Wednesday, February 03, 2010

In a changing landscape, whither the 501c3?

I'm concerned about nonprofits. Are they aware of the threats they face?

Are they prepared to demonstrate their value in the face of changes in corporate and tax law, and, as importantly, changes in the cultural zeitgeist about social capital markets and social enterprise?

For almost a century, 501c3 nonprofits have held a privileged place in our communities and in our tax code. They are provided tax exempt status, and supporters can deduct their contributions to these organizations from their income taxes. In so doing, the US tax code privileges these organizations - from major hospitals and universities to small neighborhood groups - as providers of social goods and contributors to civil society.

Those privileges are being challenged from numerous directions. Let me list just a few:
  • New corporate forms that recognize social businesses (these are modifications to the corporate codes at state levels - L3Cs, B Corporations, proposed H corporation);
  • Tax credits for social businesses;
  • Foundations' increasing interest in "sector agnostic" approaches to solving social problems;
  • Regulatory concern about good governance, payout rates, and endowment growth over charitable purpose;
  • Social investment exchanges that are expanding the revenue and capital streams to financial/social hybrids (not necessarily to nonprofits);
  • Growth of models for social goods/civil society that emphasize operating foundations or social enterprises more than a nonprofit framework (everywhere but USA).
Each of the innovations above has advantages and disadvantages and none may be explicitly targeted at putting nonprofits out of business. Most of the hybrid forms are promoted as expansions of the social sector. The fervent interest in social investment exchanges and mission related investing or impact investing are also seen as new revenue sources to good. Note, however, that these are effectively ways of expanding the pools of social good providers and social good financing, effectively increasing the pool around nonprofits, not working to strengthen, support or expand financing to them.

What we are experiencing is a confluence of forces, each of which may have merit independently, but which collectively challenge our current framework (policies, mental models. and financing systems) for where civil society and social goods come from.

Who provides them, who finances them, and how are they distributed?

Michael Edwards' new book, Small Change, which challenges the currently en vogue market model, comes closest to raising these questions. And conferences on regulation, discussions of technological innovations, and celebrations of innovations and changing ecosystems contribute to the broad awareness of options.

But who is working on these big questions in pragmatic ways? Who is looking at what nonprofits do best, what social enterprises and social businesses contribute, and what roles government can and must play? Who is looking out for the whole? Or even looking at the intersections, not all of which are complementary or positive, of these many pieces?

Currently, most of the innovation in the sector is around the edges of our existing corporate and tax frameworks - we are developing "workarounds" to the 501c3 or commercial corporate model to encourage social entrepreneurs and new investors or donors.

The preponderance of these workarounds should have been our first clue - it is time to reconsider the entirety of the systems and policies for the production, financing and distribution of social goods and civil society in the Twenty First century.


Allison Fine said...

Lucy, keen insights as always. This may be slightly off topic but I've been wondering what effect the dissterous Supreme Court ruling opening up the floodgates to corporate political contributions has on nonprofits. Has it made c4s irrelevant, will it enable c3s to become partisan. I'm just wondering if it is one more boundary blurring event like "social responsible" corporations.

Lucy Bernholz said...

I think it is RIGHT ON topic. My problem is, I don't quite know how it will play out. At very least it seems to make c4's unnecessary. I've been asking some smart folks I know what they think, and looking for resources, but haven't quite figured this one out yet. But certainly a shift of this magnitude in corporate rights will have some impact.


Lucy Bernholz said...

Along these same lines there is an interesting discussion in the arts community about 501c3 status and the needs of the arts. See some of it:


In many ways - earned revenue, business models, commercial/npo hybrids - the arts are leading edge innovators. Other sectors should heed these discussions.

Pam McAllister said...

Two colleagues of mine are collaborating to strengthen civil society in central Washington state.

One runs a nonprofit, which is also concerned with economic development.

The other owns a for-profit newspaper, which also seeks to encourage people to contribute to their communities.

The lines between the sectors do seem to blur more every day. Nonprofits (and for-profits) who ignore this seem likely to become irrelevant.

Thanks for getting me thinking about this.


Michael Edwards said...

Tks for this very useful set of thoughts Lucy. I agree that the time is ripe for a fundamental re-think of the way we support social transformation that takes us far beyond the current penchant for market-based solutions (or any other ideology for that matter). I'm definitely up for that challenge and would suggest that ideas around "ecosystems" are a useful place to start. You use that analogy in your recent paper with Stephanie Linden and Tony Wang, and I use it extensively in my books about civil society. It really helps to get people thinking about the issues in a creative way, and it surfaces issues that are often ignored in the debate - like the danger of domination and over-concentration or too much homogeneity in the forms of social action (always a disaster for a real ecosystem which runs on diversity and inter-connection), or the vital importance of a strong grassroots - literally and metaphorically - that supports the ecosystem from the bottom up. Look forward to talking more.

Lucy Bernholz said...

I think you are absolutely right about the ecosystem metaphor and its emphasis on balance, diversity and dynamism. How about we get a DEMOS/New America Foundation working group, discussion, panel, provocation happening on this - we can hit both coasts, NY and DC? And find some allies in the center of the country and begin to engage in a real discussion about what we need, want and can make happen....


Michael Edwards said...

Sounds like a good idea Lucy. Let me talk to some colleagues at Demos and get back to you (htey now have a West Coast office too). Mike

Unknown said...

We need both nonprofits and forprofits. Each have their advantages and can work well together. Consider the launch of a new innovative energy efficiency company called Energía in Holyoke, Mass.

Not only is this company going to save homeowners and landlords energy and money, but it will also create an entire new wave of green jobs in Holyoke.

It's a forprofit triple bottom line co., formed by/fundraised for/majority owned by nonprofits Nuestras Raíces and Nueva Esperanza and the forprofit renewable energy cooperative Co-Op Power.

Coop Power member

Christine Egger said...

"Yes, please" to the idea for a working group, discussion, panel, provocation around the ecosystem perspective and what it would encourage/illuminate.

Most importantly, I hope we're up to the challenge of thinking systemically about social transformation at the same time, not slipping into the practice of using the system metaphor as yet another "building block" concept in disguise. That'll be the fun (and rewarding) part...

Unknown said...

Copying a comment i left at SSIR today....

While I have enjoyed reading Lucy’s posts for a while, I always struggle to find them relevant or applicable beyond the bi- coastal philanthropic consultant blogger and professional conference attendee worlds.

In rural NM, where I work with social innovators, we too closely watch policy developments. Sector “agnostic” sounds buzzy, but the sector relationships we are concerned with now are strictly between government and nonprofits: state funding cuts affecting nonprofit service providers and cuts in state subsidies to low-income residents are the development that worry my clients in these weeks. All the blogtalk of social capital markets, social investors, tactical philanthropy, hybrid corporate forms… remains inconsequential blogtalk to us.

Foundations in New Mexico have been close to irrelevant regarding social innovation for many years now (with a few exceptions, such as the NM Collaboration to end Hunger), and this year in particular they have resorted to distributing minuscule grants to a very few nonprofits, with no social impact expected. Corporations in New Mexico so far have not stepped forward to provide leadership in any cross-sector innovative projects. I imagine this is true for many non-coastal and rural states.

So… our questions are different from the ones that Lucy is asking: How can social innovation happen through rural nonprofits that are 90% dependent on government contracts, and are mired in vendorism? How can we develop effective networks across sectors, while building the capacity of individual nonprofits? How can we participate in federal initiatives such as the Social Innovation Fund, that are already set up to work through large intermediaries, i.e. foundations, in the absence of a wealthy, progressive foundation community?

Marcia Stepanek said...

Bravo! Time to push for less fragmentation (ie, work-arounds) and more collaborative approaches to reconsidering what you call "the entirely of the systmes and policies for the production, financing and distribution of social goods and civil society." Great post. Now, wither go cross-sector collaborative efforts? Not too successful so far. What more, in your view, will be needed to bring cross sector leaders to the dinner table?

Jeff Mowatt said...

I'm beginning to see Michael's point of view about Philanthrocapitalism having read the statement that it concentrates power in the hands of too fee players. Interesting it was the same point used to argue the case for what's now known as social business, in that wealth fails to flow to the most needy in our corporate interpretation of capitalism.

I'm fairly convinced now that Philanthrocapitalism is no more than a rebrand of conventional philanthropy, a diminuation of the social business approach.

For us it was a theoretical construct in 1996 which prescribed forward investment in community enterprise intended to create new flows of wealth instead of being donated to charity support, spent and gone.

Clearly it would be inadequate in dealing with an international disaster but proof of concept was demonstrated between 1999 and 2004 in Russia where conventional trickle down capitalism simply hadn't.

B-Corps arrived with somewhat similar concepts a decade later and for all my networking in the social sector, I still find blogs such as this which paint these pioneering efforts out of the picture. How can anyone determine whether business can or cannot "save the world" by blocking out what has been achieved?