadership and managership may not be as categorical as we believe. Leaders often carry out managerial activities and managers are often leaderly in their work, and even more so in small organizations. However, the belief that leaders and managers are fundamentally

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different continues. For example, Nayar (2013) argues that managers count value while leaders create value; managers create circles of influence while leaders create circles of power; managers control and leaders influence. Models There are several types of leadership theories – trait, behavioral, contingent, and relational or inspirational.1 Early leadership thinking tried to identify those traits that distinguish leaders from others. Physical attributes such as height, weight, age, to name a few, were thought to distinguish leaders. Then researchers looked at personality traits such as originality, dominance, self-confidence – again to name only a few. The findings of trait-based leadership theories were neither uniform nor strong. The only findings that show promise are that leaders tend to be more intelligent, verbal, and cooperative than nonleaders. However, most trait-based leadership theories are not powerful predictors of leader behavior and have been largely abandoned as a line of research (Golensky, 2011). Behavioral theories of leadership were developed to address the deficiencies of the trait theories. Early in this line of research, Lewin, Lippitt, and White (1939) identified three types of behaviors – or styles – that characterized different leaders: autocratic, laissez-faire, and democratic. Each leader approaches situations with one of the three styles and does not vary the style according to the situation. Of the three styles, the laissez-faire style is the least effective because leaders using it abdicate their leadership position. The style results in confusion for the followers as the leader does not define goals, responsibilities, or outcomes. As a result, the risk of organizational conflict increases. Lewin’s original insight was further developed by two groups of scholars at Ohio State University and the University of Michigan. They measured behaviors and focused on behaviors of initiating structure (goal achievement) and consideration (relationship building). The Leadership Grid by Blake and Mouton (1978) is an extension of the pioneering work of Lewin and others. In their grid, they identify seven leadership styles. Each style varies by the degree of concern for results

1 The discussion of the four current models/types of leadership draws on chapter 12 of Nelson, Quick, Armstrong, and Condie (2015).

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or for people behaviors manifested by the leader. A middle of the road leader is one who has a middling degree of concern for results and people; an authority-compliance leader is concerned with results only; a country club leader is concerned about people rather than results and wants to be liked; a team leader is considered the ideal as he or she is focused on people and productivity; a laissez-faire or impoverished leader has little interest in people or results; a paternalistic leader uses reward and punishment; and an opportunistic leader’s main concern is maximizing self-benefit. Contingency theories of leadership followed, and they argue, in essence, that a leader’s behavior must fit the situation. The theories are typically formulated in “if/then” or “it depends” terms. If a leader is in situation X, then he or she must do Y. Fielder’s contingency theory was an early attempt to capture the relationship between leader behavior and situation. He identified two types of leaders – those who are taskoriented and those who are relationship-oriented – and argued that a leader’s effectiveness depends on the favorableness of the situation. He developed a projective technique to identify the Least Preferred Coworker to capture whether a leader was task- or relationship-oriented. He also measured the favorableness of the situation. While the theory is criticized for its use of projective techniques, Fielder’s work is important as it tried to integrate both trait and behavioral dimensions of leadership. The path-goal theory of leadership is perhaps the strongest of the contingency-based theories. It argues that a leader selects from four behavioral styles – directive, supportive, participative, or achievement orientation – to fit the characteristics of his or her followers and the demands of the workplace. For example, a leader would use a directive style to give instructions, a supportive style to express concern for followers, a participative style to engage in joint decision making, and an achievement style to set challenging goals. Leaders, based on their perceptions of their own styles, the characteristics of their followers, and the conditions of the workplace, engage in activities to shape follower behaviors. For example, if the followers are inexperienced and working on an unstructured task, then a leader in that particular situation might be most effective by using a directive style. However, if the followers are highly trained professionals working on a challenging task, the leader might be most effective using an achievement-oriented style. In short, “[The] leader always chooses the leader behavior style that best helps followers achieve their goals” (Nelson, Quick, Armstrong, &

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Condie, 2015, p. 200). Tests of the path-goal theory have provided mixed evidence about its value in predicting leader behavior. Similarly, the Hersey and Blanchard Situational Leadership Model argues that leaders need to adjust their behaviors to the maturity level of their followers. Drawing on the work of the Ohio State University researchers, Hersey and Blanchard distinguish between leaders who are task-oriented and those who are relationship-oriented. In addition, they define follower maturity (M) or readiness on four levels – (M1) insecure – that is, unable and unwilling; (M2) slightly confident – that is, willing but unable; (M3) somewhat insecure – that is, able but not confident in abilities; and (M4) confident – that is, able and willing. Follower readiness can vary by the task and the person. It is important, according to this theory, that the leader diagnose the readiness level of each follower for each task. For example, if a follower is unable and unwilling, the leader should use a telling approach by providing instructions and monitoring outcomes. On the other hand, if a follower is both able and willing, the leader should use a delegating style. While the model has received much interest, it does not yield any central hypotheses that can be tested (Bass, 1990a). More recently, relational and inspirational theories of leadership have developed that focus on the types of relationships that occur between leaders and followers. The leader-member exchange theory, known as LMX, argues that leaders form different relationships with different followers so that there is an in-group of individuals who are like their leader (and an out-group). The LMX theory has received some empirical support: in-group members are more committed to the organization and more satisfied. Out-group members, on the other hand, receive fewer rewards, are more micromanaged, and may retaliate against the organization (Graen & Uhl-Bien, 1995; Townsend, Phillips, & Elkins, 2000). Inspirational leadership theories examine how leaders are transformational, charismatic, or authentic. The concept of transformational leadership was first formulated by Burns (1978) and then further developed by Bass (1985). Transformational leadership involves the broadening and elevating the interests of followers such that they look beyond their own self-interests. Such leadership is contrasted with transactional leadership, which focuses on bureaucratic authority, task completion, and the use of rewards. According to Bass (1990b, p. 21), transformational leadership occurs when “leaders broaden and elevate the interests of their employees, when they generate awareness and acceptance

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of the purposes and mission of the group, and when they stir their employees to look beyond their self-interest …” Transformational leaders are often charismatic and inspiring, and promote intelligent and rational behaviors in their followers. They attend to their followers as individuals and serve as their coaches. In contrast to transformational leaders, transactional leaders provide rewards contingent on performance, manage by exception looking to correct errors, and avoid making decisions. In short, transformational leadership is transcendent in its purpose while transactional leadership is operational in its purpose. Of course, within each leadership type, there are differences in how the leaderly behaviors are manifest. Bass notes that transformational leadership can be learned (and taught): “Research has shown that leaders at all levels can be trained to be charismatic …” (Bass, 1990b, p. 27). Charismatic leaders are able to make their followers take extraordinary actions. Some researchers see charismatic and transformational leaders as essentially the same. What may differentiate the two types of leader behavior is that charismatic leaders rely heavily on referent power – that is, a person’s perceived attractiveness and worthiness, as well as right to respect from others (Mindtools, n.d.). It is important to note that both transformational and charismatic leadership styles can be used for good and evil. Adolf Hitler is an example of the evil manifestation of charismatic power. Authentic leadership is a model that attempts to integrate transactional, transformational, and charismatic leadership styles. It suggests that leaders use the three styles differently in different situations. Authentic leadership, while seemingly a contingent model, is distinguished by its underlying value structure: “Authentic leaders have a conscious and well-developed sense of values” (Nelson, Quick, Armstrong, & Condie, 2015, p. 203). Exemplars of authentic leadership include Nelson Mandela and Mohandas Gandhi. Authentic leadership, as a relatively new model of leadership, needs further research. Jim Collins’s research on Level 5 Leadership provides some promising insights about the importance of values in leadership. He developed a hierarchy of leadership from his observations of leaders in action (Collins, 2011/2001). It consists of five levels. A level 1 leader is a highly capable individual who contributes through his or her talents. A level 2 leader is a contributing team member who works to achieve team success. A level 3 leader is a competent manager who organizes people and processes to achieve both efficient and effective outcomes. A level 4 leader, or effective leader, creates commitment to and pursuit of an

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organization’s vision and catalyzes high performance. Lastly, a level 5 leader – a great leader – moves an organization from good to great; he or she does so through a combination of iron will and personal humility. Collins’s original research focused on identifying organizations that had progressed from good to great. It was not looking at the characteristics of the leadership of the great organizations. However, it emerged that the leaders were exceptional as they manifested level 5 behaviors. Level 5 leaders have almost no ego and ensure that values of selfishness, greed, and arrogance do not exist in their organizations. According to Collins (2011), a level 5 leader is the antithesis of an egocentric celebrity. Collins is concerned, not that there are no level 5 leaders in organi­ zations, but rather that “our culture has fallen in love with the idea of the celebrity CEO” (Collins, 2001, p. 3). As a consequence, level 5 leaders are not seen or valued as much as they ought to be. A CLOSER LOOK: DR GOVINDAPPA VENKATASWAMY (DR V) OF THE ARAVIND HOSPITAL Dr V founded, in 1976, a twelve-bed eye hospital in Mandurai, India, even though his fingers were gnarled from disease. Although he died in 2006, his family and colleagues still run five hospitals that perform more than 180,000 cataract surgeries a year. Seventy percent of the patients cannot pay while others seek and pay for the services of the Aravind Hospital as it is internationally renowned. The hospital is now the largest single provider of eye surgery in the world. As well, Aravind has its own laboratory, Aurolab, which pioneered the development of high-quality, low-cost intraocular lenses. Aurolab produces 750,000 lenses annually for Aravind and other organizations. According to Dr. V, “[To] think of certain people as ‘the poor’ puts you in a superior position, blinds you to the ways in which you are poor – and in the West there are many such ways; emotionally and spiritually, for example. You have comforts in [North] America, but are afraid of each other” (Rubin, 2001, p. 146). The term poor is prohibited from use at the hospital. Dr V’s legacy has been honored by many, and he has been heralded as level 5 leader. He was humble and determined. As he notes in his

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diary, “You must live in your soul and face the ­universal consciousness. To see all as one … To have this vision and work with strength and wisdom all over the world … To give sight for all” (Mehta & Shenoy, 2011, p. 1).

New Directions servant leadership As Senge notes, there is a veritable tidal wave of books on leadership, but the idea of servant leadership as articulated by Greenleaf, in his 1970 essay, “is the most singular and useful statement on leadership that I have read in the last 20 years” (Senge, 1995, p. 217). Servant leadership changes a person’s perspective of leadership from one that is top down to one that is bottom up. Carroll (2005) argues that servant leadership may be particularly appropriate for the social economy as much of its work involves service – to clients, on a board, for social change. Greenleaf first developed the idea and the practice of servant leadership in 1970. He noted that a servant leader is a servant first: … [The servant leader] is sharply different from [the person] who is a leader first, perhaps because of the need to assuage an unusual power drive or to acquire material possessions … The leader-first and the servant-first are two extreme types … The difference manifests itself in the care taken by the servant-first to make sure that other people’s highest priority needs are being served. (Greenleaf, 1970, p. 6)

Greenleaf advances a similar argument in describing servant institutions. In his view, institutions must serve as forces of regeneration so that our creativity can be harnessed to build a better world. And, to do so, we are to start from a position of humility and measure our success as leaders by assessing the growth of our followers. As well, it means that leaders must listen to subordinates and other stakeholders and allow themselves to be influenced by what they hear (Graham, 1991). Since its modern formulation in 1970, servant leadership has been investigated to try to identify those behaviors that represent an

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empirically grounded and practical definition of the concept. In his helpful review of servant leadership, van Dierendonck (2010) presents the development of the concept and the research progress over the past forty years. He notes that our leadership models have changed to accommodate the needs and demands of various stakeholders. Society is demanding more and better models of leadership that place greater emphasis on ethical considerations. He notes that leadership models are increasingly incorporating relational and global elements. Russell and Stone (2002, pp. 153–4) note, it is vital that the potential of servant leadership – “as a concept that can potentially change organizations and societies because it stimulates both personal and organizational metamorphoses” – be explored empirically so that individuals and organizations know what behaviors to change and how. What is central to the success – or failure – of servant leadership is the personal values of the people who practice it (Russell, 2001).

A CLOSER LOOK: CLEVELAND CLINIC Cleveland Clinic is a nonprofit, multi-specialty academic group practice that integrates clinical and hospital care with research and education. Its mission is “Striving to be the world’s leader in patient experience, clinical outcomes, research and education” (Cleveland Clinic, n.d.). Founded in 1921, it became the first healthcare provider in the United States and the second in the world in 2008 to become a signatory to the United Nations Global Compact. The Cleveland Clinic has an atypical structure as its twenty-seven thousand doctors are on salary and do not receive any bonuses or other incentives. All doctors are employed on renewable annual contracts, and their performance is reviewed annually (Cosgrove, 2011). In 2007, the clinic’s leadership decided to move toward a servant leadership culture in an effort to improve its service. At the time, the organization could not find any other healthcare organizations practicing servant leadership to study or to emulate. Even so, the organization proceeded, as it was “felt that a shift in our leadership culture was where we needed to start, and so we decided to shift to a serving leader model as we really felt it supported the service environment which we are in and it’s reflective of why people got into health care in the first place – to serve others,” according to the chief human resources officer (Neutel, 2010, p. 1).

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Research has tried to identify the key behaviors of servant leaders. Even so, van Dierendonck (2010, p. 2) notes that an actual definition of servant leadership continues to elude us: “There is still no consensus about a definition [of] and theoretical framework [for] servant leadership.” A servant leader engages in a somewhat paradoxical role: he or she serves to lead and leads to serve. A servant leader must display a genuine and practical commitment to create a learning organization. Otherwise, the followers will not be able to achieve personal growth. Senge (1990, p. 14) first developed the idea of a learning organization; it is an organization that is “continually expanding its capacity to create its future” by engaging in five process of systems thinking, personal mastery, mental modeling, team learning, and shared visioning. One of Greenleaf’s followers, Spears (1995), identified ten key attributes of a true servant leader: (1) listening, emphasizing the importance of communication and seeking to identify the will of the people; (2) empathy, understanding others and accepting how and what they are; (3) healing, the ability to help make whole; (4) awareness, being awake; (5) persuasion, seeking to influence others by relying on arguments, not on positional power; (6) conceptualization, thinking beyond the presentday need and stretching it into a possible future; (7) foresight, foreseeing outcomes of situations and working with intuition; (8) stewardship, holding something in trust and serving the needs of others; (9) commitment to the growth of people, nurturing the personal, professional, and spiritual growth of others; and (10) building community, emphasizing that local communities are essential in a persons’ life (van Dierendonck, 2010, p. 5). Others have generated not dissimilar sets of attributes. Spears’s ten key attributes have been distilled by many researchers into six attributes that represent the current synthesis of the early work of Greenleaf and Spears. The six attributes are (1) empowering and developing people, (2) humility, (3) authenticity, (4) interpersonal acceptance or empathy, (5) providing direction, and (6) stewardship. Van Dierendonck (2010) has integrated the various similar theories and constructed a useful model of servant leadership. Figure 7.1 highlights, not only the six attributes but also provides the context for and the possible outcomes of practicing servant leadership. The model underscores the importance of an individual’s motivation to lead through serving as well his or her skills at addressing complex moral problems while being an empowering individual. It also highlights the possible individual and organizational outcomes such as follower engagement and organizational citizenship behavior (OCB).

202  Understanding the Social Economy of the United States Figure 7.1  Servant Leadership Model Culture: Power Distance Humane Orientation

Need to Serve & Motivation to Lead

Servant Leadership Characteristics: Empowering and developing people Humility Authenticity Interpersonal acceptance Providing direction Stewardship

High Quality LeaderFollower Relationship: Affect Respect Contribution Loyalty

Psychological Climate: Trust Fairness

SelfActualization Follower Job Attitudes: Commitment Empowerment Job satisfaction Engagement Organizational Outcomes: Sustainability Corporate Social Responsibility

Individual Characteristics: Selfdetermination Moral cognitive development Cognitive complexity Source: Van Dierendonck, D., Journal of Management, 37(4), 1233, © 2011 by Sage. Reprinted by permission of Sage.

OCB is usually described as behavior that contributes “to the maintenance and enhancement of the social and psychological context that supports task performance” (LePine, Erez, & Johnson, 2002, 53). OCB is discretionary and not rewarded formally by the organization. In a study of three parishes, Ebener and O’Connell (2010) found evidence of both servant leadership and OCB in those parishes that excelled on strategic and operational outcomes.

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Servant leadership has faced a number of criticisms, both methodological and conceptual. The principal methodological criticism is that it remains a poorly defined construct that is hard to measure. Conceptual criticisms include that servant leadership (1) is naive and impractical concept, (2) has limited relevance for the military and prisons, (3) rests on a limited set of leadership attributes, and (4) is tied too closely to Christianity and Quakerism (Wong & Davey, 2007). Servant leadership is also criticized as a set of normative statements and nontestable bromides. By contrast, Parris and Peachey’s (2012) empirical study of the leadership style of the founder of long-running and very successful National Kidney Foundation Surf Festival concludes that he was a servant leader. The founder’s leadership style manifests servant leader behaviors: he created a shared vision of helping others, built a caring community, and created the opportunities for followers to become servants themselves. The founder had a profound impact on enhancing the volunteers’ motivations to serve and changed the power relations in the organization. Some have suggested that servant leadership is similar to transformational leadership. According to Stone, Russell, and Patterson (2003), while there are some similarities between the concepts of transformational and servant leadership, there is one key difference. They suggest that most “importantly, transformational leaders tend to focus more on organizational objectives while servant leaders focus more on the people who are their followers” (Stone, Russell, & Patterson, 2003, p. 8). Much work remains to test servant leadership as a useful model. It is highlighted here as its principles and values are similar to what the many organizations in the social economy espouse and attempt to achieve through their missions. emotional intelligence Goleman (2004a) argues that while intelligence is an important attribute of leaders, what really matters is emotional intelligence. According to Goleman, emotional intelligence consists of five components: (1) self-awareness – that is, the ability to recognize and understand your emotions and their impact on others; (2) self-regulation – that is, the ability to think before acting; (3) motivation – that is, a passion to work and ability to pursue goals with energy; (4) empathy – that is, the ability to understand the emotional make-up of others; and (5) social skill – that is, the ability to manage relationships and build rapport. Research has demonstrated there is genetic component to emotional intelligence; however, it is also affected by the situation. What is not

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known is whether nature or nurture has the greatest impact. Most individuals gain emotional intelligence as they age. Almost any leaders can improve their emotional intelligence by reflecting on feedback from colleagues. High emotional intelligence is particularly important at times when leaders face difficult decisions. Those leaders with high emotional intelligence are better able to manage their own emotions and make more rational decisions. Goleman’s own research has produced some strong results: “… when [he] calculated the ratio of technical skills, IQ, and emotional intelligence as ingredients of excellent performance, emotional intelligence proved to be twice as important as the others for jobs at all levels” (Goleman, 2004b, p. 3). Further, he found that more effective senior leaders had higher levels of emotional intelligence. Since Goleman first identified the importance of emotional intelligence in the 1980s, other researcher have examined and elaborated on his work. Stein and his colleagues, using the EQ-i® scale found, for example, in a study of seventy senior leaders that half of the skill set required for successful execution of their organization’s leadership competencies is comprised of emotional and social skills. In another study, leaders with high EQ-i scores were perceived by their fellow school administrators as more successful in their leadership roles (MHS, n.d.). Much research has highlighted the importance of and benefits from emotional intelligence. However, new research is providing some cautions about the dark side of emotional intelligence. Grant (2014) reports on an intriguing study by Menges that found that when a leader gives an inspiring and emotional speech, audience members remember and scrutinize less of the content. As Grant (2014, p. 2) notes, “Leaders who master emotions can rob us of our capacities to reason.” It is easier for such leaders then to manipulate their followers to achieve amoral ends. Emotional intelligence, therefore, needs to be seen as a useful and important component of leadership, but “it is high time that emotional intelligence is pried away from its association with desirable moral qualities” (Kilduff as cited in Grant, 2014, p. 4). Integrative Leadership Bolman and Deal (2007) have developed a leadership model that builds on the idea of looking at organizational situations from multiple perspectives simultaneously. Their fundamental argument is that all leaders have their preferred frames or mental maps but need to become

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fluent in all the four frames described below if they are to understand the complexity of organizations. Only then are leaders able to make thoughtful data-based decisions. Table 7.1 summarizes the types of behaviors that leaders would manifest depending on their preferred frame. Effective structural leaders (1) do their homework; (2) rethink the relationships between strategy, structure, environment; (3) focus on implementation; and (4) often experiment, evaluate, and adapt to changing circumstances. Their leadership behaviors are contingent on their analysis of the situation. Effective human resource leaders (1) believe in people and communicate that belief, (2) are visible and accessible, and (3) empower others. They work in service of others through their supportive and empowering behaviors. Effective political leaders (1) are clear about what they want and what they can get, (2) assess distribution of power and interests, (3) build linkages to key stakeholders, and (4) persuade first, negotiate second, and coerce only if necessary. They understand the importance of power for building coalitions to advance their self-interest and that of their followers and their allies. Lastly, effective symbolic leaders (1) lead by example, (2) use symbols to capture attention, (3) frame and interpret experience, (4) communicate a vision, (5) tell stories, and (6) study and use history (Bolman & Deal, 2007). They manage the organization’s culture through inspiration and enacting realities. While the human resource leadership and servant leadership models have clear similarities, an effective leader in the social economy would need to understand the other three approaches to leadership and be able to use them contingently. There has not been much empirical examination of the Bolman and Deal four-frame leadership model yet, but there are some interesting findings from the few studies that have been Table 7.1  Leadership Behaviors by Preferred Frame Structural

Human resource

Political

Symbolic

Effective leader Analyst and architect

Servant and catalyst

Advocate and negotiator

Prophet and poet

Effective leadership processes

Support and empowerment

Advocacy and coalition building

Inspiring and framing experience

Analysis and design

Source: Based on Bolman and Deal (2007).

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conducted. One study, which examined the differences between new and experienced university presidents, found that new university presidents were more likely to have a single-frame leadership orientation (Bensimon, 1989). Thompson (2000) tested to see if there were any gender differences in leadership orientations among educators and found none. As Thompson (2000, p. 987) observes, Bolman and Deal’s four-frame model highlights the importance of cognitive complexity and “how a multiframe or balanced leadership orientation yields the most effective managers and leaders regardless of the gender of the leader in question.” There is, however, some evidence that there may be some gender differences in leadership. Early evidence shows that women tend to use more relationship-oriented approaches to leadership (Eagly, Karau, & Makhijani, 1995). Women leaders therefore are likely to excel in situations that require strong interpersonal skills. However, more research is needed on the impact of gender on leadership and management. Strategic Management So far in the chapter, we have discussed some current thinking in leadership and noted that leadership and management are distinct organizational activities (Kotter, 2013). The distinction is often framed as “leaders do the right thing and managers do things right” (Worth, 2009). The distinction may not be as acute as the statement suggests: leaders may engage in managerial roles, and managers may engage in leaderly roles (Creelman, 2012). Now the focus shifts to strategic management, or operational governance (Buchanan & Cousins, 2012). Strategic management is a broader concept than strategic planning. Both are borrowed from practices in the for-profit sector. Hatten (1982, p. 89; author emphasis) observes “While success or failure in not-for-profit organizations is not so clearly measured as it is in private enterprises’ financial results, not-for-profit management has the same responsibility effectively to serve the consumers of its products and services, and a strategic management approach is likely to increase effectiveness in this important sector.” Strategic management is quite young as a field, and its domain overlaps with other disciplines. In one interesting study, scholars from four disciplines – economics, sociology, marketing, and management – were asked for their definitions of the field of strategic management. The researchers expected that there would be significant differences in their definitions. Rather they found “substantial commonality” with definitions that focused on the organization as the unit of analysis

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and performance in the external environment as a key element (Nag, Hambrick, & Chen, 2007, p. 947). While there is no accepted definition of strategic management, Koteen (1997, as cited in Worth, 2009) suggests that strategic management is an ongoing process that integrates strategic planning and various measurement processes for the purpose of strategic goal attainment. Therefore, strategic management encompasses the three processes of strategy formulation, implementation, and evaluation (Worth, 2009). At the core of strategic management is the strategic planning process and the plan itself, which serves a guide – and a set of priorities – to link strategic thinking and doing. Berry (2007) suggests that strategic management in the public sector, in particular, involves the management of discontinuity. She notes that the public sector is often characterized by short leadership tenure, frequent agenda changes, incremental decision making, and short-lived coalitions. As a result, a strategic management approach is necessary for the public sector so that it can demonstrate the quality of its impact. “Strategic management is a systems view of organizational performance emphasizing the alignment of strategy and the organization’s mission with its budgeting, decision-making, stakeholder management, and other management processes” (Berry, 2007). According to Phills Jr (2004, p. 44), the Oakland Symphony’s 1986 demise was a result of a common strategic mistake in the nonprofit sector. He notes that the “orchestra’s collapse is an almost textbook example of the perils of conflating mission and strategy.” As he says, mission and strategy are different: an organization’s mission is its overarching purpose while its strategy is the approach the organization uses to realize its mission. Strategy addresses an organization’s scope of activity and its value proposition or competitive advantage, as well as right structural choices (see chapter 6 for a discussion of the relationship between strategy and structure). The following A Closer Look describes an organization that focused on its artistic mission while ignoring its strategic imperatives. A CLOSER LOOK: THE OAKLAND SYMPHONY The Oakland Symphony was once a significant cultural organization in the San Francisco Bay Area. Its home was a historic building, the Paramount Theatre of the Arts, and in its early years, the symphony received accolades for its innovative programming.

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While the symphony was an artistic wonder, it was not a financial one. Its deficit was growing, its season subscription sales were shrinking, and the board drew on the endowment to meet fiscal challenges (Phills, 2004). The symphony lost its beloved conductor, Calvin Simmons, in a canoeing accident in 1982. In 1985, the musicians went on strike and soon after the board filed for c­ hapter 7 bankruptcy, and the symphony was shuttered. According to Autopsy of an Orchestra, “[The] probable ‘truth’ is that at 3:30 PM on September 12, 1986, the past caught up with the Oakland Symphony. When the critical moment came, the organization lacked the energy and the commitment necessary to rise to the challenge” (Henken, 1988, p. 2). Interestingly, the symphony was re-formed through its volunteer auxiliary group and now operates as the Oakland East Bay Symphony.

Strategic Planning Strategic planning is now quite an accepted practice for social economy organizations. Mintzberg (1993) highlights the pitfalls of strategic planning. He argues that planning is essentially a surrogate for control or the illusion of control. He goes on to argue that planning can paralyze organizations, as time spent on planning is time not spent on doing. Planning may also be a political act through which certain individuals and departments can enhance their bases of power. Mintzberg’s criticism is acute and perhaps ahead of its time. Recently, O’Donovan and Flower (2013) argued that the strategic plan is dead, but strategy is alive! Even so, many organizations continue to engage in strategic planning processes, be they substantive or symbolic. While there are some variations, strategic planning typically involves a process by which organizations examine their environment by doing a SWOT (i.e., strengths, weaknesses, opportunities, and threats) or PEST (political, economic, social, and technological) analysis, and review their vision, mission, and values. They formulate their strategies, often for a five-year timeline, and then operationalize the strategies as a series of goals that are time-bound and financially specific (Worth, 2009). Mittenthal (2002) outlines ten key elements for successful strategic planning in the social economy: (1) a clear and comprehensive understanding of external opportunities and threats, (2) a realistic and

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broad understanding of the organization’s strengths and weaknesses, (3) an approach that includes stakeholders, (4) an empowered planning committee, (5) senior leadership involvement, (6) sharing of responsibility between the board and the staff, (7) learning from best practices, (8) clear priorities and an implementation plan, (9) patience, and (10) a commitment to change. The next A Closer Look describes an innovative and data-driven approach to strategic planning. A CLOSER LOOK: ROCA Roca’s (roca is Spanish for rock) focus is the young people and young parents that society fears, forgets, and rejects. Its mission is to help these disenfranchised young people move out of violence and poverty into better, more productive lives (Roca, 2012). Its work is centered in the communities of Chelsea, Revere, in East Boston, and in Springfield, in western Massachusetts. Early in its history, Roca asked two critical strategic questions: (1) was it helping young people to change their lives, and (2) how would Roca know that it was achieving its mission? To answer the questions, Roca launched a long-term “learning process” – or strategic planning process - that resulted in the development and implementation of its Intervention Model of High-Risk Young People. To that end, Roca studied and implemented evidence-based practices drawing on theories of behavioral change with a particular focus on practices that addressed ways to keep high-risk youth out of the corrections system. Roca collected detailed data to inform its strategic and operational goals (Roca, 2012). Roca has had considerable success in keeping high-risk youth in high school, as well as getting them jobs and teaching them life skills (Roca, 2013). Roca has just signed a Pay for Success agreement with the state of Massachusetts. Roca will be paid $23 million if it can successfully demonstrate that its program reduces recidivism, increases employment, and keeps high-risk youth out of jail. Currently it costs the state $47,500 per year to house an inmate so the savings from keeping youth out of jail are considerable. The program’s effectiveness will be determined by a set of benchmarks designed by experts at Harvard University (Lamb, 2013).

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Lindenberg (2001) asks a compelling question when examining the use of private sector tools in the social economy: are we at the cutting edge or the blunt edge? While some private sector frameworks can be used, they need to be customized and used judiciously. His study looked at CARE’s use, in the 1990s, of several strategic management frameworks in its organization transformation work. Some of the macro strategic frameworks were easily adapted by CARE and well received by CARE’s employees. For example, Moore’s strategic triangle framework – which encompasses the dimension of mission and mandate, internal capacity, and external support – was used in overall assessments of the strategic issues in CARE’s program division, in the CARE-wide strategic planning effort, and in many of the country-level strategic planning exercises. Another useful framework was Porter’s competitive forces tool: Porter examined various businesses and created a framework describing three competitive strategies: low-cost leadership, differentiation, and focus. The focus strategy, in which the organization concentrates on a specific market or buyer group, is further divided into focused low-cost leadership and focused differentiation. To use this model, managers evaluate two factors: competitive advantage and competitive scope. Managers determine whether to compete through lower cost or through the ability to offer unique or distinctive products and services that can command a premium price. Managers then determine whether the organization will compete on a broad scope or a narrow scope (Daft & Armstrong, 2012). It was useful as a “positioning” tool; it helped CARE’s “senior management understand CARE’s move to a multiservice relief and development organization with higher costs and the danger of having neither competitive costs nor highly distinctive services” (Lindenberg, 2001, p. 254). Other more technical frameworks were not as useful and were not as readily accepted. Any suitable private sector frameworks need to be broad in scope so that they are they seen as inclusive of all the stakeholders. Strategic management in the social economy typically addresses such issues as financing, performance measurement, and fundraising. One of the most critical strategic management issues faced by social economy organizations is preventing or avoiding the nonprofit starvation cycle, which results from underfunding vital overhead (Gregory & Howard, 2009). The starvation cycle occurs because of three interrelated forces: (1) nonprofits neglect infrastructure, (2) funders have unrealistic expectations, and (3) nonprofits feel the need to conform. Such underfunding can have a direct impact on program delivery and reporting;

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for example, poorly trained staff are less effective in providing highquality service delivery. Funders’ reluctance to support overhead costs results in “nonprofits [settling] into a ‘low pay, make do, and do without’ culture” (Gregory & Howard, 2009, p. 51). It becomes, therefore, a strategic management imperative for organizations to develop a sustainable funding model. When developing a funding model to drive fundraising activities, organizations need to consider types of funding, including earned income sources, funding decision makers, and funder motivation (Kim, Perreault, & Foster, 2011). Even before developing a funding model, it is essential to be clear about what the organization wants to achieve – that is, clarity of program goals. Organizations need to decide if they are interested in rapid growth, financial stability, and expansion, for example. Based on their research at Bridgespan, Kim, Perreault, and Foster (2011) argue that organizations should apply four guidelines to determine a suitable funding model: (1) analyze the organization’s current strengths and weaknesses, (2) learn from good practices of peers in the field, (3) look at potential revenues against costs, and (4) develop a thoughtful plan to pilot one or two funding models. They caution that it neither necessary nor desirable to abandon existing funding sources. Such sources should be treated as complementary sources; for example, Komen gets most of its revenues from individual donors but considers corporate sponsorships as a strong additional revenue source. Strategic management will become increasingly important for the social economy. As the social economy faces significant demographic shift from retirements, the need to develop new managers who are strategic in their thinking and familiar with the tools of strategic management becomes more pressing. A 2006 Bridgespan Group study concludes that between 2007 and 2016, many nonprofit organizations will need to attract and develop a total of 640,000 new senior managers – or the equivalent of 2.4 times the number currently employed (Tierney, 2006). The demand for talent is high, and the supply is not. Strategic Managers In describing the characteristics of strategic managers, it is important to distinguish between behavior and prescription. Mintzberg (2013), in his early work, was one of the first scholars to provide insights about what managers actually did as opposed to what the accepted wisdom believe they did. His early research provided empirically based distinctions between “what is” and “what should be.” Mintzberg observed

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twenty-nine managers in various organizations such as business and government as well as the social economy and in settings as varied as a refugee camp to an orchestra. For example, we believe that managers are reflective and systematic planners, but in fact, they work at a relentless pace; their activities are characterized by brevity, variety, and fragmentation, and managers have a demonstrated bias to action. Similarly we believe that managers maintain tight control, but in fact, managers are neither conductor nor puppet. Successful managers “create some of their own obligations and take advantage of others” (Mintzberg, 2013, p. 30). Strategic managers appear to be interested in addressing canonically easy problems rather than complex problems (Moldoveanu, 2009). Again, this position is perhaps surprising as we may believe that managers are interested in doing complex problem solving. However, managers’ preference for addressing easy problems is consistent with the many limitations that we evidence in our decision making. Managers often use heuristics when they are faced with complex decisions. While heuristics are useful, they can lead to errors. As a result of relying on heuristics, individuals develop cognitive biases that affect their ability to make good decisions (Tversky & Kahneman, 1974). The core competencies for effective managers are of four types: personal, interpersonal, informational, and actional. These four have emerged from observations of managers in practice (Mintzberg, 2013). Table 7.2 lists some of the managerial competencies derived from observing managers at work. What is interesting about the competencies is they are evidently strategic but also include what some might see as more leaderly behaviors. Table 7.2  Examples of Managerial Competencies Personal

Interpersonal

Informational

Actional

Strategic thinking

Leading individuals

Communicating verbally

Designing

Career management

Team building

Communicating nonverbally

Managing change

Agenda setting

Culture reinforcement

Analysing

Resource allocation Lobbying Source: Based on Mintzberg (2013, p. 68).

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Competencies such as reinforcing culture and managing change are often considered to be what leaders, rather than managers, do. Crawford (2010) has developed what she calls the Manager-Leader Model of leadership for the social economy. Her model, based on research, identified fifteen required attributes for effective managers-leaders. There are seven skills – strategic thinker, relationship builder, collaborative decision maker, entrepreneurial achiever, effective communicator, change leader, and inspiring motivator. There are five personality traits – high integrity, agility, perseverance, interpersonal sensitivity, and mission passion. There are three expertise requirements – financial acumen, sector-specific knowledge, and diversity appreciation. The model presents useful ideas for what it is required for an individual to be an effective strategic manager in the social economy. As one of the interviewees (a CEO) in the study notes, “Nonprofits may need to ask fundamentally different questions instead of ones based on old nonprofit models or private sector models. Traditional models may be too static, given that the environment is working too fact” (Crawford, 2010, p. 4). The following A Closer Look describes a strategic performance-based approach to enhancing leadership development. A CLOSER LOOK: GOOD SHEPHERD SERVICES Good Shepherd Services, in New York City, is a youth development, education, and family service agency that services twenty-six thousand people annually. Its mission is “to surround at-risk New York City youth and their families with a web of supports that promote a safe passage to self-sufficiency” (Good Shepherd, 2014). It uses a rigorous business model that involves partnerships. As part of its business model, it places strategic importance on capacity building through training. In 2012, when Good Shepherd Services acquired two smaller nonprofits, it managed the opportunity strategically to develop emerging leaders. Two senior staff were given the responsibility to manage the change and to integrate the two organizations into the culture of Good Shepherd Services. Rather than just providing developmental opportunities for two staff, the organization is working on a plan to enable all of its senior managers to have leadership development. To that end, it is using a performance-potential matrix, which has been used in the for-profit sector (LoMonaco & Williams, n.d.).

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Conclusion This chapter presents a broad but focused cut through the fields of leadership and strategic management. In the discussion of leadership, we focused on the concept and practice of servant leadership. Thinkers such as Peter Senge regard the concept and practice of servant leadership as positive developments in the field of leadership. However, others believe that they are platitudinous. In either case, the question remains as to why servant leadership has not gained much traction in organizations yet. When discussing strategic management and its components, we focused on the value of using practices from the for-profit sector in social economy organizations. While there are useful tools such as Moore’s triangle and Porter’s forces, any tools from the for-profit sector need to be adapted to the realities of the social economy. Collins (2005) begins his monograph, entitled Good to Great in the Social Sectors, with a clear statement about the perils of simply borrowing practices from the for-profit sector. He notes (2005, p. 1), We must reject the idea – well-intentioned, but dead wrong – that the primary path to greatness in the social sectors is to become “more like a business.” Most businesses – like most anything else 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 out to correlate with mediocrity, not greatness. So, then, why should we want to import the practices of mediocrity into the social sectors?

Collins’s question is equally acute whether we are examining leadership or strategic management. Decision makers in social economy organizations should focus more on learning from or creating models that are grounded in their sector rather than looking for guidance outside. VX DISCUSSION QUESTIONS 1. Adam Grant, in his groundbreaking, empirically rigorous book, Give and Take: A Revolutionary Approach to Success, argues that those people who give, rather than take, will enjoy success. Are servant leaders givers, and if so, how should they demonstrate their giver behavior?

Leadership and Strategic Management  215 2. What is your model of leadership? Use Bolman and Deal’s framework to help you develop your model. 3. Some argue strategic planning is dead! What is your view? In your answer, please be careful to distinguish what should be from what is. 4. Why do social economy organizations suffer the starvation cycle? 5. How can small organizations apply the four principles derived by Bridgespan (Kim, Perreault, & Foster, 2011) for developing a funding model? 6. What is the risk of using private sector analytic tools for social economy organizations? 7. Do you agree with Collins’s view that we “must reject the idea – well-intentioned, but dead wrong – that the primary path to greatness in the social sectors is to become ‘more like a business’”? Why or why not?

VX CASE FOR ANALYSIS: GIRL SCOUTS OF THE UNITED STATES OF AMERICA (GIRL SCOUTS)2

Background Juliette “Daisy” Gordon founded the Girl Scouts of the United States of America in 1912. She wanted to create opportunities for girls to reach their potential. She wanted to get girls out of their societally imposed isolation so that they could participate fully in their communities. A chance meeting with Lady Baden-Powell, who had founded the Girl Guides in Britain, led to Gordon’s establishing troops in London and Scotland. Gordon came to America in 1912 and used Baden-Powells’s Scouting Manual as her guide (Cloninger, 2011). The first troop, founded in 1912 in Savannah, Georgia, included both Christian and Jewish girls. In 1956, Martin Luther King Jr stated that the Girl Scouts was “a force for desegregation” (Girl Scouts, n.d.). The Girl Scouts operated in Japanese internment camps and now operate programs in American prisons. The Girl Scouts had 3.2 million members in 2012 – 2.3 million girl members and 890,000 adult members

2 We would like to thank Kate Kennedy, MBA (Georgetown), for her helpful comments.

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working primarily as volunteers – and more than 59 million alumnae (Girl Scouts of America, 2012). The Girl Scouts also operates in more than ninety countries. Strategic Leadership The Girl Scouts has faced difficult strategic leadership challenges throughout its history. In the early 1970s, one council had to address the changing ethnic composition of its community as Asians, Hispanics, and Blacks wanted to become members. The council was dedicated to offering scouting to all members of the community but was concerned about the reaction of the original members, all of whom were white. The council worried that the affluent white families might no longer support the organization. The initial idea was to have separate troops for different ethnic groups. However, one leader asked how that particular solution met the mission of the Girl Scouts; was its mission to make money or was it to build a nation? Once the strategic issue was reframed in that way, the council soon decided that, whatever the financial risk, there would be no separate troops (Drucker, 1990). The Girl Scouts faced another significant challenge in 1976. The organization was “cascading towards irrelevance” (Collins, 2002, p. xii). Frances Hesselbein became CEO and had to address such strategic “business” issues as declining market share, unhappy customers, economic weakness and even threats of a takeover by the Boy Scouts (Byrne in Collins, 2002). Hesselbein needed to transform the Girl Scouts immediately from a declining bureaucratic organization into a contemporary organization that met the changing demographics and values of the girls of America. While she reinforced the original values of the Girl Scouts, she transformed the focus of the girls’ activities from preparation for marriage to preparation for career and personal development. Hesselbein served as the CEO from 1976 to 1990. For her accomplishments, Peter Drucker called her “the greatest leader in the country” (Pellet, 2011). In addition, she was recognized by Fortune magazine and received the Presidential Medal of Freedom (Fritz, n.d.). Hesselbein, based on her experience at the Girl Scouts and at the Peter Drucker Leader to Leader Institute, is recognized for her insights on strategic leadership. Her book, Hesselbein on Leadership, has been lauded for its wisdom and its visionary impact. In a recent interview, Hesselbein, now ninety-six, distilled her leadership experience into seven lessons: (1) if a door opens, walk through it; (2) have a clear vision – for example, the vision of the Girl Scouts was “to help each girl

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reach her own highest potential”; (3) be inclusive; (4) accept only the best; (5) be on time so you don’t miss out on any opportunities; (6) see yourself life-size – that is, understand your actual impact; and (7) look to the future (CNN Money, 2011). Her view is, “Leadership is a matter of how to be, not how to do” (Pellet, 2011). Change at the Girl Scouts continued to be a challenge. In 2002, it faced another strategic choice moment. There was concern that it was no longer living up to its mission, now phrased as “Every girl everywhere.” The demography was changing again, and the way programs were delivered for the affluent and the poor scouts was systemically different. The latter tended to be supported through programs and processes that were fragile. They were not supported through the traditional and strong model of volunteer-led troops (Phills, 2005). The interim CEO, Jackie Barnes, asked a critical strategic question when she said, “Are we out of alignment – does the business model still fit our delivery systems?” (Phills, 2005, p. 185). Again in 2003, the need for strategic leadership to effect change in the Girl Scouts became apparent. While there was no crisis per se, Kathy Cloninger, the CEO appointed in 2003, commented, Yet Girl Scouting was in a condition that, if a few more years passed without change, we might find ourselves regretfully saying as the doors closed for the last time, “The handwriting was on the wall. We just didn’t see it.” (Cloninger, 2011, Time for Change, para. 3)

Cloninger became convinced that the Girl Scouts needed to rethink its core purpose and to do so through participative processes. Several brutal truths were identified by a twenty-six-person strategy team: (1) the organization’s cherished traditions were limiting the organization’s flexibility; (2) while the country’s demography was changing, the Girl Scouts’ image and membership were not changing sufficiently in response; (3) the organization couldn’t answer a fundamental ­question – what is the Girl Scout experience?; (4) the organization was not listening to the girls themselves; (5) the adult-girl partnership model, which had been central, was not working, as the girls were seen as passive participants; (6) program delivery was fragmented; (7) the structure was not helping the organization to achieve its goals; (8) the traditional funding model of cookie sales, memberships, and merchandise sales would not be adequate for the Girl Scouts’ future growth; and (9) there were other organizations that offered similar services for girls (Cloninger, 2011).

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The Girl Scouts worked with Willie Pietersen to address the truths. Pietersen is professor of the practice of management at Columbia University’s Graduate School of Business. He specializes in strategy and the leadership of change. One of his key propositions states, “If an organization can’t define its Winning Proposition [sic] in a simple way, it cannot claim to have a strategy” (Pietersen, n.d.). As a result of his involvement as guru and change agent for the Girl Scouts, the mission was revisited again. The Girl Scouts’ mission has changed several times and now states, “Girl Scouting builds girls of courage, confidence, and character who make the world a better place” (Cloninger, 2011, Mission Statement, para. 18). From the work to craft a new mission, five strategic priorities emerged: branding, funding, and diversifying volunteers, as well as governing and programming experience, which the leadership, and the board in particular, addressed. Five gap teams were established to address each of the strategic priorities. Cloninger commented that “at this point the transformation was turning scary-real to us” (Cloninger, 2011, Closing Gap, para. 28), as significant decisions had to be made. Some core elements from the traditions of girl scouting were retained, but some significant changes were made also. For example, the role of the volunteers and the recitation of the Promise and the Law at each meeting continued. But the uniform requirement was modified so that the girls needed to wear only the sash, vest, or tunic. In 2005, the Girl Scouts became more committed to measuring its impact. Fifteen outcomes were identified as indicators of the Girl Scouts’ impact; these were bucketed into three groups – girls discover self, girls connect with others, and girls take action in service. Together these constitute the New Girl Scout Leadership Experience. The outcomes were operationalized by age group (see Exhibit 7.1 for the fifteen outcomes at the end of the chapter). The strategic priority of governance was particularly hard to implement. Starting in 2005, the Girl Scouts began a three-year plan to reduce significantly the number of councils, each with its own CEO and staff, from 312 to 112 “high impact” councils. The rate and the scope of the change were jarring to the organization and especially to the employees of the merged councils – many lost their jobs and fallout continues today. In 2011, the Girl Scouts selected Anna Maria Chavez as its CEO. She is the Girl Scouts’ first Latina CEO. She has already faced controversy from within the Girl Scouts and from the Catholic Church. In late 2011, a troop in Colorado prevented a transgendered youth from joining

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the troop. The troop reversed its decision and the Girl Scouts issued a statement that it would handle the issue of transgendered youth on a case-by-case basis (Starr, 2011). Recently, the Catholic Church launched an official inquiry into the Girl Scouts. The Church’s Committee on Laity, Marriage, Family Life and Youth will look into the Girl Scouts’ problematic relationships with other organizations and its problematic program materials (Crary, 2012). Chavez herself has been vilified by some members of the Catholic Church as someone who “leaves a professional footprint that suggests an ideology at odds with the [Catholic] Church” (Hasson, n.d.). The Girl Scouts have also faced ideological criticism from elected officials. One representative, Indiana’s Rep. Bob Morris, has described the Girl Scouts as a radical group that promotes abortion and homosexuality. While the representative apologized for his remarks, he insisted that the Girl Scouts are linked with Planned Parenthood. Another representative, Wes Keller of Alaska, supported a resolution honoring the Girl Scouts only after determining that the Girl Scouts, at the national level, had no connection with Planned Parenthood. In 2012, the Girl Scouts celebrated their centennial. While there was much excitement about the hundredth anniversary, concerns about the next hundred years were expressed, too. Membership continues to drop, donations have not recovered from the recession, and Chavez’s leadership and strategic actions have been questioned (Hall & Perry, 2013). In addition, a small grassroots organization made up thirty Girl Scout employees, volunteers, and alumnae in their twenties from across the country, called Future is Ours, has expressed its concern about the declining membership as well as about the $340 million deficit in the Girl Scouts’ pension plan (Hall, H., 2013). VX CASE QUESTIONS 1. What is your view of Hesselbein’s leadership lessons? 2. Why is defining a winning proposition important to an organization’s success? 3. What barriers to change existed in the Girl Scouts itself? 4. What should the Girl Scouts do to address its current human resources and financial threats?

VX

220  Understanding the Social Economy of the United States EXHIBIT 7.1 FIFTEEN OUTCOMES 1.  Girls Discover Self a. Girls develop a strong sense of self. b. Girls develop positive values. c. Girls gain practical life skills. d. Girls see challenges in the world. e. Girls develop critical thinking. 2.  Girls Connect with Others a. Girls develop healthy relationships. b. Girls promote cooperation and team building. c. Girls can resolve conflicts. d. Girls advance diversity in a multicultural world. e. Girls feel connected to their communities, locally, and globally. 3.  Girls Take Action a. Girls can identify community needs. b. Girls are resourceful problem solvers. c. Girls advocate for themselves and others, locally, and globally. d. Girls educate and inspire others to act. e. Girls feel empowered to make a difference in the world. Source: Girl Scouts of America (2008).

8 Human Resources Management

In this chapter, we look at the management of human resources, paid and unpaid, in social economy organizations. We first present the demographics of the social economy workforce and introduce the functions of human resources management (HRM) in general. Then we look at several models of HRM, with comparisons among the nonprofit, forprofit, and government workforces. The unique aspects of working in a social economy organization are covered next, along with their implications for HRM. We end the chapter by focusing on the skills and competencies needed to manage and work in organizations in the social economy. The Social Economy Workforce In 2010, nonprofit organizations employed about 10 percent of the workforce of the United States and paid 9.2 percent of all wages. Wages and benefits totaled about $587 billion (Roeger, Blackwood, & Pettijohn, 2012). Employment in charities alone [501(c)(3) organizations] in 2010 totaled 10.7 million people. Comparative figures for the retail trade and wholesaling industries were 14.5 million and 11.5 million people respectively (Salamon, Sokolowski, & Geller, 2012). While employment in the nonprofit sector is significant, it is also concentrated in large organizations in particular fields. One-third of nonprofit workers are employed in hospitals and 14 percent in education (Salamon & Sokolowski, 2006). Almost three-quarters of all reporting public charities are small, with expenses under $500,000, and therefore are not large employers (Cryer, 2008).

222  Understanding the Social Economy of the United States Table 8.1  Number of Firms, Average Membership, and Average Number of FTE Employees of Cooperatives in the United States Number of firms* Worker Producer

223

Average membership** 247

Average number of FTE employees 11

1494

478

49

724

8471

180

Consumer

26,844

12814

24

Total

29,295

11981

29

Purchasing

*Does not include housing cooperatives ** Individuals can belong to more than one cooperative Source: Artz and Kim (2011).

In addition, there is a large, unpaid or volunteer workforce. Studies of volunteer contributions show that in total between 8 billion and 12.7 ­ billion hours are contributed annually, or the equivalent of 3.8 ­million to 7.7 million full-time equivalent positions. If a dollar value is placed on this labor, a reasonable estimate would be from about $170 billion to $260 billion (Corporation for National & Community Service as cited in Independent Sector, 2012; Pettijohn, 2013). There is also significant employment in cooperatives, estimated at 856,310 individuals, with annual payrolls totaling more than $25 billion (Deller et al., 2009). The average number of employees, average membership, and number of firms by type of cooperative is seen in Table 8.1. The Functions of Human Resources Management Prior to the 1980s, there was little focus on management in nonprofits. However, as nonprofits started to take on a larger role in American society, there was also a movement toward more professionalization of the sector. This included the area of human resources management, an important component of which was the management of volunteers (Cunningham, 1999). In general, the functions of human resources management include recruitment, selection, training and development, compensation and benefits, retention, evaluation, promotion, and labor-management relations (Pynes, 2009). HRM aims at attracting and retaining the most effective employees in order to accomplish an organization’s goals.

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Models of Human Resources Management Approaches to human resources management in the social economy vary according to the size of the organization, the resources available (financial and human), pressures from external stakeholders, government regulations, and social goals and values (Akingbola, 2013). They also vary according to the mix of paid and unpaid staff. As a result, there are a number of different models of HRM that can be found in the social economy organizations. Akingbola (2013) presents five such models: arbitrary, administrative, values-based, strategic, and mutual. An overview of each approach is presented next, with particular attention paid to the strategic and mutual models. Arbitrary HRM In arbitrary HRM, there are no formal policies or systems in place. These practices might be found in small or new organizations that rely on interpersonal relationships to manage human resource issues. In other words, it is more of a reactive approach than one involving a lot of planning for the future (Akingbola, 2013). Administrative HRM This level of HRM has some structure and focuses on complying with regulations and employment legislation. Human resource records are kept primarily in order to meet accountability requirements from funders and government (Akingbola, 2013). Values-Based HRM In this model, HR practices are guided by the values of the organization as expressed by the mission and vision. Practices are formalized, and the goal is to maximize the fit between the employee and the mission and values of the organization. This is done with the aim of optimizing employee engagement and increasing retention (Akingbola, 2013). Strategic HRM Strategic human resources management is a particular approach to HRM that connects human resources management with the mission and

224  Understanding the Social Economy of the United States

strategy of the organization. It requires that the activities, policies, and practices of HRM are aligned with the operational and strategic objectives of the organization (Pynes, 2009). The role of HRM thus moves from one based on compliance with rules and regulations to that of being a strategic partner in the organization. This requires that HRM be flexible, able to change quickly, and tuned into the needs and performance of the organization as it seeks to achieve its mission. This also means taking a long-term perspective while undertaking short-term activities. In order to do this, the human resources function becomes part of the strategic planning processes of the organization. The organization’s strategic plan can be thought of as a bridge between its mission and vision that takes into consider core values: Mission: Why we exist Core Values: What we believe in Vision: What we want to be Strategy: Our game plan (Kaplan & Norton, 2000, p. 73)

Overall, the goal is to get “the right people into the right jobs doing the right things and being treated right” (Light 2002, p. 109). Some strategic human resources management (SHRM) practices include the following (Guo, Brown, Ashcraft, Yoshioka, & Dong, 2011, p. 256): • using the mission and values of the organization to attract employees • encouraging and allowing flexibility in work schedules and working arrangements • having internal communication practices that consistently reach all employees with valuable information • engaging in practices to retain employees such as providing competitive wages and bonuses • providing professional development opportunities for employees • specifically targeting high quality employees for leadership development • evaluating employees through multiple performance assessment strategies • linking indicators of effective employee performance to organizational objectives • providing opportunities for systematic employee feedback through surveys, exit interviews, etc.

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• conducting planning related to workforce needs • communicating and reinforcing a widely recognized corporate culture In practice, Guo et al. (2011) found that younger organizations, those with more full-time, paid staff, and those that are more technologically savvy are more likely to take an SHRM approach. Volunteer-dependent organizations had different patterns of SHRM than others, suggesting that SHRM practices differ according to whether they are applied to paid or volunteer staff. In the same study, it was found that those organizations without a formalized HR department were more likely to follow SHRM practices. Although this might seem counterintuitive, it suggests that in organizations without dedicated HR staff, the functions are being guided by top management, who generally are the strategic decision makers. Those organizations with dedicated HR staff in the study seem to be more administrative than strategic (Guo et al., 2011). Indeed in many nonprofit organizations, there is a lack of alignment or disconnect between HRM and strategy. One possible explanation is that there is a capacity challenge in place due to lack of funding for functions such as HRM and volunteer resource management. Another reason may be the presence of external parties in HR decision-making (Akingbola, 2006b). For instance, McMullen and Brisbois (2003) found that in one-third of the nonprofits they studied, staffing decisions were controlled by parties external to the organization. This was significantly higher than results for the for-profit sector, where only 8.1 percent of staffing decisions were made by parties outside of the organization. Mutual HRM Mutual HRM considers both the strategic goals of the organization, as well as broader social goals. In addition to the practices for strategic HRM outlined in the previous section, organizations might also operate according to a culture of social justice. This would be reflected in their recruitment, performance management, employee engagement, and compensation practices (Akingbola, 2013). For instance, the National Coalition for the Homeless pays its workers, at minimum, a living wage. As they state, We believe that nonprofits should be the vanguard of the Living Wage movement. We must raise the appreciation of workers to a new level just as we must raise our appreciation of those who teach our children. We

226  Understanding the Social Economy of the United States must say to both funders and economic backers whether they be for-profit or nonprofit, that workers are every bit as important as the work product they produce. When we seek funding we must clearly state how much it will cost to accomplish the goal at hand which includes paying our people a fair living wage. Funders will respect this and they will provide for it if it is uniformly explained and requested as part of the normal funding application. (Universal Living Wage, 2013)

The SHRM Foundation (2012) also gives examples of how human resource managers can include social and environmental sustainability objectives in their policies and practices. These include attention to diversity, employee well-being, and development. Regarding diversity (as well as inclusion), the foundation states: “Measure the impact of HR processes on hiring women, members of minority groups, people over the age of 45, people with disabilities, or those who have been unemployed for extended periods of time and may have difficulty reentering the job market” (2012, p. 9); about employee well-being: “Pay employees competitive wages and benefits (for example, health care, pension); and provide training and educational opportunities for employees” (2012, p. 9); and on the topic of employee development: “Provide a work environment in which employees thrive through training, promotion opportunities or enriching lateral moves, and adequate supervisory support and recognition” (2012, p. 10). For cooperatives, social goals can be found in the principles by which cooperatives operate. Compensation, democratic decision making, and commitment to community are all dimensions that would be included in the way an organization designs its HRM practices. This dual alignment not only aims for high performance at the organization level but also at the societal level (Akingbola, 2013). The A Closer Look box that follows gives another example of how broader social objectives can be included in human resource management practices. A CLOSER LOOK: THE UNITED NATIONS GLOBAL COMPACT In 1999, the United Nations created a global compact for organizations to adopt covering the principles of human rights, labor standards,

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environmental stewardship, and anticorruption. In a mutual HRM approach, policies and practices are developed that align with these principles, as well as the strategic goals of the organization (SHRM Foundation, 2012). The ten principles of the UN Global Compact are as follows: Human Rights Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; and Principle 2: make sure that they are not complicit in human rights abuses. Labor Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; Principle 4: the elimination of all forms of forced and compulsory labor; Principle 5: the effective abolition of child labor; and Principle 6: the elimination of discrimination in respect of employment and occupation. Environment Principle 7: Businesses should support a precautionary approach to environmental challenges; Principle 8: undertake initiatives to promote greater environmental responsibility; and Principle 9: encourage the development and diffusion of environmentally friendly technologies. Anticorruption Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery. (United Nations Global Compact, n.d.)

Comparisons of Nonprofit, For-Profit, and Government Workforces In a study comparing nonprofit, federal government, and private sector workers, the nonprofit workforce was found to be the healthiest

228  Understanding the Social Economy of the United States

in the United States (Light, 2002). Some other findings of the study included the following: • Nonprofit employees were much more likely than federal or private sector employees to say that the people they work with are open to new ideas, willing to help other employees learn new skills, and concerned about achieving their organization’s mission. • Nonprofit employees were much more likely to say that they took their job in the sector for the chance to help the public, to make a difference, to do something worthwhile, and for pride in the organization rather than more conventional reasons such as job security, the salary and benefits, or the paycheck. • Nonprofit employees were less likely than federal or private sector employees to say their work is boring and their jobs are a deadend with no future, and were much more likely to say that they are given a chance to do the things they do best. • Nonprofit employees were more likely than federal or private sector employees to be able to very easily describe how their jobs contribute to their organization’s mission, and more likely to say they personally contribute to helping accomplish that mission. (Light, 2002) A more recent study by LeRoux and Feeney (2013) also found distinct differences in the work environment of managers in nonprofits and the public sector. Nonprofit managers reported that they had “greater freedom in deciding how to carry out their job functions, more control over their work schedules, and greater opportunities for pay increase” than their public sector counterparts (LeRoux & Feeney, 2013, p. 1). Even so, resource shortages in the sector sometimes make it difficult to attract and retain talented employees and board members. Unique Challenges of Social Economy Organizations for Human Resources Management Social economy organizations are complex. As we have emphasized throughout this book, they have both social and economic bottom lines and are accountable to multiple stakeholders, including funders, donors, clients, and the community. They often have both a paid and unpaid workforce and operate in an environment of limited human and financial resources. Nonprofits, social enterprises, and cooperatives also each have unique features that require differing HRM approaches.

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Nonprofit Organizations For most nonprofit organizations, employees are their greatest expense, typically 50 to 80 percent of the budget, and their greatest asset (Pynes, 2009). Effective and efficient management of this resource is essential for achieving organizational goals (Arcand, Bayad, & Fabi, 2002; Hager, 2004). Of the different organizational forms in the social economy, the nonprofit sector has been studied the most. From these studies, we can identify a number of challenges that affect nonprofit human resources management (Cornelius & Corvington, 2012; Light, 2002): • perception of low compensation • flatter hierarchies and fewer opportunities for advancement • lack of succession planning • shortage of resources in general • the prevalence of small organizations • compassion fatigue and burnout in some fields There are other workforce dimensions specific to the nonprofit sector that help to mediate these challenges (Cornelius & Corvington, 2012; Light, 2002): • passion for mission • high level of employee satisfaction and engagement as compared to other sectors • opportunities for innovation • a significant volunteer workforce Some of the important issues in human resources management in the social economy are motivation, compensation, workforce engagement, retention, burnout and compassion fatigue, and managing an unpaid workforce (volunteers). We discuss each of these first with respect to nonprofit organizations. Then we consider some unique challenges found in social enterprises and cooperatives. Motivation Studies have shown that there are some distinct differences between the motives to work for a for-profit organization and the motives to work

230  Understanding the Social Economy of the United States

for a nonprofit organization (Handy & Katz, 1998; Light, 2002; Schepers et al., 2005). Some of the motives inducing people to work in the nonprofit sector as compared to the for-profit sector include “preferences for working with and for people, altruism, personal growth, social contacts, opportunities to learn versus more ambition, and intrinsic rewards versus extrinsic rewards like income and money” (Schepers et al., 2005, p. 203). Other differences comparing working in the nonprofit sector compared to other sectors include a focus on “helping the public, making a difference, doing something, and pride in the organization itself” (Light, 2002, p. 3). Nonprofit employees also report consistently higher levels of formal and informal social participation than private sector employees (Ertas, 2013). Compensation Extrinsic factors such as reasonable pay and security are also of importance to nonprofit workers and should not be underplayed (Chen, 2014). However, in comparison with workers in other sectors, fewer nonprofit workers come to work solely for a paycheck (16% versus 31% of federal employees and 47% of private sector employees) (Light, 2002). In the United States, a common belief about wages in nonprofit organizations is that they are lower than both public sector wages and forprofit wages (Cornelius & Corvington, 2012). An analysis published by the Bureau of Labor Statistics found, however, that while this was true for management and professional occupations, it was not true for entry level and mid-level occupations (Butler, 2009a, 2009b). Social economy organizations tend to have more egalitarian wage structures and smaller wage dispersion than for-profit businesses (Borzaga & Solari, 2001; Leete, 2000). In other words, there is less difference between the lowest paid and highest paid workers in social economy organizations than in for-profit businesses. There also is less labor market discrimination against women and minorities in nonprofits than in the for-profit sector (Leete, 2006). To explain differences in wage levels, we can look to economic theory. As Leete (2006) explains, we should expect different earning levels within each sector. Wages should be different as each sector of the economy is composed of a different mix of occupations and industries, each of which require different skills and have different working conditions. There are also other explanations. If we look at nonprofit firms and their for-profit counterparts in the same industry and at the same

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occupation, we might find they produce different goods. An example of this might be legal services: lawyers in a nonprofit organization who provide legal services free of charge for the poor. In this case, the lawyers might be willing to accept a lower wage in return for the intrinsic value they get from the social benefits of their work. In other words, they may view it as a sort of donation (Rose-Ackerman, 1996; Preston, 1989). For the organization, maintaining a lower wage structure might serve as a sorting mechanism to attract those who are more interested in the quality and worthiness of the services than the higher paycheck they might earn in the corporate sector (Handy & Katz, 1998; Hansmann, 1980). We can also look at nonprofit firms and their for-profit counterparts that produce identical goods. In this instance, we have examples of hospitals, nursing homes, and childcare centers. Wages between the two sectors could be either higher or lower. For instance, wages could be higher in a nonprofit organization because the organization is larger. They also could be lower because the organization lacks professionalism or is smaller (Leete, 2006). In other words, a lot of factors influence compensation, not only the sector that an organization is in. Nonwage compensation, or benefits, is an important component of the wage package of nonprofit organizations. Benefits include both monetary and nonmonetary items. We often associate benefits with monetary items such as medical insurance premiums, retirement funds, paid leave, and so on. However, benefits can also include nonmonetary items such as the ethos of the workplace, flexibility in work hours, family friendly policies, career mobility opportunities, and so forth. The economic theory of wages suggests that high pay compensates for low benefits, and vice versa (Leete, 2006). Although a salary might be low, the benefits should also be considered before coming to any conclusion that one wage package is higher or lower than the other. Workforce Engagement Interestingly, employee engagement in the nonprofit sector has been shown to be substantially higher than in other industries in the United States. Employee engagement considers both emotional and rational factors as they relate to work. It combines worker satisfaction and a sense of inspiration from work and being part of the organization (Towers Perrin, 2003). In a study of more than 35,000 employees in US companies, when comparing industries, nonprofits had by far the highest percentage of highly engaged respondents (Table 8.2).

232  Understanding the Social Economy of the United States Table 8.2  Engagement Across Selected Industries in US Companies Industry

Highly engaged

Moderately engaged

Disengaged

Nonprofit

42%

46%

12%

Insurance

18%

66%

16%

Pharmaceuticals

16%

67%

17%

High tech

15%

68%

17%

Heavy manufacturing

14%

63%

23%

Source: Towers Perrin (2003, p. 7).

Burnout and Compassion Fatigue Burnout, which can be thought of as the opposite of engagement, is also an issue in a variety of fields, including education, business, criminal justice, and healthcare (Morse, Salyers, Rollins, Monroe-DeVita, & Pfahler, 2012). Burnout has several dimensions: emotional exhaustion, depersonalization (a negative perception of clients, or cynicism), and reduced personal accomplishment (Maslach, 1993). The costs of burnout are high: increased turnover and absenteeism, reduced interaction with clients, mental health challenges such as depression, and aggressive behavior. One study of volunteering found that it was possible to predict burnout by considering the time spent volunteering per month and the type of motivations that led the volunteer to contribute his or her time. Higher levels of burnout were found where the key motivation to vol­ unteer was extrinsic (such as social or career) and the number of hours volunteered increased. Three items had a negative relationship to burnout: intrinsic motivations (such as values and understanding), degree of life satisfaction, and degree of integration in the organization (Moreno-Jiménez & Villodres, 2010). Knowing this information is important in order to create an environment and human resources policies that mitigate burnout, improve the quality of the volunteering experience, and increase retention (Moreno-Jiménez & Villodres, 2010). A related concept is compassion fatigue, seen in those working with survivors of natural disasters and terrorism (Figley, 1995; Yoder, 2010). Compassion fatigue differs from burnout in that is leads to feelings of hopelessness and helplessness because of the inability to rescue an individual from harm, whereas burnout is thought to arise from a failure to meet personal goals (Valent, 2002).

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In one study of hospice nurses, over three-quarters were found to be at moderate to high risk for compassion fatigue. The key determinants of compassion fatigue were “stress, trauma, anxiety, life demands, and excessive empathy (leading to blurred professional boundaries)” (Abendroth & Flannery, 2006, p. 352). Alongside the demands of the workplace, many nurses were also experiencing financial stress, adding to the degree of risk for compassion fatigue (Abendroth & Flannery, 2006). Managing burnout and compassion fatigue requires interventions from both the individual and the organization. There are strategies that an organization can take to reduce burnout and compassion fatigue in its employees and volunteers. This can include providing programs that help individuals recognize symptoms of burnout and compassion fatigue in themselves and others, as well as helping reduce stress. At the organizational level, reducing employee work overload and role ambiguity have been shown to be effective. Other strategies include increasing worker involvement in relevant decision making and creating a sense of community that supports employee and volunteer wellness (Morse et al., 2012). Managing an Unpaid Workforce In addition to paid staff, there is also a significant complement of volunteer labor contributed through social economy organizations, and adequate investment in the management of this resource must be made. As mentioned at the beginning of the chapter, the labor of between 3.8 million to 7.2 million full-time equivalent paid workers is provided by volunteers in the United States annually. Volunteering occurs informally, such as in citizen engagement and the ways that members of a neighborhood reach out to each other, and formally, through organizations. We address the formal aspects as they relate to human resources management. One of the key questions leaders of volunteers should be asking themselves before they decide to build a volunteer program is, “Why do we want volunteers?” (Ellis, 2010, p. 13). Some “first-choice reasons” to implement a volunteer program should consider the unique assets that volunteers can offer an organization (Ellis, 2010, p. 15). Some reasons to consider incorporating a volunteer program in an organization include the following: • Volunteers are perceived to have credibility because they are unpaid; • Receiving assistance from a volunteer (rather than from an employee) makes a difference to the recipient;

234  Understanding the Social Economy of the United States

• Volunteers have a broader point of view as they are community representatives; • Volunteers extend the sphere of influence and access to networks in the community; • Volunteers are valuable as objective policy makers; • Volunteers are private citizens and can contact legislators or the media in a way employees may not legally be able to do; and • Volunteers can experiment with new ideas and service approaches. (Ellis, 2010, 15–18) If, on the other hand, the answer to the reason to involve volunteers is “because we do not have sufficient resources [money, staff, or whatever] to do our job without the help of volunteers,” there may be problems in the long term. Ellis calls this a second-choice reason leading to volunteers being considered a “second-choice resource” (2010, p. 13). Once the reasons to involve volunteers are identified and the organization decides to go ahead, means to adequately resource the volunteer program need to be found. Although many times we hear that volunteers are “free,” in fact there is a cost to the organization to effectively manage them. This includes the salary of a volunteer resource coordinator, technology costs to schedule and keep track of volunteer contributions, volunteer recognition events, orientation and training, and liability insurance. To calculate the “return on investment” of running a volunteer program, you can place a value on the hours contributed (see chapter 9) and compare them to the costs of running the program. You want to be sure that you include these costs in any grants you are applying for, as being able to show the funder the return they will get for investing in volunteer management will help you be successful. A CLOSER LOOK: PETS ON WHEELS OF SCOTTSDALE Sharing Our Pets’ Love Pets on Wheels of Scottsdale is a 501(c)(3) tax-exempt nonprofit that runs a volunteer pet visitation therapy program. It was started by Neal and Anne Jennings in 1990 and today involves over one hundred

Human Resources Management  235

volunteers and their pets. These volunteer pet teams visit the elderly, infirm, and others weekly at sixteen healthcare centers, three rehabilitation hospital, two ­cancer ­centers, an ­adult-care center, a school for low-achieving children, and three life skills classes for developmentally challenged children, as well as a few homebound individuals. All in all, the volunteer pet teams visit almost two thousand individuals a year. Over thirty-five veterinarians in fifteen veterinary clinics contribute their time to give health examinations to the volunteer pets, once before they start the program and then annually. Owners are responsible for the costs of any inoculations, medication, or other treatment provided. For the first eight years, the organization was entirely staffed with volunteers, but in 1998 it hired its first part-time volunteer coordinator. This person screens new volunteers, coordinates visits, maintains reports, facilitates the volunteer recognition and reward program, and provides continuity for the organization so that it will continue to be sustainable. In 2012, after twenty-two years with the organization, Neil retired as president of the board. Over the years, Neil contributed twenty thousand hours and managed over sixteen hundred volunteer pet teams. Pets on Wheels of Scottsdale had expenses in 2010 of $30,000. About 20 percent of the organization’s funding comes from the volunteers themselves. The City of Scottsdale provides the organization with a small office but no other funding assistance. Several foundations provide grant funding, and other funds come from for-profit corporations, a credit union, and other nonprofits. Nonfinancial resources include a significant amount of volunteer labor.

Social Enterprises For social enterprises that operate with workers who have had various difficulties with regular employment, there are several management challenges: “(1) operating competitively with an unskilled and disadvantaged labor pool; (2) achieving a level of efficiency while balancing social and business goals; and (3) finding and retaining management staff” (Flannery & Deiglmeier, 2000, p. 11).

236  Understanding the Social Economy of the United States

Based on its extensive experience with these types of businesses, the San Francisco–based REDF Foundation recommends having both structural and operational strategies in place to help the enterprise manager deal with these challenges. Structural strategies include a training and counseling program outside of the workplace that helps employees with their social problems; clearly defined roles for staff; a clear decision-making process that helps with the balancing of social and business goals; a long-range vision that guides decision making; and an organizational culture the embraces both the nonprofit culture and the business culture (Flannery & Deiglmeier, 2000). Operational strategies can also help. This includes training staff so that everyone has a sense of both the social goals and the business goals of the enterprise; balancing the workforce so that there is a mix of employees from disadvantaged labor pools with employees from the general population; and a focus on team building between the business staff and the program staff (Flannery & Deiglmeier, 2000). Cooperatives Cooperatives take many forms, from social service cooperatives that rely both on government funding and earned income, to consumer and supply cooperatives, which operate solely in the market. As with nonprofits and social enterprises, people are also the most important resource in a cooperative. However, cooperatives operate according to a specific set of principles (see chapter 2), and as a result, they have features that result in unique human resource management issues. Some of these features are the following: • Members are also owners; in the case of worker cooperatives, the employees are the member-owners. • There is democratic decision making (one member, one vote).1 • There is a focus on education, training, and information. employee-owners In worker cooperatives, the employees are also the owners of the firm and have the discretion to set working conditions. There is some

1 This is also true of nonprofit mutual associations.

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evidence to suggest that employee ownership leads to increased ­productivity, motivation, and organizational efficiency (Freeman, 2007; Novkovic, Prokopowicz, & Stocki, 2012). It also focuses employees on the long-term success of the organization (Artz & Kim, 2011). Team decision making is an integral part of employment in a worker cooperative. It is important to have clearly defined roles and procedures for decision making. The types of decisions and kinds of issues that can be addressed by individuals, work groups, and the entire worker-member group should be specified. The roles and responsibilities of each group – the board of directors, management, and worker-owners – must be clearly set out (Northcountry Cooperative Foundation, 2006). Often, before a person can become a member-owner, he or she is employed for a probationary period of at least six months. This allows the prospective new member to learn about co-op duties and responsibilities and to see if there is a good fit. As part of its human resources management practices, the co-op sets a policy for the length of the probationary period and the procedure to accept new members (Northcountry Cooperative Foundation, 2006). A flatter hierarchy in worker cooperatives means having to evaluate one’s peers. Member-workers may lack managerial skills and may require training. Human resource policies and systems to provide guidelines for these unique working conditions can help mitigate problems and increase job satisfaction (Artz & Kim, 2011; Lawless & Reynolds, 2004). A CLOSER LOOK: ARIZMENDI ASSOCIATION OF COOPERATIVES The Arizmendi Association of Cooperatives is a second-tier cooperative based in Oakland, California. It is made up of seven member businesses: six worker cooperative bakeries and one development and support collective (AAC, n.d.). One of the keys to success in a worker cooperative is the fit between each worker-owner and the organization. Being self-motivated and

238  Understanding the Social Economy of the United States

disciplined with a strong work ethic are qualities that Arizmendi looks for in its worker-owners. For Arizmendi, before you can be a worker-owner, you go through several steps. First, you are brought in for twelve hours over several weeks to shadow one of the current worker-­owners. In this period, you try different tasks and are evaluated. Part of the orientation to the organization may include workshops on Arizmendi’s history, how participation in meetings works, what leadership and democratic participation mean in a cooperative, and effective communication and conflict resolution (AAC, n.d.). You also go through a group interview. If there is a connection, the next step is to complete a six-month probationary period. After that period, the entire membership votes on whether or not there is a good fit. If 75 percent of the votes are in favor, you are invited to join (Yeung, 2010). Every month, the cooperative has a meeting led by a trained facilitator. This is where decisions are made. Generally, consensus decision making is used. As one of the co-op members of Arizmendi Oakland said, “Consensus decision-making can be a real challenge. You may feel passionately about something but the group is focused on something else, and sometimes you are too passionate about something so you have to realize that you’re preventing the process from moving forward” (Yeung, 2010, p. 1).

member relations For other types of cooperatives, such as consumer and social services cooperatives, their customers are also their members and owners in common. Consequently, managers have to interact with their “owners” on a daily basis. They also have to involve them in major decisions affecting cooperative policy and business objectives (United States Department of Agriculture, 1997). Accordingly, member relations are a key function of a cooperative. This includes effective and transparent communication channels as well as the recruitment of new members. Management in cooperatives is often evaluated in terms of how well the cooperative serves its members. Systems and policies must be put in place in order to measure and report on this in performance evaluations.

Human Resources Management  239

democratic decision making Members of a cooperative have the opportunity to participate in issues requiring a vote, and they operate according to the rule of one member, one vote. This is in contrast to for-profit businesses, where votes are allocated according to the number of voting shares, or the ownership of capital held in the business. Managing a democratically run business requires additional skills such as meeting facilitation and conflict resolution. education and training Education and training are very important for all organizations, but in the case of cooperatives, it is one of the seven key principles by which they operate: Co-op Principle #5: Education, Training and Information Cooperatives provide education and training for their members, elected representatives, managers, and employees so they can contribute effectively to the development of their cooperatives. They inform the general public - particularly young people and opinion leaders about the nature and benefits of co-operation. (International Co-operative Alliance, 2012a)

It is important for co-op employees, members, and directors to understand the main principles guiding the organization, and this understanding is critical for the everyday operations and growth of a cooperative (Zeuli & Cropp, 2004). A CLOSER LOOK: CABOT CREAMERY COOPERATIVE Owned by Our Farm Families in New York and New England As a result of cooperative principle 5, education, training, and information, one of the unique positions you might find in a cooperative is that of educator. This A Closer Look focuses on a project from one such educator.

240  Understanding the Social Economy of the United States

In 2008, Cabot Creamery Cooperative2 was honored to receive the Outstanding Contribution to Cooperative Education and Training Award from the Association for Cooperative Educators (ACE). ACE is “a membership organization that brings together educators, researchers, cooperative members, and cooperative developers from across cooperative sectors and national borders, resulting in ideas that enhance cooperative development, strengthen cooperatives, promote professionalism and improve public understanding” (ACE, 2013, p. 2). Cabot Creamery is a longstanding dairy cooperative owned by 1,200 dairy farm families located in New England and upstate New York. It has been operating since 1919 and now employs over one thousand people including a community and education project manager. It has a reputation of having “the world’s best cheddar,” according to World Championship Cheese contests, and a longstanding tradition of focusing on health and education (Cabot Creamery Cooperative, 2008). One of the reasons Cabot was selected for the ACE award was its collaboration with the National Cooperative Business Association (NCBA) to develop a Coops for Community patch for Girl Scouts and other groups. To earn the badge, there are a minimum number of activities that have to be completed depending on the age group. Brownies (age 7–9) must complete three of the first four activities, plus two others. Juniors (age 9–11) must complete three of the first four activities, plus five others. Cadettes/Seniors (age 11–16) must complete the first three activities, plus seven others. The activities, as stated by a booklet for this purpose, include the following: • Read the Seven International Principles of Co-ops on the inside front cover of this booklet. Read the Girl Scout Promise and Girl Scout Laws. Make a list of the ways cooperatives and Girl Scouts have similar principles and values. • Visit a co-op in your area or have a co-op representative visit your troop and explain how their co-op operates differently from a similar non-co-op business. Use the suggested interview questions and

2 See http://www.cabotcheese.coop.

Human Resources Management  241

the chart on page 9 to identify the success factors and challenges experienced by the representative’s co-op. • Create a co-op with your troop on paper, and if you can, put your ideas into action! Figure out what type of service or product you want to sell (childcare, GS cookies, etc.). Make sure that either the service or product itself helps the community (such as baby-sitting) or the profits you make from the business are donated to an organization or put to good use with your troop. Ideas and helpful information on starting your own co-op are on page 10–14. You may want to complete this requirement last after learning more about co-ops from the other activities. • Visit a food co-op and a regular grocery store or a bank and a credit union and record the differences you find. Use the diagram on page 15 to record the similarities and differences. • List five different types of jobs that are available in a co-op. Note what role each position plays within the co-op.3

Skills Management of social economy organizations is complex and requires a broader range of skills than conventional management (EQUAL, 2004). For instance, in many cases financial and nonfinancial resources are limited; there are multiple stakeholders to deal with, some with more power than others; governance functions are performed by volunteers (see chapter 7); and measuring performance at the executive level is a challenge as multiple bottom lines are involved. Some of the challenges, such as limited sources of financing, are beyond the control of the manager (Borzaga & Solari, 2001). Other skills and competencies necessary to manage this complexity are summarized in Table 8.3. It is important for job postings for positions in nonprofits, cooperatives, and social enterprises to clearly identify the unique skills and responsibilities required in order to attract the best possible talent with the best possible fit.

3 The full booklet can be downloaded from the Cabot Cheese website (http://www. cabotcheese.coop/pages/community_and_you/girl_scouts.php).

242  Understanding the Social Economy of the United States Table 8.3  Social Economy Workforce Required Skills Issue

Skills

Focus on mission

Consideration of both KSAOCs (knowledge, skills, abilities, and other characteristics) and mission when hiring Labor relations Communication of vision and mission

Democratic structures

Participatory decision making Conflict resolution FacilitationTeam building Collaboration

Stakeholder approach

Stakeholder relations

Social and financial performance

Balancing multiple bottom lines Program evaluation Performance management Strategic planning

Limited resources

Facilitating innovation Grant writing Volunteer management Organizational change

Member-owners

Member relations

Focus on education

Knowledge of the cooperative principles

Often leadership positions in smaller organizations require someone who can wear “many hats.” The A Closer Look that follows outlines a job posting for a small nonprofit that illustrates this point nicely. A CLOSER LOOK: MARKETUMBRELLA.ORG Cultivating the Field of Public Markets for Public Good When the founder and executive director of marketumbrella.org was recruited to become executive director of another nonprofit, the organization found itself having to search for new leadership after fifteen years as a recognized leader and innovator in the use of public markets and public space. The responsibilities of the executive director are typical of organizations in the social economy with budgets of under $1 million (marketumbrella.org, 2013).

Human Resources Management  243

The executive director is expected to do the following: • Keep the Board of Directors fully informed on the condition of the organization and all-important factors that may influence the organization. Work with the Board of Directors to help them carry out their legal and fiduciary responsibilities according to the By-laws of marketumbrella.org and all current laws and regulations. • Lead all program, product and delivery of service by designing activities that align to the organization’s mission and goals by overseeing the design, marketing and execution of programs. • Oversee and lead the finance staff in annual budgeting and planning processes; administer and review all financial plans and make adjustments when necessary in order to conform with all financial, tax, risk management policies and procedures according to all current laws and regulations. • Effectively oversee all human resource staff assuring that all internal policies and procedures are followed and fully conform to current laws and regulations. • Create new grant proposals, manage and administer existing grants, and oversee any reporting requirements. • Maintain relationships with community members, partners, and peers assuring the organization and its mission, programs, products and services are consistently presented in a strong, positive image to the general public and relevant stakeholders via television, radio, print or online media outlets. • Provide leadership for all fundraising efforts including longterm planning, identifying resources required, researching new funding sources, establishing strategic fundraising activities, submitting proposals, and maintaining all required fundraising documentation according to all current laws and regulations. • Assume and complete other duties and responsibilities deemed necessary by the Board of Directors. (marketumbrella.org, 2013)

244  Understanding the Social Economy of the United States

Additional qualifications included the following: “A love for food, local food-systems, ecology, farmers markets and sustainable growing practices a must. Willingness to work irregular hours and weekends as necessary” (marketumbrella.org, 2013).

Conclusion This chapter looked at the implications of the unique aspects of social economy organizations for human resources management (HRM). Some of these unique characteristics were focusing on mission, balancing social and business goals, operating with limited resources, managing both a paid and unpaid workforce, and operating according to democratic principles. VX DISCUSSION QUESTIONS 1. Take a look at some of the online job boards such as idealist.org and search for positions in a nonprofit, cooperative, and social enterprise in the area in which you live. What are some unique positions in the social economy? How are the same positions in social economy organizations and for-profit businesses different or similar? 2. What are the strengths and weaknesses of the five different models of HRM presented in the chapter? How might they differ for small and large organizations? 3. Should nonprofit employees be paid a lower wage than employees doing similar work in for-profit businesses? 4. Research the living wage for the area you live in. Should social economy organizations adopt a policy of paying a minimum of a living wage to their employees? 5. Imagine you are starting a nonprofit organization, and considering whether or not to include a volunteer program. What issues would you evaluate in order to make your decision? 6. As a manager of a social enterprise that employs hard-to-employ persons, what strategies would you take so that the enterprise is sustainable in the long term?

Human Resources Management  245 7. What skills and competencies are you developing in your academic program that are transferable to managing human resources in social economy organizations? What skills and competencies are not being addressed?

VX CASE FOR ANALYSIS: ENCORE.ORG

In the United States, older adults as a percentage of the total population is changing: in 1900, they made up 4.1 percent of the population while today that figure is around 13.0 percent (United States Census Bureau, 2011). Whereas life expectancy was forty-seven years in 1900, today is it almost eighty. As a result, the number of older adults is increasing, and they are healthier than ever. They are also redefining the meaning and purpose of their lives (Harvard School of Public Health–MetLife Foundation, 2004). For many, the period of time between midlife and retirement and beyond is no longer a winding down period but a time to pursue an “encore” career. Encore career is a term popularized by social entrepreneur Marc Freedman and the nonprofit he founded in 1997 called Civic Ventures. Civic Ventures now operates as ENCORE.org with the tagline, “Second acts for the greater good.” It is a 501(c)(3) organization based in San Francisco that “seeks to tap the talents and skills of older Americans by developing avenues for meaningful service to communities. In pursuit of this mission, Civic Ventures promotes new ideas, strengthens infrastructure, and establishes and learns from new institutions” (Civic Ventures, 2003, p. i). It receives the bulk of its funding from contributions and fees for program services (Guidestar, 2013). Freedman notes, We’re witnessing the emergence of a new stage of life between the middle years and old age and also a new stage of work, and people’s priorities are shifting. More and more they’re moving towards a new hybrid, a kind of practical idealism, which has the benefit of continued income and health benefits, involves the search for new meaning and a sense of purpose; and also a desire to use one’s accumulated experience to have a social impact to leave the world better than we found it. (The Atlantic Philanthropies, 2011)

246  Understanding the Social Economy of the United States The movement of tens of millions of boomers into a new phase in their working lives is the biggest transformation in the American workforce since millions of women a generation ago broke down barriers and moved into roles that were off limits to their mother’s generation. (Encore Careers, 2011)

Research conducted in 2011 on behalf of Encore.org found that as much as 9 percent of Americans between the ages of forty-four and seventy were already in encore careers, and another 31 percent were interested in making the switch. Many are aspiring entrepreneurs who are interested in combining income generation and social mission. Only 14 ­percent said that retirement was a time to pursue leisure activities and take it easy (MetLife Foundation/Civic Ventures, 2011). The report also noted the following: Nearly two in three people (64 percent) see the next stage of life as a time to keep working, with nearly equal numbers saying: • “It’s the beginning of a new chapter … in which I can be active and involved, start new activities, and use my skills and experience to help others in a paid or volunteer position” (31 percent). • “It’s a time to keep working … as long as I am physically and mentally able, in order to cover my expenses and/or maintain my health coverage” (33 percent). (MetLife Foundation/Civic Ventures, 2011, p. 12)

Longer life expectancy means that it is increasingly hard to be financially secure for a retirement period because it can now last twenty or thirty years. With finances, healthcare, and adequate pensions as concerns, working longer, even with modest amounts of income, creates an opportunity for greater financial security. However, this also needs to come with flexibility as those seeking encore careers are also looking for time off for personal enrichment, travel, involvement in community activities, and caregiving (MetLife Foundation/Civic Ventures, 2011). Encore.org Programs By providing resources, coaching, mentorship, and assistance with financial planning, Encore.org is helping reframe how we think about

Human Resources Management  247

work. Some of the programs and strategies the organization uses to achieve their mission are discussed next. The Encore.org Website The Encore.org website is a major resource. It is geared toward individuals looking to start an encore career and organizations wishing to recruit and retain encore employees. Through the website, individuals can learn about education and training opportunities for encore careers, get more information on fellowships and awards, access job listings, and connect with other like-minded individuals. “Spotlight stories” highlight the transition process that others have already gone through. Research publications document the changing demographics and the desire of people ages forty-four to seventy to work in careers that have both personal meaning and community benefit. Advice in the following categories is provided for individuals: • finding your calling in life • revamping your resume • financing your encore career • becoming a teacher • updating your job skills • turning volunteering into a job • making the switch to a nonprofit career • finding a green job (Civic Ventures, 2013a) For encore employers, resources help to recruit encore talent, make the workplace flexible for workers of all ages, and strategize for managing, training, and retaining older employees (Civic Ventures, 2013b). Nora Hannah, the CEO of Experience Matters, a nonprofit in Phoenix, Arizona, that is part of the Civic Ventures national alliance, points out one of the challenges and opportunities for this new work stage: We have had no issues recruiting talent to organizations. But finding organizations that can use baby boomers on [their] terms is a little more challenging. They bring skills that are very strategic, you know, like human resources, and technology, and process improvement, and most nonprofits don’t yet have a system in place where they can engage volunteer talent on those high level projects so we work with them to, to help them. (Simons, 2013)

248  Understanding the Social Economy of the United States

Encore Fellowships Encore Fellows are individuals matched to a social-purpose organization for a period of six to twelve months to complete a high-impact assignment. They typically commit to one thousand hours of work and are paid a stipend ranging from $20,000 to $35,000 (Benjamin, 2012). This program is managed by a local program operator who partners with Encore.org. Costs for the program are shared by the host organization and the program sponsors. In the first eighteen months of the program, one hundred individuals contributing more than a hundred thousand hours had participated in the program (Benjamin, 2012). The program is targeted for strategic expansion and has received support from The David and Lucile Packard Foundation, Intel Corporation, California HealthCare Foundation, Virginia G. Piper Charitable Trust, HP, Goldman Sachs Urban Investment Group, and the Robin Hood Foundation (Civic Ventures, 2012). Intel, a multinational semiconductor chip maker, has integrated the Encore Career Fellowship Program with its Retirement Services function for its US facilities. An Encore Fellowship opportunity is offered as part of its phased retirement program. The fellowship begins after the employee is terminated, but the match occurs prior to separation. Fellows are paid an annual stipend of $25,000 for a commitment of a thousand hours of work. They also receive six months of paid health coverage. Some of the roles played by Encore Fellows include the following: • process improvement – improve the efficiency and effectiveness of operations; improve quality management and processes; • planning – lead or coordinate strategic, sustainability or operational planning processes; • IT support – assist nonprofits in getting the most out of their IT environment; • leadership and management development - assess management practices and create actionable plans; • administration – support and improve administrative processes and office management; • performance management – design and implement an accountability system, including leadership, job structure, metrics and goals;

Human Resources Management  249

• program support and implementation: implement a program or service or provide administrative, analytic or implementation support; • marketing and communications – help deliver coherent, compelling messaging; • human resources – strengthen hr policies, structures, systems, and practices; • facilities management – coordinate construction plans and manage facilities. (Civic Ventures, 2013c) Encore College Initiative Encore.org has partnered with forty community colleges to create and promote educational pathways to encore careers in education, healthcare, social services, and the environment. They also initiated the Community College Encore Career Grant, now run by the American Association of Community Colleges (AACC). This grant is targeted to member community colleges to start a Plus 50 Encore Completion program on their campus. The goal is to help ten thousand students over the age of fifty earn certificates or degrees in healthcare, education, and social services (American Association of Community Colleges, 2013). Examples of how community colleges are reaching out to those over the age of fifty are as follows: • Free seminars and career counseling to help boomers explore encore careers • Career coaching and peer networking opportunities to help experienced managers and executives transition to the nonprofit sector • Fast-track certification for those laid-off or retired from engineering or technology careers to become high school math and science teachers • Courses to help older adults transition to green jobs • Training for boomers to become in-home caregivers • Recruitment, training and placing older adults in healthcare, transit, social service and education jobs in partnership with local public and private employers • Recruitment of older immigrants who have worked professionally in the social services and healthcare fields in their own countries and training them as bilingual community health workers (Civic Ventures, 2013d)

250  Understanding the Social Economy of the United States

The Purpose Prize The Purpose Prize recognizes individuals over sixty who create new ways to solve tough social problems. Five to ten prizes are awarded annually, ranging from $10,000 to $100,000. Award winners also receive public relations and communications assistance and access to a network of like-minded individuals and organizations. The program has been funded by an $8 million grant from the John Templeton Foundation and The Atlantic Philanthropies (JTF, 2012). In 2012, twenty-three leaders in business, politics, journalism, and the nonprofit sector chose five $100,000 winners from a pool of more than eight hundred nominees. The winners were as follows: Bhagwati Agrawal, brings safe drinking water – rain from rooftops – to thousands of villagers in his native India, using his engineering expertise. Susan Burton, a former drug addict who spent years in and out of jail, gives female parolees tools for rebuilding their lives after prison – housing, legal services, job training and more – and advocates nationally for such support. Judy Cockerton, winner of the Purpose Prize for Intergenerational Innovation sponsored by AARP, helps people enrich the lives of foster care kids, through innovative programs. Thomas Cox, a lawyer who used to represent mortgage lenders, uncovered massive fraud among mortgage lenders leading to a $25 billion settlement. He now represents in court low-income homeowners facing foreclosure. Lorraine Decker, a financial planner, helps low-income adults and teens acquire the financial, career and life skills they need to transform their lives and prosper, through free workshops. (Civic Ventures, 2013c) VX CASE QUESTIONS 1. What are the opportunities and challenges for social economy organizations of tapping into the talent pool of baby boomers with previous careers in the government and for-profit sectors? 2. Do boomers working beyond retirement age take away jobs from the younger generation? Discuss.

Human Resources Management  251 3. Research and discuss strategies for the recruitment and retention of “encore” careerists in an intergenerational social economy workplace. 4. How might social economy organizations partner with organizations in other sectors to facilitate the transition of boomers to social economy jobs or volunteer positions? And, how might for-profit organizations partner with encore.org and other social economy organizations?

9 Financing

This chapter explores the issue of financing in the social economy. Financing is used to start an organization, cover operating expenses, purchase fixed assets such as buildings and equipment, and grow. After providing an overview of the range of revenues and financing available to social economy organizations, some of the challenges these entities face in obtaining this financing are discussed. The chapter introduces the concept of social finance, a particular form of investment that seeks to achieve social and environmental returns as well as economic ones, or what some label as a blended return (Emerson, 2000). Various forms of financing provided through the public, private, and social economy sectors are explored in more detail, as are pooled sources of financing that reach across multiple sectors. Sources of Revenue For organizations operating in the market such as cooperatives and social enterprises, the source of revenue for operations is straightforward: the sale of goods and services. Most forms of nonprofits, on the other hand, have to rely on other sources such as contributions, grants, and fees charged for program goods and services. The Urban Institute (Blackwood, Roeger, & Pettijohn, 2012) reports that overall in 2010, nonprofits earned over $2 trillion in revenues and spent about $1.9 trillion for expenses. Public charities accounted for about three-quarters of this, or $1.5 trillion in revenues and $1.45 trillion in expenses. For these organizations, half of the revenues came from fees for services and goods from private sources; 24 percent from fees for services and goods from government (government contracts, Medicare and Medicaid

Financing 253

payments); 8 percent from government grants; 13 ­percent from ­private contributions, gifts, and grants; and the remaining 5 ­ percent from investment income and other sources. Although public charities reported almost $1.5 trillion in expenses in 2010, over 85 percent of this came from only 4 percent of the organizations, primarily hospitals and higher education institutions with expenses of $10 million or more. Three-quarters of public charities had expenses under $500,000 and 60 percent of these spent less than $100,000 (Blackwood, Roeger, & Pettijohn, 2012). If you break down organizations that file Form 990 (required by the IRS for tax-exempt organizations) by size of organization according to asset size, you can see that the revenue mix for smaller organizations is much different from those at the top end. The revenue mix is shown in Table 9.1. As can be seen, smaller organizations rely more or less equally on contributions and on program service revenues, and larger organizations earn most of their revenues from program service fees. Revenue sources can also be broken down by tax-exempt type – for instance, 501(c)(3) charitable organizations; 501(c)(4) civic leagues and Table 9.1  Breakdown of Revenues for 501(c)(3) Organizations Filing Form 990, by Asset Size Asset size All 501(c) Under (3) [1] $100,000

$100,000 $500,000 under under $500,000 $1,000,000

$1,000,000 $10,000,000 $50,000,000 under under or more $10,000,000 $50,000,000

Contributions, gifts, and grants

21%

46%

58%

40%

46%

33%

14%

Program service revenue

72%

50%

36%

52%

50%

62%

79%

Other revenue

6%

4%

6%

7%

4%

5%

7%

100%

100%

100%

100%

100%

100%

100%

Total [2]

[1] Excludes private foundations, most churches, and certain other types of religious organizations. [2] Totals may not add up to 100 percent because of rounding. Source: Compiled from IRS (2014).

254  Understanding the Social Economy of the United States

social welfare organizations; 501(c)(5) labor and agricultural organizations; 501(c)(6) business leagues, real estate boards, and so on; and 501(c)(7) social and recreational clubs. For those organizations that are required to file a Form 990 – that is, have assets of $500,000 or more or revenues of $200,000 or more – the source of their revenues is shown in Table 9.2.1 The revenue mix of organizations that file a form 990-EZ is shown in Table 9.3. These organizations have assets less than $500,000 and Table 9.2  Breakdown of Revenues for Organizations Filing Form 990, by Organization Type 501(c)(3)[1]

501(c)(4)

501(c)(5)

501(c)(6)

501(c)(7)

Contributions, gifts, and grants

21%

5%

18%

18%

13%

Program service revenue

72%

90%

73%

72%

67%

6%

4%

9%

10%

21%

100%

100%

100%

100%

100%

Other revenue Total

[2]

[1] Excludes private foundations, most churches, and certain other types of religious organizations. [2] Totals may not add up to 100 percent because of rounding. Source: Compiled from IRS (2014).

Table 9.3  Breakdown of Revenues for Organizations Filing Form 990-EZ, by Organization Type 501(c)(3) [1]

501(c)(4)

501(c)(5)

501(c)(6)

501(c)(7)

Contributions, gifts, and grants

54%

32%

8%

15%

7%

Program service revenue

34%

43%

76%

72%

77%

Other revenue

12%

24%

16%

12%

16%

100%

100%

100%

100%

100%

Total

[2]

[1] Excludes private foundations, most churches, and certain other types of religious organizations. [2] Totals may not add up to 100 percent because of rounding. Source: Compiled from IRS (2014). 1 Organizations with gross receipts less than $200,000 and total assets less than $500,000 have the option to file either a Form 990E2 or Form 990.

Financing 255

revenues less than $200,000. Here you can see the revenue mix can be quite different depending on the organization type. For instance, charities in this size bracket rely more heavily on contributions than program service fees, while social and recreational clubs receive a ­limited amount of contributions and earn most of their revenue from the services they provide. We now take A Closer Look at Tucson Botanical Gardens, a mediumsize nonprofit organization, to show how this organization diversifies its revenues. A CLOSER LOOK: TUCSON BOTANICAL GARDENS Tucson Botanical Gardens has been called the “best secret garden” in America. According to its website, it covers a 5.5-acre urban space and consists of seventeen residential-size specialty gardens, a café, and gift shop. About eighty thousand people visit the gardens each year including for special community events and education classes. Gardens such as the xeriscape garden fulfill an educative purpose by showing visitors how to create beautiful landscapes that conserve water using native and arid adapted plants. The facility also features an indoor tropical butterfly exhibit. Programming includes a Horticultural Therapy program for individuals with developmental disabilities and those in long-term care facilities (TBG, 2014). As a 501(c)(3) nonprofit organization, the Tucson Botanical Gardens relies on resources from a wide variety of sources: admissions; memberships; gift shop sales; special events; classes and rentals; financial contributions from individuals, corporations, and foundations; grants from the city of Tucson and the county of Pima; and contributions of hours from volunteers (TBG, 2013). All of these resources go toward its mission of promoting “responsible and appropriate use of plants and water in a desert environment through education and demonstrations” and providing “a place of beauty and tranquility for Tucson residents and visitors” (TBG, 2013, p. 2). In 2012/13, it received financial resources of over $1.5 million, in-kind support of almost $240,000, and almost fifteen thousand volunteer hours valued at almost $300,000 (Table 9.4) (TBG, 2013).

256  Understanding the Social Economy of the United States

Table 9.4  Resources of Tucson Botanical Gardens for the Year Ended 30 June 2013 Financial Contributions

$396,339

19.2%

Grants

$175,890

8.5%

Admissions

$291,180

14.1%

Membership

$162,785

7.9%

$45,409

2.2%

Education Special events

$77,446

3.8%

Gift shop

$169,904

8.2%

Rentals

$105,319

5.1%

Other

$100,697

4.9%

$1,524,969

74.0%

In-kind support

$237,863

11.5%

Volunteer contributions*

$298,369

14.5%

$2,061,201

100.0%

Total financial resources

Total resources

*Calculated using the Independent Sector (2011) rate for volunteer hours in Arizona, including 12 percent for benefits. Source: Tucson Botanical Gardens (2013).

Sources of Financing Beyond Revenues Financing is one of the biggest concerns facing social economy organizations (Mendell, Lévesque, & Rouzier, 2001). These organizations generally have less access to financing than for-profit organizations, which can raise funds by putting up their assets for collateral for various forms of debt financing, or by issuing shares to investors. For corporations, the investors or shareholders are effectively owners and benefit through the appreciation of the corporation’s market value and through any dividends the corporation pays from its profits. On the other hand, many social economy organizations, particularly nonprofits, do not have collateral and thus are more limited in their financing options. Nonprofits are organizations that do not have

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owners in the usual sense and are without share capital. Most cooperatives can raise some equity through selling shares to their members, but this is usually not a significant amount. Social enterprises earn money in the market by selling goods and service, but generally they are not profitable enough to access traditional forms of financing. If they are nonprofit corporations as most are, they often will rely also on grants and donations (Bugg-Levine, Kogut, & Kulatilaka, 2012). These constraints create difficult challenges for organizations in their start-up phase and for those that lack a track record. There are additional difficulties faced by social economy organizations in financing their activities. As the primary objective of social economy organizations is not financial, in general they do not generate a competitive rate of return on investment. This reduces the number of institutional and individual investors they can access, as such entities are generally looking for a high rate of return. Banks consider most social economy organizations as too small or too risky to justify setting up a small-loan program for them. Finally, many individuals running social economy organizations have little experience dealing with the market economy (Mendell et al., 2001). Financing in the First Years of a New Organization The first couple of years of a new organization are crucial in terms of fundraising and other types of support such as volunteer contributions if the organization is to be successful. The initial expenses that a start-up organization may have to cover include the costs of permits, incorporation, filing for tax-exempt status, market surveys, creating a business plan, legal fees, and designing a website. For a new nonprofit, the social capital and networks of founders and their communities are key in raising resources, both financial and nonfinancial. According to a study of nonprofit start-ups in 2008 and 2009, 70 percent reported that the most important funding came from donations, while 28 percent reported that initial funding was from “a private individual or family member who was a founder of the organization” (Van Slyke & Lecy, 2012, p. 17). For the remaining funding, 26 percent came from earned revenues, 17 percent from government grants or contracts, 17 percent from membership fees, 24 ­percent from foundation grants, 9 percent from corporate grants, and 9 percent from a parent or affiliate organization. Donations and fundraisers (37%) followed by founder or family of the founder contributions (14%) were

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selected as the most important sources of funding for the first few years of operation. Volunteers are also an important resource for new nonprofits. In the same study, 85 percent of the organizations reported that they it would be difficult to grow without them. Once the organization is up and running, funding its operations is of next concern. Examples of types of operational funding include grants, contracts, earned income, and donations. Volunteer contributions of time are also important. Looking only at financial resources, the overall split of commercial revenue, private revenue (philanthropy), government grants, and other income for nonprofit organizations excluding hospitals and higher education was 58 percent, 22 percent, 17 ­percent, and 3 percent respectively (Kerlin, 2006). This varies by field. For instance, the split for human services organizations within the same sample was 59 percent, 25 percent, 14 percent, and 2 percent, and for arts organizations, it was 37 percent, 15 percent, 44 percent, and 4 ­percent (Kerlin & Pollak, 2011). Social enterprises rely on both philanthropic support as well as market revenues. Initial start-up funds often come from the founders and supporters, but there are also a number of lenders that have specialized seed grants just for social entrepreneurs. Echoing Green is an example of such a funder. Since 1987, it has provided seed grants totaling over $31 million to over five hundred social entrepreneurs worldwide. It also provides technical assistance and business support (Echoing Green, 2013). To start a new cooperative, state incorporation denotes whether there is a choice of organizing as a nonstock or stock cooperative. Some states limit stock cooperatives to agricultural producers. If the cooperative can issue stock, it can do so to raise initial capital from its membership and also to raise additional capital down the road. For nonstock cooperatives, membership certificates are issued with membership fees making up the initial and subsequent capital investments. They many also be able to issue capital certificates with no voting privileges to raise additional monies (Rapp & Ely, 1996). The sale of goods and services to members for both stock and nonstock cooperatives provides funds for operations. Another reason social economy organizations raise money is for capital items such as a new building. This might be done through a capital campaign for donations run over several years. There are also capital funding organizations specifically created to provide financing for social economy organizations. These will be discussed in the second half of the chapter.

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The Range of Financing One way to look at the different forms of financing for social economy organizations is from the return-to-investor perspective. Figure 9.1 shows a continuum of financing strategies with an expected financial return to the investor. Economic returns range from −100 percent, as is the case of grants, which do not require repayment, to full market rate, as is the case of commercial investments. There is a somewhat inverse relationship for social returns. Grants result in a high rate of social return, while commercial investments may have an indirect social return, but this is not a requirement. Another approach takes into consideration the degree of risk and the blend of social and financial returns (Figure 9.2). A low-risk investment generally results in a lower return by the investor but one that is more likely to be realized. Riskier investments result in higher returns, but there is less certainty of achieving them. For social lenders, risk also includes the probability of achieving the social objectives they were hoping to achieve with their investment. Lower risk social investments have broad social aims, such as contributing to early childhood

Figure 9.1  Expected Returns on Investment Rates

−100%

−90% to −10%

Grants

“So ” investments

Capital-protected investments

Commercial investments

Very so debt

“blended returns” equity

Market-rate debt

Mixture of grants and other capital

So debt

Equity

Willing to take belowmarket returns

Full commercial returns

Social returns only

Willing to lose some money

0%

1−7%

Source: Shortall and Alter (2009). Used with permission.

8% and more

Social benefit can be a requirement

Figure 9.2  Sources of Capital Sources of Capital

Risk tolerance & patience level of investor Higher Risk, More patient

Bulk of available capital Best-aligned capital for social enterprisel

Strategic/ Engaged Grant Making

Venture capital / Private Equity

Social Venture Funds

SRI Funds Social banks/funds Subordinated Loans Forgivable loans BelowMarket Loans

Lower Risk, Less patient

Traditional Charitable Grants

Recoverable Grants

Purely social Source: Shortall and Alter (2009). Used with permission.

Bank Loans

Purely financial

Investment objective

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education, which are likely to be reached; higher risk social investments have more specific social goals, such as the elimination of youth homelessness, which are more complex in their realization. Blended returns involve a mix of market and social returns (Shortall & Alter, 2009). Opportunities for financing are provided by institutions in all sectors: public, private, and social economy. For examples, grants for social economy organizations are available from government, corporations, and foundations. This is the same for loans, which can be financed by government, for-profit banks, and credit unions (financial cooperatives). Equity financing is less prevalent, but for those social organizations with an incorporation that permits them to raise equity, the available options are generally from other social economy organizations or through pooled resources that bring together money from multiple sources. An example of this are community development funds through community development financial institutions, described in more detail later in the chapter. Social Finance One unique type of finance that plays a key role in financing the social economy is called social finance. Social finance is distinct from other forms of financing in that its intention is to support organizations in developing a social impact, and it seeks and prioritizes social and environmental goals as well as financial ones (Draimin & Jackson, 2007; TSA Consultancy, 2003). Examples of social finance include social impact bonds, micro-finance, and social enterprise lending. Some distinct features of social finance are the following (TSA Consultancy, 2003, pp. 5–6): • The mission of social finance is to use financial tools to achieve sustainable and equitable development. • It has numerous channels of delivery, each of them with different methods and forms of behavior, acting in different ways, but together they give rise to an identity that is specific to social finance. • The emerging profession of social financier2 consists of funding activities and people that benefit their communities and societies.

2 For some more information on careers in social finance, see http://www.forbes. com/2007/06/12/social-finance-nonprofits-pf-education-in_jc_0612soapbox_inl.html.

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Social finance comes in a variety of forms. We next look at some examples: sustainable and responsible investment (SRI) including mission-based investing, program-related investments (PRIs), microfinance, and crowdfunding. Sustainable and Responsible Investment Assets invested according to sustainable and responsible investment (SRI) strategies have increased substantially in the United States over the last three decades: from $639 million in 1995 to $3.74 trillion in 2012, an increase of 486 percent. Today SRI assets constitute 11.3 percent of all assets under professional management in the United States (US SIF, 2012). The most prevalent investing strategy for SRI in the United States is negative or exclusionary screening. Examples of this type of screening include not investing in funds that contain tobacco or alcohol companies, or in companies that operate in countries with high levels of human rights abuses. The second most common strategy for SRI in the United States is through the filing of shareholder resolutions. A shareholder resolution is a proposal submitted by shareholders at a company’s annual meeting – for instance, calling for a vote to oppose some activity of the organization on issues such as climate change, energy, or water scarcity (CERES, 2013; Global Sustainable Investment Alliance, 2013). Social economy organizations are also expressing greater concern for the responsible investment of their own surpluses, reserve funds, and endowments. In the United Kingdom, a survey of large charities found that 55 percent had a formal policy on responsible investing, with the most common form (51%) being negative screening (i.e., sanctions such as withdrawal or investment boycotts of companies who invest in particular industries such as tobacco and military production), followed by engagement with companies indirectly through fund managers (28%). The most important reason these charities gave for developing an ethical policy was to avoid investments that conflicted with their aims (Kreander, Beattie, & McPhail, 2006). Indeed, more and more social economy organization are engaging in an investment approach for their surpluses, reserve funds, and endowments known as “mission-based investing.” Mission-based investments are not a distinct range of products or a market segment but rather an approach that “targets a market rate of return and also helps a foundation to achieve its mission” (New Economics Foundation, 2008, p. 9). This “positive screening” approach looks at whether or not

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an investment contributes to the organization achieving its mission and is closely related to another approach known as “program-related investments.” Program-Related Investments Program-related investments (PRI) are another example of social finance available to foundations that wish to invest their funds in program areas in accordance with their mission. The key difference to mission-based investing is that it is made to generate a positive social or environmental impact in general, while program-related investments are part of an organization’s programming strategy. In the case of foundations, mission-related investments are made from their endowment dollars, while program-related investments are made from their grant dollars (Thorpe, 2013). As program-related investments are made in order to further the organization’s mission and generate specific program outcomes rather than maximize a return on investment, a lower rate of return is acceptable (Mission Investors Exchange, 2013). Examples of program-related investments are the following: 1. Low-interest or interest-free loans to needy students; 2. High-risk investments in nonprofit low-income housing projects; 3. Low-interest loans to small businesses owned by members of economically disadvantaged groups, where commercial funds at reasonable interest rates are not readily available; and 4. Investments in businesses in deteriorated urban areas under a plan to improve the economy of the area by providing employment or training for unemployed residents. (IRS, 2013c) Federal tax law requires that private foundations distribute 5 percent of the fair market value of their assets to keep their tax-exempt status. Program-related investments can be considered a qualifying distribution if they meet these three criteria: 1. The primary purpose is to accomplish one or more of the foundation’s exempt purposes; 2. Production of income or appreciation of property is not a significant purpose; and 3. Influencing legislation or taking part in political campaigns on behalf of candidates is not a purpose. (IRS, 2013c)

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A CLOSER LOOK: W.K. KELLOGG FOUNDATION Will Keith (W.K.) Kellogg is best known as the inventor of breakfast cereal (think Kellogg’s Corn Flakes, Kellogg’s All-Bran, and Kellogg’s Rice Krispies). Born in 1860 as the seventh child of sixteen, he dropped out of school at the age of fourteen and went off to work. In his forties while working for his brother in the kitchen of one of the leading health spas in the United States, he accidentally invented flake cereal. 3 From school dropout to entrepreneur, he became one of the world’s wealthiest individuals (W.K. Kellogg Foundation, n.d.a). In 1930, he started the W.K. Kellogg Child Welfare Foundation, now known as the W.K. Kellogg Foundation. Kellogg donated most of his fortune to build the endowment of the foundation in his desire to promote “the welfare, comfort, health, education, feeding, clothing, sheltering and safeguarding of children and youth, directly or indirectly, without regard to sex, race, creed or nationality …” (W.K. Kellogg Foundation, n.d.b, p. 1). From Kellogg’s investments totaling $66 million, the endowment assets now amount to over $7 billion (WKKF, n.d.a; WKKF, 2012). Today, the foundation provides grants in three program areas: education and learning; health and well-being; and family economic security. In the 2012 fiscal year, it made grant commitments of $380 million. This included program-related investments that provide below market-rate working capital loans to social economy organizations and projects in the United States and Latin America (WKKF, 2012). In 2007, the foundation board and staff made a key decision to target $100 million of its then $9 billion endowment to mission-driven investments (Godeke & Baer, 2008, p. 39). This innovative program invests in cash equivalents, fixed income, and private equity to generate both social and financial returns. Five years into the program, the foundation has committed $75 out of the $100 million dedicated for this purpose, focusing on organizations in the United States and in southern Africa.

3 See http://www.wkkf.org/who-we-are/overview for more on the history of W.K. Kellogg.

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Economically Targeted Investments Institutional investors such as pension funds play an important role in responsible investment and in supporting the social economy. One example is the role of unionized labor pension funds in supporting economically targeted investments, or ETIs. Economically targeted investment is defined as “investment designed to produce a competitive rate of return commensurate with risk as well as create collateral economic benefits for a targeted geographic area, group of people, or sector of the economy” (Bruyn, 1987, p. 6). The use of pension funds for economically targeted investment in the United States is commonly found in real estate. For example, the AFL-CIO Housing Investment Trust has created “over 80,000 units of housing, approximately half of which are affordable to low- or moderate-income households” (AFL-CIO Housing Investment Trust, 2007). The trust invests in mortgage securities that finance housing development but adds the condition that the developer must employ union labor – an important collateral benefit for the sponsors. In addition to real estate development, economically targeted investments by pension funds also involve regional and social targeting. CalPERS (California Public Employees’ Retirement System) designates a portion of its investments for California, and in 2002 CalPERS began to target underserved areas of the state (Manley, Hebb, & Jackson, 2008). Micro-Finance Micro-finance is another example of social finance. Micro-finance consists of small loans, also called micro-loans or micro-credit, to poor and low-income people without collateral required by banks to start income-generating projects and small businesses. The bestknown micro-finance institution is the Grameen Bank in Bangladesh, which won the 2006 Nobel Peace Prize along with its founder, Muhammad Yunus, an economist who serves as the bank’s managing director. The Grameen Bank has a structure similar to a credit union in that it is owned by its members; in this case, the members are predominately women. The first loan was made by Yunus from his own pocket in 1976: it was $27 to a group of women to purchase raw materials for their trade and thereby eliminate the need for intermediaries who were exploiting and impoverishing them by raking off their profits. Since then, Grameen has loaned over $11.6 billion and in 2011 had 6.6 million

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active borrowers. Ninety-six percent of its members are women, in 81,380 villages in rural Bangladesh (Grameen Bank, 2013a, 2013b). Another distinct feature of the Grameen Bank is that it has invested in a network of services for the villages and regions in which their members live. There are twenty-five such organizations, some examples being the following: Grameen Krishi, which provides training and investment in improving agricultural practices; Grameen Shakti, which provides energy services with an emphasis on solar; and Grameen Phone, a provider of cell phone services (Yunus, 2007). The investment in these twenty-five organizations is a classic example of a financial institution using its surplus earnings to engage in community reinvestment or community economic development. Not only has the Grameen Bank done this within Bangladesh, but it has also been a leader in spawning an international movement through leading by example and also investing in the Grameen Trust, which engages in training, technical assistance, and financial support for micro-finance around the world. Today, micro-credit programs are offered in over a hundred countries, including Canada, and Muhammad Yunus and Grameen Bank are very much their inspiration. Not all micro-finance enterprises are nonprofit, however. Indeed, Yunus decries microfinance lenders who profit from poverty (Yunus, 2011). Micro-credit in the United States differs to a degree from the Grameen example and probably is more akin to first-entry loans for self-employed people with a business idea. Success with the first loan can lead to larger loans. However, the micro-program serves as a first step – a bridge to more conventional loans for the self-employed and small business people. A 2011 census of micro-finance institutions in the United States found that there were over eight hundred of them, mostly nonprofit organizations. These organizations offer micro-loans (generally up to $35,000), training, and technical assistance, as well as other services, directly to “microentrepreneurs” (FIELD, 2013, p. 1). In 2011, it was estimated that almost twenty-five thousand micro-loans totaling $175 million were disbursed. This amounts to an average of about $7,000. Fifty-six percent of the recipients were women, and 58 percent were members of traditionally disadvantage racial or ethnic groups (FIELD, 2013). Business development services are an important component of the services offered by micro-loan lenders, with the majority providing training and technical assistance, training, coaching, and financial literacy programs (Edgcomb & Girardo, 2012).

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One characteristic of micro-finance is that each loan must also c­ontribute to institutional costs to run the micro-finance institution. This includes items such as staff and technology, as well as all costs of running the lending and business development program. The setting of appropriate interest rates is one of the main challenges faced by microfinance institutions in order to ensure their viability in the long term. In some cases, the micro-finance institution must apply for grants or perform external fundraising to help cover their expenses (Pollinger, Outhwaite, & Cordero-Guzman, 2007). Sometimes institutions from different sectors come together to create micro-finance programs for the benefit of their community. For example, The Cleveland Foundation initiated a partnership that includes the city of Cleveland, Cuyahoga City, the US Small Business Administration, Huntington Bank, the Greater Cleveland Partnership, the Commission on Economic Inclusion, and the Business of Good Foundation to create a countywide micro-credit program in Cuyahoga County, Ohio. This public–private partnership assembled $4 million to fund micro-loans of up to $50,000, and $600,000 for training and support for the recipients of the loans. These loans target low-wealth entrepreneurs, including minorities, immigrants, and women (Cleveland Foundation, 2012). Globally, organization such as Kiva.org, use the Internet to encourage micro-loans to people in poorer countries. This innovative idea involves the transfer of funds from richer to poorer countries, the transfer being online to bridge distances (Kiva, 2007). Micro-finance is generally thought of as having a major influence on poverty reduction strategies, primarily in developing economies but also in wealthier countries. Its appeal appears to be the emphasis on the market – poverty can be reduced through creating a new class of entrepreneurs, it is believed – a strategy that fits well with the neoliberal focus on reducing the role of government. More recently, a critique has emerged from researchers and practitioners engaged in international development work that questions the effectiveness of micro-finance. The critique raises some fundamental concerns – for instance, as discussed in What’s Wrong with Microfinance? (Dichter & Harper, 2008). The critique’s primary thrust is that micro-finance, while providing some short-term income, is not an effective poverty-reduction strategy. Micro-loans, while classified by their proponents as business credit, are argued to be analogous to consumer loans in that in the short term they only provide a small increase in purchasing power by the recipients. Critics argue that the success stories that have emerged may have done

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so through other available lending sources, if micro-credit programs were unavailable. Group-based micro-finance, which transfers collection tasks from the micro-finance institution to the borrowers, is criticized as being less empowering than lending on an individual basis (Harper, 2008). Interest rates vary but are generally high and, in some cases, usurious (Epstein & Smith, 2007; Rao, 2008; Shakya & Rankin, 2008). Even so, repayment rates in micro-credit programs are very impressive (about 95%) even with high interest charges, an indication that the borrowers must benefit to some degree (Emran, Morshed, & Stiglitz, 2007). Nevertheless, micro-credit has become an international movement. In the modern world, typically ideas move from the wealthier to poorer nations and not always for the better, but in the case of Grameen banking, the opposite has been the case. Grameen has spawned similar programs, not only in poor countries where the basic model has been applied but also in wealthier countries such as the United States where the Grameen philosophy has been adapted and applied by lending institutions operating under the philosophy of community financing. Crowdfunding A new source of funding for social economy organizations is crowdfunding. Crowdfunding uses the Internet and social media to raise and distribute money. There are three models of crowdfunding: donation, lending, and investment. Individuals contribute small amounts of money to support a certain cause or activity, and this money is pooled and then disbursed when a certain target is reached to the organization that solicited the funds. There are hundreds of crowdfunding platforms, but some examples used for social causes are Indiegogo.com, Razoo.com, Causes.com, and StartSomeGood.com. In the United States, crowdfunding has received a boost from the passage in April 2012 of the Jumpstart Our Business Startups or JOBS Act. This enables start-up and small- and medium-size businesses to use SEC-approved crowdfunding portals to raise equity. For social enterprises, this will open up a new market for funding. The arts community is using crowdfunding to fund new exhibitions, complete independent films, and put on new shows (Sentementes, 2011). Communities have also organized giving days – twenty-four-hour online fundraising competitions for local nonprofits. The state of Minnesota has held a giving

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day called Give to the Max Day each November since 2009, and in 2012 it raised over $16 million in twenty-four hours. These funds will benefit almost 4,400 nonprofits and schools (Razoo, 2013). Institutions Providing Financing for Social Economy Organizations Financing for social economy organizations comes from institutions in all sectors: public, private, and social economy. Sometimes two or more of the sectors come together to create a pooled source of funds. Pooled funds are a way of providing more opportunities for funding while lowering the potential risk for any one investing institution. This next section briefly overviews some of the different financing vehicles available by sector, as well as examples of pooled funds. Sources of Financing through the Public Sector government funding Governments are important sources of financing for social economy organizations through grants, loans, loan guarantees, and special tax treatment. The Community Development Financial Institutions Fund is one example of government funding. It was started in 1994 and is managed through the US Department of the Treasury. Its main aim is to support mission-driven financial institutions. The mission of the fund itself “is to increase economic opportunity and promote community development investments for underserved populations and in distressed communities in the United States” (CDFI Fund, 2013). Sources of Financing through the Private Sector banks Banks provide traditional mortgages, loans, and lines of credit to organizations that qualify. Some also support social economy organizations by offering specialized banking services – for instance, they will sometimes offer accounts to nonprofits with low or no maintenance fees. Some have staff dedicated to working with charitable organizations to help build their capacity to achieve their goals while ensuring the sustainability of their organization. Banks also support the social economy through their corporate social responsibility and employee volunteer programs.

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corporate philanthropy With the mainstreaming of corporate social responsibility, for-profit businesses have become a source of financing for the social economy through grant programs, sponsorships, and strategic partnerships. Many corporations have established private foundations through which they administer a portion of their giving programs. There were 2,689 of these types of foundations in 2011, with assets of $22 billion and giving for the year amounting to $5.2 billion (Foundation Center, 2013a). Many also match employee donations of money or volunteer time to eligible nonprofits and run employee volunteer programs. Noncash giving such as product donations, pro bono services, computers, and land is also significant. Overall, a survey administered by the Committee Encouraging Corporate Philanthropy in 2011 found that the total giving by corporations can be broken down into direct cash (46%), foundation cash (35%), and noncash giving (19%) (CECP, 2012, p. 5). The top program areas receiving these funds were health and social services, K–12 education, and community and economic development. Although some advisors encourage corporate philanthropy to align with the corporation’s mission (Porter & Kramer, 2002), motivations for giving by corporations were split between philanthropy that benefits both the community and the business (51%) and giving that results in little direct business benefit (49%). The A Closer Look that follows looks at the corporate philanthropy of UPS, which is made up of both financial and nonfinancial components.

A CLOSER LOOK: UNITED PARCEL SERVICE United Parcel Service (UPS) was founded in 1907 and delivers letters and packages to more than 220 countries and territories. Its revenues in 2011 were $53 billion, with net income of $3.8 ­billion. In the same year, it made donations of cash and in-kind services of $97 million to causes in the areas of community safety, environmental sustainability, diversity, and volunteerism. It was the top contributor in the United States to United Way, with an annual donation of $55 million, and cumulative donations of over $1 ­billion (UPS, 2012).

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Each year the employees of UPS donate more than 1.6 million hours of volunteer time to local nonprofits. For example, in times of natural disaster, they have offered the services of their personnel support logistics and transport services. They also promote local engagement by giving to the local organizations where UPS employees volunteer fifty hours or more of their time (UPS, 2012). In 1951, the company set up the UPS Foundation. The foundation has 501(c)(3) tax-exempt status and is funded primarily by the profits of UPS. Of the total revenues it received in 2011 of almost $42.5 million, $39.6 million were from UPS (Guidestar, 2012).

Sources of Financing through the Social Economy philanthropy through community foundations Community foundations are locally run public foundations that administer endowments to support charitable activities in their area. Community foundations are distinct from other types of foundations in several ways. First, endowments are made up of donations from many donors, instead of a single donor or family as is usually the case with private foundations. They serve a specific geographic community and must also satisfy the public support test to maintain their tax-exempt status as a public charity (Carman, 2001). The first community foundation in the United States was the Cleveland Foundation, mentioned previously, founded in 1914 by banker and lawyer Frederick H. Goff. Goff’s revolutionary idea was to pool funds from Cleveland philanthropists, create an endowment fund, and use the earnings to improve the life of the people of Cleveland. Today its assets total $1.8 billion, and in 2011 it distributed $80 million in about three thousand grants. About half of the grants are directed by the board and staff of the foundation and half by donors (Cleveland Foundation, 2012). The Cleveland Foundation inspired a global movement, and there are now about 1,700 community foundations across the world. In 2011 in the United States there were 750 community foundations managing around $58 billion in assets and distributing $4.3 billion in grants for that year (Foundation Center, 2013b). A variation of a community foundation is a giving circle, which is an association of donors who pool funds. Some operate through community

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foundations from which the group can designate the grants it wants (Giving Circles Network, 2012). There are estimated to be four hundred giving circles nationwide that have raised about $88 million since 2000 (Giving Circles Network, 2012). They do not represent the vast wealth of independent foundations, but their contributions to organizations in the social economy are nevertheless significant. Some examples are University of Arkansas Women’s Giving Circle and the Arizona Social Change Fund (Phoenix). private foundations Private foundations are those that obtain their money from a family, an individual, or a corporation and thus do not require ongoing fund raising, as do community foundations. The purpose of the foundation is to make grants to unrelated organizations or individuals for charitable purposes. In 2011, there were 81,027 active private foundations, including the 2,689 corporate foundations mentioned previously (Foundation Center, 2013c). By law, most private foundations are required to distribute a minimum of 5 percent of the net value their investment assets annually. A study of 1,170 of the largest 1,900 foundations found that for the period of 2007 to 2009, on average $22.3 billion was paid out annually over those three years. The same foundations had total assets of $296.6 billion (Renz, 2012). About half of private foundations are family foundations. In 2010, these 38,671 foundations had total assets of $279 billion and gave away $20.6 billion. Although the top US foundation by size is a family foundation (Bill & Melinda Gates Foundation), most family foundations are smaller, with 62 percent having less than $1 million in assets and nearly half giving less than $50,000 in 2010. Most family foundation giving was to benefit the economically disadvantaged, followed by children and youth (Foundation Center, 2012a, 2013d). patient capital Patient capital is a type of investment in an organization where the investor has a high tolerance for risk and does not expect to make any immediate returns. With patient capital, the intent is to repay the principal and interest, but it could be years down the road before this is realized. The overall objective is to maximize social returns through investing in an early-stage enterprise and help to grow it to scale and make it sustainable in the long run (Acumen Fund, 2013a).

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One organization that offers patient capital is Acumen. Their i­nvestment model is to raise money for patient capital through charitable donations and then use that money to make debt or equity investments and support capacity building and infrastructure. The returns that are received are then “recycled” into new investments (Acumen Fund, 2013b). From 2001 to 2012, the Acumen Fund made patient loans and equity investments of over $68.5 million to organizations in their early stages, “providing reliable and affordable access to agricultural inputs and markets, quality education, clean energy, healthcare services, formal housing, and safe drinking water to low-income customers” (Acumen Fund, 2013b, p. 1; 2013c). Another example is the 501(c)(3) organization Slow Money, started in 2008 to “to catalyze the flow of investment capital to small food enterprises and promote new principles of fiduciary responsibility that support sustainable agriculture and the emergence of a restorative economy” (Tasch, 2013). The Slow Money Alliance (slowmoney.org) advocates for investing money locally, such as in local food enterprises in order to rebuild local food systems. This is done not for immediate returns but to improve the community and produce better food. Through saving farmland, supporting small- and mid-size organic farmers, and improving the nutritional value of the food, investments in slow money are one way to participate in addressing health and environmental issues at a local level (DeBare, 2011). Since 2010, Slow Money has provided $25 million for nearly two hundred food enterprises, “planting the seeds of nurture capital,” in the words of Woody Tasch, former CEO (Shattuck, 2013, p. A12). credit unions As discussed in chapter 2, credit unions are financial cooperatives set up to meet the financial needs of their members. Credit unions offer many of the same products and services as do for-profit financial institutions. Their products and services include checking and savings accounts, lines of credit, loans, mortgages, electronic banking, and credit cards. However, there are also some major differences. Credit unions are owned in common by their members and work for the economic and social betterment of their members and the economic development of the community. Because credit unions do not distribute profits to outside investors but rather serve the needs of their members, rates on deposits and on loans are generally better than those offered at banks.

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Each member of a credit union has one vote and is entitled to participate in the annual general meeting and run for elected officer positions. A portion of the surplus that is earned goes back to the community and to their members through patronage shares, which are proportional to the volume of business undertaken with the credit union that year. Patronage dividends are an important difference from banks, whose dividends are based on the shares held by investors, not use of the service by consumers. One of the cooperative principles by which credit unions operate is concern for community. In addition to providing financial services for their members, they also work for the sustainable development of their communities through policies developed by their members (International Co-Operative Alliance, 2012a). the national cooperative bank The National Cooperative Bank provides banking services to cooperatives and other member-owned organizations. It was created and chartered by an Act of Congress on 20 August 1978 as the National Consumer Cooperative Bank Act (92 Stat. 499, 12 U.S.C.A. 3001). The purpose of the act was to encourage the development of new and existing cooperatives at a time when cooperatives were being underserved by the traditional banking system (Office of the Federal Register, n.d.). The mission of the bank is “to help cooperatives grow by supporting and being an advocate for America’s cooperatives and their members, placing special emphasis on serving the needs of communities that are economically challenged” (NCB, 2012a). In 1985, the bank moved from the public sector to the private sector and changed its name from the National Consumer Cooperative Bank to the National Cooperative Bank. Funding for this period was obtained from capital markets where the bank was able to obtain a $50 million line of credit (NCB, 2012b). It has grown from an initial capitalization of $184 million to more than $4.5 billion “in specialized lending, investments, and technical assistance to underserved communities across the country” (NCB, 2012a, 2012c). Some examples of the impact of these services include mortgages for affordable housing, financing for community-based health centers that serve low-income families, and funding of solar energy systems serving low to moderate income communities (NCB, 2012c). member financing Cooperatives receive equity investments from members through their membership fees. Often these membership fees are modest amounts

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but when pooled for the entire membership can represent a significant investment in the organization. Members receive no direct return on their investment. For some cooperatives, the benefits they receive are based on patronage returns (Baarda, 2006). Cooperatives can be divided into “stock cooperatives” and “nonstock cooperatives.” For stock cooperatives, common shares are issued to members and carry the right to vote on decisions affecting the cooperative. Holders of common shares receive the benefits and are responsible for the losses. Common shares are generally not transferable (Baarda 2006). Cooperatives may also issue preferred shares to both members and nonmembers. The shares are called preferred because if the organization is liquidated, the preferred shareholders have priority over common shareholders in terms of claims. However, preferred stocks generally do not come with voting rights. Dividends on preferred stock are limited to 8 percent in most states (Baarda, 2006). A CLOSER LOOK: CROPP COOPERATIVE Known as the Coulee Region Organic Produce Pool, then the Cooperative Regions of Organic Producer Pools, and now simply CROPP, this organic farm cooperative has seen many changes in its over twenty-five years of existence. Back in 1988, thirty-four farms in southwestern Wisconsin joined together with the mission “to create and operate a marketing cooperative that promotes regional farm diversity and economic stability by the means of organic agricultural methods and the sale of certified organic products” (CROPP, 2012, p. 10). Today, it is the largest dairy cooperative in the United States and is made up of 1,834 members (CROPP, n.d.). Sales in 2012 were $856.7 million, with a profit for that year of $9.6 million (CROPP, 2012). It markets its own products under the Organic Valley label. Mike Bedessem, CROPP’s chief financial officer, reflects on the organization’s financing journey over its twenty-five-year history (CROPP, 2012, p. 19): When banks thought that financing a start-up cooperative was too risky and that putting faith in a market they believed nonexistent was laughable, CROPP got creative. We borrowed money from the National Farmers Organization (“our financial angel,”

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to quote Jerome McGeorge); had a customer post a [certificate of deposit] CD as collateral; and allowed farmers to buy CDs in a bank and pledge those CDs as collateral. Those CDs eventually became a Capitol Base program that we now know as Class B stock. From CROPP’s inception, non-farming friends of the cooperative wanted to help with its mission. Some people bought Class C stock way back in 1988; some pledged $500 to $1,000 as collateral for a bank loan. Over the years, hundreds of people called asking if they could invest in the cooperative. We would patiently explain that CROPP was owned by the farmers and that to “invest” they would have to be a farmer who shipped products to the cooperative. Over time, we saw that our fast growth and modest profits were constantly giving banks heartburn. We needed a financing source other than our member-owners and banks. So with the help of David Lathrop, who was (and is still today) one of our board advisors, and Ron McFall, an expert in cooperative securities, our farmer board of directors searched for a solution. After a Ron-guided tour through the myriad of federal and state securities laws, many sessions with David on how outside investors could provide stable funding for the co-op, and a membership-approved change to the cooperative’s bylaws, we finally turned to those supporters who had been calling us for years and introduced publicly-available Class E [preferred] stock, paying a 6% dividend. When we started marketing the Class E stock in 2004, we felt that raising $5 million would be a success; but wow, did we underestimate people’s desire to support the CROPP mission. People were seeking to invest money in companies that shared their organic and family farming values but found they had few or no choices. Over the years, 1,800 people have invested $50 million in CROPP through the purchase of Class E shares. It is humbling to the CROPP staff and farmers to see the amazing financial support of our mission by our friends and neighbors. Class E stock, in combination with our members’ investments, business profits and banking relationships, have all created a strong foundation supporting the cooperative’s growth.

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Pooled Sources of Financing community development financial institutions Community development financial institutions (CDFIs) were described previously in chapter 3. CDFIs provide grants and loans and other types of lending, as well as technical assistance, to locally based enterprises anywhere in the United States. CDFIs are in the business of financing community development. While the term community is not exactly defined, the Treasury Department offers three general classifications for CDFI activity according to: (1) “investment areas,” which are geographically defined; (2) low-income target populations, which may be located anywhere in the United States; or (3) other target populations that are not defined by income but rather by other attributes, such as minority group status or disability (US Treasury Department, 2012). By 2011, the Treasury Department had certified 957 CDFIs, disbursed over $1.4 billion, and awarded $29.5 billion in special tax credits (US Treasury Department, 2012). The CDFI Coalition, formed in 1992, is an advocacy group that promotes funding of CDFIs in all fifty states and the District of Columbia. Other leading associations of CDFIs include the Opportunity Finance Network, the National Federation of Community Development Credit Unions, the Community Development Bankers Association, the Community Development Venture Capital Alliance, and the Association for Enterprise Opportunity. One of the leading CDFIs is the Nonprofit Finance Fund, covered in A Closer Look. A CLOSER LOOK: THE NONPROFIT FINANCE FUND The Nonprofit Finance Fund started as the Energy Conservation Fund in 1980 to help nonprofits manage high energy costs. By 2000, it was renamed the Nonprofit Finance Fund with the mission, “We unlock the potential of mission-driven organizations through tailored investments, strategic advice, and accessible insights” (Nonprofit Finance Fund, n.d.a), As a leading community development financial institution, it has assets of over $80 million and has made loans to nonprofits of over $287 million. These loans have been used to • purchase, build, or renovate a facility, including leasehold improvements;

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• upgrade equipment necessary for an organization’s operation; • manage timing of receivables from government grants or capital campaigns; • expand programs or grow an earned income or social venture; and • temporarily smooth cash flow to meet day-to-day operating cash needs. (Nonprofit Finance Fund, n.d.b) To be eligible for loans, organizations must generally meet the following criteria: • be a 501(c)(3) organization or other entity that promotes the economic, social or cultural development of its community; • have been in existence for three years or more (some clients such as social enterprises have shorter operating histories); and • show an unrestricted annual operating revenue of at least $1,000,000. (Nonprofit Finance Fund, n.d.b)

Conclusion This chapter discussed some of the forms of financing for social economy organizations. It is noteworthy that much of the funding for social economy organizations comes from the social economy sector or from pooled sources. Nevertheless, as noted above, important sources are also provided through the government and the private sector. Recall that in Figure 1.1, where we presented the social economy using a Venn diagram, we argued that this is appropriate because it emphasizes the interaction between the social economy and the private and public sectors. Nowhere is this truer than in finance. This point then underlines a fundamental feature of the social economy: it is different in key respects, but it is part of a broader economy and a broader society. It is dependent on the private and public s­ ectors, but it interacts and influences those other sectors in important ways, not only in providing a social infrastructure but also in modeling approaches that some would argue are worth emulating. VX DISCUSSION QUESTIONS 1. What challenges do social economy organizations face in obtaining financing?

Financing 279 2. In your view, are special funding programs needed for social economy organizations? 3. Is it logical to refer to a form of financing that is social – in other words, social finance? 4. Can credit unions and conventional financial institutions assume a more important role in financing social enterprises? 5. What funding programs are available for social economy organizations in your community, both to start an organization and to scale up? 6. Research new emerging forms of financing for social economy organizations. How are they managing risk? 7. Your nonprofit organization wants to expand and in order to do so needs to build a new building. What avenues can it pursue to raise capital funds?

VX CASE FOR ANALYSIS: SELF-HELP

Background Self-Help (www.self-help.org) is a group of nonprofit organizations and credit unions (Figure 9.3) with the overall mission of “creating and protecting ownership and economic opportunity for all, especially people of color, women, rural residents and low-wealth families and communities” (Self-Help, 2007, p. 1). It provides services across the United States. The group is an excellent example of the interactive nature of the social economy. Self-Help began in 1980 in Durham, North Carolina, with the founding of the Center for Community Self-Help (CCSH) by Martin Eakes and Barbara Wright, graduates of Yale University – Eakes in law and Wright in management. Both grew up during the civil rights struggle and were determined to use their talent and knowledge to close the wealth gap between rich and poor (Davidson University, 2001). The first loan they made was for $1,700 to seven laid-off textile workers to start a community bakery (Nee, 2008). CCSH’s initial purpose was to provide management assistance to worker-owned businesses. Four years later, in 1984, it established the Self-Help Credit Union (SHCU), a 501(c)(14) nonprofit, to extend its reach. In the same year, the Self-Help Ventures Fund (SHVF) was created, funded by loans and grants from foundations, religious organizations, corporations, and government sources. The Self-Help Ventures Fund is now one of the largest community development financial institutions

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(CDFIs) in the United States. Other affiliates in the group include the Self-Help Community Development Corporation, a 501(c)(3) established in 1996 that purchases and develops residential real estate in low-income communities, and the Center for Responsible Lending, a nonprofit 501(c)(3), nonpartisan research and policy organization established in 2002 that focuses on eliminating abusive financial practices. The latest additions to the group are the Self-Help Federal Credit Union (SHFCU), a federally chartered credit union started in 2008 that primarily operates within underserved communities in California, and the Self-Help Economic Development Inc. (SHEDI), which was started in 2009 to facilitate economic empowerment of low-income neighborhoods in Oakland, California, through financial literacy education and community partnerships. Over its thirty years in existence, the Self-Help group has made over eighty-seven thousand loans to families, individuals, and organizations totaling $6.4 billion (Self-Help, 2014). Core Programs Self-Help states its main functions as follows: • We help borrowers nationwide to build wealth through ownership of a home or business. • We strengthen underserved communities by financing nonprofits, childcare centers, community health facilities, public charter schools, and residential and commercial real estate projects, and manage retail credit union branches providing responsible and fairly priced accounts and services, • We operate a secondary market program that enables private lenders to make more loans in low-wealth communities. (Self-Help, 2007, p. 1) Its product offerings include the following: • Lease-purchase mortgage: allows low-income families to rent homes while improving their credit, qualifying for a mortgage, and purchasing the home. • Energy loan fund: for energy efficiency and renewable energy improvements to existing buildings; projects ranging from $5,000 micro-loans up to $15 million for large renovations; qualifying

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loans receive an interest rate discount of 1.5 percent for the energy portion of the loans. • Environmental CD: investors can invest their dollars in a fund that provides capital to fund environmentally friendly business ventures. • Micro-branches: a new branch concept to attract unbanked families (those that do not use a bank) in low-income neighborhoods dominated by check-cashing companies. Customers are provided with credit union accounts and services in a comfortable, more informal environment than a traditional financial institution. Impact Self-Help employs a triple bottom line approach, striving for community impact in three areas: 1. Social equity, by insuring benefits flow to low-wealth communities and people 2. Economic development, in the form of wealth- and income-building opportunities 3. Environmental benefits, by building and financing more energy efficient and healthy homes, schools, and workplaces, and by supporting businesses working to sustain the environment According to its Impact Statement (Self-Help, 2014), as of 31 December 2013, Self-Help had over a hundred thousand credit union members, and 78 percent of loans were made to those who were considered low-income borrowers. It provided $568 million in small business lending to 3,436 entrepreneurs, leading to the creation or maintenance of 29,295 jobs. Over fifty-five hundred homeowners received $438 million in direct home lending with fair terms and reasonable rates. Self-Help’s real estate development arm has built almost two hundred energyefficient affordable housing units for low- and moderate-income homeowners, boasting energy costs of up to 50 percent lower than the average for similar homes. It also builds supportive housing units and renovates abandoned homes in areas of high foreclosure and then markets them through a lease-purchase program. In terms of policy, it has helped Arizona, Colorado, and Montana limit 400 percent interest

282  Understanding the Social Economy of the United States Figure 9.3  Structure of Self-Help

Self-Help Credit Union (SHCU) 501(c)(14) Center for Responsible Lending (CRL) 501(c)(93)

Self-Help Federal Credit Union (SHFCU) 501(c)(1) Center for Community Self-Help (CCSH) 501(c)(3)

Self-Help Economic Development Inc. (SHEDI) 501(c)(3)

Self-Help Ventures Fund (SHVF) 501(c) (3) Self-Help Community Development Corporation (SHCDC) 501(c) (3)

payday loans. The Self-Help organizations are strong advocates in the fields of community development and credit unions. Internally, Self-Help provides incentives to staff who bike, walk, carpool, or take public transit to work. Video conferencing and remote desktop sharing have been set up, reducing travel to meetings. Recycled and low-emitting products are purchased whenever possible (Self-Help, 2012). VX

Financing 283 CASE QUESTIONS 1. How are the impacts of Self-Help similar and different from traditional financing institutions? Think of these from the perspectives of its clients, the organization itself, and the larger community. 2. What indicators would you track, measure, and report on to gauge whether or not the organization was successful? Could these indicators be applied to all types of financing institutions? 3. What additional innovative financing programs could the organization implement in keeping with its mission? 4. What financing institutions are present in your own community? Categorize them using the framework presented in this chapter.

10

Social Accounting

In this chapter, we look at how social accounting can be used to better tell the performance story of social economy organizations. Social accounting includes a wide range of activities with the common goal of broadening the framework of conventional accounting and attempting to understand the impact that an organization has on multiple stakeholders. We consider the role of accounting in accountability and control, and also in driving behaviors that move us toward the economic, social, and environmental sustainability of the organization and of society. The last half of this chapter discusses in detail four social accounting frameworks: the expanded value added statement (EVAS), social return on investment (SROI), the Global Reporting Initiative (GRI), and The Natural Step (TNS). The challenges and opportunities of this type of accounting are also discussed. Introduction to Social Accounting When social economy organizations prepare conventional accounting statements, they use formats developed for profit-oriented businesses. Yet, as we know, the primary mission of social economy organizations is social, and as such their accounting statements miss a critical feature – that their social impact is a vital part of their performance story. In addition, social economy organizations rely to varying degrees on volunteers and members, yet the value of this unpaid service, an important part of their human resources, is typically omitted from accounting statements. Indeed, conventional accounting reflects primarily the needs of owners and managers of profit-oriented businesses and removes it from its context – society and the environment – or

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what economists call “externalities” (Hines, 1988; Mook, Quarter, & Richmond, 2007; Morgan, 1988; Tinker, 1985). However, there is nothing inherent in accounting that limits it to this set of interests. Social accounting has attempted to reorient accounting to a broader set of social variables and social interests. Experimentation with different social accounting statements emerged in the 1970s as public demand for information related to the social impacts of expenditures grew (Dilley & Weygandt, 1973). At that time, predictions were made that social audits would be required for businesses within the next ten years (Linowes, 1972). These were pioneering attempts, but all focused on the business sector (see Abt & Associates, Inc., 1974; Belkaoui, 1984; Estes, 1976; Flamholtz, 1985; Linowes, 1972; Seidler, 1973). Although these attempts did not take hold in the accounting world, they have inspired the reemergence of social accounting in the twenty-first century, including models that apply to social economy organizations (Mook et al., 2007). There are varying definitions of social accounting. All share the common features of expanding the range of “what counts” – criteria that are taken into consideration when measuring performance and looking at the organization in relation to its surrounding environment, both social and natural. Additionally, they stress that the audience for social accounting is broader and may differ from that for other forms of accounting. Mook et al. (2007, p. 2) define social accounting as “a systematic analysis of the effects of an organization on its communities of interest or stakeholders, with stakeholder input as part of the data that are analyzed for the accounting statement.” Mook et al. also argue that accounting is a driver of behavior and that social accounting can be used as a driver of social change. This relates to the notion of “we manage what we measure.” By asking the question, What goal do we want to work toward and what do we have to measure and monitor within an accounting framework to accomplish that objective?, social accounting redefines what conventional accounting statements proclaim as success –that is, profit – as something that is broader and takes societal and environmental contexts into consideration. Inherent in the social accounting approach is a stakeholder perspective in both looking at how stakeholders contribute to the organization and how they are impacted by it. Freeman (1984, p. 46) presents the most widely used definition of a stakeholder: “Any group or individual who can affect or is affected by the achievement of the organization’s objectives.” This definition casts a wide net and is refined by Clarkson

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(1995), who subdivides stakeholders into primary and secondary. In his words, “A primary stakeholder group is one without whose continuing participation the corporation cannot survive as a going concern” (1995, p. 106). He identifies primary stakeholders as employees, customers, suppliers, investors, and governments, and communities that supply laws, regulations, infrastructure, and markets. Clarkson’s list is directed to profit-oriented businesses, but it can be adapted for social economy organizations in which, for example, volunteers and members play a more important and sometimes crucial role. We also include the community and the natural environment to signify their importance both to the organization and to a social accounting framework. That said, accounting, and particularly social accounting, also has an obligation to go beyond mirroring the power dynamics of an organization, internally and externally. The accounting analysis should present the organization within its broadest context and should examine its impact on a variety of stakeholders including those with the least power. From Conventional Accounting to Social Accounting The prevailing definitions of conventional accounting present it as identifying, gathering, measuring, summarizing, and analyzing financial data in order to support economic decision making (American Accounting Association, 1990, 1992). Overall, accounting education treats the discipline as a neutral, technical, and value-free activity, and presents accounting decisions in businesses as intended to maximize shareholder wealth (Ferguson, Collison, Power, & Stevenson, 2005, 2006; Hopwood, 1990; Lewis, Humphrey, & Owen, 1992). This conventional approach to accounting is reflected in teaching and professional development, which tends to focus on technique acquisition (Gray, Bebbington, & McPhail, 1994; Roslender & Dillard, 2003). Sustained criticisms to conventional accounting emerged in the 1960s and 1970s and gave birth to a second approach known as critical accounting. The ideas presented in critical accounting have formed part of the justification for social accounting, including the creation of social accounting frameworks for social economy organizations. For instance, scholars of critical accounting began to systematically question the assumptions underlying conventional accounting, arguing that accounting practices are neither objective, neutral, nor value-free, and that they create, sustain, and change social reality (Craig & Amernic, 2004; Gray, 2002; Hines, 1988; Hopper, Storey, & Willmott, 1987;

Social Accounting  287

Llewellyn, 1994; Lodh & Gaffikin, 1997; Mathews, 1997; Morgan, 1988; Tinker, 1985). Critical accountants argue that, by the very act of counting certain things and excluding others, accounting shapes a particular interpretation of social reality. This interpretation, which corresponds to often unstated assumptions about how society functions and should function, has implications for decision making and policy (Hines, 1988; Tinker, Merino, & Neimark, 1982). Critical accounting also urges us to reflect on the conditions and consequences of accounting and to consider accounting within a broad, societal context (Lodh & Gaffikin, 1997; Roslender & Dillard, 2003). It asserts that organizations have an impact on a wide group of stakeholders and that accountability to these groups is a desirable democratic mechanism (Gray, Dey, Owen, Evans, & Zadek, 1997). Critical accounting seeks not only to understand the world but also to change it, a fundamental difference from conventional accounting. In this sense, it can be seen as a normative project and not just a descriptive or explanatory one. In theory, critical accounting aims to “engender progressive change within the conceptual, institutional, practical, and political territories of accounting” through all evaluative forms of social praxis (Tinker, 2005, p. 100). Yet this goal is hypothetical more than real, as most often critical accounting theorists develop critiques without suggesting alternative models to address issues of economic, social, and ecological justice in everyday life (Cooper & Hopper, 2006; Dey, 2000, 2002; Gray, 1998). This emphasis on theoretical critique does not detract from the merits of critical accounting. In fact, its contributions have raised important insights to understanding accounting frameworks and practices from a critical perspective – insights that have helped to justify the need for alternative frameworks for social economy organizations. However, for the most part, critical accounting does not provide accountants with working strategies and tools that challenge conventional accounting practices. In contrast, social accounting strives to provide those tools. Social accounting shares most of the critiques raised by critical accounting but also has created working frameworks that consider a broader range of factors and actors in the accounting process. Social accounting is a broad term that embraces a variety of alternative accounting models, including expanded value added accounting, environmental accounting, and sustainability accounting. Social accounting has been criticized in both conventional accounting and in critical accounting literatures. The conventional criticism of social accounting relates to Friedman’s (1970, p. 32) often quoted

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statement on corporate orientation: “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” From this perspective, social responsibility is narrowly constructed to mean the maximization of profits, and thus any focus outside of this is not in the best interest of the firm. From a critical accounting standpoint, social accounting is sometimes seen as a discourse that legitimizes the status quo, does not question the role that unregulated capitalism plays in perpetuating unequal and exploitive social relations, and provides an illusion that progress can be made by corporations (Everett & Neu, 2000). Lehman (1999, p. 220) goes even further and states: “The procedural and instrumental tendencies within reform accounting models can stall the construction of more critical and interpretive models.” Indeed, it is becoming more apparent that the current form of capitalism, “based on private property rights, growth and expansion, competition, maximizing consumption of nonessentials, maximizing returns to shareholders and directors and so on,” is not sustainable (Gore, 2006; Gray, 2005; Gray & Milne, 2004, p. 73; Robèrt, 2000). In its most extreme form, critical accounting can lend itself to a form of nihilism because it does not give accountants any agency to contribute to social change through innovating accounting frameworks and practices. We argue instead that accountants have the option either of continuing with the current accounting systems that sustain the status quo or, alternatively, of creating more transparent and participatory accounting practices in the context of a broader strategy for social change. The assumption underlying the approaches presented in this chapter is that accounting can be an agent of social change. Moreover, this point is of particular importance to accounting practices for social economy organizations, which as noted, are set up for different purposes than for-profits and therefore require different accounting frameworks – or what we refer to as social accounting. Social Accounting in Practice: Four Approaches In different parts of the world, organizations are incorporating social accounting into their daily practices. Among social economy organizations, four approaches are beginning to be implemented: (1) the expanded value added statement (EVAS); (2) social return

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on investment (SROI); (3) the Global Reporting Initiative (GRI); and (4) The Natural Step (TNS). The first two approaches, the EVAS and SROI, integrate social, environmental, and economic data. In other words, the economic, social, and environmental dimensions are not supplemental to the financial accounts; rather, they are integrated. We use the term integrated social accounting to refer to this approach, and it is the system we encourage. The last two approaches, GRI and TNS, generally result in what we call supplemental social accounting reports, which separate financial and sustainability reporting (GRI, 2000, 2005; New Economics Foundation, 1998; Sillanpää, 1998; Zadek, 1998). One approach is not necessarily better than another; rather, they present different perspectives of the organization that include dimensions broader than the financial statements do on their own. Decisions on whether to follow one of these models generally are based on the costs and benefits of doing so and how the approach fits with the values of the leadership and mission of the organization. For smaller organizations with limited budgets and either without or with a very small paid staff, some of these approaches may be too taxing for their resources without external assistance. Nevertheless, it is something to consider as an organization grows and its human resources increase. 1. Expanded Value Added Statement The expanded value added statement (EVAS) is an integrated approach to social accounting and focuses on economic, social, and environmental impacts, instead of just the “bottom line” of financial surpluses or deficits (Mook, 2007). For instance, an EVAS analysis of a housing cooperative was able to identify key aspects of the organization’s functioning that were not apparent from conventional financial statements alone (Richmond & Mook, 2001). These key aspects included the impact of unpaid labor (i.e., volunteers); the role of the organization in providing employment, skills development, and personal growth for its members; and the contribution of the organization to society through service provision and tax payment. The expanded value added statement puts together information from audited financial statements along with monetized social and environmental data. Value added is a measure of wealth that an organization creates by adding value to raw materials, products, and services through the use of labor and capital. In contrast to profit, which is the

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wealth created for only one group – owners or shareholders – value added represents the wealth created for a larger group of stakeholders including employees, society, government, and the organization itself. Indeed, conventional accounting for socially minded organizations falls short in two important areas. First, conventional accounting is incomplete as it ignores a significant source of inputs – in particular, volunteer labor. Second, it is incomplete as it ignores a significant part of its outputs, particularly social and environmental outputs. Because of these two features, conventional accounting leaves much to be desired in helping socially minded organizations measure their performance according to their combined social and economic objectives. The EVAS also emphasizes the collective effort needed for an organization to achieve its goals, viewing each primary stakeholder as important to its viability as a socially and economically responsible organization. For example, including volunteers and society as stakeholders presents an alternative perspective of an organization to focusing solely on its ability to spend its financial resources. By combining financial and social value added, the EVAS also emphasizes the interconnectedness and interdependence of the economy, community, and environment (Mook et al., 2007). determining a market value for outputs Determining the market value for the outputs of a for-profit firm is relatively straightforward – it is simply the amount of revenues received through sales or, in other words, the amount people have paid for those goods or services in the market. However, for some social economy organizations revenues are seen as inputs,1 and the term outputs is generally used to mean the direct products of its activities – for example, such services as mentorship and counseling for clients or running a soup kitchen. Determining the market value for the outputs of a social economy organization presents special challenges because some of its goods and services may not involve market transactions, and nonfinancial items such as contributions of volunteer labor are generally ignored. In order to assign a comparative market value (a reasonable rate if it were

1 The characterization of revenues as inputs might not apply to all nonprofits – for example, those that earn their revenues from market transactions.

Social Accounting  291

exchanged in the market) to the outputs of nonprofit organizations, the following procedure can be used (Richmond, 1999): • Look to the market to find a comparative market value for similar goods/services produced in the private sector (e.g., for a nonprofit organization delivering employment training services, the cost of similar private sector training could be used). • If there are no equivalents in the private sector, compare with public sector goods (in the case of employment training, the cost of federal employment training programs could be used). • If that value is not available, compare with other nonprofit sector goods/services, using fees that they receive from government for providing the services. For example, a comparison could be made with fees paid by a government department to an employmenttraining agency. In this case, the fees actually do go through the market. However, it has been argued that because the service is delivered by a nonprofit organization, which is subsidized by government and uses volunteers, the fees for the service are not an accurate reflection of their real cost in the market. Another method is to assign the value according to the cost of the resources going into creating the goods and services plus the value of in-kind and volunteer contributions. This can also be thought of as the revenues that might be received in the market less the allocation for profit. Estes (1976), one of the pioneers in social accounting, also proposed a number of techniques to assign a monetary value to outputs. His examples are largely in relation to profit-oriented businesses, but they are also relevant to social economy organizations. • Surrogate valuation: “When a desired value cannot be directly determined, we may estimate instead the value of a surrogate – some item or phenomenon that is logically expected to involve approximately the same utility or sacrifice as the item in which we are interested” (Estes, 1976, p. 110). He gives the example of estimating the value of building facilities loaned to civic groups and suggests as a surrogate the rent that would be paid for commercial facilities of a similar quality. Another example, which we use in other case studies, is establishing a surrogate value for the

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personal growth and development of volunteers from participating in a nonprofit organization. As a surrogate, we use the cost of a community college course in personal development (Mook et al., 2007). • Survey techniques: this procedure involves asking participants what a service is worth to them. To assist in establishing an accurate estimate, Estes (1976) suggests using, as a prompt, a list of either prices or consumer items and asking the respondents to situate the service in relation to others on the list. • Restoration or avoidance cost: “Certain social costs may be valued by estimating the monetary outlay necessary to undo or prevent the damage” (Estes, 1976, p. 115). Road salt corrodes automobiles, but frequent washings can prevent the damage, and that is something that can be easily priced. Similarly, it is possible to estimate the cost of restoring environmentally damaged land to either industrial or residential use. In the event of a plant closure, many governments require a cleanup of the work site to residential standards, a liability that can be determined. A CLOSER LOOK: ASSIGNING PROXY VALUES Community Village, part of a master-planned community in North America, is a composite of four interrelated organizations: an economically targeted investment, a nonprofit community police center, a nonprofit neighborhood house, and the municipal government (Mook, 2007). The social accounting statement developed for Community Village included several social and environmental aspects: the impact of transit-oriented development, opportunities for an active lifestyle, crime prevention measures, and the impact of making environmentally conscience decisions in purchasing energy-using devices. In order to place a proxy value on these impacts so they could be included in the social accounting statement, the researcher looked to a variety of sources (Mook, 2007). • Valuing impact of transit-oriented development: the data used to estimate values for the impact of transit-oriented development were taken from two sources: census data from 2001 for an area

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adjacent to rapid transit was used to determine the percentage of residents who used public transit to commute to work, and an extensive study of individual and societal transportation cost factors was used to estimate a value for this benefit (Litman, 2005). • Valuing an active lifestyle: to estimate the value of an active lifestyle, census data and two academic studies were used. One study looked at effects of physical inactivity on coronary artery disease, stroke, colon cancer, breast cancer, type 2 diabetes or mellitus, and osteoporosis, and estimated the cost of physical inactivity to the health care system (Katzmarzyk, Gledhill, & Shephard, 2000). The same study found that reducing physical inactivity by 10 percent has the potential to reduce these expenditures by 7 percent. • Valuing cost of crime: using data from the national statistics agency, the average direct cost of property crimes and the associated cost of pain and suffering were determined (Brantingham & Easton, 1998; Leung, 2004). • Valuing CO2 emissions and electricity costs: To place a value on reducing CO2 emissions, eleven alternatives were considered, which provided rates ranging from $11 a metric ton to $835 a metric ton (Wigle, 2001).

establishing a market value for volunteer and member contributions In order to place a value on volunteer labor and member contributions in cooperatives, there are two general schools of thought. The first is based on what economists refer to as “opportunity costs” and the second is “replacement costs.” The opportunity costs approach assumes that “the cost of volunteering is time that could have been spent in other ways, including earning money that could, after taxes, be spent on desired goods and services” (Brown, 1999, p. 10). Because time might have been spent generating income, the opportunity cost is tied to the hourly compensation that volunteers normally receive from paid jobs that they hold. However, this procedure could be problematic from an organization perspective because the skills associated with a volunteer service may differ

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substantially from those for which a salary is being received (Brown, 1999). The hourly rate that Mark Zuckerberg received from Facebook for his services would not be an appropriate standard if he were to spend a day volunteering at a local food bank. An opposite problem might arise if the food bank volunteer were unemployed and therefore without an hourly wage. It would be incorrect to suggest that the service is worth nothing. After considering the complexities of estimating opportunity costs, including the portion of a paid worker’s hourly wage that goes to taxes, and after adjusting for any fringe benefits, Brown (1999, p. 11) suggests that volunteer time “be valued at roughly one half to six sevenths of the average hourly wage.” In her view, higher values should be applied when volunteers have increased responsibilities relative to their paid work, and lower values should be applied in the opposite circumstance. Variations of Brown’s (1999) procedure to estimate opportunity costs of volunteers were undertaken by Wolff, Weisbrod, and Bird (1993) and Handy and Srinivasan (2004). Wolff et al. (1993) estimated the marginal opportunity costs by asking volunteers what they would have received if they had worked additional hours for pay. Volunteers not in the labor market (retired, students, unemployed) “were asked what they believed they could earn if they decided to seek paid employment” (1993, p. 31). Handy and Srinivasan (2004) also asked volunteers to estimate how much their tasks were worth, thereby arriving at a lower figure than the marginal opportunity cost. These procedures vary, but they share the common feature of looking at the value of volunteering from the perspective of the volunteer and what an hour is worth to that person. The second approach is called the replacement cost method. This method looks at volunteer value from the perspective of the organization. This procedure, which is favored by the accounting profession in cases where estimation for volunteer value is permitted by conventional accounting procedures, assumes that volunteers could be replaced by wage earners as substitutes in terms of skills and productivity. There are three approaches to estimating replacement costs: the generalist approach, the specialist approach, and the modified specialist approach (Mook & Quarter, 2004). The generalist approach makes the assumption that all volunteer tasks should be treated equally; it is the simplest of the three methods to apply. For example, the Independent Sector, an advocacy organization for nonprofits located in Washington, DC, utilizes the average hourly wage for nonagricultural workers published in the Economic Report of the President, plus 12 percent for fringe benefits (Independent Sector, 2011).

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The specialist approach, by comparison, targets the value of a volunteer’s role to the market value of the exact task (Brudney, 1990; Gaskin, 1999; Gaskin & Dobson, 1997; Karn, 1983). Its strength is its precision – comparisons are made for each volunteer task and the market rate for paid work in that category is used. These rates can be found in labor market data generated by government agencies. The limitations are that organizations may not have access to the information needed to make such comparisons and may lack the personnel do the analysis. The modified specialist approach targets the rate for a volunteer task to an organization as well as to the general skill level of the volunteer task. This approach is simpler than the specialist approach and, arguably, more practical. One method is to use the Bureau of Labor Statistic’s wage rates based on the North American Industry Classification System (NAICS). This classification system (jointly developed by the statistics agencies of the United States, Canada, and Mexico) classifies organizations (such as businesses, government institutions, unions, and charitable and nonprofit organizations) according to economic activity. The NAICS classification combines all levels of tasks for a class such as subsector 624, social assistance. This subsector includes organizations engaged in a variety of services such as food and housing within the community, and emergency and other forms of relief both for the individual and family. The NAICS classification combines all the tasks for a subsector and puts forward an average wage rate for all levels of occupation in that category, making its subsequent use straightforward. For volunteer activities requiring a high level of professional skills, the rate for salaried employees can be used. For those activities requiring basic skills, the rate for hourly employees can be used. For those activities using a mixture of skills, the two rates can be averaged. putting together an evas: oar fairfax OAR Fairfax is a nonprofit restorative justice organization started in 1971 in Fairfax County, Virginia. According to its website, in 1998 it changed its name from Offender Aid and Restoration to Opportunities, Alternatives and Resources to better reflect its mission and goals. Its mission is “to rebuild lives and break the cycle of crime with Opportunities, Alternatives, and Resources for offenders and their families to create a safer community” (OAR, 2012a). The organization offers programs for first-time offenders, those in jail, and those released from incarceration, as well as the family members of these individuals. These include a program which screens first-time and misdemeanor offenders for community service as an alternative to incarceration; a program

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for inmates where they hear from victims of crime and learn to take responsibility for their actions and develop a means to provide restoration for the harm they caused; skills development and healthy relationship programs, as well as a training program for volunteers. The board of directors includes persons who were formerly incarcerated. For the fiscal year analyzed, OAR Fairfax received $1,360,910 in financial revenue, of which $1,328,734 was spent on programming and administration; the remainder, $17,350, was transferred to its surplus account for the following year. Programming and administration expenses were as follows: $871,404 for employee wages and benefits, $65,800 for payroll taxes, and $7,183 for depreciation, and $384,347 was spent on purchasing external goods and services (OAR, 2012b). Several social value added factors were quantified by OAR Fairfax in their annual report for 2011: 1. The value of board and nonboard volunteer hours was determined. Together, 162 volunteers contributed 8,623 hours in the fiscal period. These hours were calculated to have a replacement value of $189,965 based on the 2009 Independent Sector rate for volunteer contributions for Virginia, $22.03 per hour. 2. Service hours for the 879 participants in the Community Service program were calculated and found to be worth $483,450. 3. A value was also placed on deferred incarceration costs of the participants in the Community Service program. This amounted to $645,670. 4. OAR Fairfax received in-kind contributions of several types. It received donated office facilities, utilities, and related items totaling $182,575. It also received donations of books and similar items with a fair value of $14,826. The total of in-kind items was $197,401. Donated services including accounting and information technology were measured using the applicable billing rates of the professional service providers and amounted to $33,988. In total, the social factors that were quantified totaled $1,550,474. This is the amount that will be shown as revenues in the “Social” column in the EVAS presented here in Table 10.1. The first section of the EVAS estimates the value added created by the organization. For the analysis of the value added that is created by the organization, the table is divided into three columns: (1) financial, using information from audited financial statements; (2) social contributions

Social Accounting  297 Table 10.1  Expanded Value Added Statement (Partial) for OAR Fairfax for the Period Ended 30 June 2011 Financial

Social

Expanded

$1,346,084

$1,550,474

$2,896,558

Purchases of external goods and services

$384,347

$197,401

$581,748

Value added created

$961,737

$1,353,073

$2,314,810

Outputs

Stakeholders Employees

$871,404

Community

Volunteer contributions

Larger society

Payroll taxes and reduced incarceration costs

$65,800

Organization

Depreciation

$7,183

Surplus Value added distributed

$871,404 $707,403

$707,403

$645,670

$711,470

$7,183

$17,350 $961,737

$17,350 $1,353,073

$2,314,810

for which a market-comparison monetary value is e­stimated; and (3) expanded (the addition of the first two columns). The second part of the statement shows how the value added that was created is distributed to different stakeholders. For instance, employees received payments for wages and benefits in the amount of $871,404; the community received benefits from volunteer contributions and service work ($707,403); society benefited by lower incarceration costs and the payment of payroll taxes for a total of $711,470. In total, the amount of value added distributed is equal to the amount of value added created. In contrast to the EVAS, OAR Fairfax’s Statement of Revenues and Expenditures shows that it spent slightly less than it received, resulting in a surplus of $17,350 (Table 10.2). This is important because it indicates that the organization is living within its means. However, this statement does not fully show the contribution that OAR Fairfax is making

298  Understanding the Social Economy of the United States Table 10.2  Monetary Revenues and Expenditures for OAR Fairfax, for the Period Ended 30 June 2011, per Form 990 Revenues Government grants Other grants and contributions In-kind donations

$867,101 $58,251 $14,826

Contracts

$300,848

Client fees

$117,578

Other revenue

$2,306

Total revenues

$1,360,910

Expenses Direct assistance

$214,458

Salaries

$785,409

Employee benefits

$85,995

Payroll taxes

$65,800

Accounting

$22,334

Other services

$34,660

Office expenses

$48,825

Program supplies Information technology Occupancy Travel Meetings Depreciation Insurance Other expenses Total expenses Surplus

$1,952 $27,156 $3,120 $5,612 $17,854 $7,183 $10,550 $12,652 $1,343,560 $17,350

Source: OAS Fairfax, 2011 Form 990.

to the surrounding community. The EVAS, by contrast, indicates OAR Fairfax generated expanded value added of $2,314,810, which is 141 percent higher than had we used financial information only.

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Another way of looking at this information is that if only the financial information is considered, for every $1 of purchases of external goods and services, $2.50 of value added is created. When you include the volunteer contributions and value of contributions to the community and public sector, it shows that for every $1 of external goods and services purchased by OAR Fairfax, the organization created almost $4 in value added. Social goods and services, ones that are not given a monetary value, are often a large part of the operations of a social economy organization. Without taking these goods and services into account, there is neither a clear picture of a nonprofit’s performance nor of the contributions made by its volunteers. The expanded value added statement is an experimental methodology to broaden the accounting for nonprofits to include social indicators. The EVAS tells a different story than the financial statements alone – and to a different audience. The EVAS helps various stakeholders, particularly volunteers, to see what value they have added to an organization and what value they have received. The strength of the EVAS lies in its ability to take a broader look at the organization and the role of volunteers within it and to put this in a larger social-economic perspective. The challenges faced by the EVAS are shared by other forms of alternative accounting and economics – quantifying and placing a value on goods and services that are seen as “free.” The EVAS model attempts to integrate financial information for which there are strict methods of accounting, with nonfinancial or social information, and to develop a methodology that supports this. These challenges face the nonprofit sector as a whole: there are few resources to track free goods and services. The EVAS method attempts to place a reasonable market value on items and activities that do not pass through the market. Much more research and application will be required to refine this process. However, as the report of OAR Fairfax shows, the EVAS currently captures and displays information that other forms of accounting or evaluation do not. This information can be used by the organization and its stakeholders to better understand the role and value of volunteers. Indeed, the organization could demonstrate to funders and other stakeholders that OAR Fairfax generates a large contribution of social value added for every dollar it receives from grants and other sources. By comparison, conventional accounting statements undertaken with nonprofits like OAR Fairfax portray them as the users of grants and other forms of funding, and show how they use the funds (expenditure categories) without portraying the value

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(both social and financial) that they add. This fundamental difference between the EVAS and conventional approaches to accounting strikes at the essence of social economy organizations – their social mission. The EVAS is unique because it is a form of integrated social accounting. Other forms of social accounting are also important but, as noted, are supplemental to the financial statements. Although providing useful information, these social accounting reports often receive secondary status (Coupland, 2006). It is also difficult with supplemental reports to judge the relative materiality or their ability to achieve appropriate standards of evidence of social and environmental actions with respect to financial performance. As a result, social and environmental reports published by an increasing number of corporations (especial forprofit) are frequently dismissed as “greenwashing” or “specious gloss” (Laufer, 2003; Owen & Swift, 2001, p. 5). 2. Social Return on Investment Another approach to demonstrate the economic, social, and environmental impact of an organization is a Social Return on Investment (SROI). An SROI combines elements of cost-benefit analysis and social accounting. Cost-benefit analysis is widely used in economics to compare the costs and benefits of a particular intervention to society as a whole. Both tangible and intangible items are included, and elaborate techniques have been developed to monetize intangible costs and benefits. Social accounting adds the involvement of stakeholders in the process and also positions an SROI as a management tool (Arvidson, Lyon, McKay, & Moro, 2013). Overall, the aim of doing an SROI is to understand the economic, social, and environmental value an organization adds for different stakeholders it affects. Organizations can use an SROI to clarify their assumptions about change, identify their outcomes, direct resources, and justify funding. Funders also use an SROI to help them decide where to allocate their funds (New Philanthropy Capital, 2010). The general process of an SROI is to document the outcomes of an organization using a process that involves stakeholders, and to determine which items are material and attributable to the activities of the organization and place a monetary value on them to the extent possible. The value calculated for outcomes is compared to the value calculated for the cost of providing the service (i.e., investments of money, materials, and time) to help determine if the organization is creating positive

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or negative value. If we were to write this as a formula, it would look like this (Martinez & Hayes, 2013, p. 22): net present value of benefits SROI =      net present value of investments Although historically the approach to an SROI has been to try to monetize all outcomes, it is now being recognized that both monetary and nonmonetary units of value should be included to gain a full view of the value created by an organization (Gair, 2009). Many organizations start out trying to measure the overall value that their organization creates; however, this is a complex and probably impossible task. A different approach, and more manageable, is to start with key questions that an organization wants to answer and then build the SROI analysis around those questions (Gair, 2009). Based on many years of SROI experience, REDF (also known as the Roberts Enterprise Development Fund) found that asking stakeholders what their key questions are in relation to determining impact, and what the stakeholders think is important to include in an SROI, is a much more effective way to do this type of analysis (Gair, 2009, p. 19). From the input of stakeholders, the organization then determines the data it needs to collect, monitor, and report on. An SROI can be applied retrospectively to evaluate performance or into the future as a forecasting tool for strategic planning or funding decisions (Jönsson, 2013; Nicholls, Lawlor, Neitzert & Goodspeed, 2012). Using the retrospective approach, The Children’s Aid Society, working with The Finance Project, a nonprofit research firm, embarked on a project to measure the SROI for community schools over a threeyear period (Martinez & Hayes, 2013). The organization started by choosing two community schools for a pilot test, one elementary school and one middle school. The direct beneficiaries of the schools were identified as the students, families, and school community. The Children’s Aid Society focused on the lives of those within these groups to determine what difference the community school made. The data collected included both cost and outcome data. Cost data included program costs, overhead/administrative costs, and in-kind costs. Outcome data included school enrolment data, student performance data, and health-related data. Once the benefits to the beneficiaries were determined, financial proxies were applied to the nonmonetary items. The values calculated

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for benefits were then adjusted for “deadweight” (a percentage of benefit that would have happened regardless of the program intervention) (Martinez & Hayes, 2013, p. 21). To illustrate the process of assigning a proxy and adjusting for deadweight, consider the outcome of “students graduating high school.” We can estimate the value that an individual graduating from high school gains compared to someone who has not graduated based on research studies. For instance, one study comparing life-time earnings between high school graduates and those who had not graduated high school found that those with a high school degree earned on average $200,000 to $300,000 more than those who did not graduate. Those who went on to college and completed a degree earned more than twice as much as those without a high school diploma (Day & Newburger, 2002). If it was reasonable to assume that half of the students would have graduated regardless of the programs, to calculate the value the program was generating in this instance, you would multiply the number of students graduating from high school by the amount you determined for the financial proxy value and by 50 percent. This would be the value used in the SROI for this particular outcome. The results of an SROI are typically presented as the value of benefits created per dollar of investment. In the case of the community schools SROI study, $1 worth of investment created $10.30 in social value for the elementary schools, and $1 worth of investment created $14.80 in social value for the middle schools (Martinez & Hayes, 2013). While these returns seem impressive, a particularly low return does not necessarily mean that a program is a bad investment. It might indicate that the program was resource-intensive and serving a population with complex needs. On the other hand, it could also be a signal to reevaluate and make improvements (APHSA, 2013). SROI analysis has been used by state and local governments to inform policy (APHSA, 2013). Dakota County in Minnesota has used a similar method, which is called the Return on Taxpayer Investment, to analyze programs for jail recidivism. Tennessee’s Department of Children’s Services uses social valuation to drive better outcomes for children and families under their care. The Washington State Institute for Public Policy, a nonpartisan research institute, applies an approach similar to an SROI to inform several key policy areas, such as early childhood education, substance abuse, and child welfare. In this A Closer Look, we look at the main principles guiding SROI analysis.

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A CLOSER LOOK: SOCIAL RETURN ON INVESTMENT PRINCIPLES As with other social accounting models, the Social Return on Investment approach is based on principles that guide how the methodology is applied. This set of principles was developed by the SROI Network (Nicholls et al., 2012, pp. 96–8): 1. Involve stakeholders: stakeholders are those people or organizations that experience change as a result of the activity and they will be best placed to describe the change. This principle means that stakeholders need to be identified and then involved in consultation throughout the analysis, in order that the value, and the way that it is measured, is informed by those affected by or who affect the activity. 2. Understand what changes: value is created for or by different stakeholders as a result of different types of change, changes that the stakeholders intend and do not intend, as well as changes that are positive and negative. This principle requires the theory of how these changes are created to be stated and supported by evidence. These changes are the outcomes of the activity, made possible by the contributions of stakeholders, and often thought of as social, economic or environmental outcomes. It is these outcomes that should be measured in order to provide evidence that the change has taken place. 3. Value the things that matter: many outcomes are not traded in markets and as a result their value is not recognized. Financial proxies should be used in order to recognize the value of these outcomes and to give a voice to those excluded from markets but who are affected by activities. This will influence the existing balance of power between different stakeholders. 4. Only include what is material: this principle requires an assessment of whether a person would make a different decision about the activity if a particular piece of information were excluded. This covers decisions about which stakeholders experience significant change, as well as the information about the outcomes. Deciding what is material requires reference to the

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organization’s own policies, its peers, societal norms, and shortterm financial impacts. External assurance becomes important in order to give those using the account comfort that material issues have been included. 5. Do not over-claim: this principle requires reference to trends and benchmarks to help assess the change caused by the activity, as opposed to other factors, and to take account of what would have happened anyway. It also requires consideration of the contribution of other people or organizations to the reported outcomes in order to match the contributions to the outcomes. 6. Be transparent: this principle requires that each decision relating to stakeholders, outcomes, indicators and benchmarks; the sources and methods of information collection; the different scenarios considered and the communication of the results to stakeholders, should be explained and documented. This will include an account of how those responsible for the activity will change the activity as a result of the analysis. The analysis will be more credible when the reasons for the decisions are transparent. 7. Verify the result: although an SROI analysis provides the opportunity for a more complete understanding of the value being created by an activity, it inevitably involves subjectivity. Appropriate independent assurance is required to help stakeholders assess whether or not the decisions made by those responsible for the analysis were reasonable.

3. Global Reporting Initiative The next social accounting approach, the Global Reporting Initiative, or GRI, is used by organizations in the for-profit, public, and social economy sectors. It is considered a supplemental approach as its report is presented separately from the financial statements. The Global Reporting Initiative defines its purpose as the creation of globally accepted sustainability reporting principles. GRI (2006, p. 40) states: “Sustainability reporting is the practice of measuring, disclosing, and being accountable for organizational performance while

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working toward the goal of sustainable development. A sustainability report provides a balanced and reasonable representation of the sustainability performance of the reporting organization, including both positive and negative contributions.” Stichting Global Reporting Initiative2 is the nonprofit organization that coordinates the networks that came together to develop the Global Reporting Initiative Framework. It is headquartered in the Netherlands, and its mission is “to create conditions for the transparent and reliable exchange of sustainability information through the development and continuous improvement of its Sustainability Reporting Framework” (SGRI, 2007). The organization was started in 1997 as a partnership between the Coalition for Environmentally Responsible Economies (CERES) in Boston and the United Nations Environment Program (UNEP). It published its first guidelines in 2000. Today, using a global, multi-stakeholder, consensus-seeking approach, the guidelines are now in their fourth version (G4), and numerous sector supplements have been developed to provide specialized guidance, including one for nonprofit organizations. More than 4,000 organizations (private, public, and nonprofit) have declared their use of the GRI guidelines in their sustainability reports. Many others use the guidelines on a more informal basis (GRI, 2014). indicator protocols The Global Reporting Initiative provides guidance to measure and report on the results of an organization in six dimensions: economic, environmental, human rights, labor, product responsibility, and soci­ ety. There are over ninety indicators, selected by a network of thousands of individuals from sixty countries through a consensus-seeking process. Each dimension has core indicators and additional ones. Core indicators are those that have been identified as being of interest to most stakeholders and assumed to be material unless deemed otherwise. Additional indicators are those that may be material so some organizations but generally not to the majority. The A Closer Look that follows shows how one nonprofit organization implement the GRI approach.

2 Stichting is the Dutch word for foundation.

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A CLOSER LOOK: THE FULBRIGHT ACADEMY FOR SCIENCE & TECHNOLOGY An example of an organization that has used the Global Reporting Initiative reporting framework is the Fulbright Academy for Science & Technology (FAST), a 501(c)(3) nonprofit based in Cape Elizabeth, Maine. It issued its first sustainability report in 2011, using the NGO Sector Supplement of the Global Reporting Initiative, covering the years 2009 to 2010 (Fulbright Academy for Science & Technology, 2011). The report provides a good example of the steps taken and information provided by a social economy organization to engage stakeholders and determine what economic, social, and environmental aspects of the organization were material enough to include in a sustainability report. As of 31 December 2010, FAST had a board of directors of fourteen members, over forty volunteers, and a paid staff of one full-time position. Revenues for 2010 amounted to $197,846, while operating costs were $196,549, including employee wages and benefits of $39,513. One of the important characteristics of social accounting is the engagement of stakeholders. Selected stakeholder groups were asked through discussions and surveys to identify the most important and material economic, environmental, and social performance aspects of the organization. In total, four aspects were identified: financial sustainability, branding and positioning, membership development, and the environmental footprint of the organization’s events. The next step was to consider all the core indicators associated with the material aspects selected by the stakeholders. The full report of actual results is available online, but some examples of the indicators (along with their respective short-form codes) are the following: • economic performance (EC1): direct economic value generated and distributed, including revenues, operating costs, employee compensation, donations and other community investments, retained earnings, and payments to capital providers and governments • emissions, effluents, and waste (EN16): total direct and indirect greenhouse gas emissions by weight.

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• employment (LA2): total number and rate of employee turnover by age group, gender, and region • product and service labeling (PR5): practices related to customer satisfaction, including results of surveys measuring customer satisfaction FAST also provides disclosures on its management approach in terms of program effectiveness and economic performance, such as stakeholder involvement, monitoring, evaluating and learning, and ethical fundraising.

The strength of the GRI Framework is its focus on stakeholder engagement and on materiality. Although there are many indicators, the framework in which they are set helps to make their complexity manageable and easy to understand across organizations. One limitation is that it is unclear how each indicator actually contributes to achieving sustainability, and although the GRI alludes to placing an organization’s performance in context with larger societal issues, contextual indicators are not included in the indicator protocols. 4. The Natural Step Framework Another approach to social accounting taking hold in the United States is The Natural Step Framework, developed in Sweden in 1989 by Dr Karl-Henrik Robèrt, a medical doctor and cancer scientist. Robèrt worked with over fifty Swedish scientists to develop a consensus document that described how the biosphere functions, how society influences and is a part of natural systems, how societies are threatening these systems, and what opportunities exist to reverse unsustainable behaviors. As a result, four system conditions were identified that must be satisfied in order to move toward sustainability (Broman, Holmberg, & Robèrt, 2000). The Natural Step also refers to these system conditions as the four principles of sustainability: To become a sustainable society we must 1. eliminate our contribution to the progressive buildup of substances extracted from the Earth’s crust (e.g., heavy metals and fossil fuels);

308  Understanding the Social Economy of the United States

2. eliminate our contribution to the progressive buildup of chemicals and compounds produced by society (e.g., dioxins, PCBs, and DDT); 3. eliminate our contribution to the progressive physical degradation and destruction of nature and natural processes (e.g., over harvesting forests and paving over critical wildlife habitat); and 4. eliminate our contribution to conditions that undermine people’s capacity to meet their basic human needs (e.g., unsafe working conditions and not enough pay to live on). (Natural Step, n.d.) In order to develop a strategic approach for sustainable development, a process called “backcasting” is used. This framework serves as a tool or compass used by an organization to set its strategic direction. It envisions a future where the organization is complying with system conditions and then works backwards. Once organizations understand the framework and their role in it, they undertake a baseline assessment, noting where they are contravening the principles of sustainability and designing a program for change that will take them from where they are today to their future vision (Broman et al., 2000). This is the process followed by hundreds of organizations and municipalities including the city of Santa Monica, California; Gloria Dei Lutheran Church in Duluth, Minnesota; the Tri-Met Public Transit System in Portland, Oregon; Organically Grown Company in Eugene, Oregon (see the A Closer Look that follows); the Piscataqua Sustainability Initiative of Maine and New Hampshire; and the Twin Ports of Minnesota and Wisconsin. A CLOSER LOOK: ORGANICALLY GROWN COMPANY Organically Grown Company (OCG) started out as a nonprofit organization of gardeners, small-scale farmers, and activists in the late 1970s (Parker, 2006). By 1982 it had become a producers’ cooperative owned by its employees and farmer-owners, grounded in values of health, sustainability, partnerships, and integrity. Its board of directors is made up of employees, growers, and community members. As the largest wholesaler of organic produce in the northwestern United States, OCG employs 160 employees and has sales of over $50 million (OGC, 2014; Worker, 2008).

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Following The Natural Step Framework, Organically Grown Company looked at the gap between its vision of a successful, sustainable cooperative and where it currently was at, and determined its long-term sustainability goals: GOAL #1: Achieve carbon neutrality and eliminate fossil fuel use. GOAL #2: Eliminate solid waste and toxic substances. GOAL #3: Achieve on-farm sustainability and small/medium farm viability. GOAL #4: Foster a healthy and fulfilling workplace. GOAL #5: Build customer and broader community awareness and support for a healthy and sustainable food system. (OGC, 2014). Each year the organization identifies initiatives that will move it closer to achieving long-term goals. For 2011, fifteen such projects were incorporated into the annual operating plan. These included the following: • Revise Employee SMART Commute program to reward employees for using alternative transport to work (10 cents per mile for carpool, bus, light rail; 20 cents per mile for bike, walk, run) (GOAL #1). • Implement a wax alternative in repack and test for the organization’s LADYBUG brand packaging in 2011 (GOAL #2). • Complete Salmon Safe certification with all LADYBUG brand farms in 2011 (GOAL #3). • Increase employee participation in Health and Wellness program by 20 percent (GOAL #4). • Analyze options for developing interactive applications (e.g., mobile applications) to create more customer awareness and loyalty to organic and local growers (GOAL #5).

Other Examples to Explore Social accounting and sustainability reports come in many different formats. Knowing how to start and what to include in an organization’s first report need not be daunting. The accountability standards and social accounting approaches presented in this chapter provide

310  Understanding the Social Economy of the United States

guidance to help organizations get started. Once you have an idea of the basic principles, it is also useful to read the reports of other social economy organizations. Several more examples, national and international, are presented for illustration. connecting the gri to the natural step framework One of the main criticisms of sustainability reports is that they have nothing to do with sustainability (Gray, 2000). As part of their master’s program in strategic leadership toward sustainability at the Blekinge Institute of Technology in Karlskrona, Sweden, Chester and Woofter (2005) addressed this criticism and evaluated the 2002 Global Reporting Initiative Sustainability Reporting Guidelines against The Natural Step principles of sustainability. By doing this, they created indicators based on science that would report the organization’s contribution to unsustainability. Examples of these indicators, which they call GRI+, included the following principles (Chester & Woofter, 2005, pp. 27–8): Goal #1 Report on how your organization contributes to systematically increasing concentrations of substances extracted from the lithosphere: (1) mining of metals or minerals, (2) extraction of petroleum-based materials, (3) reliance on metals, minerals, or petroleum-based materials in manufacturing, logistics, etc., and (4) life cycle analysis of relevant metal/mineral/petroleum products. Goal #2 Report on how your organization contributes to systematically increasing concentrations of substances produced by society: (1) carbon dioxide, (2) nitrous oxides, (3) chlorofluourocarbons (CFCs), and (4) any other persistent unnatural compounds. Goal #3 Report on how your organization contributes to systematically increasing degradation by physical means: (1) strip mining, (2) timber harvesting, (3) land use changes, and (4) biodiversity. Goal #4 Report on how your organization contributes to conditions that systematically undermine people’s capacity to meet their needs: (1) child labor, (2) women’s rights, (3) human rights, and (4) fair wage.

Social Accounting  311

food trade sustainability leadership association, usa The Food Trade Sustainability Leadership Association (FTSLA), located in Portland, Oregon, is a membership association made up of organic food trade businesses. Over a three-year period, the members of the association developed an action plan called the “Declaration of Sustainability in the Organic Food Trade”; it consisted of guidelines and recommendations to facilitate continual improvement and transparency in eleven areas of sustainability performance: organic, distribution, energy, climate change, water, waste, packaging, labor, animal care, education, and governance (FTSLA, 2011). Each member of the association has committed to produce an annual sustainability report that addresses these areas. the co-operative group, united kingdom The Co-operative Group, headquartered in Manchester, United Kingdom, consists of nine businesses run by over 2.5 million members, of which 1.5 million are economically active. The Co-operative Group includes food stores, financial services, travel services, pharmacies, funeral care, legal services, and “smile, the internet bank.” The Co-operative Group issues an extensive sustainability report that can be downloaded from its website. It follows both the GRI and AA1000 guidelines. In 2013, it reported on the following cooperative, social, and environmental performance areas: social responsibility, protecting the environment, and delivering value to stakeholders (Co-operative Group, 2013). It also has an extensive sustainable development policy that guides the operations of its businesses. An example of how the Co-operative Group has implemented this policy is developing wind farms and a solar tower to provide it with renewable energy. Ninety-eight percent of its electricity now comes from renewable energy sources. Conclusion As can be seen, social accounting includes a broad range of activities, from formats such as the Global Reporting Initiative and The Natural Step to the expanded value added statement and social return on investment. Although these approaches differ, they share the common goal of broadening the framework of conventional accounting and attempting to understand the impact that an organization has on the communities to which it relates and the physical environment. Social accounting, therefore, is useful for social economy organizations as they are created

312  Understanding the Social Economy of the United States

to fulfill a social mission. Ignoring their social impact, as conventional accounting does, misses an essential feature of their performance story. In an age when so many demands are being made of social economy organizations, having tools that assess their accountability and their social impact is sine qua non for survival. VX DISCUSSION QUESTIONS 1. Social accounting is based on stakeholder involvement in providing input and feedback. What are the benefits and potential risks of stakeholder involvement? 2. In your view, why were the attempts of the 1970s at broadening financial statements to include social accounting items not picked up by the accounting profession? How is it different today? 3. Accounting can be seen as a driver of behavior and thus an agent for social change. Do you agree or disagree with this statement, and why? 4. What are the pros and cons of the supplemental and integrated approaches to social accounting? 5. Outline some of the multiple accountabilities of social economy organizations. 6. What does an expanded value added statement (EVAS) tell us about an organization that conventional accounting statements do not? 7. How can information from social accounting models help us understand the role of social economy organizations?

VX CASE FOR ANALYSIS: GRID ALTERNATIVES

Background GRID Alternatives is a 501(c)(3) nonprofit solar installer based in Oakland, California, that operates in California and Colorado, with plans to expand to New York and New Jersey.3 It was founded in 2001 by two engineers: Erica Mackie, who also has a background in social work, and Tim Sears.4 Erica and Tim had a lot of experience with large-scale renewable energy

3 See http://www.thedailybeast.com/articles/2013/09/03/grid-alternatives-combatspoverty-by-installing-solar-arrays-on-roofs-of-low-income-households.html. 4 See http://www.gridalternatives.org/learn/headquarters-staff/.

Social Accounting  313

projects for the private sector but felt that “free, clean electricity from the sun should be available to everyone” (GRID Alternatives, 2014a, p. 1). Wanting to touch and feel the difference they could make in people’s lives, they quit their jobs and took a chance by starting GRID Alternatives to provide solar power to low-income homeowners. For the first six months, they wondered if they were going to make it. They needn’t have worried. Today, GRID is a multimillion dollar organization and making a difference in thousands of people’s lives. GRID has developed a replicable program “to train and lead teams of community volunteers and job trainees to install solar electric systems for low-income homeowners, generating financial benefits for families, job training opportunities for local workers, and environmental benefits through the reduction of greenhouse gases” (USEPA, 2013, p. 1). Erica and Tim were awarded the James Irvine Leadership Award in 2010, and GRID was recognized by the US Environmental Protection Agency as a Climate Change Champion in 2012. As stated on its website, the mission of GRID is “to make renewable energy technology and training available to underserved communities” (GRID Alternatives, 2014a, p. 1). From the very beginning, GRID used a barn-raising model, where homeowners, neighbors, other volunteers, job trainees, and GRID staff all work together for one or two days to install the solar panels and equipment needed to run the solar system. All work is supervised by GRID, which is also a licensed contractor, and inspected by the municipality. GRID has no trouble getting supporters. The combination of economic, social, and environmental aspects of the organization attracts thousands of volunteers every year. Reasons for getting involved with GRID are many: “an environmental activist worried about climate change, an affordable housing advocate, a job trainee learning a greenindustry trade, and a homeowner who just wants lower electricity bills” (The James Irvine Foundation, 2010, p. 1). The Organization As a licensed contractor, GRID Alternatives employs over 120 individuals in seven offices in California and one in Colorado. Each regional office is headed by a regional director, and staff typically includes a construction manager, outreach coordinators, development officer, and volunteer and training coordinator. The construction manager also supervises solar installation supervisors, a construction assistant, and multiple construction fellows. Each office has its own budget and does its own local fundraising, but functions such as HR, accounting, solar

314  Understanding the Social Economy of the United States

equipment procurement, trainings, and multiregion fundraising are done centrally through the head office in Oakland. To work at GRID Alternatives, one of the recommended qualifications is a “passion for sustainability, affordable housing, the environment, or environmental justice, or just generally grounded in making the world a better place” (GRID Alternatives, 2014b, p. 1). Selected information from the organization’s Form 990 are shown in Table 10.3. GRID uses the calendar year as its fiscal year. In the last four years, it has tripled its number of employees, and revenues have increased ten times, thanks to their role as manager of California’s Single-Family Affordable Solar Homes Program (SASH). Table 10.3  Selected Information from GRID Alternative’s Form 990, 2008 to 2012 2008

2009

2010

2011

2012

Number of employees

–

34

56

87

121

Number of volunteers

–

2,000

3,000

1,945

2,956

$3,094,714

$8,031,312

$21,023,868

$33,895,965

Total revenues not including donated services

$842,503

Government grants

–

$167,369

$235,741

$193,503

$203,937

Other contributions and grants

–

$560,715

$1,092,822

$2,104,723

$4,362,391

Noncash contributions*

–

$6,739

–

$1,011,766

$1,293,086

Utility incentives (service contract)

–

$2,221,078

$5,721,429

$17,876,828

$29,274,471

Fees for service

N/A

$112,409

$868,639

$720,770

Included above

Donated services

N/A

$123,998

$61,706

$168,637

$648,197

$1,072,988

$3,091,718

$7,986,133

$18,562,171

$29,878,751

Salaries and benefits

Total expenses

$609,990

$1,511,660

$2,439,396

$4,324,672

$5,875,981

Net assets

$445,216

$448,212

$493,391

$2,955,088

$6,972,302

*Noncash contributions include clothing and household goods, vehicles, and construction material.

Social Accounting  315

Core Programs Single-Family Affordable Solar Homes Program (SASH) The reach of GRID Alternatives was greatly enhanced when in 2008 they were selected to be the statewide program manager for the SingleFamily Affordable Solar Homes Program (SASH) of the California Public Utilities Commission. This is GRID’s primary program in California. SASH was created as a result of the passing of California Assembly Bill 2723, which requires that at least 10 percent of the funds of the California Solar Initiative be put toward assisting low-income households obtain solar power. The objectives of the program are to accomplish the following: • Create broad community engagement with solar in low-income affordable housing. • Provide education for low-income homeowners on the benefits of energy efficiency and solar technologies. • Enroll and refer qualifying families to providers for energy efficiency services. • Enable low-income families to access money-saving solar technologies by providing up-front incentives. • Provide opportunities for community volunteers to participate and for public-private partnerships supporting low-income communities to develop. • Support local green-jobs training and workforce development programs by enabling job trainees to participate in solar electric system installations. (GRID Alternatives, 2014c, pp. 1–2) To qualify for the SASH program, the household income of the homeowner must be 80 percent or below the area median income, which varies by county and by the number of persons in the household. The house must also be designated as affordable housing as defined by California Public Utilities Code 2852.5 Rebate levels are determined by income level. If the household income is less than 50 percent of local median income, the homeowner may qualify for a free one-kilowatt system; if the household

5 See http://www.gridalternatives.org/learn/sash/sash-eligibility-requirements

316  Understanding the Social Economy of the United States

income is between 50 and less than 80 percent of local median income, the system is highly subsidized.6 Grants, donations, and discounts on equipment all help to defray other expenses.7 By the time the program concludes, GRID estimates it will have installed solar panels for five thousand low-income households. Electric bill savings to the homeowner are estimated to be up to 75 percent as the excess electricity generated by the solar panels is sold back to the utility company. Training An important component of the work that GRID Alternatives does is training and awareness. Everyone goes through an orientation and training program where they learn about environmental issues, energy efficiency, and solar panel installation.8 A Team Leader Program offers additional training and opportunities for those who wish to further develop their skills. This program also provides the experiences necessary to pass the exam to become a certified PV Installer (through the North American Board of Certified Energy Practitioners) and start a career in solar energy.9 Many volunteers for GRID have found full-time jobs in the solar industry.10 Solarthons, Solar Spring Break, and Corporate Team Building GRID also hosts Solarthons and Solar Spring Break, where hundreds of volunteers, green job trainees, corporate partners, and homeowners come together to do mass installations of solar energy systems. Programs are also available for corporate groups to sponsor installation events and undergo team building as well.11

 6 See http://www.gridalternatives.org/learn/sash/sash-eligibility-requirements.  7 See http://irvine.org/leadership/meet-the-recipients/2010-recipients/tim-searsand-erica-mackie.  8 See http://www.gridalternatives.org/volunteer/become-a-volunteer/.  9 See http://www.gridalternatives.org/volunteer/team-leader-program/. 10 See http://www.thedailybeast.com/articles/2013/09/03/grid-alternatives-­combatspoverty-by-installing-solar-arrays-on-roofs-of-low-income-households.html. 11 See http://gridalternatives.org/volunteer/.

Social Accounting  317

Impact GRID Alternatives did its first two solar installations in 2004. In 2012, it did over twelve hundred.12 So far, the organization has installed solar panel systems for over four thousand households. Those served by GRID include “seniors on fixed incomes, veterans, and homeowners struggling with unemployed and underemployment, as well as low-income residents of more than 14 tribal communities throughout California” (USEPA, 2013, p. 1). GRID estimates that the panels they have installed generate over twelve megawatts of clean, renewable power, saving more than $110 million in energy costs and preventing the release of 340,000 tons of greenhouse gases. This is the same as removing over sixty-four thousand cars from the road for a year.13 Over fifteen thousand volunteers and job trainees have contributed and benefited from hands-on experiences in solar power installation.14 Testimonial statements illustrate some of the impacts the organization has had on the lives of those it has touched. “Lawrence Jackson worked with GRID Alternatives to install solar panels on his home, not just to lower his bills but also, as he says, ‘to help the environment – I want to be part of the solution, not part of the problem.” Eighty years old but “always ready to learn something new,” he now volunteers to help his neighbors go solar and enjoys the camaraderie that develops between neighbors and volunteers as much as he loves saving money and energy. When you work with GRID Alternatives, says Lawrence, “you’re working together. It all comes together like a beautiful puzzle” (GRID Alternatives, 2014d, p. 1). “Taulafo ‘Lafo’ Laulu graduated from a community job training program for low-income workers looking to break into the solar industry, but struggled to find employment with no direct experience on his resume. GRID Alternatives gave Lafo the opportunity to gain hands-on experience on all aspects of solar electric installation and as a result he was able to get a job with a local solar installer. ‘I worked warehouse

12 See http://blogs.kusp.org/environment/2013/09/12/nonprofit-empowers-lowincome-families-job-trainees-through-solar-power/. 13  See http://www.epa.gov/cleanenergy/energy-resources/calculator.html. 14  See http://www.gridalternatives.org/learn/about-grid/.

318  Understanding the Social Economy of the United States

for twenty years, but never had much money in my pocket. My life is much better now that I made a career change” (GRID Alternatives, 2010a, p. 4). “James (Jimmy) Adauto came to GRID Alternatives after participating in the Homeboy Industries program in L.A. for formerly ganginvolved and recently incarcerated men and women. Jimmy was ready to turn his life around for himself and his family and saw a bright future in the green industry. He started volunteering with GRID Alternatives in April 2012 to supplement his classroom solar training. Within six months, Jimmy had logged over 170 installation hours and become a GRID Certified Roof Team Leader, helping teach other volunteers. His experience with GRID landed him a position with the Plumbers and Pipefitters Union working on a solar thermal project at the CaliforniaNevada state line” (GRID Alternatives, 2014e, p. 1). “April Honore runs a childcare center out of her home. This involves long hours during the day and night as she watches and cares for as many as 8 children at a time. While families usually try to cut back on electricity use, in April’s case, the children’s comfort has to come first. April’s summer electric bill was double the amount during the winter. Since most of her income from her business is spent on her electric bill, April was considering raising her prices just for her business to survive! This all changed, however, when April contacted GRID Alternatives, and the magic of energy efficiency and solar transformed not only her utility costs, the lives of the families she was caring for!” (GRID Alternatives, 2014f, p. 1). Phil Kilbridge, executive director of Habitat for Humanity San Francisco, sums it up well: I think that what GRID Alternatives is doing is so unique because it’s not only about the technology that they’re providing for the homeowner, it’s not just about the environmental impact, it’s about the civic engagement and community building. They’re bringing people from corporations, youth, individuals together, to do this team-building activity, where they are making a real impact. (GRID Alternatives, 2010b)

VX CASE QUESTIONS 1. Who are the primary and secondary stakeholders of GRID Alternatives? 2. In light of GRID Alternatives’ mission, outline the primary economic, social, and environmental measures of impact for the organization and its

Social Accounting  319 stakeholders. In your response, include applicable benchmarks, indicators, and the information system required to track, measure, and report. 3. What information is GRID Alternatives already collecting that could be used in a social accounting report? What additional data could be collected? Design an information system that would facilitate the reporting of this data. Pay attention to the principles of materiality and stakeholder inclusion. 4. Design and present a social accounting report for a social economy organization in your community.

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11  Concluding Thoughts

As we approach the end of our discussion of the social economy of the United States, we will briefly review the territory covered and then address some key issues for the future. The first two sections of this book described how different types of organizations with a social mission fit into categories of the Venn diagram (Figure 11.1) arranged to reveal the dynamic structure of the social economy of the United States. Here, four points merit attention. First, the Venn is inclusive of all organizations with a social mission, not simply one organization type such as a nonprofit, cooperative, or social business. Second, the discussion illustrates the differing forms of interaction between organizations in the social economy and those in the public and private sectors. These interactions are complex and at times challenging to present in simple terms. We used four categories: social economy businesses, local development enterprises, public sector nonprofits, and civil society organizations. We find this classification system useful, but like all classifications it is a simplification, and at times it might not capture the complexity of the interactions between organizations in the social economy and the other sectors. Third, the discussion of interactions underlines the point that organizations in the social economy are not just ends in themselves but also exist in relation to other parts of society – the private and public sectors. Put differently, they are a very important part of a complex society, sometimes referred to as a mixed economy. Fourth, the first two sections of the book are based upon the premise that the organizations of the United States social economy, while containing distinct features that differentiate them from the other sectors, take the form that they do because of the overall structure of the US economy. In other societies and economies, the social economy may take a somewhat different form.

324  Understanding the Social Economy of the United States Figure 11.1  The Social Economy: An Interactive Approach

PUBLIC SECTOR

Local Development Enterprises Public Sector Nonprofits

Social Economy Businesses

PRIVATE SECTOR

Civil Society Organizations

SOCIAL ECONOMY

The third section of this book shifted the focus from the structure of the social economy to the special challenges of such organizations in the areas of organizational design and governance, leadership and strategic management, human resources management, financing, and social accounting. We chose to include these topics in our textbook rather than separating them into another book as we feel that it is not possible to fully understand the organizations of the social economy without comprehending the unique and practical challenges that they experience. For example, the human resources of organizations in the social economy often involve large numbers of volunteers. Understanding that challenge is critical to an appreciation of human resource management for this sector. Similarly, the accounting for organizations in the social economy requires an understanding of social impact and in that regard conventional accounting frameworks have their limitations. Again, understanding the special accounting needed, or what we refer to as social accounting, is critical to our framework. One of the challenges in classifying the organizations of the social economy is that the United States has a vibrant and mixed economy that gives rise to new and changing organizational types and activities

Concluding Thoughts  325

in response to changing social needs. Let us take a few examples to illustrate this point. Civil society organizations, for example, such as environmental groups have emerged with force during recent generations because of our deteriorating environment, which is largely a byproduct of our economic system. The neoliberal emphasis on entrepreneurship is fueled largely by the view that government has grown too large and resulting cutbacks have led to increased pressure on social economy organizations to earn a greater portion of their revenues from the market. Private universities have been facing rapidly rising costs and accordingly have increased tuitions and student fees. Indeed, we found it challenging to categorize private, nonprofit universities within our framework because their sources of income and the nature of their activities often span multiple sectors of the social economy. Universities act like public sector nonprofits when they undertake government contract and grant activities; social economy businesses when they perform fee-for-service activities; and civil society organizations when they receive charitable and grant funding from individuals and foundations as well as provide charitable services to others in need. Moreover, universities also engage as local development enterprises through their investments in their communities. Overall, universities are engaged in complex relationships in society. We also found it challenging to classify business associations. They have the characteristics of a social economy organization such as a nonprofit mutual association and participate vigorously in civil society debates, but they are largely an extension of the private sector businesses that organize them. While rapid social change leads to complexity and heterogeneity, we subscribe to our classification system because it helps to understand differing forms of interaction and relationship and the differing functions of organizations in the social economy. In years hence, the forms of interaction may change, and we might want to modify the categories, but for the present, they seem reasonable. In addition to these challenges, we also acknowledge that our effort to analyze the breadth of the social economy and illustrate the differing forms of interaction between organizations in the social economy and the other sectors of the economy does not explain why and how such organizations emerge in the first place. This is a complex issue, and to date there is not a compelling explanation that we feel satisfies this need. If you are interested in theories related to the social economy, some sources that may be consulted are briefly described here.

326  Understanding the Social Economy of the United States

Theoretical Sources Douglass North’s work on social change and economic performance (North, 2005), explains how and why social institutions change in response to social needs by arguing that organizational development is constrained by a history of prior arrangements, also called path dependence (David, 1975, 1985), in ways carried out by organizations and their entrepreneurial leaders. North defines organizations as “groups of individuals bound by some common purpose to achieve certain objectives” and includes political, economic, social and educational bodies (North, 1993, p. 3). The types of organizations that come into being are determined by what is rewarded by the institutional framework (i.e., formal and informal rules and their enforcement). Within organizations are entrepreneurs serving in the role of decision makers. The choices they make are based on the opportunities they perceive. In making these choices they are also learning, and it is a combination of this learning and external constraints that lead to incremental changes in institutions. Henry Hansmann takes the economic concept of transaction costs and, influenced by the “new institutional economics” of Coase (1937) and North (2005), attempts to explain why different organizational types emerge with different arrangements for ownership and control – the for-profit corporation (investor-owned firms), the cooperative, and the nonprofit organization (Hansmann, 1996). The idea is that organizations take the form that most efficiently lowers the transaction costs of operations. Because cooperatives are democratically operated, and because such cooperation, Hansmann believed, is less efficient than the command and control authority found in investor-owned firms, there are far more investor-owned firms than cooperatives. To date, economists have not, for the most part, explored the realm of human values, tending to assume that behavior is guided by rational choice. Instead, values have been studied by cultural anthropologists (C. Kluckhohn, 1951; F.R. Kluckhohn & Strodtbeck, 1961) and social psychologists (Fiske, 2004; Haslam, 2004; Rokeach, 1973, 1979; Schwartz, 2012). Nevertheless, values theory has important implications for the social economy as the organizations within it are based upon a social mission that is values based. Research by Whitman (2008, 2009) has explored how social values may explain resource allocation decisions in philanthropic foundations, but far more work must be done in this area to understand why organizations, particularly with a social mission, emerge. One organizational theory that is of importance to understanding the character of social economy organizations comes from Hirschman

Concluding Thoughts  327

(1970). His theory explains organizational sustainability and change in terms of opportunities for voice, which he defines as “any attempt at all to change, rather than to escape from, an objectionable state of affairs, whether through individual or collective petition to the management directly in charge, through appeal to a higher authority with the intention of forcing a change in management, or through various types of actions and protests, including those that are meant to mobilize public opinion” (Hirschman, 1970, p. 30). Where voice is unsatisfactory, individuals may attempt to change the organization, and where voice is unacceptably constrained or nonexistent, individuals exit the organization and may migrate to another organization or start a new one. Hirschmann’s theory, therefore, is seminal to understanding organizational change for all forms of organizations, including those in the social economy. Stefan Hedlund has modified Hirschman’s theory to account for “soft voice” and “soft exit” in authoritarian states, where underground economies and secret meetings take the place of otherwise forbidden speech and actual exit through emigration (Hedlund, 1987). Jeffrey Pfeffer and Gerald Salancik go beyond investigating internal power to further consider the external control of organizations, opening the resource dependence line of inquiry (Pfeffer & Salancik, 2003). Richard Steinberg (2006) provides a useful review of the “threefailures theory” to explain the rise of nonprofit organizations. In his account, according to Burton Weisbrod (1975), nonprofits arise to serve where failure to meet needs occurs in the market (market failure) or the government (government failure), and, conversely, according to Lester Salamon (1987), the market and/or government can step up in cases where nonprofits fail to serve needs (voluntary failure). In addition, Henry Hansmann explains the role of nonprofit organizations and government agencies as being more trustworthy providers than the market when contract failure occurs due to a lack of market transparency (Hansmann, 1987). These, then, are a few suggested references for the student seeking more explanatory theories of social economy. Challenges for the Future A logical next step to this current text is to undertake a comparative analysis of the social economy in different nations. As stated above, the social economy is a part of the overall economy and by necessity reflects the character of the society of which it is a part. The character

328  Understanding the Social Economy of the United States

of the social economy in one society can differ in significant ways from another. The international comparisons led by Lester Salamon and his associates (Salamon et al., 1999), resulting in the outstanding compilation Global Civil Society: Dimensions of the Nonprofit Sector, is a seminal effort in this regard. That body of research lends itself to comparisons of the social economy in nations around the world. Similarly, our predecessor volume, Understanding the Social Economy: A Canadian Perspective (Quarter, Mook, & Armstrong, 2009), offers a basis for a comparative analysis. Although the United States and Canada are as close as neighbors can be, their differences are well documented, including their social values (Adams, 2003, 2005; Heath, 2001; Lipset, 1990; Martin, 1985) as well as the constitution of their respective social economies. But if a comparative analysis adds insight, explanatory power may hold the most socially useful promise for policy making. This emphasis on policy needs is crucial. As North (2005) has shown, societies can diverge vastly based on their preferred social institutions, and the differences between the United States and Canada alluded to above are but a modest case of such divergence; the differences between the United States and Latin American countries or Russia are even greater. Another major challenge for the future of the US social economy is the question of whether we can take for granted that the requisite political will and the needed natural and human resources will be there to achieve or sustain the demand to meet human needs in the future. Current demographic trends indicate that a massive proportion of the population is rapidly entering a nonproductive but resource-demanding stage of aging. At the same time, global economic competitive forces, the loss of cheap fossil fuels, and growing dislocations from climate change are reducing overall once-plentiful resources. One final concluding comment – as noted above, this text has presented an analytic account to understand the social economy in the United States and its many interactions with the other sectors of the economy. However, our analysis leaves open a more comprehensive and theoretical explanation of why organizations of different types arise in the first place and why, despite heterogeneity of statutory structure, mission, ownership, and control, they nevertheless can be aggregated into more or less defined segments within the social economy. Underlying this descriptive, structural picture lies a compelling need to understand far better the causal forces that link specific organizational structures and functions to critical social needs.

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Index

abused women’s services. See rape crisis centers accountability, x, 17, 28, 122, 169, 173–4, 223, 248, 284, 287, 309, 312 Ace Hardware, 41, 49 Acumen Fund, 272 – 3 advocacy, 21, 110, 135 – 6, 145 – 6, 205, 277, 294 Affordable Care Act, 102, 105. See also Obamacare affordable home ownership, 18, 87 Alcoholics Anonymous, 143 – 4 American Automobile Association, 18 American Bar Association, 135 American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), 131 – 3 American Federation of Teachers, 131, 134 American Guild of Organists, 135 American Legion, 142 American Medical Association, 102, 135 – 6, 138 American Petroleum Institute, 130 American Postal Workers Union, 131 American Red Cross, 161, 164, 187 – 90

Americans for the Arts, 83 Amnesty International, 147 apex organizations, 41, 44, 136, 173. See also California Credit Union League; Council of Better Business Bureaus; Credit Union National Association (CUNA); National Cooperative Business Association; National Cooperative Grocers Association; umbrella organization Apple Eco-Friendly Cleaning, 50 Arizmendi Association of Cooperatives, 237 – 8 Arizmendi Bakery, 50 Ashbury Images, 81 assigning proxy values, 292 – 3 associations of race and ethnicity, 20, 125, 141 Avaaz.org, 147 Avalon Theatre, 52 – 3 Avenue Community Development Corporation, 70. See also community development corporations B Corporation, 6, 57 – 8; definition, 25; vs. benefit corporations, 57 – 8

380 Index B Lab, 6, 25, 58 – 9. See also Certified B Corporation Bank Transfer Day, 45 benefit corporations, ix, 3, 6, 12, 16 – 18, 37, 53, 57 – 60; definition, 25 – 6; vs. B Corporations, 57 – 8; as social economy businesses, 57 Better Business Bureau, 136 – 7 Bill & Melinda Gates Foundation, 21, 150, 272 Blue Cross Blue Shield Association, 18 board design, 169 – 70, 185 – 6, 189; for for-profit organizations, 170; for member-based associations, 179 – 80; for nonprofit organizations, 171 – 2 BoardSource, 174 Brinker, Nancy, 192 – 3 Buffet, Warren, 9 burnout, 185, 229, 232 – 3 Bush, George W., 119 business associations, 23, 125, 130 – 1, 140, 146, 325; vs. civil society organizations, 130. See also nonprofit mutual associations relating to the economy business improvement districts, 18, 67, 75 – 6, 90; and self-help, 75 business unionism, 131 Cabot Creamery Cooperative, 239 – 41 California Credit Union League, 173 Carnegie, Andrew, 9, 150 Carpet One, 49 Carver model, 175 – 6, 178, 186, 189. See also governance, for nonprofit organizations

Catholic Scholars for Worker Justice, 139 Center for Responsive Politics, 146 Central Florida Community Development Corporation, 70. See also community development corporations charitable donations, vii, 3, 37, 101, 127, 163, 268, 270, 272 – 3 charitable objectives, 8 – 9 charities, 4, 9, 27, 52, 97, 100; employment in, 221; financing, 252 – 5; public trust in, 161 – 2; relationship with the government, 97 – 101 charity, 3 – 4, 6, 8 – 9, 27, 52, 55, 57, 78, 92, 97, 100, 136 – 7, 149, 153, 161, 163, 190, 193, 221, 252 – 3, 255, 262, 271; definition, 25 – 6 Child Healthcare Insurance Program (CHIP), 102 Choral Expression in Washington, DC, 83 – 4 CHS Inc., 49 civic engagement, 154, 318 civil rights, 9, 49, 69, 79, 100, 126, 141, 279 civil society, 15 – 16, 23, 115, 124 – 32, 138, 146 – 7, 151, 169, 325, 328 civil society organizations, xi, 14 – 15, 17, 20 – 4, 38, 68, 99, 107, 110, 113 – 15, 118, 124 – 31, 136 – 8, 140, 151, 179, 323 – 5; definition, 26; serving the public 20, 145 – 9. See also nonprofit mutual associations; sociopolitical organizations; unions Clean Currents, 58. See also benefit corporations

Index 381 Clean Yield, 58. See also benefit corporations Cleveland Clinic, 200 Cleveland Foundation, 267, 271 Clinton, William Jefferson “Bill”, 102, 113, 115 collectives, 27, 184 – 5; feminist, 184 – 5 community benefit district, 75 Community Development Banking and Financial Institutions Act, 73 community development corporations (cdcs), 18, 67, 69 – 73, 90, 108; vs. community development financial institutions, 73; reliance on foundation grants, 70; reliance on government, 70 – 1. See also National Community Development Association (NCDA) community development financial institutions (CDFIs), 18, 67, 73 – 4, 90, 153, 261, 269, 277, 280; vs. community development corporations, 73 community foundations, 21, 150, 155, 271 – 2 Community Health & Social Service Center in Detroit, 103 – 4 community health centers, 97, 101 – 5, 114 Community Health Centers Trust Fund, 105 community land trusts, 87 – 8 Community Reinvestment Act, revised, 73 – 4 Community Reinvestment Act of 1977, 73 Community Village, 292 – 3 compassion fatigue, 229, 232 – 3

consumer associations, 20, 125, 130, 136 – 8, 141 consumer cooperatives, 18, 32, 43, 47 – 8, 50, 182; definition, 42; and the government, 48 Consumer Federation of America (CFA), 137 – 8 conventional accounting, 284 – 7, 290, 294, 299, 311 – 12, 324. See also critical accounting; social accounting Cooperation Works!, 51 Cooperative Development Institute, 182 Cooperative Group, The (United Kingdom), 311 cooperative principles. See Rochdale Principles cooperatives, ix, 3 – 5, 10 – 12, 17 – 18, 21, 24, 27 – 9, 31 – 2, 37 – 51, 59, 62 – 5, 70, 80, 85 – 9, 103, 108, 117, 170, 173, 179 – 86, 194, 226, 228 – 9, 236 – 42, 252, 257 – 8, 261, 273 – 6, 309, 311, 323, 327; definition, 10, 26, 37 – 40; demutualization, 10; economic impact of, 40; employment in, 222; vs. private sector businesses, 40. See also consumer cooperatives; credit unions; first-tier cooperatives; food cooperatives; housing cooperatives; insurance cooperatives; manufactured home cooperatives; marketing cooperatives; nonstock cooperatives; producer cooperatives; purchasing cooperatives; Rochdale Principles; second-tier cooperatives; stock cooperatives;

382 Index third-tier cooperatives; worker cooperatives corporate philanthropy, 270 corporate social responsibility, 8, 202, 269 – 70 Corporation for Public Broadcasting, 116 – 23 Council of Better Business Bureaus, 136 – 7 Credit Union Membership Access Act, 45 Credit Union National Association (CUNA), 40, 44, 173 credit unions, 3, 5, 10 – 11, 17, 27, 41 – 6, 179, 261, 273 – 4, 279, 281 – 2 critical accounting, 286, 287, 288. See also conventional accounting; social accounting CROPP Cooperative, 275 – 6 crowdfunding, 13, 262, 268 – 9 crowdsourcing, 13 DC Central Kitchen, 6 – 7, 81, 161 DC Rape Crisis Center, 111 – 15 de Tocqueville, Alexis, 124 Delancey Street Foundation, 81 Democracy at Work Network, 51 digital civil society, 16 Dr. Govindappa Venkataswamy (Dr V) of the Aravind Hospital, 198 – 9 emotional intelligence, 203 – 4 ENCORE.org, 245 – 51 Endless Sky, 56 – 7 Enterprise Community Partners, 109 environment, 15 – 16, 28, 57 – 9, 95, 100, 128, 147, 154, 182, 226 – 7, 249, 252, 255, 261, 263, 270, 273, 281, 284 – 7, 289 – 90, 292, 300, 303, 305 – 6, 311, 313 – 14, 316 – 18, 325

equal exchange, 61 – 5 expanded value added statement (EVAS), 284, 288 – 90, 295 – 300, 311 farm-marketing cooperatives, 49 farm producer cooperatives, 48 – 9 Federation of Southern Cooperatives, 49 Feeding America, 57, 148 feminist movement, 111, 113 – 14, 126, 180, 184 financing, vii, xi, 17, 98, 106, 108, 153, 210, 241, 252, 256 – 9, 261, 268 – 71, 274 – 8, 324 first-tier cooperatives, 44 food cooperatives, 28, 48 Food Trade Sustainability Leadership Association (FTSLA), 311 foundations, 12, 20 – 2, 56 – 7, 100, 125, 128 – 9, 145, 147, 149 – 51, 153, 155, 163, 261, 263, 270, 326. See also community foundations; private foundations Franklin, Benjamin, 11, 46. See also Philadelphia Contributionship for the Insurance of Houses from Loss by Fire fraternal organizations, 5, 147 Fulbright Academy for Science & Technology, 306 – 7 funding models, 211 Gates, Bill, 9. See also Bill & Melinda Gates Foundation Georgetown Business Improvement District, 75 – 6 Girl Scouts of the United States of America (Girl Scouts), 81, 192, 215 – 20, 240

Index 383 Girls Inc., 169 – 70 giving circle, 271 – 2 Global Reporting Initiative (GRI), 284, 289, 304 – 6, 310 – 11; and the Natural Step, 310 Good Shepherd Services, 213 governance, 11, 14, 17, 93 – 4, 118 – 19, 154 – 5, 161 – 2, 165, 169 – 71; employee participation in, 183 – 4; issues, 185 – 6; for memberbased associations, 11, 29, 48, 70, 130, 179 – 83; for nonprofit organizations, 171 – 9 government, ix, 5, 9, 19 – 20, 23, 26, 39, 44, 51, 62, 86, 97 – 9, 101, 103, 106 – 7, 110, 114 – 5, 122, 127, 129 – 30, 267, 286, 290 – 2, 325 – 7; agencies, 87, 90, 98, 100, 102 – 3, 107 – 8, 114, 136, 138, 295, 326; and civil society organizations, 22, 124, 127, 138; and community development corporations, 70 – 1; and consumer cooperatives, 48; cuts to funding, 110 – 11, 325; funding, 7, 13, 19 – 23, 27, 52, 67, 69 – 71, 81, 94, 96 – 8, 107 – 8, 110 – 11, 113, 116 – 18, 122, 143, 163 – 4, 236, 252 – 3, 257 – 8, 261, 269, 278, 280; healthcare, 102 – 3, 105 – 6, 142; housing, 107 – 10, 115; independence from, 4, 14, 39, 113, 115 – 16, 122, 129, 191; legislation, 47, 101, 111, 114 – 15, 118; and local development enterprises, 21, 26, 67, 69, 87; partnership, 19 – 20, 23, 87, 97 – 8, 107, 118, 138; policy; 19, 27, 46, 97 – 8, 115, 136; programs, 5, 19, 21, 26, 48, 71, 98 – 103, 105, 108, 110; and public sector nonprofits, 19 – 20, 22, 27, 97 – 9, 101, 112, 114 – 15; support, 19, 69, 82, 87, 95,

107 – 8, 115, 122, 163; workforce, 221, 223, 227, 230 Grameen Bank, 54, 265 – 6, 268. See also Yunus, Muhammad Grameen Danone Foods, Ltd., 54 GRID Alternatives, 312 – 19 Grimes, Peggy, 56 – 7. See also Endless Sky Habitat for Humanity, 81, 88, 107, 148, 167, 174, 318 Harbor City, 81 Harvard Cooperative Society, 42 – 3 Hawaii Community Development Authority, 71 Health Resources and Services Administration (HRSA), 104 – 5 healthcare, 12 – 13, 19, 21, 42 – 3, 48 – 9, 86, 101 – 4, 106, 115, 131, 142, 145 – 6, 200, 232, 235, 246, 248 – 9, 273 healthcare nonprofits, 19 homelessness, 106, 261 Housing Assistance Council (HAC), 109 housing cooperatives, 47, 89, 108, 289 Housing Partnership Network, 108 Hub Bike Co-op, 50 human capital, 77, 90 human resources management, x, xi, 221 – 3, 228 – 9, 233, 237, 244; models of, 223 – 4; and strategic planning, 223 – 5 hybrid organizations, 16 ICA-Group, 50 Illinois Facilities Fund, 74. See also community development financial institutions (CDFIs) Illinois Mutual, 47

384 Index Indian Health Service, 102 informal economy, 3, 82 – 3 Instituto del Progreso Latino (Instituto), 78 insurance cooperatives, 43, 46, 103 Internal Revenue Service, 4, 25, 52, 56, 100, 152 International Co-operative Alliance (ICA), 10, 39 Internet, 11, 13, 15, 41, 84, 138, 145, 147, 267 – 8 Isthmus Engineering and Manufacturing, 50 Jacobs, Jane, 108 Jesuits, 139 – 40 Johnson, Lyndon Baines, 76, 100, 102, 118 Kairos USA, 140 Kennedy, John F., 100; Center for the Performing Arts, 84 Kennedy, Ted, 102 Kiva.org (Kiva), 13, 167 – 9, 267 Kiwanis, 148 La Caisse Populaire, 45 La Montaña Food Cooperative, 27 – 32, 48 Lakeside Community Development Corporation, 70. See also community development corporations Land O’Lakes, 41, 49 Lang, Robert, 56 – 7 Latino Community Development Agency, 70. See also community development corporations leader-member exchange theory (LMX), 196

leadership, x, xi, 16 – 17, 192 – 4, 199 – 205, 214, 324; gender differences in, 206; Hersey and Blanchard Situational Leadership Model, 196; Manager-Leader Model, 213; vs. managership, 193 – 4, 206; servant leadership, 199 – 203, 214; theories of, 194 – 8 leadership model, 175 – 8, 186. See also governance, for nonprofit organizations Liberty Mutual, 47 Lions Clubs, 148 local development enterprises, xi, 14 – 15, 17 – 19, 21 – 2, 24, 38, 67 – 9, 73, 75 – 7, 80, 82, 84, 87, 90, 95, 99, 108, 127 – 8, 323 – 5; characteristics of, 18; definition, 26. See also local economic development local economic development, 67 – 9, 71, 77, 90; definition, 26. See also local development enterprises Local Initiatives Support Coalition (LISC), 109 Local Sprouts, 50 Low Income Investment Fund, 74. See also community development financial institutions (CDFIs) low-profit limited liability company (L3C), 3, 6, 16, 18, 37, 53, 55 – 6, 60; definition, 26 manufactured home cooperatives, 87 – 9 Mariposa Food Coop, 50 market failure theory, 23 market-based organizations, 22 marketing cooperatives, 17 – 18; farm, 49 marketumbrella.org, 242 – 4

Index 385 Mary Reynolds Babcock Foundation, Inc., 152 – 7 Massachusetts Association of Community Development Corporations, 72 – 3 Medicaid, 4 – 5, 100 – 2, 105, 132, 252 Medicare, 4 – 5, 13, 100 – 2, 105, 132, 252 member financing, 4 – 5, 13, 100 – 2, 105, 132, 252 member-based associations, 70, 75, 103, 130, 179 – 81, 183, 186; vs. conventional businesses, 181. See also board design, memberbased associations; governance, member-based associations member-based organizations, 20, 170 membership fees, 22, 127, 130, 179, 257 – 8, 274 micro-credit, 265, 266 – 8. See also micro-finance micro-finance, 168, 261 – 2, 265 – 8. See also social finance Midlands Latino Community Development Corporation, 70. See also community development corporations mission creep, 99, 169 mixed economy, ix – x, 14, 23 – 4, 323 – 4 Mondragón Cooperative Corporation, 51, 55, 134 Monkeywrench Books, 50 Montana Food Bank Network, 56. See also Grimes, Peggy Mutual Aid, 10, 129 – 30, 143, 179 mutual associations, 140. See nonprofit mutual associations mutual insurance, 40 – 1, 43. See also insurance cooperatives Mutual of Omaha, 47

National Alliance of Community Economic Development Associations, 71 National American Women Suffrage Association, 126 National Association for the Advancement of Colored People (NAACP), 126, 141 National Association of Community Health Centers (NACHC), 103, 114 National Association of Latino Arts and Culture (NALAC), 141 National Coalition for the Homeless, 225 – 6 National Community Development Association (NCDA), 71 National Community Land Trusts, 87 – 8 National Cooperative Bank, 274 National Cooperative Business Association (NCBA), 41 – 2, 240 National Cooperative Grocers Association, 28, 31, 48 National Council of Women’s Organizations, 113 – 15 National Credit Union Administration (NCUA), 44 – 5, 109 National Health Service Corps Trust Fund, 105 National Organization of Women (NOW), 113 – 14, 126, 147 National Rural Electrical Cooperative Association (NREC), 85 – 6; interaction with the government, 86 Natural Step (TNS), 284, 289, 307 – 9, 311; and Global Reporting Initiative (GRI), 310

386 Index NCB Capital Impact, 74, 89. See also community development financial institutions (CDFIs)  NeighborWorks America, 89, 109 – 10, 115 neoliberal emphasis, 325 net impact, 12 New Door Ventures, 81 New Door’s Ally program, 81 New Jersey Community Development Corporation, 70. See also community development corporations newcomers, 141 Newman’s Own, 13, 54 – 5 Noah’s Ark Community Development Corporation Inc., 70. See also community development corporations nonmarket housing organizations, 19 Nonprofit Finance Fund, 277 – 8 nonprofit housing organizations, 97, 105 – 11. See also government, housing nonprofit mutual associations, 10 – 11, 20 – 1, 115, 127, 129 – 30, 142, 145, 151, 170, 179, 186; definition, 26; focusing of social needs, 20, 138 – 45; relating to the economy, 20, 130 – 8; and self-help, 143 – 5. See also community health centers; social clubs nonprofit organizations, vii, ix, 5, 9 – 10, 16, 20, 23, 25 – 6, 97, 99 – 101, 164, 169 – 70, 211, 225, 258, 266, 291 – 2, 326 – 7; compensation, 230 – 1; definition, 26; employee engagement, 231 – 2; employment in, 221, 227 – 9; motives to work

for, 229 – 30; and the private sector, 16; as social economy businesses, 17, 37, 51 – 3; tax exemption, 4 – 5, 9. See also board design, for nonprofit organizations; governance, for nonprofit organizations; government, partnership nonstock cooperatives, 258, 275 North American Students for Cooperation (NASCO), 108 North Carolina Association of Community Development Corporations (NCACDC), 71 not-for-profit organization. See nonprofit organization Oakland Symphony, 207 – 8 OAR Fairfax, 295 – 9 Obama, Barack, 102, 119, 140 Obamacare, 105, 135. See also Affordable Care Act Ocean Spray, 41, 49 Office on Violence Against Women (OVW), 113 – 15 opportunity costs, viii, 293 – 4. See also volunteers, estimating the value of opportunity threads, 50 Organically Grown Company, 308 – 9 organizational design, 161 – 2, 165 – 70, 173, 186, 324 other workplace associations, 20, 128, 130, 134 Partners for the Common Good, 74 Patagonia, 58. See also benefit corporations   patient capital, 272 – 3 Pedal Revolution, 81 Per Scholas, 78

Index 387 performing arts organizations, 18, 82 Pets on Wheels of Scottsdale, 234 – 5 Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, 11, 46 political action committees (PACs), 131, 146 political parties, 146 Positive Vibe Café, 81 private foundations, 4, 27, 56, 73, 153, 263, 270 – 2 private nonprofit universities, 23, 325 private sector business, 13, 18, 23, 32, 37, 90, 128, 130, 179, 325; vs. cooperatives, 40; vs. social economy businesses, 17, 27, 37, 59; vs. social economy organizations, 24. See also business associations producer cooperatives, 42, 48 – 9 professional associations, 20, 22, 128, 134 – 6 profit-distribution constraint, 10 profit-oriented businesses, 11, 12, 284, 286, 291 public broadcasting. See Corporation for Public Broadcasting public sector nonprofits, xi, 14 – 15, 17, 19 – 20, 22 – 4, 38, 68, 71, 97 – 9, 101, 103, 114 – 15, 118, 128, 173, 323 – 5; vs. civil society organizations, 127; definition, 27, 97; history of, 99 – 101; relationship with the government, 19 – 20, 22, 27, 97 – 9, 101, 103, 109, 112, 114 – 16; and universities, 325 public sector organizations, 4, 22, 137 public service organizations, 20, 22, 125, 146 – 9

purchasing cooperatives, 42, 49 – 50, 62 Putnam, Robert, 125 Quakers, 140 rape crisis centers, 19, 97, 101, 111 – 15, 184 Rape, Abuse and Incest National Network (RAINN), 112 – 15 Reagan, Ronald, 62, 101, 120 Recreational Equipment, Inc. (REI), 181 – 2 RecycleForce, 82 Red and Black Cafe, 50 Red Feather Development Group, 91 – 6 Reinvestment Fund of Philadelphia, 74. See also community development financial institutions (CDFIs) religious congregations and orders, 20, 139 – 41; charitable contributions to, 139 replacement costs, 293 – 5. See also volunteers, estimating the value of Rivanna Natural Designs, 58 – 9. See also benefit corporations ROC USA, Resident-Owned Communities, 89 – 90 Roca, 209 Rochdale Principles, 30, 39, 43, 173, 180 – 1, 226, 236, 239 – 40, 242, 274 Roosevelt, Franklin D., 62, 85, 100, 102, 107, 131 Rotary Club, 148 rural electrification cooperatives, 47, 85 – 7; interaction with the government, 86 – 7. See also National Rural Electric Cooperative Association

388 Index rural infrastructure development organizations, 18, 84 – 7 rural telephone cooperatives, 47, 85 Salamon, Lester, 23, 97 – 8, 118, 326 – 7 Salvation Army, 81, 140 Schulze-Delitzsch, Hermann, 45 second-tier cooperatives, 26, 44, 85 – 6, 141, 180, 237 self-help, 10 – 11, 73, 75, 129, 143, 145; and business improvement districts, 75; groups, 10, 20, 125, 128, 143 – 5; and nonprofit mutual associations, 143 – 5 Self-Help (financing institution), 279 – 84 Services Training Officers Prosecutors (STOP) Violence Against Women, 115 sexual abuse centers. See rape crisis centers sexual assault centers. See rape crisis centers Slow Money Alliance, 273 social accounting, xi, 17, 284 – 9, 291 – 2, 300, 303 – 4, 306 – 7, 309, 311, 324; definition, 285. See also assigning proxy values; conventional accounting; critical accounting; expanded value added statement (EVAS) social audit, 285 social businesses, 13, 17 – 18, 21, 24, 37, 53 – 5, 60, 80, 323; definition, 53 – 4; vs. social economy businesses, 18, 53 social capital, 125, 135, 257 social clubs, 20, 22, 125, 128, 142 – 3, 179 social economy businesses, xi, 12 – 15, 17 – 18, 21, 23 – 4, 26, 37 – 8,

48, 53, 59 – 60, 68, 99, 128 – 9, 179, 323 – 4; and benefit corporations, 57; vs. civil society organizations, 127; and consumer cooperatives, 48; definition, 27, 37; vs. local development enterprises, 18 – 19, 26, 69; nonprofits as, 51 – 2; and universities, 23, 325; vs. social businesses, 18, 53 social economy organizations, x, xi, 4, 7, 10 – 13, 15, 24, 27, 46, 55, 71, 97, 150, 163 – 4, 167, 170, 172, 175 – 6, 183, 185 – 6, 192, 208, 210, 214, 221, 223, 228, 230, 233, 241, 244, 252, 256 – 8, 261 – 2, 264, 268 – 9, 278, 284 – 8, 290 – 1, 299 – 300, 306, 310 – 12, 325, 326; definition, 27 social economy definition, 27; framework, vii, viii, ix, x, 3, 14 – 18, 21, 23 – 5, 38, 52, 68 – 9, 71, 99, 113, 118, 127 – 8, 138, 278, 323 – 5 social enterprise, 6, 56, 70, 81, 101, 164, 228 – 9, 235 – 6, 241; and financing, 252, 257 – 8, 260 – 1, 268, 278 social finance, 252, 261 – 3, 265 social movement, 8, 39, 45, 49, 62, 63, 69, 101, 111, 126, 132 – 3, 140 – 1, 165, 187, 191, 222, 225, 246, 266, 268, 271 social objectives, ix, x, xi, 3 – 4, 6 – 8, 10, 12 – 13, 15, 17 – 18, 21, 23 – 4, 26 – 7, 37, 46, 53 – 4, 59, 67, 226, 259 social return on investment (SROI), 284, 288 – 9, 300 – 2, 311; principles, 303 – 4 social wealth, 24 sociopolitical organizations, 20, 125, 145 – 7, 151 St. Mary’s Cooperative Credit Association/ St. Mary’s Bank, 11, 45 

Index 389 stakeholders, 60, 104, 163, 175, 185, 199 – 200, 205, 207, 209 – 10, 223, 228, 241 – 3, 284 – 7, 290, 297, 299 – 301, 305 – 7; definition, 285 – 6; primary, 173, 286; secondary, 286. See also social return on investment (SROI), principles starvation cycle, 210 Statute of Charitable Uses, 8 Statute of Elizabeth, 8 Stewards of Affordable Housing for the Future, 108 stock cooperatives, 258, 275 strategic management, xi, 17, 192, 206 – 7, 210 – 11, 214, 324 strategic managers, 211 – 13 strategic planning, 192, 206 – 10, 242, 301; and human resources management, 224 – 5 Sunkist, 41, 49 Sun-Maid, 41, 49 Susan G. Komen for the Cure (Komen), 192 – 3 sustainability, 26, 43, 68, 92, 95, 202, 226, 248, 269 – 70, 284, 287, 305 – 11, 314, 326; reporting, 289, 304 – 6, 309 – 11. See also social accounting sustainable development, 39, 274, 305, 308, 311 SWOT, 183, 208 tax exemption, 4, 9, 52. See also taxexempt organization tax-exempt organization, 9, 89, 253; definition, 27. See also tax exemption Texas Association of Community Development Corporations, 71 third-tier cooperatives, 26, 173 Toledo Community Development Corporation, 70. See also

community development corporations Triangle Residential Options for Substance Abusers (TROSA), 82 TRICARE, 102 True Value, 41, 49 Truman, Harry S., 102, 107 Tucson Botanical Gardens, 255 – 6 umbrella organizations, 10, 39, 71, 142, 148, 173 Union Cab, 50 unions, 20, 22, 27, 125, 128, 130 – 4, 139, 141, 146, 183, 295; business unionism, 131. See also credit unions Unitarian Universalist congregations, 140 United Nations Global Compact, 200, 226 – 7 United Parcel Service, Inc. (UPS), 270 – 1 United States Department of Housing and Urban Development (HUD), 71, 94, 106 – 7 United States Federation of Worker Cooperatives, 51 United Way, 21, 149 – 50, 173; of America, 150, 161 – 2 US Chamber of Commerce, 130 – 3 USA Track & Field (USTF), 142 Violence Against Women Act, 113, 115 Violence Against Women Survey (NVAWS), 111 volunteers, ix, 10, 22, 27, 29 – 31, 72, 83, 93, 95, 101, 112, 127, 129, 139, 140, 146, 148 – 51, 161, 172 – 3, 176, 185, 187, 190, 192, 203, 208, 216 – 19, 225, 229, 232 – 5, 241, 247,

390 Index 255 – 8, 269 – 71, 286, 306, 313 – 18, 324; estimating value of, 289 – 99; reliance on, 107, 131, 135, 142, 149, 172, 176, 225, 234, 241, 284; value of, 5, 7, 31, 112, 222, 233, 255 – 8, 289 – 99 Wallace, George, 125 – 6 water cooperatives, 47; rural, 85 Welch’s, 41, 49 Wheeler Creek Community Development Corporation, 69. See also community development corporations   Wikipedia, 149 W.K. Kellogg Foundation, 264 women’s shelters. See rape crisis centers

women’s suffrage, 126 worker cooperative, 37 – 8, 42, 50 – 1, 61, 63 – 4, 134, 183 – 5, 236 – 7 workforce development in the District of Columbia, 78 – 80 workforce development organizations, 18, 77 workforce enterprises for marginal social groups, 18, 80 – 2 workforce training, 67, 77 Yakima Neighborhood Health Services, 103 YMCA, 18, 52 Yunus, Muhammad, 13, 53 – 4, 265 – 6. See also Grameen Bank YWCA, 52