Earlier this week, I had the privilege of guest lecturing to Scott Curran‘s Lawyers as Social Innovators class at Chicago-Kent College of Law at the Illinois Institute of Technology. The following is an excerpt of my notes for the class:
Nonprofit Scandals
Heard any juicy stories this summer?
MIT Media Lab and Jeffrey Epstein, Varsity Blues and the College Admissions Scandal, Liberty University and Jerry Falwell Jr., NRA.
Most of the scandals have to do with money. Often, it’s about insiders making decisions to benefit themselves. And there are both federal tax laws and state charitable trust laws that can apply to board members, officers, their family members, and their controlled companies that receive excessive payments from a charitable organization (e.g., private inurement, private benefit, excess benefit transactions, self-dealing, diversions of charitable assets). But sometimes the “scandals” may arguably not involve clear violations of laws and are more about wealthy, privileged outsiders exercising their influence with money.
Controversies with Philanthropy
Power, privilege, money … that also signals some controversies over philanthropy that have captured many people’s attention over the past few years. Is philanthropy a good thing? Or is it a cover-up for plutocrats (the super rich) to continue to preserve the status quo and obscure their role in causing the problems they later seek to solve. That’s the premise of a book called Winners Take All, written by Anand Giridharadas, that was among the 100 books to read on the New York Times list last year. Just Giving, by Rob Reich, identifies philanthropy as an exercise of power that is tax-advantaged and deserving of our scrutiny more than our gratitude. And Decolonizing Wealth, by Edgar Villanueva, discusses our history of colonization, dividing, conquering and exploiting people, and how philanthropy can restore balance and heal our divides.
All this criticism of philanthropy has received pushback as well from defenders who cite all of the good done with philanthropic funds, but the recent tainted donor stories (Jeffrey Epstein, Felicita Huffman) and large concentrations of wealth sitting in endowments and DAFs, typically invested without ESG considerations, have continued to fuel the criticism.
Movements
There are broader movements that are also impacting the nonprofit sector, including movements focused on racial justice, women’s rights, LGBTQ+ rights, poverty alleviation, environmentalism and climate change, gun control, and the UN’s Sustainable Development Goals. Nonprofits are often in the forefront of these movements and they can influence which policies and laws are created, amended, and repealed. In addition, nonprofit leaders can also determine which internal policies and rules are created, amended, and repealed to address not only compliance, but also the organization’s values.
Social Enterprises – Nonprofits
If you’re thinking about whether your social enterprise could be run within a nonprofit, consider the types of businesses we see in nonprofits: theatres, art galleries, coffee shops, restaurants, clothing stores, law offices, insurance companies, moving companies, management consulting firms, incubators and accelerators, coworking companies, cookie sellers, health clubs, country clubs, and professional sports associations.
In making a determination of whether your social enterprise might be structured as a for-profit or nonprofit, I highly recommend the following article, For Love or Lucre, by Jim Fruchterman.
Federal Tax Laws – 501(c)(3)
- Exempt purpose – what is charitable? what is educational?
- Organizational test
- Operational test
- Benefit a charitable class
- No private benefit
- No private inurement
- Public Charities – no excess benefit transactions
- Private Foundations – no self-dealing
- No substantial lobbying – but:
- Most advocacy is not lobbying
- Public Charities – 501(h) expenditure test (provides generous and clear lobbying limits)
- Private Foundations – no lobbying
- No political campaign intervention
Common Areas of Nonprofit Organizations Counsel for Charities
Can we do this?
- Earned income – think Girl Scouts
- Fundraising – registration
- Advocacy – underutilized
- Grantmaking and support of other organizations
- Own a taxable subsidiary
What is our board supposed to do?
- Governing documents
- Direct
- Oversee
- Protect
How much can we compensate or pay?
- Insiders (including board members, if possible)
- Outsiders
How do we collaborate?
- Informal
- Formal
- Mergers
- Joint ventures with individuals or for-profits
How do we protect our organization and our board?
- Governance
- Conflicts of interest
- Ethics and transparency
- Organizational structures
- Insurance
We screwed up – now what?
Closing Thoughts
I’m a biased fan of the nonprofit sector, but I also recognize it doesn’t hold a monopoly on good works and it’s critical that all sectors work towards positive social and environmental change. And the emergence of the for-profit social enterprise subsector is of enormous importance at a time of critical need. It gives us another tool to make positive change in this world. But we have to be cautious of its misuse (greenwashing being one example) and understand where different companies may be on the spectrum of balancing profits and organizational financial health with social and environmental impact.