The term ‘not-for-profit’ is controversial and imperfect, and has become the subject of vigorous debate within the sector. The AICD has explored the issue with a view to forming a position on the use of the term.
If you’re involved in the not-for-profit (NFP) sector, you’ve probably heard someone complain about the use of the term ‘not-for-profit’.
The criticisms are fairly common: it defines the sector by what it’s not, has an inappropriate emphasis on profit and doesn’t provide insight into the sector’s character and purpose.
But at times, debate about the term can seem a surprising distraction from the critical issues facing the sector. So why is it so often discussed?
It must be acknowledged that there is a strong sentiment that the term is less than ideal. In a survey of members of the Australian Institute of Company Directors (AICD), 52 per cent felt that the term has a negative impact on the sector.
There are many reasons behind this sentiment. The most commonly-cited is that the term contributes to a misunderstanding of the role of profit among NFPs. The AICD’s 2016 NFP Governance and Performance Study (the Governance Study) revealed that some NFP directors perceived that NFPs were not “allowed” to make a profit.
This view is not widely held - 78 per cent of directors said their organisations felt comfortable making a profit. However, across the broader sector, the Governance Study found that the great majority of NFPs set unambitious profit targets (most aiming to break even or make only marginal profit), reflecting a pessimistic outlook for the sector’s long term financial strength. Although the extent to which the term ‘not-for-profit’ contributes to this is not easily measurable, the intuitive link is obvious.
But for all the criticisms of the term, a clear alternative has yet to emerge.
The challenge in finding an alternative is the tremendous diversity of NFPs in terms of purpose, income sources, size, legal structure and governance. It is difficult (if not impossible) to capture this while also providing the detail necessary to provide an insight into the sector’s character and purpose.
None of the alternative terms proposed capture the full spectrum. ‘Community services organisation’, for example, might suit a shelter for people experiencing homelessness, but wouldn’t suit a Buddhist temple. “Social impact organisation” might suit a refugee health clinic, but wouldn’t suit a sporting club.
In our survey of directors, we sought feedback on five potential terms to use to describe the sector:
‘Community benefit organisation’ was the most preferred term (35 per cent), closely followed by ‘for-purpose organisation’ (31 per cent). However, there was significant disparity in preference based on whether or not respondents were directors of an NFP.
Among NFP directors, ‘community benefit organisation’ and ‘for-purpose organisation’ rated equally highly (35 per cent respectively). Respondents who were not directors of NFPs favoured ‘community benefit organisation’ (37 per cent) more and even rated ‘not-for-profit’ (24 per cent) above ‘for-purpose’ (21 per cent). Among proponents for change, ‘for-purpose’ is a popular alternative, but it appears to lack the resonance with the broader community needed for it to be seriously considered.
Add to this the complexity of how deeply the term and concept is embedded in the policy and tax landscape, and its resistance to change becomes apparent.
Without a clear alternative, and recognising the enormous project of work that would be required to facilitate a transition to a new term, there is a real potential that any change could create further complexity.
There is no doubt that the term ‘not-for-profit’ is imperfect and a debate about the sector’s identity and perception is worthwhile. But the question must be asked: why now, and to what extent does a focus on this question distract from the critical issues facing the sector.
Building a more complete understanding within the broader community of the character and purpose of the NFP sector is not an unrealistic goal. The NFP sector has a great story to tell and increasingly, thanks to the work of the Australian Charities and Not-for-profits Commission among others, there is high-quality data available to support a clearer picture of the collective impact and nature of NFPs.
Many challenges lay ahead for the NFP sector; regulatory reform, funding disruption and an increasingly complex operational environment will dominate the attention of boards for years to come. Against this backdrop, the issue of what we call the sector is unlikely to rank among top priorities for NFPs, government and the broader community.
The AICD has prepared a position paper setting out its view on the use of the term ‘not-for-profit’. This paper explores the background of the term and why it has become the subject of debate. It also considers how it is used by government, potential alternatives and evaluates the merits of change.
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