Thursday, October 16, 2014
An insightful Wall Street Journal commentary addresses the likely outcome for the IRA Charitable Rollover Provision. This provision allows taxpayers aged 70.5 and older to make deductible charitable contributions (up to $100,000) from their IRAs without having to include such charitable contributions in their income. In addition, the charitable contributions count against minimum IRA distribution requirements. The Wall Street Journal concludes that while Congress is likely to extend the provision this year, it is unlikely to do so before the November election. At the same time, it is possible that Congress will restore this break retroactively. The commentary provides a good balance of the implications should Congress choose to extend or not to extend.
Wednesday, October 15, 2014
A concept that I have introduced through scholarly writing and blogged about here is the need for a more efficient charitable market. In August, I commented upon a Vanguard Charitable study that found millennials are more likely to see their charitable giving as a form of investment and thus promote a culture of giving that demands more transparency and accountability, two hallmarks of a more efficient charitable market. A recent NPR broadcast that examined the work of Scott Harrison’s nonprofit, Charity: Water, confirmed just that.
In the segment, Harrison spoke about his dual purpose in forming Charity: Water. First, he wanted to provide clean water to the almost 800 million people globally who lack access to it by building wells. Second, he sought to make an example of how a nonprofit could do its work in a way that would resonate with the next generation of givers. He recounted his own experience of being hesitant to give to charities prior to starting Charity: Water, which stemmed from the absence of information on how a charity would use the funds. Today the nonprofit world is concerned with how approximately 80 millennials make their decisions about giving, and not surprisingly, it is different from the prior generation(s). As stated in my prior post, it is widely accepted that millennials want to view their “donation” as “investment,” and at least one commentator recommends that nonprofits refer to the latter. Another salient point is how technology intersects with millennial giving. Millennials value their time, and as a result, any form of technology that makes it easier for them to invest is preferable. Moreover, the Ice Bucket Challenge that swept through social networks over the summer shows that the desire of millennials to share the details of their lives extends to their giving. In response, Charity: Water is utilizing a birthday campaign where donors can ask their network to donate one dollar for each year celebrated, i.e., $25 dollars to celebrate a 25th birthday. Charity: Water is also placing sensors on its wells, so donors may interact with the impact of their investment in a novel manner. Charity: Water’s innovative approaches are proving successful. They have helped over 4 million more people in twenty-two countries gain access to clean water. Millennials and nonprofits like Charity: Water may just help move giving into the next century and towards a more efficient charitable market.
Monday, October 13, 2014
As the Ebola threat looms, many observers are considering whether the responses of the U.S. government, the CDC, and the World Health Organization, inter alia, are appropriate. Similarly, nonprofit commentators are considering whether private donations of funds and resources from the U.S. are adequate. As one commentator reports, there have been several U.S. private foundations that have made large-scale contributions to the fight against Ebola; in addition, the experience of two U.S. Christian organizations operating in West Africa evinces that publicity helps generate more donations. The U.N. has estimated that $1 billion is necessary to effectively combat the Ebola virus.
A recent article in The Chronicle of Philanthropy has predicted that the first confirmed case of Ebola in the United States will lead to greater charitable donations to stop a further outbreak of Ebola abroad. Several U.S. private foundations have already made multi-million dollar gifts to combat a spread of the virus. The Bill & Melinda Gates Foundation has decided to contribute $50 million to U.N. agencies and other organizations. The Paul G. Allen Family Foundation donated $9 million to the CDC, $2.8 million to the American Red Cross, and $100,000 in the form of matching funds to Global Giving. The William and Flora Hewlett Foundation contributed $5 million to various international health organizations. Moreover, the U.S. government has provided numerous resources, including, inter alia, individuals to build treatment units and training for health-care providers. The USAID has expended over $100 million in an effort to quell the outbreak and is on record for the contribution of an additional $75 million.
At the same time, commentators have denounced U.S. donors as not donating enough. The Director of International Communications at the Red Cross has stated that the Ebola outbreak is not “top of mind as a place to donate” precisely because of the involvement of the U.S. government, the CDC, and the World Health Organization. Nevertheless, SIM USA, a Christian mission organization who had two health-care workers infected with Ebola in Liberia late in the summer, has received sizable donations to support its work in West Africa. SIM USA has seen an increase in volunteers, and although these actions are later than anticipated, they show promise for a mobilization of donors and volunteers to fight the deadly virus. Additionally, Samaritan’s Purse, also a Christian organization working in West Africa, experienced a 13% increase in cash contributions (when compared to last year’s donations) after one of its doctors was infected with Ebola and successfully treated at Emory University Hospital. (For more on Samaritan’s Purse, see JRB’s insightful post). Thus far, $4.4 million of its donations has been designated for fighting the Ebola outbreak. As the speculation about a U.S. outbreak grows, the public’s attention has become more focused on donating to assist with the global efforts already underway, e.g., see the following article on UK donations. For a complete list of non-governmental organizations responding to the Ebola outbreak, see here).
Tuesday, September 30, 2014
Preliminary planning is underway for a group of donors to form a nonprofit organization that would own the U-T San Diego, according to the U-T itself. It looks like the newspaper would stay as a for-profit organizaton, and the nonprofit would own the equity of the for profit. Random thoughts:
- I'm not sure that such a structure would insulate the for profit from political and lobbying concerns. It's an interesting question, however - one they recognize as they state that the editorial policy would be "as inclusive and community-focused as possible. 'Almost by definition, if not be law, a nonprofit has to be nonpartisan.'" Hmmm.
- Could they make the media company an L3C? That would automatically read in the prohibition on lobbying and political activity.
- It looks like a handful of donors would fund the nonprofit. Query whether that means that they would be a private foundation or whether they tried to form as a supporting organization). Either way, they would have to deal with the excess business holdings rules - I would presume they would try to say that it is a functionally related business under Section 4943(d)(3)(A), and therefore, not a "business enterprise" covered by the rules.
- If a private foundation - presumably operating foundation status would be necessary to avoid mandatory distributions under Section 4942.
- Looks like they went ahead and started the Form 1023 process to get approval for the nonprofit, even though the actual transaction to purchase the media company hasn't been consummated.
Anyone have any details?
Friday, September 26, 2014
Reuters is reporting that over 120 Islamic scholars from around the world have issued an open letter denouncing Islamic State militants and refuting their religious arguments. Many of these scholars are themselves leading Muslim voices in their own countries.
The 22-page letter, written in Arabic and heavy with quotes from the Koran and other Islamic sources, strongly condemns the torture, murder and destruction Islamic State militants have committed in areas they control.
The Reuters report states in part:
"You have misinterpreted Islam into a religion of harshness, brutality, torture and murder," the letter said. "This is a great wrong and an offense to Islam, to Muslims and to the entire world."
[The letter's] originality lies in its use of Islamic theological arguments to refute statements made by self-declared Caliph Abu Bakr al-Baghdadi and his spokesman Abu Muhammad al-Adnani to justify their actions and attract more recruits to their cause.
The letter is addressed to al-Baghdadi and "the fighters and followers of the self-declared 'Islamic State'", but is also aimed at potential recruits and imams or others trying to dissuade young Muslims from going to join the fight.
Nihad Awad of the Council on American Islamic Relations (CAIR), which presented the letter in Washington on Wednesday, said he hoped potential fighters would read the document and see through the arguments of Islamic State recruiters.
"They have a twisted theology," he said in a video explaining the letter. "They have relied many times, to mobilize and recruit young people, on classic religious texts that have been misinterpreted and misunderstood."
Reuters describes the 126 signatories as "prominent" Sunni men from across the Muslim world -- from Indonesia to Morocco, and from other countries such as the United States, Britain, France and Belgium.
Among those who signed are "the current and former grand muftis of Egypt, Shawqi Allam and Ali Gomaa, former Bosnian grand mufti Mustafa Ceric, the Nigerian Sultan of Sokoto Muhammad Sa'ad Abubakar and Din Syamsuddin, head of the large Muhammadiyah organization in Indonesia. Eight scholars from Cairo's Al-Azhar University, the highest seat of Sunni learning, also put their names to the document."
The Philanthropy News Digest is reporting that the American Association of School Librarians, a division of the American Library Association, is accepting applications from school librarians for its AASL Innovative Reading Grant program.
One grant in the amount of $2,500 will be awarded in support of the planning and implementation of a unique and innovative program for children that motivates and encourages reading, especially among struggling readers.
Projects should promote the importance of reading and facilitate literacy development by supporting current reading research, practice, and policy. In addition, projects must be specifically designed for children (grades K-9) in the school library setting, encourage innovative ways to motivate and involve children in reading, and should demonstrate potential to improve student learning.
To be eligible, applicants must be a member of AASL. Grant recipients may be invited to write an article that delineates their reading incentive project and demonstrates their successes, trials, and recommendations so others may replicate the project.
Wednesday, September 24, 2014
The Clinton Global Initiative, former President Bill Clinton's annual philanthrophy summit held in New York ends today. The summit opened on Sunday and has thus far heard from speakers include actor Matt Damon, representing the charity he co-founded, Water.org; Laurent Lamothe, Prime Minister of Haiti; and Judith Rodin, president of the Rockefeller Foundation.
Ever since it was established in 2005, the Clinton Global Initiative has drawn more than 180 world leaders and more than 2,900 commitments worth an estimated $103-billion. This year's announced pledges include:
- $280-million from BRAC International to help more than 2.7 million girls across eight countries to finish school and go on to careers;
- $100-million from Camfed to help girls in Sub-Saharan Africa complete secondary school;
- $50-million from Grameen America to support 7,000 female entrepreneurs in Harlem;
- $19-million from Discovery Communications and the United Kingdom’s Department for Internaitonal Development to improve learning for girls in Ghana, Kenya, and Nigeria;
- $16-million from Plan International to prevent and respond to gender-based violence at schools in Asia;
- $12-million from Room to Read to help an additional 15,000 girls in nine countries to finish secondary school and go on to college and careers;
- $6-million noncash support from Direct Relief, Last Mile Health, Wellbody Alliance, and Africare to airlift 100 tons of medical supplies to West Africa to combat the Ebola outbreak;
- $4-million from the FHI Foundation and FHI 360 to study how to improve international-development projects across different fields;
- $3.2-million from the Lumina Foundation and $3-million challenge grant from Cisco to the National Service Alliance for its Service Year program, which encourages young adults ages 18 to 28 to embark on community service for a year;
- $3-million from Comcast and NBCUniversal, Airbnb, Jonathan and Jeanne Lavine, and Josh and Anita Bekenstein to Be the Change for its ServiceNation campaign to encourage people to volunteer for a year.
March of the Benefit Corporation: So Why Bother? Isn’t the Business Judgment Rule Alive and Well? (Part III)
(Note: This is a cross-posted multiple part series from WVU Law Prof. Josh Fershee from the Business Law Prof Blog and Prof. Elaine Waterhouse Wilson from the Nonprofit Law Prof Blog, who combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides. The previous installments can be found here and here (NLPB) and here and here (BLPB).)
In prior posts we talked about what a benefit corporation is and is not. In this post, we’ll cover whether the benefit corporation is really necessary at all.
Under the Delaware General Corporation Code § 101(b), “[a] corporation may be incorporated or organized under this chapter to conduct or promote any lawful business or purposes . . . .” Certainly there is nothing there that indicates a company must maximize profits or take risks or “monetize” anything. (Delaware law warrants inclusion in any discussion of corporate law because the state's law is so influential, even where it is not binding.)
Back in 2010, Josh Fershee wrote a post questioning the need for such legislation shortly after Maryland passed the first benefit corporation legislation:
I am not sure what think about this benefit corporation legislation. I can understand how expressly stating such public benefits goals might have value and provide both guidance and cover for a board of directors. However, I am skeptical it was necessary.
Not to overstate its binding effects today, but we learned from Dodge v. Ford that if you have a traditional corporation, formed under a traditional certificate of incorporation and bylaws, you are restricted in your ability to “share the wealth” with the general public for purposes of “philanthropic and altruistic” goals. But that doesn't mean current law doesn't permit such actions in any situation, does it?
The idea that a corporation could choose to adopt any of a wide range of corporate philosophies is supported by multiple concepts, such as director primacy in carrying out shareholder wealth maximization, the business judgment rule, and the mandate that directors be the ones to lead the entity. Is it not reasonable for a group of directors to determine that the best way to create a long-term and profitable business is to build customer loyalty to the company via reasonable prices, high wages to employees, generous giving to charity, and thoughtful environmental stewardship? Suppose that directors even stated in their certificate that the board of directors, in carrying out their duties, must consider the corporate purpose as part of exercising their business judgment.
Please click below to read more.
Wednesday, September 3, 2014
(Note: This is a cross-posted multiple part series from WVU Law Prof. Josh Fershee from the Business Law Prof Blog and Prof. Elaine Waterhouse Wilson from the Nonprofit Law Prof Blog, who combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides. The previous installment can be found here (NLPB) and here (BLPB).)
What It Is: So now that we’ve told you (in Part I) what the benefit corporation isn’t, we should probably tell you what it is. The West Virginia statute is based on Model Benefit Corporation Legislation, which (according to B Lab’s website) was drafted originally by Bill Clark from Drinker, Biddle, & Reath LLP. The statute, a copy of which can be found, not surprisingly, at B Lab’s website, “has evolved based on comments from corporate attorneys in the states in which the legislation has been passed or introduced.” B Lab specifically states that part of its mission is to pass legislation, such as benefit corporation statutes.
As stated by the drafter’s “White Paper, The Need and Rationale for the Benefit Corporation: Why It is the Legal Form that Best Addresses the Needs of Social Entrepreneurs, Investors, and, Ultimately, the Public” (PDF here), the benefit corporation was designed to be “a new type of corporate legal entity.” Despite this claim, it’s likely that the entity should be looked at as a modified version of traditional corporation rather than at a new entity.
This is because the Benefit Corporation Act appears to leave a lot of room for the traditional business corporations act to serve as a gap-filler. West Virginia Code § 31F-1-103(c), for example, explains, “The specific provisions of this chapter control over the general provisions of other chapters of this code.” Thus, the benefit corporation provisions supplant the traditional business corporation act where stated specifically, such as with regard to fiduciary duties, but general provisions of the business corporations act apply where the benefit corporation act is silent, such as with regard to dissolution.
In contrast, the West Virginia Nonprofit Corporation Act is a broader act that discusses dissolution, mergers, and other items specifically in a way that more clearly indicates the nonprofit is a distinct, rather than modified, entity form. Furthermore, a benefit corporation is actually formed under the Business Corporations Act: “A benefit corporation shall be formed in accordance with article two, chapter thirty-one-d of this code, and its articles as initially filed with the Secretary of State or as amended, shall state that it is a benefit corporation.” W. Va. Code § 31F-2-201.
So what makes a benefit corporation unique?
1. Corporate purpose - The traditional West Virginia business corporation is created for the purpose “of engaging in any lawful business unless a more limited purpose is set forth in the articles of incorporation.” W. Va. Code § 31D-3-301. Under the Benefit Corporation Act, “A benefit corporation shall have as one of its purposes the purpose of creating a general public benefit.” Id. § 31F-3-301. A specific benefit may be stated as an option, but is not required. Note similarly that a part of the corporation’s purpose must be for general public benefit, but that benefit need not be a primary, substantial, significant or other part of the corporation’s purpose.
For purpose of comparison, the low-profit limited liability company (or L3C) typically has a much more onerous purpose requirement. For example, the Illinois L3C law requires
(a) A low-profit limited liability company shall at all times significantly further the accomplishment of one or more charitable or educational purposes within the meaning of Section 170(c)(2)(B) of the Internal Revenue Code of 1986, 26 U.S.C. 170(c)(2)(B), or its successor, and would not have been formed but for the relationship to the accomplishment of such charitable or educational purposes.
2. Standard of conduct – The statute requires, in § 31F-4-401, that the directors and others related to the entity:
(1) Shall consider the effects of any corporate action upon:
(A) The shareholders of the benefit corporation;
(B) The employees and workforce of the benefit corporation, its subsidiaries, and suppliers;
(C) The interests of customers as beneficiaries of the general or specific public benefit purposes of the benefit corporation;
(D) Community and societal considerations, including those of each community in which offices or facilities of the benefit corporation, its subsidiaries, or suppliers are located;
(E) The local and global environment;
(F) The short-term and long-term interests of the benefit corporation, including benefits that may accrue to the benefit corporation from its long-term plans and the possibility that these interests and the general and specific public benefit purposes of the benefit corporation may be best served by the continued independence of the benefit corporation; and
(G) The ability of the benefit corporation to accomplish its general and any specific public benefit purpose;
(emphasis added). While these are significant mandatory considerations, they are nothing more than considerations. Directors and others “[n]eed not give priority to the interests of a particular person referred to in subdivisions (1) and (2) of this section over the interests of any other person unless the benefit corporation has stated its intention to give priority to interests related to a specific public benefit purpose identified in its articles.” § 31F-4-401(a)(3).
As such, while directors must consider the general public benefit of their decisions (and any specific benefits if so chosen), it is not clear the ultimate decision making of a benefit corporation director would necessarily be any different than a traditional corporation. That is, a director of a benefit corporation could, for example, consider the impacts on a town of closing a plant (and determine it would be hard on the town and the workforce), but ultimately decide to close the plant anyway.
Furthermore, many corporations seek to serve communities and benefit the public. McDonald’s, Coca-Cola, and many others already have programs to benefit the public, so it appears that many traditional corporations have already volunteered to meet and exceed the standards of the West Virginia benefit corporations act.
3. Formation – An entity becomes a benefit corporation by saying so when filing initial articles of incorporation with the Secretary of State, § 31F-2-201, or by amending the articles of an already created corporation, § 31F-2-202. Presumably, this serves a notice function, informing the benefit corporation’s current and potential constituents that there is the possibility that profit maximization will not be (or may not be) the corporation’s primary goal. The notice function does not work in reverse, however, as benefit corporation status does guarantee that public benefits have any primacy at all, merely that such benefits will be considered.
4. Termination - Termination of the benefit corporation status is allowed and is achieved by changing the articles of incorporation in the same manner in which traditional corporations modify their articles. § 31D-10-1003. As a result, it doesn’t appear that there is anything in the statute from preventing a benefit corporation from reaping the public relations or capital raising upside of being a benefit corporation, and thereafter abandoning the status should it become inconvenient. Query whether to the extent a transfer to a benefit corporation could be deemed a gift for a public purpose, the Attorney General might have oversight over the contribution in the same manner as it has oversight in cy pres and similar proceedings.
5. Enforcement – Third parties have no right of action to enforce the benefit goals unless they are allowed to use derivatively as “specified in the articles of incorporation or bylaws of the benefit corporation.” Id. § 31F-4-403. Otherwise, a direct action of the corporation or derivative actions from a director or shareholder are the only ways to commence a “benefit enforcement proceeding.” Again, the statute does not give the Attorney General specific statutory authorization to proceed on the basis that a member of the public may have transferred funds to the benefit corporation in reliance upon its benefit corporation status.
So, the statute provides the option for stating and pursuing general and specific benefits, but there are not a lot of structural assurances to anyone—investor, lender, public—that a benefit corporation will actually benefit anyone other than its equity holders. But benefit corporations are required to consider doing so. This is not to say there isn’t some value. As Haskell Murray has noted,
Directors would benefit from having a primary master and a clear objective. . . . [But,] [t]he mandate that a benefit corporation pursue a "general public benefit purpose" is too vague because it does not provide a practical way for directors to make decisions.
As such, an entity may create a clear set of priorities and guidelines that could provide useful and lead to benefits, but the benefit corporation act most certainly does not mandate that.
Finally, although most of the above is focused on the West Virginia benefit corporation law, much of it applies to the other versions of such laws in other states. Cass Brewer notes
Effective July 1, 2014, West Virginia’s benefit corporation statute generally follows the B-Lab model legislation, but among other things relaxes the “independence” tests for adopting third-party standards and does not require the annual benefit report to disclose director compensation.
As an additional resource, Haskell Murray provides a detailed chart of the state-by-state differences, here.
Next up: Part III - So Why Bother? Isn’t the Business Judgment Rule Alive and Well?
EWW & JPF
Over the summer those who believe the controversy is overblown - or even that the IRS did not do anything wrong in the first place - could point to a report from the Center for Public Integrity that the IRS had denied the exemption application of the left-leaning Arkansans for Common Sense as evidence that the IRS was, or least now is, even-handed in its treatment of such applications.
Critics of the IRS could point to a report from Judicial Watch that Justice Department attorneys have admited the emails of Lois Lerner and other IRS officials are not truly lost, but that it is simply too onerous to retrieve them from an apparently cumbersome backup system. (Additional coverage: The Hill; The Washington Free Beacon). They also could point to the decision by federal District Court Chief Judge Susan J. Dlott to let some of the claims made by NorCal Tea Party Patriots against the IRS proceed, although a careful reading of Judge Dlott's opinion reveals that some of the asserted claims did not in fact survive motions to dismiss. More specifcally, the claim of vionlations of the First and Fifth Amendments and of section 6103 (relating to confidentiality of tax return information) survived the motions to dismiss as against Treasury, the IRS, and IRS employees in their official capacities, but the constitutional claims did not survive as against IRS employees in their individual capacities (the 6103 claim was not asserted against the employees in their individual capacities). Interestingly, in allowing the constitutional claims to proceed the court relied significantly on an earlier opinion in the pending Z Street case.
Wednesday, August 27, 2014
The New York Times reports that members of the Board of Directors for the section 501(c)(6) United States Tennis Association appear to have numerous conflicts of interest. For example, the article reports that one board member's company is the largest single contractor with the USTA, receiving almost $3 million in 2012, and another board member is the executive director of a nonprofit that received almost $1 million in grants from a USTA charitable affiliate over three years. In response, the USTA denied that the board members had any say in the decision that led to funds going to organizations with which they are affiliated.
Tuesday, August 26, 2014
West Virginia is the latest jurisdiction to adopt benefit corporations – the text of our legislation can be found here. As with all benefit corporation legislation, the thrust of West Virginia’s statute is to provide a different standard of conduct for the directors of an otherwise for-profit corporation that holds itself out as being formed, at least in part, for a public benefit. (Current and pending state legislation for benefit corporations can be found here.)
As WVU Law has two members of the ProfBlog family in its ranks (Prof. Josh Fershee (on the Business Law Prof Blog) and Prof. Elaine Waterhouse Wilson (on the Nonprofit Law Prof Blog)), we combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides. For those of you on the Business Prof blog, some of the information to come on the Business Judgment Rule may be old hat; similarly, the tax discussion for those on the Nonprofit Blog will probably not be earth-shaking. Hopefully, this series will address something you didn’t know from the other side of the discussion!
Part I: The Benefit Corporation: What It’s Not: Before going into the details of West Virginia’s legislation (which is similar to statutes in other jurisdictions), however, a little background and clarification is in order for those new to the social enterprise world. A benefit corporation is different than a B Corporation (or B Corp). B Lab, which states that it is a “501(c)(3) nonprofit” on its website, essentially evaluates business entities in order to brand them as “Certified B Corps.”
It wants to be the Good Housekeeping seal of approval for social enterprise organizations. In order to be a Certified B Corp, organizations must pass performance and legal requirements that demonstrate that it meets certain standards regarding “social and environmental performance, accountability, and transparency.” Thus, a business organized as a benefit corporation could seek certification by B Lab as a B Corp, but a business is not automatically a B Corp because it’s a state-sanctioned benefit corporation – nor is it necessary to be a benefit corporation to be certified by B Labs.
In fact, it’s not even necessary to be a corporation to be one of the 1000+ Certified B Corps by B Lab. As Haskell Murray has explained,
I have told a number of folks at B Lab that "certified B corporation" is an inappropriate name, given that they certify limited liability companies, among other entity types, but they do not seem bothered by that technicality. I am guessing my fellow blogger Professor Josh Fershee would share my concern. [He was right.]
A benefit corporation is similar to, although different from, the low-profit limited liability company (or L3C), which West Virginia has not yet adopted. (An interesting side note: North Carolina abolished its 2010 L3C law as of January 1, 2014.) The primary difference, of course, is that a benefit corporation is a corporation and an L3C is a limited liability company. As both the benefit corporation and the L3C are generally not going to be tax-exempt for federal income tax purposes, the state law distinction makes a pretty big difference to the IRS. The benefit corporation is presumably going to be taxed as a C Corporation, unless it qualifies and makes the election to be an S Corp (and there’s nothing in the legislation that leads us to believe that it couldn’t qualify as an S Corp as a matter of law). By contrast, the L3C, by default will be taxed as a partnership, although again we see nothing that would prevent it from checking the box to be treated as a C Corp (and even then making an S election). The choice of entity determination presumably would be made, in part, based upon the planning needs of the individual equity holders and the potential for venture capital or an IPO in the future (both very for-profit type considerations, by the way). The benefit corporation and the L3C also approach the issue of social enterprise in a very different way, which raises serious operational issues – but more on that later.
Finally, let’s be clear – a benefit corporation is not a nonprofit corporation. A benefit corporation is organized at least, in some part, to profit to its owners. The “nondistribution constraint” famously identified by Prof. Henry Hansmann (The Role of Nonprofit Enterprise, 89 Yale Law Journal 5 (1980), p. 835, 838 – JSTOR link here) as the hallmark of a nonprofit entity does not apply to the benefit corporation. Rather, the shareholders of a benefit corporation intend to get something out of the entity other than warm and fuzzy do-gooder feelings – and that something usually involves cash.
In the next installments:
Part II – The Benefit Corporation: What It Is.
Part III – So Why Bother? Isn’t the Business Judgment Rule Alive and Well?
Part IV – So Why Bother, Redux? Maybe It’s a Tax Thing?
Part V - Random Thoughts and Conclusions
EWW and JPF
The Oregonian reports that lawyers have filed a class-action lawsuit in state court against Regence BlueCross BlueShield, claiming that the (taxable) nonprofit is acting like a for-profit company. More specifically, the lawsuit asserts that Regence is accumulating excess funds to support large, executive salaries instead of using those funds to benefit its members. The lawsuit points specifically to a public-purpose clause in Regence's bylaws that it claims is violated by these practices. The article further reports that Regence has responded by stating that the claim is without merit and that it intends to aggressively defend itself against the allegations.
Monday, August 25, 2014
On Friday the Wall Street Journal published online an article titled Tax-Smart Philanthropy Made Easy: Many Donors Should Consider a "Charitable Gift Trust" or "Donor Advised Fund". The article documents the continued growth of donor advised funds, with total assets reaching $26 billion as of June 30, 2014, with new contributions and grants for the 12 months before that date reaching $7.4 billion and $4.1 billion, respectively. The article also provides an interesting glimpse into the giving priorities of DAF donors, as the largest holder of DAFs - Fidelity Charitable - provided a breakdown by program area of where the $2.1 billion in grants it made in 2013 went. Over a third went to education, with the next biggest areas being religion (16%), "society benefit" (14%), and human services (10%). The article attributes the continued and indeed growing popularity of this vehicle to a bull market, increasing mergers and acquisitions, and the risk of future changes in the tax laws that make it particularly attractive to lock in a charitable contribution now while still being able to put off final decisions regarding where to give.
Over the summer the Freedom from Religion Foundation announced that it had agreed to the dismissal (without prejudice) of its lawsuit against the IRS alleging that the IRS had filaed to enforce against churches the prohibition on political campaign intervention. See previous post regarding the 2013 rejection of the IRS' motion to dismiss this case for more details. What is most dramatic about this development is the letter from the IRS to the DOJ attached to the Foundation's Memorandum in Support of Motion to Dismiss detailing the current audit activity relating to churches. Here is the substance of that letter:
1. Subsequent to the publication of proposed regulations on section 7611 of the Internal Revenue Code on August 5, 2009, the IRS has processed several cases involving churches using procedures designed to ensure that the protections afforded to churches by the Church Audit Procedures Act are adhered to in all enforcement interaction between the IRS and churches. The procedures require the reasonable belief determination under section 7611(a) to be made by the Commissioner, TEGE, either directly or as concurrence to the determination made by the Director, Exempt Organizations.
2. Our written procedures for our Dual Track process for information items (a.k.a. referrals) alleging violation of the political intervention prohibition of section 501(c)(3) require evaluation of the information item by our Review of Operations (“ROD”) unit and then the Political Activities Referral Committee (“PARC”). With regard to these referrals that concern violations by churches, the PARC has determined that as of June 23, 2014, 99 churches merit a high priority examination. Of these 99 churches, the number of churches alleged to have violated the prohibition during 2010 is 15, during 2011 is 18, during 2012 is 65, and during 2013 is one.
This comes after an apparent hiaitus in such activity, as detailed in a previous post. What is perhaps most surprising is that it has come without the finalization of the proposed regulations referenced in the above letter regarding exactly who, within the IRS, has sufficient authority to sign off on church tax inquiries and, if justified, church examinations.
Saturday, August 16, 2014
When I first started out in practice, I was asked to compose a paper on behalf of the State Bar of California on whether contributions to wholly-owned single member LLCs are deductible under the check the box regulations. It appears that single member LLCs are once again in the forefront of the nonprofit sector. Social enterprises wholly-owned by family foundations, i.e., family owned social enterprises (“FOSEs”), are used in the business sector, and they have the potential to be used in the social sector. Mike Miesen’s article on this topic raises an interesting perspective:
"Owning a social enterprise (or creating a disregarded entity) allows a foundation to efficiently effect change using market mechanisms to sell a good or service, while using philanthropic resources to address market failures and advocate a cause. Critically, it is also a tax-free investment vehicle for the foundation, fulfills the foundation’s requirement to spend 5 percent of its endowment annually, and because [single member limited liability corporations] SMLLCs are autonomous legal entities, protects the foundation’s assets from any liability to which their investees expose them. We think this model could provide a more efficient option that conventional grant- and donation-based models.”
Thursday, August 14, 2014
According to findings of the Charities Aid Foundation (CAF), UK consumers want businesses to be more open and transparent about their philanthropy. See today’s Guardian article entitled “New Survey Shows FTSE 100 Companies Have Increased Charitable Giving.” Over half of the 2,000 British people CAF interviewed commented that they would be more likely to purchase a product if part of its price was donated to charity. In addition, those aged 18-24 increasingly express a desire to work for businesses that are ethical. Job seekers within this age range see working for a company that allows one “to give back” to be a major selling point.
As a result, UK businesses seeking to have a social impact are taking on more sustainable approaches, are re-thinking their purpose, and are marketing their products in the context of how they help solve social problems. Klara Kozlov, head of corporate clients at CAF, urges businesses to adopt a “framework for reporting their philanthropy activity and …. measur[ing] and report[ing] the impact of their giving.” She emphasizes that the public reporting of social impact is essential.
The impact investing sector in the US serves as a relevant model for these businesses. Like the nonprofit sector, the impact investing sector has social impact as goal, but it also has profit earning as an aim. In other words, it is a growing sector for those consumers and investors who are increasingly making their choices based upon their “personal, social, and environmental values”, and thus demand that businesses have a double bottom line: profit and social impact. In sum, a double bottom line means that a business will both earn a profit for investors and produce a benefit to society or social impact. (For more on impact investing, see “Impact Investing: The Power of Two Bottom Lines”). Since impact investors also expect a financial return, the sector has had to bring a level of rigor commensurate with the financial markets to bear upon the measurement of both elements of their return.
Wednesday, August 13, 2014
Earlier this week, I wrote about the need for donors to view their charitable giving as a form of investment. According to the results from a Vanguard Charitable study released earlier this month, Millennials are doing just that. See The NonProfit Times article "Millennials More Generous with Donor-Advised Funds." Millennials want to track the results of their giving and be involved in implementation associated with their donations. They are frequently turning to donor-advised funds ("DAFs") in this endeavor, including Mark Zuckerberg and his wife. (If you are interested in the overall DAF debate, see the Forbes article from earlier this year).
In “An Inside Look,” Vanguard Charitable looked at 15,330 donors over a 10-year period. These donors used Vanguard’s DAF to make their donations. Although Millennials comprised the smallest percentage of donors when compared to Baby Boomers and Traditionalists (those born before 1946), as a whole, they contributed more money on average. According to Vanguard Charitable, Millennials gave $9,065 compared to an average of $6,979 and $7,877 for Traditionalists and Baby Boomers, respectively.
At the same time, Millennials report that they are unsure of how to give outside of using DAFs. Clearly, Millennials want their charitable dollars to end up with those charities that will put them to their most productive use. Although the chief philanthropic officer at Vanguard Charitable has recommended that they hold board positions as a way to achieve this result, I would argue that charities themselves should assume responsibility for communicating to donors what their “return” or “social impact” is for a given investment. Donors should not want to give a substantial amount to a charity or to charities without understanding what the resulting social impact is. Millennials are creating a culture in their giving that will demand more transparency and accountability and that has the ability to re-shape the future of the nonprofit sector.
Tuesday, August 12, 2014
Nonprofit evaluation is a key component of establishing an efficient charitable market. Without a way to measure social impact, both nonprofits and donors remain unaware of whether investment is being put to its most productive use. (Social impact may be thought of as what the charity has accomplished with a donation). As Stephen Goldberg has noted in his book Billions of Drops in Millions of Buckets, one of the reasons inefficiency exists in the charitable market is because funders currently cannot differentiate between effective and ineffective charities. The Stanford Social Innovation Review recently examined the need for a shift in nonprofit evaluation and the discourse surrounding it in “Measuring Social Impact: Lost in Translation,” and the ideas expressed hold valuable insights for the sector.
Most importantly, the authors contend that nonprofits need to set the agenda in terms of evaluation and should use a qualitative approach in addition to a quantitative one. They point out that if nonprofits do not shape the evaluation conversation, funders will do it for them. They note five specific items that nonprofits should “talk more about” in terms of evaluation. First, nonprofits should focus more on their purpose and their strategy for achieving it. As the authors advise, “[A]ll nonprofits should have a clearly defined theory for how they will create change that connects their strategies and programs to the results that they anticipate.” Second, nonprofits should spend more time discussing people. Funders often want nonprofit assessment to include quantitative assessments, e.g., the number of people indirectly affected. However, too much emphasis on quantitative analysis reduces a nonprofit’s impact to a series of numbers. The authors promote a more balanced approach that includes qualitative assessments as well: “Qualitative assessments that draw on conversations with people are often more consistent with how nonprofits operate, and they are also a methodologically valid form of evaluation.” Third, nonprofits would benefit from drawing attention to the big picture. In other words, evaluation should consider how a given nonprofit’s work fits within the collective transformation of an area. Fourth, nonprofits should not shy away from discussing their challenges. Their failures and lessons learned are beneficial in terms of collective learning. Accordingly, the authors urge nonprofits to highlight not only monitoring but also transparency as a goal in evaluation. Finally, nonprofits should encourage more learning. Currently, funders (who focus more on monitoring than learning) have a much louder voice in evaluation than beneficiaries and nonprofit workers who are directly involved and who may facilitate learning.
In terms of the discourse surrounding nonprofit evaluation, the authors caution that business, managerial, and scientific language is drowning out the nonprofit voice. This underscores the need for nonprofits to take charge of shaping evaluation. Too often terms such as “investment,” “returns,” “output,” and “outcomes” are used to discuss social impact, without regard to the five other areas identified. The Stanford team’s study of 400 individuals and organizations in the nonprofit sector revealed that the vocabulary of nonprofit evaluation typically falls within 3 cultural domains: (1) managerial, (2) scientific, and (3) associational, with managerial terms dominating the discourse. All of these domains hold valuable insights for the nonprofit sector; however, nonprofits themselves should be the ones to shape their evaluation and the discourse surrounding it.
Monday, August 11, 2014
A recent opinion piece in The Chronicle of Philanthropy urged the media to stop making a big deal over big donors. See "America's Press Needs to Stop Fawning Over Big Donors." According to Eisenberg, the danger is that the media praises a giver as good based upon how much he/she has given rather than upon what impact his/her dollars have had. The real danger is that the most urgent global problems of our times are not being addressed effectively despite the number of dollars donated annually. There is adequate funding but inadequate progress. The UN has stated, “Millions still live in extreme poverty, yet the world has enough money, resources, and technology to end poverty.” Donations of wealthy donors often end up in the hands of US and non-US charities, and no one is asking systematically what these charities are accomplishing.
Earlier this summer, I had a conversation with Eric Thurman, CEO of Geneva Global, a firm that provides research and grant management for philanthropists internationally, about who should be considered the best givers. He remarked that buying a lot of stock does not make one a great investor. If someone owns stock, they look to see how their stock is performing. In the nonprofit world, often the givers who have contributed the largest amounts are the most celebrated regardless of the social impact achieved from their donations. If donors treated their donations more like investments, progress could be made toward ameliorating some of the most pressing humanitarian and global problems of our times. (For more information on Thurman’s viewpoint, please see "Performance Philanthropy," Harv. Int’l Rev., Apr. 2006, at 18).
A problem with the charitable market is that funding does not flow toward effective charities and away from ineffective charities. In an efficient market, private sector investors use information available at the time of investment to receive returns; these returns generally do not exceed average market returns because the same information is available to all investors. Succinctly stated, it is difficult for an investor to beat the market. In the inefficient charitable market, the market is easily beaten; the donor simply gives to a charity that a reputable rating organization recommends. A donor will receive more measurable social impact for his/her buck in giving to a recommended charity versus a non-recommended one. However, pervasive questions still linger. How many donors are using a thorough rating organization? Are the rating organizations asking charities the right questions?
In a forthcoming series of articles, I have set forth the concept of an efficient charitable market or one where collective charitable investment ends up in the hands of charities that will put it to its most productive use. One of the reasons inefficiency exists in the charitable market is because donors currently cannot easily differentiate between effective and ineffective charities. Granted, it is no easy task to make this distinction, but it is possible. If this became a crucial question for charities and donors, perhaps the media would report on the good accomplished rather than on the number of dollars donated.