UNIT 4 PHILOSOPHY AND NATURE OF NONPROFIT ORGANISATIONS

Contents
4.0 4.1 4.2 3.3 4-.4 4.5 4.6 4.7 4.8 4.9 Aims and Objectives Introduction Essential Attributes Transformation of Nonprofit Organisations Theoretical Approaches to Nonprofit Organisations Nonprofit Organisations and the Market Future Prospects of Nonprofit Organisations Let Us Sum Up Suggested Readings and References Model Answers

4.0 AIMS AND OBJECTIVES

The main aim of this unit is to acquaint you with nature and character of nonprofit organisations in modem economy and society. We will describe the essential attributes and main characteristics of contemporary nonprofit organisations. You will learn about the theoretical approaches to nonprofit organisations and the nature of relationship between nonprofit sector and market. At the end, we will also explain the future prospects of nonprofit organisations. After studying this unit you should be able to : identify the essential attributes of nonprofit organisations; describe the transformation of nonprofit organisations; depict the main characteristics of contelnporary nonprofit organisations; analyse the theoretical approaches to nonprofit organisations; differentiate between economic and sociological approaches; understand the relationship between nonprofit organisations and market; and explain the future prospects of nonprofit organisations.

4.1 INTRODUCTION
The existence of nonprofit organisations in modern societies is a unique phenomenon. The significance, role and contribution of these organisatioks is extremely valuable to the functioning of market economies. The structural location of nonprofit sector vis-a-vis state and market and its advantageous positioning in the pluralistic welfare system (in provision of goods and services) has evoked considerable academic interest in recent times. In this unit we will explain to you the important aspects of nonprofit organisations. At the very outset, we will explain the essential attributes of nonprofit organisations. You will learn about the basic philosophical tenet that 'profit' or personal economic gain is not the sole motivation that determines the economic behaviour of individuals in society. This philosophical tenet lies at the root of nonprofit organisations. While explaining main attributes we will also explain the general definitional aspects of nonprofit organisations.

After that we will analyse the transformation of nonprofit organisations in the context of the crisis of welfare state. Retreat of welfare state created vital space for the growth of nonprofit organisations since they played a vital role in meeting the demand of goods and services in society. In this process they also acquired new innovative characteristics suitable to their functioning in modem market economies. You will learn about the main characteristics of contemporary nonprofit organisations. Next, we will discuss the theoretical approaches to nonprofit organisations. We have analysed the crucial issues inherent in the economic and sociological approaches which are of vital significance to the functioning of 'nonprofit organisations in a modern society. You will learn that Weisbrod's approach is rooted in 'state failure' and Hansmann's approach that is based on the philosophical tenet of 'contract failure'. You will also learn that unlike rational-choice models inherent in economic approaches, the sociological approaches give an entirely different treatment to notions of 'trust' and 'rationality' while analyzing the existence and functioning of nonprofit organisations. There is a unique relationship between nonprofit organisations and market structure in modern economies. We will describe the salient features of this relationship, more specifically in the context of for-profit business organisations. We will also explain the significance and relevance of regulatory environment, financial resources and labour market to the functioning of contemporary nonprofit organisations. Lastly, we will furnish a broad description of future prospects of nonprofit organisations. You will learn that there is a whole range of complex issues which may influence the future evolution of nonprofit organisations in a modern society.

Philosophy and Nature of Organisations

4.2 ESSENTIAL ATTRIBUTES

In this section, we will describe the essential attributes of nonprofit organisations. You will learn that the main attributes of nonprofit organisations are : a formal organisation; independence from state; self-governing; nondistribution of profit and voluntarism. We will also acquaint you with the general definitional aspects of nonprofit organisations. The existence of nonprofit organisations in a market economy is undoubtedly a unique phenomenon. The fundamental assumption inherent in such organisations is that 'profit' or 'personal economic gain' is not the sole motivation for determining the economic behaviour of human beings. There are certain needs of individuals in modern society which can not be satisfied through the self-interested pursuit of 'profit' in market relations. Many a times markets do not respond or are simply not interested in producing goods or services which are not economically rewarding to producers. Sometimes, the special nature of goods or services requires such small scales of production as are not profitable at all. Even at times, monopoly of market produces goods or services of substandard quality for the capitive clients; hence there is always a craving for quality goods. On the other hand, there are always many areas or services or goods which usually remain unattended or ignored by a modern state. In such a situation interested people come together and establish non-profit organisations to produce goods or services (not-for-profit) either for the benefit of its members or for wider use of community or society. Nonprofit organisations which produce goods for more or less, exclusively, for the benefit of its members are called mutual-benefit organisations. The others, which serve the broader interest of community or some vulnerable sections of society are called public benefit organisations. A fundamental distinction between voluntary organisations (including NGOs) and non-profit organisations is of critical importance in this context. One of the essential characteristics 'intrinsic to voluntary organisations is that they are also non-profit

Voluntarism, State and Society

in nature. Non-profit organisations discussed here are those which directly enter into the process of production of goods and services. They also generate revenue from sales af goods and services to its members or various sections of society. The underlying fundamental distinction is that non-profit organisations come into direct competition with other for-profit organisations is the market. By adhering to social ethos of non-profit, non-profit organisations struggle to produce high quality goods and services and are able to sell such goods and services at competitive price (at a substantial lower price than those produced by for-profit organisations) to its members or particular sections of society. Many a voluntary organisations (including NGOs) also charge nominal fees for providing goods or services in society. Such an exercise pertains to only supplementing their resources and usually does not become the predominant means of generating resources. On the other hand non-profit organisations have all the characteristics inherent in voluntary organisations except that they come into direct competition with for-profit organisations in the market while being engaged in the process of production and sales of goods and services in society. The production and sales of goods and services by directly competing with market forces, becomes the main source of revenue generation for non-profit organisations. Nonprofit organisations display a diversity in regard to their structure, specifically, the source of finance and the nature of control exercised to run an organisation. An organisation which is mainly dependent upon donations is characterized as 'donative' type. In case a non-profit organisation generates revenues from sales of goods or services, it is characterized as a 'commercial' type. Further, a nonprofit organisation which is controlled by its patrons (i.e. original members who joined together to establish it) is described as belonging to a mutual type. In case an organisation expands its production or services and in turn is controlled by board of directors, it is known as entrepreneurial type. Combining these essential criteria nonprofit organis'ations are categorised as : donative mutual: donative entrepreneurial; commercial mutual; and commercial entrepreneurial. Notwithstanding these distinctions, according to Jeremy Kendall and Mastin Knapp (1993), a nonprofit organisation must possess the following essential attributes : i)

Formal Organisation : A Nonprofit organisation must have a formal organisation with a charter, a constitution or sets of rules, formally registered with public body (including tax authorities), possibly incorporated under company law and SO on.

ii) Independent of State : A nonprofit organisation should be constitutionally or institutionally independent of state. It should not be controlled by any for-profit organisation or an institution of state. In practice the nature and extent of independence from state is essentially a dynamic relationship between state and a nonprofit organisation. Literature suggests that there is always some concern about state control over nonprofit sector via the medium of funding or other financial mechanisms. How to draw a line between independence and dependence? Ideally, it is argued that key indicator of independence is the way a nonprofit organisation exercises control over its own constitution and makes decisions about resource allocations in consonance with its stated aims, objectives and goals. iii) Self-Governing : Non-profit organisation must be a self-governing body having its own internal decision making structures. Control by patrons (donors or clients) is the principal reason d'etre for nonprofit organisations. However, as noted above, some non-profit organisations are controlled by a 'self-perpetuating board of directors and are called 'entrepreneurial' in contrast to 'mutual' which are controlled by patrons of the organisation. iv) Non-distribution of 'Profit' : The most fundamental attribute of a nonprofit organisation is the 'non-distribution constraint of profit'. A nonprofit organisation

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can not distribute its net profits among members, officials, directors or trustees who exercise control over such an organisation. No doubt, profits can be earned but such profits must be invested back in the nonprofit organisation. The trustees can not display any interest in the 'profits' since specific constraints on the redistribution of profits are usually imposed by the state. v) Voluntarism : Voluntarism is another significant attribute of a nonprofit organisation. It means that individuals who come together to establish such an organisation should become members according to their own choice and free will. No person should be forced to become member, patron or participant. The members and office bearers should have the independence and autonomy to make decisions. Further, ideally members or patrons must make voluntary philanthropic donations to the organisation. Even if a major share of income comes from state funding or from fees charged for services from clients, a certain degree of voluntary contribution from members must remain an integral part of nonprofit organisation. This key attribute nurtures the trust and good will of community or society towards a nonprofit organisation.

Philosophy and Nature of Organisations

4.2.1 Definitional Aspects

The above discussed attributes are crucial to the existence of nonprofit organisations. Peter Dobkin Hall (1987) furnishes a very broad definition of nonprofit organisation as a body of individuals who associate for any of the following three purposes : i)
ii)

to perform public tasks for which there is a demand that neither the state nor for-profit organisations are willing to fulfill; to perform public tasks which are usually delegated by the state; and

iii) influence the nature and character of policies of the state, for profit sector or other nonprofit organisations. Peter Dobkin Hall further noted that nonprofit organisations exist and flourish under certain specific ideological, political, social and economic conditions which, in turn, are shaped by particular historical processes and experiences. By ideological, he means that individuals establishing a nonprofit organisation consider the will of state as the collective will (general will) of the people. This view that sovereignty resides in the collective will of the people, finds political expression in institutional and legislative forms such as grants of incorporation, tax exemptions and regulations which provide incentives to individuals for making donations to nonprofit organisations. It further gets translated into various juridical devices (for instance, equity jurisdiction) that encourage collective action and creates scope for allocation and administration of property for future general good of society. Such ideological and political conditions can materialize only in a social context where individuals are socialized to value responsible autonomy. And the modes of governance and authority are conductive to compliance rather than coercion. Reinforcing all these conditions is the economic system in which individuals can utilize their resources and productive energies according to their own discretion and choices in the free market relations. In this sense, nonprofit sector is a distinct phenomenon rooted in democracy and capitalism. Hence in western democratic societies and capitalist economies there is a significant growth and diversity of nonprofit organisations. Nonprofit organisations are most common in sectors as social services, health care, education and research, arts and culture and community development.

Check Your Progress I Note: a) Use the space given below for your answers.
b) Check your answer with the model answer given at the end of this Unit. 83

Voluntarism, State and Society

I ) The following statements have been based on the text that you have already read. Indicate whether these statements are true or false by putting tickmark (.\i ) in the relevant box. True False The fundamental assumption 'inherent' in nonprofit organisations is a) that 'profit' is not the sole motivation that determines economic behaviour [ I [ ] of individuals.
b)

Nonprofit organisations which produce goods or services exclusively for the benefit of its members are called mutual-benefit organisations.

1 1 1 1
C) Nonprofit organisation which is dependent upon donations is called [ I [ ] 'donative type'. d) A nonprofit organisation need not have a formal organisation. [ ] [ ] e) A nonprofit organisation functions fully under the control of state.

[ I [ ]
f)
A fundamental attribute of a nonprofit organisation is the 'non-distributive [ I [ ] constraint'.

g) Voluntarism is not related to existence of nonprofit organisations.

[ I l l
h) Nonprofit sector is a distinct phenomenon rooted in democracy and capitalism. [I[]

2) Explain in brief, the definitional aspects of a nonprofit organisation. (Hint : see the text)

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4.3 TRANSFORMATION OF NONPROFIT ORGANISATIONS

In this section, we will furnish, in brief, the process of transformation of nonprofit organisations. We will explain to you the nature of change in the character of nonprofit organisations with the rise of welfare state. Later, the crisis and retreat of welfare state created social space for the expansion of nonprofit organisations in the provision of goods and services in society. The process radically transformed the nature and character of nonprofit organisations. We will describe the salient aspects of the main characteristics of contemporary nonprofit organisations. The characteristics of nonprofit organisations vary from country to country. The constitution, legal and judicial system, tax and regulatory institutions of a.country influence the nature and character of nonprofit organisations. Further, factors such as social values, cultural attitudes, religious traditions and people's disposition towards state also shape the overall existence of non-profit sector in a society. Democratic societies have long-established philanthropic and voluntary traditions, laws and policies which generally encourage private nonprofit initiatives to enhance public interest and general well being of people.

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The fundamental tenet of nonprofit was very well inherent in traditional (religious) philanthropic and charitable pursuits in history. The role of traditional philanthropy and charities mostly remained limited to extending help to poor, destitutes, disabled and so on or providing relief during times of natural disaster. Nonprofit organisations acquired innovative characteristics such as production or distribution of goods, valueaddition, and improvement in quality of services with the rise of democracy, modem state and capitalist mode of production. What is more, the true significance and relevance of nonprofit organisations was realized during the crisis of the welfare state.

Pbilosoph~and Nature of Nonprofit Organisations

4.3.1 Welfare State and Nonprofit Organisations

A perceptive analysis of transformation of nonprofit organisations is furnished by Carlo Borzaga and Alceste Santuari (2000) in the context of welfare state. Notwithstanding the details of their analysis, we will present the essence of the argument which brings out the innovative characteristics associated with contemporary nonprofit organisations.

The rise of the welfare state in western Europe impinged on the existence of nonprofit organisations. Since late 1940s state policies were generally formulated around the concept of universal welfare of society. It was basically a system in which state authorities played a major role in delivery of collective goods and public services. Since the systems and institutions designed by state played a leading role in the welfare of society, the not-for-profit organisations came under serious pressure to change their basics for survival. The importance of not-for-profit organisations decreased. They increasingly started to concentrate their activities in fields having least economic or distributive implications. Consequences for nonprofit organisations were as follows : i)
A large number of nonprofit organisations changed their character vis-8-vis their original nature since they were compelled to exist within the public sector.

ii) Some nonprofit organisations were incorporated in the welfare system. They formally and legally remained private organisations but were subjected to administrative and bureaucratic controls, hence losing their autonomy.
iii) Nonprofit organisations which had not become a part of welfare system, were prevented from engaging in productive activities, i.e., production and distribution of public goods or services. Hence, role of non-profit organisations was reduced and remained more or less limited to advocacy functions.

4.3.2 Crisis of Welfare State : Transformation of Nonprofit Organisations

Since 1970s. welfare state started facing financial and organisational crisis in western Europe. In the beginning, the crisis was mainly fiscal in nature which resulted mainly from decline in the rates of economic growth and the rise of unemployment in most west European societies. Most west European states reacted to overcome this fiscal crisis by reforming and restructuring the welfare systems. Efforts were made to slow dawn or outrightly block the growth of public supply of social services. However, traditional economic solutions proved inadequate to respond to an ever-swelling demand for social services which had by now became highly differentiated and attentive to quality. This give birth ultimately to the legitimacy crisis of the welfare state. Welfare state attempted wider reforms in regard to the provision of welfare services. The reforms aimed at tailoring the supply of services to user's needs in order to reduce the impact on public budget of the state. Decentralisation of the process of decision making and implementation of policies, privatisation of services and shift

Voluntarism, State and Society

from passive to active labour and employment policies were some of the important measures adopted by the welfare state. Privatisation of social services provision was implemented by separating financial responsibility. The financial part was retained by public authorities. The services provision was contracted out to private enterprises. Welfare state even outrightly retreated from the production of some services. This resulted in substantial demand for private prbd;cers of social services and consequently opening new spaces for the growth of nonprofit initiatives within society. Decentralisation and consequent shift in responsibilities to local bodies (closer to citizens's needs) conferred legitimacy on nonprofit initiatives in civil society. The growth of nonprofit sector was further boosted since it ventured into areas hitherto ignored by for-profit enterprises in the market. To sum up : As a consequence of the crisis of the welfare state in western Europe since 1970s an increasing number of nonprofit organisations started providing social services, especially for groups adversely affected by economic crisis and not covered by public social policies. In the beginning, such initiatives were largely independent and voluntary in nature, autonomous from the state and often in contrast with the public policies of the state. However, during the decades of 1980s and 1990s, shift in public policies resulted in an increasing collaboration between institutions of state and nanprofit organisations. Systematic funding policies of state strengthened the existence of nonprofit organisations in civil society. Notwithstanding the substantial growth and economic dimensions, the contemporary nonprofit organisations acquired innovative characteristics suitable to the welfare and developmental needs of society.

4.3.3 Main Characteristics of Contemporary Nonprofit Organisations

The chwacteristics of contemporary nonprofit organisations which have emerged since 1970s in democratic societies are as follows : i) ii) They are predominantly engaged in entrepreneurial activities and production of goods and services. While organizing a productive activity they generate their resources from volunteers, donations, public funds and other sources, and are market oriented.

iii) They display innovations while providing social services and production of goods as for instance, rendering services to marginalized and vulnerable sections, empowerment of suppressed strata of society. iv) They contribute to the creation of jobs and training opportunities especially for unemployed youth. v) They establish strong linkages with well defined local communities and strive for the upliftment. vi) In principle, they do not distribute profits. However, they do not become blind victims of 'non distributive constraint' while striving to achieve clearly defined social goals. They give equal representations to stakeholders (members, patrons and others) and importance to democratic management and control of the organisation. Furthermore, as compared with traditional nonprofit organisations, the contemporary organisations are: i) ii) more independent and display autonomy since they depend upon plurality of resources, and relate with the state through contracts as independent organisations; more sensitive to generate employment opportunities for disadvantaged sections; because of this reason they usually display keen interest in collaboration with forprofit business organisations;

iii) alert to demarcate ownership, hence ensuring the involvement of members in self-management;
iv) usually small in size and completely embedded in local communities; v) interested in the creation of new services (ignored by other organisations) and willing to innovate to meet the social needs; and vi) not inclined towards advocacy, or consider advocacy as a secondary function. The most significant innovation of contemporary nonprofit organisation is the creation of 'multi-stakeholder' form of organisation. The administrationlmanagement, viz., executive board and membership aspects are shared by volunteers, workers, consumers and even representatives of public authorities, considering the different interests involved in the production of goods or services. Hence nonprofit organisations have transformed not only in respect to their goals but also in terms of operational methods and management of organisation.

Philosophy and Nature of Nonprofit Organisations

Check Your Progress I1 Note: a) Use the space given below for your answers.
b) Check your answer with the model answer given at the end of this Unit.

1) The following statements have been based on the text that you have already read. Indicate whether these statements are true or false by putting tickark (4) in the relevant box. True False a) Nonprofit organisations acquired such characteristics as production and distribution of 'goods' and 'services' along with the rise of democracy and capitalist mode of production. [ I [ ]
b) The crisis of welfare state led to wider reforms in regard to the provision of welfwe services. [ I [ ]

c) Privatisation of services did not result in contracting out provision of [ I [ ] services to nonprofit. d) The crisis of welfare state created space for the expansion of nonprofit organisations in the provision of goods and services to society.[ ] [ ]

e ) Nonprofit organisations are not engaged in the production and distribution [ I [ ] of goods and services. f) Nonprofit organisations usually generate their resources from volunteers, donations and membership fees, and other sources. [ I [ ]

g) Nonprofit organisations do not create any employment and training opportunities for unemployed youth. [ I [ ] h) Nonprofit organisations built strong linkages with local communities and strive for their upliftment. [ I [ ]

2) Compare the traditional and contemporary roles of nonprofit organisations. (Hint : see the text)

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Voluntarism, State and Society

4.4 THEORETICAL APPROACHES TO NONPROFIT ORGANISATIONS

The theoretical interest in nonprofit organisations is a relatively recent phenomenon. Till the end of 1970s, there were hardly any systematic studies on the dimensions of nonprofit sector. The initial theoretical interest stemmed from the realization that nonprofit had its own specific dynamics and considerable presence (number of organisations) in the process of production of goods and services, and generated employment opportunities in society. Since then attempts have been made to analyse the objective basis, dimensions and social and economic relevance of nonprofit sector in various societies. In the following, we will acquaint you with some of the important approaches to nonprofit organisations.

4.4.1 Economic Approaches

The existing economic approaches to nonprofit organisations can be broadly classified into two categories based on the concepts of 'state failure' and 'contract failure'. a)

Weisbrod's Approach of 'State Failure'

The concept of 'state failure' as the basis for the emergence of nonprofit organisation is considered in the theory developed by Weisbrod (1977, 1988) which is also known as 'public goods' theory. The essential argument of Weisbrod is that it is generally not possible for state to supply all the public goods in response to the 'demand' in society. The state will always make inadequate provisions as regarding the total quality af goods required in society. Further, state shall never have the means, resources and wherewithal to produce a diverse range of quality goods and services required to satisfy the tastes, preferences and choices of individuals in society. Basically, state can provide too few public goods and an insufficient range of them since the state is subject to various social, political and economic constraints and limitations. For instance, the cause of shortfall is identified in the political expediency of state. In order to stay in office, a government must satisfy the demand for public goods and services of the 'median voter'. The government will raise taxes to cover the cost of public goods and services. but there will always be people in society who will, be paying more taxes for the production of public goods and services than they actually want to meet their needs. On the other hand, there will be others for whom there are insufficient quality public goods or services available to suit their tastes, preferences 'or choices. The overall scenario will lead to the shortfall in the supply of private goods from government. According to Weisbrod, the unsatisfied demand will evoke a response in the private sector for the production of goods and services. In the case of public goods and services, it will be nonprofit organisations which represent a mechanism to satisfy the residual demand by means of private production of public goods. Hence the existence of nonprofit organisations in democratic and capitalist societies. On the one hand, there will be nonprofit organisations which may produce goods to satisfy the demand of its members only. On the other hand socially motivated nonprofit organisations may produce goods or services to satisfy the particular demands of disadvantaged, poor or marginalized sections of society. Weisbrod's theory is challenged with two major criticisms : i) The services of goods produced by a large number of nonprofit organisations do not subscribe to the domain of public goods and services. Rather, they represent private goods and services bringing in picture a direct competition between state, private for-profit businesses, and nonprofit organisations. Such competition is difficult to reconcile with public goods theory which assumes a privileged space for nonprofit organisations in society.

ii)

It is not clear why demand for public goods in excess of their provision by state should necessarily be met by nonprofit organisations rather than for-profit business firms. The issue at stake is why it is so compelling that public goods needs to be supplied on private basis by nonprofit organisation. In modem societie3 where individuals can act rationally and employ efficient means to achieve desired knds and assuming that free-rider problem can be overcome, public goods can be very well supplied by for-profit enterprises.

Philosophy and Nature of Organisations

Despite its limitations Weisbrod's model was a significant conmbution whch stimulated further rational choice models of nonprofit organisations. b)

Hansmann's Approach of 'Contract Failure'

Hansmann (1987) was the first to develop a theory which took into account the
. 'contract failure' dimensions of market. Hansmann considered 'contract failure' as

the limitation of consumers to ascertain the quality of goods through ordinary contractual deilices. Since consumers are generally unable to monitor and assess the supply of goods at the desired level of quality (for which they have paid), the phenomenon represents a particular kind of market-failure. 'Contract failure' takes place when consumers have no means to determine the quantity or quality of goods and services supplied to them. For instance, the quality of services can not normally be ascertained in the case of medical care, nursing homes, day care centers for children and so on. In such situations for-profit business firms will attempt to supply low quality/quantity services or goods for a given price, hence creating scope for appropriating (maximizing) profits. Since nonprofit organisations function on the fundamental assumption that no profits can be appropriated by members or patrons, customers feel assured about the qualitylquantity of products. Nonprofit organisations are not motivated by any incentives (profit) in case of business firms to deceive the customers. In this regard, nonprofit organisations are more trustworthy than for-profit business organisations. Contract failure approach has a direct bearing on commercial nonprofit organisations which generate their resources by selling of goods or services to clients. Further, this approach has a distinctive appeal for donative nonprofit organisations which are exclusively dependent upon philanthropy and donations. Now donations make sense only if the donor is assured of the fact that funds will be properly utilized for achieving the purposelgoal envisaged by the donor. For instance, if the for-profit organisation receives donations, it will naturally be tempted to appropriate it as 'profit'. On the other hand, nonprofit organisation will be legally bound to utilize all donations for the declared goals/purposes of the organisation. In the case of philanthropy and donations, 'contract failure' approach considers nonprofit organisations as a response to the trustworthy relationship between principal and agent - principal being the donor and agent being the entity entrusted to manage the funds. Nonprofit organisations can correct a typical market failure, which results from the consumers' inability to exercise control over for-profit business firms. Since nonprofit organisations are managed and controlled by members and patrons, the cl~entsare assured of a sufficiently high quality of goods or services. However, in case where the priority is to minimize prices paid by clients, nonprofit organisations acquire resemblance to economic functions of cooperatives. On the other hand, the major objective regarding maintenance of high quality of products is achieved through the establishment of mutual nonprofit organisations.
The n'ain criticisms of this approach are that the managers of nonprofit organisstions can invent other nlechanisms to dishonestly appropriate arbitrarily raising their salanes, perks 2nd so on. Further, clients generally are not aware whether a pmicular is nonprofit or for-profit organisation Lasly, to greater extent, it

Voluntarism, State and Society

is quite apparent that people make donations to nonprofit organisations rather than for profit business firms, however, contract failure theory does not explain why individuals at all want to make donations.

4.4.2 Sociological Approaches

Unlike rational-choice models inherent in economic approaches, sociological approaches give an entirely different treatment to notions of 'trust' and 'rationality' while analyzing the existence of nonprofit organisations. In the following, we will acquaint you with essential aspects of the analysis of sociological approaches furnished by Helmut K. Anheier and Jeremy Kendall (2000). This analysis examines the implications of sociologi~al meanings and interpretations of 'rationality' and 'trust' in the context of nonprofit organisations. Sociological approaches lay considerable emphasis on an individual's ability to place unequivocal trust in the motivation and behaviour of other fellow individuals in society. It is argued that there is always pre-rational and pre-existing trust which lies at the root of all contracts. Intrinsic to every contact are a number of tacit arguments which are generally not concretized or given formal shape in routine contractual descriptions. Such unstated argumqnts are usually assumed, understood and adhered to in contractual transactions by individuals. Hence a sociological understanding of trust has an essence of presumed reliability, which is entirely different from 'rationalistic' or 'risky' conceptions of trust inherent in rational-choice models, of economic approaches to nonprofit organisations. In economic models the conception of rationality is merely a subjective probability calculation in situations of uncertainty. The consumers simply try to make assessment whether or not suppliers will honour contractual commitment and deliver goods according to their expectations. According to these authors (Anheier and Kendall. op. cit) In a sociological perspective, this kind of instrumental calculation is misleading since it devalues 'trust' to simply an exercise of 'risk-assessment', thus missing the real import of trust. In support they cite Anthony Giddens (1990) that ultimately "all trust is in a certain sense blind trust". This sociological interpretation has significant implications for the understanding of trust and nonprofit organisations. The evolution of trust does not take place through mutually benefit interactions mediated by market place. Rather, trust is seen as rooted in normative social structure. This social distinctiveness from the market is the crucial dimension which facilitates the growth of trust. In fact, it is the absence of market logic that permits the real evolution and strengthening of trust. Making a perceptive assessment and indepth analysis of a vast corpus of literature, Anheier and Kendall, build the argument as follows: Trust is seen as a taken for granted assumption which determines social relations and transactions among individuals. Trust and voluntary action are essential attributes of nonprofit sector as interest and profit seeking are vital for business organisations. Accord~ngto economic theory, nonprofit organisations usually function in an environment influenced by extraneous considerations and information imbalances. In such a situation, pre-existing truqt may give preference to particular kind of providers of goods and senices. Nonprotjt organisations turn out to be trustworthy intermediaries favourably positioned between \upply and demand. For instance, many nonprofit organisations are dependent upon religious philanthropy and charities. Such organisations have an advantageous position to draw on resources of pre-existing trust, which is usually not questioned in various transactions. Since trust becomes slmply a taken-for-granted expectation and eliminates the calculation of risk. Potential clients consider such religions organibations as a priori trustworthy. A simultaneous critical dimension associated with this kind of unequivocal trustworthiness is that such nonprofit organisations are also highly fragile. Trust once violated cannot be easily restored. Even modest\riolations may rewlt in far-reaching and unim.gnabie

consequences for such nonprofit organisations. Another implication is that such highly trustworthy nonprofit organisations are resistant to change. They are less sensitive to demand and supply incentives as compared with business organisations. Before we proceed further, it is of paramount importance to explain to you a conceptual distinction in sociological literature related to different kinds of trust: Trust is rooted in shared social values in contrast to interest based conception of confidence that underlies the contractual relations among individuals. There are three types of trust which are amenable to change with time. i)

Philosophy and Nature of Nonprofit Organisations

Characteristic-based trust is associated with a person depending upon such attributes as background, and ethnicity.

ii) Process-based trust is linked to past or present exchanges as evident in reputation or gift-exchanges.
iii) Institutionally-based trust is based on institutional arrangements such as certificates, form characteristics, and legal constraints. Reverting to the main argument, as societies evolve and develop there occurs a general shift from particularistic trust based on individual characteristics to trust based on process and social experience. With more advancement, generalized institutional trust becomes chwacteristic of modem societies. Hence, during the evolution of societies, transformation of social relations have fundamentally altered the very nature and characteristics of trust. Social relations in traditional societies were not extensively determined by trust, but rather were structured in confidence. Social and economic relations were rooted in an elaborate system of kinship structure. Social and economic behaviour was subjected to an extensive system of formal and informal sanctions. The system promoted and encouraged predictability which, in turn, substantially reduced dependence upon trust. It is lack of predictability and absence of familiarity in social and economic relations which fosters the enhanced significance, relevance and need for trust. Social relations in modem society are more unpredictable than in traditional societies since there is hardly any system of imposing sanctions and any common basis of familiarity among individuals. Hence, modem society relies more and more on institutional trust and least dependent upon characteristic based trust (created through family, kin or friends). In the absence of any sound mechanisms of sanctions, modem society tends to display lower levels of predictability. The above discussion is extremely important in the sociological approaches which explore the linkages between trust and nonprofit organisations. Since nonprofit organisations, to a certain extent, retain the original conditions available during their establishment, their organisation forms may reflect a mixture of above discussed forms of relations. Hence, nonprofit organisations formed during pre-modem and traditional era will infuse greater measure of confidence and predictability among its members. Nonprofit organisations established around particular actor background (patron) or ethnicity may predominantly display characteristic based attributes of trust among members. As discussed above, religious nonprofit organisations appear to potential clients as a priori trustworthy. Nonprofit organisations which represent friendship networks and bonds of civility (cutting across ascriptive categories) generally display attributes of institutionally based trust among its members. The above discussion has revealed that nature and character of nonprofit organisations is substantially influenced by social parameters which determine its priorities, activities, functions and ultimately behaviour of its members, and relationship with other social structures (including market) of society.

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Voluntarism. State and Society

Check Your Progress I11

Note: a) Use the space given below for your answers.
b) Check your answer with the model answer given at the end of this Unit. 1) The following statements have been based on the text that you have already read. Indicate whether these statements are true or false by putting tickmark (4 ) in the relevant box. True False a) b) c) Weisbrod's approach to nonprofit organisations is based on the concept of 'state and failure'. [ 1 1 1 Weisbrod argued that a government usually strives to satisfy the demand for public goods and services of the 'median voter'. [ I [ ] According to Weisbrod, 'state failure' does not evoke any response in the private sector for the production of goods and services. [ ] [ ]

d) Hansmann's economic approach is based, on the theoretical tenet of [ I 1 1 'contract failure'. e) Hansmann considered consumers are usually able to police the producers regarding the quantitylquality of goods and services supplied to them.

[ 1 [ 1
f)

Since nonprofit organisations are not motivated by such incentive as 'profit', they are considered more trustworthy than for-profit business [ ) [ I firms. Unlike economic approaches, sociological approaches to nonprofit organisations give an entirely different treatment to notions of 'trust' [ I [ ] and 'rationality'. According to sociological approaches, trust is not mediated by a market place, rather it is embedded in the normative social structure of society.

g)

h)

[ 1 [ 1
2) Describe the three types of 'trust' considered in sociological approaches to nonprofit organisations. (Hint : see the text)

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4.5

NONPROFIT ORGANISATIONS AND THE MARKET

The functioning and performance s f nonprofit organisations is, to a greater extent, determined by the dynamics of market structure. On the surface, it appears that nonprofit organisations are autonomous and functioning independent of market forces. They have a unique position in terms of legal status, taxation structure, sources of

finance and so on. However, their overall performance in a modern economy is substantially influenced by the broader process of 'capital formation' in the market situation. Like for-profit business firms, nonprofit organisations are also engaged in the processes of production, distribution and marketing of goods and services in society. Richard Steinberg (1987) has furnished an indepth analysis of the functioning of nonprofit organisations in the context of market. Notwithstanding the specificities, in the following, we will explain to you the fundamental issues discused in his analysis so that you learn about the basic aspects of the relationship between nonprofit organisations and market. According to Steinberg, a review of literature reveals that behaviour and performance on nonprofit organisations cannot be adequately analysed by looking at their functioning in isolation. Nonprofit organisations are always in competition with each other in the market for mobilizing donations, membership, clients, sales and other functions. On the other hand, nonprofit sector as a whole is in competition with the non-profit private sector and sponsored public sector in the markets in terms of skilled labour, sales, cost determination of goods and services and other factors. The competition in marked by intrasectoral cooperation (fund raising campaigns etc.) and intersector transfer of capital (corporate donations, state grants etc.) in the market. Unlike, for-profit business firms, nonprofit organisations receive donations and procure finances through fund-raising campaigns. Members of nonprofit organisations usually donate their time, labour and money since they wish to enhance the prospects of their organisation. Notwithstanding the different internal structure of nonprofit and forprofit sectors, both the sectors perform generally in a similar manner in tlle process of production, marketing and distribution of services. In the overall scenario, market structure determines the performance of both nonprofit and for-profit sectors.

Philosophy and Nature of Nonprofit Organisations

4.5.1 Regulatory Environment

Nonprofit organisations are not only in competition among themselves, but also with for-profit business firms and state run public sector in both input and output markets. No doubt, all the three sectors compete in the same markets; they are, however, not governed by same rules and regulations. The understanding of market structure remains incomplete without a proper description of the regulatory mechanisms. State usually enjoys monopoly of legitimate coercive power rooted in constitutional framework which is further supported by majority of citizens in society. Therefore, it has substantial freedom to mobilize resources according to its requirements. Furthermore, state dictates the rules of competition and usually frames different sets of rules and regulations for the nonprofit and for-profit sectors. Nonprofit organisations enjoy an advantageous location in market since they : i) are granted exemption from corporate income tax;

ii) receive tax deductible donations; iii) are often exempted from local property and sales taxes; iv) are subjected to differing standards of antitrust regulation; v) receive special consideration regarding social security, unemployment insurance, minimum wages and so on.

Notwithstanding these aspects, the nonprofit organisations face many of the same regulations as applicable to for-profit business organisation.

4.5.2 Financial Resources

For-profit business forms raise initial capital through debt instruments and generate continuing finances through sale of goods and services in market. Nonprofit organisations obtain initial funds from grants and donations and continue to supplement

Voluntarism, State and Society

finances through gifts, dues, membership fees as well as sales of goods and services. Donations and charitable contributions are generally not made to for-profit business concerns because donors suspect their donations may be rnisutilised for increasing stockholder dividends. Since nonprofit organisations are subjected to 'nondistributive constraint', donors feel assured that their money will be utilized for promoting charitable goals and purposes. The practice of raising financial resources through dues, membershiplaffiliation fees adopted by nonprofit organisations is not analogous to the financial structure of for-profit sector.

A significant difference between nonprofit organisations and for-profit sector is in their potential to obtain financial capital. Nonprofit organisations can not have assess to equity capital because of the 'nondistributive constraint'. However, to some extent, they can obtain resources through debt financing. Since donations are not a very much certain and adequate source of capital, nonprofit organisations are left with the only option of retaininglreinvesting earnings for capital growth. Exemption from corporate income tax leads to further faster growth, since it allows nonprofit organisations to retain and reinvest more earnings. Hence, both external constraints on borrowing and internal subsidization through tax exemption, act favourably to retain earnings and strengthening the capital structure of f on profit organisations.
Regular banks are generally reluctant to lend initial capital to nonprofit organisations. However, they are able to obtain financial facilitylservices through grants from foundations. Such grants generally make available long-term capital rather than initial funds to nonprofit organisations. Furthermore, foundations normally give seed money to new nonprofit organisations and also to new innovative programmes initiated by the already existing nonprofit organisations.

4.5.3 Labour-Market
There are marked differences in terms of source and condition of labour between forprof$ and nonprofit organisations. Firstly, a potential source of labour for nonprofit organisations is voluntary labour, which is an unheard of practice in for-profit organisations. Secondly, in case of paid labour, wage structures differ substantially for comparable jobs in for-profit and nonprofit organisations. Thirdly, the consequences of labour unions differ significantly for nonprofit and for-profit organisations. Generally, it appears that voluntary labour remains uncompensated and incurs no costs to a nonprofit organisation. However, there are four main incentives and personal benefits to volunteers : i) pleasure and personal satisfaction drawn from the act of giving to community;

ii) prestige attached to certain kinds of noble and good work in society;

iii) personal influence exercised over the functioning and distribution of charitable goods and services;
iv) acquiring of skills and knowledge which helps voluntary labour in future employment. Literature suggests that many a times donors working as voIuntary labour gather information about the quality and efficiency of competing nonprofit organisations before comrniting, their funds to a particular organisation. Further, voluntary labour serves as role-model and motivates other individuals to contribute time, labour and money to services valued by society. In this sense, unpaid voluntary labour seems to be compensated but not by direct payments from the nonprofit organisation. ~ t e i r i b e r(op. ~ cit) argued, that voluntary labour is not a free resource available to nonprofit organisations. Voluntary labour blocks the upward mobility of paid workers hence reducing their motivation and productivity. Moreover, a nonprofit organisation

makes efforts so that voluntary labour is drawn towards it; they are imparted training for specific positions, and are encouraged and motivate to stay on longer with the organisation. All these activities cost money, staff-time and pressure on infrastructural facilities which burden the organisation. Thus, apparently, nonprofit organisations may not pay salaries to voluntary labour but they certainly incur substantial costs in retaining and upkeeping of voluntary labour. Even in situations where all workers are paid salaries, nonprofit organisations seem to differ from for-profit firms and state bodies in their utilization of labour. Literature suggests that 'in general, nonprofit organisations display more sensitivity to wages in their hiring decisions than forprofit business organisations.

Philosophy and Nature of Organisations

FUTURE PROSPECTS OF NONPROFIT ORGANISATIONS

It needs no reiteration that a large, autonomous and well developed nonprofit sector is an essential component of modern society. Like its past history, the future prospect of nonprofit organisations is tied up with the dynamics of pluralist system of welfare since it plays a crucial role in the supply of goods and services. Carlo Borgaza and Alceste Santuari (op. cit) have built an analysis to understand the future role of nonprofit sector in Europe. The basic arguments of this analysis are valid for any democratic society, a state committed to welfare and development, and modem economic structures including a dynamic market. In the following, we will present a summary of this analysis so as to depict the essential aspects related to the future prospects of nonprofit organisations. The formation of nonprofit organisations relies heavily on a hlgh degree of 'trust', rather than well defined rules; hence the organizational model remains fragile. The ownership is either not well defined or is usually shared by plurality of stakeholders. This advantage of democratic governance (by clients, members, representatives of community) may turn out to be a stumbling block to their future transformation. The conflicts arising out of diverse interests may undermine their potential to quickly respond to changing socio-economic environments in future. Nonprofit organisations (including their management) still have a very Limited knowledge and awareness about their exact role vis-3-vis public and for-profit institutions in modern economies. Management capacities must evolve faster in keeping pace with the plurality of objectives and strive towards fusion of social goals and economic constraints. The general trend among nonprofit organisations is to acquire isomorphc characteristics, thus hindering the development of innovative features suitable for future adaptation. The main risk is that under pressures of economic competition nonprofit organisations tend to convert into 'associated workers' companies. The sole objective becomes to safeguardlpromote interests of its members/employees, hence overlooking the vital linkages with community. Furthermore, dependency upon public subsidies erodes autonomy and 'redistribution character', hence making the future direction of nonprofit organisations uncertain and unclear. The predominant social ethos in modem societies considers structures of state and for-profit sectors as having sufficient potential to satisfy the overall demand of social and community services. Such an ethos undermines the potential role of nonprofit sector. Nonprofit organisations, at their best, are considered offering transitory solutions. At times they are even regarded as unnecessarily dependent upon State policies and subsidies. The general view seems to be that they should be active only to attend such problems as are left unattendedlignored by state or for-profit sector. The relationship among the diverse range of nonprofit organisations is also unclear.
95

Voluntarism, State and Society

Social and labour public policies are still to a large extent incoherent in modem societies. The retreat of welfare state meant discontinuation of public provision of social and community care services. The new state policies effected a separation of financial responsibility from service provision. However, new policies have not yet put in place comprehensive contractual relationships and funding rules along with the growing requirements of nonprofit organisations. Old financing methods have become increasingly irrelevant while contracting out rules (to nonprofit organisations) have not yet crystallized. In this scenario of unclear mix of subsidies and uncertain contracting rules (in the post-welfare state era) the future of nonprofit organisations is riddled with uncertainties. Furthermore, hard contracting out practices usually ignore the specific characteristics or local advantages of nonprofit organisations. Consequently, nonprofit organisations are operating in uncertain and insecure environments. Their functioning is substantially influenced by short-term contracts at the cost of their own long-term planning and development. The legal structures suitable for the functioning of nonprofit organisations are still inadequate in modern societies. Mostly, legal frameworks have been designed to favour the existence of 'company' forms. Legal provisions conducive to the growth of entrepreneurial nonprofit organisations have not yet been put in place by modem states. The situation limits the scope of reproducing social enterprises. State policies should give full legal recognition to nonprofit organisations. The aim of such state policies should be : i) to consolidate the most innovative nonprofit organizational solutions;

ii) to promote the replication process of successful nonprofit organisations; iii) to encourage the spread of new nonprofit organisations; iv) to create legal structures for the protection of consumers' rights; and V) to create conditions as to avoid isomorphism among nonprofit organisations. State policy should consist of well defined contracting out strategies. Such a policy should recognize the specificities of nonprofit organisations and their redistributive potential of goods and services. Nonprofit organisations are dependent upon a peculiar mix of resources and usually have a local dimension. Contracting out strategies should preserve these features and strengthen the already existing trust and community relationships with nonprofit organisations. Efforts should also be made to create such conditions of trust where they do not exist. Competition is vital for efficiency, but contracting-out strategies should not eliminate already functioning non-profit organisations in the name of competition. Contracting out strategies should ensure continuity and development of already existing network relations which generate trust and social capital. Local dimension must be incorporated in contracting out procedures so as to minimize adverse effects of competition on community care services. The evolution of nonprofit organisations as well as state social policies is far from complete in modem societies. Nonprofit organisations are still searching for an autonomous space not only among social organisations but also in the entrepreneurial sector. However, social ethos of modern 9 cieties and dynamics of contemporary economic structures are not yet prepared to face this challenge. Regarding social policy, modern states are making different attempts to evolve new strategies. Literature suggests none of such attempts is well defined and universally accepted. To a greater extent, it can be said with certainty that nonprofit organisations will play a major role in future in modern democratic societies. However, their future, form, characteristics and contributions are subject .to the evolution of state policies and the dynamics of pluralistic welfare system.

96

Check Your Progress IV Note: a) Use the space given below for your answers.
b) Check your answer with the model answer given at the end,-of this Unit. 1) The following statements have been based on the text that you have already read. Indicate whether these statements are true or false by putting tickmark (4) in the relevant box.

Philosophy and Nature, of Nonprofit Organisations

True
a) b) c)

False

Nonprofit organisations have a unique position in terms of legal status, taxation structure, sources of finance and other features. [ ] [ ] The overall performance of nonprofit organisation is not influenced by broader processes of capital formation in a market-situation. [ ] [ ] The behaviour and performance of nonprofit organisations cannot be adequately analysed by looking at their functioning in isolation.

[ I l l
t determines the overall performance of nonprofit and d) ~ a r k e structure [ I [ ] for-profit sectors. e)
f)

Non-profit, for-profit and public sectors compete in different markets and are governed by same rules and regulations. [ I [ ] Nonprofit organisations receive tax deductible donations.
[ ] [

g) A significant difference between nonprofit organisations and for-profit [ I [ ] sector is in their potential to obtain financial capital. h) There are marked differences in terms of source and condition of labour between for-profit and nonprofit organisation. [ I [ ]

2) Explain briefly the four incentives and personal benefits enjoyed by voluntary labour in nonprofit organisations. (Hint : see the text)

4.7

LET US SUM UP

The significance, role and contribution of nonprofit organisations in modern societies have found a radical transformation in the 'post-welfare' state era. The functioning of nonprofit organisaitons in market economies has evoked a serious academic interest in the recent past. In this unit, we have explained to you the dynamics of relationship between the modern state and market economy. More specifically, we have analysed the role and contribution of nonprofit organisations in the provision of goods and sefiices within the 'pluralistic system of welfare. In the beginning we have described the essential attributes of nonprofit organisations. We have explained that philosophical roots of nonprofit organisations lie beyond the notions of 'profit' and 'self-gain' which normally determine the functioning of market

Vuluntarism, State and

Society

structure. We have noted that a formal organisation, independence from state, selfgoverning, non-distribution of profit and voluntarism are the key attributes of a nonprofit organisations. At this stage, we have also attempted a broad definition of a nonprofit organisation. After that, we have depicted the transformation of nonprofit organisations in relation to the crisis of the welfare state. The space vacated by welfare state has to a great extent, been occupied by nonprofit sector in meeting the demand of goods and services in society. You have learned that this process effected a significant transformation in the nature and character of nonprofit organisations. We have described in detail the main characteristics of contemporary nonprofit organisations. Next, we have deliberated on the crucial issues involved in the theoretical approaches to nonprofit organisations. We have discussed the economic approaches and sociological approaches whlch are vital to the understanding of the existence and functioning of nonprofit organisations in market economy of a modem society. We have dascribed Weisbrod's approach of 'state failure' and Hansmann's approach of 'contract failure' since these are the landmark theoretical formulations in the understanding of the economic characteristics of nonprofit organisations. Further, we have discussed salient aspects of important relationships between market and nonprofit organisations. We have explained the nature and significance of a regulatory environment, sources and character of financial resources and relevance of labour market in the functioning of nonprofit organisations. In the end, we have analysed the future prospects of nonprofit organisations in modem societies. You have learned that nonprofit organisations are evolving and still searching an autonomous space vis-h-vis state and market. Nonprofit organisations will continue to play a major role in modem democratic societies.

4.8

SUGGESTED READINGS AND REFERENCES

Ben-Ner. Avner, 'Nonprofit.organisations: Why do they exist in market economies?' in Susan Rose-Ackerman (ed.) Economies o f Nonprofit organisations, Oxford: Oxford University Press, 1986. Carlo Borgaze and Alceste Santuari, The Innovative Trends in the Nonprofit Sector in Europe : The Emergence of Social Entrepreneurship, Conference Paper, OECDILeed Forum on Social Innovations, International Seminar on The Role of the Nonprofit Sector in Local Development : New Trends; Washington : Organisation for Economic Cooperation and Development, 11-12 Sept., 2000. Giddens, Anthony, The Consequence of Modernity, Standford California : Stanford University Press, 1990. Hansmann H., 'Economic Theories of Nonprofit Organisations' in Walter, W. Powell, (ed.), The Nonprofit Sector, 1987 Helmut K. Anheier and Kendal, Jeremy, Trust and Voluntary Organisaitons: Three Thdoretical Approaches, Civil Society Working Paper 5, Feb. 2000. Kendal, Jeremy, and Martin Knapp, 'Defining the nonprofit sector : The United Kingdom', Working Papers of the Johns Hopkins Comparative Nonprofit Sector, Project No. 5 (ed. By Lester M. Salamon and Helnlut K. Anheier. Baltimore: The John Hopluns Institute of Policy Studies, 1993. Peter Dobkin Hall 'A Historical view of the private nonprofit sector', in Walter, W. Powell, (ed.), The Nonpro@t Sector, 1987

, !

PO\;~II, Walter, W. (ed.), The Nonprofit Sector : A Research Handbook, New Haven : Yale Universitiy Press, 1987. Steinberg, Richard, Nonprofit Organisations and the Market in Walter, W. Powell, (ed.), The Nonproft Sectoc 1987. Vladislav Valentinov, Explaining Nonprofit Organisations : The Social Value Approach, First European Conference of EMES and ISTR, Paris, France, 2005. Weisbrod B, 'Towards a Theory of the Voluntary Nonprofit Sector in a Three-Sector Economy' in Weisbrod (ed.). The Voluntary Nonprofit Sector, Lexington, M.A.: DC Health, 1977. Weisbrod B, The Nonprofit Economy, Cambridge, M.A. : Harvard University Press, 1988.

Philosophy and Nature of Nonprofit Organisations

4.9
1)

MODEL ANSWERS
a) True

Check Your Progress I

b) True
g) False
C)

True

d) False

e) False

f) True

h) True

Check Your Progress I1

1)

a) True
f)

b) True

c) False h) True

d) True

e) False'

True

g) False

Check Your Progress I11

1) a) True
f)

b) True E) l-he

c) False h) True

d) True

e) False

True

Check Your Progress IV

1

>

a) True
f>

b) False

c) True

d) True

e) False

True

g) True

h) True