Hartford Business Journal

www.HartfordBusiness.com • December 23, 2019 • Hartford Business Journal 29 RULE OF LAW Nonprofits should adopt these private-sector practices By John Horak I n my Oct. 14th column I discussed a new wave of thought called "stakeholder capitalism," which injects some fundamentally new DNA into corporate America by requiring governing boards, for the first time, to consider social justice as they make their business decisions, even if doing so lessens shareholder profits. I noted that the social-justice responsibili- ties imposed on businesses are of the same na- ture as those for which philanthropic organi- zations have always and exclusively operated. This led to the following question: If the public good will be enhanced by requiring businesses to operate a little like nonprof- its, might the public good also be enhanced (increased efficiency and results) by having non- profits operate a little like a business? I believe the answer is yes, and on a level so fundamental that it may make people's heads spin. Our standard philan- thropic operating model is based on 19th-century thought, and is not well-suited for a 21st century in which nonprofits are operating enterprises as complicated as any business. I suggest that the term "charity" should be deleted from the lexicon because it is de- meaning (who wants to be a "charity case") of the people being served and devalues the nature of the work performed in their service. Similarly, the term "nonprofit" should be jettisoned because it has created a "poverty-is-virtue" mindset totally inconsis- tent with the fact that it takes a lot of money (profit) to confront social issues effectively. Here are a few other areas in which capi- talist thinking could improve the nonprofit sector's efficiency and effectiveness. Nonprofits are not subject to market-force corrections. Businesses fail if they cannot sell goods or services profitably; but ineffec- tive nonprofits can linger for as long as they can attract contributions sufficient to keep the lights on, depriving the public of the self- corrective aspects of competitive markets. The nonprofit sector needs to develop a system of commonly accepted metrics by which they can gauge the long-term "return" on their efforts so that funding sources can (as with investors) put their money where there will be better results. For example, what are the long-term ben- efits of youth intervention programs after the young people move on with their lives — are we providing a Band-Aid or a fix? Funders will want to know. An accepted nonprofit-sector custom is that organizations that should merge (for financial and performance reasons) will not do so if one organization's CEO will lose his or her job. Nonprofit mergers tend to happen only when one of the CEOs is ready to depart. This is a terrible custom that subordinates the long-term prospects of the organization to the personal interest of a CEO. In a similar situation in the business world, companies typically "buy out" the departing CEO because the severance adds value to the enterprise by enabling the completion of a merger that will improve profitability. Cash expenditures of this type are still anathema in the nonprofit sector — but they shouldn't be. There are other ideas but let me close by making it clear that I am not being critical of the many dedicated people who manage nonprofit organizations diligently and well. I am suggesting that their jobs would be easier, and their missions better fulfilled, if the standard nonprofit model, which they inherited and have lived with, was updated in fundamental ways that are "business- like" in nature. John M. Horak is the director of TANGO Nonprofit Education and Consulting. His opinions are his own. amount generated by the current corporate income tax. I know it feels good to "stick it to" corporations, but if the goal is generating revenue for the federal gov- ernment in an efficient manner, the elimination of the corporate income tax is the way to go. Additionally, taxing corporations has led to some economically perverse incentives and decisions. Cor- porations reported having over $535 billion in retained earnings in 2018. But this amount does not include the amount of profits corporations use to purchase their own stock. Since the Trump administration's corporate tax cuts, corporations have plowed over 70 percent of their profits into stock buybacks, which create more wealth for senior corporate executives and large shareholders. This does not make companies more competitive, more innovative or more entrepreneurial. If shareholders were taxed on their pro-rata share of corporate profits, I doubt that corporations (with independent boards of directors) would be investing so much wealth in their own shares. Taxing shareholders on their share of profits is the way to change the incentives, generate more federal tax revenues, eliminate waste, simplify the tax code and get corporate leaders focused on improving their businesses and not being distracted by short-term stock price changes. Fred McKinney is the Carlton Highsmith Chair for Innovation and Entrepreneurship and director of the Center for Innovation and Entrepreneurship at the Quinnipiac University School of Business. Making matters worse, Hartford has the state's only bifurcated property-tax system, in which commercial property owners pay a higher tax rate than residential homeowners. HBJ published a series of in-depth stories earlier this year that laid out in stark terms how Hartford's high and unequal property-tax system has sapped economic growth. More importantly, we also present- ed five "solutions" on how to solve, or at least alleviate the problem. We recommend the new committee take a hard look at our series before they put out recommendations. The simplest and clearest path to reversing Hart- ford's economic fortunes is to choose a competitive mill rate and adopt it over a relatively short time period. It would need to be done in close coordination with the state, which is currently overseeing the city's finances following the 2018 bailout agreement. It also might mean homeowners pay higher taxes. The committee has a tough task ahead but there are plenty of ideas from which its members can draw. I hope they offer a realistic blueprint that gains enough political support to actually get implemented, but I'll believe when I see it. John Horak

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