The distinct challenges of nonprofit leadership

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The nonprofit sector accounts for over 10 percent of the U.S. workforce and nearly $2.6 trillion in assets, and yet significant studies of the distinctive challenges of leading the nonprofit organization did not seriously begin until after the 1980s.

Anyone who has led a nonprofit knows that there are important differences in leadership challenges compared to leading a for-profit corporation, and that these challenges create pressures on the nonprofit leader that create unfortunate consequences. According to a 2006 national study of over 2,000 nonprofit executive directors, three-quarters of nonprofit executives plan on leaving their jobs within the next five years.

What makes nonprofit leadership distinctive from for-profit organizational leadership, and how can the nonprofit executive anticipate these differences and learn how to address them?

First of all, The NPO has a distinctive social mission, purposes, and goals which do not easily lend themselves to measurement. For-profit leaders have their financial bottom-line and key performance indicators to demonstrate progress and success, but the NPO leader struggles with quantifying the result of social change and mission objectives. Recently, help has come out of the funding community that provides some guidance for measuring social outcomes and impact, but the NPO leader is largely on his or her own when it comes to defining the most appropriate evaluation approach.

Second, nonprofit leadership is distinctive because of the diverse nature of NPO stakeholders, which changes the nature of governance and accountability. The owner or owners of the for-profit corporation are clearly defined, and accountability is largely accomplished through financial reporting. The NPO leader answers to stakeholders instead of stockholders who form a loosely defined and changing body of interested parties — donors, constituents, board of directors, the funding community and even society at large. The challenge for the NPO leader is to identify the appropriate stakeholder groups for organization and balance suitable levels of accountability with each.

Third, NPO leaders are often expected to exhibit values-expressive character in their leadership. In today’s culture, all leaders are expected to adhere to a set of values that reflect the company’s ethos. But the nonprofit leader has the added burden of exhibiting in their own character and actions additional values and beliefs that reflect the exempt mission and purpose of the organization. Thus the NPO leader of a child-welfare organization is expected to demonstrate personal compassion and passion for the plight of underprivileged children, while the leader of a religious nonprofit is expected to adhere not only to certain theological beliefs but also be a member of a specific religious group or order.

NPO leaders quickly find that there are constraints on nonprofit entrepreneurial activity that require a distinctive approach to new opportunities, accountability, and access to capital. Regulatory and stakeholder control place constraints on nonprofit entrepreneurial activity that often frustrate the NPO leader who comes from the freer entrepreneurial environment of small business. The leader quickly learns that he or she must be sensitive to the opinions of stakeholders and potentially more restrictive regulatory limitations when considering new entrepreneurial options.

Fourth, most NPO leaders understand the constraints placed on them to recruit personnel and to implement compensation systems that reward performance. The recruiting process is bounded by the search for personnel that must agree with the mission of the organization and exhibit some of the same values-expressive character traits that are required of the leaders. Most NPOs have mostly basic compensation systems that avoid reward-based or performance-based compensation because of the concern for conflict of interest with respect to the delivery of human services.

According to Burt Nanus and Steven Dobbs in “Leaders Who Make a Difference,” the primary purpose of nonprofit leadership is to focus laser-like attention throughout the organization on providing the greater good to society. The leader must know how to marshal the energy of its employees and its resources to maximize the social goods the organization can produce for society and the people it serves. This presents the NPO leader with distinct challenges that need to be understood and supported.

Wilson is an executive coach with Vistage International and the Nonprofit Leadership Exchange in Colorado Springs. He can be reached at kent.wilson@vistage.com.