In my last post about nonprofit structure, some interesting and important aspects of tax-exemption weren’t fully explored. Specifically, I glossed over why tax-exemption exists in the first place. Let’s rectify that.

The tax-exemption at the heart of nonprofit organizations—along with “nondistribution constraint” (i.e. one cannot profit from, or own equity in, a nonprofit; it may not inure to someone)—is the the key distinction between a nonprofit organization and any other incorporated entity. The reasons why a nonprofit organization should receive tax-exemption (and the government subsidy it implies) are varied and contested.

Norman Silber’s A Corporate Form of Freedom (p. 167-169) presents the following reason why nonprofit organizations—in aggregate—should receive the special privilege of tax-exemption:

• The difficulty in measuring a nonprofit’s income and assessing an appropriate tax. (Boris Bittker and George Dahdert, 1967)

• It rewards altruistic behavior in support of communities that might otherwise diminish or fail entirely without governmental subsidy. (Prof. William Ginsberg, 1980)

• Tax-exempt services offset services the government would otherwise provide directly. But, to compensate taxpayers for the benefits conferred by government exemption, taxpayers must receive services(“quid pro quo”). This would also require tax authorities to seek direct evidence of need prior to conferring an exemption.

• Tax-exemption contributes to pluralism “by providing the public goods and services that either are undersupplied by the private market or by the government or else not provided in the same socially desirable manner” (“Community Benefit” theorists)

• The nondistribution constraint necessitates that nonprofits operate where the government or market have failed and this thus justifies their tax exemption. (Prof. Henry Hansman, 1980)

• The justification for tax-exemption may be found in understanding nonprofits as part of a “sovereignty”: independent of the state rather than subservient to it. The weakness of this theory being how this quality—and by whom it is determined—is conferred upon these “sovereigns”. (Prof. Eveylyn Brody)

Of all of these theories, “none of them quantify, in the interests of equal treatment, the particular quality that would result in an exemption being granted or denied.”

Additionally, none of these theories provide rationale for why anyone would go to the trouble of forming a tax-exempt organization that inherently denies profit and ownership. The rise of the modern nonprofit sector can be traced back to the 1960s with an increase in government giving and the humanitarian, charitable and altruistic impulses that emerged in culture at that time. As to why those impulses should lead to the current expansive nonprofit field, the following reasons have been given:

• Middle-class guilt about the disparities between the affluent and the poor

• Wealth-transfer mechanisms for the rich

• Dissatisfaction with the profit motive as an incentive to extract work and induce consumption

• Greater abundance in society general

• The inability for government agencies to provide services to meet growing needs as a result of the widening gap between rich and poor

I’ve recently been collecting examples of whale art. My interest mostly lies around their monotonous use in hipster art; and they’re kind’ve cute. I put up on Flickr a gallery of whale archetypes.

Left-to-right and top-to-bottom, the whales are named: Billy, Gus, Tina, Sal, Sanjay, Perth, Jill, Buddy, and Ann. Some of them may be familiar to you.

My radio program piece I posted last week generated some good discussion in the comments. In this post I would like to follow up by providing some background to the discussion that nonprofit organizations are not fully deserving of the aura they they receive. The following is a synopsis of the Nonprofit Structure training I give for AmeriCorps*VISTA members; you can also watch the 40 minute training.

Most people have heard of what I will, for the rest of this article, call nonprofit organizations, nonprofits, or the nonprofit sector. There are many terms though that people use:

• Non-profit (with a hypehen)

• Not-for-Profit

• Charity (or Charitable Organization)

• Agency

• NGO (Non-Governmental Organization)

• Social Change Agency

• Mission-Based Organization

• Community Benefit Organization

• Philanthropic Agency

• Voluntary Sector

• Third Sector (the first two being the Public and Private Sector)

Regardless of what you call a nonprofit, it’s really only but two elements:

1. A Corporation: an incorporated entity that provides limited liability for its agents and its actions

2. Tax Exemption: generated (program income) and contributed (donations) revenue are not subject to taxation

These two foundational pieces are explicitly regulated by the government: state governments determine the rules under which an entity may incorporate; the Federal Government—Congress, the Courts and especially the IRS—determine why a corporation may be tax-exempt. Important point:

By allowing certain corporations to be tax-exempt, the government, in effect, provides an indirect subsidy of about 25% of their income.

(This frame is not my own idea, but was first presented to me by Michael Davidson of Governance Matters from this post on board governance)

Why would the government provide such a subsidy? The rules for tax-exempt organizations are laid out in the 501(c) tax statute, but Nonprofit Organizations, as we think of them, lie specifically within the 501(c)3 statute. This statute lays out exempt purposes for charitable, religious, educational, and scientific purposes (as well as some very specific ones, like international sports competitions). Charitable is defined in the generally accepted legal sense as relief of the poor or distressed, lessening burdens, eliminating prejudice and discrimination and other things.

In actuality, the purposes for which a nonprofit organization can organize are near in-exhaustible. As Norman Silber argues in A Corporate Form of Freedom, court cases during the 1950s and 1960s (especially NAACP v. Patterson and Association for the Preservation of Freedom of Choice v. The Secretary of New York State) eroded Discretionary Conception—the legal framework under which the formative purpose of a corporation could be contested. These court decisions created a near entitlement to organize for any purported social purpose upon the grounds of liberty and the 1st Amendment.

Because of these decisions, it’s perhaps more important to look at the few reason for which a nonprofit may not incorporate, or actions an incorporated Nonprofit may not take. Here they are:

1. May not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.

2. None of its earnings may inure to (i.e. there is no equity to be owned), or activities benefit any private shareholder or individual.

Number 2 on that list is a pretty self-evident, but Number 1 is the prime reason that nonprofit organizations are beggared in their ability to effectively change society for the better. The context and effect of this fundamental rule though will have to be left to another post.

I’ve been thoroughly amused by the vetting process for political (and supposedly un-political) government positions. Recently there was the vetting for Sarah Palin, VP for McCain’s Republican ticket:

Defending his choice and the team that helped pick her, McCain said Tuesday that “the vetting process was completely thorough.” Advisers said Palin went through a rigorous process that included a three-hour interview and a survey with some 70 questions, including: Have you ever paid for sex? Have you been faithful in your marriage? Have you ever used or purchased drugs? Have you ever downloaded pornography?

Those 5 questions are good to juxtapose against the Nexis search string Monica Goodling used to research applicants to the Bush Attorney General’s office:

[First name of a candidate]! and pre/2 [last name of a candidate] w/7 bush or gore or republican! or democrat! or charg! or accus! or criticiz! or blam! or defend! or iran contra or clinton or spotted owl or florida recount or sex! or controvers! or racis! or fraud! or investigat! or bankrupt! or layoff! or downsiz! or PNTR or NAFTA or outsourc! or indict! or enron or kerry or iraq or wmd! or arrest! or intox! or fired or sex! or racis! or intox! or slur! or arrest! or fired or controvers! or abortion! or gay! or homosexual! or gun! or firearm!

I returned to the airwaves this morning with my coworker Jules to talk about nonprofits and society on WUML. My good friend Charlotte, who I know from my Lowell cable access days, hosts Thinking Out Loud every Friday morning. I previously was a guest on her show two years ago plugging my job, the CTC VISTA Project.

This time, Jules and I had a free-ranging discussion on the nonprofit sector and its role in constructing society. As we’re arguing, nonprofits are hamstrung as social innovators because of their structure: barred from advocacy, they concentrate on services which—while individually valuable—provide only symptomatic relief rather than comprehensive reform. We don’t want to discount the valuable and necessary services of nonprofits (not at all!), but believe that a parallel movement of advocacy and reform is key to building a better society. While nonprofits are perhaps a natural place to begin dialogue, vision and action for improving society as a whole, those components must ultimately move beyond the narrow confines of traditional nonprofit organizations in order to be effective.

Listen to the program below

Click to play

Click here to download the mp3.

If you find this type of talk interesting, you would probably enjoy the book The Revolution Will Not be Funded.

I feel like this xkcd comic describes a lot of internet interactions I know. This is my take on it.

Also, a shout-out to my mom, who now subscribes to my blog via Google Reader.

I like taking on the role of facilitator to help people realize their potential, whatever it might be. In a strategic planning class I audited last year, I found myself spending more time (and enjoying myself more) turning other people’s vague concepts into plans, than I did my own. Many of the AmeriCorps*VISTA members I work with have trouble recognizing their abilities, expressing their roles, and most importantly, translating their experiences into a narrative they can parlay into brighter pastures. I’ve learned a lot about how to work with them to do this.

This I’ve learned: no one ever has everything they need, and not even everything they want. Being able to make do with with what you got (“have” for the grammar police), is one of those key lifetime skills.

The following substitutional characteristics are how I try to make do with what I’ve got. These are for use in situations where I have to persuade someone of my abilities or those of something I represent or anything that requires more than a broad smile (though that goes far as well):

If you lack ______, stress your ______.

For example,

• If you lack Education, stress your Competence: demonstrate your hands-on experience or abilities; use big words and big ideas; show analysis and foresight
• Experience … Dedication: talk about how far back your interest lies; create a narrative that makes where you are right now seem like a mandate from god; talk about how A led you to B, which led you to C
• Results … Parallels: refer to similarities from other semi-related successes; “Albert Einstein failed math in school, therefore you should give me a chance”/p>
• Resources … Popularity: talk about your base; describe a safety net of friends or constituents
• Legitimacy … Credibility: explain why it should__ work; show planning and due diligence
• Partnerships/Collaborators/Corroborators: Get some!

Diebold (now Premier Election Systems), admits voting machines have had critical software bug for the last 10 years that can result in votes being lost.

Nonsensical comments from election officials:

DuPage County election officials were upset to learn their election equipment vendor has acknowledged a programming error that could cause votes not to be tallied, but they said last week that they are confident local elections were not affected.

…

DuPage has used Premier equipment since 2001. Still, Saar [executive director of the DuPage County Election Commission] said he is confident there were no problems in previous elections.

Saar said DuPage has a rigorous pre-election testing regimen, and its election results are audited by a bipartisan committee.

Where does this confidence stem from? Obviously the pre-election testing and bipartisan committee failed to catch this critical flaw. Not to mention that the lab that certified voting machines was shut down for not actually doing their job.

The first NY Times article says that they have systems in place to audit and catch inconsistencies. But shouldn’t that have set off alarm bells that something in the system was broken?

I get really frustrated when going to grant-writing workshops. The workshops are usually laid out structurally rather than purposefully; emphasis is placed upon each individual section of the grant in isolation (the mission and history section, the budget section) instead of concentrating on how to effectively interpret your goals and objectives for a funder. The latter obviously has a structural component, but structure is how you organize your explanation, not how you turn your thoughts into a logical argument for funding. Grant writing is persuasive writing, not just expository.

For any burgeoning grant-writer, I think there are a few, mostly simple pieces for crafting an effective grant: some structural, some logical, and some reality-checking. I call it the APPPPPLE model—the L is actually the most important (and often overlooked) part, but putting it first makes a lousy mnemonic.

The APPPPLE Model

Ask: Every grant requires an explicit request for money. “Door is requesting $20,000 from the Window Foundation to expand our lock program into two new communities serving 20,000 homes.” There is an explicit dollar amount and purpose. In my personal style, I believe that the Ask should be the only part of the grant that is written in the passive voice (everything else should be active voice, e.g. no passive verbs: am is are was were be being been).

Proofing: Editing your work means more than running it through the spell-checker. You want to check for clarity, consistency, brevity, clear topic sentences, correct citations (if you are referencing study or census data, and you should) and yes, spelling and grammar. Some methods I use for this: reading it out loud to yourself, giving it to someone else to read (both familiar and unfamiliar with your plans), or plain not looking at it for 24 hours (or more). Priority check: if you have clear topic sentences, I as a reviewer won’t have to spend too much time making sense of paragraph interiors, which means your minor spelling or grammar errors will not glare out at me.

Partnerships: You need to demonstrate some level of involvement with your community. Seriously. Grant reviewers love collaborative projects; we’re cynically aware that oftentimes they run shallow, but legitimacy exchange is key to making your case.

Page Numbers: Every page of your grant application should include page numbers and the name of your organization or uniquely named program. This goes hand in hand with…

Paperclips: Unless you are explicitly asked for multiple copies of an application, you should send one copy (with original signatures—I like .07mm blue rollerball) that is held together with a tight paperclip (preferably one with a grippy texture), or a binder clip (of size commensurate with the thickness of the grant; no 2” binderclip for a 6 page proposal). Most reviewers make multiple copies of a grant and it’s a lot easier to add a staple than it is to remove one. If they’re asking for multiple copies, staple the copies (but keep the original paperclipped)—and if they provide explicit instructions otherwise, follow them with deadly accuracy.

Priority Mail: There are legitimate purposes to overnight a grant, but I would rather see that $18 be put into a $4 Priority Mail (with delivery confirmation) and the remainder spent on celebrating the completeness of your submission.

Logic Model: The “L” should really stand for what I say to people after reading their lousy propsal. “Look”, I say, “You need to have Programs tell you what they really are going to do.” Of course, when you’re an organization of one, you can’t punt like that. So to make it clear: you need to have a well flushed out logic model. Goals, objectives, outcomes, activities, indicators, and targets: google “nonprofit logic model”. A grant is just a logic model, explained in words, with a specific ask (and some general boilerplate, like your history and Directors).

Examples: The best way to be a good grant writer is to learn by example. Get a copy of other grant writer’s proposals (ask them, many are happy to help or even mentor you—though keep an open mind that they may not actually be good themselves). Try to get copies of reviewer evaluation sheets or rubrics (google for generic rubrics); they’ll help you understand the mind of a reviewer. Lastly, become a grant reviewer: find opportunities (check your local association of philanthropic organizations) where you can review other people’s grants and find out for yourself what is effective and what isn’t (it will shock you).

And that’s it. I also really like this book: The Only Grant-Writing Book You’ll Ever Need: Top Grant Writers and Grant Givers Share Their Secrets!

Last weekend I was in NYC for the Craigslist Foundation’s Nonprofit Bootcamp. As a one-day conference, I’ve really enjoyed it as having a wide variety of informative sessions. This is my second time going and for 2 out of 3 of the sessions, I attended the Board Governance track. The following are my combined notes from 2 sessions: Board Governance 101 by Michael Davidson (Governance Matters), and Managing a Board by John Brothers (Cuidui Consulting) and David LaGreca (Volunteer Consulting Group).

7 Board Roles (from Michael Davidson)

1. Setting Strategic Direction

2. Providing Financial oversight and management

3. Protecting assets and ensuring legal and ethical integrity

4. Ensuring adequate resources

5. Serve as advocates and ambassadors for the organization

6. Developing and maintaining a cohesive and committed Board of Directors

7. Select, support, partner with and evaluate the executive Director

4 Board Roles (from John Brothers and Dvid LaGreca)

1. Know why the organization exists… and annually review why it should

2. Interpret the organization’s work to the public in words of 2 syllables

3. Combine a sense of obligation with a sense of humor

4. Give money, or get it, or both

Board Structure: structure should be determined by what you are doing, not bylaws or god.

Board Giving: every board member should give a personally meaningful value. This can be arrived at through dialogue began by other board members who have already given.

Board Fundraising: The actual ask by a boardmember is easy (though no one ever wants to do it). The harder and more involved issue is how do board members represent the organizing and cultivate potential donors.

Executive Leadership: When your Director retires and you being a new search, often the discussion turns to: “Our last ED successfully led the organization for 20 years. We want someone exactly like her.” Instead, the board should continually evaluate the question: does our Executive Director have the skills and vision for the organization and world right now?”

Excellence: The New York Time’s Award of Excellence focuses heavily on board involvement and controls contributing to organizational effectiveness and success.

The Engaged Board: Through dialogue with your board, you should define the vision and characteristics that will have board members:

• Expend significant time and effort

• Make a meaningful financial contribution

• Solicit contributions

Common Board Issues: vague expectations; not knowing what having “success” as a board member means; no feedback loops (was I good or bad as a board member); hot romance/cold match syndrome (hot and heavy dating/recruitment but a cold marriage/service)

The Board Chair: It is the Board Chair’s (the President usually) responsibility to create a functioning board. The board chair doesn’t support the organization, they support the board.

Terms and Limits: Michael strongly recommended terms as opportunities to review performance and lead some structure and legitimacy to ditching unengaged board members (deadwood). He was cooler on mandatory term limits, recommending instead board assessments to be more active. While the purpose of limits is to get fresh blood and ditch deadwood, they also mean that you lose your best members—even with by-years, they’ll find another cause to commit to. Also, Worrying about the problems takes our eyes off of motivating the good people

Creating Director Expectations: Have a board member Report Card that is completed every year for each board member.

Explaining benefits: the board as a whole has a responsibility to its members. This includes:

• Sending information in a timely manner

• Giving members training on how to explain, promote and raise money for the organization. Make it fun, interesting and absorbing

Engaging Board meetings: Board meetings can suck, no doubt about it. This is because they are used for reports that everybody can read, and not dialogue that requires people together to have. Michael recommended Consent Agendas: Send out all of the information (ED Report, Budget report, committee check-ins, etc.) in advance. Questions can be raised via email. If face-to-face discussion is still needed, it can be discussed during the meeting. This reserved the agenda for real, necessary, generative discussions. Bring in an outsider to start conversation or have real dialogue around the strategy or future of the organization.

Everyone at board meetings should have (eg be explicitly given) opportunities to “chirp”. Everyone loves to feel needed. Don’t typecast board members: for example, the treasurer shouldn’t be excluded from programmatic goal discussions.

Tell people at what points they are working: within the agenda, note “discussion only” or “discussion needed”, and make sure to include this at least once every meeting

ED Review: Yearly, have your Executive Director put together a review of their view of their own accomplishments. This leads to a dialogue with board of priorities for next year and allows the board to fill in where needed.

HR Policies: Make sure there is a mechanism in the HR manual for staff members to discuss the ED with the board.

The New 990: “The IRS can do things by regulation that could not be done by legislation” (referring to the failed Senator Grassley bill to bring Sarbannes-Oxley-type requirements to the nonprofit sector. While the new 990 form dramatically increases the level of disclosure of internal processes and controls, it’s also an opportunity to present your organization in a positive and effective light (since any organization’s 990 is available publicly through services like Guidestar or the Foundation Center ).

** Board Toolkit**: Documents that your board can create to guide and improve its ability to fulfill its leadership and governance responsibilities. From Governance Matters

Metaphors: John says that managing a board is nearly identical to caring for standing herds of horses; just replace “horse” with “board member” in the literature”.