Tuesday, January 8, 2008

The Efficiency Rationale and Nonprofit Organizations

Last Sunday morning in New York, the AALS Section on Nonprofit and Philanthropy Law sponsored a discussion entitled, "Roundtable on Nonprofit and Philanthropy Law Scholarship."  We discussed (1) the development of Nonprofit Law as a discrete discipline, (2) the current state of scholarship in the field, and (3) fruitful areas for future research.  With regard to the first question, Professor Rob Atkinson made the fascinating assertion that the factor working most against the continuing development of "nonprofit law" (however we might define that phrase) is the implicit belief that any field of law can be evaluated for its effectiveness using the falsely objective analytical tools of the law and economic movement.  "Efficiency," he noted, "is not necessarily the standard against which we should measure the legitimacy of any particular rule relating to nonprofit organizations."  Atkinson reminded us that social justice is the historical and contemporary impetus for the nonprofit sector.  The assertion seems both indisputable and obvious; certainly it is worth repeating.  Indeed, nonprofit organizations arise because of the lack of profit potential with respect to certain goods and services.  This doesn't mean that every "charitable" activity holds no potential for great profit (profit being the implicit driver of efficiency in the law and economic sense) -- the existence of well endowed institutions of higher education and "nonprofit" hospitals proves that point.  By coincidence, a Sunday (January 6, 2008) morning editorial in the New York Times entitled, "Can Foundations Take the Long View Again" argued that using "efficiency" as a measurement of charitable effectiveness or worthiness would likely lead to short-sighted activities:

AS business leaders like Ted Turnder, Bill Gates and George Soros have moved vast swaths of their private wealth into the philanthropic sector, market expertise has migrated there, too. As a result, foundation directors, trustees and advisers from corporate America have taken a stance that the return on charitable dollars should be tangible and measurable, and should drive capital flow in much the same way that earnings figures do in commerce.  But a small and increasingly vocal group of foundation leaders is challenging the benefits of this approach.

My co-editor and co-author David Brennen, has written eloquently on this issue in his recent article, A Diversity Theory of Charitable Tax Exemption:  Beyond Efficiency, Through Critical Race Theory, Towards Diversity.  I have not previously thought of the efficiency rationale in quite such stark terms as those used by Professor Atkinson -- certainly not as a threat to the very existence of a separately recognized and respected social sector.  But I suppose even people who don't think deeply about how to define the "nonprofit sector' have already agreed, at least implicitly, that efficiency should not necessarily dictate how we legislate on the subject of nonprofit organizations.  For example, it was almost a given that Sarbanes Oxley should not apply to nonprofit organizations.  Instead, nonprofits have been urged to carefully consider whether particular mandates in Sarbox should be adopted voluntarily by nonprofit organizations and nonprofit organizations continue to be left alone to self-regulate, notwithstanding the occasional calls for more federal or state oversight.  It is good to be reminded that the nonprofit organizations exist precisely because "losers" are inherent to a society that values winner take all ideals.



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