Business Models

Is It Against The Law To Pay Me More?

by

You may have heard about Dan Palotta’s recent TED Talk about how judging charities on concepts like administrative overhead ratios is hobbling their ability to solve huge problems.

He makes some persuasive points, though some of the concerns I had with his proposals when they appeared on the Harvard Business Review blog three years ago still remain.

Gene Takagi picked up on the talk and addressed legal considerations which would prevent non-profits from operating in the manner Palotta suggests. (Just to be clear, Palotta never suggests charities cleave to non-profit status.)

Takagi notes that charity pay scales are limited by laws governing 501 c 3s and so can’t compete well on salary if supporters show tolerance for doing so to attract the best talent. Expenditures are limited in much the same manner,

“If a for-profit spends 90 cents to make $1, it may be a perfectly acceptable profit margin, but if a charity spends 90 cents to make $1, it would be widely viewed as a terrible waste. As a result, many charities fail to properly report their fundraising expenses, and the IRS has raised the possibility of utilizing the controversial commensurate test, which addresses whether a charity is using its resource in line with its charitable mission…But this can’t be judged strictly on percentages, and charities should be allowed to experiment so if an honest fundraising and mission awareness-raising campaign fails, the charity isn’t slaughtered for it. The problem, however, is not the law, but the misguided public ideology of which Dan spoke.”

Charities are also often limited and discouraged from pursuing new revenue ideas by federal and state laws as well as popular sentiment.

I think the biggest question that this whole discussion raises for me is whether social attitudes are such that a for-profit company raising money for social issues will be tolerated. Given that people will give money to projects via things like Kickstarter without much consideration about whether it is non-profit or not, is the idea that non-profits do things that companies won’t due to lack of profitability and governments can’t/won’t due to lack of political will and expertise, over?

Currently I think there is a capricious element to Kickstarter campaigns that make it an unsuitable model for garnering long term support. However the very existence of such mechanisms may be shifting mindsets to a place where worthiness and overhead ratios are not mutually exclusive.

What About Artists On Corporate Boards?

by

A posting by Alex Tabarrok today on Marginal Revolution inspired some “what’s good for the goose…” thinking for me today. He links to a study showing that academics on corporate boards tend to keep the company healthy.

I am not going to suggest putting arts and culture people on corporate boards will automatically help a corporation any more than encouraging them to settle in a city will make the area more economically prosperous. However, many of the impacts the study finds academics (both professors and administrators) have on companies appear to be ones that arts professionals might bring as well.

First, academic directors are outside directors with relatively strong reputations and a tradition of independent thinking. They are trained to be critical thinkers with their own opinions and judgments, and they are less influenced by others and can be tough when necessary (Jiang and Murphy, 2007)…Fama (1980) and Fama and Jensen (1983) argue that outside directors have incentives to monitor management because they want to protect their reputation as effective, independent decision makers. Thus, the monitoring theory indicates that academic directors would be important monitors of management.

Obviously, not all professors would make good directors, nor would all arts people. However, arts people have that tradition of independent thinking and an almost inborn fear of being labeled a sell-out which can motivate them to speak their concerns.

Third, academic directors’ primary areas of expertise are academic in nature. They tend to think through problems differently than nonacademics and can provide different perspectives in the boardroom, which adds to the board’s diversity. Prior studies find that board diversity (such as occupational diversity, social diversity, gender diversity, and ethnic diversity) is an important factor that influences board efficacy and firm performance

If arts people don’t bring a different perspective to things, I don’t know who will.

The area the study found that academics contributed most to a company was in relation to oversight. As I read the following, it seemed that non-profit board meetings and the attendant committee meetings, something that is at the center of both a professor and an arts administrator’s life, might actually be an asset.

“We find that academic directors are more likely to attend board meetings than other outside directors. In addition, academic directors hold more outstanding committee memberships than other outside directors. Specifically, academic directors are more likely to sit on monitoring-related committees, such as auditing committees and corporate governance committees, than nonacademic outside directors. The results on the director attendance behavior and committee assignments indicate that academic directors are better at board governance than other outside directors.”

Other benefits to oversight the study found was that CEO turnover was more closely tied with company performance and the financial operations were run in such a way there were fewer Securities and Exchange Commission investigations of the top executives when academics sat on the board. Companies with academics on the board also tended to be more innovative.

Now, of course, the disclaimers. Not all types of companies had academics on the boards and the study finds that different types of companies benefited from different board compositions.

Business professors were the most effective board members. Other types of academic fields mentioned were technology and law. This is not to say that arts people wouldn’t be effective because it doesn’t appear that too many liberal arts professors were asked to serve. It is something of an unknown quality.

If corporations are valuing creativity and critical thinking from employees, especially recent college graduates, they could presumably benefit from tapping those who teach them.

Likewise, they could benefit from arts people who are not only creative, critical thinkers, but are constantly cobbling together coalitions to pursue projects.

But the potentially biggest impediment to effective service on a for-profit board for both academics and arts people is whether they are dependent on the corporation upon whose board they serve for support.

“Furthermore, some academic directors hold administrative positions and thus may have connections to companies through university endowments or other fundraising relationships, which may make them less independent than inside managers.”

Still, it is interesting to think about the potential benefits to a corporation to have an arts person serve on the board.

In wondering why it doesn’t happen more often, I came to the not inconsiderable or illogical conclusion that corporations may not view those who ask them for money as equal to the task of helping them make money.

Trying New Things With No Apparent Benefit

by

Something a former employer has started doing has reminded me to always keep your options and mind open even if the potential value is unclear.

I used to coordinate the operations for the Appel Farm Arts and Music Festival. A few years ago, one of the board members, (now executive director), had the idea to offer a 25 mile bike ride on the festival day. I believe this year will be the third year they are doing it.

Because the festival is outdoors in a rural area, having a bike ride does fit the vibe of the event and the lifestyle of many of those who attend. But I gotta tell you, it would have never occurred to me that people would be up for a 25 mile ride followed by a full day attending an arts and music festival.

Just thinking about it is exhausting to me. Also, most of the audience does not live in the immediate area. Will people really want to haul their bikes to south Jersey to do this ride and attend the festival?

Just based on my experience living where I do now, I know there are enough bike enthusiasts who won’t hesitate to answer yes to all of the above. 10 years ago, I would have discounted the idea. And in fact, maybe all the elements weren’t in place to make it an attractive option back then.

As the guy responsible for all the logistics for the event, there are details related to adding the ride that would have concerned me and made me resist it. But there was a good volunteer corps that supported the festival so none of the details would have been too troubling in the end.

I applaud them for making the initial investment of time and energy to try it out. It is easy to advocate for experimenting and trying new things, but there are always practical considerations. The festival is a big event and to add something new diverts attention away from the core activity.

It may sound simple to gather a bunch of people on bikes, send them on a ride and make sure to have water and snacks available at the planned rest stops. There is still a lot of planning and tracking involved with the ride and I imagine the festival staff and volunteers make it look a lot easier than it is.

I think that it can sometimes be easier to diverge from the core mission of the organization in order to chase funding and grant money, but more difficult to add activities which complement existing programs but do not have a clear potential for financial gain.

I am not saying this was the case with the bike ride. They may have seen the opportunity to add 50 new attendees for all I know. I am just observing what is a potential paradox of just about any business. It is easy to get sidetracked by the prospect of new opportunities to the detriment of enhancing the value of existing conditions.

People may think that doing something with no apparent benefit is the cornerstone of a non-profit organization’s existence, but living and working under that philosophy doesn’t make the decisions any easier–especially when you are frequently enjoined to act more like a business.

Toward Better Organizational Self-Evaluation

by

I have been thinking a bit more on my post about when you get your first hint that things aren’t going well for your organization. I haven’t thought up any more interesting warning signs, but I have been thinking about the “after action” conversations between staff members I mentioned.

It isn’t necessarily a sign that things are going downhill, but I do think at least a semi-formal post mortem discussion that leads to action is necessary for the health of the organization. If people gather around the water cooler, talk about how great the show was, sigh “if only more people were in the audience” and then go back to their desks leaving it to the marketing department to fix or hoping things are better next time around, that isn’t really constructive.

I have worked for companies where a post mortem discussion focused on the technical issues that needed to be fixed/learned from the next time around, but I have come to realize that development, marketing and audience services need to be given equal time. And they need to be at the same meeting with the technicians.

I will be the first to admit I don’t do this to the extent I am envisioning it should be done as I write this.

There may be smaller meetings prior to the post mortem where each department collects their thoughts so they can summarize their victories and challenges and keep the meeting short. But if you are going to embrace the idea that responsibility for marketing and development are shared across the organization, then every department probably needs to be largely present.

It is too easy otherwise for those who are not present to feel disconnected and uninvested in the central goals of the organization, inhibiting long term progress.

It can be easy to address concrete technical problems like broken equipment and missed cues. It is more difficult to figure out intangible things like how to attract audiences and motivate volunteers. When the decision is made to have a cabaret in the lobby prior shows in order to engage audiences as they arrive, it is better that the tech people were in on that entire discussion and know the motivation rather than being told they now needs to support a cabaret before every show.

Probably annually there should be a discussion about whether what the organization is doing is working. The ultimate decision will be up to the board, but the staff are all experts in their respective fields. They may be best positioned to say whether what the organization is doing is working. If the season is programmed out of a sense of obligation (seven shows, Shakespeare in the Fall, Musical in the Spring) rather than as an acknowledgement of the current operating environment and community, then the impetus for change and the supporting evidence may need to come from the organization’s staff.

Admittedly, it is difficult to move against the inertia of an organization’s history and business model for both staff and board. I don’t know that a staff would initiate a radical change. On the other hand, if they were regularly involved with providing feedback and saw it was often acted up, who know what people might feel empowered to suggest.

The impetus for this post came not only from thinking about the warning signs post from last month, but also thinking about a post I did from a year about about founding arts organizations with planned expiration dates. Though I thought expiration dates are a great idea, I wondered if anyone would have the fortitude to do it.

From there my thoughts turned to the concept that any business should always strive to do things a little better the next time around. I figure there is a better chance of arts organizations putting a self-evaluation process in place than planning for their own demise. Given that, I started thinking about what practices need to be in place to allow an arts organization to be responsive to changing times?

What I would really be interested in is knowing if anyone works for any sort of organization or business that has institutionalized a really effective self-reflective process like this. What about the corporate/organizational culture has made it so effective?

People will avoid the mechanical imposition of this sort of structure so there needs to be some whole hearted investment by the employees. I would bet that any organization that does a good job examining themselves also has a highly effective personnel review process.