ROI vs. SROI: Differences and Similarities Between Nonprofits and For-Profits

December 2018 – Rick Szilagyi, Principal

There are numerous articles which compare and contrast for-profit and nonprofit organizations, and focus on how they are different. I’ll do a little of that below, but equally important is how they are the same.

The Differences

While a for-profit and a nonprofit are both legal entities, the former is created to satisfy the profit-motive for its stakeholders. The latter is created as an organization through which people can join forces to achieve the public-motive of providing services for members and people. Relative to the income which supports the two organizations, the for-profit earns most of its revenue from selling goods and/or services, while the nonprofit is supported by dues, donations, grants, etc. And, of course, taxation is handled differently between the two.

Areas of Similarity

Directors and officers for both types of organizations serve as fiduciaries, and therefore owe their stakeholders the duties of care, loyalty, and obedience. They are to make decisions to the best of their ability (duty of care), they make decisions that help the organization and not solely themselves (duty of loyalty), and they guide the organization to behave within the regulatory framework established for their organization (duty of obedience).

Conflict of Interest

There will be times when a proposed board decision could offer benefits to an individual board member. If the proposed decision benefits an individual director or officer, and not the organization, it is a conflict of interest. These conflicts of interest are prime examples of board members being “tested” by the duty of loyalty. Their loyalty must be to the organization. Board members can withdraw from discussions on motions that represent a potential conflict, and/or they can submit an abstaining vote.

ROI versus SROI

A standard measure in the for-profit world is Return on Investment (ROI): money-in compared to money-out on a given project, program, material, product, service, etc. The measure can certainly be used in the nonprofit world, as well. But based on the intrinsic difference between the two types of organizations (profit maximization versus maximizing achievement of a service mission) perhaps there is a better – or at least, an additional – measure for non-profits: The Social Return on Investment (SROI). With the word “social,” this is obviously focused on certain non-profits, including 501(c)(3) organizations.

Following the economic downturn of 2008, nonprofits have faced increased challenges in attracting funds. Given that the focus of a nonprofit is to realize its mission and not focus solely on dollars, a different measure, like SROI, makes sense. Adoption of such a measure can assist in attracting additional and ongoing funding from donors. More children engaged in sports… more patients supported… more educational sessions held… all of these can be measured and used to assist in securing and growing the organization into the future.

And One More Thing…

Please do not “check at the door,” all the good business sense you have learned in the for-profit sector when you enter the nonprofit boardroom. Your decision-making skills and business experience should be brought forth to assist the nonprofit in achieving its mission, and ensuring its sustainability so it can continue to deliver on its mission into the future.