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The new way of doing non-profit

by John Lorinc

A new cohort of entrepreneurial activists is reinvigorating the charitable sector with innovative methods of funding, managing and measuring altruistic operations.

Last winter, the Omega Foundation launched a partnership with six Canadian banks and credit unions that bore little resemblance to the sort of well-meaning philanthropy most of us associate with social welfare works. Omega’s campaign was about persuading families to work with local branches to set up registered education savings plan (RESP) accounts — a laudable goal, yet not exactly the sort of thing that stirs donors to open their wallets.

But Omega’s project had a compelling twist. For the past few years, the Toronto-based charity, launched by Martin Connell in 1992, has worked with thousands of community and religious leaders in have-not neighbourhoods across Canada, encouraging them to tell residents about a federal program that provides grants of up to $2,000 per child to low-income families that set up post-secondary savings accounts. The policy, introduced by former Liberal prime minister Paul Martin in 2004, seems straightforward enough. The problem, explains Omega executive director May Wong, was that fewer than 20% of eligible families took advantage of it. “We thought, ‘This is crazy. This is free money. Why aren’t people using it?’”

In 2010, Omega set out to raise that ratio with some savvy social marketing. That process boosted the proportion of eligible enrolled families in some low-income areas from 27% to as high as 41% — figures that translated into an additional 33,000 children who now have the seed of an RESP. The bank partnership added another inducement, with Omega setting up multilingual, easy-to-use online applications, and the banks offering no-fee RESP accounts.

Omega’s entrepreneurial approach of boosting RESP uptake is indicative of a shift among Canada’s more than 86,000 registered charities, many of which are now operating in decidedly non-traditional ways. The change isn’t surprising. Individual giving surged by 8% to $624 in 2014, according to a BMO survey. Statistics Canada says Canadians gave $8.6 billion in 2013, and this total has also been rising. At the same time, the non-profit sector has become attractive to millennials. Job postings attract hundreds of applicants willing to work for modest salaries.

But many non-profits still face tough fundraising challenges because of smaller government grants and Canada Revenue Agency audits. In this environment, some non-profits and charities are setting up social enterprises that provide revenue independent of income from grants and donations. “This is one of the biggest new innovations in the not-for-profit world,” says Rayna Shienfield, a lawyer who is a principal in CPA Canada’s corporate oversight and governance group focusing on not-for-profits.

Indeed, spurred on by a new generation of young activists raised in a digital culture, charities today seek out novel marketing techniques, take business risks, manage their brands and pay attention to measuring the impact of what they do. These are definitely not your parents’ charities. Here’s how some are setting themselves apart.

Brand value

In 2012, RXR Realty, a New York developer, approached the Toronto-based Centre for Social Innovation with a business opportunity. The CSI, a nonprofit founded in 2004 by property manager Margie Zeidler and four others, owns two refurbished warehouses in Toronto that offer “co-working” spaces to nonprofits, entrepreneurs and freelancers. CSI’s buildings, as well as two other rented venues, have become prized addresses in a city teeming with social entrepreneurs looking for affordable offices.

While it depends on rental and event income, CSI introduced an innovative fundraising strategy in 2010. Its “community bonds” allow individuals to invest in CSI’s mortgages and earn a fixed rate of return of 3% to 4.5%. According to CSI CEO Tonya Surman, the bonds have netted almost $4.3 million and allow CSI to buy real estate as a means of controlling tenant rents.

CSI’s bonds are just one of many revenue strategies that have emerged in recent years. Many charities now employ commission-driven fundraisers, launch crowdfunding campaigns and establish deals with retailers that solicit point-of-sale donations from customers. Technology has also played a role. ChangeIt, a Waterloo, Ont., firm, set up a partnership last year with BMO that allows credit card holders to round up the price of their purchases, with that additional change automatically going to preselected charities, which pay a fee for the service.

In the case of CSI, its community-funded buildings have become so sought-after that the organization’s reputation spread internationally. RXR conducted a global search for similar organizations and concluded that CSI was an ideal partner. CSI’s board struck a deal with RXR and now manages a vast co-working space with 200 tenants in Manhattan, NY, one of the world’s hottest real estate markets.

The move raised questions many nonprofits don’t contemplate: does CSI’s brand or goodwill have value? As Surman says, there’s a gap between the book value of CSI’s assets and its revenue-generating capacity. “We’re still struggling with this,” she says. “I don’t think we’ve nailed it at all.”

Surman adds that such calculations represent a crucial evolution in the way charities think about their reputation and their finances. “You better start talking the language of business so you can understand what you’re doing,” she says. “Nonprofits would be better off if we could be more focused and impactful.”

Not everyone agrees. “There is this implicit pressure that nonprofits become more efficient and effective, which is code for businesslike,” says Ann Armstrong, a lecturer at the Rotman School of Management at the University of Toronto. In some cases, the drive to reduce administrative overheads in an attempt to appease big donors may inadvertently lead to poorer service quality. “But,” she adds, “the numbers look good.”

Social enterprise

In the early 2000s, Winnipeg social entrepreneur Marty Donkervoort set up a charity to help homeless and low-income inner-city residents, many of them aboriginal Canadians. He also established a subsidiary — a general contracting company that would provide building services to paying customers. To do the work, the firm, Inner City Renovation, hired chronically unemployed or underemployed Winnipegers.

Initially, says Donkervoort, who now teaches nonprofit management at the University of Winnipeg’s faculty of business, Inner City Renovation received 40% to 50% of its revenue from the charity and the rest from customers. Today, the proportion of income that comes from the social enterprise has risen to 98%. The contracting firm, he says, competes for work with forprofit construction companies.

There’s nothing new about social enterprises — Goodwill, The Salvation Army and nonprofit healthcare organizations such as the Victorian Order of Nurses have relied for decades on revenue from retail outlets or homecare clients. But the social enterprise sector has exploded in recent years, and its ranks now include courier firms, high-end restaurants, bike sales and repairs, printing and building supply retailers, such as ReStore, a division of Habitat for Humanity.

Almost all provide jobs for people at the margins of the labour market. In his report for CPA Canada, 20 Questions Directors of Not-for-Profit Organizations Should Ask About Social Enterprise, lawyer Andrew Valentine cites the example of St. John’s Bakery in Toronto. “This social enterprise produces and sells organic bread and baked goods and provides employment and skills training to marginalized individuals, including welfare recipients, people with addictions and mental illness, and new immigrants,” he notes.

Donkervoort warns that as these businesses gain a measure of commercial viability, they must ensure that they don’t lose sight of their original mission or risk losing the charitable status of the parent organization.

Charity as investment

When entrepreneur and philanthropist Bill Young launched Social Capital Partners in 2001, he wanted to crack a tough social nut: create employment solutions for chronically unemployed people.

Young tackled the problem as an investor would. For six years, SCP provided venture funding to small social enterprises that created jobs. Their efforts translated into about 400 positions. But when he took stock, Young concluded his investments weren’t delivering enough punch. “What we [were] was an interesting magazine article,” he admits. “But what we were doing was seen as an anomaly.”

So SCP executed a pivot. The organization focused upstream, on the recruitment obstacles that prevent private firms from hiring welfare recipients. They lent money to franchise owners, conditional on the business agreeing to implement a community hiring program. After analyzing existing systems, SCP officials realized they had to design changes in the way case workers deal with social assistance recipients. Those social workers, Young says, are good at helping clients access services, but they are not as good at placing individuals with employers. SCP tested a new demand-driven recruitment system with auto repair chains such as Active Green+Ross, where employees could develop skills on the job.

Now, SCP is working with Deloitte and Toronto’s MaRS Solutions Lab to develop employer-friendly techniques for connecting unemployed people with jobs. “We don’t want to own any of this,” Young says. “We see ourselves as an R&D lab for companies. In some ways, my goal is not to exist.”

Social return on investment

Ravi Sreedharan, a transaction advisory services associate partner at EY, is the treasurer and a founder of the Fort York Food Bank (FYFB), a nonprofit that uses a very traditional charity to connect high-needs individuals with counselling services and advice to help them deal with the underlying issues that forced them to rely on handouts.

The lean Toronto organization stands out for another reason: it has made a point of leveraging metrics to measure its effectiveness and attract backers. In 2013, FYFB distributed 360,000 meals through its three-day grocery basket program, and also served 40,000 meals at its drop-in centre. As for the advice element, FYFB provided 1,700 clients with counselling. Managing a spartan budget of $170,000, the organization delivered $1.7 million in “charity value.”

FYFB’s board worked for many years to figure out how best to quantify the organization’s activities. Early on, the agency developed a strategic plan that used data to track the FYFB’s social impact, including the effectiveness of its counselling referrals. “We used a wide variety of metrics and found a set we were comfortable with,” says Sreedharan. “We tried to keep things as simple as possible.”

Many nonprofits are now engaged in a similar search — how do they measure their so-called social return on investment? “All of that is emergent,” observes Marilyn Struthers, the former John C. Eaton chair of social innovation and entrepreneurship at Ryerson University’s faculty of community services. “No one has a handle on how to do that really well.”

According to a 2010 essay published in the Stanford Social Innovation Review by Geoff Mulgan, who runs a British endowment fund, there are hundreds of competing tools for evaluating the impact of charities. But, he observed, there’s no consensus on how to put a value on a desired social outcome — e.g., connecting a homeless person with an entry-level job. “Borrowing practices from business and economics has led to many mistakes in the measurement of social value,” Mulgan concluded.

Jack Quarter, a professor in the department of leadership, higher and adult education at the Ontario Institute for Studies in Education who has written extensively about gauging impact in the social economy, agrees that broad-strokes measures, such as social return on investment, are not simple to apply because such social accounting techniques rely heavily on finding credible market proxies.

In some cases, Quarter adds, it is possible to assign monetary value to charitable activities, such as the contribution of volunteers. He cites examples such as Frontier College, a national literacy group, which last year reported that its 2,631 volunteers contributed almost 97,000 hours, valued at more than $1.7 million. “It can be done,” he says, but adds that there’s no accepted accounting standard for making those kinds of calculations, as there is with other estimates recognized by GAAP, such as depreciation.

The growing focus on measurables, however, is controversial. Elissa Beckett, vice-president of development and strategic initiatives at Tides Canada, a charitable organization that gives grants to other smaller nonprofits, says sophisticated donors want to know their money is well spent, and they are interested in evidence of success. But, says Beckett, they also understand that “too much measurement is expensive and can undermine the mission.”

Accounting for nonprofits

The changes sweeping the nonprofit sector have prompted accounting standards bodies to think about how charities should present financial information to donors, governments and stakeholders. The Accounting Standards Board and the Public Sector Advisory Board are providing advice on modernizing financial reporting guidelines for both public and private nonprofits (see frascanada.ca for more information). “We’re looking for a better understanding of the true uses of [nonprofit] financial statements,” says AcSB chair Linda Mezon. “We have to tread carefully in making changes.”

Accounting professionals should also pay attention to governance issues related to charities. Rayna Shienfield, principal, research, guidance and support at CPA Canada, says the landscape is shifting as more nonprofits move to set up social enterprises. Last year, in fact, CPA Canada asked lawyer Andrew Valentine, a partner at Miller Thomson LLP, to scope out 20 key considerations directors must assess before agreeing to serve on nonprofit boards with social enterprises. They include issues such as business and tax compliance risk for charities with social enterprise subsidiaries; director risk and duties; and appropriate success metrics. “This is the way that not-for-profits are going,” Shienfield observes, “so it’s important for the profession to keep up and adapt as not-for-profits adapt.”

John Lorinc is a freelance writer based in Toronto.

This article was originally published in the August 2015 edition of CPA Magazine.