Posts Tagged ‘philanthrocapitalism’

A remarkably clear statement of what’s wrong with L3Cs. . .

November 29, 2011

for which the Nonprofiteer can take no credit.  Rather, thanks to her friend, Baltimore tax lawyer Stuart Levine, for laying out so clearly the problem with low-profit limited-liability companies, the latest fad in efforts to do well by doing good.  Stuart’s argument appears in response to, among other things, a recent New York Times report that foundations have increased the proportion of their “grants” which are actually program-related investments, that is, grants for which repayment is expected to a greater or lesser degree.

Words from the wise:

Look, there are numerous “good cases” where one can see that infusion of capital that doesn’t really have to be repaid at market rates makes good sense.  (Actually, government loan guarantees of, say, solar power start-ups falls into this category.)  The problem with allowing 501(c)(3)’s to make these sorts of investments is that the process is subject to abuse.

Say that I want to create “Stuart Levine’s Good Works Foundation.”  The Foundation attracts $10M in tax deductible contributions.  The Foundation uses the cash to “invest” in projects operated either by me or my Aunt Minnie.  While Minnie and I invest our own funds in these businesses, our capital position is ahead of the Foundation’s and gets a higher return, so that the first profit out goes to pay us and, if the deal craters, the biggest part of the hit will fall on the foundation.  (Did I mention the $250K a year consulting fee paid to me by the investment entity?)

I don’t for a minute believe that the Bill and Melinda Gates Foundation is engaged in double-dealing of the sort that I described.  I have less faith in the “Stuart Levine’s Good Works Foundation.”   Has everyone forgotten the Pallottine Fathers?  See here:

Or, as one might say, everything old is new again.

The burden of proof rests on those who believe L3Cs are essential.  They must demonstrate that the entities’ potential for abuse is outweighed by their capacity to meet needs that are otherwise unmet.  But all that’s unmet so far is that burden of proof.


At long last coverage

November 10, 2011

It will be interesting to see how things develop at the Washington Post’s new On Giving section.  Self-described as a “conversation about philanthropy and social entrepreneurship,” it at least aspires to talk about the nonprofit sector in more depth than the conventional scandal-or-gala approach.  (The Nonprofiteer has long complained about the mainstream media’s coverage of the sector, which manages to be both narrow and shallow; in fact, those shortcomings account for the launching of this blog.)

But is a focus on mammoth gifts and efforts to up-end the nonprofit model really any better?  Maybe those are the dog-bites-man stories.  Maybe the day-to-day struggles of the majority of good-deed-doing agencies simply don’t lend themselves to the conventions of daily journalism—but the Nonprofiteer would give a lot to see someone try to find out.

Everything old is new again; and nonprofits should stay that way

April 21, 2011

So a couple of weeks ago the Nonprofiteer received a press release announcing “Redefining [of] the Nonprofit Model.”  Doubtless you’re all familiar with the genre: a group of business people get together and decide that the nonprofit sector hasn’t cured cancer or ended poverty because people in the nonprofit sector are stupid and lazy, and that an infusion of good old hard-headed American for-profit business practices will compensate for that.  Voila: instant Great Society!

This particular redefinition was truly revolutionary:

One hundred advisors, including many of Silicon Valley’s elite, are coming together to disrupt the nonprofit space. . . . [They] have committed to one full year of serving on the board of a nonprofit. . . . [and] attending monthly salons where they will discuss the specific pain points of their assigned nonprofits and attempt to find solutions as a team. . . . [This] is part of a larger movement . . . to make the non-profit world more efficient. . . .  “This is just the start of how [we] will disrupt the nonprofit sector and create new, innovative ways for business leaders to contribute . . . . Before [this], there was no easy path for nonprofits to find experienced leaders to help them at a board management level. A board role is not just about fundraising, but includes developing growth plans, operational efficiency, cause marketing, customer relationship management, event planning, and much more.”. . . . In order to maximize results, [the group] carefully matches advisors to nonprofits based on their skills, interests and a nonprofit’s needs.

So let’s review: a bunch of business people are going to sit on nonprofit Boards of Directors!  And then periodically those business people will get together and talk about how to be better Board members!   As Board members, they will not only fundraise but contribute their skills!  They’ll join Boards based on their interest in the nonprofit’s mission!  And they’ll seek ways to improve the whole sector!

The accumulation of these radical notions caused the Nonprofiteer to swoon;  but the one idea that really had her down for the count was that the entire purpose of the endeavor was to “disrupt the nonprofit space.”  Because really, what nonprofits trying to serve their clients need most of all is disruption of their management to supplement the disruption of funding they face constantly, disruption of their staff produced by those funding crises, and disruption of their ability to operate smoothly or secure resources when their message is being drowned out by a constant drumbeat of demands for “reinvention.”

The Nonprofiteer understands that in the tech world, “disrupt” is a positive word, suggesting the kind of change-the-world ethic that fueled Microsoft and Facebook.  But she urges everyone to notice that when those disruptive entrepreneurs Bill Gates and Mark Zuckerberg moved into the nonprofit sector, what they did was to find nonprofits doing good work and give them lots of money to do more of it.  If the disruptive “advisers” of the press release would just do the same thing, there would be less “news” but a healthier nonprofit sector.

As she fanned herself back to consciousness, the Nonprofiteer was struck once more.  In this case, the weapon was yet another article about hybrid corporate forms designed to enable nonprofits to earn their own revenue and stop “begging.”  Whether the discussion purports to be about L3Cs or public benefit corporations or Triple Bottom Lines, the argument is always the same: nonprofits should just get with the capitalist program, identify lucrative markets and earn their keep like every other good red-blooded American.

This approach ignores the fact that nonprofits’ markets usually consist of clients who are not profitable to serve—because if they were profitable to serve, the for-profit sector would be serving them.  The better a nonprofit is at finding and serving its market, the poorer it will be, because though for-profit clients are a profit center, nonprofit clients are a cost center.

Fine, say the hybrid-benefit-earn-your-own-revenue people: so start a profitable business and funnel its profits into the charity.  But this notion of a two-headed agency is, like most similar creatures, a monster.  If nonprofits expend their limited energy on creating market-based revenue streams, they’ll be diverted from their mission-based activities.  Either the marketing strategy succeeds, in which case the profit-generating people gain the power within the organization and mission falls to a sad second; or the marketing strategy fails, in which case it has consumed significant resources that should have gone to serving clients.

There are, of course, institutions for which running a business can be part and parcel of mission, for instance, job-training centers.  But for mental health agencies, arts organizations, group homes, rape crisis hotlines and most of the other charities which do the important work in our society, running a business is a dangerous distraction.

What if, instead of spending time telling nonprofits how they should operate differently, business people re-examined their own operating principles?  What if every business set aside 25% of its profits for investing not in the business itself but in the wider community?

In other words, instead of asking why a charity can’t be more like a business, let’s start asking why businesses don’t operate more like charities.  Businesses receive all sorts of public services and protections, from the enforcement of contracts in the law courts to well-maintained roads along which to distribute their products.  Why shouldn’t they be expected to contribute to the public good in return?

Most business people would say, “But our primary duty is to our shareholders, not to the public good” (and those over-influenced by Ayn Rand and the University of Chicago economics department would say “Our SOLE duty is to our shareholders, the public be damned”).  Right: and the primary (or SOLE) duty of charities is to their/our clients.  Anything that takes nonprofits away from that activity is perforce improper.

What’s the point of this thought experiment, in which charities chide businesses instead of the other way around?  Simply to demonstrate how much business advice to charities is sheer nonsense.  To presume that the voluntary sector doesn’t make a profit because it hasn’t thought about how to do so is to fundamentally misconceive its role in the wider economy.

Besides, what nonprofits need isn’t more advice: it’s more money. When business people are ready to provide that—when they’re ready to serve on Boards not as agents of disruption but as securers of resources; when they’re ready to advocate for a tax system which will underwrite the necessary work done by the voluntary sector—well, THAT will be the time for a press release.

“L3C” spells “caveat emptor”

March 17, 2011

Here’s something strange: a concept thrown around routinely and casually in conversations among nonprofits and philanthropies is simultaneously the subject of fierce debate and sometime disapproval by the Internal Revenue Service, a committee of the American Bar Association, and other experts. What is going on?

The notion of Low Profit Limited Liability Corporations (L3Cs, for short) is that they’re a vehicle for doing well by doing good and therefore an improvement over the typical nonprofit structure. L3Cs are permitted to earn profits but proponents claim that their praiseworthy intentions—to end hunger or provide clean water or whatever—make those who lend to them eligible for the special tax benefits attached to program-related investments. In other words, this is a legal structure presented as a technique for gaining access to capital (always a struggle for nonprofits) by providing a tax benefit to lenders.

Of course, foundations already get a tax benefit for program-related investments in regular nonprofits, so what, exactly, is the appeal? In theory, foundations might be more interested in program-related investments that generate a reliable flow of capital (in the form of profit) than in program-related investments that generate nothing but additional nonprofit programs and services. Likewise in theory, regular venture capitalists outside of foundations will be more interested in making investments in profit-making entities than in pure nonprofits. This—the notion goes—will increase the amount of capital available to support general good-guy behavior.

However, a number of scholars and lawyers (Daniel Kleinberger of William Mitchell College of Law prominent among them) see the L3C as, at best, redundant and, at worst, an invitation to fraud. They point out that regular limited liability corporations can be organized for any purpose, including public-spirited and low-profit ones. They point out that the IRS has not yet issued (and does not seemed inclined to create) a rule awarding automatic program-related investment status to any investment in an L3C. So anyone who invests in an L3C on the basis that it provides a higher return than a regular nonprofit with the same tax benefits will find out to his/her sorrow that this is not the case.

What strikes the Nonprofiteer as peculiar, though, is that in the many discussions she’s heard and read about L3Cs, only one mention (specifically, Professor Kleinberger’s Nonprofit Quarterly article) has ever surfaced of this opposition from the bar and Federal regulators.  Not until her tax lawyer Stuart Levine asked about the [successful] efforts in Illinois to create L3Cs did she realize there was anything controversial about the phenomenon.  After bringing her up to speed Levine wisely said,

L3C’s don’t work unless there is a change in federal tax law.  In other words, L3C’s are a little like Oreo-Tycin-Myacin—the wonder drug for which there is no known disease.

L3C’s raise difficult issues of fiduciary duty and the inherent conflict between “charitable” purposes and “business” purposes.  At the least, these conflicts cannot be dealt with via a quick-fix state statute.

Doubtless the Nonprofiteer spaces out on frequent occasions and misses aspects of what’s said or done in the sector.  But she suspects there’s also a disconnect between what nonprofit executives and L3C promoters expect and describe and what lawyers and regulators understand.

So if you’re considering investment in an L3C, be the aware buyer of whom you’ve heard.

What a difference a syllable makes

November 19, 2010

More about the troubles of the do-well-by-doing-good gang, this time in the financial services sector.

Which raises the question: when does “profiting” turn into “profiteering”?

Social Enterprise and Its Discontents

November 17, 2010

A new study—poignantly titled “Social Enterprise: Innovation or Mission Distraction?”—reports that nonprofit agencies which choose to support themselves with for-profit businesses end up serving their clients less and worse.  Moreover, when the businesses thrive the profits go back into the business, while when the businesses falter the losses are taken out of the hide of the agencies.  (So glad to see nonprofits acting like businesses!  This “heads I win, tails you lose” approach is just what the investment bankers did—en route to destroying the economy.)

Gloating is unattractive, and unwarranted.  After all, any friend of the nonprofit sector would be delighted to learn there was a way to strengthen it without having to stretch every penny into a copper wire, or grovel to wealthy people who understand the situation less well than the people they may or may not deign to help.  But a bit of schadenfreude directed at the prophets of social enterprise really can’t be avoided.

It’s always seemed obvious to the Nonprofiteer that if there were money to be made in ending poverty, poverty would long since have been ended.  The challenge is to provide services and alleviate suffering when it isn’t profitable.  It seems equally obvious that any system which must allow for a private person to make money before the clients get served is one that reduces the resources available for those clients.

Now, lots of things that are obvious also happen to be false.  And certainly there’s a reasonable discussion to be had about whether, once you factor in all the costs of raising donations, it would be cheaper or more efficient—even with a profit margin—to organize charities as business enterprises.  But a decade’s worth of experimentation suggests that the answer is “No.”

Are services provided by social entrepreneurs better than no services at all?  Sure, but it demonstrates the poverty of our current mindless anti-tax political discourse that those seem like the only two choices.  The real alternative to entrusting the provision of public services to for-profit groups is having them supplied by the public.  Anyone familiar with the history of the private subway franchises and private lending libraries and private schools of the 19th Century will be grateful that our predecessors decided to eliminate the middleman markup and run subways and libraries and schools as the public goods they are.

Have social enterprises ever succeeded?  Certainly, and more power to them.  But anyone who claims they will supplant philanthropy, charity or social change movements is selling snake-oil.

The most thoroughgoing enthusiasts of the market seem to forget that Adam Smith himself recognized areas in which it would, and did, fail.  Those of us caring for people who can’t make profits for other people are dealing with the consequences of those failures.  So let’s face it: we’re outside the market economy.  Let’s stop contorting ourselves to fit into it, and concentrate on figuring out how to make our own systems function more fairly, transparently and effectively.

An appraising stare down the gift horse’s gullet

August 31, 2010

Jane Mayer’s excellent piece in this past week’s New Yorker about the brothers Koch, oil billionaires who’ve donated hundreds of millions to nonprofits promoting right-wing causes, finally clarified for the Nonprofiteer her unease at Bill Gates’s campaign to persuade billionaires to donate half their estates to charity.  It’s not a question of who has or hasn’t taken the pledge, though that’s an entertaining parlor game.  Nor is it the fact that the generosity of extremely wealthy people may not be what the rest of us have in mind when we hear the word “charity.”  (The Kochs’ “charity,” for instance, is a term of art encompassing donations to all kinds of institutions, predominantly think-tanks churning out rationales for the economic interests of wealthy people and front groups to make it appear that defending those economic interests is the political will of the non-wealthy majority.)

What’s troubling about the billionaires’ pledge remains so even when the receiving causes are unexceptionable.  Gates, for instance, has very generously underwritten substantial efforts by the Global Fund to Fight AIDS, Tuberculosis and Malaria.  Good for him, and for the world.


Even the best-intentioned best-directed private donations are a way for moneyed people to work their will on the public, while the rest of us have nothing but the vote.  And when the level of contributions is discussed in fractions of $1B, it’s no longer charity within a democracy: it’s benevolent dictatorship.

Maybe our country should be giving less to treat AIDS et al and more to eradicate infant and maternal mortality through the UN Population Fund; maybe not.  That’s a decision to be made by the people of the United States, through our government.  It’s really not a decision for a single person.

Why not?  Well, for starters, the “single person” in question is a billionaire, and thus always a man.  That means almost by definition that the highest levels of charitable giving will overlook women, though we constitute more than a majority of the population.  And if that’s the case—if society’s needs are met by individual whim instead of collective decisions about the greatest good for the greatest number—then what, actually, is left of self-government?

Of course, billionaires have plenty of assistance in the task of allowing economic power to trump political will.  The Supreme Court’s decision in Citizens United, holding that corporations are “persons” with First Amendment rights violated by limits on their campaign spending, already put the nation quite a way down that road.  But somehow it’s worse when something that sounds so benign—“half my estate to charity, because I’ve been so fortunate”—actually translates as “I set the agenda for the future of this country, because I’ve been so fortunate.”

What we really want from billionaires is for them to pay a lot more in income taxes: say, the 87% of taxable income paid in 1954,  or even the 70% paid at the start of the 1980s.  And then we as a group can decide where our group’s money goes.  All contribute, all decide.

And what we really want from billionaires’ heirs is for them to pay the 77% estate tax rate in effect in 1941, or even the 70% estate tax rate in effect in 1976.   (And let’s not hear any nonsense about “death taxes.”  The dead aren’t the ones paying.)  Why shouldn’t people who get money by inheritance have to pay taxes on it, just like people who get it by working?

Merely to ask that question is to answer it: no democratic society decides that people who don’t work should be privileged over those who do.  Societies like that are called “aristocracies,” and all those so-called Constitutional Originalists running around hijacking elections by screaming about excessive taxation should take a moment to remember that our Constitution was designed precisely to interfere with the establishment of a government by inheritance.

The Constitution prohibits not once but twice the granting of any title of nobility; but the Framers didn’t rest there.  They fought to cripple and ultimately abolish entail and primogeniture, the primary devices by which English law kept family fortunes together.  Why?  Because they realized that, if you’re founding a republic, it’s really not a good idea to let money keep piling up generation after generation in the same few pairs of hands.

Self-governing societies can’t operate on noblesse oblige, and societies that do aren’t truly self-governing.  As Dr. Franklin said, “A republic—if you can keep it.”

Dear Nonprofiteer, Are voluntary Internet payments “contributions” for tax purposes?

July 28, 2010

Dear Nonprofiteer:

What rules govern the websites that provide a free useful service to people but also have a PayPal “donate” button on their page to keep the service free?

If that person’s PayPal is linked up to it, does that not mean that the donations (if any) cannot exceed the IRS annual exclusion amount of $13,000?  Or should that person try to register the Website as a non-profit?

Signed, Prepared to Pony Up But Puzzled

Dear Puzzled:

The Nonprofiteer was completely stymied by the legal and technical nature of your question.  Fortunately, she has a colleague in the Association of Consultants to Nonprofits whose knowledge of nonprofit law is encyclopedic.  Attorney Kathryn Vanden Berk kindly provided the following responses to your questions:

At first blush, I assumed that the Websites are 501(c)(3) entities, and that the advice is offered without charge — with the “ask” being a free-will tax-deductible donation.

However, I wonder if you’re talking about a for-profit entity that is asking for a free-will non-deductible “donation” in lieu of a charge.

In the first instance, there is no prohibition against an exempt organization (EO) giving advice or asking for donations.  It can even charge for the advice, as when Lumity requires payment for the book I wrote about how to start nonprofits in Illinois.  If it is asking for a free-will donation so that the service will remain free, then anyone can make up their own mind as to whether or not they want to click on the donate button. I used to use the Cornell University Law School LII (Legal Information Institute) to get into the IRS Code.  It would often put up a screen asking for donations for the site’s upkeep.  I just returned to their website and found that they still ask for donations.  You can see this at

In the second instance, a person may request a “donation” so long as they don’t hold themselves out to be a 501 (c)(3) charity, and/or claim that the “donation” is tax-deductible.  This might be a good way for some enterprising law firm to throw things out on the web to see if anyone finds it to be sufficiently useful that they are compelled by guilt (or appreciation or whatever) to pay for it.

If that person’s PayPal is linked up to it, does that not mean that the donations (if any) cannot exceed the IRS annual exclusion amount of $13,000?  Or should that person try to register the Website as a non-profit?

I’m not sure what you mean by this. The annual excludable amount for charitable contributions is related to one’s income, not to any arbitrary number.  Can you be more specific?  Are you talking about standard deductions?

The Nonprofiteer wonders whether the $13,000 cited by Puzzled refers to  the limit on tax-free gifts to individuals.  If so, then yes, gifts to a personal PayPal account must be counted toward that total.  If not, she urges Puzzled to clarify her question in the comments section below.

Whatever the circumstances, there’s no option simply to “register the Website as a nonprofit,” unless it actually IS a nonprofit, meaning an agency with a public purpose governed by a Board of Directors.  As in the case of “What about gifts to individuals?”, the Nonprofiteer stresses that nonprofit status is not camouflage for other economic arrangements; it’s an actual status requiring service to the community.

Many thanks to Ms. Vanden Berk for her expertise.  Input on these technical questions from other lawyers and IRS specialists gladly accepted!

Where angels fear to tread

March 4, 2009

A group of Rice University MBA students is spending spring break in Rwanda, hoping to use their skills to come up with a distribution system for a trio of products developed through the university’s global health initiative: a low-cost neonatal incubator, a diagnostic lab-in-a-backpack and a plastic dosing device for liquid medicines.

“All of these products are terrific designs, but you cannot solve pervasive health problems with one or two of these,” [the supervising professor] said. “You need them by the hundreds and thousands, and you need to overcome the problem of distribution, which has stymied Western governments and aid organizations for decades.”


“Neither governments nor aid organizations have been effective at getting products to the people who really need them,” [the professor] said. “But that’s what business does best. Products get delivered and customers get served when there is a profit motive.”

The Nonprofiteer doesn’t wish to be cynical, and she really doesn’t want to devalue the obvious effort Rice University has put into making its students aware of the outside world.  But the notion that a group of MBA students can solve problems that have “stymied . . . governments and aid organizations for decades,” just because they’re interested in making money and those earlier groups were not, makes her want to hurl.

This is arrant nonsense, market-worshiping of the most thoughtless type.  It is NOT true that the profit motive is best at assuring distribution of necessities to poor people; the profit motive, and the free-market capitalism in which it’s embedded, are best at assuring distribution of items to people who can pay for them.

We in the nonprofit/NGO sector are happy to welcome any allies to our fight, but please don’t insult our intelligence, experience and expertise by suggesting that the obstacles we face will melt away magically with the application of a little well-placed self-interest.

If the days of Gordon Gekko and “Greed is good” aren’t over yet, with the world financial system circling the drain in a crisis created by people who believed the profit motive could solve all problems, the Nonprofiteer wonders what will be necessary to drive a stake through its heart.

Or, more succinctly: puh-LEASE.

Foundation Friday: Not just another analysis

May 23, 2008

If you haven’t read Just Another Emperor, Michael Edwards’ anatomy [and debunking] of philanthrocapitalism/social venture philanthropy, do. It. Now.