March 1, 2005

Flexible Support, Tough Love

Funding practices can significantly affect nonprofits' ability to attract talent, says Paul Brest, president of the William and Flora Hewlett Foundation in this commentary on the 2005 Bridgespan Group report, "The Nonprofit Sector's Leadership Deficit." The importance of strengthening nonprofit leadership suggests that funders should consider general operating support to help organizations' meet their goals.

A commentary on The Nonprofit Sector's Leadership Deficit

Foundations can make grants specifically aimed at inspiring and preparing nonprofit leaders, for example, by funding management and leadership programs or supporting the development of social entrepreneurs. However, the value of increasing the availability of high-quality nonprofit leaders ultimately depends on whether they are attracted to the organizations that need them. A strategically oriented organization that has adequate resources and considerable autonomy over their deployment is likely to attract talented leaders who, in turn, can achieve real impact. And funding practices can significantly affect these organizational characteristics.

By definition, general operating support gives an organization’s CEO the flexibility to allocate foundation funding to what he or she (in consultation with the staff and board) deems to be the organization’s highest priorities. At the other end of the spectrum, a CEO’s ability to chart his organization’s course can be frustrated by funding that is directed toward specific projects—for example, a grant to a youth services organization to implement a particular drug prevention program that has captured the funder’s fancy. Grants of these sorts often reflect the funder’s priorities rather than those of the organization, and a CEO faced with many such grants can lose much of the opportunity to shape his organization’s strategies.

Of course, one cannot simply say that general support grants are good and project grants are bad. Like the organizations seeking its support, a funder has its own legitimate social, environmental, or cultural goals, and the nature of its support inevitably depends on how the organization’s activities are aligned with those goals. If you want to improve the overall quality of a university, general support is the appropriate vehicle; if you are particularly interested in promoting Islamic legal studies, then a project grant to the law school for this particular objective would be more to the point.

Although there is nothing intrinsically wrong with project support, the importance of strengthening nonprofit leadership suggests that funders should have a presumption in favor of general operating support. (It also suggests that project oriented grants should pay their fair share of overhead. Otherwise, the CEO will have to draw on unrestricted funds to pay for the full costs of funder-designated projects.)

A funder concerned with the strength of an organization and its leadership will not only be inclined to provide general operating support, but to make renewable multiyear grants. Grants of several years’ duration reduce the organization’s fundraising costs, allowing its management to devote more resources to its mission. A presumption favoring renewable multi-year grants allows the CEO to plan over a reasonable time horizon. Of course, there’s circularity here: Only an organization with strong leadership can gain the confidence necessary to justify a funder’s long-term support.

It may seem paradoxical, but a funder also strengthens an organization and its leadership by being demanding both at the beginning of the grant and as it proceeds. At the start, a funder appropriately demands clarity about the organization’s goals and its strategies for achieving them—necessary though not sufficient conditions for the organization’s effectiveness. An organization that meets these conditions can distinguish itself and attract more resources from strategic funders than one that cannot. For organizations that aren’t there yet, the requirement provides a manager with an opportunity to improve his own and his organization’s strategic skills.

As the grant proceeds, the funder will demand reports on the organization’s progress toward its goals. Of course, an organization with ambitious goals may not be able to produce actual impact during the grant period. But it should be able to demonstrate that it has taken the steps required by its strategic plan to ultimately achieve impact. Here too, superior leaders will rise to the challenge, and an effective organization will distinguish itself.

What is the role of so-called “capacity-building” or “organizational effectiveness” grants in improving the leadership of nonprofit organizations? At first glance, it might seem that a funder concerned with strengthening an organization should simply provide general operating support, which the CEO can use for any capacity-building that he deems a priority. In some situations, though, a capacity-building grant provides “cover” for a CEO who wants, say, to improve the organization’s communication skills or IT systems, but feels pressure to devote funds to immediate needs rather than invest in capacity. Perhaps in an ideal world the CEO would not need the funder’s leverage to take the longer view; but sometimes one must deal with organizational realities.

Particularly germane to Tom Tierney’s article, a capacity-building grant targeted, say, to increasing a CEO’s compensation or to filling a management gap can signal the importance of strengthening an organization’s leadership in a way that (mere) general operating support cannot.

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