A Good Comparison Between NonProfit and ForProfit

In yesterday’s article, I spent a good but of time ripping up what I thought was an inaccurate comparison between for profit and non profit organization.  But there are some rules the for profit industry has to follow that the non profit industry is exempt from; but if managers were required to follow these same rules, nonprofits would be forced to adopt better financial practices and procedures.

Specifically, I’m talking about the rules established by the SEC.  This government agency guarantees that any individual can have access to a wealth of information about an individual company.  The only way a potential investor won’t have access to accurate quarterly financial information is if the company intentionally reports false data.  Here’s how the SEC describes its mission:

The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public, which provides a common pool of knowledge for all investors to use to judge for themselves if a company’s securities are a good investment. Only through the steady flow of timely, comprehensive and accurate information can people make sound investment decisions.

As a result, anyone can go online to the SEC website and obtain detailed information about any company.  And if you don’t know what you’re doing, the SEC has a step by step guide to help you understand what you’re looking at:

If you can read a nutrition label or a baseball box score, you can learn to read basic financial statements. If you can follow a recipe or apply for a loan, you can learn basic accounting. The basics aren’t difficult and they aren’t rocket science.

So if the government can create a system to help investors learn about for profit companies then there is no reason why nonprofit companies can’t follow suit.  Yes, you can obtain nonprofit 990 forms which includes information about the organization which is reported to the IRS, but those documents are usually a few years behind and to obtain current information is a more complicated process.

It’s a shame that as an individual I can have access to a slew of financial information about a publicly traded company – including balance sheets, income statements, cash flow statements, and statements of shareholders’ equity – but I can’t even begin to have an equal level of access to that same information for nonprofit groups; not even the musicians in an orchestra are allowed access to that level of information.
Seems odd though, doesn’t it?  If some organization is going to come to you and ask for donations don’t you think they should be willing to tell you how they are spending their money in at least as much detail as their for profit counterparts?

Microsoft hasn’t sent me an email asking me to buy stock, but I can still find out precisely how their executive retirement benefits have changed this past month (which they have).  But I received eight email requests for donations from various orchestras this month (so far) yet I can’t even have access to their generic business plan not to mention actual financial data.

You won’t see the government changing this system anytime soon.  The amount of time and effort it would take to implement this sort of system would be substantial, plus most orchestra managers and board executives like things just the way they are; the less information they have to share the better.

What’s going to need to happen is a handful of orchestras are going to have to begin imposing a sort of “self regulation” and begin behaving like their for profit counterparts by making a wide range of information available to the public on a quarterly basis.

This would radically change the way orchestras function on an administrative level, but for any associated negatives that may crop up, they’ll be easily offset by the positives.  Once other orchestras see the constructive results, they’ll all start to follow suit; then everyone will be better off.

About Drew McManus

"I hear that every time you show up to work with an orchestra, people get fired." Those were the first words out of an executive's mouth after her board chair introduced us. That executive is now a dear colleague and friend but the day that consulting contract began with her orchestra, she was convinced I was a hatchet-man brought in by the board to clean house.

I understand where the trepidation comes from as a great deal of my consulting and technology provider work for arts organizations involves due diligence, separating fact from fiction, interpreting spin, as well as performance review and oversight. So yes, sometimes that work results in one or two individuals "aggressively embracing career change" but far more often than not, it reinforces and clarifies exactly what works and why.

In short, it doesn't matter if you know where all the bodies are buried if you can't keep your own clients out of the ground, and I'm fortunate enough to say that for more than 15 years, I've done exactly that for groups of all budget size from Qatar to Kathmandu.

For fun, I write a daily blog about the orchestra business, provide a platform for arts insiders to speak their mind, keep track of what people in this business get paid, help write a satirical cartoon about orchestra life, hack the arts, and love a good coffee drink.

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