Charity law's essentials.

AuthorReiser, Dana Brakman

The boundary between charity and business has become a moving target. Social enterprises, philanthropy divisions of for-profit companies (most notably at Google), and legislation creating hybrid nonprofit/for-profit forms all use business models and practices to mold and pursue charitable objectives. This Article asserts that charity law must be streamlined in order to respond to these and other dramatic charitable innovations. My new vision of charity law centers around two essential requirements. First, charity law must continue to demand that charities maintain an other-regarding orientation, pursuing benefits for someone other than their own leaders and managers. Second, existing charity law must be revised and supplemented to mandate that charities utilize group governance. Additionally, this dual focus should be intensified by removing the limits on commercial and political activity that currently clutter charity law. These reforms will enhance charity law's ability to regulate traditional charities. Moreover, focusing charity law on its essentials will reveal the tools necessary to respond to the exciting developments blurring the boundary between charity and business.

INTRODUCTION

The boundary between charity and business has become a moving target. Google located its philanthropic efforts within its for-profit company, rather than in a traditional nonprofit foundation. Social entrepreneurs are forming for-profit companies to pursue environmental, educational, and public health objectives. Jurisdictions are creating hybrid forms of organization, which blend elements of a charity and those of a business enterprise. Scions of business speak of the need to incorporate social goals and responsibility into their models, in order to generate sustainable success. Yet, the serious shortcomings of current charity law thwart its ability to respond to these dramatic innovations. Legislators, regulators, and courts can enable charity law to do so by identifying and focusing on its essentials.

So, what are charity law's essentials? First, one must unpack the concept of "charity." To be a charity, an organization must pursue a charitable mission as its dominant and overriding purpose. Notably, such charitable missions go well beyond almsgiving. They embrace a broad array of missions, each pursuing some vision of the good, and include entities as diverse as the American Red Cross, your local community theater, and most U.S. law schools. The ways an individual charity achieves its charitable mission can and should evolve in response to changing times and circumstances. Still, the mission imperative remains the touchstone of what is a charity.

The problem with the mission touchstone, however, is enforcement. Accountability to mission is exceedingly difficult to measure and police. Perhaps some donors or patrons may be willing to monitor mission and withhold their support and patronage as a sanction, but these efforts will be limited and insufficient. Public enforcement threatens undesirable government influence on the content of charities' missions. Moreover, public enforcement of mission undermines charities' autonomy, the characteristic that enables them to be innovators, to take countermajoritarian positions, to serve the underserved. (1) Ultimately, charities must be trusted to police mission themselves.

A key goal of charity law is thus to assist charity leaders and stakeholders in enforcing mission. Until now, discussions of charity law have argued the essential way that charity law does this is through the nondistribution constraint. A charity must reinvest its residual earnings in its mission to serve others, rather than route those earnings to individuals who possess organizational control. (2) Current charity law embodies this rule and the slightly more general idea that charities must use their assets to benefit some charitable class. This requirement that charities maintain an other-regarding orientation focuses charities on mission by declaring self-regarding behavior unacceptable. This basic command to serve others is, indeed, one of charity law's essentials.

Yet, other-regarding orientation is not alone sufficient. To enforce mission accountability, each charity must also be governed by a group, rather than by a single individual. Again, the tension between the mission touchstone and the challenge of its enforcement is the key. Society cannot and should not rigorously police the content of a charity's mission or the activities pursued in furtherance of it. Strong group governance creates a means for dialogue about how a charity meets and evolves its mission. Through collaboration and discourse, group governance offers an internal, structural solution for policing charitable mission. Notably, however, this essential principle is largely absent from current charity law. Charity law must be reformed to embrace group governance forcefully.

The necessary reforms to charity law do not stop with this addition. An important excision is also required. Current charity law is replete with attempts to prohibit or penalize charities' decisions to engage in commercial or political activity. These doctrines go far beyond discouraging self-regarding behavior and chill charities' pursuit of legitimate mission-related programs. Rather than promoting discussion of whether a commercial or political activity will support a charity's mission, these doctrines drive charities away from these activities ides wholesale. This ill-fated attempt to guard the border (3) of what will serve charitable mission has generated vague categories and myriad exceptions that are easy for charities to avoid and nearly impossible for courts and regulators to police. This body of law might be read to suggest two further essentials: that charities should sharply limit their commercial undertakings, and that they should eschew involvement in politics. Such restrictions, however, are not essential to enforcing mission and the current charity law expressing them is, for the most part, wasted effort.

The time is ripe for a substantial reform of charity law, focusing it on other-regarding orientation and group governance and eliminating its misguided fixation on commercial and political activities. The rationalization of charity law would always be a welcome development to better regulate traditional charities, but the speed and variety of innovations blending charity and business demand action now. Emphasizing other-regarding orientation and group governance will allow us to discern and enforce the true line between charity and business. Jettisoning the commercial and political restrictions on charities will remove major impediments to innovators' use of traditional charity forms. Focusing on charity law's true essentials will enable it to respond to the exciting and sometimes vexing trend blurring charity and business.

Part I reviews how current charity law distinguishes charities from businesses, drawing on statutory pronouncements, regulatory activity, and common law decisions based on state organizational law and federal and state tax law. The other-regarding orientation requirement is fully expressed in these sources. The group governance norm's grip on current charity law is more tenuous, and this Part will identify several gaps that must be filled for it to achieve its potential as a structural solution to the challenge of enforcing mission accountability. Finally, this Part reviews the substantial body of law restricting the commercial and political activities of charities. Charting the contours of these rules and doctrines reveals a landscape in need of reform.

Part II introduces myriad innovations mingling charity and business that are pressuring charity law today. It argues these innovations can best be understood and regulated by refocusing charity law on the other-regarding orientation and group governance requirements alone. For-profit or hybrid organizational forms used to pursue charitable goals challenge the nondistribution constraint and other prohibitions on self-regarding behavior. The social enterprise trend also deeply challenges the group governance norm, as the structures used to maintain social goals within a for-profit business rely on preserving control with a founder. These challenges are serious and cut to the core of charity law--enabling self-regulation of mission. They highlight the need to continue charity law's vigilance regarding other-regarding orientation and to amplify its commitment to group governance.

Developments on the charity-business border are also pressuring current charity law's restrictions on commercial and political activity. Social enterprise, microfinance, and creative or philanthrocapitalism challenge the idea that charitable mission and commercial activity are incompatible. Social entrepreneurs who spurn charitable forms to avoid their political restrictions suggest that political activity may be necessary to achieve some charitable goals. Here, the experiences of innovators demonstrate the gains to be made by removing many of current charity law's limitations on commercial and political activity.

  1. CURRENT CHARITY LAW

    At the outset it is important to clarify and limit my claims. I argue that the other-regarding orientation and group governance requirements are the appropriate basis for the law's definition of a charity. (4) The concept of a charity is more limited than that of a nonprofit organization more generally. Noncharitable entities may form as nonprofits, most commonly to pursue the mutual benefit of their members, such as in social clubs and trade associations. (5) These entities may engage in some charitable activities, but they are not charities. The limitations that I argue are essential to charity status do not seriously constrain mutual benefit organizations. The limited focus on the proper emphasis of charity law also will not necessarily line up precisely with the...

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