Thursday, November 6, 2014

Privacy Debate Returns To Harvard

 

Last year a privacy debate erupted at Harvard when it was revealed that the university had searched the email accounts of 16 junior faculty members.  The debate prompted a major self-examination and promises by the administration to do better.

Today's New York Times is reporting that the prickly topic is back.  This time, the university has acknowledged that as part iof a study of attendance at lectures, it had used hidden cameras to photograph classes without telling the professors or the students.

While students and faculty members did not view the secret photography as serious as looking through people's email, it struck them as out of bounds -- or, at least, "a little creepy."  It also set off more argument about the limits of privacy expectations. 

The Times reports Jerry R. Green, a professoir of economics and former university provost, as saying, "I wouldn't call it spying, but I don't think it's a good thing."

The Times continues:    

Some students called the secret photography a violation of trust, while others shrugged it off because cameras are already ubiquitous, said Sietse Goffard, a junior who is vice president of the Harvard Undergraduate Council. “It’s a question I’m still really conflicted about,” he said.

The episode comes as the university is getting familiar with a new honor code that will go into effect next year. That code, Mr. Goffard said, “stresses the importance of transparency and community trust.”

Carolyn O’Connor, a first-year student, said she would be concerned if the pictures were made public. But “if it’s for academic reasons, I don’t have a problem with that,” she said.

Researchers at the Harvard Initiative for Learning and Teaching set up the cameras to investigate professors’ complaints that many students skipped lectures, and that attendance dropped as a semester wore on. (The photos confirmed both points.) The researchers were concerned that letting professors or students know could skew the results.

They received clearance from Peter K. Bol, a vice provost, and took still images in the spring in 10 classes, which have not been identified, with a total of about 2,000 students. Administrators said that students were not tracked, that professors were not judged on the results, and that after attendance figures had been compiled, the pictures were destroyed.

Harvard's respect for privacy is a touchy subject because of the email search of last year.  When word broke of those searches, many professors were furious, arguing that although the university owned the email system, the professors had an expectation of privacy.  In response, the administration adopted a policy on electronic privacy.

This time around, the photography has not drawn the same kind of reactions.  "This should have been done better," the Times quotes Wilfried Schmid, a mathematics professor, as saying.  "This is not in the same league as the email searches.  It's more like a lack of courtesy."

Vaughn E. James

 

November 6, 2014 in Current Affairs, In the News | Permalink | Comments (0) | TrackBack (0)

Prospects for Nonprofits Under GOP-Controlled Senate

With Republicans poised to take control of the Senate following Tuesday's elections, Alex Daniels writes in the Chronicle of Philanthropy that it is likely that lawmakers will dig deep into the Internal Revenue Code soon after a new Congress is sworn in next year.  Daniels continues:

While that means added scrutiny on the charitable deduction and the tax treatment of nonprofits, charity leaders are confident a solidly Republican Congress will keep their cherished provisions intact.

Before the current Congress wraps up its business, however, charity officials expect lawmakers to consider certain items in the tax code, including moving the deadline for claiming the charitable deduction from the end of the year until April 15 as well as a set of tax preferences that are usually renewed each year.

Also, Congress has yet to take action this year on the "tax extenders," expiring provisions of the tax code that include benefits for land conservation, donations to food banks, and contributions to charity made from certain retirement accounts.

Republicans strengthened their hold on the House of Representatives, and will hold at least 52 seats in the Senate. Michelle Nunn, a nonprofit executive who ran for the Senate in Georgia, was among the candidates Democrats were counting on to help them keep control of that chamber, but she was defeated handily by Republican David Perdue.

Next year, when Republicans control the Senate and operate with an even stronger hand in the House, they are likely to consider a much more comprehensive tax overhaul. While the chances of enacting the first major changes to the tax code since 1986 are slim, some say, any legislative action during the next session of Congress will set the stage for future tax debates during the 2016 presidential campaign.

Daniels lists five top issues he says nonprofit organizations are watching for legislation and executive action:

  • Internal Revenue Service rules governing 501c(4) social-welfare organizations. The IRS is considering what constitutes political activity by these groups and whether their donors can remain anonymous.
  • Foundation excise taxes. The House has passed a measure to simplify and lower this tax to 1 percent.
  • A proposal to require donor-advised funds to pay out at least 5 percent of their assets each year.
  • The provision of federal support for social-impact bonds that fund "pay for success" efforts at the state and local levels.
  • Pending rules that limit how to conduct federated campaigns. The United Way hopes a Republican Congress will remove recently added federal regulations.

Time will tell whether Alex Daniels is correct. 

Vaughn E. James

   

November 6, 2014 in Current Affairs, In the News | Permalink | Comments (0) | TrackBack (0)

Wednesday, November 5, 2014

As Economy Improves, Large Corporations Increase Charitable Giving

Yesterday's NonProfitTimes had some pretty good news: as the economy continues to recover from what the Times labels "the Great Recession," the nation's largest corporations have increased their charitable giving.  Between 2010 and 2013, says the Times, nearly two-thirds of these corporations increased their giving.  This increase in giving is often driven by performance: "revenue increased a median of 11 percent among companies giving 10 percent or more between 2010 and 2013."     

The Times explains that

Those were some results from Giving In Numbers, an analysis of corporate giving by the Committee Encouraging Corporate Philanthropy (CECP) and The Conference Board, both based in New York City.  Data comes from 261 corporations representing more than $25 billion worth of giving in 2013.  Median total giving was $18.46 million per company.

Central to the study was a matched subset of 144 companies that provided giving data in all four years, 2010 through 2013.  More than half of the 64 percent of those companies in the matched set that increased giving increased by 10 percent or more.  In that matched set, aggregate giving went up 15 percent, from $15.22 billion in 2010 to $17.55 billion in 2013.  Non-cash contributions — product donations and pro bono services — accounted for 90 percent of that increase.

Pro-bono service is the fastest growing employee engagement program.  Companies offering pro-bono service jumped from 35 percent in 2010 to 50 percent in 2013. However, pro-bono was only 19 percent of all noncash giving.  Product donations were king in 2013, making up an average of 60 percent of noncash giving.  Other noncash contributions clocked in at 21 percent of noncash gifts.

Growth, however, slowed last year compared to prior years analyzed in the study.  Among companies that increased their giving, their change in median giving was 6 percent, down from 17 percent in 2012 and 21 percent in 2011.  Companies that decreased their giving did so by 6 percent in 2013, compared to 1 percent in 2012 and 5 percent in 2011.

For the 10 percent of organizations in the matched set that reported a slight decrease (less than 10 percent), many cited a one-time spike in giving in response to Hurricane Sandy in 2012 as the reason for a slowdown in 2013.  Those companies giving significantly less (10 percent or more) reported company-wide cost reductions, corporate divestitures and transitioning away from cause areas previously supported.

While respondents classed as Fortune 100 companies (of which there were 52) gave much higher than average, giving fell for those companies between 2012 and 2013, from a median $66.29 million in 2013 to $62.94 million in 2013.  “Several (Fortune 100) companies have begun better aligning their corporate giving focus with their business strategy, resulting in a transition away from unaligned partnerships.  Several survey respondents cited this as a reason for the decrease in giving,” wrote report author Michael Stroik, manager of research and analytics at CECP.

As giving climbed, the number of corporate grants dropped from a median of 1,000 in 2010 to 701 in 2013.  Grantmaking expenses also fell: median $2.2 million in 2010 to $1.8 million in 2013.  “Companies are clearly making fewer grants and contributions staff likely have greater bandwidth to monitor and evaluate grants on an ongoing basis.”  More than three-quarters of corporate giving departments measured the outcomes or impacts of the grants they made in 2013.

More than one in three survey respondents (38 percent) expect their giving levels to increase for 2014.  About half, or 48 percent, expect no change, and only 13 percent expect a decrease.  “Two cause areas, Higher Education and Health and Social Services, could have a strong year in 2014, based on the fact that these two areas were supported more in 2013 by companies that expect to increase their giving than by companies that expect to decrease their giving,” wrote Stroik.

Stroik sees the trends found in the Giving In Numbers report as a continuation of business practices established during the recession.  “Companies implemented more strategic and business-aligned community investment strategies during the recession, which continue today,” he said via a statement.  “They continue to see the win-win of their more strategic — and in many cases increased — community investments as their revenues rise with their societal engagement.”

 

Vaughn E. James

 

November 5, 2014 in Current Affairs, In the News | Permalink | Comments (0) | TrackBack (0)

Monday, November 3, 2014

Nonprofit CEOs Say Board Members Need to be Better Fundraisers

 

The Chronicle of Philanthropy is reporting that a recent "Living with Intent" survey conducted by the nonprofit watchdog group BoardSource found that nonprofit leaders gave their boards an average grade of B minus, and judged trustees to be better at technical tasks like financial oversight than at setting strategy or reaching out to the community.

As in years past, the CEOs cited fundraising as a significant concern: 60 percent of them said it was the area their boards most needed to improve.

BoardSource works to improve nonprofit governance.

According to the Chronicle:

In 1994, chief executives said that 60 percent of their board members gave money to the organization, a figure that grew to 85 percent in this year’s survey. But giving by 100 percent of all board members—the gold standard espoused by BoardSource and other nonprofit experts—was reported by only 60 percent of the respondents in this year’s survey.

Many nonprofit organizations set minimum donations expected by trustees and encourage them to contribute at least that amount and ask others to follow their example. But trustees remain challenged when it comes to asking family members, friends, and colleagues for donations; 43 percent of board members in this year’s survey, about the same as in previous years, said they are uncomfortable asking for money.

The survey also found some signs of improvement in boards’ racial and ethnic diversity, which was rated as more important for boards than including equal numbers of male and female trustees or making sure that organizations recruit trustees of different ages. Respondents reported that 20 percent of their board members, on average, are people of color, up from 16 percent in 2010, but a quarter of the respondents said their boards are all white and nearly 70 percent of respondents indicated they are dissatisfied with the racial and ethnic composition of their boards.

Gender representation among the executive ranks of nonprofit organizations in the survey has improved over the years, but women remain underrepresented as chief executives in large organizations. Women accounted for 65 percent of chief executives in groups with budgets under $1-million; 75 percent among nonprofits with budgets of $1-million to $9.9-million. But among groups with budgets of $10-million or more, only 37 percent of chief executives were women.

Nonprofits appear to be recruiting more board members under 40 years old, with 17 percent of respondents in this year’s survey reporting trustees in that age group, up from 14 percent in 2010.

Nonprofits also are recruiting smaller boards, the survey found. In 1994, the first year of the survey, respondents reported 19 trustees, on average. In this year’s survey, that number dropped to 15.

According to the Chronicle, 850 chief executives and 246 board chairs responded to questions posed by the survey.  A free coipy of the findings are available online.  BoardSource says it will publish a more complete report on its website in December. 

 

Vaughn E. James

November 3, 2014 in Current Affairs, In the News, Other | Permalink | Comments (0) | TrackBack (0)

Thursday, October 16, 2014

IRA Charitable Rollover Provision: Will Congress Extend or Not Extend?

        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.

 

Khrista Johnson

October 16, 2014 in Current Affairs, In the News | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 15, 2014

On the March to Efficiency: Millennials & Charity: Water

        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.

 

Khrista Johnson

October 15, 2014 in Current Affairs, In the News, International, Web/Tech | Permalink | Comments (0) | TrackBack (0)

Monday, October 13, 2014

Are Donors Doing Enough to Fight Ebola?

        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). 

 

Khrista Johnson

October 13, 2014 in Current Affairs, In the News, International | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 30, 2014

Next Nonproft News Paper Target: U-T San Diego

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?

EWW

 

 

September 30, 2014 in Current Affairs, In the News | Permalink | Comments (0) | TrackBack (0)

Friday, September 26, 2014

Reuters: Muslim Scholars Present Rebuttal to Islamic State

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."

VEJ

 

September 26, 2014 in Church and State, Current Affairs, In the News, International | Permalink | Comments (0) | TrackBack (0)

American Association of Librarians Accepting Applifcations for Innovative Reading Grant Program

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.

VEJ

September 26, 2014 in Current Affairs, In the News, Other | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 24, 2014

Clinton Global Initiative Ends Today -- Millions of Dollars Pledged

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.

VEJ

September 24, 2014 in Conferences, Current Affairs, In the News | Permalink | Comments (0) | TrackBack (0)

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.

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September 24, 2014 in Current Affairs, In the News, State – Judicial, State – Legislative | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 3, 2014

The March of the Benefit Corporation: Next Up, West Virginia (PART II)

(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-3-301Under 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

September 3, 2014 in Current Affairs, In the News, State – Legislative | Permalink | Comments (0) | TrackBack (0)

IRS 501(c)(4) Application Controversy Update

IRSThe slow motion train wreck of the IRS 501(c)(4) exemption applications controversy continues to unfold, with of course partisan spin.  

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.   

Lloyd Mayer

 

September 3, 2014 in Federal – Executive, In the News | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 27, 2014

NY Times on the U.S. Tennis Association and Possible Director Conflicts

UstaThe 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.

Lloyd Mayer

August 27, 2014 in In the News | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 26, 2014

The March of the Benefit Corporation: Next Up, West Virginia (Cross Post)

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

August 26, 2014 in Current Affairs, In the News, State – Legislative | Permalink | Comments (1) | TrackBack (0)

What Does It Mean to be "Nonprofit"? Lawsuit Against Regence BlueCross BlueShield

Blue-crossThe 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.

Lloyd Mayer

August 26, 2014 in In the News, State – Judicial | Permalink | Comments (0) | TrackBack (0)

Monday, August 25, 2014

WSJ on Donor Advised Funds

WSJ DAF ChartOn 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.

Lloyd Mayer

August 25, 2014 in In the News | Permalink | Comments (0) | TrackBack (0)

Church Tax Inquiries Starting Up Again (without final regs)

IRSOver 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.  

While an intervenor represented by the Becket Fund for Religious Liberty sought to prevent the dismissal, according to the Becket Fund the court ultimately granted the requested dismissal.

Media Coverage:  Christianity Today; Washington Times.

Lloyd Mayer

August 25, 2014 in Church and State, Federal – Executive, In the News | Permalink | Comments (0) | TrackBack (0)

Saturday, August 16, 2014

FOSE for Change

        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.”

 

Khrista Johnson

August 16, 2014 in In the News | Permalink | Comments (0) | TrackBack (0)