As nonprofit organizations earn more unrelated business income—through such activities as merchandise sales or renting their donor lists—the proportion of their budgets that they spend on programs goes down, according to a new report.
The study analyzed 700 informational tax returns filed by 150 social-service organizations in Manhattan for the years 2000 to 2005. It was conducted by Rebecca Tekula, executive director of the Helene and Grant Wilson Center for Social Entrepreneurship at Pace University, in New York.
Ms. Tekula says that research in corporate finance has found that diversification leads to a loss of value at for-profit companies and that high-performing divisions subsidize less successful lines of business. She speculates that the same thing is true for nonprofit organizations.
“Stakeholders of nonprofits really need to ask themselves the question, 'Should we really be in the business of business?’ and not blindly go towards it because a donor encourages them or they read a case study of another organization that does it successfully,” says Ms. Tekula.
Not everyone in the nonprofit world agrees on the meaning of the study’s findings.
Steve Goldberg, author of Billions of Drops in Millions of Buckets, a book about philanthropy, takes issue with the study’s methodology. In the report, Ms. Tekula explains that she’s using the percentage of income spent on programs as a proxy for the group’s social benefit.
“That’s the equivalent to saying that overhead is an unproductive expenditure for a nonprofit organization,” Mr. Goldberg said. “We have learned in recent years that, although we all believed that forever, that is an unfounded and dangerous belief to hold.”
He also worries that people outside of academe who read about the paper will miss the distinction between unrelated business income, which is what the study analyzed, and business ventures that charities run that are related to their missions.
For her part, Ms. Tekula thinks that the study points to a need for more rigorous study of the field of social enterprise.
“We need to move beyond anecdotes that X organization does a really good job of earning money,” she says.