For-Profit Philanthropy: Has its time come?

Traditionally, a donor will contribute funds or assets to a not-for-profit philanthropic organization, receive an income tax deduction, and essentially partner with the government in philanthropy. Some of today’s entrepreneurs, however, would rather not take on that partnership, but instead choose to make an “impact investment.” That investment may or may not lead to financial profit, but it will lead tophilanthropy social good.

The idea of focusing on the “bottom line” is uncommon in not-for-profit philanthropy. Propelling for-profit philanthropy forward, however, is the idea that focusing on the bottom line will make philanthropy more efficient and therefore more effective.  At its core, the goal of social investing is to produce both a financial and social/environmental return. To the investor, the social impact is as important as any financial return. Muhammad Yunus, a microfinance pioneer and Nobel laureate, has called this “social business,” where the goal is to create a venture that pays for itself and turns a profit.

The most well-known for-profit philanthropy is Google.org. Originally launched as Google’s corporate foundation, Google.org became a for-profit subsidiary so that the company could easily make investments in for-profit companies and innovative start-ups. In addition, Google Inc. has committed to dedicating one percent of its equity and profit to philanthropy.

The Google.org model is actually quite interesting. Unlike traditional corporate philanthropy, which disperses funds to external charitable endeavors, Google.org funds are transferred to a subsidiary that is owned by Google, Inc., so its direction and accountability is de facto internally controlled. This set-up leads to a closer integration of philanthropic and business goals

In addition to focusing on the bottom line, for-profit philanthropic entities can spend more on marketing and salaries, and may be able to engage in political activities – all of which would be more tightly controlled if under governmental scrutiny. Further, by establishing as a for-profit entity, it may be easier to raise other funds to help finance the growth of the organization. Some successful entrepreneurs who are angel investors like the idea of combining possible profit with impacting social change. A for-profit philanthropic endeavor may also make it easier to leverage the products it develops and push them into the for-profit arena.

Critics, however, believe that when philanthropic organizations increase their focus on the bottom line, the neediest causes will become even more vulnerable and they may ultimately go unserved.

The new trends in philanthropy reach across the globe. As an international example, LifeSprings Hospitals  (www.lifespring.in) is a for-profit chain of maternity hospitals in India that provides high-quality care to lower income women and children.  It is a 50-50 equity partnership between HLL Lifecare Limited (a government of India enterprise) and the Acumen Fund, a U.S.-based nonprofit global venture philanthropy fund.

Jeffrey Skoll, the first employee and president of eBay, founded The Skoll Foundation which is focused on social entrepreneurship. Its flagship program, The Skoll Awards for Social Entrepreneurship, supports 81 social entrepreneurs representing 65 organizations across the globe. These are three-year awards that support the continuation, replication, or extension of programs that have proved successful in addressing a wide variety of social change areas: tolerance and human rights, health, environmental sustainability, institutional responsibility, peace and security, and economic and social equity. (www.skollfoundation.org)

Critics also express concern about possible exit strategies. When the aim is to build sustainable enterprises, it is important to consider how the enterprise will succeed past the initial social investment. As with traditional for-profit ventures, the exit strategy should include diversified funding sources, reducing reliance on the initial funder, and developing additional revenue streams to support sustainability. Additional financing may include grant financing, debt financing, and equity capital.

In a hybrid version, some philanthropists now treat their philanthropic endeavors with the same attitude as a venture capitalist – they seek to invest their philanthropic dollars in programs that are catalysts for change. They measure performance and results, look for the impact of their investment, and watch the productivity of the organization.

The Gates Foundation combines grants with targeted investments and has a $1 billion pool for investments and loans for philanthropic goals. In addition, it spends more than $3 billion a year on traditional philanthropic giving. As an example of its blended strategy, The Gates Foundation has made equity investments in biotech companies that complement the work the Foundation is doing in its global health initiative. This type of philanthropy raises a variety of issues that will be explored as time goes on. For example, if a foundation is making a “philanthropic” investment that could make money for the foundation, should the foundation still have tax-exempt status?  Where should the tax-exempt line be drawn? Should for-profit philanthropy have some sort of tax exempt status?

Professors Anup Malani and Eric Posner, in a summary of their 2006 University of Chicago Law School article, “The Case for Non-Profit Charities,” note that nonprofit firms may not distribute profits to owners but must retain or reinvest them. Nonprofits that are “charitable organizations” under Section 501 (c)(3) of the Internal Revenue Code  may receive donations from individuals who are allowed to deduct their donations for income tax purposes. They argue that that the law should not link tax benefits to corporate form in this way, and that there may be good arguments for recognizing the nonprofit form and good arguments for providing tax subsidies to charities or donors to charities; but there is no good argument for making those tax subsidies available only to charities that adopt the nonprofit form.

Currently, no tax entity exists, but the authors argue that the reason is tax discriminatory; that the charitable activities of many commercial firms suggest that in the absence of discriminatory tax treatment, for-profit charities would flourish. The authors advocate that current tax benefits for charitable nonprofits should be extended to for-profit charities, and to the charitable activities of for-profit commercial firms.

Their position, however, was rebutted by George Washington Law School Visiting Professor Brian Galle, in his Texas Law Review article, “Keeping Charity Charitable.” He argues that because of the high costs of monitoring and the presence of externalities (the charitable organization’s services may be controversial or redistributive), low-powered incentives (not high-powered incentives that cut costs), are preferable for firms that produce public goods, as most charities do. He also argues that allowing some for-profit firms to receive charitable subsidies would raise the cost of producing those goods in government or other firms because it would diminish the “warm glow” workers enjoy from being recognized as self-sacrificing.

The lines between the nonprofit and the for-profit worlds are blurring, and it is possible that new hybrid entities with partial tax exempt status will emerge. Visionary entrepreneurs are shaping the future in this world the same way they did in the business world – as advisors we should be aware of and open to the possibilities that will surely unfold.

 

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit, http://www.patriciaannino.com.

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