A Project of the American Enterprise Institute and the Federalist Society

Where the Money Goes

Newsweek

October 31, 2005

By Rana Foroohar

If it weren't for the raffia coasters and folk art in her office, it would be tough to tell Barbara Stocking from a big-time CEO. The director of Oxfam's British operation has the power manner, and calendar: one summer week took her to a meeting with EU Trade Minister Peter Mandelson, a fund-raiser with European business leaders and the G8 summit in Scotland. Minions shuffle in and out, briefing her on tsunami relief, Ethiopian elections, a Chilean earthquake. "Right, is that all the disasters?" she asks briskly. Stocking says it's her mission to "save the world." But she's doing it in a suit rather than sandals--and so are many others. Spurred by a growing number of global conflicts, increased outsourcing of aid work by Western governments and the boom in private philanthropy, nongovernmental organizations like Oxfam have become big businesses. The Comparative Nonprofit Sector Project at Johns Hopkins University recently studied 37 nations and found total operating expenditures in 2002 of $1.6 trillion. The sector is dominated by charity schools and hospitals, which account for 57 percent of the expenditures, and includes everything from soup kitchens to professional associations, as well as the fast-growing budgets of aid-cum-activist NGOs, some of which now spend more than $1 billion a year.

This is an unusual growth story, for NGOs face tensions unique to their mission. If profit is the bottom line for business, what is the bottom line for nonprofits that seek a more businesslike efficiency? Who regulates a sector in which many executives now make serious money, yet still are not exactly in it for the money? The gray-area issues are coming to the fore now, as Republican Sen. Chuck Grassley of Iowa plans to introduce rules for nonprofits that some have compared to Sarbanes-Oxley, the corporate-governance code inspired by the scandals that began with Enron.

Remarkably, nonprofits grew faster than the rest of the U.S. economy even during the late-1990s boom that produced Enron. When the economy fell into a jobless recovery, with total employment falling between 2001 and 2004, employment in the nonprofit sector grew by 2 percent to 4 percent a year. Experts say international growth mirrors the U.S. experience. One reason is the boom in global services--most NGOs are, after all, service providers, delivering things like health care and education, and they are beginning to look more like the corporations they've been known to criticize. "Call it the 'moral economy,' if you like," says Nicholas Stockton, a former executive director of Oxfam. "There's a market for good works, and it's big business."

Salaries are rising as recruits arrive from the corporate world. Marsha J. (Marty) Evans, president and CEO of the American Red Cross, manages a $3 billion budget and makes $450,000 a year. She regularly hires from for-profit businesses (her new finance director is from a big bank) or from one of dozens of new NGO-specific business programs and courses at schools like Harvard and Stanford.

As M.B.A. s come onboard, nonprofits are opening profitable businesses. Oxfam, a loose federation of independent national offices coordinated out of London, recently hired McKinsey to review its private-sector work and has launched its own fair-trade-coffee shop in London's Covent Garden. The Chicago Children's Choir runs a singing-telegram business; groups like the Rainforest Alliance have taken environmental consulting fees from timber companies. According to Johns Hopkins, service fees paid to nonprofits (mainly schools and hospitals) account for about half their revenue, or nearly $880 billion a year.

Donations are rising, too. Government aid, much of which flows through NGOs, hit a record $78.6 billion worldwide in 2004. The number of private foundations has tripled since the early 1990s, creating incentives to chase aid, which can undercut the whole point of a businesslike approach to aid work: greater efficiency. "It's not unheard of to have plastic surgeons who've never seen a case of cholera" operating in Africa, says James Bishop, head of InterAction, an umbrella group for 160 U.S. NGOs. Jagdish Bhagwati, a Columbia University trade expert, has criticized groups like Oxfam and Action Aid for expanding beyond their expertise. "These groups are huge and diversified, just like multinational businesses," he says. "And like businesses, they have the profit motive, which pushes them into new markets."

All this has brought the accountability question to the fore. Harvard's Hauser Center for Nonprofit Organizations has found 152 cases of misconduct by U.S. nonprofits between 1995 and 2002, including 104 criminal cases. The author, Marion Fremont-Smith, notes that as NGOs operate more like businesses, there will inevitably be a greater need for tighter rules.

The effort is a work in progress. There are currently many "global" codes of conduct to which various nonprofits have signed on. NGOs are also struggling to find a bottom line--a nonprofit equivalent of profit. A number of for-profit consulting firms have sprung up to advise donors and aid recipients on how to choose an NGO. Stockton now runs the Humanitarian Accountability Project in Geneva, and is trying to establish a ranking system. Some big NGOs are onboard, but not all. "Historically, there has been a sense that 'We're doing God's work, and could everyone please leave us alone?'" says John Elkington, head of SustainAbility consulting.

These pressures have triggered a period of creative destruction as NGOs merge and streamline. The American Red Cross is dropping policy work and beefing up its relief-delivery systems. Many national branches of Oxfam are contracting fieldwork to locals who can do it more cheaply.

Meanwhile Oxfam continues to expand. It plans to increase involvement in issues from climate change to HIV and AIDS prevention, to explore commercial enterprises and add more global celebrities to its promotional roster, which already includes Bono, Michael Stipe and Alanis Morissette. With the goal of expanding the business (measured by expenditures) by 50 percent or more within the next few years, Stocking may well turn Oxfam into the Microsoft or McDonald's of the nonprofit world. And the business-minded members of the NGO world will see that as high praise indeed.

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