How can the cultural sector survive the financial crisis?

LabforCulture  January 2009

Helmut K. Anheier (Ph.D. Yale University, 1986) is Professor of Sociology at Heidelberg University and the academic Director of the Heidelberg Centre for Social Investment. He is also Professor and Director of the Center for Civil Society and the Center for Globalization and Policy Research at UCLA’s School of Public Affairs. Anheier’s work covers the civil society, the nonprofit sector, philanthropy, organisational studies, policy analysis and comparative methodology. In 2008, he published Cultures and Globalization: The Cultural Economy.

It is clear to everyone who follows daily reports about the cancellation of cultural events and the closure of opera houses and theatres, or learns about economic troubles at one cultural institution or another, that the global financial crisis is already having a significant impact on philanthropic giving and non-profit organisations. [1]
It is also clear that the crisis’ impact is going to get deeper and wider for some time to come. It is less clear how long the fallout will last; and it is especially unclear what the crisis ultimately means for policy-makers, leaders and managers in the cultural sector. This article examines how the arts and culture sector is responding to growing uncertainty in the global economy – and how the sector can weather the gathering storm.

How is the arts and culture sector responding to the crisis?

The current economic downturn, triggered by the financial crisis, is closely related to the inability of governments and international institutions to address what experts call the ‘global governance problem’ – the growing mismatch between the forces of globalisation (largely financial), and the capacity of governments to steer and regulate. Illustrative of this problem is not only the crisis itself but also the often hapless responses in political capitals: no national government and no international institution, including the European Union, is able to deal with weaknesses in the global economy. Unless the systemic failures of governance are fixed through policies and institutions that adequately consider the challenges of a globalised economy and global financial markets, the governmental response will remain focused on managing their political image at worst and ‘doctoring with the syndrome’ at best.

Image: Financial Crisis Mural in SoHo by bbusby

At another level, much more can be done, not in the sense of the global or macro issues mentioned above, but in terms of proactive policy and management responses for, and on behalf of, philanthropic giving and cultural non-profit organisations. This level, and what it means for non-profits, is the primary focus of this article. However, before delving into the options, two preliminary points are worth raising:

Firstly, in the arts and cultural field – and in the non-profit sector overall – there is very little interest in the origins of the current crisis (i.e., financial markets that were beyond the control of policy-makers and business leaders). Rather, the field is focused almost entirely on dealing with the immediate fallout, with some energy placed on developing strategies for surviving in the medium to long term.

Secondly, it is equally important to separate what would have happened anyway and what has happened additionally, sooner than later, or more dramatically, because of the crisis.

Of course, while we cannot predict the future, we can reasonably extrapolate a number of trends from developments in the field of arts and culture over the last ten years. Among them are:

  • Greater demand for cultural goods and services combined with less public funding that is more competitive
  • Competition models developed elsewhere (in the health, social services and education sectors) being applied to arts and culture, with an emphasis on cost control rather than outcome quality
  • Search for new business models for non-profits in many fields, including arts and culture, to compensate for lower levels of government support
  • Professionalisation of finance, management and service delivery, often combined with a certain timidity in terms of advocacy
  • Policy emphasis on greater civic engagement and fiscal transparency for legitimacy reasons
  • Private philanthropic support that can be fickle, resulting in fluctuating levels of support
  • Overly optimistic expectations about what foundations can do for arts and culture (e.g., substitute for reduced government spending).

What these developments mean is more than a rhetorical question, for the simple reason that these trends are continuing, albeit in the context of a crisis. For a start, transferring models between non-profits and businesses would have become more frequent in regulated quasi markets (health, social services), as would conversions of public to private institutions (education, culture). In other words, many organisations would have changed, and many non-profits would have become more like businesses, while many public institutions would have become more private.

In turn, this would have brought about fierce and long drawn-out debates: about the right revenue structure for cultural non-profits and the optimal mix of earned income, public funds and private donations, including foundation grants; about asset management and acquisition policies; about barriers of exit and (re)entry for donors and recipients alike; about stakeholder involvement (artist, consumer, client, member, funder, staff, the general public etc.); and, about professional control over mission and operations, and the role of the board.

How should non-profits rise to new challenges?


Image: Credit cruncher by earnest70six

What the economic crisis adds now is a potent mix of new challenges to what was an already complex set of issues:

  • At the societal level, there is a loss of trust in the ‘system’, a general sense of insecurity among the general public, and opportunism among some political actors on the left and the right.
  • European governments, many more fiscally secure than the United States and with more room to maneuver, rediscover Keynesianism. They interpret it to their own political advantage, typically resulting in massive public spending programmes (of which only a rather small portion will reach arts and culture). Increases in public investments are combined with reductions in current budgets, and create shortfalls, of which some, often indirectly, are passed on to non-profits.
  • Businesses engage in short-termism while trying to calm shareholders. They are eliminating programmes for corporate social responsibility and giving, including arts and culture funding. At the same time, they are looking for government handouts and subsidies in return for some guarantees, typically related to employment and performance.
  • Philanthropic foundations see continuing drops in asset values of a scale not seen in decades, with expected reductions in grant payouts, concerns about the sustainability of current programmes and commitments, and a growing emphasis on asset protection.
  • Many households face both greater financial uncertainty and declining net worth, which could lead to drops in donations and a decline in volunteering.
For arts and culture non-profits, the current crises undoubtedly mean fewer resources for current expenditures; however, depending on public spending priorities, it may also yield some additional funding for investment programmes. First and foremost, it means greater financial instability, more uncertainty for management and staff, possibilities of unfulfilled contracts and obligations, and unmet demand.

The reaction of boards and management could easily fall victim to common extremes: on the one hand, to a ‘do nothing approach’, because of denial or fatalism; and on the other, to different forms of over-reaction and blind activism. There are, however, other options that reveal themselves only when appreciating what sets non-profits apart from other organisations.

Three features are central:

  • The presence of deeply embedded values (religious, political, humanitarian, moral, artistic) is a distinct feature of many non-profits. How far these values influence organisational behaviour varies, but the significant presence of values implies at the very least a more complex means-goal relationship between operational and ultimate objectives. These values can be enabling or restraining; protecting or stifling; leading or misleading; invigorating or distracting.
  • The presence of multiple stakeholders (trustees, staff, volunteers, users/clients, state agencies, etc.) makes non-profits inherently political organisations, and turns managing them into a complex task of creating and coordinating coalitions around a common purpose.
  • The presence of multiple revenue sources (markets, quasi-markets, membership, various forms of transfers from government, various forms of donations and sponsorship, contracts, etc.); at the same time price mechanisms (the best indicators of performance) are frequently absent. This means that non-profit leaders manage multiple revenue streams when performance is uncertain.

Six tips for weathering the storm

Against a backdrop of mounting problems and special features, there is still quite a lot that can be done. Here are six short-term options:

  • Revisit the value base of your organisation. If values are the foundation of your mission, reinvigorate their meaning and make them relevant by basing all major decisions on values rather than economic rationale alone; if values are less central, make economic sustainability a priority.
  • Consolidate resources around mission critical, resource attractive programmes, and prune activities that are less mission critical and less resource attractive. Align stakeholders accordingly and build appropriate coalitions.
  • Cooperate only around mission central programmes, and consider merger and franchise models.
  • Cross subsidise only if less mission critical programmes have a proven and significant capacity to generate revenue. Rededicate assets and reserves accordingly, and divest cross subsidising programmes.
  • Spread risk in revenue streams by avoiding dependencies on government, donors etc. and by diversifying earned income options (sliding fees, charging above marginal costs, using assets, cross subsidising etc).
  • Run an active information campaign about what your plans are and how you seek to achieve them. Transparency and public awareness with all stakeholders is important for any short-term reorganisations to find legitimacy and success.

The “Six tips for weathering the storm” are also available in Czech on ProCulture.
Click here: Šest tipů kulturnímu sektoru jak proplout úskalími finanční krize

Asking tough questions for long-term survival

For many, the result will be a smaller and leaner non-profit, one shaped by short-term reactions to a crisis to sustain operations. It may not yet be a non-profit forged as a strategic response to a changed environment, and with long-term sustainability in mind. Therefore, non-profits can engage in strategic planning and visioning by asking tough questions about their very existence, functioning and impact. Options include:

  • Specialisation versus generalisation of programmes, target groups, fields etc.
  • Considering achieving a scale of operations adequate to both mission and resources
  • Building partnerships and networks along economies of scale
  • Exploring multi-site and franchise models for scale economies
  • Engaging members and users more by activating value base, to reduce costs and create buy-in
  • Reinvigorating advocacy and lobbying campaigns; be heard and raise concerns; demand government funding when appropriate.

Preparing for the future

The main point is that non-profits have to be proactive and inventive when responding in the medium term to the fallout of the current crises. Yet what can be done to prepare for future crises? Such measures include:

  • Exploring institutional innovations for the non-profit field as a whole: e.g., dedicated financial institutions for non-profits including insurance funds, forms of capital markets etc., as well as smart public private partnerships with profit/reserve options.
  • Establishing a Public Trust Fund for non-profits to smooth eligible organisations through a period of fiscal uncertainties, budget shortfalls etc. Of course, there are different ways to build and run such a trust fund (tax-based, community foundation model).
  • Developing a membership base that can be mobilised politically for advocacy purposes as well as economically for resource generation.
  • Seeking non-profit liaison or focal points in key government areas for arts and culture, and creating ‘cultural listening posts’ as an early warning system.
  • Investing in more and more effective non-profit advocacy in the field of arts and culture, and strengthening the watchdog function of non-profits.

Sociologists and economists have long argued that crises are the necessary correctives, part of an ongoing process of the ‘creative destruction’ that has shaped much of the modern world, with globalisation as the latest development. If this is the case, the crisis offers perhaps as much in terms of opportunities as it does in terms of challenges. It will lead to the demise of some institutions and the rise of others. Some non-profits will flourish while others become moribund. Old leadership and elites will be replaced, at least partially. New funding patterns and ways of organising are likely to emerge.

Responding to a crisis requires both a reduction of uncertainties and capitalising on opportunities. Above all, mastering the crisis demands a proactive stance on the part of Europe’s cultural leadership – not by asking for old wine to be served in new bottles (as the American car giants or European banks and manufacturers have been doing), but by embracing what cultural policy stands for: making space for creativity and innovation and preserving past achievements for the benefit of all.

Footnotes
[1] In Southern California, for example, the Orange County Opera Pacific cancelled its season and may shut down entirely. They said that a “limited number of donors who had funded the company no longer could come up with the necessary gifts in the wake of drastic hits to their investment portfolios” (Los Angeles Times, 6 November, 2008). Also caught in the budget crisis, the Orchestra of Pasadena cancelled two concerts and issued emergency fundraising appeals to save the remaining schedule.

[2] All images sourced from Flickr through a search for financial crisis and credit crunch.

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