July 26, 2013Doug Hadden
Doug Hadden, VP Products
There is a discussion about social enterprises on what is the best model – for profit or non-profit. Does profit create incentives for greed? Does non-profit create incentives for not taking risk? This is similar to the argument over whether public services are best carried out by government or the private sector.
Other Peoples’ Money
These discussions are focused on the wrong concept. It’s not so much whether an organization is for profit or non-profit. It’s how the informal culture of the organization combined with governance mechanisms deal with “other people’s money.”
Individuals in private companies are spending investors’ money – from the stock market, from venture capitalists, from business owners. Governments are spending taxpayer funds. NGOs spend donors’ funds. International Financial Institutions spend money collected from governments. There is a physical disconnection between the source of the money and those spending it.
This is where the informal culture comes into play. And, where internal governance mechanisms become important.
Informal Culture and Governance: Power of Transparency
Informal cultures differ in numerous ways. There seems to be a number of dimensions.
- Mandate to Entitlement Dimension. Some organizational cultures focus on delivering on the mandate as best as possible. These organizations reduce waste and try not pass on unnecessary expenditures or administrative costs to clients. The opposite is where employees receive generous benefits in travel, expenses and bonuses. (The ‘business class” set.) This entitlement culture disconnects employees from the social problems that they might be trying to solve.
- Continuous Improvement to Continuous Marketing Dimension. Some organizations seek to improve outcomes by gathering evidence. Success for “continuous improvement” organizations comes from improved evidence of results. It’s all about you. The opposite culture focuses on the “buy side” through influencing buyers in large annual events and through continuous marketing noise. It’s all about them.
- Governance as Performance to Governance as Ceremony. Some organizations use governance mechanisms to improve results. The audit profession, for example, has become more focused on performance beyond policy compliance. Some organizations use governance as a ceremonial “check all the boxes” function. These organizations find narrative rationalization for behaviours and decisions that are objectively ethically suspect.
Governance mechanisms can be used to support informal cultures that are more focused on ethics. The key governance mechanism to adapt cultures is transparency, particularly in the public sector. Opaque internal processes for audits, investigations and performance appraisal often do little to ensure that “other people’s money” is being appropriately spent. Recent revelations in the Canadian Senate, for example, demonstrated the ethical gap between culture and what Canadians expect. The intention had been to keep the Auditor General out of any Senate investigation and to keep the process entirely behind closed doors. Pressure for transparency resulted in public disclosure of spending irregularities by 4 Senators.
FreeBalance is a for-profit social enterprise. We focus on making our solutions financially sustainable. We have some verty strict policies including:
- Flights are economy on the lowest price airlines – those who can get free upgrades get them.
- Travel approval for last-minute flights, at higher costs, requires CEO approval.
- Staff charge travel and living costs, not per diems.
- Expense reports are scrutinized. Unusual expenses must be justified at the highest level.
- Expensive hotels are avoided.
- Budgets for customer events are tightly controlled and lessons learned from these events are publicized.
- Use of open concept in office space means that the vast majority of employees do not have private offices.
- Immediate reporting of non-compliance of our code of conduct.
- ISO-9001 and Integrity Due Diligence processes for procurement and partnerships.
- No use of third party sales agents or “marketing representatives” .
- Intense focus on trying to make FreeBalance solutions financially sustainable.
- Transparency with investors, business partners, donors and customers.
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