2301_NPQ_Summer_2016.web

Promoting Spirited Nonprofit Management  Summer 2016  $19.95 The N E W Nonprofit Regulatory Environment: What You Should Know Pratt on Nonprofit Regulation vs. RightsLott on the Shifting Regulatory Landscape Gross on Major Changes at the IRS

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Volume 23, Issue 2 Summer 2016 Features Page 6 22 The Rising of the States Page 12 in Nonprofit Oversight 5 Welcome The states are organizing among 6 Battlefield History and themselves, and we are likely to Status: First Amendment see a real advancement in nonprofit Tensions between Nonprofits regulation and enforcement at and Governments that level. In a brief history of nonprofit regulation, by Lloyd Hitoshi Mayer Jon Pratt asks nonprofits to resist challenges to their First Amendment 28 Changes in the IRS Oversight rights, but also to work toward getting of Nonprofits: A Conversation reasonable regulatory controls in place with Virginia Gross to protect the public from fraud. Battered and bruised by its recent by Jon Pratt raking over the coals (based on what many saw as a misuse of its discretion), 12 The Shifting Boundaries of the Exempt Organizations unit of the Nonprofit Regulation and IRS has erected strict boundaries and Enforcement: A Conversation systematized its exam function. with Cindy M. Lott 34 Regulation of Nonprofit and With years of experience under her belt Philanthropic Organizations: working with state charity regulators An International Perspective and enforcement communities, Cindy Lott looks at the directions in which This article provides an international the complex regulatory environment is view of civil society regulatory trends. moving and how nonprofits can expect to be affected by the shifting landscape. by Mark Sidel Page 22 COVER DESIGN BY CANFIELD DESIGN COVER ART: “THREE CATS” (DETAIL) BY KEFU HU/WWW.SAATCHIART.COM/KEFU.HU

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Departments Page 28 44 The Sustainability Prerogative— Page 34 Nonprofits in the Future of 39 Dr. Conflict Our Economy: A Conversation with Douglas Rushkoff Elder care and sharknados: what’s a nonprofit board consultant to What does the ideal sustainable do? Read all about it in the latest business look like? According to installment of Doctor Conflict! Douglas Rushkoff, it would be a nonprofit. In this interview, Rushkoff by Mark Light, MBA, PhD dismisses Amazon’s and Uber’s “scorched earth practice” in favor of 41 Who Says a Common Agenda Is the nonprofit sector’s mandate to build Necessary for Collective Impact? long-lasting investments in society. Based on decades of empirical research 49 10 Places Where Collective on networks, this article advocates Impact Gets It Wrong that a common agenda should be an aspiration rather than a destination In ten summary points, Tom Wolff for collective impact leaders. breaks down the various issues the collective impact model fails to by Brint Milward, Katherine R. Cooper, understand and acknowledge about and Michelle Shumate building community coalitions. by Tom Wolff www.npqmag.org Nonprofit Information Networking Association Ruth McCambridge, Executive DirectorThe Nonprofit Quarterly is published by Nonprofit Information Networking Association, 112Water St., Ste. 400, Boston, MA 02109; 617-227-4624. Nonprofit Information Networking Association Board of Directors Ivye Allen, Foundation for the Mid South Copyr­ight © 2016. No part of this publication maybereprinted without permission. Charles Bell, Consumers Union ISSN 1934-6050 Jeanne Bell, CompassPoint Nonprofit Services Jim East, George Kaiser Family Foundation Chao Guo, University of Pennsylvania Anasuya Sengupta, Activist/Strategist/Facilitator Richard Shaw, Youth Villages

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WelcomeExecutive Publisher Dear readers, This edition turns out to have been perfectly Joel Toner timed to coincide with a shift that is occurring in our nonprofit regulatory environment—aEditor in Chief shift that Cindy Lott, developer of and lead counsel to the Charities Regulation and Oversight Project for overRuth McCambridge a decade, first described to us as a dovetailing—with the IRS moving back a bit and the states’ regulatory andSenior Managing Editor enforcement mechanisms preparing to become more active both individually and in collaboration. In discus-Cassandra Heliczer sion with the other authors, this description held up, with many complexities embedded in the evolution.Contributing Editors For both the IRS and the states, technology plays a major role in what they will do differently. For the IRS, technology will allow a much more systematic examinationFredrik O. Andersson, Jeanne Bell, of every 990 submitted, removing questions of bias or targeting from reviews, and the flow of new nonprofits may be less impeded as increasing numbers of applicants useChao Guo, Jon Pratt the EZ form. In the wake of the Tea Party “brouhaha,” as it has come to be called, there seems to be an overwhelming intention to remove discretion around what kinds ofOnline Editor Community Builder organizations to look at critically in the system. At the same time, all fifty states and the District of Columbia have successfully completed a collaborative suit against aJason Schneiderman Shafaq Hasan group of cancer charities and are considering how to effect more information sharing and enforcement across state borders, making liberal use of technology. This mayDirector of Digital Strategies involve federal agencies other than the IRS. The two movements together promise a new landscape—and inasmuch as the Aine Creedon states are still evolving their models, it is a great time for nonprofits to get involved and develop a voice about what is and is not important to them. Jon Pratt, director ofGraphic Design the Minnesota Council of Nonprofits and Nonprofit Quarterly editorial team member,Kate Canfield does a great job describing the inherent tensions in this advocacy work: protection of institutions, of free speech, of donors and other stakeholders—all is addressed. Production Lloyd Mayer, professor of law at Notre Dame Law School, writes about the growing Nita Cote cooperation of state nonprofit regulators vis-à-vis oversight. Virgina Gross, member of the Exempt Organizations subcommittee of the IRS Advisory Committee on TaxMarketing Coordinator Exempt and Government Entities (ACT), discusses the current state of IRS regulation of exempt organizations. And Mark Sidel, Professor of Law and Public Affairs at theAmanda Nelson University of Wisconsin-Madison and consultant on Asia at the International Center for Not-for-Profit Law, looks at the use of regulatory systems around the globe—inOperations Manager some cases to restrain and repress civil society and in other cases to facilitate it. Scarlet Kim As our cover suggests, it is all a little like herding cats. We give a special thanks to Cindy Lott—who helped us to conceptualize thisCopy Editor Proofreaders edition—as well as to our brilliant editorial committee, for ensuring that we choseChristine Clark James Carroll, the right mix of voices to describe this relatively fluid situation. Dorian Hastings Editorial Advisory Board Elizabeth Castillo, University of San Diego Eileen Cunniffe, Arts & Business Council of Greater Philadelphia Lynn Eakin, Ontario Nonprofit Network Anne Eigeman, Anne Eigeman Consulting Robert Frady Chao Guo, University of PennsylvaniaRahsaan Harris, Emerging Practitioners in Philanthropy Paul Hogan, John R. Oishei Foundation Mia Joiner-Moore, NeighborWorks America Hildie Lipson, Maine Center for Public Interest Lindsay Louie, Hewlett Foundation Robert Meiksins, Forward Steps Consulting LLC Jon Pratt, Minnesota Council of NonprofitsJamie Smith, Young Nonprofit Professionals Network Michael Wyland, Sumption & Wyland Advertising Sales 617-227-4624, [email protected] Subscriptions: Order by telephone (215-458-8557),fax (617-227-5270), e-mail ([email protected]), or online (www.nonprofitquarterly.org). A one-year subscription (4 issues) is $49. A single issue is $19.95.SUMMER 2016 • WWW.NPQMAG.ORG  T H E   N O N P R O F I T   Q U A R T E R LY  ​5

Nonprofit Regulation & Free Speech Battlefield History and Status: First Amendment Tensionsbetween Nonprofits and Governments by Jon PrattCongress shall make no law respecting an establishment of religion, or prohibiting thefree exercise thereof; or abridging the freedom of speech, or of the press; or the right of thepeople peaceably to assemble, and to petition the Government for a redress of grievances.T —First Amendment to the Constitution of the United States of America, 1789 he deterioration of the Internal Revenue Service’s authority over Exempt Organiza- tions and the wider implications of Citizens United v. Federal Election Com- mission (2010) need to be understood as part of the ongoing tension between government regulation of the financial and political activities of U.S. organiza-tions and their First Amendment rights of speech and association. Struggles over the reg-ulatory frame surrounding nonprofits represent the next chapter in the evolution of thestructural definitions of the nonprofit sector. Nonprofits rely upon government authorityto provide their structural integrity—a reliable degree of certainty regarding corporateformation, ownership of property, tax treatment, and contract enforcement; but theystruggle to maintain their autonomy and range of movement in the face of various gov-ernment accountability reforms and political pressures. With the end of World War IIand the adoption of the Universal Declaration of Human Rights, a worldwide consensusdeveloped that functioning democracies with market economies benefited from a robustset of nonprofit or nongovernmental organizations to provide opportunities for citizensto do things together that they could not do apart. The growth of organizations in overtwo hundred countries confirms that there is an almost universal interest in formingassociations that are larger than friend and family relationships but smaller than thestate.1 However, there is no consensus on how freely these organizations may operate. Governments generally have an affinity for organizations that promote civic peace—whether through supporting disaster relief, the performing arts, healthcare, or educa-tion—but have less patience with those that seek to influence the workings of government,let alone aspire to rule the state. The ability of associations of plain citizens to serve asan intelligent check on the abuses of democratic power assumes a substantial degreeof freedom of expression and association. This ability is often unappreciated and peri-odically suppressed by those in power. Neither Alexis de Tocqueville in Democracy inAmerica nor the authors of the Federalist Papers felt that these expanding voluntary6 ​T H E   N O N P R O F I T   Q U A R T E R LY  “IMJINGAK-RO, BORDER TO NORTH KOREA, SOUTH KOREA, 2013” BY LUCA FACCIO / HTTP://WWW.LUCA-FACCIO .COM/EXHIBITIONS/COMMON-GROUND.HTML. ©LUCA FACCIO

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associations were a completely posi- Congress to enact the Tax Reform Act The tax exemption (from corporatetive development for democracy, or that of 1969, which imposes an excise tax income tax, state sales tax, and localthese organizations should have unre- and special restrictions on the use of property taxes) and eligibility for taxstricted freedom. Tocqueville understood private foundation funds. The ongoing deductible gifts convey a significantthat forbidding some types of associa- tension between the economic regulation economic benefit to the recipient orga-tions and allowing others would confuse of nonprofits and the First Amendment nizations, and are a major explanationpeople and inhibit the use of associations rights of people in organizations is now for why charitable organizations inbut could be justified by the need for largely overshadowed by the nonprofit English-speaking countries comprise aorder. As he expressed it in Democracy: sector’s high rate of economic activity larger segment of the economy than in and the location of the federal regula- other developed countries. The power I certainly do not think that a tory structure of nonprofits in the IRS. to tax (or not to tax) is well understood nation is always in a position to Because two defining features of chari- to include the power to regulate, so the allow its citizens an absolute right table organizations are their freedom U.S. Internal Revenue Code has reserved of political association, and I even from the corporate income tax and their the best financial incentives for organiza- doubt whether there has ever been ability to receive tax-deductible contribu- tions that accept the greatest restrictions at any time a nation in which it was tions, charitable organizations are com- (including restrictions and expenditure wise not to put any limits on the monly seen as creatures of tax policy, as limits on some types of speech, such as freedom of association. opposed to expressions of speech and lobbying and electioneering). association. Academic explanations forTocqueville admitted that there would the existence of nonprofits mirror this In addition to enforcing tax laws andbe a cost to restricting the right of focus on the economic aspects of orga- collecting revenue, state and federal gov-association: nizations, citing “market failure” as a ernments focus on financial oversight of primary cause: When the marketplace nonprofits as part of their interest in pro- To save a man’s life, I can under- fails to provide certain types of goods tecting consumers (to prevent theft and stand cutting off his arm. But I or services, the last resort is to form an fraud), and the state attorneys general don’t want anyone to tell me that association or nonprofit organization to have broad powers to preserve charitable he will be as dexterous without it. provide said goods or services. trusts and assets. When specific problems or well-publicized abuses occur, new laws In Federalist 10, James Madison That the IRS was designated as the and regulations are proposed, yet legisla-sought strategies to counteract the inevi- primary federal regulatory agency for tors unfamiliar with nonprofit organiza-table development of factions and special nonprofits adds to this economic focus, tions can be prone to overreaching andinterests dividing the attention and the despite the fact that nonprofit corpora- overregulating (with loud calls that “thereloyalties of the public. Nevertheless, the tions generate just a sliver of tax revenue oughta be a law!”)—sometimes triggeringFirst Amendment rights of citizens to for the federal government—their regu- constitutional challenges. According topeaceably assemble, speak, and petition lation is a mismatch of the IRS’s exper- the National Center for Charitable Statis-the government were seen as necessary tise and attention. (By contrast, in Great tics, the nonprofit sector has 1.5 millionchecks to protect the young democracy Britain, the Charity Commission, not the organizations with $358 billion in chari-against authoritarian regimes. Department of Inland Revenue, provides table contributions and $905 billion in oversight of charitable organizations. total revenue. The growth in the number Periodically in U.S. history, particular Most U.S. states locate this respon- and size of U.S. nonprofit organizationstypes of associations have been defined sibility with their attorneys general.) threatens to overwhelm the sector’s regu-as threats to the Republic requiring The primary federal report required of latory framework.2 During this growth,active suppression—including aboli- nonprofit organizations, IRS Form 990 federal and state policy-makers havetionists, victims of the Palmer raids of (Return of Organization Exempt From sought a parallel increase in regulation.1919–21, labor unions under antirack- Income Tax) is termed an “informationeteering investigations, Civil Rights and return,” not a tax return, and has evolved The structural beginnings of the non-anti-Vietnam war protest groups in the to be both a primary enforcement vehicle profit sector are usually traced back to’50s and ’60s, and Muslim charities after and an awkward public disclosure and England’s Charitable Uses Act of 1601,September 11. Special concerns about education tool. the full name of which is “An Acte tothe concentrations of power held by redress the Mis-employment of Landes,large private foundations controlled bywealthy families sparked members of8 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2016

Goodes, and Stockes of Money here- • The Tax Reform Act of 1976 clari- • The American Jobs Creation Act oftofore given to Charitable Uses.” The fied lobbying by charitable organiza- 2004 included legislation to limit theBritish Parliament passed this law to tions, defining, specifically, allowable deduction for vehicles contributed tocodify what already existed in common amounts for grassroots and direct lob- charity (in response to evidence thatlaw to prevent charitable assets from bying, and creating a special option taxpayers were overstating the valuebeing taxed into nonexistence, and legis- allowing organizations to spend up of their contributions)—projected tolatures have been adding provisions ever to 20 percent of the first $500,000 in save $3.4 billion.since. In the United States, the adoption expenditures on lobbying activities. Simultaneous with increased federalof the federal income tax and the desire (This amount has not been adjusted forfor a charitable deduction propelled inflation since then; if it had, it would legislation, forty-six states and the Dis-the formalizing of tax-exempt organiza- have reached $2.1 million by 2016.) trict of Columbia have adopted systemstions—incorporated and chartered by requiring charities to register their fund-state government, and made exempt first • The Intermediate Sanctions legis- raising activities and file reports on theirby the federal government. lation of 1996 prohibited excess financial activity, out of a desire to prevent benefits from being granted to indi- fraudulent charities from victimizing The modern dimensions of the non- viduals who control tax-exempt orga- innocent donors.3 As a result, the regula-profit sector have been shaped by five nizations. Previously, the IRS’s only tory framework that specifically governschanges to the Internal Revenue Code penalty for violations was total revo- nonprofits is half state and half federal—governing exempt organizations: cation of exempt status—and, despite with miscellaneous city and county regu- • The Revenue Act of 1950 subjected publicized abuses, organizations were lations—in addition to the full range of rarely punished. The 1996 legislation employment, land use, environmental, otherwise tax-exempt organizations included potential fines against board postal, and credit regulations that govern to the regular corporate tax rate members and nonprofit managers for every employer, property owner, mailer, for Unrelated Business Income Tax excessive compensation violations. and financial entity in the United States. (UBIT). Concerns about unfair com- petition from nonprofit organiza- LOW-INCOME STUDENTS ARE tions owning for-profit enterprises, 5X MORE LIKELY TO GRADUATE including New York University’s WHEN THEY RECEIVE ARTS macaroni company, Mueller Pasta INSTRUCTION. Co., prompted Congress to carve out economic activities by nonprofits Learn how the arts are transforming that would no longer be exempt (and our communities and our lives. would be reported on IRS Form 990T). Learn more at www.AmericansForTheArts.org. • The Tax Reform Act of 1969 defined private foundations as a new subset of charitable organizations, with greater restrictions—out of con- cerns that large foundations lacked accountability: some were benefiting their donors and could sway elec- tions and public debate. The 1969 law included an excise tax on private foundations’ investment earnings, set out “prohibited transactions” with insiders, severely limited grants to individuals, restricted grants for voter registration to grantee organizations active in five states, and prohibited expenditures or grants specifically for lobbying.SUMMER 2016 • WWW.NPQMAG.ORG  T H E   N O N P R O F I T   Q U A R T E R LY  ​9

The tension between government commercial speech, citing previous Prospective donors had been told thatregulation and organizational speech has cases on canvassing by religious and a majority of donated funds wouldplayed out through a series of Supreme charitable organizations.5 While the benefit Vietnam veterans, thoughCourt cases establishing a moving municipality had an interest in protect- only 15 percent of contributions wentboundary between permissible regula- ing its citizens from fraud, its remedy to the named charity, VietNow.8 Thetion and protected speech. Five notable was an overly broad prophylactic lower courts in Illinois supportedcases help set the limits of government measure. Instead, the court’s opinion Telemarketing Associates’ requestauthority over organizations: suggested that making information to dismiss the charges on the same • At the height of the civil rights move- about organizations publicly available grounds as the Schaumburg decision: was a preferred route. The court’s that charitable solicitation is highly ment’s struggle for voting rights in the dicta on the benefits of public educa- protected speech. The Supreme Court South, Alabama ordered the National tion could be seen as spurring regula- reversed this thinking in Illinois ex Association for the Advancement of tors and watchdog groups to invest rel. Madigan v. Telemarketing Asso- Colored People (NAACP) to disclose resources in educating donors to ask ciates (2003), ruling that fraudulent the names of all its members in the about fundraising and administrative charitable speech is not protected and state. In NAACP v. Alabama (1958), costs, and, ultimately, for charitable that a narrowly tailored fraud action the Supreme Court found that the organizations to have their IRS 990 was an appropriate remedy since the state of Alabama violated the First forms posted on the Internet at mul- burden of proof for all of the elements and Fourteenth Amendment rights of tiple sites, including www.guidestar. of fraud, including intent, would be NAACP members, because “freedom org and www.eri-nonprofit-salaries. ample protection for speech by to engage in association for the com—and ideally also at individual charitable organizations.9 The ruling advancement of beliefs and ideas is organizations’ own websites. strengthened the hand of regulators an inseparable aspect of the ‘liberty’ • When government is a major source while affirming that charitable speech assured by the Due Process Clause of of nonprofit revenue, the points of must be carefully protected through the Fourteenth Amendment, which control are conditions attached to using narrowly tailored remedies to embraces freedom of speech,” and government subsidies, grants, and address a compelling state interest. that it was “immaterial whether the contracts, such as the ban on abortion • In the 2010 case of Citizens United beliefs sought to be advanced by asso- counseling by organizations receiving v. Federal Election Commission, the ciation pertain to political, economic, federal family planning funds. In Rust U.S. Supreme Court again addressed religious or cultural matters, and state v. Sullivan (1991), the Supreme Court the First Amendment rights of a action which may have the effect of rejected a First Amendment chal- nonprofit corporation, holding in a curtailing the freedom to associate is lenge in a 5-4 decision, holding that 5-4 decision that independent politi- subject to the closest scrutiny.”4 the restrictions were simply to ensure cal expenditures were protected • In suburban Chicago, the Village of that appropriated funds were not used speech.10 The headline news of Schaumburg adopted a municipal for activities, including speech, that the Citizens United case ended up ordinance requiring 75 percent of an were outside the federal program’s not being the broader freedom of organization’s revenues be expended scope.6 In the case of tax exemption expression for nonprofits but the for “charitable purposes” as a condi- itself, federal restrictions on charita- surprising outcome that the major- tion for a solicitation permit. This was ble organizations’ speech were upheld ity opinion extended that conclu- a condition that Citizens for a Better by restricting the amount of organi- sion to for-profit corporations and Environment, an environmental group zational resources a nonprofit could labor unions, reshaping the political with a door-to-door canvass, could not expend on lobbying (Regan v. Taxa- landscape. Writing for the majority, meet. In Village of Schaumburg v. Citi- tion with Representation, 1983).7 Vet- Justice Kennedy declared, “If the First zens for a Better Environment (1980), erans’ organizations remain free from Amendment has any force, it prohib- the Supreme Court nullified the ordi- this restriction. its Congress from fining or jailing citi- nance (and similar state laws around • In 1991, the attorney general of Illi- zens, or associations of citizens, for the country that restricted charitable nois sued Telemarketing Associates, simply engaging in political speech.”11 organizations to specific efficiency per- a professional fundraiser, alleging Ironically, in the ensuing campaign centages) and rejected the argument fraud and deceptive trade practices. expenditure free-for-all, speech that soliciting contributions was purely10 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2016

from regular nonprofit organizations Notes 9. Illinois ex rel. Madigan v. Telemarketing has been overshadowed by a prolif- 1. For a list of the countries, see the ICNL’s Online Associates, Inc., 538 U.S. 600 (2003). eration of new entities—frequently Library (www.icnl.org/research/library/ol/). 10. Citizens United v. Federal Election Com- 501(c)(4)s—and opportunistic pop-up 2. Brice S. McKeever, The Nonprofit Sector mission, 558 U.S. 310 (2010). political organizations. in Brief 2015: Public Charities, Giving, 11. Ibid. and Volunteering (Washington, DC: Center 12. Richard Rubin and Julie Bykowicz, • • • on Nonprofits and Philanthropy at the Urban “IRS Look at Progressive Groups Com- Institute, October 2015). plicates Controversy,” Bloomberg News,With the continued growth of non- 3. Affinity, “Charitable Registration States June 25, 2013, www.bloomberg.comprofit financial activity, media reports Map,” Fundraising Registration website, /news/articles/2013-06-24/irs-screenedof abuses, additional pressures on law- accessed May 31, 2016, www.fundraising -applications-using-progressive-israel-; andmakers from contentious social issues, registration.com/resources/Charitable Ryan Chittum, “The IRS scandal unwinds:and the permanent war on terrorism, _Registration_States.php. And Peggy Noonan pushes crazy conspiracydiscussion regarding legitimate versus 4. NAACP v. Alabama, 357 U.S. 449 (1958). theories in the WSJ,” Columbia Journalismillegitimate controls on nonprofit activ- 5. Village of Schaumburg v. Citizens for a Review, June 25, 2013, cjr.org/the_audit/theity is likely to continue to grow. The IRS’s Better Environment, 444 U.S. 620 (1980). _irs_scandal_narrative_unwi.php.regulatory appetite was greatly dimin- 6. Rust v. Sullivan, 500 U.S. 173 (1991).ished by revelations that IRS employees 7. Regan v. Taxation with Representation, Jon Pratt is the executive director of thewere screening new organization exemp- 461 U.S. 540 (1983). Minnesota Council of Nonprofits and a con-tion applications against code words like 8. Rick Cohen, “America’s Worst Charities tributing editor to the Nonprofit Quarterly.“tea party,” “Patriots,” “9/12 Project,” Enriching For-Profit Telemarketers,” NPQ“progressive,” “occupy,” “Israel,” “open Newswire, June 7, 2013, nonprofitquarterly To comment on this article, write to us atsource software,” “medical marijuana,” .org/2013/06/07/america-s-worst-charities [email protected]. Order reprints fromand “occupied territory advocacy.”12 -enriching-for-profit-telemarketers/. http://store.nonprofitquarterly.org, usingUnder pressure from Republican code 230201.members of Congress, IRS Exempt Orga-nization Director Lois Lerner invoked PEOPLE WHO PARTICIPATEthe Fifth Amendment and subsequently IN THE ARTS ARE 20% MOREresigned; the Exempt Organization divi- LIKELY TO VOTE.sion has been a lesser presence sincethat time. Due to the ongoing tensions Ibetween nonprofit organizations and VOTEDgovernment agencies, it is in the bestinterest of nonprofits to do four things: I • Educate the public about their role as VOTED vehicles of free speech and associa- Learn how the arts are transforming tion in our democracy; our communities and our lives. • Resist government controls that are Learn more at www.AmericansForTheArts.org. aimed at limiting these rights; • Proactively ensure that reasonable government controls are in place to protect the public’s contributions and organizations from fraud, theft, and insider transactions; and • Support reasonable campaign finance reforms, so that the voices of plain cit- izens and plain organizations are not overwhelmed by a political-spending arms race.S U M M E R 2 016 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​11

Nonprofit Regulation & Oversight The Shifting Boundaries ofNonprofit Regulation and Enforcement: A Conversation with Cindy M. Lott At the federal, state, Editors’ note: In this interview, Cindy M. Lott, who has worked with theand local levels, there state charities regulation and enforcement community for many years andare distinct challenges who is now also working with the federal regulators, discusses the overallto providing reasonable regulatory landscape of nonprofits. Lott sees a shift occurring at both the state and federal levels, with a new balance in the process of being struck— regulation and particularly in light of changing priorities and subsequent resource allo- oversight for cation at both levels of government. She views this shift as a harbinger of nonprofits. further change in the nonprofit sector. While some states may have more Lott approaches the field from various perspectives, as she has held structured and a unique set of positions in her career. She developed and ran the Chari- comprehensive ties Regulation and Oversight Project at Columbia Law School for over a regulatory processes, decade, which focused on state charities officials, and is now developingothers struggle, leading a new program at the Urban Institute’s Center on Nonprofits and Philan-to unequal monitoring thropy that addresses the overall regulatory framework for the charitableacross state lines. But sector, state and federal. Lott has been at the intersection of regulators,as additional research academics, and practitioners in the nonprofit sector—having served in each is undertaken and as of those capacities over the last two decades—and has worked to bring allthe states collaborate of them together to make visible regulatory challenges in the field. In addi-with greater ease, we tion to her new position as director of nonprofit management programs atcan expect a significant Columbia University’s School of Professional Studies, she just completedimpact from the more her first term on the IRS Advisory Committee on Tax Exempt and Govern- widespread use of ment Entities (ACT); this year’s report, released on June 8, is replete with technology. recommendations—not only for the IRS, but also for the sector as it evolves in its working relationship vis-à-vis regulators.112 ​T H E   N O N P R O F I T   Q U A R T E R LY

“CARGOL TREU BANYA” BY ESTEVE NAVARRETE CONESA/ESTEVENAVARRETE.COM/

Much of what is being Ruth McCambridge: Cindy, let’s talk about perhaps other sectors, we don’t know the truedone vis-à-vis state what the landscape of nonprofit regulation and extent of enforcement.enforcement is done enforcement has looked like over the past tenvery quietly in this years, because there have been some shifts. We In research conducted by Columbia Universitysector. State officials know that regulation may be uneven from one and the Urban Institute’s Center on Nonprofits andare not necessarily trying state to another, but the relationship between Philanthropy, we tried to establish a baseline ofto put an organization the states and the IRS has also been changing. what state charity offices and regulatory systemsout of business or look like.2 One of the things that we asked aboutmake others doubt its Cindy Lott: Agreed. Some prefatory comments were enforcement mechanisms, and we foundeffectiveness; they’d to lay a bit of groundwork for our discussion: that the most frequent enforcement mechanismsalmost always rather First, there exist many misconceptions about by far are letters and phone calls to nonprofitshelp improve it and let charities regulation at the state level, most of from state regulators or enforcers when theyit continue on with its which I attribute not only to a lack of empirical think that something may be wrong.mission. data but also to the very nature of state regulation in this field, which is more complex than most As for how problems are identified, sector participants realize. whistle-blower complaints are one of the most frequent ways that state charity offices and Second, as a baseline for discussing—and, other state enforcement mechanisms hear about more important, addressing—improvement in our potential issues, because there are simply never sector’s regulation, we have to recognize that we enough resources to be completely proactive in have a federalist system. No different from other this space. So, our state charities regulators rely sectors, the layers of regulation in the charitable on nonprofit staff, board members, donors, the sector—as well as the intersections of jurisdiction media, and the public to alert regulators as to among the states and other federal agencies and where there may be an issue. local governing bodies—compose a 3-D matrix, if you will. States get to decide on their own what it The hope is always that the problem may be is that they want to do in terms of regulation and resolved after a few well-directed calls and/or enforcement of nonprofits—and even those pri- letters to an entity that appears to have compli- orities and decisions may change with the coming ance issues. Is that a fallible system? Absolutely. and going of state officials. They have their respec- Is it easy or even appropriate for a state attor- tive opinions about how many resources they’re ney general or a secretary of state to put all of going to put into nonprofit regulation and how those instances of inquiries or warnings on their they are deployed and in conjunction with what. website? Probably not. So the upshot is, we I have often said it is not the case that there are simply don’t know the exact statistics on what states that just don’t do regulation and enforce- types of enforcement—and what frequency of ment of nonprofits—but it can certainly look quite that enforcement—are being done state to state. different from one state to another. But I can assure you from my years of working with all of the states, D.C., and even the territo- Much of what is being done vis-à-vis state ries—every jurisdiction is doing something. enforcement is done very quietly in this sector. State officials are not necessarily trying to put an That said, we definitely have states that tend organization out of business or make others doubt to have more enforcement and also have more its effectiveness; they’d almost always rather help robust regulatory environments than others—and improve it and let it continue on with its mission if that can mean everything from carefully drawn there is a low-key way to have that happen. charitable solicitation laws to actually thinking about adopting parts of uniform or model laws. And therein lies the tension: not everything There are a number of states that have recently regulators do is going to become a lawsuit or revamped their laws, including New York, Del- reach the media—although problems are much aware, and D.C. This reflects the reality that more likely to be heard in the media than they are lately there has been much more going on in the in court. So, as a result, in this sector more than charitable arena at the state level of regulation than in the past. The question for every state14 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2016

individually is how to build a comprehensive, this and recognize the importance of this sector Now is a particularlyeffective approach to regulation with sometimes in a manner that may not always have been the appropriate time forquite limited resources. case; just this year, the state attorneys general states to take up the two collectively created a new standing committee questions of recognizing The states have an amalgam of issues that they on charities regulation and enforcement within the importance of thehave to deal with when we talk about charities the National Association of Attorneys General. In sector within their stateslaw. It involves more than a half-dozen different reality, however, the ability to execute regulation and providing resourcesareas of law—trusts, corporate, solicitations, gov- and enforcement is a budget issue for each state, for regulation andernance, criminal, antitrust, transactional, con- so it is best to think about it as recognition plus enforcement, as theservation easements, etcetera—and that’s why resources. IRS is going through itsit can be tough for a state office to staff these own changes on thesematters unless you have an entire charities bureau Now is a particularly appropriate time for same two fronts.to make sure that you have a comprehensive take states to take up the two questions of recogniz-on the landscape. For state attorneys general, ing the importance of the sector within theirfor example, their bread-and-butter work—and states and providing resources for regulation anda major priority—is consumer protection. And enforcement, as the IRS is going through its ownwhile there is a whole debate in the field about changes on these same two fronts. This will be anwhether we actually want to view donor dollars interesting discovery process, because the statesas consumer dollars, when you’re looking at the and the IRS as enforcement sites have existed inrubric of an enforcement office it may be that parallel universes for a very long time, with a lackthe easiest way for state officials to think about of information sharing between the IRS and thedeploying resources is to see it as an extension of states.4 If there is to be an effective regulatoryconsumer protection in some ways. framework of any sector in a federalist system, the states and the feds have to be able to commu- We do have thirteen states that have dedicated nicate and execute their respective roles in whatcharities bureaus, but most states don’t.3 Those I call “interlocking jurisdiction.”states without dedicated bureaus are pulling skillsets and resources from various parts of their RM: The lack of information sharing betweenoffices and putting them all together depending the IRS and the states is legendary.on what type of case they have. This model is verysimilar to how law firms used to staff nonprofit or CL: Well, it certainly has been a one-way valve.charitable matters until many larger firms intro- The states can always refer a case to the feds,duced formal practice groups for this work. but the feds can’t refer the other direction. What we’re seeing now at the IRS is a greater focus onRM: But it must be hard to keep all of those the tax administration aspect of its role. The auditstrands together and advancing unless you have numbers at the IRS for the exempt organizationsthem coordinated out of one place. area are at an historic low. We are also seeing, with the advent of 1023-EZ, that the IRS has deter-CL: Not having a dedicated charities bureau in a mined itself to be less of a gatekeeping function.5state does not mean there isn’t a point person or And, with its commitment to digitize and makeattorney who serves as the lead on these matters. publicly available the information it receives elec-In fact, this was a major goal of the Charities Reg- tronically, we are seeing a greater sharing of whatulation and Oversight Project at Columbia Law information the IRS does collect. Taken together,School over the past decade: to raise awareness this means that the IRS may not have as muchwithin some of the less active and/or resourced information on an entity at the beginning of its lifestates such that every state would build capacity cycle, and the entity is likely never to be audited,for this work. We also developed resources for but whatever information it gives to the IRS willstates to help them institutionalize their regula- now be in the public domain. Per its commitmenttory and enforcement training and outcomes. of last year, in June of this year the IRS beganI think the states have made huge headway onS U M M E R 2 016 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​15

The 990 is going to to release digitized Form 990 information it has now dovetailing for a new regulatory reality. Theremain extraordinarily received from the nonprofit sector. And this is IRS is doing its own rethinking about issues thatimportant as a data what states must now consider in determining have been going on for some time; and in the verysource for regulators, where they will allocate resources for their own same decade, the states were starting to becomebut we also now have the data collection from exempt entities, revamping much more aware of what each other was doing.states actively saying, their state laws, and dedicating personnel to edu- It just so happens that now those two trajectories“We need a better cational as well as enforcement efforts. are, I believe, intersecting. And that will changesystem of regulation and how people think about the balance of regulationenforcement, and we’re Now, here comes the shift. While the IRS has of nonprofits.willing to try to help reallocated its own resources due to changingbuild it ourselves.“ priorities, the states happen at the same time to RM: Well, it’s interesting, because I think that have been working on what is known as the Single there has been some feeling for years that there Portal Initiative (also called the Single Portal were a lot of problems wafting about that nobody Multi-State Charities Registration project). The was picking up on unless the media exposed goal is to enable a technological platform that will them—and sometimes not even then. The IRS make it easier for the sector to provide informa- wasn’t following up on them, and it wasn’t clear tion that is required at the state level.6 In addition, that the states were following up on them. And, the Single Portal platform will import the 990 data in some cases, the problems extended beyond for an entity and populate the platform with that state borders; so they were problems that existed data. The 990 is going to remain extraordinarily in a number of states, but nobody was coordi- important as a data source for regulators, but we nating any action against them. But the cancer also now have the states actively saying, “We need charities fraud case was an exception. Could a better system of regulation and enforcement, you talk a little bit about the importance of that and we’re willing to try to help build it ourselves.” development in all of this? I think it’s almost emblematic of what it is that you’re talking More important, the states are undertaking about.7 a mapping exercise to try to figure out, state to state, what information is asked of entities. The CL: Yes, I am on record as saying that I think the states are considering: Why do we collect this cancer charities fraud case reveals the good, the information? What do we do with this informa- bad, and the ugly of where regulatory activities tion? Is it really useful? Do we make public all are right now in the nonprofit arena. that we require for compliance? In previous times, more data was always considered a good—and in First, let’s remember that it took an excruciat- this sector, even a public good. With cybersecu- ing four years to resolve even this particularly rity and privacy concerns, data may now also be egregious case in which there was no gray area. considered a liability. More and more, we see in Even in such an extreme situation, it took that many sectors the mantra of, “Collect only what long because the states had to share data in rudi- you use and can secure.” The nonprofit sector is mentary ways and chase information down inde- no different. pendently. That is where the Single Portal project, I think, is going to be incredibly helpful and a real It has been assumed that the government, as tool for the enforcement community, where it is a sector, would be the correct repository of all of much needed as a data-sharing platform. this information—and that may remain true; but which part of the government is another matter. The legal complaint in the cancer charities The states are becoming more consciously active fraud case is also a revealing primer on jurisdic- in this area at the very time the IRS has moved to tion among the states and also vis-à-vis the feds— an emphasis on tax administration. which in this case was the FTC.8 Anyone reading the complaint will see the array of the different So, there are shifts happening within our fed- state laws, and you’ll also note that in some states eralist system; and, again, what was happening at only the secretary of state had jurisdiction over X, the state and federal levels was occurring inde- pendently of each other, but the two shifts are16 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2016

Y, and Z, as opposed to the AG’s office. Long story slowed by a lack of technology and resources. The Open data brings muchshort, the states don’t all have the same jurisdic- Single Portal project will help further a situation information to light—tion by a long shot. So, these kinds of multistate where the state regulators will be only one of a some of which may notcollaborations help states also think through what number of accountability bodies. All of the data always be flattering tothey want their laws to look like, what they want will be public, so anybody—the media, academics, the sector, especially oneto enforce, and who in each state should have the anybody—can take that data and mash it up and do dependent on the trustresources to do X, Y, and Z. The case was not only whatever they want with it for their own purposes. of the public.an example of what could be done collectively bythe states and feds but also shone a light on some RM: That’s amazing. That’s like the Chicago openjurisdictional gaps. It was an example, too, of how data project [Citizens Police Data Project] onpainfully long it can take to investigate and litigate police violence. It allows citizens and media toa multistate case that, ultimately, was pretty black do their own investigations.and white. CL: It’s all part of the open data movement, but itRM: Yes. And this is may be a hugely impor- also means that the regulators can have their owntant point, because when you look at cases that algorithms on their own back page, too. Open datado seem egregious, and the movement on them brings much information to light—some of whichis so slow, it can feel like there are in fact no may not always be flattering to the sector, espe-consequences—or the consequences can come cially one dependent on the trust of the public. Aso late and be so minimal that it almost feels lot of money flows through this sector, and wherelike, why bother? But, it sounds to me like what there is money, you’re going to have a certain per-you’re talking about is something that’s headed centage of fraud. Those folks who look to takein another direction. Do you think that there is fraudulent advantage of others are indifferent togeneral agreement among the states and—this where they find their nefarious opportunities, andis probably a difficult question—among the state our sector may be particularly appealing to them,attorneys general to actually work in this more given the general lack of resources for enforce-coordinated way? ment. The more the public, the media, academic researchers, and the regulatory community knowCL: Absolutely. But the states have always about our nonprofit sector, the more patterns canworked in coordinated ways to some extent. It’s be analyzed, correlations made, thoughtful andvery common in antitrust cases, in consumer consistent regulation developed, and enforcementcases, all sorts of cases like that. Litigation models actions effectively and efficiently undertaken. Theabound at the state level and among state AGs, open data movement is not a friendly environmentand even secretaries of state or other state agen- for those looking to commit fraud, so I say thecies that get involved in various multistate types sooner it comes to our sector, the better.of cases. Sharing information among states ona legal matter is one aspect, but coordinating RM: It’s almost like you have to create the foun-an enforcement action is a whole other matter, dation for a more networked kind of approach.requiring a huge amount of resources. That is true That’s really what you’re talking about.for any enforcement action. CL: The networked approach you refer to is what But to your earlier question of what the status we were helping to promote for the last decadeof regulation and enforcement is in the nonprofit at the Charities Project at Columbia Law School,arena: even when it looks quiet on the surface, that by bringing the states together for trainings anddoesn’t mean that there isn’t an immense amount policy conferences. Now we are doing somethingof activity going on under the surface at the state similar with the states and feds combined at thelevel. It’s just that through the data-collection Urban Institute’s Center on Nonprofits and Phi-process and having to do the analytics around it, lanthropy. The first step is to outline commonit has been a painfully complicated process, andS U M M E R 2 016 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​17

Some of the states, of understandings and challenges among jurisdic- We have a variety of federal agencies that cancourse, have been having tions, both state and federal, and then move into go after different aspects of nonprofit conduct.these conversations for considerations of actively deploying resources. Then, we have the states, which are very muchyears—and they have Some of the states, of course, have been having thinking about governance, nonprofit corpora-more robust regulatory these conversations for years—and they have tion law, trusts, and criminal jurisdiction, amongregimes and simply more robust regulatory regimes and simply have other things. All of that theoretically interlocks,have more resources more resources dedicated to this sector. But but there are still very limited resources in thisdedicated to this sector. with a multistate action, and one that involves a space for dealing with regulation and enforce-But with a multistate federal agency such as the FTC, there is a bigger ment in this sector, and little research to con-action, and one that intention at play. It is one message for a couple of textualize what regulators may be looking at.9involves a federal agency the big states to go after an entity, but it’s another But the more that we have information out in thesuch as the FTC, there is a message altogether to have all fifty plus D.C. and public domain and the more that we have tech-bigger intention at play. the FTC coordinate. nology to make information accessible, the more bodies there will be that can act on the informa- RM: That’s what I thought was really extraordi- tion and the more completed investigations and nary about that particular situation. enforcement we will see. CL: We’re not sure if such an effort has ever hap- To date, as a matter of law, we’ve always had pened in any sector—all fifty states plus D.C., plus the state attorneys general, who historically have the feds on any litigation matter. So, though I do had legal standing to bring an action against an understand the complaints in the field about the entity or a board.10 We’re now seeing, however, cancer fraud prosecution—that it took so long small pushes for other types of stakeholder and the sanctions seemed so minimal to some standing. Occasionally, we see beneficiaries observers—the reality is that the case served to who say, “Wait a minute—I represent an interest lay a groundwork for future actions, and it was that is not being brought by AGs for whatever also the culmination, frankly, of years of the reason.” And we see marginalized members of enforcement community talking and thinking and the board and donors who say this as well.11 And saying, “We need to be able to do better and do with more and more open data available, now it collectively.” With technology that now exists, these stakeholders are going to have new and it is really incumbent upon government to better better tools for making their case. This is what is utilize resources and share resources, and that’s new and different in our particular sector. where we are headed now on multistate and fed– state interactions. Other sectors have shareholder actions, class actions, individual rights to action. If resources RM: Very interesting. So, along with that, when are not dedicated to enforcement personnel we last talked, you mentioned something that at the state and federal level in the nonprofit was very provocative about the idea of legal sector, and with the rising tide of data available standing. Because if we’re going to make all publicly—which makes more evident some of of this information more and more accessible, the enforcement gaps—I predict pressure will what does that mean about who has standing build to allow other forms of standing to bring to take action against a nonprofit? Where is the an action, even in limited form, akin to qui tam issue of legal standing now? Where would you actions in other areas of the law. Some of my legal expect it to go? There seems to have been a very colleagues may view this as blasphemous, given narrow interpretation of who has standing to our centuries-old standing laws, but note that I bring an action against a nonprofit in the past. am not advocating the change. I am merely noting what may be a natural outcome of the current CL: Well, let me back up for one second to talk trajectory of an underresourced enforcement more about who can go after whom in this sector. community intersecting with a wealth of publicly available data. We may very well find in the near future that donors and beneficiaries who have18 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2016

access to information about where these billions they do and in terms of how they’re pulling back. For better governmentof dollars are going may, in fact, decide that they I think our expectation of them as a major force regulation, it is time towould like a say when they believe something is waning. look more pointedly atgoes off the rails. resources, research, CL: Many people do not recognize that there and coordination, andRM: The case at Sweet Briar College seemed to are federal agencies besides the IRS that involve to compare our sectorcontain that dynamic.12 themselves in the charitable sector. The Federal to other fields and Trade Commission, for instance, has always had regulators—forCL: Yes, and we’ve had other instances where people that have dealt with charities issues. These example, financialpeople want to bring a class action.13 I think that FTC attorneys know the states because they have regulation or healthcarewe’re going to see some really novel actions— involved themselves in these issues—even par- regulation, the SEC,well, they’re not novel in other parts of our legal ticipating in some of our trainings—and they’ve or even the FEC.system, but they may be novel to this sector. been good colleagues. As always, it is a matter of, one, recognition that these issues are important For better government regulation, it is time to and, two, deploying resources. The FTC did thatlook more pointedly at resources, research, and with the cancer charities case, to their credit. Tocoordination, and to compare our sector to other be clear, this is not the first time the FTC has hadfields and regulators—for example, financial a relationship with the states. We’re hoping thereregulation or healthcare regulation, the SEC, or will be some further steps and big-picture thinkingeven the FEC. We’ve simply not had as much rec- about what these types of relationships can do inognition of the need for regulation and enforce- the future. The cancer charities case reminds thement in some ways for our sector, which means sector that the IRS is not the only federal agencywe’re never going to get the resources. This is with jurisdiction in this space—and that’s a goodwhy many of us advocate for more research in thing. We have an enforcement ecosystem, if youthe field—to build upon that done by academics will—a regulatory and enforcement ecosystem—and researchers in the past but also to research and this cancer charities case really showed that.specifically the regulatory issues. Even if thisreveals some ugly truths at times, we need the One of the other interesting developmentsdata and the empirical evidence so as to be able occurring in this sector right now is that theto go to policy-makers and say, “This is what this layers of jurisdiction are becoming more appar-sector looks like in real life and numbers, not just ent, including at the local level. We are seeing thisanecdotally.” in particular with the examination of the definition of charity.14 States don’t have to have the same def-RM: Right. So, basically, you’re saying that what inition of charity that the feds do, and now evenis occurring out there is, number one, we still local jurisdictions are staking a claim on definingdon’t have a baseline to use almost as a guide charitable activities within their borders. And thisto where to look for enforcement; and that does is going to be one of the issues that come to thenot exist because we don’t have the research. fore over the next few years.Regulators are going essentially by their ownexperience and by their own records about RM: That is a very central question.what matters and what doesn’t, and are oftenalerted to problems only by a stakeholder coming CL: A very central question. This gets us back toforward to complain. The states are, in fact, the start of our talk: we have a federalist system.beginning to look at some collaborative activity On the one hand, every jurisdiction can determinethat would, in concert with more research, begin its own requirements independent of the otherto provide a more systematic way of looking at jurisdictions; on the other hand, when one regula-regulation and enforcement. And, two, at the tor alters requirements, it may necessitate othersame time, we’re seeing the feds—specifically the regulators to recognize those changes and takeIRS—pulling back a bit, both in terms of what that into account for their own requirements.S U M M E R 2 016 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​19

RM: It’s so much more of a collective effort, by press release, May 1, 2014, www.nasconet.org/nasco the looks of it. -submits-comment-on-proposed-form-1023-ez/; and see Tim Delaney, “Express lane to more trouble for CL: Well, it certainly is a multilayered effort—and the IRS?” Congress Blog, The Hill, June 2, 2014, thehill sometimes, occasionally, it might be collective. .com/blogs/congress-blog/economy-budget Large policy questions abound: Should regulators /207640-express-lane-to-more-trouble-for-the-irs. employ collective efforts only sparingly, because, 6. Multistate Registration and Filing Portal, Inc. again, it is a federalist system? Are these collec- (MRFP), mrfpinc.org; and see National Association of tive efforts more efficient or less efficient? Do State Charity Officials, “Single Portal,” www.nasconet they homogenize requirements, or is it a useful .org/category/single-portal/. leveling effect that brings consistency and pre- 7. Federal Trade Commission, “FTC, States Settle dictability? What type and frequency of regulation Claims Against Two Entities Claiming to Be Cancer and enforcement ultimately helps this particular Charities; Orders Require Entities to Be Dissolved and unique sector the most? These are not just and Ban Leader from Working for Non-Profits,” fascinating academic questions; answers based press release, March 30, 2016, www.ftc.gov on accurate empirical evidence will impact the /news-events/press-releases/2016/03/ftc-states-settle charitable sector in fundamental ways never seen -claims-against-two-entities-claiming-be-cancer. before. 8. FTC, 50 States, and D.C. v. Cancer Fund of America, Inc., et al., Complaint No. 2:15-cv-00884-NVW (D. Ariz. Notes filed May 18, 2015), www.ftc.gov/system/files 1. Amy Coates Madsen et al., “Stewards of the Public /documents/cases/150519cancerfundcmpt.pdf. Trust: Long-Range Planning for the Future of the IRS 9. Cindy M. Lott et al., State Regulation and Enforce- and the Exempt Community,” in Advisory Commit- ment in the Charitable Sector (forthcoming 2016). tee on Tax Exempt and Government Entities (ACT): According to the research report, 53 percent of those 2016 Report of Recommendations, IRS.gov, Forms who responded to the survey noted that the staff and Publications, June 8, 2016, 89–156. assigned to charity regulation in their offices/juris- 2. Cindy M. Lott et al., State Regulation and Enforce- dictions has remained the same since 2008. But the ment in the Charitable Sector, Columbia Law School’s sector, meanwhile, has been continually growing. In Charities Regulation and Oversight Project and the the decade between 2003 and 2013, the number of Urban Institute’s Center on Nonprofits and Philan- registered nonprofits in the United States rose 2.8 thropy (forthcoming 2016). percent; in 2013, approximately 1.41 million non- 3. Ibid. According to the forthcoming report, thirteen profits were registered with the IRS; and see Brice S. states have a dedicated charities bureau. McKeever, The Nonprofit Sector in Brief 2015: Public 4. For more specifics, see letter from the National Charities, Giving, and Volunteering (Washington, Association of Attorneys General to the Hon- DC: Urban Institute, October 2015). orable Max Baucus, Chairman, Committee on 10. See, for example, Emily Myers, ed., State Attor- Finance, United States Senate, and the Honor- neys General Powers and Responsibilities, 3rd ed. able Orrin Hatch, Ranking Member, Commit- (Washington, DC: National Association of Attorneys tee on Finance, United States Senate, October General, 2013). 28, 2011, www.nasconet.org/wp-content/uploads 11. See, for example, Jonathan Ellis, “Sons want account- /2013/01/NAAG-Info-Share-Letter.pdf; and see United ing of how Schwan Foundation lost hundreds of millions,” States Government Accountability Office, Tax-Exempt Argus Leader, April 18, 2016, www.argusleader.com Organizations: Better Compliance Indicators and /story/news/2016/04/18/sons-want-accounting-how Data, and More Collaboration with State Regulators -schwan-foundation-lost-hundreds-millions/831 Would Strengthen Oversight of Charitable Organiza- 88868/. tions, December 2014. 12. See, for example, Ruth McCambridge, “Codifying 5. National Association of State Charity Officials, Governance Lessons Learned the Hard Way: Sweet “NASCO Submits Comment on Proposed Form 1023-EZ,” Briar College’s New By-Laws,” Nonprofit Quarterly,20 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2016

May 31, 2016, nonprofitquarterly.org/2016/05/31 determines tax exemption, but state law defines chari-/codifying-governance-lessons-learned-the-hard table and noncharitable nonprofit organizations and-way-sweet-briar-colleges-new-by-laws/. regulates their governance. If nonprofit organizations13. See, for example, Dickson et al. v. Gospel for ASIA, are operated to the detriment of the public interest,Inc. et al., Complaint No. 5:16-CV-5027 PKH (D. Ark. state attorneys general have the power to investigatefiled Feb. 8, 2016). This class action suit was filed and discipline them. New York and California haveagainst a charity by donors claiming they had agreed both attempted to address the same concerns aboutto give only on the condition that 100 percent of their secret money in politics that led to the IRS scandalgift be used for a specified charitable purpose, and and proposed regulations.” See also Russell Blair,who later discovered that the full amount of the gift “As Budget Woes Grow, Some Want To Tax Yale’swasn’t used for the intended purpose. Endowment,” Hartford Courant, March 22, 2016,14. See, for example, Linda Sugin, “Politics, Disclosure, www.courant.com/politics/hc-yale-endowment-taxand State Law Solutions for 501(c)(4) Organizations,” -0323-20160322-story.html; and Evelyn Brody, “TheChicago-Kent Law Review 91, no. 3 (forthcom- 21st Century Fight Over Who Sets the Terms of theing) Fordham Law Legal Studies Research Paper No. Charity Property Tax Exemption,” Exempt Organiza-2768165: “The post-Citizens United explosion of (c) tion Tax Review 77, no. 4 (April 2016).(4) political activity—and the federal government’sdysfunction—did not go unnoticed by the states. To comment on this article, write to us at feedbackWhile the federal government was at an impasse, @npqmag.org. Order reprints from http://s​ tore.nonprofitsome states attempted to bridge the gap. Federal law quarterly.org, using code 230202. $6,022,190.00**That’s the potential unemployment cost savings of over 400 nonprofits last year. What’s yours? Get your free unemployment UST Serving Nonpro ts Since 1983 cost analysis at ChooseUST.org/NPQSUMMER 2016 • WWW.NPQMAG.ORG  T H E   N O N P R O F I T   Q U A R T E R LY  ​21

Nonprofit Regulation & Oversight The Rising of the STATES NonprofitinOversight by Lloyd Hitoshi Mayer22 ​T H E   N O N P R O F I T   Q U A R T E R LY  “LICENSE PLATE MAP OF THE USA” BY DESIGN TURNPIKE/WWW.DESIGNTURNPIKE.COM

WHILE THE IRS’S ROLE VIS-À-VIS NONPROFITS HAS BEEN UNDER FIRE,THE STATES HAVE BEEN EXPLORING BETTER WAYS TO COLLABORATE ON IMPROVING THEIR ROLE IN REGULATION AND ENFORCEMENT— INCLUDING A TEST CASE ON NONPROFIT FRAUD THAT INVOLVED ALL FIFTY STATES AND THE DISTRICT OF COLUMBIA. TECHNOLOGICAL ADVANCES WILL FIGURE PROMINENTLY IN THIS VENTURE.In an extraordinary development, all fifty and administrative duties related to the Afford- Even before the recent states, the District of Columbia, and the able Care Act, or Obamacare. These pressures, controversy related Federal Trade Commission filed a federal in turn, led to a growing backlog of applications to the handling of lawsuit in May 2015 against four charities and for recognition of exemption, a decline in the exemption applications their operators, alleging that they had defrauded already low audit rate for tax-exempt nonprofits, filed by politically active more than $187 million from donors.1 While the and limited new guidance for nonprofits seeking nonprofits, the IRS faced dollar amount was staggering, the most unusual to comply with the complex federal tax rules a tight budget and a aspect of the lawsuit was the incredible level of applicable to them.3 growing list of cooperation among state nonprofit regulators. responsibilities. This cooperation was evident not only in the The mess involving exemption applica- bringing of the lawsuit but also in its successful tions filed with the IRS by Tea Party and other settlement less than a year later, with the defen- conservative-leaning groups worsened this situ- dant charities and their principal officers surren- ation in several ways, however. It accelerated dering substantial assets, agreeing to dissolution the development of streamlined application pro- of the charities, and acquiescing to being banned cedures—including, but not limited to, the new from fundraising and management of charities Form 1023-EZ—that significantly reduce the level and charitable assets in the future.2 of IRS review for new organizations. It also gave This development highlights the growing Congress another reason to underfund the IRS, sophistication and cooperation of state nonprofit forced a wholesale change in the leadership of the regulators. And it is not an isolated incident. Build- IRS Exempt Organizations Division, and almost ing on seeds planted over the past several decades, certainly made employees throughout that divi- state regulators are both individually and collec- sion wary of pursuing all but the most egregious tively increasing their oversight of nonprofits. violations of federal tax law. IRS examinations of This trend is fortunate for those who care annual information returns (primarily the Form about oversight of nonprofits, because it comes at 990 series) are now at an anemic level of less a time when the Internal Revenue Service’s efforts than four-tenths of a percent annually. This is at in this area are atrophying. Even before the recent controversy related to the handling of exemption Lloyd Hitoshi Mayer is a professor of law at Notre applications filed by politically active nonprofits, Dame Law School, where he focuses on federal, state, and the IRS faced a tight budget and a growing list of foreign laws governing nonprofit organizations. Before responsibilities, including significant rulemaking entering the academy, he practiced with the Exempt Orga- nizations Group at Caplin & Drysdale.S U M M E R 2 016 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​23

States and localities a time when the number of tax-exempt nonprofit policy (with certain provisions for boards of allhave also become organizations has grown to over one and a half nonprofit corporations), mandates certain proce-increasingly active in million—not including churches and other houses dures for related party transactions, and requireschallenging the often of worship that are not required to seek such rec- a whistle-blower policy for nonprofit corpora-very valuable property ognition from the IRS. tions with twenty or more employees and over $1tax exemptions enjoyed million in annual revenue. New York also recentlyby many nonprofits. So, what have state nonprofit regulators been announced a project to systematically review itsThese disputes have doing during this time of decline in IRS oversight? registration and financial filing procedures forinvolved Princeton Individually, many of them have been working charities and fundraising professionals.6University; the Shrine hard to review and improve their laws and pro-of Our Lady of LaSalette, cedures governing nonprofits, as well as increase These efforts are in addition to the increas-in Attleboro, efforts to reach the regulated community and ing availability of state nonprofit filings throughMassachusetts; dozens those who advise that community. Internet-accessible databases, prominentof hospitals; and announcements of investigations into allegedproperty owned by Individual State Initiatives wrongdoing by nonprofits, and required annualnumerous other reports detailing the high fundraising costs oftypes of nonprofits. In the wake of the Enron disgrace and other scan- certain nonprofits. On the latter point, examples dals that rocked the for-profit sector, California include California’s commercial fundraisers enacted the Nonprofit Integrity Act of 2004 to reports, Massachusetts’s Report on Professional improve the governance procedures and enhance Solicitations for Charity, and New York’s the filing requirements for charities, other non- Pennies for Charities report. In addition, state profits that hold funds for charitable purposes, regulators have been working to enhance the and commercial fundraisers.4 Significant new other information available on their websites, requirements included in the act are a shortened providing an increasing number of plain-language period for registering with the attorney general guides on topics ranging from formation to fidu- (thirty days after the initial receipt of property); ciary duties to dissolution. State regulators have mandatory audited financial statements and also become regular presenters at many confer- detailed audit-committee requirements for chari- ences focused on nonprofit legal issues, including table corporations with gross annual revenues meetings of the Exempt Organizations Commit- of $2 million or more; mandatory board or board tee of the American Bar Association, Section of committee review of senior officer compensation; Taxation; the Georgetown Law Representing and and numerous additional filing requirements for Managing Tax-Exempt Organizations conference; commercial fundraisers. and the Loyola Law School Western Conference on Tax Exempt Organizations. In 2013, New York enacted the Nonprofit Revi- talization Act based on recommendations from At least one state has taken a more innovative Attorney General Eric T. Schneiderman’s Lead- approach to combating what it perceives as unduly ership Committee for Nonprofit Revitalization, high fundraising expenses: An Oregon statute now made up of representatives from the New York disqualifies charities from eligibility to receive nonprofit community.5 The act sought to relieve contributions that are tax deductible for purposes burdens on that community by reducing the of Oregon’s income tax and corporate excise tax number of categories for nonprofit corporations if program expenses fall below 30 percent of total under New York law, simplifying certain formation annual functional expenses for the most recent procedures, and increasing revenue thresholds three-year period. In December 2015, the Oregon for certain auditing requirements. It also imposed Department of Justice announced the first three enhanced corporate governance standards— nonprofits to fall afoul of this rule; it remains to including those relating to conflicts of interest, be seen whether any of them try to challenge their related party transactions, whistle-blowing, and disqualification in court.7 financial audits—and gave the attorney general increased enforcement authority. More specifi- States and localities have also become increas- cally, the act requires a written conflict of interest ingly active in challenging the often very valuable24 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2016

property tax exemptions enjoyed by many non- (NAAG), they gained a more formal structure State nonprofitprofits. These disputes have involved Princeton with the launch of the National Association regulators have alsoUniversity; the Shrine of Our Lady of LaSalette, of State Charity Officials (NASCO) in 1979. In been increasing theirin Attleboro, Massachusetts; dozens of hospitals; particular, NASCO’s annual conference, which communication andand property owned by numerous other types of includes both public and regulator-only sessions, coordination acrossnonprofits.8 With no relief in sight for many state provides an ongoing opportunity for state regula- state lines.and local government budgets, these challenges tors to meet each other, share their experiences,show no signs of ebbing. and learn about new developments. NASCO has also played a critical role in helping develop the At the same time, state nonprofit regulators Unified Registration Statement for nonprofitsappear to have mostly avoided or backed away engaged in charitable solicitation, and the morefrom getting involved with the regulation of polit- recent Single Portal Initiative, which seeks toical activity by nonprofits. While California and develop a one-stop Internet platform for chari-New York have been particularly active in this table solicitation registration and reporting forarea, those states ultimately passed new election all states that require such filings. NASCO haslaws expanding disclosure of political activity by also begun to show a willingness to critique IRSall types of entities, not just nonprofits, and dis- oversight efforts—not just behind the scenes butclosure of funding sources for such activity.9 By also publicly, as shown by the concerns it recentlydoing so, they avoided any need to modify the raised about the new IRS Form 1023-EZ.11laws specifically covering nonprofits. In NewYork, the attorney general actually revoked pre- The Single Portal Initiative is a good exampleviously issued proposed regulations that would of how long it can take for such collective effortshave targeted for disclosure political activity by to bear fruit. The Initiative can be traced at leasttax-exempt organizations, on the grounds that the as far back as 2003, when the U.S. Department ofelection law changes made the proposed regula- Commerce provided initial funds for the projecttions largely redundant. This is almost certainly a to GuideStar, which was working in partnershippositive development, given the IRS’s experience with NASCO.12 Almost thirteen years later, the Ini-with regulating political activity by tax-exempt tiative published an official Request for Informa-organizations, as it keeps this difficult and risky tion, seeking input on the pilot website that NAAGtask in the hands of the state agencies that admin- and NASCO plan to launch by the end of 2016.ister state election laws and thus are better suitedto oversee such activity. That risk is illustrated In 2006, the National State Attorneys Generalby the ongoing litigation challenging California’s Program at Columbia Law School developedattempts at requiring tax-exempt nonprofits to the Charities Regulation and Oversight Projectsubmit to the state attorney general the list of directed by Program Executive Director anddonors they file with the IRS. The U.S. Court of Senior Counsel Cindy Lott.13 The project pro-Appeals for the Ninth Circuit has upheld on its vides an opportunity for state regulators to gatherface the attorney general’s ability to demand this together to learn about various topics of commoninformation, but a federal district court has barred interest, including conservation easements, fraudthis demand with respect to one particular, politi- in the charitable sector, and future trends in statecally active nonprofit: the Koch brothers–funded regulation of charities. It also supports in-depthAmericans for Prosperity.10 research into state regulation and enforcement of the charitable sector, in cooperation withCollective State Efforts the Urban Institute’s Center on Nonprofits and Philanthropy.14State nonprofit regulators have also been increas-ing their communication and coordination across Finally, NAAG recently formed its Charitiesstate lines. While such efforts can be traced back Committee, which joins a dozen other NAAGto occasional projects under the auspices of special committees that focus on topics rangingthe National Association of Attorneys General from agriculture to federalism to substance abuse. This move is significant, because itS U M M E R 2 016 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​25

The bottom line is that institutionalizes attorney general–level attention example, New York’s Nonprofit Revitalizationnonprofits need to be to the oversight of charities. Consisting of eight Act amended New York’s Not-for-Profit Cor-aware that even as IRS attorneys general, the committee’s description poration Law to raise revenue thresholds forenforcement of the highlights the breadth of its role: certain audit requirements and to simplify thefederal requirements classification of nonprofit corporations. Thefor tax-exempt The NAAG Charities Committee mission is to Single Portal Initiative’s stated goal is to sig-organizations continues assist and enable attorneys general concern- nificantly reduce the administrative burden onto be battered by ing charities registration and enforcement nonprofits and professional fundraisers thatlimited resources and issues and matters by providing informa- solicit charitable contributions in multiplecongressional criticism, tion, communication and support; to facili- states, by providing a single online system forthe states have quietly tate cooperation among the various areas of required registration and reporting. At the samelaid the groundwork attorneys general offices that handle chari- time, however, these initiatives often imposefor more effective ties registration and enforcement through additional governance requirements on all orindividual and collective open dialogue and communication; to plan, some nonprofits, as exemplified by some of theoversight of nonprofits. organize and conduct training and annual recent changes to New York law and Califor- seminars in coordination with the National nia’s Nonprofit Integrity Act of 2004. Association for State Charities Officials and • For noncompliant nonprofits, there is less its assistant attorney general members for room to fly below the radar. As states update the exchange of ideas and information on and revise their laws governing nonprofits matters relevant to charities registration and and the procedures for enforcing those laws, enforcement; and to promote the develop- fewer out-of-compliance nonprofits will be ment of effective charities registration and able to escape scrutiny. And increased com- enforcement programs and education for munication between the states means less the protection of citizens and increasing opportunity for out-of-compliance nonprofits awareness of our duties to our citizens.15 to avoid oversight by simply ending activities in a given state or relocating to a different state. Ramifications for Nonprofits For example, one aspect of the Single Portal Initiative is to bring together IRS Form 990 data So, what do these developments mean for non- with state registration data, making it easier for profits? There are several important takeaways: state regulators to identify nonprofits that are • The IRS is not the only sheriff in town. operating in their jurisdictions without having properly registered or reported, as well as to Especially for charities, state regulators have spot fraudulent activity. These developments the authority and willingness to pursue wrong- are good news for the nonprofit sector as a doing. Like the IRS, they face budget pressures whole—they should reduce bad behavior, such and competing priorities, but state regulators as that highlighted in the FTC/50-State & DC are showing an ability to manage these pres- Lawsuit, that damages the sector’s reputation. sures through both innovation at the individual At the same time, however, less sophisticated state level and coordination with other states and less well-resourced nonprofits that, while and federal agencies at the national level. otherwise acting properly, have been able to Forums such as NASCO, NAAG’s Charities ignore at least some state legal requirements Committee, and the Charities Regulation and with relative impunity, may no longer be able Oversight Project will only continue to enhance to do so—including with respect to both chari- state regulators’ ability to do more with their table solicitation and property tax exemption. limited resources and to work together. • For compliant nonprofits, increased state The bottom line is that nonprofits need to be innovation and cooperation is (mostly) aware that even as IRS enforcement of the federal good news. A primary goal of the ongoing requirements for tax-exempt organizations con- state efforts is to reduce the regulatory burdens tinues to be battered by limited resources and on nonprofits that are in good faith seeking to comply with applicable state laws. For26 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2016

congressional criticism, the states have quietly 7. “Disqualified Charities,” Oregon Department oflaid the groundwork for more effective individ- Justice, accessed May 13, 2016, www.doj.state.or.usual and collective oversight of nonprofits. That /charigroup/Pages/disqualified.aspx.groundwork is starting to bear fruit, as illustrated 8. Evelyn Brody, “The 21st Century Fight Overby the recent multistate lawsuit, the renewed Who Sets the Terms of the Charity Property TaxSingle Portal Initiative, and the NAAG Charities Exemption,” Exempt Organization Tax ReviewCommittee, as well as the addition of increasing 77, no. 4 (April 2016), papers.ssrn.com/sol3/papers.governance obligations to the nonprofit laws of cfm?abstract_id=2773866; and Michael O’Loughlin,California and New York. Nonprofits, therefore, “Should Courts Get to Define Religion?,” Atlantic, Maymust be sure to treat compliance with their state 3, 2016, www.theatlantic.com/politics/archive/2016/05legal obligations as seriously as compliance with /how-do-the-courts-define-religion/480903/.their federal tax obligations, as well as making 9. Linda Sugin, “Politics, Disclosure, and State Lawsure to keep track of the ongoing state law devel- Solutions for 501(c)(4) Organizations,” Chicago-Kentopments that could impact them in numerous Law Review 91, no. 3 (forthcoming), Fordham Lawways. Legal Studies Research Paper No. 2768165, papers.ssrn .com/sol3/papers.cfm?abstract_id=2768165.Notes 10. Josh Gerstein, “Koch-linked group scores legal1. Federal Trade Commission, “FTC, All 50 victory over California AG,” Under the Radar (blog),States and D.C. Charge Four Cancer Charities Politico, April 21, 2016, www.politico.com/blogsWith Bilking Over $187 Million from Consum- /under-the-radar/2016/04/koch-group-scores-legalers,” press release, May 19, 2015, www.ftc.gov -victory-over-california-ag-222288./news-events/press-releases/2015/05/ftc-all-50-states 11. Letter from Alissa Hecht Gardenswartz, president,-dc-charge-four-cancer-charities-bilking-over. National Association of State Charity Officials (NASCO),2. Federal Trade Commission, “FTC, States to Office of Information and Regulatory Affairs (April 30,Settle Claims Against Two Entities Claiming to 2014), www.nasconet.org/wp-content/uploads/2014/05Be Cancer Charities; Orders Require Entities to /FINAL-NASCO-comments-re-Form-1023-EZ1.pdf.Be Dissolved and Ban Leader from Working for 12. GuideStar, “Federal Grant to GuideStarNon-Profits,” press release, March 30, 2016, www.ftc Funds Creation of National Charity Registry,”.gov/news-events/press-releases/2016/03/ftc-states press release, October 14, 2003, www.guidestar-settle-claims-against-two-entities-claiming-be-cancer. .org/rxa/news/news-releases/2003/federal-grant3. Lloyd Hitoshi Mayer, “‘The Better Part of Valour Is -to-guidestar-funds-creation-of-national-charityDiscretion’: Should the IRS Change or Surrender Its -registry.aspx.Oversight of Tax-Exempt Organizations?,” Columbia 13. Columbia Law School, “Charities RegulationJournal of Tax Law 7, no. 1 (2016): 80–122. and Oversight Project,” accessed May 13, 2016,4. “Nonprofit Integrity Act of 2004: Summary of Key Pro­ web.law.columbia.edu/attorneys-general/policy-areasvisions,” California Registry of Charitable Trusts, October /charities-law-project.2004, oag.ca.gov/sites/all/files/agweb/pdfs/charities 14. Alex Daniels, “Nonprofits Proliferate but Not/publications/nonprofit_integrity_act_nov04.pdf. the Regulators, Says Report,” Chronicle of Philan-5.“The Nonprofit Revitalization Act’s New Annual Filing thropy, October 5, 2015, philanthropy.com/articleRequirements,” New York State Office of the Attorney /Nonprofits-Proliferate-but-Not/233641.General, accessed May 13, 2016, www.charitiesnys 15. National Association of Attorneys General, “Chari-.com/nonprofit_rev_act.jsp. ties Committee,” accessed May 13, 2016, www.naag6. “Charities Bureau’s Business Process Analysis,” .org/naag/committees/naag-special-committeesNew York State Office of the Attorney General, /charities-committee.php.December 16, 2015, static1.squarespace.com/static/514df9aae4b0123f55d14129/t/5672d016df40f3 To comment on this article, write to us at feedbackfd5f51bc61/1450364950229/Charities+Bureau+CSG @npqmag.org. Order reprints from http://​store.nonprofit+Announcement+-121615-F.pdf. quarterly.org, using code 230203.S U M M E R 2 016 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​27

Nonprofit Regulation & OversightChanges in the IRS Oversight of Nonprofits: A Conversation with Virginia Gross While the IRS’s Editor’s note: This interview with Virginia Gross, member of the Exempt Organizations (EO) sub- enforcement committee of the IRS Advisory Committee on Tax Exempt and Government Entities (ACT), delves into capacity has the current state of the regulation of exempt organizations by the IRS. Gross describes a major shiftdiminished in recent at the IRS that combines a greater use of technology to review returns with a more siloed approach to years, there are its various roles. All of this adds up to a sense that there will be less discretion by the Exempt Orga- changes afoot that nizations division right at the point when the floodgates have been opened with the Form 1023-EZ.will influence how it continues to both As a shareholder with Polsinelli PC, Gross focuses on providing advice and counsel to nonprofit andmonitor and regulate tax-exempt organizations on all aspects of tax-exempt organizations law—such as their formation, nonprofits in the qualification, activities, and business ventures—and advises nonprofit clients on issues regardingnear future. Instead their operations, fundraising practices, grantmaking, unrelated business income planning, joint of focusing on venturing and partnering, and the use of supporting organizations and for-profit subsidiaries. Her reviewing certain publications include Nonprofit Governance: Law, Practices & Trends (2009) and The New Form 990: industries for Law, Policy, and Preparation (2008), published by Wiley & Sons. She is also a contributing author toparticular issues, it is The Jossey-Bass Handbook of Nonprofit Leadership and Management (2011) and Nonprofit Managementmoving toward more 101: A Complete and Practical Guide for Leaders and Professionals (2010).objective, wholesale examinations Ruth McCambridge: The assumption on the activities qualified, whether certain things they of all exempt part of nonprofits has always been that the do could jeopardize their status, and what would organizations that IRS had a primary role in its monitoring and be the tax treatment of those activities. And then,file 990s—and this regulation—and sometimes, though relatively certainly in the past, we saw a lot of compliance will likely lead to rarely, in enforcement. Can you talk a little bit checks. Many of these compliance checks havegreater scrutiny for a about how that may have changed over the past been industry-specific, like the big hospital com- larger number of decade or so? pliance check many years ago—and, of course, nonprofits. the college and university study several years ago Virginia Gross: The IRS has always had a role was a huge one. in determining whether an organization fits into a particular tax-exempt organization category— But a lot has changed internally that, in the end, and it still does. It has produced guidance in the will have external effects. It is a reorganization form of revenue rulings, information letters, and that more strictly assigns certain kinds of tasks to lots of private letter rulings, allowing taxpayers specific departments. First, we’ve had the big shift to ask specific questions about whether their of employees from the Exempt Organizations divi- sion to the Chief Counsel division, and now that28 ​T H E   N O N P R O F I T   Q U A R T E R LY  “YOU ARE HERE” BY SAMMY SLABBINCK/SAMMYSLABBINCK.TUMBLR.COM/



The new process will division is doing everything with private letter and how you’re answering certain questions onvastly increase the rulings, technical advice memoranda, and formal Schedule L—and seeing if all that matches up.number of returns the guidance. The EO division is now more about the Certainly, they might look for information thatIRS can look at, and determinations function (which concentrates on could give rise to intermediate sanctions, or itemsthere may be a greater reviewing applications for tax-exempt status) that might give rise to questions concerning unre-likelihood of a more and the exam function (which involves auditing lated business income. I think that those morequalitative exam if the exempt organizations). major categories and topics would be what thequery process raises queries are focused on, but we really don’t know.warning flags. This likely has flowed from the 501(c)(4) brou- This is purely speculation on my part. haha, which caused Congress to take a look at the EO division and work at eliminating discretionary RM: When would the queries be made? or subjective power over nonprofits. I don’t think that ten years ago we would have seen things like VG: I think after the returns are filed, it would be the spending bill associated with PATH, the Pro- part of the review process of the returns. Right tecting Americans from Tax Hikes Act of 2015, now, I believe that less than 1 percent of exempt where you had Congress saying to the IRS that it organizations are examined, because it takes a lot couldn’t issue the 501(c)(4) regulations—that they of manpower to pull a 990, review it, and decide were going to restrict the IRS from doing that. if there are things on it that should be questioned or looked at further. RM: So, it’s the imposition of limitations on the IRS’s discretion? RM: What are we headed for now? VG: Exactly. And the IRS itself is moving to be VG: The new process will vastly increase the more objective in other areas, too. That lessening number of returns the IRS can look at, and there of discretion is also seen in a more automated may be a greater likelihood of a more qualitative exam function—one that is being implemented exam if the query process raises warning flags. more broadly and organized around a system of approximately 190 Form 990 queries, designed to The IRS has stated publicly that it will be surface potential compliance risks. What the IRS doing more limited-scope exams and corres­ is saying is that this is going to lead to more objec- pondence exams. So, I would imagine that the tive examination and review of exempt organiza- first line of attack might be a letter from the IRS tions, because basically they’ll take all the 990s, asking for an explanation. Or, if a return surfaces they’ll run them through the queries, and then, a number of problems, an organization might based on those queries, they’ll identify the orga- get a letter saying a revenue agent is going to be nizations that are more at risk for noncompliance. coming to visit and needs to look at its books and records. So, rather than having to pick an industry and say, “We’re going to study colleges and universi- RM: So, the way people answer questions on ties,” “We’re going to study hospitals,” or, “We’re their returns will be under tighter scrutiny in going to study social clubs,” the new process the future because we’re dealing with a more will instead study all exempt organizations that automated system? file 990s, and decide who’s going to be examined based on those queries. VG: I think that exempt organizations will want to be very careful about how they’re answering ques- RM: Can you talk a little bit about the queries? tions on the Form 990—making sure that they’re being very accurate. And they will want to be very VG: Well, they’re keeping those very close to their careful about completing the other required parts chest. But I can imagine they might touch on such or schedules if they’re answering a question that matters as loans with officers or directors, the then requires a schedule or another part of the existence or not of a conflict-of-interest policy,30 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SPRING 2016

form to be filled out. The IRS has stated that in increasing. But I don’t know the statistics. Also, Because of the EZ, the2016 its goal is to conduct 7,000 exams—which the IRS just announced that the user fee for the backlog of applicationsis up from 6,300 in 2015.1 1023-EZ is going down—from $400 to $275, effec- has dramatically tive July 1, 2016. decreased. Apparently,RM: Can you talk a little about what effect the over half of newuse of the Form 1023-EZ has had on the flow of One other point about the EZ forms is that the organizations are ablethe approval process for tax exemption? IRS is going back to 3 percent of the 1023-EZ filers to file the EZ, so that and asking them a series of questions. That’s their has freed up the IRS toVG: Because of the EZ, the backlog of applica- backend check on the 1023-EZ filer. look at the other 1023stions has dramatically decreased. Apparently, and 1024s—the longover half of new organizations are able to file the RM: What other changes are we potentially forms being filed.EZ, so that has freed up the IRS to look at the looking at?other 1023s and 1024s—the long forms being filed.And last I saw, it was about 100 days average turn- VG: One of the changes we are seeing as it relatesaround time as compared to about nine to twelve to exempt organizations is that there seems tomonths previously. So, this is a really good time have been a decision made to be a little moreto be filing a Form 1023 or 1024, because they are formal about how things are being done—that thebeing processed more quickly. determinations folks are the ones best suited to be making determinations and the exam folks areRM: Is the overall effect of that a positive or a the ones best suited to be making adjustments andnegative, do you think? corrections, but not determinations. For example, if the IRS is examining an exempt organization, theVG: I think for the long form it’s a very positive examining agent can no longer approve a changeresult, because there’s a lot of satisfaction. You to the organization’s exempt status. The agent cancan form an organization and know that you’re only revoke the current exempt status, and thenprobably going to have your determination letter the organization is going to have to apply to havefrom the IRS in four months, and then you can the new exempt status recognized. So there willbe fully operational. Now, with the EZ organiza- be a waiting period between the two events. Andtions, I still hear a fair amount of complaints about part and parcel of that is also a question that’show their activities and organizational documents been getting a lot of discussion at conferencesare not going under any kind of serious review by and such, which is when you request a privatethe IRS to make sure they’re meeting the require- letter ruling on whether an exempt organizationments of their tax-exempt status. can engage in certain activities, can you get a ruling on whether the organization can keep itsRM: So, there’s less of a problem getting through tax-exempt status, or will the activity jeopardizeover the threshold. its exempt status? Well, we can no longer do that. We can write in and say an organization wants toVG: Right. do these activities, and, for example, ask if they are permissible activities for a 501(c)(3) organiza-RM: Are we likely to see a real increase in the tion. But the Chief Counsel division can’t rule onnumbers of nonprofits? whether the activities are going to jeopardize the exempt status or cause the organization to lose itsVG: Oh, yes, I think we are. The IRS is report- status, because that’s a determinations function.ing that 58 percent of the determinations so farhave been on the Form 1023-EZ, and the approval RM: What else will our readers potentially expe-rate this fiscal year has been 94 percent. With the rience as changes from the IRS?easier Form 1023-EZ process, I think the numberof new Section 501(c)(3) organizations will be VG: Well, as I mentioned, the EO division shifted a number of employees over to Chief Counsel,SPRING 2016 • WWW.NPQMAG.ORG  T H E   N O N P R O F I T   Q U A R T E R LY  ​31

As far as exempt and that’s where more of the guidance is coming think they should feel like the playing field isn’torganizations are from. They’re being very forthcoming, though, what it used to be. I mean, they’re still having toconcerned, I don’t think in telling taxpayers that, when they come in abide by the same laws. It shouldn’t change howthey should feel like for a private letter ruling, they should request a they’re doing things. But it does mean that theythe playing field isn’t pre-ruling conference and talk about the issues probably need to pay more attention to their Formwhat it used to be. . . . ahead of time. So, they’re being very generous 990s going forward. There may be an increase inBut it does mean that with those pre-ruling conferences, and encourag- the IRS’s ability to review the activities of exemptthey probably need to ing them. And I think that’s a positive change that organizations with this shift to the data-drivenpay more attention to your readers may want to know about. decision making.their Form 990s goingforward. There may be Another thing the IRS is trying to do is become RM: In short, how do you think nonprofits mightan increase in the IRS’s more organized through something called Knowl- experience the relationship with the IRS differ-ability to review the edge Networks, or K-Nets. These are collections ently over the next few years?activities of exempt of written materials and other resources that func-organizations with this tion as networks to organize the wisdom in the VG: Well, in our June 2016 advisory committeeshift to the data-driven agency in a more cohesive and consistent way, report, we are encouraging the IRS to engage indecision making. for everyone at the IRS to use—but within the more communication with the sector and include IRS only. They’re not going to be made public for more voices in those conversations.3 And we are the rest of us to use. They already have a K-Net encouraging the IRS to give the sector easier on private foundations and one on unrelated busi- access to the knowledge and tools it needs to be ness income, for instance. I think there are six compliant, through educational materials and altogether that are applicable to exempt orga- informal guidance that apply to current types of nizations. But the IRS is making public its new issues experienced by nonprofits. So much of the “issue snapshots” on various exempt organization existing guidance is very dated. We’re hopeful that issues.2 the IRS will be able to do this, but unfortunately it is still under severe budget restraints. But, for Again, the idea is consistency and objectivity in now, the IRS is working with what it has to reach giving guidance and making determinations—the out to the sector and to oversee exempt organiza- intention being that if everyone is reading from tions in a meaningful way. the same playbook, the law will be more consis- tently applied. RM: So, the big news, really, is that the IRS is Notes trying to organize itself—at least internally—to 1. Comments from Margaret Von Lienen, director be more consistent and less vulnerable to attacks. of exempt organizations examinations, delivered at At the same time, it’s broadening the way it will the TE/GE Joint Councils on February 26, 2016, as alert itself to problems related to individual reported in the EO Tax Journal. organizations, rather than looking at particular 2. See www.irs.gov/government-entities/tax-exempt- fields for particular issues. Do you think it will and-government-entities-issue-snapshots for access still be looking at doing some of those field-wide to the “issue snapshots.” compliance checks, or do you think this really 3. Amy Coates Madsen et al., “Stewards of the Public is a replacement? Trust: Long-Range Planning for the Future of the IRS and the Exempt Community,” in Advisory Commit- VG: I think it’s going to be moving away from tee on Tax Exempt and Government Entities (ACT): industry compliance checks and more toward 2016 Report of Recommendations, IRS.gov, Forms what the IRS calls “data-driven decision and Publications, June 8, 2016, 89–156. making”—where the IRS is trying to remove sub- jectivity out of the mix. To comment on this article, write to us at feedback @npqmag.org. Order reprints from http://​store.nonprofit But the law has not changed. So, as far as quarterly.org, using code 230204. exempt organizations are concerned, I don’t32 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SPRING 2016

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Nonprofit Regulation & Oversight; InternationalRegulation ofNonprofit andPhilanthropicOrganizations:An International Perspective by Mark SidelDespite the great T he world is a remarkably diverse place, sodiversity in local, any attempt to discuss recent trends inregional, and international regulation of nonprofitsinternational nonprofit is fraught with difficulties. Comparingsectors, there are countries is very challenging, and local contextimportant trends on differs from place to place. Well over two hundredthe international countries have various forms of regulation of non-scene vis-à-vis civil profit and philanthropic organizations in place—society. While this is which is to say that virtually all countries do (withgenerally seen as an the exception of a few places, like North Korea).important component Discussing such trends is thus always subject toof democracy, there the dreaded caveat, “but in x. . . .”are also activeattempts to shut Mark Sidel is Doyle-Bascom Professor of Law anddown dissent and Public Affairs at the University of Wisconsin-Madison,exclude foreign and consultant on Asia at the International Centerinfluences on issues for Not-for-Profit Law (ICNL).such as human rights.34 ​T H E   N O N P R O F I T   Q U A R T E R LY  “GLOBE NO.2” BY AMBRUS GERŐ/AMBRUS1.COM/



There can be no doubt Yet, even with an understanding of the broad postactivity reporting of planned activities; andthat we are seeing diversity of local context and national approaches, restraints on financial activities, among manyconstraints on nonprofit we can see important trends under way in recent others. It is not going too far to say that, in thisorganization and years in the regulation of nonprofit and philan- area, it is as if China had catalogued the ways inadvocacy in a number thropic groups in countries around the world. which governments can restrain local nonprofitsof countries. Over the past year, a key development has been through legal means and then employed virtually the increase of constraints on civic space—and all of those means in regulating foreign NGOs. those constraints are often accomplished using Other countries also regulate the work of foreign regulatory means. In order to give some specifi­ NGOs, but often in more targeted ways; India, city to this, I use China as an example, but this for example, targets foreign funding through the trend is occurring in a number of other countries Foreign Contributions Regulation Act, which and regions, as well. has been in place since 1976. China has chosen a wider brush. The Complex Picture of Nonprofit and Philanthropic Regulation On the other hand, while the growing restric- tions against and repression of domestic advo- There can be no doubt that we are seeing con- cacy groups and legal constraints against foreign straints on nonprofit organization and advocacy NGOs are an illustration of nonprofit and philan- in a number of countries. The International thropic regulatory developments, they are not Center for Not-for-Profit Law (ICNL, with which the entire picture: the Chinese state uses a broad I work), the United Nations Special Rapporteur brush yet chooses its targets carefully: While on the rights to freedom of peaceful assembly domestic advocacy groups and at least some and of association, and many other national and foreign NGOs are under significant constraint, international bodies have labored over the past numerous other groups continue to expand and several years to document that shrinking space develop in China, in perhaps the most extensive around the world. development of a nonprofit sector anywhere in the world in the past several decades. Developments in China illustrate the com- plexities of this trend. On the one hand, China is In China, domestic social services organiza- clearly moving to limit civic and organizational tions, social enterprises, and other groups that space through regulatory action. Particularly are perceived as valuable to the state are not since the Xi Jinping administration came to seeing the levels of constraints that the advocacy power in 2012, labor and feminist activists have and foreign sectors are experiencing. The new been jailed, an array of advocacy organizations domestic Charity Law in China, adopted earlier have been closed, liberal intellectuals have been this year, illustrates this. While the Chinese non- criticized, and a pall has descended on some profit community is most certainly not free from public and advocacy aspects of Chinese life. In constraints and controls, it views the Charity the regulatory sphere, the strongest example of Law quite differently from the new Foreign NGO this trend is the new Chinese Law on the Man- Law. It is seen as at least partly facilitative of the agement of Domestic Activities of Foreign Non- growth and expansion of the Chinese nonprofit governmental Organizations (Foreign NGO Law), sector and of legislative reforms in regulation— which was adopted in late April. such as more streamlined registration for domes- tic charitable organizations—that the Chinese The Foreign NGO Law employs virtually nonprofit sector has long requested and with the entire spectrum of constraints on foreign which China has experimented in certain areas NGOs and foundations that is available to a of the country. state: restraints on and restrictive processes for registration; state management and supervi- In China, if not always abroad, there is some sion; requirement of local partners—and legal recognition that the Chinese state is molding its responsibility on those partners for the work of nonprofit sector—encouraging the formation foreign NGOs; pre-reporting and approval and and development of groups that it sees as useful,36 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2016

while constraining, bureaucratizing, and repres­ nonprofits by terrorists. But all too often nations Over the past severalsing domestic advocacy groups that are perceived are using the broad language of Special Recom- years, the environmentto threaten the state and the Communist Party. mendation VIII to, for instance, restrict funding to for civil society has nonprofit organizations or certain advocacy work shrunk and tightenedDoes International Law Play a Role in that nonprofit organizations do, well beyond the worldwide—a trendAmeliorating Constraints on Civic Space? international legal requirement and in ways that that ICNL and a number constrain the work of the sector. Being able to of other organizationsAll of this points to a key element in the develop- term such restrictions an implementation of inter- have documented inment of nonprofit and philanthropic law around national antiterrorist funding provisions can be a Egypt, China, and dozensthe world. These developments are almost always legitimizing convenience for some governments. of other countries . . .country-based, not regional or international, and indeed, it could be saidregional or international legal arrangements play A second example is how constraining legal that we are in an era ofrelatively little role in ameliorating constraints environments are referenced and at times even the closing of civic space.on civil society. copied by other nations that seek to impose the same restrictions. A good illustration of this is the A number of actors would like more regional proliferation in South Asia of regimes for restric-and international regulation of nonprofit and tion of foreign funding. For instance, there arephilanthropic action. Usually, these are groups restrictions on foreign funding in India that gofocused on ensuring broader rights to freedom back to 1976, when the original Foreign Con-of association and supporting efforts to reform tributions Regulation Act was enacted. Sincerestrictive legal frameworks in various coun- then—with increasingly restrictive amend-tries. There is regional and there is interna- ments—it has become harder and harder fortional regulation in a number of other areas, NGOs and other charitable groups in India toof course, but expanding it for nonprofits and access funding offered by foreign donors andphilanthropy currently seems difficult. Organiza- other groups. That’s a national system in India—tions and commentators like ICNL and the UN and what’s regional about that? What’s regional isSpecial Rapporteur are engaged in uncovering that, in recent years, other nations in South Asiawhat little in international law seems to apply have sought to impose their own restrictions onto the nonprofit arena. Expanding regional and foreign funding to their own domestic NGOs andinternational legal standards to provide a more other groups, often in very similar terms to theenabling environment for nonprofit and philan- original—and highly persistent—Indian law. Inthropic organizations is a long-term—and cer- Bangladesh, for one, the government is deeplytainly worthy—project. But, on the relatively rare suspicious of the role of the country’s vibrant andoccasions where regional or international law on effective NGO sector, and has sought to enact afreedom of association comes to the fore, it is permission-based regulatory scheme for foreignoften, regrettably, in a restrictive mode. funding of charitable organizations. Similarly, in Pakistan, the government has introduced restric- Two examples of this regionalization of non- tions on foreign funding in recent years.profit law will suffice. Since shortly after the Sep-tember 11 terrorist attacks, the Financial Action Problems in the “Closing ofTask Force (FATF), an international legal body Civic Space” Narrativecombating terrorist financing, has included a pro-vision (Special Recommendation VIII) that pri- Over the past several years, the environment formarily seeks to prevent nonprofit and charitable civil society has shrunk and tightened world-organizations from being used as conduits by ter- wide—a trend that ICNL and a number of otherrorist groups. The goal is laudable, but in many organizations have documented in Egypt, China,countries implementation of that measure has led and dozens of other countries. Many meetingsto unnecessary and unfortunate restrictions on have been held and many articles published onthe work of nonprofits. Sometimes, those limita- the “closing space” phenomenon—indeed, ittions are a good-faith attempt to implement the could be said that we are in an era of the closinginternational legal strictures against the use ofS U M M E R 2 016 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​37

But the “closing space” of civic space. Two decades ago, as civil society have heard discussions of the Chinese overex-narrative has become expanded around the world, Lester Salamon, ercising sovereignty over advocacy and foreignsomething of a in a well-known piece he wrote for Foreign NGOs, or “using” sovereignty for repressivemantra for nonprofit Affairs, called the development an “associational means. There is an irony here: in the longdevelopment around revolution.”1 Today, as governments around the sweep of decades of strengthening the capa­the world. It has been world shrink the space for civil society, we are city of states such as China, a process in whichstated overbroadly seeing, rather, an associational counterrevolu- many foreign foundations and NGOs have par-and without sufficient tion underway. But the “closing space” narrative ticipated actively and with Chinese support,nuance, and it requires has become something of a mantra for nonprofit we are now in an awkward position when asome careful thinking. development around the world. It has been stated stronger China decides to use its strengthened overbroadly and without sufficient nuance, and capacity in ways with which we disagree. it requires some careful thinking for the follow- ing reasons: • • • 1. Constraints on nonprofits and regulatory The “closing space” phenomenon and debate will tightening are often far more complex than continue to dominate global dialogue on nonprofit the “closing space” theme allows. In a number and philanthropic regulation for at least several of countries, for example, there isn’t a closing years to come. More work must be done vis-à-vis of civic space across the board but rather for the developments of these regulatory constraints a carefully selected range of nonprofits on on countries around the world, and groups like which the state is focusing—often advocacy ICNL and the UN Special Rapporteur are doing organizations. Other valuable and effective that quite effectively—indeed, I applaud their organizations such as social enterprises, work (and participate in ICNL’s work on this). social service groups, and others may, in fact, But we must practice caution in our approach see their space remaining similar to what they to the “closing space” mantra, and try to ensure once had—or even opening up. This is the case, that it does not oversimplify the complex develop- to some degree, even in a country like China. ments we are witnessing during a crucial time for There has perhaps been no greater develop- the development of nonprofit and philanthropic ment of nonprofit and hybrid organizations sectors around the world. anywhere in the world over the past decade than in China. At the same time, the Chinese Note state has put significant constraining pressure 1. Lester M. Salamon, “The Rise of the Nonprofit on advocacy organizations, grassroots organi- Sector,” Foreign Affairs 73, no. 4 (July/August 1994): zations, and some foreign NGOs. To describe 109–22. all this as merely “closing space” oversimpli- fies the process of molding and channeling the To comment on this article, write to us at feedback nonprofit sector that is under way in China and @npqmag.org. Order reprints from http://​store.nonprofit many other countries. quarterly.org, using code 230205. 2. The “closing space” mantra and criticism show little regard for national sovereignty. I (and others) may not like what the Chinese state is doing to restrain the civic and advo- cacy space available to grassroots, advocacy, and some foreign nonprofit groups—includ- ing their new Foreign NGO Law. But implicit— and often stated—in the external analysis of “closing space” developments is the idea that countries carry out these policy shifts illegally and illegitimately. Thus, in recent years, we38 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2016

Dr. Conflict by Mark Light, MBA, PhD Consultants sometimes organize their approach to nonprofit boards around a set of strict norms and assumptions that are not exactly on point. Here, the good doctor’s advice contains a gentle “Physician, heal thyself” nudge.Dear Dr. Conflict: and so forth, but there is lip service and the majority you’re working with are I am a consultant who has there is action, and clearly they don’t really in their eighties, you may have been doing strategic planning want to take action. Ideas?!? a point, and your rationale that some with a nonprofit that is facing turnover promotes diversity/brings in significant marketplace changes. The (2) The vice president is soon to new blood makes sense. But that’s still a executive director is very knowledgeable be president, and he is not going to lot of wisdom, wealth, and work to lose. on many levels. She has a great board be good for the organization. He is a That said, you could try to influence the president, who is a whiz at finance and very aggressive person and shoves his board to go for term limits (71 percent of is very supportive. ideas down everyone’s throat. No one boards have them) by putting together a There are a couple of issues: (1) Most will stand up to him, and I understand list of respected agencies in your com- of the board members are retirees. This why: it’s exhausting! munity who have term limits, along with is not a problem; recent retirees make their rationale for doing so—maybe even some of the best board directors! Yet, If he becomes president, he will make have a few tell their stories to the board. at least half of the members have been the executive director’s life miserable. on the board for between ten and over He doesn’t respect the ED, who is well Now to your question about the aggres- twenty years. The board president has respected in the field and has two mas- sive incoming president. A solution is to served as president for fifteen years. ter’s degrees, including one in nonprofit have the next VP serve in a closer partner- One cannot question the passion management. No one on the board will ship with the new president to balance these folks have for the commitment; admit to any discomfort or confront the his style. But where is the ED in all this? however, I do feel some turnover is problem. I advised the board to give the This is a clue as to why there are so many healthy, and I cannot persuade them prospective president an out by having difficulties. Robert Herman says, “Boards of that fact. Far too many—in fact, the the current board president question if are much more likely to be active, effec- majority—are octogenarians. I am a he has enough time to devote to all the tive bodies when they are supported by a big believer in the value of institutional changes ahead. Any other ideas?? chief executive.”2 Dr. Conflict guesses the history, but this is way too much. I have ED is absent because she doesn’t know run into this before in cases where long- —Can’t Get Through how to take this role. The bottom line is, time board directors throw out term you can’t get through, because you’re not limits so they can keep on serving. They Dear Can’t Get Through, supposed to; that’s the ED’s job, armed truly believe that what they are doing is You applaud these octogenarians for with your support/counsel. Instead of a in the best interest of the organization. their commitment, and praise the value consultant, be a coach, and help the ED Of course, I made the recommenda- of recent retirees, but at the same time improve her leadership. She’ll be better tions for healthy turnover, diversity, you want to get these lifers out the door. off, the board will be more effective, and you can take a much-needed vacation. Nationwide, the percentage of chairs and board members sixty-five and older is 27 and 16 percent, respectively;1 ifS U M M E R 2 016 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​39

CONFLICT Dear Dr. Conflict, establish policy; secure essential of a coach and help the younger board As a consultant on governance, I am resources; ensure effective resource members understand that politics are working with a board of directors that use; lead and manage chief executive an unpleasant fact in all arenas, includ- on the surface seems to be functioning performance; engage with constituents; ing nonprofits. Then, teach them how to in a reasonably harmonious and profes- ensure and enable accountability; and make politics work for them to get what sional manner. It was only after private ensure board effectiveness.3 Then, evalu- they truly want. They may be purists at interviews with most of the directors ate whether or not the board members heart and have disdain for the whole that I discovered a deep divide in the are doing their job “to exhibit the care, idea, but remind them that “the lack of board between an “old guard” (many of loyalty, and obedience on behalf of the power corrupts. If you don’t have power, whom are former football players with organization [that requires] active and you can’t stand up for what you believe little interest in the substance of the informed preparation and participa- is right.”6 board’s work, and whose main focus is tion in the conduct of board business, the social side of board activities) and including raising questions and issues Notes a “new guard” (a group of younger that would reasonably be raised by any 1. BoardSource, Leading with Intent: A members who take their fiduciary prudent person.”4 This one has Dr. Con- National Index of Nonprofit Board Prac- responsibilities seriously and want the flict worried because of your description tices (formerly known as the BoardSource board to operate in a more professional of the football players as having “little Nonprofit Governance Index). manner). The leader of the “old guard” interest in the substance of the board’s 2. Robert Herman, “Executive leadership,” in clique is a former board chair. He dis- work, and whose main focus is the social David O. Renz, ed., The Jossey-Bass Hand- likes the current board chair and works side of board activities.” book of Nonprofit Leadership and Manage- actively to undermine him, even to the ment (San Francisco: Jossey-Bass, 2010), point of calling other directors before Assessing the performance of both 174. board meetings to encourage them not to the board and board members might 3. David O. Renz, “Leadership, governance, support the existing chair. What action begin with BoardSource’s excellent and the work of the board,” in David O. Renz, would Dr. Conflict advise a consultant range of tools, followed by a consultant ed., The Jossey-Bass Handbook of Nonprofit to take under such circumstances? just like you to help the board understand Leadership and Management (San Fran- its opportunities.5 But however you do cisco: Jossey-Bass, 2010), 125–56. —What’s a Consultant to Do the assessment, do it you must. 4. Ibid., 134–35. 5. To access the tools offered by Board- Dear What’s a Consultant to Do, Why? Consultants (like all human Source, visit www.boardsource.org. On the surface, the board is harmoni- beings) often see what they expect to see 6. Linda A. Hill and Kent Lineback, “The Best ous and professional, but underneath based on their own biases. For example, Way to Play Office Politics,” Harvard Busi- the placid surface is a sharknado of how do you know that the former board ness Review, hbr.org/video/2226595804001 old-guard board members advocating for chair is truly working actively to under- /the-best-way-to-play-office-politics. their social interests against a new guard mine the existing chair? Given that one of younger, well-intentioned fiduciaries. of the duties of the board is to raise ques- Dr. Conflict is the pen name of Mark Light. Adding chum to the water is the former tions and issues, is doing so behind the He is founder and president of First Light chair, who is undermining the current scenes verboten? Does being an effec- Group (www.firstlightgroup.com), whose chair. Your own stance on the matter tive board member forbid one from mission is to bring your future within reach seems to be decidedly pro–new guard: having sidebar conversations with other through executive coaching, sustainable fiduciary versus social interests, operate members in the interest of the agency? strategy, teaching and training, and writing. in a professional manner, etcetera. Is lobbying other board members to Light is also senior professional lecturer at support one’s motion hostile to good DePaul University School of Public Service. So what to do? Start by examining governance? If it were, the Civil Rights your own appraisal that the board is Act that just celebrated its fiftieth anni- To comment on this article, write to us at “functioning in a reasonably harmoni- versary never would have become law. [email protected]. Order reprints from ous and professional manner.” What http://store.nonprofitquarterly.org, using indication do you have that this is true? If you truly believe the old guard is code 230206. I suggest starting with the core func- outmaneuvering the younger members tions of the board: Lead the organization; and you have confirmed this theory, it could be time for you to take the role 40 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2016

Who Says a Common Agenda Is COLLABORATION/COLLECTIVE IMPACT Necessary for Collective Impact? by Brint Milward, Katherine R. Cooper, and Michelle Shumate A common agenda or agreement on a core vision among collective impact stakeholders and leaders is important, but the process of creating a common agenda and incorporating diverse perspectives may be even more valuable. This article suggests that we revise the common agenda standard as a threshold for coming together and avoid the tension of hidden agendas by leaving room for exploring differences.Editors’ note: This piece differs from those previously published on collective impact in that the implications stem from severaldecades of empirical research on networks. Although collective impact is often portrayed as a relatively new phenomenon, years’worth of network research suggest insights that may be useful to the all-important early step of determining an initiative’scommon agenda. The article also elaborates on an often underexplored area of collective impact. Although some parts of thecollective impact framework have gotten increased attention (the backbone organization, equity in collective impact, strategiesfor mutual alignment), the notion of a common agenda is often taken for granted, when in fact it poses a real stumbling blockAfor networks in their early stages. at odds with “mainstream” values and reaching a threshold of agreement that greeing on a common agenda is assumptions. moves initiatives forward—even if total one of the chief tenets of col- agreement can’t be achieved. There is lective impact—and one of the Although we agree that a common much to be said for a principled agree- prerequisites for moving col- agenda is important, we suggest thatlaboration forward. However, our expe- collective impact leaders should treat ment to disagree on some elements of arience working with collective impact it as an aspiration rather than a desti- common agenda.initiatives and other, similar networks nation. We draw upon several decadessuggests that collective impact leaders of network research and exemplar net- Birds of a Featheroften struggle to get buy-in from various works to suggest instead that focusing on Over thirty years of network researchcommunity stakeholders in the crucial the process of creating a common agenda has demonstrated that the easiest wayearly stages. Specifically, we’ve seen that allows for diverse perspectives to impact to form a social network is to recruitinsistence on a common agenda sets a the initiative’s trajectory. To that end, we people who share a common experi-high bar, and may derail partnerships identify common barriers to agreeing on ence based on characteristics such asearly on. More important, the common a common agenda, including the “birds race, class, gender, or education.1 Thisagenda may create barriers to entry of a feather” tension and the “two hats” is the principle of homophily, or “birdsfor diverse partners if they hold views problem. We then offer suggestions for of a feather flock together.” BecauseS U M M E R 2 016 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​41

COLLABORATION/COLLECTIVE IMPACT partners with similar backgrounds can included members who had interests in a collaborative named for the public relate to one another, they bond more education, members who had interests lands joining the Santa Catalina and easily than those who don’t. This means in social services, and members who Rincon Mountains. The collaborative’s that the quickest way of building a represented diverse constituencies first task was to recognize the legitimacy common agenda is to rely on like-minded (“opposites”). The network acknowl- of the interests of all concerned. In this individuals. edged differences between the “birds” case, a common agenda took a back seat and the “opposites” by creating terms of to respect for the differing interests of This sounds dismal for those of us reference that specified different obliga- a group of other individuals: environ- who value diversity and inclusion, but it tions for the two groups. Core members, mentalists, property owners, a cattle needn’t be so—there is another power- the “birds,” shared a common agenda, grazing permittee, horseback riders, ful finding from network research that whereas “opposites” shared some, but hikers, off-road vehicle owners, and gun helps mitigate the principle of homoph- not all, of those interests. enthusiasts—a group with diverse views ily: Although bringing people together regarding conservation and availability in the first place is made easier through Both network evaluation and par- of the Pass for recreational use. Their similarities, networks are more innova- ticipant observation concluded that second task was to develop enough tive when diverse partners participate. acknowledging this “birds/opposites” agreement so that they could negotiate Through the interaction of stakehold- dilemma and creating an institutional a set of consensus recommendations to ers with diverse goals, expertise, and structure to mitigate this tension was the U.S. Forest Service on how to better backgrounds, networks become more one of the keys to SACYHN’s success. manage Redington Pass. In this example, innovative, effective, and resilient. In Over the life of the network, SACYHN recognition of the “two hats” problem other words, effective networks adopt has been viewed reputationally as the was the basis for the more diverse the principles of both “opposites attract” most successful child and youth health group’s willingness to join Friends of and “birds of a feather.” network in Canada.2 Redington Pass and thus gain standing as a body that deserves to be at the table as The question of which principle Two Hats a partner with the Forest Service.3 networks honor—and when—poses a dilemma; however, leaders should recall In addition to creating a bias toward Implications of the “Birds of a that dilemmas cannot be solved—only “birds of a feather,” the common agenda Feather” and “Two Hats” Dilemmas managed better or worse. Therefore, standard doesn’t address the “two hats” for the Common Agenda one of the most important network problem, which is a shorthand way of 1. The SACYHN example demonstrates management tasks is balancing the need saying that members have interests in for networks to have enough cohesion their organizations and the network. that, rather than having exact agree- to hold themselves together, but not so This tension can lead to hidden agendas, ment, it’s more important that part- much that they exhibit “groupthink” that which are toxic in networks. ners speak honestly about their causes them to reject new ideas and prac- varying reasons for involvement in tices. From the standpoint of network The “two hats” problem cannot and the network, and communicate clearly research, managing the “birds/opposites” should not be wished away. Network the degree of their commitment to the dilemma is one of the keys to network members may be torn between their own network. effectiveness. organizational agenda and the agenda 2. In the example of Friends of Reding- of the network itself. Network research ton Pass, people approach a common One way that networks manage this teaches us that there are two fundamen- agenda with different stakes in the tension is by explicitly acknowledging tal tasks that every manager in a network problem—and it is necessary and and accounting for differences. For must adhere to: managing the network, healthy to acknowledge those dif- example, in research conducted on and managing his or her organization ferences, as this discourages hidden the Southern Alberta Child and Youth in the network. One way to manage agendas. We argue that it is better Health Network (SACYHN), we discov- this tension is by creating a threshold to air these differences publicly ered that the network dealt with this of agreement, rather than insisting on rather than keep them hidden. This dilemma by having two “tables.” One a completely common vision of the allows network managers to manage table included the network members desired outcome. For example, in rural the dilemma of the “two hats” in an in the healthcare arena who created Pima County, Arizona, a group of individ- the network (“birds”), and the other uals created Friends of Redington Pass, 42 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2016

Strategies for Collective Impact Initiatives COLLABORATION/COLLECTIVE IMPACT1. Reach a threshold of agreement. In the case of Friends of Redington Pass, for example, the group found that a network’s agenda could succeed with only a 60–70 percent agreement, so long as that agreement coalesced around “core”parts of the network’s common agenda.2. Decide the extent to which your network needs a shared vision. Stakeholders may differ in their values. In the case of SACYHN, the partners created a constitution that determined the extent to which the agenda must be held in common by all, as well as corresponding guidelines for governance and decision making.3. Encourage dialogue and acknowledge difference among network stakeholders. Friends of Redington Pass demonstrates why it is so important to encourage stakeholders to voice opinions that diverge from the common agenda—and why the success of the network may depend on the inclusion of these voices at the expense of exact agreement. open and frank way that views other encourage and accommodate diverse University of Arizona School of Government agendas as legitimate and allows views as well as to make adjustments and Public Policy, and board president of members to meet a threshold of based on new information or changed Friends of Redington Pass. agreement. circumstances.3. Some organizations are more criti- Brint Milward is director of the School cal to collective impact success than • • • of Government and Public Policy at the others, as illustrated by the SACYHN University of Arizona, and holds the Provi- network’s “two tables” approach. Today, Friends of Redington Pass serves dence Service Corporation Chair in Public Agreement upon a common agenda as an umbrella organization to bring Management. For over thirty years, Brint’s may be more important for core orga- together groups and organize events work has focused on understanding how to nizations than for others. that allow and encourage shared use effectively manage networks of organiza-4. Some elements of the common agenda of the land. Their experience—and that tions that jointly produce public services. may have more relevance for the net- of SACYHN—demonstrates that both Katherine R. Cooper is research associate work’s success, while others may common and divergent interests can in the School of Communication at North- not. Group members disagreed on be a powerful force for bringing groups western University, and associate director how open Redington Pass should be together and facilitating change for of the Network for Nonprofit and Social to the public (for example, the envi- those working to improve educational, Impact. Kate’s research interests include ronmentalists argued for more pro- environmental, or health outcomes in a nonprofit and cross-sector collaboration tection of the Pass than the off-road collective impact setting. in response to large-scale social prob- vehicle group or the gun enthusiasts lems. Michelle Shumate is director of the typically supported), but everyone Notes Network for Nonprofit and Social Impact. realized that they were more power- 1. Janice Popp et al., Inter-Organizational Shumate is also an associate professor in ful working together than separately Networks: A Review of the Literature to the School of Communication and a faculty to leverage their common interests for Inform Practice (Washington, DC: IBM affiliate at the Institute for Policy Research, greater conservation resources to be Center for the Business of Government, 2014). both at Northwestern University. The dedicated to the Pass in the Coronado 2. Ibid.; and Robin H. Lemaire, Keith G. Network for Nonprofit and Social Impact National Forest plan. Provan, and H. Brinton Milward, SACYHN is dedicated to answering the question:5. The creation and implementation of network analysis and evaluation report How can nonprofit networks be rewired a common agenda has negative impli- (Calgary, AB: Southern Alberta Child and for maximum social impact? cations for equity—there’s power not Youth Health Network [SACYHN], unpub- only in setting the agenda but also in lished document, 2010). To comment on this article, write to us at forcing others to adhere to the agenda. 3. Information in this section is from an inter- [email protected]. Order reprints from Viewing the common agenda as a “con- view conducted by Brint Milward, on May http://store.nonprofitquarterly.org, using tinuing dialogue” makes it easier to 17, 2016, with Kirk Emerson, professor of code 230207. practice in collaborative governance at theS U M M E R 2 016 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​43

NONPROFITS & THE ECONOMY The Sustainability Prerogative— Nonprofits in the Future of our Economy: A Conversation with Douglas Rushkoff With digital companies like Amazon and Uber focusing primarily on returning share value to investors in a “growth above all” mindset, many question how sustainable their practices truly are. The stock market business emphasizes growth of the industry but places little value on the individual or the community fostering the industry. It may be time to consider transitioning into a different economic model, in which companies are structured like nonprofits: economically sustainable while building investments that will nurture society. Editors’ note: Douglas Rushkoff’s best-selling books on media and popular culture, including Present Shock: When Everything Happens Now, have been translated into over thirty languages. He is professor of media theory and digital economics at CUNY/ Queens, technology and media commentator for CNN, digital literacy advocate for Codecademy.com, and a lecturer on media, technology, culture, and economics around the world. In his new book Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity, he argues that we have failed to build the distributed economy that digital networks are capable of fostering, and have instead doubled down on the industrial-age mandate of “growth above all.” Central to his argument is the rise of a new dominant business form—and it is, ideally, nonprofit. This interview was first published on NPQ’s website on April 27, 2016. Ruth McCambridge: Douglas, your the tendency in the nonprofit sector is growth and what it is doing to the ideas are so aligned with a lot of what to deal with one social issue at a time, planet, and then describe to some extent we’ve been thinking about at NPQ in and not with the larger construct of the the whole distributed alternative and terms of where the general economy is economy or with the way individual what we have to pay attention to in going and what part nonprofits should enterprises reflect one economic pri- terms of a platform. have in its future. We have been talking ority over another. That leads to some with our readers about thinking bigger, pretty muddy thinking where valuing I can set this up with two simple understanding that there’s a major shift ourselves as economic engines goes. questions: What is your book’s basic going on—and that they have to under- proposition, and can you describe your stand the hugeness of that shift and the I was hoping that you could describe hypothesis about why an emphasis on capacities of it before it’s too late. But just where you see the economy as growth would lead us down the wrong regards the character of for-profit-style path at this point? 44 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2016

Douglas Rushkoff: I think that the non- charge of the company would rather see capital, that’s not good enough. That NONPROFITS & THE ECONOMYprofit sector in particular is perfectly sit- the company die than be a “single” or doesn’t work. You need to grow. Youuated to help us transition to a different a “double.” In other words, it can’t just need to show your shareholders thateconomic landscape. You know, most be a successful company, because that your quarter-over-quarter business pros-nonprofits think of themselves as doing doesn’t serve him. pects are doing better and better, so thatsomething good, but what I want to try you can get a higher and higher shareto make them more aware of is that the What he needs is for this company price and your shareholders are happy.nonprofit structure itself—the way the to be “100x” return, meaning that onebusiness is actually structured—may hundred times his initial investment has So, Amazon goes and looks at thebe doing more good than whatever their to be paid back in a sale. And the reason book industry; it doesn’t care if it killsparticular business is. why he would rather the company die is it. All it needs to do is be able to domi- because until the very last minute—the nate it completely so it can then leverage And that’s my basic premise: While very last second—there’s some possi- that monopoly into another industry, andthe public looks at nonprofits as bility that even the dying company will yet another industry—whether it’s dronedo-gooders, I’m looking at the structure be acquired. So, he will position the planes or retail toys and clothing orof nonprofits and not-for-profit corpo- company for that. This doesn’t mean cloud services or any other market. Therations as business entities. Because having a successful sustainable business same goes for Uber. It doesn’t care if thethey’re not for sale—because they’re not enterprise or making revenue; it means drivers all go bankrupt. It doesn’t care ifshareholder or share value–maximizing establishing a defensible monopoly over the taxi business it’s starting or the taxicompanies—what they end up doing is a particular industry. You don’t even marketplace it’s running is ultimatelypromoting revenue and the exchange have to think of that industry—or that unsustainable—because it doesn’t needof value and the circulation of money, vertical, as they call it—as something it. It’s buying the taxi industry in orderwhich revives a whole economy rather you want to thrive, that you want even to to flip it into something else—in order tothan enriching the few. survive; it’s just something that you can move into drone delivery or logistics or so totally own that you have the ability some other market. The major businesses that are around to then leverage that monopoly to go gettoday—particularly digital businesses— another one. Traditional corporate capitalismdon’t understand those business basics. always worked this way, but it was a bitThe way that digital companies make Look at Amazon with books. Amazon slower. It took Walmart twenty or thirtymoney is simply by returning share value doesn’t care about authors and publish- years to bankrupt one of the communi-to their investors. So, some young person ers. It doesn’t care if HarperCollins is ties it was extracting value from. So nowor developer might have a great idea for making more money or less, or if authors Walmart is in trouble, because so manyan application or for a platform that reach more readers or fewer readers. It towns where it operates are impover-makes revenue and helps people accom- chose the book industry as its initial ished. Once you have a Walmart, youplish a purpose, that maybe helps other beachhead in the American economy can’t make any money doing anythingpeople do business, that maybe even because the book industry was weak. else. Everyone just either works for themakes users rich on one level or another. Oh, it was fine, hobbling along, but it was Walmart or buys from the Walmart—But this developer takes money from a dying in the sense that it wasn’t a growth that’s it. And it’s an extractive force, soventure capitalist, who then has a very industry. It couldn’t compete against all eventually the towns go belly up, anddifferent goal for the company. His goal the other growth businesses out there, now there are Walmarts closing, becausefor the company is that it gets acquired from the Internet to oil or something the towns they’re operating in have died.or that it reaches an IPO—meaning it gets else. We are a sustainable little indus-listed on the stock exchange—within try. There’s only so many people alive, But what happens when you do thiseighteen to twenty-four months. That’s so many people reading, so much time digitally—when you do it with a digitalwhat the venture capitalist wants, and it’s they can spend reading. platform like an Amazon or an Uber?a win-or-lose landscape. That company That value extraction happens a lothas to hit a “home run”—which means it Now, in real business, you can open faster. So, what used to take thirty yearsmakes it all the way to IPO and becomes a one store, make pizza, sell pizza, make might now happen in three years. Butmultibillion-dollar company—or nothing. a profit, feed your family, and go on they don’t care, because they’re goingThe venture capitalist who is now in like that until you die. But in the stock to move on to another and another and market business, in traditional corporate another. It’s the scorched-earth practice.S U M M E R 2 016 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​45

NONPROFITS & THE ECONOMY RM: So, this is antisustainability? again and again and again and again. price more valuable and then selling that A good company, in other words, to other people. It means that the invest- DR: Yeah, and they don’t really care, ment that you put into the company because the object of the game is to buy understands that if it has wealthy cus- stays in the company. You can’t extract a business and then sell that business tomers and if it circulates money, it can that when you leave. for enough profit that you never have to earn the same dollar ten different times work again. And, as the world gets worse rather than just taking $10 off the table. So, it’s much more like a family because of that activity, it doesn’t really What traditional corporations have done business—and if you look at the data, matter, because you’ve earned enough is they’ve extracted so much money from family businesses do better than millions of dollars to insulate your family the marketplace that there’s not enough shareholder-owned businesses in pretty and yourself from the reality that you’ve money for people to do the things they much every single metric, and they last created. So, that’s really the whole idea: actually need. Most of the people are a whole lot longer. You’re building a get a business and sell that business so poor, and the corporations are rich— company not because you want to take that you have enough money to protect but they’re so rich that they’re suffering value out of it and then use that money to yourself from the devastation and the from a kind of a financial obesity, where bequeath an inheritance to your grand- poverty and the unrest that’s around you. they’ve accumulated all this money children but rather because you hope it but they’re really bad at deploying the will still be around when your grandchil- Now, the thing that I’m arguing to money. They’re bad at making money dren need a job, to circulate wealth when those people, to business people, is that with their money. you die. the probability of being what they call a unicorn—the probability of having In technical terms, corporate profit That’s why I’m trying to convince the one-out-of-ten-thousand chance of over value has been going down for Internet startups to be benefit corpora- having a company that ends up being seventy-five years. That means they’re tions, multipurpose corporations, or, a Facebook or an Uber or a Twitter or very good at collecting money but very best of all, nonprofits. Once you’re a non- whatever—is so small, that creating a bad at spending it, at using it, at doing profit, you don’t have to worry anymore. sustainable business and shooting for anything successful. A big, for-profit You can still borrow money if you want some millions of dollars rather than pharma company now doesn’t have the to and issue bonds and do other things, creating an unsustainable business and capacity to innovate. Instead, it looks but it makes it impossible for share- shooting for billions of dollars is actu- around for little companies that are holders to come and demand that you ally smarter business. It’s better business innovating, and then buys them. So, change your business. You know, if the because—worst case—you can always they’re not really pharmacy companies mob is going to take over your restau- fall back on the fact that you have a anymore; they’re holding companies. rant, they don’t care about your meals revenue-producing sustainable business. They may as well be a mutual fund or anymore; they’re using your restaurant In other words, why not at least have a a bank. That’s even what happened to as a front for something else. That’s what company that generates revenue, that Google. Google now calls itself Alpha- shareholders do: They use any goodwill has a market that is thriving? bet. It got so big that it really couldn’t that you’ve created with your little app, figure out how to innovate on its own with your little company, that name that What I’m arguing is that digital com- anymore, so it buys drone companies people have on their lips—and they use panies—and all companies, really— and robotic companies and other soft- that as a front for an IPO, as a front for should look at everyone from their ware companies that do still have the a flip. And, even if you get to IPO, that supply chain through their consumption ability to use their funds to innovate. doesn’t guarantee ongoing success. Take, chain as people who they want to make as an example, my dear little friends at rich. If you make your customers rich, Now, in the nonprofit sector, unlike in Twitter, who got to IPO and have this then you’ve got wealthier customers and the for-profit sector, the company can’t incredibly successful app that simply people who are going to come back. So, sell itself, and it doesn’t have shares delivers 140-character messages to other you need to start looking at money not that go up in value. Everything else is people; who make $500 million a quarter; as something that you extract from the the same. You could be a nonprofit store. and who are considered an abject failure economy and store in share price, but That doesn’t mean you don’t make rev- by Wall Street because they peaked. You rather as something that you circulate enues. It doesn’t mean you can’t pay make $500 million a quarter—but what through the economy and that you see yourself. It just means that the way you about the next quarter? 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much money as a 140-character messag- who want so much more water from it don’t follow the rules that we’ve estab- NONPROFITS & THE ECONOMYing app can make? What if just $2 billion than it can really supply. lished to maintain that commons.a year is all that this little tiny app canmake? The market is going to drive them The rate of the artificial marketplace I mean, it seems like simple logic, butout of business, right? It’s going to get rid is much faster than the rate of the real it’s looking at a resource as somethingof them. It’s going to kill the company planet. It’s not even the rate of real busi- that we want to maintain over time. Webecause it can’t grow anymore. And ness. Most business—94 percent of want to maximize the value that every-that’s tragic. business, something like that—is now body can create, as opposed to . . . well, derivative. People aren’t even buying the way a short-term company looks atRM: So tragic. I think it’s exactly why and selling real shares; they’re buying something. The ideal scenario for them,we’re losing so many newspapers. and selling derivatives based on those I guess, is when you go to someone else’sIt wasn’t about whether they could shares. The derivatives exchange got so country, you mine for things—and yousupport themselves or not; it was about big that it bought the stock exchange. So, mine for things in such polluting wayswhether they were still growing. we’re looking at a completely synthetic that you make it impossible for the local form of moneymaking. Seventy-four community to do subsistence farmingDR: Yep. We live on a planet that—I hate percent of the revenues earned—the anymore. So now everybody has to workto admit it—might have a fixed quantity money earned by the top 1 percent— for your company if they want to haveof real estate. From space, it looks like was utterly passive synthetic income. an income. And then even after you’rea sphere; it doesn’t look like it’s growing It was valueless. It was just derivatives gone, they don’t have a way to sustainto me. This looks like it’s about it. And of derivatives. It was pure drag on the themselves, so they become utterlyit may be able to go on for a whole long system, and it just doesn’t work after a dependent on you and the World Bank ortime, way longer than people think, but while. foreign lenders in order to buy chemicalsit needs to start thinking about itself as a or whatever they need to try to grow onregenerative system—more like a coral RM: Can you say a little bit about the their polluted topsoil. It’s the anticom-reef or a forest than like a corporate concept of the commons? I know you’ve mons view.marketplace that’s supposed to expand been talking about it throughout—non-forever. And whenever I say this, people profits come out of that concept—but RM: One last question: One thing Iaccuse me of being Malthusian, that I’m can you talk explicitly about how that found fascinating is this concept ofsaying things are limited and we’re all needs to apply here? platform monopolies. What’s the alter-going to die, and I’m really not saying native to platform monopoly, and howthat— DR: The commons has gotten maligned. do we get this sector focused on that and People talk about the “tragedy of the other modern concepts of the commons?RM: Well, hello! In fact, we are all going commons,” which is the idea that if noto die, and things are limited. one owns the thing, everyone is just DR: I think the most promising new going to abuse it and take everything, and structure I’ve been looking at is calledDR: Things are limited, but you can still there will be nothing left. But, in reality, a platform cooperative, and it’s thegrow. It doesn’t mean you can’t have a commons is a managed common opposite of what an Uber or an Amazonprogress and change. You can have all resource, and a real commons has very does. Uber and Amazon want to estab-sorts of innovations and shifts of stuff, strict rules. So, if there’s a pond in our lish monopolies of their platforms. It’sbut even if we may be able to grow— town that we all fish from, we’re going the same as the old chartered monopolyeven grow forever—there’s a certain to have to make rules about this com- that destroyed the peer-to-peer economypoint at which you can only extract so monly used resource. We’ll say, Okay, if of the late Middle Ages, but instead of itmuch water from an aquifer before it you want to use this, you can only have being the East India Trading Companycan’t replenish itself fast enough and the ten fish a day, or twenty fish a week from or Walmart being defended by laws oraquifer is gone. Yes, in a billion years— this, and you can only use this kind of their access to capital, now it’s digitalassuming the planet is not gone—the bait because this other kind is going to platforms that are defended by their veryaquifer will replenish itself, but maybe pollute the water. And then, as managers programming.not fast enough for the human beings of this common resource, we have the ability to penalize or exclude those who Right now, on a platform like Uber, you have drivers who are doing theS U M M E R 2 016 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​47

NONPROFITS & THE ECONOMY research and development for robotic If your neighborhood gentrifies, and if money and still undercut us on price? cars that are going to replace them. So, you’re just a renter in that neighborhood, That makes no sense.” It’s like, Yeah, they’re investing their time and labor you’re screwed. But if you own a build- well, they don’t have the overhead that into something that will soon make them ing in the neighborhood that’s gentrify- you have. They don’t have the overhead even more jobless than they already are. ing, at least your property value is going of shareholders who want to extract all If it were a platform cooperative, then up. At least you’re benefiting in some the value from this equation. And that’s the difference would be that the drivers fashion. But, if you are just a disenfran- the real difference here. would own the platform instead of share- chised worker, like an Amazon Turk or holders. Instead of investing $5 billion an Uber driver, there’s no hope. What nonprofits have to realize is or $10 billion into this platform to give that growth can be a happy side effect it a war chest to deregulate or reregulate So, what I’m looking at is models that of reaching more people and doing more markets in their favor, and to undercut include workers as owners. And there things. The one advantage the nonprofit everybody else in the industry (which is are examples of them. There’ve been sector has over its for-profit counter- what that cash is for—it’s to have lower co-ops for a long time—for instance, parts is that you don’t have the obliga- prices than are manageable, than are there’s WinCo, which is a competitor to tion to grow. You are not structurally sustainable), it would be a driver-owned Walmart out west. No, it’s not a nonprofit, required to grow. And if you don’t play platform and they could pay themselves but it’s a worker-owned cooperative that that advantage, then you’re going to get fair wages. Moreover, even if they do is beating Walmart in both prices and eaten—one way or the other. obsolesce their own driving—even if quality—and certainly in sustainabil- they obsolesce their own careers—they ity—because it pays its workers more To comment on this article, write to us at would be owners in the company that and its workers are owners. I’ve talked [email protected]. Order reprints from they built, which is a totally different to some of the biggest shareholders of http://store.nonprofitquarterly.org, using relationship to it. Walmart, and they’re so confused: “How code 230208. can these people pay their workers more “The Nonprofit Quarterly is the Harvard Business Review for our world.” 48 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2016