Nonprofits as a Resilient Sector: Implications for Public Policy

1 Introduction

Lester Salamon was the first scholar to characterize the nonprofit sector in the United States as “the resilient sector” (Salamon 2003, 2012). In light of recent crises including the financial crisis of 2008–2009, the COVID pandemic beginning in 2020, and various other recent episodes of economic, social, political and environmental turmoil affecting nonprofits, Salamon’s focus on resilience is ever more relevant today. Questions remain, however, as to how resilient nonprofits really are to future threats, and what can be done by government, philanthropy and nonprofit organizations themselves, to ensure their future resilience.

This paper examines what resilience means for individual organizations, for the various organizational networks in which nonprofits are enmeshed, and for the sector at large. From this examination we assess how public policy can strengthen the nonprofit sector so as to continue to live up to Salamon’s characterization as a resilient sector. We will observe that resilience as a sector does not mean the same thing as resilience of individual nonprofits, hence policymakers must decide how much to target policies and programs addressed to all nonprofits versus policies and programs that would strategically assist some nonprofits more than others or would focus on particular groupings or networks of nonprofits. For example, in the COVID 19 pandemic, arts institutions and small colleges suffered greatly while food banks grew stronger.

In the next section we summarize what Salamon had to say about nonprofit resilience which mainly focused on nonprofits as a whole sector or as a collection of aggregate subsectors. Implicit in Salamon’s analysis is a notion of resilience that abstracts from decision making and behavior at the organizational level; in this view the sector is resilient if it thrives as a whole without special concern about the welfare of individual institutions. Thus, his policy prescriptions are addressed to the sector in full as well as the government and philanthropic institutions that support the sector.

In the third section, we examine resilience at the level of individual nonprofit organizations and find that many have developed strategies and tactics that allow them to remain effective over time and to navigate crises successfully (Young and Searing 2022). While these strategies are focused at the managerial level, they have policy implications because they allude to ways in which government, foundations and federations, and regulatory structures such as rating and accreditation agencies can strengthen the resilience of individual organizations, and by implication, the sector as a whole.

In the fourth section, we take note of the fact that individual nonprofits are commonly members of multiple networks that serve in various ways as sources of assistance, sometimes acting as safety nets for nonprofits in difficulty. Here we can ask how such networks can be strengthened so as to better support their constituent members in challenging times. Again, there are policy implications that go beyond assisting individual nonprofits or the sector as a whole. For example, government can, and does, stipulate particular kinds of networks to conform with its funding of various services such as programs to address homelessness or serve community health care needs. The policy questions here are how selected nonprofit networks can be made more resilient as a whole and how can they can help strengthen their members.

In the fifth section, we return to the sector level, asking what kinds of sector level policies may help build resilience of the sector as a whole, as Salamon asked. Here the answer is not so simple because the sector is not just the sum of its parts. An ecological perspective suggests that selective strengthening of certain nonprofits or particular networks might be more effective than across-the-board policies affecting all nonprofits or nonprofit networks.

In the concluding section, we bring the discussion together by juxtaposing policy initiatives to increase sector resilience at the organizational, network and sector levels and ask what combinations of such policies may be most effective in addressing overall sector resilience. This suggests an expanded framework to deliberate on the meaning of resilience in the nonprofit sector and the various kinds of policies that should be considered to ensure future sector resilience.

2 Salamon’s Resilient Sector

Without offering a precise definition of resilience, Salamon (2003) argues that resilience is the nonprofit sector’s ability to respond to “enormous challenges and also important opportunities … often with considerable creativity and resolve” (p. 5). He observes that “Faced with an increasingly competitive and changing environment, nonprofit organizations and the institutions and traditions that support them have been called on to make fundamental changes in the way they operate.” (p. 5)

Salamon’s conception of resilience is focused more on adaptation to trends and ongoing developments than crises per se though he would no doubt have been cheered by the ability of many nonprofits to absorb the shocks of recent traumatic events and to adapt to the new circumstances created by them. Salamon’s indicators of resilience also reflect this idea of long term continuity and adaptation. Thus, he offers as evidence of nonprofit sector resilience its record of growth, changes in its patterns of finance over time, changes in methods of fundraising, increasing involvement in the marketplace through entrepreneurial ventures and business partnerships, building of sector infrastructure including educational programs and umbrella associations specifically targeted to nonprofit concerns, and its increasing involvement in advocacy activity.

So too, Salamon’s policy prescriptions are targeted to the sector level, aimed at stabilizing and building support for the sector by crystalizing its distinctiveness as a vehicle of community benefit and charitable purpose. His specific proposals include clarifying the qualifications for tax exemption, tax incentives more focused on specific charitable activities rather than organizations per se, investing in public education about the sector, tax credits for nonprofit capital investments, liberalizing reimbursement parameters for third party payers including government and insurance companies, and replacing tax deductions with tax credits for charitable giving.

Salamon’s prescriptions for continued resilience of the sector are meant to address growing, ongoing threats including a perceived identity crisis among nonprofit institutions, mission creep, increasing demands on nonprofit managers, disadvantages to smaller nonprofits from increasing market competition, and general losses of public trust. To address these threats, he posits a renewal scenario involving clarification of nonprofits’ value proposition, improving nonprofit-government partnerships, strengthening nonprofit finance, and improving public understanding of the sector (Salamon 2012). Recent work on measuring the “health” of the aggregate nonprofit sector, though not specifically framed in terms of resilience, shares some of this perspective, including assessment of public trust, financial support, market competition and supportive laws and regulations (Abramson 2022).

Essentially, Salamon’s view of resilience averages over particular institutions and organizations and assumes continuity over time. He is concerned with long term survival and prosperity of the sector as a whole, not with the tribulations of particular organizations or the focus on singular time periods or events. By contrast, recent work on nonprofit resilience is more organization-focused and time-specific in relation to crises. The connections between these levels of resilience requires exploration. Clearly, the sector cannot be resilient in the long term if too many of its constituent organizations fail to navigate dire circumstances in the short run.

3 Organization Level Nonprofit Resilience

Historically, research on the wellbeing of individual nonprofit organizations has focused on their financial health as measured by a variety of risk factors such as net assets, income surpluses or deficits, debt and administrative cost ratios, liquidity and the degree to which income is diversified (Bowman 2011; Greenlee and Tuckman 2007). While this genre of research accounts for year to year changes it is not specifically framed in terms of resilience in a dynamic and uncertain world. More recent work by Young and Searing (2022) explores the strategies that nonprofit organizations can use to prepare for, and navigate through, crises that seriously threaten their existence or their future capacity to serve effectively. The view taken here is that, within broad limits, nonprofit organizational leaders are in charge of their own destinies and that with wise selection of their management strategies they can prepare for future shocks and successfully navigate through them. In contrast to Salamon, the latter analysis posits that circumstances can change suddenly and in surprising ways, not necessarily along the lines of recent trends and long term evolutionary developments. Nonetheless, an organization’s economic and regulatory circumstances are important because they may either inhibit or facilitate an organization’s ability to pursue productive resilience-based strategies. For example, reimbursement arrangements, donor rating schemes, or foundation policies that penalize the accumulation of surpluses or reserve funds, or inadequate funding of overhead costs and staff compensation, may leave organizations fragile and vulnerable to shocks stemming from unanticipated events or developments. Mitchell and Calabrese (2019) cogently argue that nonprofits are widely constrained by an internal and regulatory culture of austerity that severely limits their efficacy. Understanding this context is key to policymaking that could bolster nonprofit resilience at the organizational level.

Early work on nonprofit organizational mortality by Hager et al. (1996) found that younger and smaller organizations are less likely to survive and that financial difficulties, personnel losses and paucity of network connections were important factors to their demise. In addition, Milofsky and Romo (1988) found that financial and programmatic diversity helped nonprofits survive the massive federal budget cuts of the Reagan era. Most recently, Young and Searing (2022) note that nonprofit organizational resilience is built along multiple channels of managerial decision making. They examine eight dimensions along which nonprofit organizations can build their resilience strategies. These are: balance sheet strategies, cost strategies, income strategies, technology strategies, human resource strategies, entrepreneurial strategies, network strategies and information strategies. Two central concepts underlie these strategies: organizational slack and organizational learning. The first of these is the most controversial because much of conventional nonprofit managerial methodology and nonprofit-related policymaking is based on the concept of “efficiency” usually conceived narrowly as obtaining “the most bang for the charitable or government dollar” or ensuring that a charitable culture of parsimony, austerity and selflessness is maintained in the sector to justify public trust and tax benefits. As Steinberg and Morris (2010) explained these approaches are often flawed even from a narrow efficiency perspective. Resilience-oriented organizational strategies, to the contrary, are more broadly concerned with long term viability of nonprofit organizations in an environment of risk and uncertainty. This in turn requires that they have sufficient margins of slack with which to navigate unanticipated crises. The various dimensions of resilience strategy illustrate the point:

1. Balance sheets document assets and liabilities that reflect levels of available slack (or lack thereof). On the asset side, these include reserve funds that can be tapped in difficult times, and even restricted funds and endowments that may be accessed in emergencies. On the liability side, these include lines of credit and credit histories that establish access to borrowing when needed. A resilience approach would maintain these dimensions at levels generous enough to respond to crises; an efficiency approach eschews maintaining substantial reserves or routine borrowing.

2. Cost structures involve a balance of fixed and variable costs, combined to underwrite production of output at any given level. An efficiency approach seeks to minimize average total (fixed plus variable) cost at whatever level of output is desired over the long run, or often myopically over the short term. However, variable costs are reduced when output is diminished while fixed costs remain a burden in the short run. A resilience approach would emphasize flexibility by favoring variable over fixed costs where possible – for example, a workforce emphasizing volunteers and contract over salaried workers, or renting rather than owning facilities.

3. Nonprofits rely on diverse sources of income including donations, government funding, earned income, investment income and gifts-in-kind (including volunteering). An efficiency approach would focus on particular sources of income yielding the highest returns per dollar invested. A resilience approach would emphasize diversification in order to reduce risk of reliance on any particular source of income.

4. Technologies are the methods through which nonprofits deliver their services and address their missions. An efficiency approach adopts particular technologies to maximize cost-effectiveness. A resilience approach suggests redundancy in the adoption of technologies so as to avoid the risk of failure of a particular technology in a crisis situation. For example, physical in-person service yielded to on-line provision in the recent pandemic.

5. Traditional efficiency-oriented human resources practice emphasizes deployment of salaried, part-time and volunteer workers in a manner that achieves maximum mission impact within cost constraints, with deference to proper labor practices and considerations of fairness and diversity. Resilience-oriented human resources practice emphasizes work-force flexibility and addresses the trade-offs between flexibility, fairness and long term development of human capital to ensure institutional memory and worker motivation.

6. In traditional nonprofit management, information is used for routine administration of service delivery, management of resource development, finances and human resources, marketing and planning. In resilience-oriented management, information is used for organizational learning including early warning indicators of trouble, adaptation to crises situations and improvement of performance in the future.

7. Traditional nonprofit management focuses on effective routine budgeting and administration of organizational resources and the development of strategic plans. Resilience-oriented entrepreneurial nonprofit management emphasizes problem solving, prudent risk taking, and development of innovations to address challenges and crises.

8. Traditional nonprofit management engages in necessary network relations related to funding, professional practice and other mission-related relationships. Redundancy in networks is discouraged in favor of maximizing connections associated with a particular (limited) number of network relationships (Burt 1992). Resilience-oriented nonprofit management emphasizes redundancy in relationships with other organizations, reciprocity with network partners, and participation in networks with an eye towards building safety nets for difficult times.

In general, the idea of resilience-focused organizational management is to strengthen all nonprofit organizations so that they are prepared to deal with the turbulent economic and social environments in which they operate. No distinction is made between weaker or stronger organizations, or which are more worthy of survival and support than others. Hence, policy based on improving nonprofit resilience at the organizational level, by providing assistance along the eight dimensions cited above, would support all nonprofits that seek help or guidance. However, policy addressed to increasing resilience of the sector as whole might be more discriminatory, as considered below. The gap between individual nonprofit organizations and the aggregate sector is bridged by the networks in which most if not all nonprofits are embedded. Thus, a link to sector resilience is the resilience of these networks.

4 Network Level Nonprofit Resilience

As Koliba (2015) observed, nonprofit organizations are widely embedded in a variety of networks including grant and contract networks, partnership networks, advocacy networks, intergovernmental networks and regulatory networks. These networks are manifest both within the nonprofit sector and across sectors with government and business organizations (Fu and Cooper 2021) The members or “nodes” of these networks can be mixes of nonprofit organizations, grant making foundations, profit making businesses, and government agencies. Membership in some networks is mandatory and voluntary in others. For example, nonprofit grant recipients or contractors may be required to participate in the networks of their funders and nonprofits that are affiliates of federations or franchise systems must belong to those umbrella groups (and may be prohibited from joining others). As noted above, nonprofits often have considerable discretion over their decisions to join networks and indeed can choose to join networks strategically to foster their goals, including building safety nets to enhance their resilience. Fu and Cooper (2021) introduce the notion of network portfolios to characterize the diversity of network relationships that a given nonprofit may have, along four dimensions: the number of relationships, the degree of integration or formality of the relationships, the intensity of interactions, and the duration of those relationships. In some areas of activity, notably social services, networks have evolved into “collaborative governance arrangements” which operate as loose decision making bodies for their members to act in concert with one another to address complex problems such as homelessness (Mosley and Park 2022). Finally, it is worth noting the many nonprofit networks have a geographic dimension. Federation and franchise affiliates are commonly defined by their states or localities, and other networks are built around the construct of “community” where the notion of working together to solve shared, complex problems such as homelessness, environmental pollution, racial tensions or local economic development comes into play.

Few studies have directly addressed the resilience enhancing properties of nonprofit networks. A recent exception is Waerder et al. (2022) who found that networks of nonprofits and for-profits contributed to the stability and capacity of nonprofits involved in addressing the refugee crisis in Germany in 2015. Nonprofit networks have a variety of functions, hence they can underwrite the resilience of their members in different ways. For example, foundations at the centers of their grant networks are strategically placed to help grantees under duress while the members of advocacy networks can help each other through collective action towards achievement of common goals. The overall structures of nonprofit networks are key to their resilience value. Networks with strong bonds of reciprocity among their members may be particularly effective in crises where stronger members feel obligated to come to the aid of ailing ones (Krackhardt 1992). Networks rich in “weak ties” may also underwrite resilience by providing rich flows of information that can help guide challenged members (Granovetter 1973). In advocacy networks Mosley and Park (2022) demonstrate that networks that are too heavily directed by a central node organization may be less effective as a whole because they generate less commitment by constituent members.

Of particular interest are federations of service providing nonprofits, such as Girl Scouts, YMCAs, and Goodwill Industries (Young and Faulk 2018). These too exhibit a wide variety of structures ranging from highly decentralized trade associations sharing a common industrial subfield (e.g. symphony orchestras) to corporate franchises such as Boys and Girls Clubs whose affiliates operate according to a specific centrally defined corporate model, to federations such as United Way where there is considerable sharing of authority between national headquarters and locally autonomous United Way affiliates and between local United Ways and their diverse nonprofit social service providing affiliates. The effectiveness of these networks as safety nets for their members depends on the degree of obligation the central body maintains towards its affiliates, and to some extent on mutual bonds among affiliates themselves (e.g. in particular localities or regions). An example of safety net resilience in federations was the response of the Jewish Community Centers Association of North America in the COVID pandemic, which offered advice, guidance and consultation services to all its members through its JResponse program. This was supplemented with material assistance from the Jewish Federation, an overall umbrella association and charitable arm of Jewish social service agencies (Young and Searing 2022).

Given the significance of networks in the nonprofit sector, a relevant issue for purposes of nonprofit resilience management is the resilience of the networks themselves (as opposed to networks’ roles in the resilience of their members). This issue has received little attention in the nonprofit research literature but it is critically important to the question of overall sector resilience. Network resilience means the ability of networks to hold together and remain viable and effective under duress. This in turn is highly contingent on the structure of the network. If the network is centralized and dependent on the functioning of a central node (e.g. headquarters of a federation) then a critical question is how that node is sustained. For example, how much does it depend on the support of members versus having independent sources of support? And where the central node has independent sources such as grants or earned income from programming, the network needs to resolve issues of potential service or resource raising competition between headquarters and member organizations.

For highly decentralized networks, ranging from loose formal associations to informal ad hoc and many local networks, the question of network resilience revolves around the glue that holds members together, i.e. the strength of the bonds among members, both the strength of individual bonds (weak or strong ties) and the multiplicity and patterns of those bonds. Resilience of a decentralized network can be achieved by strong reciprocal bonds among members as well as redundancy in network relationships (so that the loss of individual connections does not undermine the network as a whole). Moreover, even in decentralized networks the overall pattern of network relationships matters. In particular, some networks are richer in pathways from one node to another (Burt 1992). Given that in large networks, individual nodes (members) cannot feasibly be connected to all other nodes without considerable inefficiency and information overload, the design of pathways can affect resilience. Resilience requires enough redundancy in pathways to hedge against disruption, but also robustness of the available links from one node to another to assure the flow of important information from diverse outlying parts of the network.

From a policy perspective, enhancing nonprofit sector resilience offers strategic leverage. In theory at least, by strengthening the “safety net” capacities of nonprofit networks, policies can conceivably bolster a considerable segment of the nonprofit sector without having government directly involved in the affairs of individual nonprofits. The problems, however, are determining what networks can best offer this safety net capacity, and how to build resilience for nonprofits that remain outside these networks.

5 Sector Level Nonprofit Resilience

Resilience of the nonprofit sector as a whole, or of large subsectors such as social service nonprofits or arts and cultural nonprofits, depends on both the resilience of individual nonprofit organizations in the sector and resilience of the networks to which they subscribe. But this is more than a simple additive relationship. A looming question is whether weak nonprofits should be allowed to fail in order to provide space in a limited resource environment for stronger or more innovative ones to gain traction and thrive. Another important issue is whether iconic nonprofit institutions must remain viable in a resilient nonprofit sector. Moreover, one must ask whether there are existential threats to the sector at the societal level to which it must respond, or alternatively whether there are opportunities to elevate the sector as a whole to a more resilient state.

A comparison may be made with the for-profit business sector where the theory of competition holds sway. Schumpeter (see Aghion, Antonin, and Bunel 2021) argued that “creative destruction” allows the business sector to be refreshed with new “combinations” such as new products and services, new technologies of production, or indeed new organizations, through entrepreneurial engagement. In this context, competition is viewed as a constructive force for renewal and long term business resilience, even if it means the demise of many individual businesses over time. This view is complemented by concerns about monopolies that may eventually result from open competition – producing behemoth institutions that grow lazy, rapacious or unresponsive to market pressures and ultimately subject to stagnation and failure. Hence, unfettered capitalism requires anti-trust regulation and other policies to maintain competition and/or to regulate businesses with extraordinary market power. Thus, resilience in the business sector is not so much a matter of assuring the viability of individual businesses as it is to foster an appropriate ecology of organizations in which the population of productive businesses is successfully maintained. That is, we tend to judge the resilience of the business sector in terms the vibrancy and viability of the sector as a whole, accepting and indeed celebrating the fact that businesses often fail and new businesses regularly enter the fray with new products, services and ideas.

One might ask, what then would a sectoral resilience failure look like in the business sector and how might this apply to nonprofits? Such failure would indeed reflect a lack of growth or shrinkage of business activity (recession or depression) but in the extreme it could be a collapse following an existential shift such as a communist revolution or an industrial nationalization policy.

To what extent does the competitive market paradigm apply to the nonprofit sector? Certainly some nonprofits are stronger than others; moreover, there is substantial competition within the sector for charitable funding, volunteers and staff, service markets, and government contracts, etc. Would not the nonprofit sector be more resilient if weaker nonprofits were winnowed out or allowed to fail? To what extent should mergers with stronger organizations be encouraged? And is there a danger of some nonprofits becoming too large and unresponsive, as monopolies may do in the business sector?

Studies of competition in the nonprofit sector are few but suggestive. For example, Seaman, Wilsker, and Young (2014) found that by traditional measures of sector concentration used in the business sector, the nonprofit sector is relatively concentrated or monopolistic in many of its subsectors and locales. Alternatively, Harrison and Thornton (2014), inquiring if there were “too many nonprofits?” as some critics have claimed, find that relative to growth of demand, nonprofits were essentially keeping pace and not unreasonably prolific. Thus preliminary evidence does not suggest that winnowing out weaker organizations from the sector would make it more vibrant, although offering competition to monopolistic nonprofits might do so.

However, note that there are certain considerations that differentiate the nonprofit sector from business in terms of resilience. One difference is that the nonprofit sector contains venerable institutions whose demise would be considered highly unfortunate or even unacceptable. Examples may include iconic arts institutions such as the Metropolitan Museum of Art or the Kennedy Center, major hospitals, or historic universities. Some of these institutions have built unique assemblages of human talent and intellectual capital, e.g., research centers, musical ensembles, art collections, which could be difficult to preserve or replicate should their institutions be disbanded. An analogue in the business sector might be businesses that were considered “too big to fail” in the 2008–2009 financial crisis because their demise would lead to widespread damage to the economy. In the case of nonprofits, it is well to recognize that unlike commercial businesses, they are more highly differentiated in their character and less interchangeable with competitors than businesses. Thus, saving an iconic or unique nonprofit is more likely to be considered a necessary element of overall sector resilience than saving a business is for business sector resilience. Moreover, in some areas even smaller less well-known nonprofits may be deemed essential because they provide necessary services where few alternatives exist. Local hospitals in rural areas or libraries in low income neighborhoods, offer illustrations of this type of local, essential nonprofit “monopoly.”

To assess nonprofit sector resilience thus requires an understanding of the ecology in which nonprofits operate and how this may resemble or differ from the business sector. This ecology entails multiple, simultaneous processes including the birth of new nonprofits, the demise of weak nonprofits, mergers and consolidations, the growth of strong nonprofit organizations, and the filling of various “niches” in the service environment by organizations adapted to local conditions or particular specialties (McPherson 1988). In ecological terms, the resilience of the sector is about how the nonprofit population as a whole prospers or diminishes over time as well as how well its iconic and essential institutions and its specialized human and intellectual capital are maintained.

To some degree the analog with business is appropriate. A non-resilient nonprofit sector would stagnate or shrink (echoing Salamon’s choice of growth indicators as measures of sector resilience). And in the extreme a non-resilient nonprofit sector would be diminished in its functioning or suppressed or outlawed, as it tends to be autocratic regimes.

It is at this macro level of sector analysis that ecology theory becomes applicable. Ecology theory, originally developed within environmental science, revolves around the idea of a “system equilibrium” (Young 2012; Young and Kim 2015). In this paradigm, stable systems can be perturbed by various forces and events but unless these perturbations are very large, the systems are expected to return to their original states as a matter of course. However, once perturbed by major disruptive factors, a system may deviate substantially from its original equilibrium and eventually find either a new equilibrium or cease to function. In this theory, every system has “thresholds” which when exceeded result in such a dynamic shift.

Thus, in the case of the nonprofit sector, the question is what are the forces and the thresholds that would throw it out of its current equilibrium. In these terms, resilience would be the ability of the system (sector) to maintain its equilibrium in the face of shocks, and thresholds would be the limits to such resilience. Specific applications of this concept include:

1. What levels of competition from other sectors (thresholds) or reductions of charitable and governmental support would lead to permanent stagnation or contracting of the nonprofit sector (measured in terms of employment, contributions to GDP or other indicators)?

2. What changes in tax policies (thresholds) would lead to nonprofit sector stagnation or contraction?

3. What changes in public governance such as restrictions of free speech and freedom of association (thresholds) would permanently diminish the nonprofit sector in economic terms or lead to its effective demise as a democratic force in society?

Alternatively, these questions could be flipped to the positive side, to ask if changes in sources of income support, competition, tax policy or parameters of democracy would flip the sector into a new (better) equilibrium state in which its resilience along these various lines would increase. The implication here is that once the sector is pushed out of its current equilibrium it might conceivably settle into a more desirable equilibrium state. While resilience is usually thought of in terms of ability to cope with the destructive aspects of a crisis, it also includes the ability to exploit crisis situations in order to improve conditions in the future – hence the maxim “a crisis is a terrible thing to waste.”

6 A Resilience Policy Trifecta

Public policies designed to bolster the resilience of the nonprofit sector could be targeted at one or more of three levels of aggregation: individual nonprofit organizations, nonprofit networks and the nonprofit sector as a whole (or specific subsectors thereof). Such policies might involve direct funding, tax and other incentives, educational initiatives and regulation. Policies at these various levels could be complementary to one another, or they might be inconsistent or even in conflict. A holistic approach would require top to bottom coordination as well as the involvement of key private actors including charitable foundations and rating agencies, major nonprofit associations, and all levels of government.