Usha Rodrigues, Entity and Identity

• Citation: Vol. 60 No. 6
• Publication year: 2011

ENTITY AND IDENTITY

Usha Rodrigues*

ABSTRACT

The function, indeed the very existence, of nonprofit corporations is undertheorized. Recent literature suggests that only preferential tax treatment adequately accounts for the persistence of the nonprofit form. This explanation is incomplete. Drawing on psychology’s social identity theory, this Article posits that the nonprofit form can create a special “warm-glow” identity that cannot be replicated by the for-profit form. For example, a local nonprofit food cooperative sells more than the free-range eggs or organic strawberries that Whole Foods and other for-profits market so effectively. The co-op offers community participation and an investment in local farms, a distinctive ethos that is incompatible with the profit motive. Ascribing a special meaning to the nonprofit form allows us to view afresh a variety of issues regarding the appropriate legal treatment of nonprofits.

* Associate Professor of Law, University of Georgia School of Law. I thank Dan Coenen, Henry

Hansmann, Paul Heald, Jill Horwitz, Michelle Morris, Larry Ribstein, participants in colloquia at Illinois, Duke, Emory, and the University of Pittsburgh Law Schools, the 2008 and 2010 Law and Entrepreneurship Retreats, and a Georgia Law brownbag. Exceptional research assistance was provided by Judson Bryant, Sunny Chung, John Crotty, Meredith Lee, Bin Minter, and Eric Stolze.

INTRODUCTION 1259

1. THE NONPROFIT PUZZLE 1265

   1. The Peculiar Problem of Agency Costs for the Nonprofit 1267

   2. Why Nonprofits? 1271

2. THEORIES OF NONPROFITS 1273

   1. Theories of the Firm (in a Nutshell) 1273

   2. Theories of the Firm as Applied to Nonprofits 1275

   3. Contract Failure 1276

3. SOCIAL IDENTITY THEORY 1279

   1. Introduction to Social Identity Theory 1280

   2. Social Identity and the Firm 1281

   3. Social Identity Versus Norms or the Expressive Function of

      Law 1285

   4. Return to Public Radio 1286

   5. Nonprofit Social Identity 1287

4. ENTITY AND IDENTITY 1292

   1. Service Providers 1293

   2. Donative Organizations 1296

   3. Trade Associations and Social Clubs 1303

   4. Religious Organizations 1305

   5. Hybrids: The University Example 1306

   6. Cooperatives 1309

5. IMPLICATIONS 1311

   1. The Solution to the “Nonprofit Puzzle” 1311

   2. Tax Status 1312

   3. The L3C 1314

   4. First Amendment Implications of a Social Identity Theory of Nonprofits 1319

CONCLUSION 1322

INTRODUCTION

The distinction between nonprofit organizations and for-profit firms is blurring before our eyes. Corporate social responsibility, sustainability, and green movements have made doing good an important component of many products offered not only by nonprofits, but also by for-profit firms.

Economists call “warm glow” the utility one derives from giving.1

Increasingly, for-profit corporations sell us warm glow. Consider Starbucks’s description of its Shared Planet initiative:

It’s our commitment to do things that are good to each other and the planet. From the way we buy our coffee, to minimizing our environmental footprint, to being involved in local communities. It’s doing things the way we always have. And it’s using our size for good. And because you support us, Starbucks™ Shared Planet™ is

what you are a part of too.2

Whole Foods is another corporation that markets its products and brand as better not only for the consumer, but also for the larger community. From its webpage:

Yes, we are a publicly held company and have to make a profit to survive in the marketplace. But we’ve proven that a company can do good and do well if the doing comes from the heart. Luckily, our success helps us bring about change in the marketplace, which we

hope will lead to good things for you and us and the planet.3

Corporate philanthropy has a long and distinguished lineage. Profit- making firms have often received (or claim to have received) reputational benefits from such philanthropic projects as sponsoring World’s Fair exhibits, supporting 5K benefit races, or donating to the Ronald McDonald House. It’s easy to be cynical about corporate efforts to sell consumers warm glow along

with their quarter pounders, coffee, and kumquats.4 Regardless of actual

1. M. Todd Henderson & Anup Malani, Corporate Philanthropy and the Market for Altruism, 109 COLUM. L. REV. 571, 583 (2009) (internal quotation marks omitted). By contrast, the utility one feels when another’s welfare is improved is “pure altruism.” Id. (internal quotation marks omitted).

2. Social Responsibility, STARBUCKS COFFEE CO. CAN., http://www.starbucks.ca/en-ca/_

   Social Responsibility (last visited May 28, 2011).

3. Values & Actions Overview, WHOLE FOODS MKT., http://www.wholefoodsmarket.com/values (last visited May 28, 2011).

4. Indeed, such efforts might be counterproductive, to the extent that consumers spend money on green

   coffee rather than, for example, donating to an environmental nonprofit that would more directly achieve the end the consumer seeks. James R. Hines Jr. et al., The Attack on Nonprofit Status: A Charitable Assessment, 108 MICH. L. REV. 1179, 1191 n.54 (2010).

   motives or benefits, however, what seems undebatable is that more and more for-profit corporations are overtly marketing an intangible positive energy as part of the products they sell.

   
   

   Increased warm-glow marketing from the for-profit sector is part of what is blurring its boundary with the nonprofit sector. But there is more: Nonprofits and for-profits now compete in areas formerly occupied almost exclusively by nonprofits. An example involves microfinance—the provision of credit to low-income individuals not served by traditional financial institutions. The Grameen Bank, a nonprofit that began in Bangladesh, developed a successful microfinance model based on organizing borrowers into groups that take

   collective responsibility for members’ loans.5 The Grameen Bank model

   spawned many nonprofit imitators, but before long, for-profit entities jumped on the microfinance bandwagon as well. Thus Compartamos, which began as a nonprofit Grameen-style bank in 1990 but converted to the for-profit form in 2006, has become one of the largest microfinance institutions in Latin

   America.6 Muhammed Yunus, founder of the Grameen Bank and winner of

   the 2006 Nobel Peace Prize, thinks for-profits cannot be true microcredit providers: “When you discuss microcredit, don’t bring Compartamos into it. . . . Microcredit was created to fight the money lender, not to become the money lender.”7 For-profit institutions nonetheless argue that their economies of scale permit them to make more credit available than nonprofit entities can. Citibank8 and Deutsche Bank,9 to name but two international banks, have dedicated microfinance divisions.

   
   

   Even as the line between for-profits and nonprofits is blurring, debate swirls about whether nonprofits should continue to enjoy tax-exempt status. For example, the tax-exempt status of nonprofit hospitals has received close scrutiny in recent years by Congress and the public, as “nonprofit” hospitals have been perceived to be increasingly profitable, perhaps more so than their

   
   

5. See generally About Us, GRAMEEN BANK: BANK FOR THE POOR, http://www.grameen-info.org/index. php?option=com_content&task=view&id=792&Itemid=759 (last visited May 28, 2011).

6. Keith Epstein & Geri Smith, Compartamos: From Nonprofit to Profit, BUSINESSWEEK, Dec. 24, 2007,

   at 45.

7. Online Extra: Yunus Blasts Compartamos, BUSINESSWEEK (Dec. 13, 2007, 5:00 PM), http://www. businessweek.com/magazine/content/07_52/b4064045920958.htm.

8. Citi Microfinance, CITI, http://www.citibank.com/citi/microfinance (last visited May 28, 2011).

9. Microfinance: Effective Self-Help for Entrepreneurs in Developing Countries, DEUTSCHE BANK (Jan. 31, 2011), http://www.db.com/csr/en/social_investments/microfinance.html.

   for-profit counterparts.10 A critical Wall Street Journal article observed that at least twenty-five nonprofit hospitals or hospital systems have reported earnings of over $250 million a year, and one, Ascension Health, reported $1.2 billion in net income during the 2007 fiscal year and a staggering $7.4 billion in cash and investments—making this nonprofit more profitable than the Walt Disney

   Company.11 Soaring executive compensation has also led to skepticism over

   whether nonprofit hospitals are deserving of tax-exempt status.12 The former CEO of Chicago’s Northwestern Memorial Hospital, Gary Mecklenberg, received $16.4 million dollars in 2006, while the hospital spent only $20.8 million—less than 2% of its revenues and only a small fraction of its tax

   breaks—on charity care.13 Northwestern’s annual tax exemptions are estimated at over $50 million, not including its tax-exempt capital gains.14 Accordingly, some argue that the “nonprofit” label is a misnomer that should be replaced by “nontaxable.”15

   
   

   It is true that nonprofit hospitals, with their lack of access to the capital markets, have more reason to stockpile cash than for-profit entities. And it is hard to compare salaries across nonprofit and for-profit hospitals; for example, nonprofit salaries may be higher, but incentive compensation tends to be

   lower.16 Still, the perceived increased profitability of nonprofit hospitals, and

   their comparatively minimal expenditures on charity services, has led Congress to question nonprofit hospitals’ tax-exempt status and the propriety of nonprofit tax exemptions generally: “[M]any goods and services provided by tax-exempt organizations are similar, if not identical, to goods and services provided by tax-paying entities. This raises a fairly fundamental question of

   
   

10. See, e.g., John Carreyrou & Barbara Martinez, Nonprofit Hospitals, Once for the Poor, Strike It Rich, WALL ST. J., Apr. 4, 2008, at A1 (“Nonprofits, which account for a majority of U.S. hospitals, are faring even better than their for-profit counterparts: 77% of the 2,033 U.S. nonprofit hospitals are in the black, while just 61% of for-profit hospitals are profitable, according to the [American Hospital Directory] data.”).

11. Id.

12. Id.

13. Id.

14. Id. Of course, income is manipulable, and comparisons to for-profit hospitals might well be unfair. Were the income of nonprofit hospitals subject to taxation, it...