Management in the Not for Profit Organization

Dedicated to Exploring the Philosophies and Techniques of Management in the Non-Profit Sector

Have you ever seen... 

a Ponzi scheme become the primary paradigm for an entire organization?


A Ponzi, or Pyramid Scheme relies on the constant establishment of new sources of revenue in order to pay debts accumulated while establishing previous income sources.  When individuals do it to other individuals it is regarded as a crime.  This is because it is a certainty that the possibilities for new sources of income must eventually be exhausted.  Whoever is on the last rank of those who have become involved are the ones left holding the bag.  Think of it as an adult version of the children’s game called “musical chairs”.  There are not enough seats to go around, and somebody is always caught short when the music stops.


The corporate equivalent of the Ponzi scheme occurs when an organization is constantly using anticipated revenue from one venture to finance another.  They hope that one new product line or location will become profitable in time to pay back money borrowed to finance the next product.  Each generation of investors is betting that another group willing to buy into the paradigm is not far behind them.


The level of risk involved in this process is dependent upon the market, how good the product is, and how much is wagered on its success.  Wise bets are essential.


Unfortunately, the parallel to a game of chance is all too close.  Much like a person addicted to gambling, the greater the losses the more desperate one becomes to win big.  Of course, to win big you must bet big.  And desperation is rarely a source of wisdom in placing the bets.  But then, overconfidence is not known to make people wise either.


No matter how you look at it, it is a dangerous game to play with high stakes.


Now imagine that through desperation or overconfidence a terrible decision is made.  For instance, instead of using the anticipated income to pay old debts or finance a new income producing venture, corporate leadership elects to obtain non-income producing assets.  Or worse yet, spends the money on creature comforts.


Now the pyramid collapses.  It is those who have come last who are hurt the worst.  In the traditional pyramid scheme, it is those who invested last who are hurt the most, because there is no one to pay them yet.  In the corporate version of the scheme it is those who were hired last who are hurt the most because they have the least seniority and are usually the first to be laid off.


Ponzi’s original design works the same way as all other con games.  It relies on the victim’s greed.  The urge to get rich quick is a necessary component in the seduction by the con artist.  In the corporate world, it is often not “get rich quick” but “get big quick” which is the enticement.  No matter.  It taps into the same “beat the system” feelings that drive the typical pyramid scheme participant.


This article is not intended to question the legality of the practice of building card houses with company funds.  After all, there is no intent to deceive or do harm.  Rather, the question is:  As managers, how do we decided how much risk is too much?  This is a question that can only be answered in part by the mathematical equations of Operations Research and Management Science.  In general, the elements of corporate personality and individual judgment are key factors.


The question becomes almost entirely one of ethics when one is working in the non-profit sector, or in a publicly held corporation.  That is, when it is not the manager’s own money that he or she is gambling with.


Many of these decisions are made at the C.E.O. and C.O.O. levels.  This writer has seen too many occasions in which the board of directors is the proverbial “Johnny come lately” and is shocked to find what sort of condition its enterprise is in.  Then they begin making decisions based in desperation too.


Have you seen instances in which too much aggressive growth based on unstable finances have brought an organization to the brink of disaster?  What finally caused recognition of the problem?  What was done about it?