New research suggests that this mistrust is not strange at all. In fact, it can boost team performance, says Erich Dierdorff, an assistant professor in the department of management at DePaul University. Dierdorff wanted to see whether more collectivist, group-oriented teams in fact do better work. His answer is a resounding yes.

Psychological collectivism has many facets, from how much people like or prioritize teamwork to how comfortable they are with relinquishing control. Dierdorff and colleagues showed that these facets have different effects on team performance at different times. As groups of three to six students in a capstone business course competed at running simulated companies, Dierdorff assessed each member’s collectivist tendencies and compared them to the team’s performance at the beginning and end of a several-week stint in the widget business.

“Teams that had more members who were higher in preference for group work and higher in concern for other people had better early performance,” says Dierdorff. When those teams cooperated well, high preference also increased final performance. Teams whose members tended to put group goals before their own performed better at the end, but no differently at the beginning. Whether people embraced group norms made little difference.

And reliance—the characteristic that Moore lacks— turned out to be bad for early performance. Whereas high-reliance people just figure the team will get it done, low-reliance people take more responsibility on themselves. As long as the members are cooperating well, low-reliance groups continue to succeed.

To the extent that the student simulation reflects real-world workplaces, practical lessons can be gleaned. Putting group objectives ahead of one’s own makes a big difference to the team’s success And the quality of cooperation can make or break the performance boost that collectivism offers. Training in cooperative exchange could turn groups that enjoy each other into groups that succeed together, and would especially benefit those who are least comfortable relying on others—because “at some point, with a good team, you let go of that distrust,” says Moore.

Erich C. Dierdorff, Suzanne T. Bell, and James A. Belohlav, “The Power of ‘We’: Effects of Psychological Collectivism on Team Performance Over Time,” Journal of Applied Psychology 96, 2011.

Her guinea pigs were affiliates of Communities in Schools, a nationwide network of nonprofit organizations that bring community support to public school students. For two years, she visited locally controlled, independently programmed organizations in Florida, Georgia, North Carolina, and South Carolina. She left questionnaires with every employee and board member and interviewed 79 executive directors, many of whom couldn’t wait to tell her what was new. She gathered enough data to distinguish different types of innovation: the administrative (a new organizational structure or administrative system) and the technological (a new program or service). Administrative innovation was associated with centralization and a new executive director. Transformational leadership was defined by both administrative and technological innovation.

Across widely different affiliates and programs—from turning a donated bus into a brightly colored mobile library in rural Georgia to providing mentoring and college scholarships to the children of fallen soldiers in metropolitan Florida—Jaskyte found similar leadership styles. Transformational leaders find ways to “capitalize on that creativity that employees have,” says Jaskyte. They create trusting relationships by “challenging the process, inspiring a shared vision, enabling others to act, modeling the way, and encouraging the heart.”

One such leader is Jon Heymann, CEO of Communities in Schools of Jacksonville, which runs the after-school programs that have become the standard in the city. “We have no canned programs,” Heymann says. “Anything we have done we’ve invented and designed ourselves.” He calls his direct reports “renegades” because “each one of them could run their own nonprofit. They are at times very hard to manage,” he says, “but I would rather have that than rubber stamps, where all of the ideas have to come from me. ”

Jaskyte hesitates to offer practical advice based on her findings. But to those executive directors who tell her they just don’t have time to pioneer new programs and processes while they’re busy trying to stay afloat, she counters that innovation would make everything else easier. Michael Austin, professor of nonprofit management in the School of Social Welfare at the University of California, Berkeley, agrees. “The most successful organizations, in terms of sustaining themselves, are the ones that are continuously innovating,” Austin says.

Kristina Jaskyte, “Predictors of Administrative and Technological Innovations in Nonprofit Organizations,” Public Administration Review 71, 2011.

Yet according to the United Nations, some 100 million people worldwide remain homeless, and nearly 3 billion live in poverty. If Habitat for Humanity continues to build homes at its current rate, the organization will fall far short of its goal of eliminating homelessness and what it calls “poverty housing” – that is, the substandard, overcrowded, and even dangerous conditions in which many poor people live.

But one country program, Habitat for Humanity Egypt (HFHE), is covering more ground in pursuit of its mission. Whereas a typical Habitat for Humanity country program produces around 200 houses each year, HFHE has on average built some 1,000 houses annually, for a total of more than 8,000 houses in just eight years. At the same time, HFHE has transformed the communities in which it works by collaborating with local organizations to address the root causes of poverty and homelessness. Indeed, HFHE is on track to realizing its vision: “to serve 10 percent of the 20 million Egyptians living in poverty and to develop the local capacity to serve the remaining 90 percent in need over the next 25 years.”

Our research reveals the secret of HFHE’s success: It has replaced the traditional nonprofit focus on internal activities such as fundraising, staff recruitment, and program development with an external focus on building its network. Taking stock of his organization’s resources – capital and housing program expertise – HFHE’s national director, Yousry Makar, asked himself what other resources his organization needed to reduce homelessness in Egypt. He concluded that it needed the on-the-ground knowledge and deep relationships that community- based organizations already had. This led him to develop the loose network of local nonprofits that has made HFHE such a success.

We have studied several organizations that exemplify this network approach. By mobilizing resources outside their immediate control, networked nonprofits achieve their missions far more efficiently, effectively, and sustainably than they could have by working alone. Many traditional nonprofits form short-term partnerships with superficially similar organizations to execute a single program, exchange a few resources, or attract funding. In contrast, networked nonprofits forge long-term partnerships with trusted peers to tackle their missions on multiple fronts. And unlike traditional nonprofit leaders who think of their organizations as hubs and their partners as spokes, networked nonprofit leaders think of their organizations as nodes within a broad constellation that revolves around shared missions and values.

Most social issues dwarf even the most well-resourced, well-managed nonprofit. And so it is wrongheaded for nonprofit leaders simply to build their organizations. Instead, they must build capacity outside of their organizations. This requires them to focus on their mission, not their organization; on trust, not control; and on being a node, not a hub.

Network for a Change

Nonprofits that understand how to network range across both nations and issues. One organization we have studied, for instance, is the Guide Dogs for the Blind Association (GDBA), a United Kingdom-based nonprofit that is the world’s largest breeder and trainer of guide dogs. When Geraldine Peacock became its CEO in 1997, GDBA was providing guide dogs to only 5,000 clients. Yet the organization’s own research suggested that more than 200,000 people in the United Kingdom needed mobility services, which include providing guide dogs and training clients to use canes. At the same time, the organization was losing millions of pounds sterling per year operating hotels and a travel agency for the visually impaired.

Peacock decided to scale back her organization and focus only on its primary area of expertise: mobility training. But her clients still valued GDBA’s hotel and holiday operations. Rather than abandoning these enterprises altogether, Peacock offered to partner with other organizations that serve the visually impaired – GDBA’s former competitors. GDBA then not only handed over the management and control of the hotel and travel programs to its partners but also invested an additional £8 million to improve the programs’ quality and to ensure their sustainability. GDBA’s partners only had to meet jointly determined performance benchmarks.

GDBA also partnered with local governments to improve the quantity and quality of mobility services. In the United Kingdom, local governments are legally responsible for providing mobility training, independent living skills, and communication skills to the visually impaired. Yet government budget constraints leave many of these services underfunded. And so GDBA offered to fund local governments’ mobility training initiatives. The governments could use the funds to subcontract with either GDBA or another nonprofit. When governments chose the latter, GDBA offered to give technical support to its peers. In exchange for the funding, the government agencies reallocated the money they saved to other services for the visually impaired.

Finally, Peacock created an independent umbrella organization, Vision 2020 UK. The organization helps various service providers coordinate their efforts and share the costs of operations (such as payroll). It also brings together eye care service users and providers to produce a unified plan for action on all issues relating to vision. Within five years of creating these partnerships, GDBA more than doubled the number of clients to whom it provided mobility services without scaling up its own operations. Instead, it worked through other nonprofits and the government to achieve its mission. After witnessing GDBA’s success, the U.K. government established a £125 million fund in 2002 to invest in the types of nonprofit networks that GDBA and its partners had pioneered.

Some microfinanciers have also learned the power of nonprofit networks. Women’s World Banking (WWB) is one of them. Founded in 1976, WWB seeks to expand the economic assets, participation, and power of low-income women.

When Nancy Barry assumed leadership of WWB in 1990, the organization reached approximately 50,000 clients and lent approximately $25 million through its network of affiliates. To deliver on its mission, Barry decided to grow the WWB network to include more independent microfinance institutions – such as ASA in Bangladesh – and banks – such as Shorebank in the United States. Today, the WWB network includes 53 microfinance institutions and banks in 30 countries. By 2003, WWB’s expanded network gave 18 million people worldwide $8.5 billion in direct credit services. This growth translated into a more than 350-fold increase in the number of clients whom WWB served. At the same time, WWB’s staff barely grew – from 16 employees in 1993 to 50 employees in 2003. Its budget likewise did not keep pace with its impact: from $3 million in 1993 to $10 million in 2003.

WWB gives its network members the services for which scale improves efficiency, such as technical and financial services, market research, and loan guarantees. It teaches affiliates best practices. And it advocates better microfinance policies. Yet most of the network’s power lies in the support that its members give to each other. WWB network members share product and process innovations, provide technical services, evaluate each other, and hold each other accountable for results. “To create real networks, you have to believe that the center of an operation does not have a monopoly on truth,” says Barry. “You need to trust the people, trust the process.”¹

Mission, Not Organization

Although HFHE, GDBA, and WWB are building different types of networks to achieve disparate missions, they share a common mind-set. First, they put their missions rather than their organizations at the center of their operations. By sharing the pursuit of their mission, these organizations forsake many organizational benefits, such as control over program implementation, funding, and recognition. At the same time, however, they have far more impact than they could ever have had on their own.

For example, when Makar began to lead Habitat’s efforts in Egypt, he first identified nongovernmental organizations (NGOs) that were already tackling issues related to poverty, such as economic development, education, and health care. “We have an Egyptian proverb that I use, which is that ‘the basket that has two handles should be carried by two people,’” says Makar. “So I put this proverb in my mind and this is how I began to think to address this problem [of housing in Egypt].”

He then partnered with these organizations to develop housing programs, keeping in mind that alleviating poverty would require more than housing. Indeed, Habitat for Humanity International has built homes in communities that deteriorated into slums because no one had confronted the root causes of poverty.

Rather than impose his ideas upon the network, Makar supports HFHE’s partners to the point when they become self-sufficient. Some of these alliance partners now attract their own funding, operate their own housing programs, and even disseminate their expertise without HFHE’s involvement. When these partners and HFHE agree to part ways, HFHE can turn its attention to new communities with unmet needs.

HFHE freely shares recognition for its successes. At an event commemorating the building of HFHE’s 6,000th house, Makar was invited to say a few words about HFHE’s achievements. In his remarks, Makar said: “It’s not Habitat. The community is doing it. We just provide support.” He then invited his network partners to join him on stage.

GDBA likewise gives up control, funding, and recognition to support competitor NGOs and local governments that are dedicated to the same mission. Peacock readily acknowledges that GDBA cannot single-handedly serve the mobility needs of the entire visually impaired population of the United Kingdom, even though the organization is the second largest charity in this domain. In an interview she said: “It was less important which organization was providing services, or in turn which organization got credit or recognition for doing so, be it the government, or competing nonprofits, as long as services were being provided to the visually impaired at a high quality on a sustainable basis. … It’s really about working smarter and thinking laterally.”

Trust, Not Control

In many partnerships, nonprofits feel they must exert control to ensure quality. But when networked nonprofits share the same values, they do not have to try to manage for every contingency. Although partners may still opt to have formal contracts, they more often use them to define roles and responsibilities rather than to enforce rules. For them, trust governs the network.

Before HFHE accepts a new partner, for instance, it examines not only the potential partner’s track record in community development, but also its alignment with HFHE’s core values: integrity (following through on commitments), diversity (no discrimination on the basis of color, religion, gender, nationality, or disability), and equity (serving those in greatest need). To assess the potential partner on these dimensions, HFHE conducts extensive interviews with local leaders, beneficiaries, and NGOs.

The organization also involves the potential partner in volunteer activities. Because HFHE spends considerable time and resources selecting partners, it does not need to rely on traditional top-down approaches to control them. Instead, the nonprofit treats its partners as trusted equals who play a central role in designing and executing the housing programs that best serve their community’s needs.

Barry likewise works hard to build a shared vision and culture throughout her organization’s network. For example, WWB facilitated a series of meetings with its partners to define their shared values. According to Barry, these values included a belief in poor women as entrepreneurs, clients, and change agents; in business approaches to economic and social changes; and in the power of self-determined organizations bound by mutual accountability for results, rather than in donor-driven approaches or top-down controls. “We believe that the practitioners are the experts,” she says.² Thus, unlike its counterparts that advocate for a specific method of microfinance, WWB relies on its partners’ values to ensure adherence to the network’s shared vision while encouraging network members to tailor their methods to local contexts and client needs.

Networked nonprofits cannot take values alignment among partners for granted. They must commit time and resources at the outset to assess whether there is sufficient common ground on which to build a network. They must then invest in strengthening the shared values and monitoring adherence to them. Above all else, all network members must demonstrate their ongoing commitment to the social impact of the network rather than to their own organizational interests. Despite the cost of these investments, networked nonprofits are often far more productive because they don’t have to rely on formal control mechanisms. Instead, their partners’ internal motivation and commitment drive them to work hard for the shared vision of the network.

Node, Not Hub

Networked nonprofits like HFHE, WWB, and GDBA share a third trait: They see themselves as nodes within a constellation of equal, interconnected partners, rather than as hubs at the center of their nonprofit universes. Because of the unrestricted and frequent communication between their different nodes, networked nonprofits are better positioned to develop more holistic, coordinated, and realistic solutions to social issues than are traditional nonprofit hubs.

For example, although HFHE’s network partners receive 95 percent of their funding from HFHE, Makar knows that his organization is equally dependent on these partners to bring superior knowledge of the local communities and credibility in them. As a result, HFHE encourages its partners to tailor their housing grants to community needs and then spreads the resulting innovations. In one case, a partner asked HFHE if it could use its overhead contribution (5 percent of its capital) to build homes for families that were too poor to qualify for HFHE loans. HFHE agreed, and then promptly offered the partner’s innovation to all of the other nodes in its network.

WWB similarly relies on network members’ knowledge and expertise to amplify its impact. According to WWB founder Michaela Walsh, “Instead of running a global institution from on high, we wanted decisions made from the bottom up, through consensus building.”³ WWB staff help members by coordinating technical and financial products and services and offering training. Yet WWB depends on network members themselves to help each other achieve high performance. In 1998, a core group of network members worked together to establish minimum performance standards. By treating network members as equals and valued peers, WWB was able to establish demanding performance standards that were far more credible and effective than if they had been pushed down from WWB headquarters.

Change for the Better

According to our research, nonprofits that pursue their missions through networks of long-term, trust-based partnerships consistently achieve more sustainable mission impact with fewer resources than do monolithic organizations that try to do everything by themselves. Unfortunately, however, many practices in the nonprofit sector inhibit the creation of such networks.

Nonprofit leaders often view organizational growth and revenue increases – rather than impact – as their primary metrics of success. As in the corporate sector, the nonprofit sector considers growth of some form – whether scaling up existing programs, expanding to new locations, raising more money, or proliferating new programs – to be a sign of vitality and impact. Organizations whose budgets, staff, and programs are growing in direct response to an urgent need are often viewed as the most successful.

Nonprofit boards can also prove to be an impediment to network building. Boards are charged with overseeing the accountability of the nonprofit. This mandate often translates into an internal, organization-level focus on activities and performance, such as costs and revenues, number of new programs, number of clients served, or brand building and fundraising. Boards do not have strict, clear standards for measuring progress toward their mission.

Donors likewise hinder the broader use of networks in the nonprofit sector. Although many funders today encourage collaboration among grantees, they often do so in a top-down manner. They fail to realize that relationships cannot be forced with the blunt tool of funding. Furthermore, donors have historically preferred to give restricted funding to specific programs rather than unrestricted funding to the organization. Dictating what and how programs should be delivered severely limits the creativity and flexibility that experts need to build powerful networks.

Even high-engagement philanthropy, with its longer-term funding, organizational capacity investments, and strategic coaching, does not go far enough: Its emphases on organizational performance, accountability, and going to scale often preclude leveraging resources beyond organizational boundaries. Instead, they drive nonprofits to concentrate on outcompeting their peers and building their own organizations’ brands so that they can secure funding in competitive philanthropic capital markets. Even organizations that can afford to go it alone should explore whether working through a network can generate greater impact with fewer resources.

To harness the tremendous potential of networks, all nonprofit leaders – presidents and CEOs, board members, and funders – must let go of conventional wisdom and shift their focus from organization-level goals to network-level impacts. Nonprofit leaders should put the pursuit of their missions – not the growth of their organizations – back at the center of all of their organizations’ activities. They should identify their organizations’ unique competencies and actively seek partnerships with other organizations that will help them serve their missions more efficiently and effectively. They should look to both complementary and competing organizations as potential partners.

Board members must grant nonprofit leaders the autonomy to develop innovative approaches to achieving their missions in the long term, even if it means sacrificing short-term organization- level achievements. The board should also invest organizational resources in network building, enable formal relationships with external parties, and value impacts over outputs.

Funders too can nurture nonprofit networks. They should select grantees that embody the vision, values, and leadership capabilities needed to create and work through networks. By selecting for these values and providing unrestricted, long-term support, funders can help their grantees build and develop strategic networks that have the greatest impact. Because no single organization can claim the achievements of the network, funders must also fundamentally rethink their accountability systems and remain realistic about the timelines required for achieving network-level impacts.

More With Less

Networked nonprofits are some of the most effective nonprofits in the world. They are different from traditional nonprofits in that they cast their gazes externally rather than internally. They put their mission first and their organization second. They govern through trust rather than control. And they cooperate as equal nodes in a constellation of actors rather than relying on a central hub to command with top-down tactics.

By mobilizing vast external resources, networked nonprofits can focus on their own expertise. At the same time, these external resources enhance the value and influence of each organization’s expertise. They help each network partner respond to local needs and become self-sustaining. And they allow networked nonprofits to develop holistic solutions at the scale of the problems they seek to address.

Although the social problems that nonprofits are tackling are growing in both magnitude and complexity, funding is failing to keep pace. Networks do not require more resources, but rather a better use of existing resources. And so networked nonprofits are uniquely poised to face the perennial challenge of the nonprofit sector: achieving lofty missions with decidedly humble means.

1 http://www.alumni.hbs.edu/awards/2005/barry.html

2 James Austin and Susan Harmeling, “Women’s World Banking: Catalytic Change Through Networks,” Harvard Business School (1999).

3 Ibid.

JANE WEI-SKILLERN is an assistant professor of business administration in the General Management Unit and Social Enterprise Group at Harvard Business School. In addition to conducting research on networked nonprofits, she teaches in the field of social entrepreneurship.

SONIA MARCIANO is a clinical associate professor of management and organizations at New York University’s Stern School of Business. Before joining Stern, Marciano taught strategy at Columbia Business School and was a senior lecturer at Harvard University.

Given this context, the timing seems especially ripe for Nonprofit Sustainability from co-authors Jeanne Bell, Jan Masaoka,and Steve Zimmerman. The authors, all respected nonprofit executives and consultants, have developed a framework that will help nonprofit executives take an approach that integrates financial performance and social impact considerations in strategic decision making. The book’s premise is that “financial and impact information can and must be brought together in an integrated, fused discussion of strategy,” which is true and increasingly important. Much as 21st-century corporations are integrating social responsibility and sustainability practices in their business models, 21st-century nonprofits must integrate financial considerations with their social impact priorities as well. It’s all reflective of the movement toward a broader perspective of organizational performance and the idea of “blended value” that Jed Emerson gave us many years ago.

Beyond this important premise, Nonprofit Sustainability’s primary contribution is a framework for operationalizing the integration of financial and social impact. The “Matrix Map,” a standard 2 x 2 matrix that is the trusted friend of every good consultant, is a simple but powerful model for assessing the impact and profitability of a nonprofit’s programs. In this model, programs are reclassified as “business lines” and include fundraising efforts as well. Each business line is assessed on its impact and profitability and then plotted at the appropriate point and scale on the matrix. Through this process, nonprofit executives get a clear picture of both the absolute and relative performance of each important program and fundraising effort. No doubt the picture this exercise reveals will be enlightening for many nonprofit leaders and put them in a better position to make smart resource allocation decisions. A simple, easy-to-use framework that gives nonprofit leaders sharpened strategic clarity about the value of programs and initiatives? For that alone, we should all hail the arrival of the Matrix Map.

It should be noted, and more overtly than it is in the book, that the Matrix Map is a direct descendant of Boston Consulting Group’s Growth-Share Matrix, which dates to 1968 and is familiar to everyone who has since pursued an MBA. The BCG Matrix famously gave us “Stars,” “Cash Cows,” “Question Marks,” and “Dogs,” and suggested that companies should classify and manage their product portfolios accordingly. Nonprofit Sustainability’s Matrix Map gives us “Stars,” “Money Trees,” “Hearts,” and “Stop Signs,” and suggests that nonprofits classify and manage their program portfolios accordingly. If it sounds like the Matrix Map is essentially the BCG Matrix applied to nonprofits, it’s because that’s exactly what it is. Even so, the Matrix Map’s lineage doesn’t change the fact that its application to nonprofits is at least somewhat novel, and it does create a potentially important new tool for nonprofit boards and executives.

The first half of Nonprofit Sustainability develops the Matrix Map as a model and helpfully illustrates its use and applicability through a variety of examples and situations. The second half is largely filler, seemingly purposed around the need to reach a certain page count to achieve book status. Part Four in particular, a 32-page laundry list of every imaginable fundraising and earned income vehicle, bears little relevance to the Matrix Map or its application. Rather than an encyclopedic list and description of earned income types, a chapter on how social enterprise models could be evaluated using the Matrix Map model would have been far more valuable. Similarly, although the book does devote a few pages to the Matrix Map’s usefulness in potential merger evaluations, surely there is more to say about how this tool can help facilitate nonprofit merger and joint venture activity, which has to be one of the biggest untapped opportunities in the sector.

Nonprofit Sustainability is a book that would’ve been, and probably should’ve been, a great article in the Stanford Social Innovation Review, where the core idea and useful Matrix Map could have found a larger audience. Nonetheless, I fully intended to order copies for the executive directors and board chairs I work with, until I found it priced at a whopping $35 for a paperback edition. Although Nonprofit Sustainability and its Matrix Map deliver an important idea for nonprofits, it’s an idea that should have been delivered more accessibly and affordably. Something isn’t right about a business model that takes a good (but hardly proprietary) idea for nonprofits and turns it into a high margin, low volume product. Perhaps that’s a critique of book publishers more than the authors, but Nonprofit Sustainability is ultimately a product of both.

Jim Schorr is a professor at Vanderbilt University’s Owen School of Management, where he teaches coursework on social enterprise and CSR. Previously, he was executive director of Juma Ventures and a co-founder of Net Impact. He currently serves as a trustee of the Nature Conservancy of Tennessee and as board president of Oasis Center, Nashville’s leading nonprofit organization for disadvantaged youth.

An integrated report is a single document that presents and explains a company’s financial and nonfinancial—environmental, social, and governance (ESG)—performance. The impetus behind issuing this document was the King Report on Governance for South Africa 2009 (King III), written by University of South Africa professor Mervyn King, which recommended that companies and other organizations produce integrated reports connecting material financial and sustainability information. King III was created to maintain South Africa’s leadership in standards and practices for corporate governance. It also reflects the country’s intention to be “at the forefront of governance internationally,” as the report states. “We believe this has been achieved because of the focus on the importance of conducting business reporting annually in an integrated manner, i.e., putting the financial results in perspective by also reporting on how a company has, both positively and negatively, impacted on the economic life of the community in which it operated during the year under review; and how the company intends to enhance those positive aspects and eradicate or ameliorate the negative aspects in the year ahead.” ¹

South Africa’s integrated reporting requirement is an important step toward creating a more sustainable economic, social, and environmental society. King hopes it will cause a worldwide domino effect. “Companies, investors, and other stakeholders in South Africa are very supportive of integrated reporting and excited about the opportunity we have to help lay the foundation for spreading this practice on a global basis,” he said. But companies cannot be the only force behind integrated reporting. “All of us are responsible for creating a sustainable society,” said King, “and I think NGOs have a critical role to play as representatives of civil society.”

This article explores the strengths and challenges of integrated reporting and how the public, private, and nongovernmental sectors can collaborate to create a worldwide movement that requires organizations of all kinds to act more sustainably.

THE STATE OF CORPORATE REPORTING TODAY

Every company listed on a stock exchange is required to issue on at least an annual basis a financial performance report. These reports are based on a set of accounting standards—typically International Financial Reporting Standards or US Generally Accepted Accounting Principles—that define the information reported in a company’s income statement, balance sheet, and notes to the financial statements. High-quality and transparent financial reporting that presents an accurate view of a company’s financial condition is one of the bedrocks for fair and efficient capital markets. Companies, their external auditors, standard setters like the Financial Accounting Standards Board in the United States and the International Accounting Standards Board, and regulators such as securities commissions all make substantial efforts to ensure high-quality financial reporting by listed companies. In 2010, the total market value of these 45,517 companies was about $52 trillion, with revenues of some $46 trillion and total employment of nearly 200 million people, according to the World Federation of Exchanges and Capital IQ, respectively. By comparison, global GDP that year was $58 trillion, illustrating how significant corporations have become. Given the large amount of financial, natural, and human resources controlled by these companies, it is important that investors have accurate information when making their resource allocation decisions. Similarly, other stakeholders, such as employees and customers, need this information to decide where to work and from whom to buy.

Financial reporting has institutional legitimacy, thanks to a variety of factors. They include measurement, reporting, and auditing standards; effective enforcement mechanisms, including courts of law for redress of fraud in the financial statements; sophisticated internal control and measurement systems; and information technologies that enable rapid capture and aggregation of data. But financial reporting also has its critics, who cite its increasing complexity, making it hard for all but the most sophisticated users to understand the reports. There is also the difficulty of finding the most relevant information, the time lag in issuing reports, the paucity of information about the risks being taken by the company to create value for shareholders, and the backward-looking nature of the reports. Questions about whether a financial report presents a “true and fair view” of a company cannot be adequately answered, because the reports do not contain information on nonfinancial performance that can determine a company’s long-term financial picture.

As a result, an increasing number of companies are voluntarily starting to produce sustainability or corporate social responsibility reports. Typically, they contain information on a company’s environmental (e.g., energy and water usage and carbon emissions), social (e.g., labor practices, employee turnover, and workforce diversity), and governance (e.g., independence of the board and approach to risk management) performance. In some cases, they also include information on the company’s philanthropic and community activities. Frameworks and standards for the information in these reports are not nearly as well established as they are for financial reporting. Nevertheless, investors are increasingly interested in nonfinancial information. In July 2009, Bloomberg added ESG data to its information offerings that cover thousands of public companies. Now Bloomberg’s 300,000 customers see ESG data, such as toxic discharge, water usage, and more than 100 other indicators, from companies like General Electric and Deutsche Bank. In the second half of 2010, customers in 29 countries accessed more than 50 million ESG indicators.

There are also several important nonfinancial reporting initiatives. The NGO Global Reporting Initiative’s G3 Guidelines are a good start for a set of reporting standards. And the NGO AccountAbility has issued the AA1000 Assurance Standard, which provides assurance on nonfinancial information. Also relevant is the Climate Change Reporting Framework issued by the Climate Disclosure Standards Board. The percentage of companies publishing reports on their nonfinancial performance varies by country, with European countries, Australia, Brazil, and Japan being more active than China, India, and the United States. The European Commission is considering making ESG disclosures mandatory. Currently, Australia and Brazil have the highest number of companies publishing nonfinancial performance reports. In 2009, there were approximately 1,400 companies issuing nonfinancial reports using the G3 Guidelines, a 29 percent increase from 2008. In 2012, the NGO Global Reporting Initiative will release its G4 Guidelines, which will be a steppingstone for signatories to produce integrated reports.

Although the original intention of nonfinancial reporting was to provide information of interest to stakeholders, shareholders are paying increasing attention. For example, a representative of Aviva Investors, an international coalition of large institutional investors facilitated by the U.N.-backed Principles for Responsible Investment, sent a letter in January 2011 to the CEOs of the world’s top 30 stock exchanges asking them to encourage their listed companies to improve disclosure on sustainability performance and strategy. The letter calls for stock exchanges to “consult with companies on how they should be integrating sustainability into long-term strategic decision making—e.g., highlighting risks and opportunities within the existing business model on their website and in their financial report. This includes encouraging companies to undertake integrated reporting.” ² Steven Waygood, head of sustainability research and engagement at Aviva Investors, said he sent the letter because “we need this data in order to assess the wider risks and opportunities associated with a company. Without it, we cannot properly integrate these issues into valuation models.” Waygood believes that stock exchanges and their regulators have a crucial role in fostering integrated reporting. “Integrating sustainability into valuation helps to ensure that capital flows in the direction of more sustainable companies,” he said. “This can only be a good thing for long-term investors and the broader economy, and we believe that exchanges have a responsibility to help.”

THE EMERGENCE OF INTEGRATED REPORTING

The Danish company Novozymes, whose core business is industrial enzymes, microorganisms, and biopharmaceutical ingredients, is generally considered the first company to issue an integrated report, which it did in 2002. The first US company to issue an integrated report was the diversified manufacturing company United Technologies in its 2008 annual report. The next year these companies were joined by American Electric Power, PepsiCo, and Southwest Airlines. Other early adopters include the Danish diabetes care company Novo Nordisk (2004), the Brazilian cosmetics and fragrance company Natura (2008), and the Dutch health care and lighting company Philips (2008). Given the industry and geographical diversity of these companies, it is unlikely that they knew about each other’s efforts. But their reasons for issuing integrated reports are similar. They include a commitment to sustainability, defined broadly in financial and ESG terms terms; a belief that an integrated report is the best way to communicate to shareholders and other stakeholders how well a company is accomplishing these objectives; and a recognition that integrated reporting is an important discipline for ensuring that a company has a sustainable strategy.

The earliest corporate adopters of integrated reports, sometimes referred to as One Reports, did so before any literature existed on the topic, showing how practice often leads theory in new management ideas. Although some of the seeds for integrated reporting go back as far as John Elkington’s concept of the triple bottom line in 1994 and to work by this article’s co-author Robert G. Eccles and PricewaterhouseCoopers on ValueReporting in 1999, the first use of “integrated” in this context is Allen White’s discussion of Novo Nordisk’s “integrated, balanced, and candid reporting” in a June 20, 2005, Business for Social Responsibility brief titled “New Wine, New Bottles: The Rise of Non-Financial Reporting.”

In August 2005, Solstice Sustainability Works published a 16-page white paper called “Integrated Reporting: Issues and Implications for Reporters,” sponsored by Vancity, Canada’s largest member-owned and -directed credit union. This paper was ahead of its time—too far ahead of its time—and largely disappeared from view. Eccles and Michael P. Krzus were not aware of it until after the publication of their 2010 book, One Report: Integrated Reporting for a Sustainable Strategy. Since then, a number of articles, papers, and blogs have been written on integrated reporting, as well as a free e-book, The Landscape of Integrated Reporting: Reflections and Next Steps, published in November 2010 following an integrated reporting workshop at Harvard Business School. Companies now have the benefit of an increasing body of literature on integrated reporting, nd those writing about it have the benefit of an increasing number of companies that are practicing it.

Although South Africa is the only country that has mandated integrated reporting, Denmark, Norway, and Sweden require sustainability reporting to varying degrees, and the Grenelle II legislation in France will require “all major French listed and non-listed large companies to disclose in their annual reports how they take into account the environmental and social impacts of their activities as well as their contributions to developing a sustainable society.” The legislation also requires this information to “be verified by an independent third party.” ³ These efforts may soon become Europe-wide. According to a January 2011 report of the European Sustainable Investment Forum, “After years of engaging in dialogue with industry stakeholders, disclosure of nonfinancial information by companies is poised to move from a voluntary to a mandatory basis.” ⁴

Complementing these regulatory and legislative actions is the Sustainable Stock Exchanges Initiative, which is studying how exchanges can work with investors, regulators, and companies on ESG reporting. Australia, Italy, Japan, Korea, and New Zealand are exploring the formation of national organizations to advocate for integrated reporting. They all plan to coordinate with the International Integrated Reporting Committee (IIRC), formed in July 2009, and with the Prince’s Accounting for Sustainability Project, which in 2007 proposed the creation of a Connected Reporting Framework. The IIRC plans to release a draft framework in June 2011 and is working to get integrated reporting on the agenda of the G-20 meeting hosted by France in November 2011.

THE BENEFITS OF INTEGRATED REPORTING

Integrated reporting begins with a single report on a company’s financial and nonfinancial performance. An integrated report is not intended to be a compendium of every single piece of performance information. Rather, it brings together material information on financial and nonfinancial performance in one place. Ideally, it also shows the relationships between these material financial and nonfinancial performance metrics, although this is uncommon, even among the most sophisticated companies practicing integrated reporting today. Examples of the kind of information that would be included in an integrated report are: How much water does a company use per unit of production compared to its competitors? To what extent do energy-efficiency programs reduce carbon emissions and lower the costs of production? What is the impact of training programs on improved workforce productivity, lower turnover, and greater customer satisfaction? How do improvements in customer satisfaction lead to greater customer loyalty, a larger percentage of the customer’s spending, and higher revenue growth? How is better management of reputational risk through good corporate governance contributing to the value and robustness of the company’s brand?

Although integrated reporting is still in its infancy, it is possible to identify three classes of benefits. The first is internal benefits, including better internal resource allocation decisions, greater engagement with shareholders and other stakeholders, and lower reputational risk. ⁵ The second is external market benefits, including meeting the needs of mainstream investors who want ESG information, appearing on sustainability indices, and ensuring that data vendors report accurate nonfinancial information on the company.⁶ The third is managing regulatory risk, including being prepared for a likely wave of global regulation, responding to requests from stock exchanges, and having a seat at the table as frameworks and standards are developed. ⁷

Of course, integrated reporting is not a panacea for improving resource allocation decisions or a silver bullet for solving contemporary problems with financial and nonfinancial reporting, particularly as it is so young. Companies interested in implementing integrated reporting face a number of challenges, beginning with the fact that no globally accepted framework specifying what goes into an integrated report exists. But there are a growing number of examples of integrated reports from which companies can learn. A closely related problem is that there is no globally accepted set of standards for measuring and reporting nonfinancial information. Although the G3 Guidelines can be useful, they may not be entirely appropriate to a company’s circumstances. As a consequence, few companies have internal control and measurement systems for nonfinancial information that are of the same quality as for financial information. Simply gathering all the nonfinancial and financial information to issue an integrated report is a formidable challenge in most companies.

Users of integrated reports also face constraints that limit the value of integrated reporting to them today. The lack of a framework and standards for nonfinancial information makes it difficult to compare the performance of different companies, a core feature of investment analysis. Another limitation is the small number of companies practicing integrated reporting, and the fact that it will likely be adopted across industries and countries to varying degrees. Questions exist about the reliability of the information reported by companies. For the most part, having any type of third-party assurance on nonfinancial information in the report, let alone on the entire integrated report, is voluntary. And even when assurance is provided, it is not done with the same degree of rigor as the audit of a financial report.

Although these challenges are significant, they can and must be overcome, and quickly. A sustainable society requires that all of its companies practice integrated reporting, so that resources used today do not jeopardize access to resources for future generations. There really is no alternative to integrated reporting. This still infant idea needs to grow into a strong and robust management practice. Doing this requires a cross-sector approach that involves the public and private sectors, and civil society as represented by NGOs.

PHILIPS: AN EXAMPLE OF INTEGRATED REPORTING

Headquartered in Amsterdam, Royal Philips Electronics is a diversified company focused on the health care, lifestyle, and lighting sectors. Philips first streamlined its financial and sustainability reports into an integrated report for its 2008 annual report. It continues to do so because the company considers “sustainability to be a driver of growth and an integral part of the Philips DNA.” ⁸

The adoption of integrated reporting at Philips can be attributed to three motivating factors: increased efficiency, reduced cost, and improved communication. Pierre-Jean Sivignon, former chief financial officer of Philips, said integrated reporting started as an exercise in streamlining. “The goal with producing the annual report,” he said, “was threefold: Do it in a cost-effective manner and quickly, so as to get the finance team focused back on this business as soon as possible.” To expedite the creation of the financial report and the sustainability report, while meeting US and international legal requirements, an integrated paperless document made most sense. From the perspective of Henk de Bruin, global head of corporate sustainability at Philips, the impetus behind integrated reporting was transparency and a one-channel communication on company performance. “There are synergistic elements between the finance discipline and sustainability discipline. The finance discipline has learned to be high-quality data oriented, while the sustainability discipline emphasizes communication and a stakeholder approach toward multiple audiences, such as financial and sustainability analysts in the investor world and governmental and nongovernmental organizations. Sustainability reminds finance that we don’t communicate just for legal reasons to meet statutory obligations and inform shareholders, but that one-channel communication can be used for so much more.” De Bruin notes that the integrated report serves as a business card for the company both externally and internally. “It highlights to employees what is going on around the organization in a clear and easily accessible format. … It increases their pride in the company knowing Philips takes sustainability seriously.” Externally, the benefit of the online integrated reporting model is that Philips can better understand what users care about and improve the annual report going forward.

The roots of integrated reporting at Philips can be traced to 1998, when it produced its first environmental report. In 2008, the company issued its first integrated report and accompanying website. Sustainability issues were woven into the report in both quantitative and qualitative form, and received limited assurance coverage by the company’s auditors, KPMG. The 2008 integrated report showcased ESG metrics such as the net promoter score, which measures customer satisfaction and loyalty to the Philips brand; employee engagement information, including perceptions and attitudes related to employee satisfaction, commitment, and advocacy; sales of green products; and operational carbon footprint. The website offered a tool for creating individualized reports and a user survey for stakeholder engagement.

Although the 2008 integrated report and website set the foundation for Philips’s new reporting initiatives, the 2009 and 2010 integrated reports and their websites show deeper linkages between and analysis of financial and ESG information. Starting in 2009, the annual report website included economic indicators in sustainability performance and identified the opportunities and risks related to sustainability, linking them to other relevant sections. Unique to the 2010 annual report website is a feature that allows users to select the role of “sustainability analyst,” “financial analyst,” or “employee” to see different views of the data. The website also offers the report in Mandarin. The 2010 home page features interactive charts with both financial and ESG information under performance highlights, reinforcing the link between the two. Users see that in 2010 Philips invested more than €450 million in green innovations, achieving the 2012 target of €1 billion invested in green innovations two years ahead of schedule; and that the company aims to invest a cumulative €2 billion during the coming five years.

Although opportunities still exist for Philips, integrated reporting has been an important catalyst in bringing sustainability to the forefront of the management team agenda. Critical to this goal will be ongoing stakeholder engagement. Simon Braaksma, senior director at Philips’s corporate sustainability office, commented: “These collaborations get board-level attention within the company. Stakeholder engagement is a key part of our business operations, expanding our knowledge of markets and improving our products as we balance our financial and ESG goals.” As an example, Philips is involved with the Dutch Sustainable Trade Initiative (IDH), which creates multi-sector partnerships to achieve the United Nations Millennium Development Goals. Philips is participating in the IDH Electronics Program to improve working conditions for 500,000 workers in China’s Pearl River Delta. This form of stakeholder engagement enables Philips to create a more sustainable society while expanding its presence in a growing market. The approach also highlights the integrated nature of business results and sustainability as well as the role integrated reporting can play in fostering multi-sector partnerships.

THE ROLE OF CIVIL SOCIETY

Although most of the current focus on integrated reporting is on companies, the concept applies equally well to many types of organizations. Virtually any organization that uses financial, natural, and human resources should practice integrated reporting. The U.S.-based National Association of College and University Business Officers is exploring integrated reporting, and Dean Nitin Nohria of the Harvard Business School plans to produce a One Report on the school. Living PlanIT, the high technology start-up for sustainable urbanization, is developing an application of integrated reporting for cities along with its partners Microsoft and Cisco Systems.

As representatives of civil society and in collaboration with the public and private sectors, nongovernmental organizations have a major role to play in promoting integrated reporting, particularly through their advocacy role and what Waygood calls “capital market campaigning.” This is based on two complementary techniques, argues Waygood, of “first, pressuring investors to invest capital in one company or sector rather than another; and, second, using the rights and influence associated with share ownership to voice concerns directly with company directors and senior management.” ⁹

NGOs can act at a more strategic level through formal partnerships with institutional investors. An example of an NGO working with investors is the Oxfam Better Returns in a Better World Project, facilitated by the Principles of Responsible Investment (PRI), which is assessing the potential for investors to contribute to poverty alleviation. The project made two recommendations for institutional investors. The first is “develop, implement, and report on their responsible investment strategies, with a particular focus on how they will address poverty.” The second is that “asset owners explicitly demand and reward investment managers that take particularly proactive responses to responsible investment.” ¹⁰ Another example of NGO investor engagement is the Access to Medicine Index. Developed by a group of prominent institutional investors with the help of the PRI, the index is designed to encourage pharmaceutical companies to develop, implement, and report on policies that give people in developing countries access to affordable medicines. Twenty-seven investors, managing a total of $3.3 trillion in assets, signed an Investor Statement that, among other things, commits them to “take into account the analysis generated from the index as appropriate in the ESG analysis we conduct on the companies we invest in.” ¹¹

NGOs can direct investor groups to influence industry associations, stock exchanges, standard setters, regulators, and legislators to encourage and require integrated reporting by companies. NGOs also can use their public policy advocacy muscle to argue that the current structure of capital markets acts as a constraint against sustainable development for two main reasons: short-termism and market failure. Focusing on short-term financial targets clearly creates a disincentive to make investments that produce positive economic and sustainable returns, such as reducing a company’s carbon emissions and waste and improving its working conditions. NGOs can advocate for a longer-term orientation by investors, just as they can by companies. They also can lobby government entities to require companies to internalize the environmental and social costs they create by placing these liabilities on their balance sheets, thereby addressing the market failure problem. Obviously, NGOs cannot do any of this unless ESG performance information is available from companies. One hopes the desire for this information will create an incentive. And as time goes on, investors will be in a position to compare the performance of their portfolio companies practicing integrated reporting to those that are not.

Similarly, NGOs can pressure government, in its many levels and functions, to practice integrated reporting. Focusing solely on GDP is no different from focusing solely on quarterly earnings. British Prime Minister David Cameron has made this distinction part of his Big Society campaign. In a November 2010 speech he said, “It’s time we admitted that there’s more to life than money and it’s time we focused not just on GDP but on GWB—general well-being.” Citing recent market failures, Cameron continued: “Governments have failed to sufficiently internalize companies’ environmental and social costs such that the consequent economic development is fully sustainable. … As a result of government’s failure to internalize these costs on company balance sheets, the capital market does not incorporate companies’ full social and environmental costs.”¹² But if governments were practicing integrated reporting, they would have incentives to address this market failure. Requiring companies to put financial and nonfinancial externalities on their balance sheets will improve the management of natural, human, and financial resources at the company level. It also, in the aggregate, will improve performance at the country level.

NGOs have an important role to play in the creation and enforcement of frameworks and standards for integrated reporting. They can engage with the IIRC and support its efforts. They also can help ensure the proper practice by companies and use by investors and other stakeholders of integrated reporting by monitoring public and private sector entities that have an enforcement role. In doing so, they will be the “watcher of the watchers,” representing the interests of civil society, to ensure that those responsible for the application of integrated reporting frameworks and standards are doing their job.

Finally, if NGOs expect companies and investors to put their self-interest in a broader social and longer-term context, they must do the same. NGOs advocating for integrated reporting must practice it themselves. Like all organizations, NGOs use financial, natural, and human resources to accomplish their objectives—admittedly at smaller levels than large corporations and governments. They need to disclose their use of these resources, practicing the same level of transparency they want from companies, investors, and the government.

The clock is ticking for creating a sustainable society. In some areas, such as climate change, there are those who believe it has already struck midnight. But we must get on with it, starting with each and every one of us as citizens of the world, whether we represent public, private, or nongovernmental interests. Now is the time for all three sectors to acknowledge and act before it is too late.

Robert G. Eccles is a professor of management practice at Harvard Business School. He is the author, with Michael P. Krzus, of One Report: Integrated Reporting for a Sustainable Strategy and the editor, with Beiting Cheng and Daniela Saltzman, of The Landscape of Integrated Reporting: Reflections and Next Steps.

Daniela Saltzman is a second-year MBA student at Harvard Business School. Previously, she worked at Goldman Sachs and Generation Investment Management in London. She is the editor, with Robert G. Eccles and Beiting Cheng, of The Landscape of Integrated Reporting: Reflections and Next Steps.

“These firms have agreed to do something above and beyond what’s required by law,” says Jodi Short, an associate law professor at Georgetown University. But is that promise any more than window dressing? Short found that when firms commit to policing themselves, they do in fact have better compliance outcomes—under certain conditions. “There are things regulators can do to promote the meaningful implementation of self-regulatory commitments,” she says. In particular, watching them is more effective than warning them.

Looking at hundreds of industrial facilities subject to the Clean Air Act across the United States between 1993 and 2003, Short showed that surveillance of self-auditing firms increases compliance, whereas overt threats decrease it: Those companies that started self-regulating only when the EPA said it would punish them did not improve compliance outcomes. Coercion reframes self-regulation from a question of corporate honesty to a cat-and-mouse game, says Short, and “you can’t sustain voluntary regulation without a certain amount of non-calculative motivation—motivation to just do the right thing.”

The practice of imposing compliance auditing as a part of enforcement action settlements has become widespread across a range of fields, Short says. But her research shows it doesn’t help—a finding that field experience confirms. “For a self-audit to be effective, you really need to have major senior management buy-in,” says James Salzman, the former European environmental manager for S.C. Johnson, now a professor of law and environmental policy at Duke University. “And senior management buy-in is more likely if it comes organically than if it comes at gunpoint.”

This is not to say that sanctions aren’t important. “There’s a lot of data to suggest that big sticks lead to better compliance,” Salzman says. But it is regulators’ watchful eyes more than their shaking fists that make firms follow through on self-policing promises.

Short’s findings suggest an important role for social movement activism. As the idea of a “corporate conscience” spreads across industries—from occupational health and safety to industrial food processor inspection to financial auditing—one of the most important motivators is visibility. Activists offer “another source of surveillance,” Short says. “They can provide another set of eyeballs.”

"Jodi L. Short and Michael W. Toffel, Making Self-Regulation More Than Merely Symbolic: The Critical Role of the Legal Environment, Administrative Science Quarterly, 55, 2010."

“Most of the women who die in domestic violence in America die after they’ve sought a restraining order, after they’ve called the police, after some interaction with the system,” says Casey Gwinn, president of the National Family Justice Center Alliance (NFJCA).

The system can work better, Gwinn insists, if communities make it easier for victims to access the comprehensive services they need. He helped pioneer the concept of a “one-stop shop” for domestic violence services in San Diego. Since 2002, when police, prosecutors, social service agencies, and nonprofit advocates came together under the same roof at the San Diego Family Justice Center, the city has seen a 90 percent drop in intimate partner homicides. Victims now access a wider range of services, starting with a danger assessment to plan for their immediate safety. Heightened collaboration among agencies has generated system-changing ideas and fostered public-private support. But the most dramatic outcome, Gwinn says, may be this: “Women aren’t dying anymore when they come into our system.”

This wraparound model is spreading as other communities look for strategies to curb domestic violence. It’s an issue that costs the United States more than $5.8 billion annually, according to the Centers for Disease Control and Prevention.

Some 60 independently operated family justice centers have opened, in communities as different as Brooklyn, N.Y., and Sitka, Alaska. New Orleans opened a center after Hurricane Katrina destroyed the patchwork of services that had existed, “and it’s been a bright spot in a community that’s still recovering,” says Director Mary Claire Landry. Similar programs are under way internationally in Jordan, Mexico, and the United Kingdom. The NFJCA, headquartered in San Diego, has become an engine for replication.

LEARNING BY LISTENING

Gwinn didn’t plan on a career in domestic violence advocacy. In 1985, as a new prosecutor in San Diego, he was “asked to volunteer for the cases that nobody else wanted. I knew nothing about domestic violence,” he admits, and insights were hard to come by. In those early days of the domestic violence movement, policies and practices tended to blame the victim if she stayed with her abuser. A network of feminists who became Gwinn’s advisors and, eventually, his colleagues recognized that change would require finding allies within the system— including men. “I needed their help,” Gwinn says he quickly realized.

Some of the changes that have resulted came from simply listening to victims. “They told us how difficult it was to navigate the system,” Gwinn recalls. “They had trouble understanding the role of police and prosecutors, let alone civil legal services or social services.” Services were geographically scattershot. Many victims simply gave up.

By 1990, San Diego started bringing services together by locating staff from five agencies in the same building. When Gwinn was elected San Diego city attorney in 1996, he used his bully pulpit and city resources to push for a more comprehensive approach. The San Diego Family Justice Center opened in 2002, with staff from 27 agencies—including a special unit of the police department— sharing three floors of a former bank. Co-locating created unanticipated changes, starting with how agencies work together.

Gael Strack, former assistant city attorney, took a collaborative leadership approach when she became the first center director. “She understood how to bring people together when they don’t work for you,” Gwinn says. Simple routines such as a morning meeting got people from multiple agencies talking and, eventually, building relationships. “The magic is not co-location,” Gwinn says. “It’s the processes you put in place to cause people to interact with each other every day.”

Each innovation that emerged has reflected a “victim-centered, survivor-driven” philosophy. “It’s no different from a well-run venture in any consumer-oriented sector,” Gwinn says. “If you don’t know what your consumers want, you’ll never provide it.” Focus groups and exit interviews with clients have helped staff fine-tune services. But each victim decides for herself which services she’s ready to take advantage of.

The first month it opened, the San Diego center served 87 clients. Two years later, it was serving 1,200 monthly. A client named Sally said the program “made an extremely uncomfortable and embarrassing experience bearable.” Adds Gwinn, “We found out, if you build it they will come—and they will keep coming back if you’ve built a safe place that’s responsive to their needs.”

MOMENTUM FOR A MOVEMENT

What began as one city’s innovative idea quickly gained momentum. Oprah Winfrey’s endorsement on national television in January 2003 raised visibility and brought visitors to San Diego from around the world. Later that year, the U.S. Department of Justice awarded $20 million to 15 communities (out of 400 applicants) to start their own centers. The nfjca, established in 2006 and headed by Gwinn and Strack, has become the go-to technical assistance provider for new centers.

In a new book about this movement, Dream Big: A Simple, Complicated Idea to Stop Family Violence, Gwinn acknowledges both the simplicity of the one-stop model and the complexity of replicating it. Each community has to summon the will to get started, he says, along with the vision to adapt the model to fit local needs. A few important lessons stand out:

Form an interdisciplinary community leadership team: Ideally, Gwinn says, the team should include “a visionary, big-picture thinker,” along with representatives from law enforcement and the prosecutor’s office, a community-based advocate, and a survivor of domestic violence.

Learn together: San Diego and other established centers have become learning labs, where visitors can observe best practices. nfjca has produced books, toolkits, webinars, and other online resources to guide everything from hiring practices to client intake procedures.

Plan strategically: Planning to launch a program may take a year or longer. Cleveland, which has engaged nfjca staff for assistance, is close to securing start-up funding from the county after years of lobbying, according to Municipal Judge Ronald Adrine. “We also want to convince the philanthropic community and the corporate community to be part of this and make it sustainable,” he says. “That takes time.”

Adapt to each community: No two family justice centers are exactly alike. Gwinn says local agencies often have to work through “power and control issues, turf battles,” he says, before collaboration can take hold.

DATA TO MAKE THE CASE

Portland’s Gateway Center for Domestic Violence Services, open since September 2010, resides in a homey building, painted yellow with bright flowers blooming outside. But there’s no effort to disguise what happens here. Billboards around the city advertise the brand-new center’s services. “Compared with the confidential shelters, we’re loud and proud,” says Gateway Director Martha Strawn Morris, a lawyer who previously spent a decade working for the county family court.

Heightened visibility brings safety risks, which is why a sheriff’s deputy keeps watch and bulletproof glass shields the reception area. “If we can take some of the shame out of help seeking,” Morris says, the center will get closer to its dual goals of serving the needs of victims and preventing future domestic violence.

The Gateway Center borrows liberally from the one-stop model but incorporates its own innovations. A videoconferencing system connected to the county courthouse enables clients to obtain a restraining order without having to leave the safety of the building. “Victims tell us the courthouse is a scary place,” Strawn Morris says, so she convinced judges to allow ex parte motions to happen here. Gateway staff, called “navigators,” fluent in nine languages and familiar with diverse immigrant groups, work one-to-one with clients to make sure they understand all the available service options. A room reserved for teens feels like a clubhouse, but offers a place to focus on serious issues like dating violence and sex trafficking.

With $1.3 million in start-up funding from the city of Portland, and more support from the county and a federal grant, Gateway Center is on a sound footing for at least three years. But it is already gathering data to make the case for future support. After three years of operating the New Orleans center, Landry has tracked not only a decline in domestic violence homicides but also a drop in repeat offenses. Such numbers help make the case for ongoing investment.

Nationally, centers have sustained support in lean times by drawing on both public and private resources, Gwinn says. A continuing challenge is making sure family justice centers don’t compete with existing nonprofits, such as community-based shelters.

Another challenge is “the difficulty of proving a negative,” acknowledges Judge Adrine, who has seen Cleveland struggle with its own recent spate of domestic violence homicides. “Would these deaths have happened even if we had a program in place? We can’t know that,” he says. But he does know that one homicide costs society more than $2 million, and that’s just the price for prosecuting and incarcerating the perpetrator. A smarter investment, he insists, is offering help to people in crisis “in a place that’s safe and unthreatening.” After visiting San Diego and other centers, he adds, “you can see that this idea is not brain surgery. And you think, gosh, why haven’t we done this before?”

Suze Boss is a journalist from Portland, Ore., who writes about social change and education. She contributes to Edutopia and Worldchanging and is co-author of Reinventing Project-Based Learning.

Some entrepreneurs, however (especially the most intrepid ones), have found ways to combine the best of the for-profit and nonprofit models. They have done this by creating a hybrid structure: separate nonprofit and for-profit organizations that are bound together through governance or legal agreements. Hybrids, of course, are not new. They have been around for decades (consider Children’s Television Workshop, owners of the Sesame Street characters). For the most part, hybrids have been created by an existing nonprofit or for-profit to meet a new objective that could not be met under its existing legal structure. A for-profit corporation might create a nonprofit foundation to manage its philanthropic work. Or a nonprofit museum might create a for-profit retailer to sell posters, jewelry, and other merchandise.

In recent years, however, social entrepreneurs have taken the hybrid model to a new level, crafting it into what is in effect a single structure that can operate as both a for-profit and a nonprofit. Social entrepreneurs are now creating complex hybrid structures from the start, ones that use contracts to intimately tie together the nonprofit and for-profit organizations. I call these new entities contract hybrids, to distinguish them from the hybrids of the past.

NEVER THE TWAIN SHALL MEET

To understand what a contract hybrid is and how it works, one must first understand that the entire legal and regulatory structure that governs U.S. businesses and nonprofits is designed to ensure that the charitable sector and the business sector stay fundamentally distinct. In a nutshell, charity is supposed to be all about mission and not about money, whereas for-profit businesses are supposed to be all about money and not about mission. As a result, business and charities are regulated and operated according to fundamentally different principles, and any crossing of the lines is viewed with skepticism by regulators and the public.

As Dan Pallotta points out in his book Uncharitable, this divergence is not rooted in any law of economics or even politics. Rather, it is the result of historical accident. It is essentially the view propounded by the Puritans who settled in the United States in the 17th century. They believed that business and commercial activity was a sin, albeit a necessary one. To atone, one did charitable work, which had to be kept clean of any taint of commerciality. Although we have progressed in our thinking since then, Congress, the Internal Revenue Service (IRS), state regulators, the general public, and even nonprofit leaders remain locked into this outmoded mental model.

Creating a hybrid entity that can serve both charitable goals and business objectives simultaneously may sound simple, but from a legal perspective it is actually quite complicated. For-profit businesses have as their primary objective the pursuit of profit for the benefit of their owners. The directors and managers of a for-profit business have a fiduciary duty to maximize shareholder return, and if pursuit of a social mission interferes with that primary duty, the directors and officers can face legal jeopardy.

Nonprofits, on the other hand, have as their primary objective the accomplishment of a social or public mission. Nonprofit directors and managers must run the enterprise to further public rather than private interests. If they confer private benefits on individuals (other than reasonable compensation for services rendered, itself a touchy subject), they may face legal liability. And they generally cannot engage in profit-sharing arrangements with private investors or businesses. To put it another way, businesses and nonprofits are fundamentally single-purpose entities. Although the law allows them to stretch toward each other, a complete synthesis is not possible, and the further each model is stretched, the more legally uncertain the venture becomes.

The three most popular stretched models today are the B corporation, benefit corporation, and low-profit limited liability company (L3C). The B corporation is a brand, certified by B Lab (itself a nonprofit), rather than a legal form in the eyes of the IRS. To be certified a B corporation, the owners and managers of the organization voluntarily submit themselves to a rigorous battery of questions and tests that measure their commitment to social values and socially and environmentally responsible practices. B Lab makes the results of these tests public, so that consumers can find out what these companies stand for and how their claims of social responsibility are put into practice. B Lab promotes B corporations as a group, which gives them a marketing advantage and provides further incentive for them to justify social mission as a business strategy.

The benefit corporation, which is officially recognized in Maryland (and Vermont beginning April 2011) and is under consideration in several other states, is often confused with the B corporation but is actually distinct. Whereas the B corporation is essentially a brand, a benefit corporation is a legally distinct type of business corporation that is committed to accomplishing one or more social or public purposes. A benefit corporation must specify in its charter that it is formed to pursue a social purpose, it must have at least one “benefit” member on its board whose sole duty is to protect mission rather than profit, it must be certified by an independent third party as complying with standards promulgated by the certifying agency, and it must produce an annual report that explains what it has done during the prior year to accomplish its social mission. In return, the directors of the benefit corporation are protected from liability for decisions that further the social mission, even if they impair profitability.

The L3C, which has been legally recognized in several states and is under consideration in several others, is essentially a limited liability company (LLC) whose purpose is limited to “low profit” activities that further a charitable purpose, and the generation of income is not a significant purpose of the venture. The L3C was originally designed to be a special purpose vehicle to which private foundations could more easily make PRIs. Practitioners argue whether or not the L3C has any utility at all in this regard (because foundations can already make PRIs in for-profits), but the brand has caught on and many people now regard it as a way to signal their intent to place mission at a level that is equal to or greater than profit, while still enjoying the advantages of a business structure (the ability to accept private investment and enter into a broad range of business relationships). The B corporation, benefit corporation, and L3C do not qualify for tax-exempt status; they are all firmly in the for-profit sphere.

THE HYBRID

Standing in contrast to these stretched models is the hybrid. It is based on the principle that a single entity—be it an L3C, a 501(c)(3), a benefit corporation, or a traditional for-profit—cannot by itself do everything that a social venture needs to do. Instead, the hybrid uses a series of contracts and agreements to combine one or more independent businesses and nonprofits into a flexible structure that allows them to conduct a wide range of activities and generate synergies that cannot be done with a single legal entity. The two (or more) entities that generally make up a hybrid are distinct for legal purposes, and each is responsible for compliance with the laws and regulations that govern it, but when properly structured, the legally distinct entities can behave much like a single entity. For these reasons, a hybrid is often a better solution than a single legal entity that tries to incorporate a wide range of activities.

Hybrids, as mentioned before, are nothing new. For decades, nonprofits such as the National Geographic Society have created for-profit subsidiaries and entered into strategic relationships with for-profit companies to exploit their assets in the marketplace. Catholic Charities USA, the American Health Assistance Foundation, the National Center on Family Homelessness, Community Teamwork, the DC Central Kitchen, and the United Spinal Association are all examples of charities that over the past 10 years have created LLCs to carry out profit-making activity.

Hospitals, universities, and museums also routinely engage in commercial transactions and collaborations with for-profit companies, including joint ventures that serve the mission of the nonprofit and the financial interests of the businesses. Nonprofits contract with for-profits all the time, and it is now common to see businesses associate themselves with nonprofits using a variety of cause marketing techniques, including corporate sponsorships and commercial co-ventures. These arrangements are fairly well understood and have been approved by the IRS on numerous occasions.

Most existing hybrids are structured either as parent-subsidiary relationships, where the charity owns the business, or as “one-off” arrangements where the charity and the for-profit collaborate to achieve a particular project or activity. There are variations on these models (such as the corporate foundation and the joint venture), but the parent-subsidiary model essentially uses governance as the mechanism of control and is intended to ensure a high degree of integration over time. One-off arrangements use contracts as the mechanism of control but are limited in scope and the degree of integration between nonprofit and for-profit is usually limited.

What makes the contract hybrid different is the degree to which the goals, objectives, and strategies of the nonprofit and the business are coordinated to serve mutual interests. Rather than a one-off deal where a nonprofit licenses property to a for-profit company, or a company provides marketing dollars to benefit a specific charity event, the purpose of the contract hybrid is to create an ongoing, symbiotic relationship between a nonprofit and a for-profit to accomplish mission and business objectives on a long-term basis.

Some might describe the distinction between a traditional hybrid and a contract hybrid as a matter of degree, but from a legal point of view it is more than that. It allows synergies that simply aren’t possible with the other models, because both the nonprofit and the business are free to pursue their activities in a way that is most likely to be successful within the legal, financial, and regulatory framework that applies to it, without being bogged down in the limitations and regulatory burdens of the other party. Yet they are tied together in a way that allows the whole structure to leverage the strengths of each organization.

UP CLOSE

To understand what makes a contract hybrid special, it is useful to take a close look at one example. (These are real organizations, but for privacy their names have been changed.) The Appalachian Economic Development Corporation (AEDC) is a nonprofit that provides assistance to the chronically unemployed in the economically distressed region of Appalachia. In order to create jobs, stimulate the regional economy, and generate revenues to support its operations, the organization decided to use mail-order catalogs to market and sell products made by local residents. Because AEDC had little experience in this area, it entered into an agreement with the North American Catalog Company, a for-profit C corporation, to handle marketing, sales, and distribution. Under the contract, North American Catalog is paid a percentage of sales, with incentives when sales reach certain milestones. AEDC, in consultation with North American Catalog, selects the products to be sold, which must meet standards and guidelines set forth in the agreement.

AEDC assists the local residents with business advice and support, including low-interest loans provided by North American Catalog (the company lends money to AEDC, which in turn lends it to the residents). The loans allow the residents to expand their production and management capacities to meet the higher demand for their products that the catalogs create.

AEDC promotes the products (sold exclusively by North American Catalog) on its website and licenses its mailing lists and logo to the company, which can use the lists and logo only for catalogs that include products created by the residents. North American Catalog agrees to spend a certain amount of money on marketing and to distribute a certain number of catalogs each quarter. It also agrees to use local printers and designers so long as they can produce work of acceptable quality at an acceptable price. These arrangements are not just for a single season or for one or two products but cover a wide range of products over five years, with an option by either side to extend it another five years.

The agreement allows AEDC to withdraw without penalty if it determines that the arrangement is not in its best interest or would jeopardize its tax-exempt status. North American Catalog can terminate the agreement if sales don’t meet certain minimums, if it has a change in control, or if a certain percentage of the products selected by the nonprofit don’t meet the negotiated guidelines.

Sales are about $13 million per year, with North American Catalog earning about $1 million after expenses, AEDC earning about $400,000, and the local residents collectively earning about $3 million. More important, a large percentage of the expenditures are made within the Appalachian region, pumping between $7 million and $8 million into the local economy every year, creating jobs and increasing the local tax base. None of the parties could have done this on their own: it required a collaborative effort and a carefully crafted set of agreements to make it work. It required a contract hybrid.

PRINCIPLES OF CONTRACT HYBRIDS

Six basic principles govern the creation of contract hybrids. First, the nonprofit and the business must be legally independent of each other, with independent majorities on each board to minimize conflicts of interest and assure that each entity has the ability to comply with the laws, regulations, and best practices that apply to it. It is not uncommon for each entity to have its own accountants and lawyers to preserve this independence.

Second, the entities are tied together using a variety of contractual arrangements. These include contracts for goods or services, financing agreements, shared service agreements, intellectual property licenses, fiscal sponsorships, participation agreements, nondisclosure agreements, grant agreements, and leases.

Third, each of these contractual agreements is negotiated at arm’s length. For example, in the case of AEDC and North American Catalog, the sales, marketing, and distribution agreement was not a standard contract. Various provisions had to be customized and each side had to make concessions so that each party could fulfill its part of the bargain on commercially reasonable terms without either side taking unfair advantage of the other. This is one reason why many contract hybrids have separate boards of directors, lawyers, and accountants to ensure that each entity looks out for its own best interests, and that its advisers and decision makers don’t have conflicted loyalties.

Fourth, if the assets of the nonprofit are to be used by the for-profit, the nonprofit must receive fair value in exchange. For example, if a nonprofit has developed a product or service that the for-profit wants to use, the nonprofit has to ensure that the benefit to the investors in the for-profit is incidental, meaning that the benefit to the outside investors is not out of proportion to the overall venture or the size of their investments, and the arrangement is structured so that its primary purpose is to accomplish mission (or benefit the nonprofit) rather than to enrich the investors.

Fifth, any payments from the for-profit to the nonprofit should be taken as a marketing or other business expense by the for-profit rather than as a charitable contribution whenever possible. For example, the Sugar Bowl, a 501(c)(3) organization that hosts a nationally televised college football game, receives a significant payment each year from Allstate Insurance Company in exchange for naming its game the “Allstate Sugar Bowl,” and for providing prominent visibility for Allstate’s name and logos. Because this is a “qualified corporate sponsorship,” an arrangement whereby a company makes “donations” to a charity in exchange for recognition and the right to use the charity’s name and logo for promotional purposes, these payments are treated as contributions on the nonprofit’s tax return rather than taxable advertising income. These payments are treated as a business expense by Allstate rather than a charitable contribution because they serve a business purpose.

Last, all transactions and arrangements should be fully documented, everything should be reviewed and approved by the boards independently, and there should be special provisions in the documents to protect both the business and the nonprofit against allegations that either is being used to unfair advantage by the other.

There are downsides to the contract hybrid model: Because there are so many formalities to be observed, overhead may go up; and the structure can be complex and hard to understand, which may impair the venture’s ability to attract philanthropic and private capital. But those problems can often be solved by putting clear policies and procedures in place that minimize the need for improvisation and the concomitant risks of noncompliance. Furthermore, if done properly, the structure can be explained in a relatively simple manner. The greatest problem, ironically, is that most nonprofit and business lawyers are not yet familiar with these structures, so they often advise their clients to stay away from them because of perceived risk.

STRUCTURING A CONTRACT HYBRID

From a legal point of view, deciding whether and how to structure a contract hybrid depends on some well-understood considerations, in particular IRS rules on joint ventures, private benefit, unrelated business income tax, conflicts of interest, related party transactions, and the new IRS Form 990, each of which is discussed below.

Joint Ventures | Although joint ventures may be a practical option for nonprofits that want to conduct business ventures with for-profit entities, the contract hybrid may be a better choice in many cases. Unless the nonprofit has effective control over the joint venture (which many investors will resist), or the joint venture is small in comparison to the nonprofit’s overall activity (which is generally true only for very large nonprofits), there are substantial risks to the nonprofit’s tax-exempt status if it engages in a joint venture with a for-profit entity. By contrast, with a contract hybrid, there is no separate entity or partnership formed, and thus no joint venture in the legal sense. Instead, the contract hybrid consists of nothing more than a series of agreements that tie the parties together with respect to certain activities in which they have a common interest or in which exchanges for value are involved. Take, for example, a business that employs disabled workers. The workers need various support services, such as housing assistance and occupational therapy, that the business cannot provide. So the business enters into an agreement with a nonprofit. The nonprofit provides the needed support services and refers eligible workers to the business, and in return the business pays a referral fee to the nonprofit. The parties do not control each other, they are not obligated to look out for each other’s interests, they do not jointly conduct activities, they do not share profits or losses, and each party is free to conduct its own activities as it sees fit, subject only to the agreements it has signed.

Private Benefit | A charity cannot qualify for 501(c)(3) tax exemption (or retain its exemption) if it confers substantial private benefits on non-tax-exempt entities or private individuals. Take, for example, a nonprofit art museum whose only activity is showing the work of new artists. The museum enters into an arrangement with a for-profit art gallery in which the works shown by the museum are sold by the gallery on a consignment basis. The artists and the gallery keep 90 percent of the sales price, and the museum receives the other 10 percent. Because the museum’s sole activity directly and substantially benefits the gallery owners and the individual artists out of proportion to the benefits to the museum, and the activity that generates the benefit does not contribute to the accomplishment of the museum’s tax-exempt mission, under relevant IRS authority, the museum can lose its tax-exempt status. The rule, however, is not absolute. Private parties can benefit from joint activity if the benefits are inherently unavoidable, indirect, and insubstantial. For example, a nonprofit formed to clean and maintain a lake that is used for recreational purposes by the public would not lose its tax-exempt status merely because its activity benefits the homeowners who own property on the lake.

Unrelated Business Income Tax | Every 501(c)(3) organization must pay a tax on net income from unrelated business activity, called the unrelated business income tax (UBIT). The tax must be paid when the charity conducts a trade or business that is regularly carried on and that is not “substantially related” to its tax-exempt purposes. The classic example is a case involving New York University. The owner of a macaroni factory bequeathed the factory to NYU when he died. The IRS ruled that because the operation of a macaroni factory did not further the university’s educational mission, the income from the factory was subject to UBIT. An activity is substantially related to a charitable purpose only if it contributes to the accomplishment of a tax-exempt purpose in an important way other than through the production of income. For example, a pharmacy within a hospital that fills prescriptions only for patients of the hospital. There are several exceptions to UBIT, the most important of which are the exceptions for so-called passive income, such as rents, royalties, and dividends. A contract hybrid can avoid liability for UBIT by following several basic rules. Whenever possible, unrelated business activities should be conducted by the for-profit entity and not the 501(c)(3). The income should flow from the for-profit to the nonprofit either as compensation for goods and services, or as passive income; or the income should flow to the nonprofit in the form of donations, such as a qualified corporate sponsorship (the payments from Allstate to the Sugar Bowl are an example of this).

Conflicts of Interest | It is important that contract hybrids are structured to avoid conflicts of interest that may arise in transactions between the nonprofit and for-profit entities. It is well-established in nonprofit corporate governance that directors and officers must act solely in the interests of the organization, and not in their personal interests or the interests of another party. To ensure that this occurs, state corporate law and IRS rules require that directors and officers—indeed, anyone who is in a position to influence a nonprofit’s decisions on a particular issue—disclose any personal interest they have in the transaction and recuse themselves from participating in the decision. With a contract hybrid, the directors and officers of the nonprofit may sometimes have a financial interest in transactions between the nonprofit and the for-profit entity. For example, they may be investors in the for-profit entity. This creates a conflict of interest that must be disclosed, and the director or officer may not participate in decisions related to the transaction. So long as the transactions are approved by a majority of the “disinterested” directors (those who do not have a conflict), however, the transaction can go forward and will be legal. This is another reason why a majority of the boards of the nonprofit and for-profit should be independent of each other.

Related Party Transactions | A related party transaction is a transaction between a charity organization and one or more of its officers or directors, or anyone else within the organization who is in a position to influence the charity with respect to the transaction, or with an organization in which such a person has a substantial financial interest. An example of this is a director of a nonprofit who sells insurance to the nonprofit. The term also applies to transactions between a charity and another organization that controls it or is controlled by it, or where both are controlled by a third party. Transactions with “supporting organizations” are also covered. Finally, organizations, whether or not tax-exempt, that have entered into partnerships (including LLCs taxed as partnerships) with a charity are also treated as related parties. One needs to be careful of related party transactions because, although they are not prohibited, they must be reported to the IRS on the charity’s annual Form 990, and they may be scrutinized by the IRS to determine whether or not the related party received an excess benefit.

Form 990 | Charities are required to disclose on Form 990 whether they have invested in, contributed assets to, or otherwise participated in a joint venture. Unlike a legal joint venture, which requires the creation of a legal entity or partnership to carry out the venture, a joint venture for this purpose is defined broadly as a “joint venture or other similar arrangement with one or more taxable persons.” It includes a broad range of arrangements in which assets, revenues, gains, and losses are shared, regardless of who controls the venture or how it is legally structured. If an organization has participated in a joint venture using this broad definition, it has to answer a follow-up question concerning whether it has a written policy or procedure meeting certain requirements. It must also be able to assert that it has taken steps to safeguard its tax exempt status. The 990 disclosure requirement has not been used as a basis for applying the rules applicable to legal joint ventures. Nevertheless, disclosure may lead to scrutiny to ensure that the arrangements are appropriate. The contract hybrid probably has to be disclosed as a “similar arrangement” even though it doesn’t meet the legal definition of a joint venture. So thought must be given to how the arrangement is described.

CONCLUSION

In the absence of a legal form specifically designed to allow the pursuit of mission and profit simultaneously, practitioners are often forced to create structures that combine for-profit and nonprofit entities in ways that allow each to do what it does best. The contract hybrid is one approach that has been specifically designed to overcome the obstacles that current law imposes on partnerships and collaborations between nonprofits and for-profits.

The contract hybrid can be complicated to create and maintain, and it will not work in all situations, particularly where the rules are difficult or impossible to follow. In situations where a nonprofit or a business can accomplish its goals without the need for a hybrid legal structure (for example, where a business can accomplish its social goals by making donations, or a charity can establish a business venture using a subsidiary that does not require outside investors), those approaches may be preferable.

The concepts and techniques that form the foundation of the contract hybrid are, however, well established in law, and a number of experienced lawyers have agreed that the contract hybrid is a useful approach. Done correctly, it can offer the opportunity for charities and business to do things that they cannot do on their own. Although not the final answer, the contract hybrid represents an important step in the evolution of legal structures for social ventures.

Allen R. Bromberger is an attorney with Perlman & Perlman, a New York City law firm specializing in providing services to nonprofits and mission-driven businesses. Before joining the firm, he served as president of Power of Attorney, a private operating foundation, and as executive director of Lawyers Alliance for New York, a public interest law firm for nonprofit and community development organizations. Bromberger is the author of two books on nonprofit formation and operation, Getting Organized and Advising Nonprofits.

A third skill—I call it civic reach—distinguishes a great board member from a merely adequate one, a world-class nonprofit from one that is simply functioning. Take a couple of examples: Back in 2005, Rochester Area Community Foundation’s (RACF) smart, highly engaged board had few well-known civic leaders. With the guidance of Jennifer Leonard, the foundation’s president and executive director, RACF aimed to become greater Rochester, N.Y.’s “catalyst for community change” and realized that movers and shakers could extend the institution’s influence. RACF added to its board the CEO of the city’s chamber of commerce, the CEO of a leading advertising company, the area’s school board president, a noted venture capitalist, a former United Way campaign chair, and the head of Rochester’s downtown development group. In just one of the positive outcomes, the chamber incorporated RACF’s recommendations into its annual state advocacy platform, resulting in $7.8 million in restored child care subsidies, plus crucial support for after-school funding.

In another example, the board of directors of Make-A-Wish Foundation International, a nonprofit devoted to granting the wishes of children with life-threatening medical conditions, shifted its composition to achieve a worldwide leadership profile. Previously, the organization was governed by chapter affiliate representatives from various counties, a decidedly internal focus. The new board boasts a powerful cadre of business leaders with the prestige, power, and contacts to open doors worldwide. Two board members illustrate this new heft. Jim Fielding, president of Disney Stores Worldwide, connects Make-A-Wish to Europe, Asia, and North America, prime markets for both Disney merchandising and Make-A-Wish civic engagement. Tim Kilpin, general manager and senior vice president for Mattel Brands, provides Make-A-Wish with cash contributions from the company’s toy sales and facilitates business relationships through its worldwide network. Savvy, connected players like Fielding and Kilpin—people with profound civic reach—serve as global thinkers for charities while they tend to their own business interests. As a result of its new board, Make-A-Wish more expertly navigates its corporate and individual relationships, ties its work to corporate social responsibility efforts, attracts a wider range of corporate sponsorship dollars, and manages its wish granting on a worldwide scale.

POWER TO THE WEAKEST SECTOR

Board members with civic reach compensate for the inherent limitations of the social sector, arguably democracy’s most critical, yet weakest, arena in terms of money and power. Social ventures generally lack the commercial sector’s profit-driven muscle and the public sector’s power to mandate by law and levy taxes to raise resources. Nonprofits need deep civic roots to thrive. To scale up operations, they need strong relationships with leaders in business, government agencies, and elective office. The sum of every board member’s civic reach is the soil in which those roots grow. Boards anemic in civic reach oversee organizations that are weak in civic relevance and resilience. Such organizations might have a range of funding sources and may run well operationally. But they rarely find themselves plugged into the civic power grid, where decisions about community and individual needs are largely made. Even with success, organizations deficient in civic reach often stand as capable orphans, unaccountably disconnected and alone, wondering why the recognition they think they deserve lies beyond their grasp.

In my work as a nonprofit organization executive, I’ve learned that civic reach is a function of three factors in a prospective board member: the person’s personal and professional prestige, his local knowledge, and what he can deliver in terms of communitywide or worldwide strategic relationships. These three assets—prestige, knowledge, and connections—matter as much to the organization as attentive governance, outright donations of money, and the ability to solicit gifts. Taken together and used wisely, board member prestige, knowledge, and relationships can produce monetary and marketing returns while elevating ordinary fundraising and routine governance into transformative stewardship. Nonprofits cannot afford to leave to chance that board members will acquire these abilities.

This street also runs both ways. The smartest board members want to serve on nonprofit boards that know how to trade on civic reach. These people know that investing their prestige, knowledge, and connections on behalf of an organization can have the virtuous effect of increasing and enhancing their reach in other civic settings and on other boards.

OTHER NECESSARY QUALITIES

People with civic reach also distinguish themselves through at least four other qualities. They tend to have what I call shrewd environmental sensing. They possess upstream knowledge about unfolding events and can position nonprofit programs and services at the confluence of opportunities to make positive change and secure resources. Board members with civic reach can sensitize the organization’s antennae to read political, economic, and societal signals and translate them into planning and initiatives that succeed and grow. For example, former cable television business executive Perry Parks grew up in south Los Angeles, served as a social worker after college, and for most of his business career lobbied every department or political body in the city that touched on telecommunications interests. On the board of Community Partners, the organization I run, Perry became the go-to guy for decoding the interests of elected officials or for developing strategies to reach civic leaders in ways that would cause them to listen and respond.

Another quality that distinguishes board members is an ability to advance and defend a nonprofit’s organizational mission. When board members of impeccable credibility stand up on behalf of an organization, decision makers heed what they have to say. For example, Robert Hertzberg, a successful business entrepreneur and former speaker of the California State Assembly, co-chaired the board of the nonpartisan policy organization California Forward. Respected as a pragmatic moderate in the assembly, Hertzberg lent his finely honed legislative instincts to practically every recommended element on the organization’s reform agenda. When California Forward took the agenda to the state’s governor and other elected leaders, everyone knew that Hertzberg’s political intelligence and political weight lay behind the ideas up for adoption. The jury’s still out on the agenda of California Forward, but according to Hertzberg, California voters and the state’s new governor, Jerry Brown, will have ample chance in the months ahead to grapple with its recommendations, both legislatively and through initiatives on statewide ballots.

Board members also should be able to reach the broader public. The visibility, credibility, and genuine commitment of board members with civic reach can confer indisputable local authenticity on nonprofits, even when the nonprofit is a private grantmaking foundation. Time saved in establishing public credibility translates directly to money saved for other organizational priorities. For example, Tessie Guillermo, former president and executive director of the Asian & Pacific Islander American Health Forum and president and CEO of the nonprofit ZeroDivide, straddles many civic, cultural, and community boundaries. From her perch as chair of the California Endowment’s board of directors, Guillermo can confer legitimacy for the grantmaker’s sometimes controversial giving agenda inside and beyond the state’s swelling Asian-Pacific Islander community. As a recognized change maker and leader with strong roots and relationships in the state’s Asian-Pacific Islander community, Guillermo’s presence on the California Endowment’s board speaks volumes about the foundation’s commitment to a fair shake in its grantmaking for groups serving Asian-Pacific Islanders.

Finally, board members should have inside access to power. That way, they can help place representatives of groups they serve at tables where pivotal deals and allocation decisions get made. This notion became clear to me when I met Norm Clement in 1997. Some called Clement, now deceased, a political fixer. He worked for Richard Ferry, co-founder of executive search giant Korn/Ferry International. He knew the business community and had a reputation for getting things done. President Bill Clinton had just passed welfare reform legislation, and cities and counties everywhere were feverishly fashioning programs to help low-income people meet the new law’s work requirements tied to receiving welfare. Clement offered himself less as a board member and more as a civic scout to our loose-knit coalition of nonprofits and business groups in Los Angeles. We’d tell Clement what we were looking for—office space, seed funding, meetings with important people—and, more often than not, Clement could deliver or direct us to someone who could.

All of this shows that the moral aura of nonprofit charitable endeavors must be accompanied by the actuality of real influence. Time and time again, I have heard funders and other donors insist that they want to invest dollars for maximum leverage. Nonprofits interested in answering this call need to prove they have adequate capital substitutes to backstop their work. Nonprofit boards with extensive civic reach provide that bulwark. Experience has shown me that funders and donors place their grant bets on confident civic achievers accustomed to getting community work done quickly and without fuss.

Alongside fundraising and governance, then, civic reach represents nothing less than the essential third leg of a nonprofit board’s sustainability platform. Organizational sustainability depends on intimate local knowledge that can inform program direction and on relationships that can connect programs to resources and communities. No matter how good an organization becomes at fundraising and governance, without civic reach it risks failure.

Paul Vandeventer serves as president and CEO of Community Partners, a civic innovation springboard in Los Angeles that joins social entrepreneurs, innovators, grantmakers, and civic leaders in accelerating good ideas for effective action and social change. He is the coauthor of Networks that Work: A Practitioner’s Guide to Managing Networked Action.

Against these daunting odds, a remarkable exception seems to be emerging in Cincinnati. Strive, a nonprofit subsidiary of KnowledgeWorks, has brought together local leaders to tackle the student achievement crisis and improve education throughout greater Cincinnati and northern Kentucky. In the four years since the group was launched, Strive partners have improved student success in dozens of key areas across three large public school districts. Despite the recession and budget cuts, 34 of the 53 success indicators that Strive tracks have shown positive trends, including high school graduation rates, fourth-grade reading and math scores, and the number of preschool children prepared for kindergarten.

Why has Strive made progress when so many other efforts have failed? It is because a core group of community leaders decided to abandon their individual agendas in favor of a collective approach to improving student achievement. More than 300 leaders of local organizations agreed to participate, including the heads of influential private and corporate foundations, city government officials, school district representatives, the presidents of eight universities and community colleges, and the executive directors of hundreds of education-related nonprofit and advocacy groups.

These leaders realized that fixing one point on the educational continuum—such as better after-school programs—wouldn’t make much difference unless all parts of the continuum improved at the same time. No single organization, however innovative or powerful, could accomplish this alone. Instead, their ambitious mission became to coordinate improvements at every stage of a young person’s life, from “cradle to career.”

Strive didn’t try to create a new educational program or attempt to convince donors to spend more money. Instead, through a carefully structured process, Strive focused the entire educational community on a single set of goals, measured in the same way. Participating organizations are grouped into 15 different Student Success Networks (SSNs) by type of activity, such as early childhood education or tutoring. Each SSN has been meeting with coaches and facilitators for two hours every two weeks for the past three years, developing shared performance indicators, discussing their progress, and most important, learning from each other and aligning their efforts to support each other.

Strive, both the organization and the process it helps facilitate, is an example of collective impact, the commitment of a group of important actors from different sectors to a common agenda for solving a specific social problem. Collaboration is nothing new. The social sector is filled with examples of partnerships, networks, and other types of joint efforts. But collective impact initiatives are distinctly different. Unlike most collaborations, collective impact initiatives involve a centralized infrastructure, a dedicated staff, and a structured process that leads to a common agenda, shared measurement, continuous communication, and mutually reinforcing activities among all participants.

Although rare, other successful examples of collective impact are addressing social issues that, like education, require many different players to change their behavior in order to solve a complex problem. In 1993, Marjorie Mayfield Jackson helped found the Elizabeth River Project with a mission of cleaning up the Elizabeth River in southeastern Virginia, which for decades had been a dumping ground for industrial waste. They engaged more than 100 stakeholders, including the city governments of Chesapeake, Norfolk, Portsmouth, and Virginia Beach, Va., the Virginia Department of Environmental Quality, the U.S. Environmental Protection Agency (EPA), the U.S. Navy, and dozens of local businesses, schools, community groups, environmental organizations, and universities, in developing an 18-point plan to restore the watershed. Fifteen years later, more than 1,000 acres of watershed land have been conserved or restored, pollution has been reduced by more than 215 million pounds, concentrations of the most severe carcinogen have been cut sixfold, and water quality has significantly improved. Much remains to be done before the river is fully restored, but already 27 species of fish and oysters are thriving in the restored wetlands, and bald eagles have returned to nest on the shores.

Or consider Shape up Somerville, a citywide effort to reduce and prevent childhood obesity in elementary school children in Somerville, Mass. Led by Christina Economos, an associate professor at Tufts University’s Gerald J. and Dorothy R. Friedman School of Nutrition Science and Policy, and funded by the Centers for Disease Control and Prevention, the Robert Wood Johnson Foundation, Blue Cross Blue Shield of Massachusetts, and United Way of Massachusetts Bay and Merrimack Valley, the program engaged government officials, educators, businesses, nonprofits, and citizens in collectively defining wellness and weight gain prevention practices. Schools agreed to offer healthier foods, teach nutrition, and promote physical activity. Local restaurants received a certification if they served low-fat, high nutritional food. The city organized a farmers’ market and provided healthy lifestyle incentives such as reduced-price gym memberships for city employees. Even sidewalks were modified and crosswalks repainted to encourage more children to walk to school. The result was a statistically significant decrease in body mass index among the community’s young children between 2002 and 2005.

Even companies are beginning to explore collective impact to tackle social problems. Mars, a manufacturer of chocolate brands such as M&M’s, Snickers, and Dove, is working with NGOs, local governments, and even direct competitors to improve the lives of more than 500,000 impoverished cocoa farmers in Cote d’Ivoire, where Mars sources a large portion of its cocoa. Research suggests that better farming practices and improved plant stocks could triple the yield per hectare, dramatically increasing farmer incomes and improving the sustainability of Mars’s supply chain. To accomplish this, Mars must enlist the coordinated efforts of multiple organizations: the Cote d’Ivoire government needs to provide more agricultural extension workers, the World Bank needs to finance new roads, and bilateral donors need to support NGOs in improving health care, nutrition, and education in cocoa growing communities. And Mars must find ways to work with its direct competitors on pre-competitive issues to reach farmers outside its supply chain.

These varied examples all have a common theme: that large-scale social change comes from better cross-sector coordination rather than from the isolated intervention of individual organizations. Evidence of the effectiveness of this approach is still limited, but these examples suggest that substantially greater progress could be made in alleviating many of our most serious and complex social problems if nonprofits, governments, businesses, and the public were brought together around a common agenda to create collective impact. It doesn’t happen often, not because it is impossible, but because it is so rarely attempted. Funders and nonprofits alike overlook the potential for collective impact because they are used to focusing on independent action as the primary vehicle for social change.

ISOLATED IMPACT

Most funders, faced with the task of choosing a few grantees from many applicants, try to ascertain which organizations make the greatest contribution toward solving a social problem. Grantees, in turn, compete to be chosen by emphasizing how their individual activities produce the greatest effect. Each organization is judged on its own potential to achieve impact, independent of the numerous other organizations that may also influence the issue. And when a grantee is asked to evaluate the impact of its work, every attempt is made to isolate that grantee’s individual influence from all other variables.

In short, the nonprofit sector most frequently operates using an approach that we call isolated impact. It is an approach oriented toward finding and funding a solution embodied within a single organization, combined with the hope that the most effective organizations will grow or replicate to extend their impact more widely. Funders search for more effective interventions as if there were a cure for failing schools that only needs to be discovered, in the way that medical cures are discovered in laboratories. As a result of this process, nearly 1.4 million nonprofits try to invent independent solutions to major social problems, often working at odds with each other and exponentially increasing the perceived resources required to make meaningful progress. Recent trends have only reinforced this perspective. The growing interest in venture philanthropy and social entrepreneurship, for example, has greatly benefited the social sector by identifying and accelerating the growth of many high-performing nonprofits, yet it has also accentuated an emphasis on scaling up a few select organizations as the key to social progress.

Despite the dominance of this approach, there is scant evidence that isolated initiatives are the best way to solve many social problems in today’s complex and interdependent world. No single organization is responsible for any major social problem, nor can any single organization cure it. In the field of education, even the most highly respected nonprofits—such as the Harlem Children’s Zone, Teach for America, and the Knowledge Is Power Program (KIPP)—have taken decades to reach tens of thousands of children, a remarkable achievement that deserves praise, but one that is three orders of magnitude short of the tens of millions of U.S. children that need help.

The problem with relying on the isolated impact of individual organizations is further compounded by the isolation of the nonprofit sector. Social problems arise from the interplay of governmental and commercial activities, not only from the behavior of social sector organizations. As a result, complex problems can be solved only by cross-sector coalitions that engage those outside the nonprofit sector.

We don’t want to imply that all social problems require collective impact. In fact, some problems are best solved by individual organizations. In “Leading Boldly,” an article we wrote with Ron Heifetz for the winter 2004 issue of the Stanford Social Innovation Review, we described the difference between technical problems and adaptive problems. Some social problems are technical in that the problem is well defined, the answer is known in advance, and one or a few organizations have the ability to implement the solution. Examples include funding college scholarships, building a hospital, or installing inventory controls in a food bank. Adaptive problems, by contrast, are complex, the answer is not known, and even if it were, no single entity has the resources or authority to bring about the necessary change. Reforming public education, restoring wetland environments, and improving community health are all adaptive problems. In these cases, reaching an effective solution requires learning by the stakeholders involved in the problem, who must then change their own behavior in order to create a solution.

Shifting from isolated impact to collective impact is not merely a matter of encouraging more collaboration or public-private partnerships. It requires a systemic approach to social impact that focuses on the relationships between organizations and the progress toward shared objectives. And it requires the creation of a new set of nonprofit management organizations that have the skills and resources to assemble and coordinate the specific elements necessary for collective action to succeed.

THE FIVE CONDITIONS OF COLLECTIVE SUCCESS

Our research shows that successful collective impact initiatives typically have five conditions that together produce true alignment and lead to powerful results: a common agenda, shared measurement systems, mutually reinforcing activities, continuous communication, and backbone support organizations.

Common Agenda Collective impact requires all participants to have a shared vision for change, one that includes a common understanding of the problem and a joint approach to solving it through agreed upon actions. Take a close look at any group of funders and nonprofits that believe they are working on the same social issue, and you quickly find that it is often not the same issue at all. Each organization often has a slightly different definition of the problem and the ultimate goal. These differences are easily ignored when organizations work independently on isolated initiatives, yet these differences splinter the efforts and undermine the impact of the field as a whole. Collective impact requires that these differences be discussed and resolved. Every participant need not agree with every other participant on all dimensions of the problem. In fact, disagreements continue to divide participants in all of our examples of collective impact. All participants must agree, however, on the primary goals for the collective impact initiative as a whole. The Elizabeth River Project, for example, had to find common ground among the different objectives of corporations, governments, community groups, and local citizens in order to establish workable cross-sector initiatives.

Funders can play an important role in getting organizations to act in concert. In the case of Strive, rather than fueling hundreds of strategies and nonprofits, many funders have aligned to support Strive’s central goals. The Greater Cincinnati Foundation realigned its education goals to be more compatible with Strive, adopting Strive’s annual report card as the foundation’s own measures for progress in education. Every time an organization applied to Duke Energy for a grant, Duke asked, “Are you part of the [Strive] network?” And when a new funder, the Carol Ann and Ralph V. Haile Jr./U.S. Bank Foundation, expressed interest in education, they were encouraged by virtually every major education leader in Cincinnati to join Strive if they wanted to have an impact in local education.¹

Shared Measurement Systems Developing a shared measurement system is essential to collective impact. Agreement on a common agenda is illusory without agreement on the ways success will be measured and reported. Collecting data and measuring results consistently on a short list of indicators at the community level and across all participating organizations not only ensures that all efforts remain aligned, it also enables the participants to hold each other accountable and learn from each other’s successes and failures.

It may seem impossible to evaluate hundreds of different organizations on the same set of measures. Yet recent advances in Web-based technologies have enabled common systems for reporting performance and measuring outcomes. These systems increase efficiency and reduce cost. They can also improve the quality and credibility of the data collected, increase effectiveness by enabling grantees to learn from each other’s performance, and document the progress of the field as a whole.²

All of the preschool programs in Strive, for example, have agreed to measure their results on the same criteria and use only evidence-based decision making. Each type of activity requires a different set of measures, but all organizations engaged in the same type of activity report on the same measures. Looking at results across multiple organizations enables the participants to spot patterns, find solutions, and implement them rapidly. The preschool programs discovered that children regress during the summer break before kindergarten. By launching an innovative “summer bridge” session, a technique more often used in middle school, and implementing it simultaneously in all preschool programs, they increased the average kindergarten readiness scores throughout the region by an average of 10 percent in a single year.³

Mutually Reinforcing Activities Collective impact initiatives depend on a diverse group of stakeholders working together, not by requiring that all participants do the same thing, but by encouraging each participant to undertake the specific set of activities at which it excels in a way that supports and is coordinated with the actions of others.

The power of collective action comes not from the sheer number of participants or the uniformity of their efforts, but from the coordination of their differentiated activities through a mutually reinforcing plan of action. Each stakeholder’s efforts must fit into an overarching plan if their combined efforts are to succeed. The multiple causes of social problems, and the components of their solutions, are interdependent. They cannot be addressed by uncoordinated actions among isolated organizations.

All participants in the Elizabeth River Project, for example, agreed on the 18-point watershed restoration plan, but each is playing a different role based on its particular capabilities. One group of organizations works on creating grassroots support and engagement among citizens, a second provides peer review and recruitment for industrial participants who voluntarily reduce pollution, and a third coordinates and reviews scientific research.

The 15 SSNs in Strive each undertake different types of activities at different stages of the educational continuum. Strive does not prescribe what practices each of the 300 participating organizations should pursue. Each organization and network is free to chart its own course consistent with the common agenda, and informed by the shared measurement of results.

Continuous Communication Developing trust among nonprofits, corporations, and government agencies is a monumental challenge. Participants need several years of regular meetings to build up enough experience with each other to recognize and appreciate the common motivation behind their different efforts. They need time to see that their own interests will be treated fairly, and that decisions will be made on the basis of objective evidence and the best possible solution to the problem, not to favor the priorities of one organization over another.

Even the process of creating a common vocabulary takes time, and it is an essential prerequisite to developing shared measurement systems. All the collective impact initiatives we have studied held monthly or even biweekly in-person meetings among the organizations’ CEO-level leaders. Skipping meetings or sending lower-level delegates was not acceptable. Most of the meetings were supported by external facilitators and followed a structured agenda.

The Strive networks, for example, have been meeting regularly for more than three years. Communication happens between meetings too: Strive uses Web-based tools, such as Google Groups, to keep communication flowing among and within the networks. At first, many of the leaders showed up because they hoped that their participation would bring their organizations additional funding, but they soon learned that was not the meetings’ purpose. What they discovered instead were the rewards of learning and solving problems together with others who shared their same deep knowledge and passion about the issue.

Backbone Support Organizations Creating and managing collective impact requires a separate organization and staff with a very specific set of skills to serve as the backbone for the entire initiative. Coordination takes time, and none of the participating organizations has any to spare. The expectation that collaboration can occur without a supporting infrastructure is one of the most frequent reasons why it fails.

The backbone organization requires a dedicated staff separate from the participating organizations who can plan, manage, and support the initiative through ongoing facilitation, technology and communications support, data collection and reporting, and handling the myriad logistical and administrative details needed for the initiative to function smoothly. Strive has simplified the initial staffing requirements for a backbone organization to three roles: project manager, data manager, and facilitator.

Collective impact also requires a highly structured process that leads to effective decision making. In the case of Strive, staff worked with General Electric (GE) to adapt for the social sector the Six Sigma process that GE uses for its own continuous quality improvement. The Strive Six Sigma process includes training, tools, and resources that each SSN uses to define its common agenda, shared measures, and plan of action, supported by Strive facilitators to guide the process.

In the best of circumstances, these backbone organizations embody the principles of adaptive leadership: the ability to focus people’s attention and create a sense of urgency, the skill to apply pressure to stakeholders without overwhelming them, the competence to frame issues in a way that presents opportunities as well as difficulties, and the strength to mediate conflict among stakeholders.

FUNDING COLLECTIVE IMPACT

Creating a successful collective impact initiative requires a significant financial investment: the time participating organizations must dedicate to the work, the development and monitoring of shared measurement systems, and the staff of the backbone organization needed to lead and support the initiative’s ongoing work.

As successful as Strive has been, it has struggled to raise money, confronting funders’ reluctance to pay for infrastructure and preference for short-term solutions. Collective impact requires instead that funders support a long-term process of social change without identifying any particular solution in advance. They must be willing to let grantees steer the work and have the patience to stay with an initiative for years, recognizing that social change can come from the gradual improvement of an entire system over time, not just from a single breakthrough by an individual organization.

This requires a fundamental change in how funders see their role, from funding organizations to leading a long-term process of social change. It is no longer enough to fund an innovative solution created by a single nonprofit or to build that organization’s capacity. Instead, funders must help create and sustain the collective processes, measurement reporting systems, and community leadership that enable cross-sector coalitions to arise and thrive.

This is a shift that we foreshadowed in both “Leading Boldly” and our more recent article, “Catalytic Philanthropy,” in the fall 2009 issue of the Stanford Social Innovation Review. In the former, we suggested that the most powerful role for funders to play in addressing adaptive problems is to focus attention on the issue and help to create a process that mobilizes the organizations involved to find a solution themselves. In “Catalytic Philanthropy,” we wrote: “Mobilizing and coordinating stakeholders is far messier and slower work than funding a compelling grant request from a single organization. Systemic change, however, ultimately depends on a sustained campaign to increase the capacity and coordination of an entire field.” We recommended that funders who want to create large-scale change follow four practices: take responsibility for assembling the elements of a solution; create a movement for change; include solutions from outside the nonprofit sector; and use actionable knowledge to influence behavior and improve performance.

These same four principles are embodied in collective impact initiatives. The organizers of Strive abandoned the conventional approach of funding specific programs at education nonprofits and took responsibility for advancing education reform themselves. They built a movement, engaging hundreds of organizations in a drive toward shared goals. They used tools outside the nonprofit sector, adapting GE’s Six Sigma planning process for the social sector. And through the community report card and the biweekly meetings of the SSNs they created actionable knowledge that motivated the community and improved performance among the participants.

Funding collective impact initiatives costs money, but it can be a highly leveraged investment. A backbone organization with a modest annual budget can support a collective impact initiative of several hundred organizations, magnifying the impact of millions or even billions of dollars in existing funding. Strive, for example, has a $1.5 million annual budget but is coordinating the efforts and increasing the effectiveness of organizations with combined budgets of $7 billion. The social sector, however, has not yet changed its funding practices to enable the shift to collective impact. Until funders are willing to embrace this new approach and invest sufficient resources in the necessary facilitation, coordination, and measurement that enable organizations to work in concert, the requisite infrastructure will not evolve.

FUTURE SHOCK

What might social change look like if funders, nonprofits, government officials, civic leaders, and business executives embraced collective impact? Recent events at Strive provide an exciting indication of what might be possible.

Strive has begun to codify what it has learned so that other communities can achieve collective impact more rapidly. The organization is working with nine other communities to establish similar cradle to career initiatives.⁴ Importantly, although Strive is broadening its impact to a national level, the organization is not scaling up its own operations by opening branches in other cities. Instead, Strive is promulgating a flexible process for change, offering each community a set of tools for collective impact, drawn from Strive’s experience but adaptable to the community’s own needs and resources. As a result, the new communities take true ownership of their own collective impact initiatives, but they don’t need to start the process from scratch. Activities such as developing a collective educational reform mission and vision or creating specific community-level educational indicators are expedited through the use of Strive materials and assistance from Strive staff. Processes that took Strive several years to develop are being adapted and modified by other communities in significantly less time.

These nine communities plus Cincinnati have formed a community of practice in which representatives from each effort connect regularly to share what they are learning. Because of the number and diversity of the communities, Strive and its partners can quickly determine what processes are universal and which require adaptation to a local context. As learning accumulates, Strive staff will incorporate new findings into an Internet-based knowledge portal that will be available to any community wishing to create a collective impact initiative based on Strive’s model.

This exciting evolution of the Strive collective impact initiative is far removed from the isolated impact approach that now dominates the social sector and that inhibits any major effort at comprehensive, large-scale change. If successful, it presages the spread of a new approach that will enable us to solve today’s most serious social problems with the resources we already have at our disposal. It would be a shock to the system. But it’s a form of shock therapy that’s badly needed.

John Kania is a managing director at FSG, where he oversees the firm’s consulting practice. Before joining FSG, he was a consultant at Mercer Management Consulting and Corporate Decisions Inc. This is Kania’s third article for the Stanford Social Innovation Review.

Mark Kramer is the co-founder and a managing director of FSG. He is also the co-founder and the initial board chair of the Center for Effective Philanthropy, and a senior fellow at Harvard University’s John F. Kennedy School of Government. This is Kramer’s fifth article for the Stanford Social Innovation Review.