Reviving the not-for-profit business model for a sustainable economy
By Lowik Pieters & Quirien Reijtenbagh.
It is often assumed that profit is to capitalism as sand is to a beach. The constant growth of resource extractions, essential in a for-profit economy, is aggravating ecological and social crises. Currently, many organizations are adopting a not-for-profit structure. How can these structures contribute to an economy that includes environmental and social justice? Hinton & Maclurcan (2018) developed a Not-for-Profit (abbreviated as NFP) World economic model. In this article, we will investigate the potential for a ‘real-world application’ and the possibilities for starting an NFP business after graduating from Industrial Ecology.
What is the NFP business model?
Let’s start with a clear definition: a non-profit organization is legally excluded from making profits, whereas a not-for-profit business model should be understood as a not-only-for-profit business. For such organizations, profit is no longer the key focus. Practically, we use not-for-profit as an equivalent for non-profit in this article, since we think the long term strategies of both business models are the same. We do not favor hybrid structures, which we will explain later on.
Organizations that have adopted an NFP model are seen as mission-driven enterprises, usually with a changed nature of incentives and ownership structure (Hinton & Maclurcan, 2018). The successes of these companies are based on their impact in the community, rather than the profits they generate. NFPs don’t have private owners and financial surpluses should serve social and environmental benefits (Hinton, 2020).
The NFP business model isn’t new. Lately there has been renewed interest in old business models such as consumer cooperatives (Utting et al., 2014). Nowadays, consumer cooperatives often supply food or renewable energy. We think that the NFP business model has been on the rise because of a certain level of distrust in governments and new forms of financing, such as crowdfunding or community bonds.
Hybrid business models?
The profit/non-profit dichotomy is secured in most industrialized countries in regulations with a clear distinction between the for-profit and the non-profit legal status (e.g. foundations, associations are not allowed to make profits). This separation resembles the classic capitalist distinction between market and state. However, in practice, many companies already have diverging operations that make the profit/non-profit distinction questionable (Schmid, 2018). Scholars demand a hybrid structure (Alberti & Varon Garrido, 2017), but we specifically propose a revival of the not-for-profit with an obligation to clearly define objectives and values.
We chose this option because we think that the dynamics of a not-for-profit organization are key to breaking with the capitalist growth mantra. A hybrid structure is diffusing. Social housing corporations represent a pertinent example. Many Dutch housing corporations prefer building profitable houses where returns are high, rather than serving their original objectives: essentially, these organizations should provide affordable household and community services.
The critical role of profit for sustainability
An unfortunate consequence of the for-profit structure is that it is built on the foundations of ‘limitless growth economy’. This system encourages depletion of natural resources, consumerism and social inequality (Hinton, 2020). A typical example of a for-profit structure is the shareholder model with profit maximization. Profits are usually the only incentive for shareholders to invest. Diametrically opposed to this, when the legal structures are well defined, a not-for-profit should only pursue social and environmental benefits. Any generated profits should be reinvested to ensure the continuation of the NFP’s socio-environmental strategy.
Moreover, the diversity of goals of not-for-profit organizations supports heterogeneous economic structures, which helps us to move away from the narrow-minded perspective that economics only includes for-profit enterprises (Schmid, 2018). Contrary to for-profits, NFP structures, such as cooperatives, are surprisingly resilient when coping with (financial) crises (Toia, 2013). The societal benefits of NFPs can be derived from the fact that NFP earnings are maximized for mutual or collective benefit rather than for individual investors (Utting et al., 2014).
Pros for non-profit startups
At the micro level of a company itself, the advantages of the NFP business model are as follows.
- A not-for-profit business is usually easy and cheap to start, as costs of legal assistance for founding the company are low.
- NFPs can enjoy tax exemptions in many countries (such as ANBI status for foundations in NL )
- But most importantly, NFPs create a lot of public goodwill and generally have more options for voluntary help from universities and research centers. This is particularly valuable for startups.
Is it always promoting sustainability?
Even though Hinton & Maclurcan (2018) argue that the NFP business model encourages sustainable decision-making by a changed ownership and incentive structure, NFPs are not obliged to have social and environmental aspects as part of their strategy. This is an important limitation that is lacking in legal requirements (Schmid, 2018). Also, the blurry legal structure allows for cheating. Limited supervision by authorities can promote abuse of the regulations such as misreporting on annual accounts (happens at ANBI foundations (In Dutch)).
A Business Model for Sustainability
Schaltegger, Lüdeke-Freund, and Hansen propose a ‘Business Model for Sustainability’, that “helps describing, analyzing, managing, and communicating (i) a company’s sustainable value proposition to its customers, and all other stakeholders, (ii) how it creates and delivers this value, (iii) and how it captures economic value while maintaining or regenerating natural, social, and economic capital beyond its organizational boundaries” (Schaltegger,Lüdeke-Freund, and Hansen, 2016: 6). We agree with the three points of this definition, but would like to emphasize the need of supportive and transparent governments.
The role of the government
Due to their structured course of action and their enormous outreach, we see governments as perfect facilitators of bottom-up initiatives like cooperatives. However, they should not become initiators that try to function as a business. If citizens come up with initiatives, governments should find ways to support them, but not appropriate their ideas. Nonetheless, we encourage governments to arrange appropriate supervision to avoid cheating with the mutually agreed rules. An important condition of this collaboration is that a government should have the trust of its citizens. But a trustworthy government is unfortunately not a matter of course.
We stress that the NFP business model should not function as a substitute for failing government policies. This is how many NFPs started in the 19th century in The Netherlands. In this era, the night-watchman state model demanded self-sustainability of all citizens. Non profit organizations, such as housing corporations, were established to provide services for those who couldn’t afford it.
How to substitute for missed profit taxes
What if many businesses would really adopt an NFP business model? You might think that this article is just a range of utopian ideas. We couldn’t resist already thinking about practicalities that could help you to put these ideas in a realistic perspective. Considering this proposal from a government perspective, we might imagine that policy makers will wonder: What should governments do to replace the missed profit taxes? Let’s look at our current regulations: carbon taxing of current for-profit businesses has not worked so far and nations struggle to implement laws that include external costs of pollution, environmental damage and social inequality. NFPs are likely to be less harmful. For instance, they could be the big equalizers when adopting nature and environmental inclusive values and employing workers that have a distance from the labor market. This will prevent governments from making costs to fix these negative externalities. Even though NFP business models might lead to less tax revenues, we expect that government expenditures could likewise be reduced.
Cons for non-profit startups
In practice, many businesses start with a not-for-profit structure but eventually move to a for-profit model when they grow bigger. This usually has to do with the fact that NFPs have to publish a detailed report of their annual results to the general public. Public scrutiny makes companies more transparent, but also more vulnerable to competitors and prone to social pressure. Since many NFPs strongly depend on a sense of morality, their activities can face opposition. This is why we think that the legal statuses of NFPs should be protected by the government and so should be the level playing field of NFPs. We encourage policymakers to think about instruments for this.
An organization that advocates a separate legal status for NFPs as well is Social Enterprise NL (for info on legal status see here). This association aims to connect members that are businesses acting as a ‘social enterprise’ (read the criteria developed by EU here) by supporting them, inspiring them and facilitating an optimal business environment. An important step of the last goal is legal recognition.
In short, our proposal includes both a top-down and a bottom-up approach. For governments we underline that they should protect not-for-profits legally, they should demand goals related to sustainability and equality and check regularly if these strategies are complied with. For businesses that want to adopt NFP, we deem it important that they include social and environmental values in their statutes. The same holds for non-distribution clauses and asset locks. By including these values, they do not only serve as objectives, but as a pledge for a long term strategy.
Must reads if you are thinking about starting a not-for-profit business:
- The Hidden Power of a Nonprofit Business Model
- Check the website of Social Enterprise NL
- And their Impact Path, an open source tool to measure entrepreneurial impact
Alberti, F. G., & Varon Garrido, M. A. (2017). Can profit and sustainability goals co-exist? New business models for hybrid firms. Journal of Business Strategy, 38(1), 3–13. https://doi.org/10.1108/JBS-12-2015-0124
Hinton, J., & Maclurcan, D. (2017). A not-for-profit world beyond capitalism and economic growth? Ephemera, 17(1), 147–166.
Hinton, J. B. (2020). Fit for purpose? Clarifying the critical role of profit for sustainability. Journal of Political Ecology, 27(1), 236–262. https://doi.org/10.2458/v27i1.23502
Schaltegger, S., Hansen, E. G., & Lüdeke-Freund, F. (2016). Business Models for Sustainability: Origins, Present Research, and Future Avenues. Organization & Environment, 29(1), 3–10. https://doi.org/10.1177/1086026615599806
Schmid, B. (2018). Structured Diversity: A Practice Theory Approach to Post-Growth Organisations. Management Revue, 29(3), 281–310. https://doi.org/10.5771/0935-9915-2018-3-281
Toia, P. (2013). Report on the contribution of cooperatives to overcoming the crisis (Nr. A7-0222/2013; Committee on Industry, Research and Energy Report). European Parliament. https://www.europarl.europa.eu/sides/getDoc.do?type=REPORT&reference=A7-2013-0222&language=EN
Utting, P., van Dijk, N., & Matheï, M.-A. (2014). Social and Solidarity Economy: Is there a new economy in the making? (p. 71). United Nations Research Institute for Social Development. http://www.unrisd.org/unrisd/website/document.nsf/(httpPublications)/AD29696D41CE69C3C1257D460033C267?OpenDocument