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Making Rain for the Social Sector

September 2, 2014

"You can lead a philanthropist to water, but you can't make him drink."

These words were uttered by Harry F. Hopper, chairman of the board of the Corcoran Gallery of Art in Washington, DC, under questioning by the lawyer representing opponents to a planned merger of the Corcoran with the National Gallery of Art and George Washington University this past summer.

The merger agreement, which would dissolve the Corcoran and donate its collection to the National Gallery and its building to George Washington University, was forged after the trustees of the Corcoran failed to complete a capital campaign to build a new addition to the museum. When the campaign fell apart, some of the trustees left the board and the remaining board and staff had difficulty raising the funds to operate the museum and college.

Saying that it was "financially impossible" to carry on the museum and school, the current board forged an agreement with the National Gallery of Art and George Washington University that it felt would preserve the collection in public hands and allow the building to stay open and classes to continue. However, a group of donors, students and faculty members sued to block the merger, and all parties ended up in court.

In a way, this dispute mirrored another taking place at the Metropolitan Opera during the summer. In that dispute, general manager Peter Gelb was trying to cut costs by renegotiating with 15 of the company's 16 unions - asking them to accept cuts in pay and benefits. The unions resisted, and much of the summer was spent in a highly public airing of grievances between the various parties.

Mr. Gelb asserted that "lower contributions" were contributing to a growing deficit at a time that the Met was increasingly reliant on donations to cover its operating expenses. In a financial filing at the end of July, Gelb asserted that the opera's deficit would be "significantly larger" than the gap that it had reported a year before. The unions asserted that the board and management of the opera had failed to raise the money that is needed to operate the institution, and Local 802 of the American Federation of Musicians went so far as to issue a news release entitled, "Met Orchestra Musicians Detail Failed Management and Lack of Artistic Vision of Met Opera General Manager Peter Gelb."

Essentially, both of these disputes revolve around capital -- or the lack thereof.

One of the major responsibilities of the board of any nonprofit organization is to secure the resources that are needed to fulfill the mission of the organization. Organizations do this through a mix of earned income (e.g., ticket sales), contributed income (e.g., grants from individuals and foundations), and investments. Increasingly, however, many nonprofit organizations have been forced to increase the percentage of their budgets coming from earned income - resulting in higher ticket prices or client fees - because contributions from traditional sources -- like government, foundations and corporations - have either decreased or stagnated.

All nonprofit organizations (except for those few that are heavily endowed or self-sustaining), need access to capital and the skills to use it and invest it properly. In fact, Clara Miller of the Nonprofit Finance Fund, has argued that there are three factors that interact to sustain an organization's health over time: mission, organizational capacity and capital structure.

In the following weeks, we'll explore ideas on how to raise capital, how to create a sustainable capital structure, how corporations and foundations can help, and what American Express is doing to build this capacity with nonprofit organizations and social entrepreneurs.

If you have a comment or question, please follow me on Twitter at @timmcclimon and let's start a conversation there.

Next week: Raising Capital for the Social Sector


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