GETTY: Fun with Fungibility

One of the clear differences between nonprofit and for-profit creative enterprise is how each can use cash and financial resources to advance its work. This distinction seemed to stick during the GLI/NAS roundtable in June (see my original post for background, also note that the Getty Leadership Institute has now posted a summary of the event and downloadable versions of the briefing and summary reports).

The flexible and malleable use of cash and monetary assets is a hallmark of for-profit enterprise. If a dollar isn’t serving its best purpose in one place, a smart for-profit manager is expected to redirect that dollar somewhere else. The magic word that kept arising at the Getty gathering was ‘fungibility’ (defined here, if you need a word of the day), or the ability to use an asset in a flexible way, rather than have it restricted to a specific purpose.

For all sorts of reasons, nonprofit enterprises often find themselves with funds that aren’t fungible, i.e., can’t be redirected from their original purpose. Some reasons are obvious — as public entities, nonprofits receive many fiscal priveledges, adding an extra layer of responsibility and accountability to their actions. Some reasons are systemic — contributed funds often carry specific restrictions on how and when they are to be spent, either directly stated or merely implied.

As the event briefing paper describes it:

The business model that comes with red-ink businesses is a cumbersome one, reliant as it is on contributed income. Richard Caves again: ‘The growth of bureaucracy in arts organizations stems not just from its enlarged size but also from the need for donations, which require the organization of fundraising and the bureaucratic display of orderly procedure and accountability.’ More generally, the increasing preoccupation of foundation and government funders with evaluation of outcomes and outputs — all in itself entirely legitimate — similarly shifts the balance between accountability and the fostering of innovation.

That balance between accountability and innovation is the crux of the matter for cultural nonprofits who, often as a result of their funding structures and limits, end up focusing more on the means than the mission. Often, even if an organization found a more effective and powerful way to fulfill a stated goal, it could not redirect its contributed income from what it already said it would do.

As an example, suppose a nonprofit received a grant to involve public school teachers in the performing arts through a series of lecture/discussions. Then suppose they eventually realized that for their community, a series of individual ticket vouchers would better match the teachers’ time and interest, or a hotline for specific curriculum questions, or a series of in-services sent into the schools. Without specific consent from the granting organization or donor, they could not redirect the funds, even if the goal was better served. The money isn’t fungible, isn’t flexible, as it is tied to the means of the project rather than the ends.

It’s not that for-profit creative organizations are swimming in fungible cash. Contracts with investors can look just as complex and means-focused as grant guidelines. And if they are publicly traded organizations, for-profits have an increasingly burdensome responsibility to justify their actions and expenditures. The grass isn’t greener on either side of the fence.

But when such sources become too restrictive in the for-profit world, there are a wider variety of financial tools and resources to draw from…not to mention a deeper pool of business expertise and financial innovation.