Although better known as the apostle of modern business management, Peter Drucker has been working closely with nonprofits for five decades. He taught his first seminar on the subject during the Truman Administration, and typically maintains two or three pro bono nonprofit clients (he spent twelve years as principal advisor to the Girl Scouts). Of his 31 books, only three are explicitly about business management, and one is entirely about nonprofits.
The Vienna native sees more similarities than differences between nonprofit and business management. He wants both to be accountable for “results,” though lacking the discipline of a bottom line, charities and foundations need to make an extra effort to focus on a core mission and live up to a standard of performance. “Too many nonprofits,” notes Drucker, “believe that good intentions are sufficient.” Quixotic efforts are not inherently bad, but beware the curse of ineffectiveness: “Most of the people who persist in the wilderness leave nothing behind but bleached bones.”
There are, of course, crucial differences as well. “Business expects to be paid: it supplies. The social sector institutions aim at changing the human being.” An early proponent of “nonprofitization,” Drucker notes dryly that “nonprofits spend far less for results than the governments spend for failures.”
Now in his 90th year, Drucker is still hard at work writing, giving speeches, and consulting. Philanthropy spoke with him at his home office in Claremont, California.
PHILANTHROPY: Have the large, influential foundations made a useful contribution to society, or are they the kind of top-heavy, out-of-touch corporate structures that you have faulted in the industrial world? The model for the Rockefeller Foundation was, after all, Standard Oil.
MR. DRUCKER: Well, I have never worked in a foundation, so I am not speaking from direct knowledge; I am just speaking from what I see. Contrary to what Irving Kristol has said in his interview [see the October-November 1998 issue of Philanthropy] those major foundations have made an impact—Carnegie and Rockefeller on medical education and research, and Ford with the Green Revolution, which means that India no longer imports grain and is no longer threatened with famine.
Kristol has a major point in saying that these foundations can very easily lose sight of what the founder intended them to do, but what is worse is if they keep on doing what they did 50 years ago. One of the basic problems of being so big and so rich is that you keep on doing what you were set up to do long after that ceased to make any sense. But that’s also true of General Motors. It’s true of anything that is very big and complex, and especially too rich. Too much money may be worse than too little.
PHILANTHROPY: Who is the General Motors of philanthropy?
MR. DRUCKER: Well, let’s be indiscreet. Name a single major foundation that has done a good job for more than five or eight years, without turning into a grantmaking machine where grant requests come in and the money flows out. The Ford Foundation had this one accomplishment—the Green Revolution in India—but otherwise, all their spending has had absolutely no results. When is the last time the Carnegie Foundation made a difference? Not in my lifetime. Rockefeller made a difference—a tremendous difference—in the 1920s and 1930s, but since then what have they done? Mr. Getty left an enormous amount of money for that magnificent museum, and he changed the cultural landscape of Los Angeles, which was, in terms of art, a desert. But other than that, who has made a difference here?
PHILANTHROPY: What are the nonprofit sector’s main shortcomings?
MR. DRUCKER: The main shortcoming is that far too many nonprofits believe that good intentions are sufficient. They lack the discipline—the imposed discipline of the bottom line. The second and very common shortcoming is that they don’t abandon. I got a letter from a fast-growing pastoral church, in which that pastor told me how much he owed to me because he accepted my injunction to build organized abandonment into his work. This is a church that 20 years ago was in a storefront. He now has 60 outreach churches and some 20,000 worshippers. And every year, he spends three or four days in a retreat working on abandoning programs that do not produce results. That kind of discipline is still very rare. It’s also very rare in business.
PHILANTHROPY: Why is it so rare?
MR. DRUCKER: Nobody likes to abandon. In business, if you don’t sell the Edsel for two or three years, you don’t redouble your efforts, you just get rid of it. The greatest single weakness of government is that government cannot abandon. As for charitable organizations, the less success they have, the greater they feel is the need.
PHILANTHROPY: In your book Post Capitalist Society, you write that organizations must take responsibility for limiting their mission so they don’t get into areas where neither have legitimacy or competence. Is this also true of nonprofits and foundations?
MR. DRUCKER: It is particularly true for nonprofits and foundations. I just finished reading a book on the history of Phillip II by a very good English historian in which the author points out that being such a big power induced Phillip to try to be at all times at every place in Europe, in America, and in Asia. As a result he achieved nothing. You have to concentrate to achieve, and the bigger you are, the less you achieve if you diversify. One of the greatest weaknesses of nonprofits is that they splinter themselves. They don’t say “What is our mission?” and “What results do we need?” They don’t concentrate.
At the Peter F. Drucker Foundation, to which my connection is limited to being honorary chairman, we focus on small local community organizations. We developed the Self-Assessment Tool, which is our first and our most important product. It helps nonprofits answer questions like “How do you define results?” In business, the bottom line, while a very crude measure, is still a measure. A nonprofit really has to think it through, and define what it means by performance and results. This isn’t always easy. In fact, this is the most critical decision any of my clients can make. You may have to do this every three or four years. Very rarely is a definition valid for a long time.
I worked with the American Red Cross some twenty years ago, to help define its mission and its functions. Up until World War II the Red Cross had only one mission in peacetime—disaster relief. Since then it has taken on a good many other tasks, and disaster relief is no longer the only major task. And the Red Cross mission and functions are still being defined. I understand that Mrs. Dole before she left the Red Cross presidency recently was still struggling with those definitions in some areas.
PHILANTHROPY: Aside from being clear about their mission, what are some general ways nonprofits can be made more productive?
MR. DRUCKER: Well, I would say “more effective,” not “more productive.” Nonprofits today are probably pretty much where American business was in the late 1940s, with a few outstandingly effective, well-managed companies, and the great bulk of them at a very low level. In the business world, the average has risen dramatically. Yet today, the vast majority of nonprofits are not so much badly managed as they just are not managed at all. One of the reasons I spend so much time on nonprofits is that it is so incredibly easy to improve them, because you start from such a low base.
PHILANTHROPY: What about your theories of turning volunteers into “partners.” What does that mean?
MR. DRUCKER: Let me give you an example, that of a Catholic parish in the Midwest, which has one-third of the priests it had 30 years ago. And yet the diocese today has four or five times the parishioners it had 30 years ago because it put 2,500 lay people to work. They run the parishes as parish administrators, and the diocese is very tough on them. They have to go to school every year for four to six weeks. They are appraised by their peers, and if their performance is less than superior for two years they are asked to leave. If they have been there for more than five years they are asked to teach. The diocese makes enormous demands on them. But that is what today’s volunteers demand. They are no longer satisfied with being members of the altar guild, arranging the flowers. They want responsibility.
PHILANTHROPY: Can nonprofits do the same thing with their donor base?
MR. DRUCKER: Well, again, you have to figure out what kind of results are meaningful to a particular donor. I am in my 90th year. The American Heart Association does not come to me and expect me to be interested in preventing heart attacks, because at my age that is the best possible way to go. They focus on the 50-year-old, for whom that is a meaningful result. Also, volunteers give twice as much as non-volunteers. Now, not all nonprofits can have volunteers. God help you if you are a hospital with volunteers doing anything more than pushing the wheelchairs of discharged patients. A hospital is not a volunteer organization. But churches increasingly are.
More and more, donors demand that you define performance. If you look at the really successful fundraisers, like the American Heart Association, they not only define clearly what they are trying to do—and they have redefined it every five years—but they do not ask for money. They say this is what we have achieved in the past 20 years, this is what we have achieved this past year. Some are long-term, such as improvements in the treatment of cardiac disease. They talk in terms of performance and results, and donors respond to that. If you only talk in terms of need, you get five bucks.
It’s a mistake, by the way, to think that foundations and corporations are the main source of revenue for nonprofits. They are a marginal, tiny source of revenue—at most 8 percent of the sector’s $620 billion in revenue.
And donations are only a part. The largest single part of revenue to the nonprofit sector is actually fees. For many years, museums and symphony orchestras were among my main pro bono clients. Their main source of income is of course fees. Increasingly, nonprofits obtain their revenues from their services from their fees and charges, which account for about 40 percent of the sector’s revenue.
PHILANTHROPY: You have also criticized nonprofits for wasting their efforts on “activities that would be done better—and more cheaply—by a business.” What are some examples of things that would be better done by a business?
MR. DRUCKER: Well, the move from the old community hospitals to the for-profit hospitals has been wholesome, and it by no means involves only corporations. The most successful hospital chains in this country today are run by Sisters of Charity. You know that there is nothing tougher than an experienced nun. The Sisters of Charity are basically running the hospitals as for-profit hospitals, and they are doing an excellent job. They realized very early on that there would be an end to the gravy train, where government and insurance companies would pay your bills without asking a question. They looked at their activities and they placed them on a basis where fees and charges will support them, up to a point. And they have been very successful.
PHILANTHROPY: You have predicted a major expansion in nonprofit programs to tackle social problems and other areas. Yet, if this year’s State of the Union address is any indication, the demise of big government appears to have been greatly exaggerated. With budget surpluses as far as the eye can see, there appears to be no pressing reason for Congress or the President to oppose major increases in domestic outlays. Do you still anticipate that nonprofits will take on a larger role?
MR. DRUCKER: Well, first of all, if you look at the batting average of the people making these projections about surpluses, it is about zero. And second, even if we have the surpluses, we can spend, but that doesn’t mean that we will accomplish anything. So far, on the contrary, it is very likely that surpluses will enable us not to tackle problems, because they allow us to paper over problems. For example, we are spending more money than ever on the public schools, even though today one out of every five children in this country is not in a traditional public school. The gap between what the schools deliver and what society needs will grow, as more and more kids move out of traditional schools—not to expensive schools, but to places like parochial schools.
The parochial schools have the same children as the public schools. In Chicago, the proportion of children from single-parent families is as large or larger as the public schools. In New York City, the public schools have the same children, but spend two-and-a-half times what the parochial schools spend. The parochial school children learn, are disciplined, and, whether they are black or Latino, get into trouble at about one-third the rate of the teenagers who attend the public schools. When you look at the prison system in New York, the proportion of black youngsters who are imprisoned who went to parochial schools is about one-tenth of those who went to public schools. And yet the teachers unions and the New York Board of Education will make sure that nothing changes.
I look at results. The parochial schools do very simple things, basically what worked 50 years ago. They are not innovative, they are not entrepreneurial, they simply say “We do what works.” Public schools for the past 40 years have focused on the ones who don’t learn. Parochial schools basically focus on those who want to learn, and that makes all the difference. Their teachers are underpaid, and a good many of them have no official credentials. But if their children don’t learn, they are out of the school in two years. The principals who run parochial schools, at least the ones I know, don’t put up with teachers whose kids don’t learn.
PHILANTHROPY: Is it time for the government to provide a voucher to enable lower-income parents to send their children to a private or parochial school?
MR. DRUCKER: Well, I think we have reached the point that we have to have vouchers. I don’t see the public school system reforming itself. The additional money the government is spending on education is making them even less willing to reform.
PHILANTHROPY: Are you hopeful or skeptical about the philanthropic contribution the new money is likely to make, now that Bill Gates has become a major philanthropist?
MR. DRUCKER: Well, Bill Gates is about as traditional as you can be. He is giving money, just like Carnegie, Rockefeller, and Ford. It may be very salutary, but there’s nothing new to it. What is new is that there are now many thousands of people in their forties who have made a substantial amount of money, and who are going into social entrepreneurship—people like Bob Buford, author of Halftime. These are people who are not going to retire; they are much too young, and they are starting their own nonprofits.
I know a man who was general counsel of a major company, and was very successful. He is now 47 and he is building charter schools in the Southwest and running them. He is giving money, but above all he is working two days a week. Another man, in his late forties, built a substantial business in food distribution. He loves his business, he enjoys it, and he is not going to retire. But he is working with black churches on his special interest, which is substance abuse. He has his own little nonprofit. We have learned that the most successful drug abuse programs are religiously affiliated, in fact we learned this a long time ago from the Salvation Army. But they are not church programs, since churches do not have the competence to run such programs. And he is helping this group but not by giving money. He is spending two days a week working in and with the schools, and that is very different from what Bill Gates is doing.
Giving money is basically passive. In the parable of the good Samaritan, the important thing is that the Samaritan went back the next day, to make sure that the victim was treated well. He wasn’t just giving money; he was giving care. Lots of people give money; he gave care, he did something. Social entrepreneurs are not satisfied with just giving money.
But the social entrepreneur is a new phenomenon. Will it work? We probably won’t know for 20 years.
PHILANTHROPY: Marie Antoinette had a building erected on the grounds of Versailles where she and her friends could pretend to be shepherds. Does social entrepreneurship hold any danger of Antoinettism?
MR. DRUCKER: Well, yes, but the greater danger for those who give money is that it is wasted. That is also something we are going to work on at the Peter Drucker Foundation, to make sure that the social entrepreneurs are disciplined, that they don’t just do good, but have results. Also, the virtues of social entrepreneurship should not be construed as an argument against giving money. My books are selling well, my consulting fees for business are paying well, and my lecture fees are paying well. So I am giving money. But I am giving a very substantial part of my own work, and I am good at it, or people wouldn’t come back to me year after year.
PHILANTHROPY: Irving Kristol, in a recent interview with Philanthropy, abjured the notion of a “Third Sector” because such nomenclature makes foundations “think that they have a completely independent role to play.” Kristol added: “Foundations, except in very special cases, should not try to start something new” because “if it were something worthwhile, someone else would have thought of it and would be doing it already.” You on the other hand have referred to the “social sector” as an independent entity, distinct from the public and private sectors. Who is right?
MR. DRUCKER: Well, Kristol is quite justified in saying that the Rockefeller Foundation and the Ford Foundation believe they know what is to be done. But the fact is that they don’t know, and so in many cases they do harm.
But Kristol defines anything that is not in the government as the private sector. It would come as a substantial surprise to the half of adult Americans who are doing volunteer work that they work for the private sector. He is entitled to his definition, but something like 40 percent of these volunteers are working for churches. I don’t think Kristol would consider the churches to be part of the private sector. He also says that if he had a large sum of money to give away, he would give it to a Jewish day school. I think that these religious schools, in which a great many people teach at well below public school salaries, do not see themselves in the private sector.
PHILANTHROPY: Any closing thoughts on foundations?
MR. DRUCKER: The greatest contribution of foundations is that they changed the nature of philanthropy from giving money because it is good for your soul to focusing on making a difference. That was true of Carnegie’s libraries, it was true of the Rockefeller Foundation’s research.
Perhaps the idea that foundations should be around forever is a mistake. And maybe that is one of the strengths of the social entrepreneur, because that person’s contributions are limited, not by law, but in effect to the lifetime of that one person who has committed himself personally.