The Purpose Driven Corporation – How Charities Can Make a Profit and an Impact

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The single most pressing problem facing every charitable enterprise in the United States is one that is inherently tied to the fundamental nature of non-profits: funding. Regardless of whether the enterprise is a non-religious charity or a church-sponsored structure, the difficulty remains the same. Funding levels are inevitably dependent upon the goodwill and graciousness of sponsors and other donors who underwrite the enterprise’s activities.

Of course, few people would claim that there is a crisis in charitable giving in the United States. After all, though total charitable giving in 2008 and 2009 saw a real decrease in inflation-adjusted dollars, the total amount of money given was still in excess of $300 billion in each year – hardly a number about which to complain. Still, with Federal and State budgets across the nation stretched thin through a combination of overspending and shortfalls in revenue – and with the nation’s economic condition balancing the tightrope between fragile recovery and double-dip recession, many non-profits are bracing themselves for even larger revenue shortfalls in the years ahead.

Unfortunately, any reduction in the revenues received by charities and churches will have an ever-increasing impact on the most vulnerable of society. As government budgets face burgeoning deficits and the very real threat of across-the board freezes or outright cuts in programs that serve the poor and disadvantaged, charities and churches will be needed more than ever to help meet these societal needs. The problem is that demand for these services is peaking at precisely the moment that the financial resources of most charitable enterprises are at their weakest point in decades.

The question that needs to be asked is a simple one:

Given that the demand for charitable services is most keenly felt during times of strong economic distress – such as the current recession, and that it is during such times of distress that these charitable entities often have the fewest resources with which to meet demand, should we not work to find a better way to provide funding to charities and churches to ensure that they have the opportunity to meet the needs of the people they service? In other words, should we not strive to find a means by which charities and churches are allowed to be self-empowering entities?

An historic problem

The principle difficulty in empowering charities is primarily derived from the history of such entities within the United States. In fact, the very term “non-profit” is perhaps illustrative of the underlying reason why so many charitable enterprises struggle so mightily to achieve their goals. Derived from the Latin word “profectus”, the word profit literally means “to progress”. In like manner, the word “non-profit” means the opposite –not to progress. Indeed, the history of American charities makes clear that these entities were expected to do precisely that.

The earliest history of organized charitable activity in what would later become the United States occurred with the Puritans who settled in the Northeast. Though devoted to a strong work ethic derived from Biblical directives regarding man’s duty to work diligently, the Puritans nevertheless retained the Calvinist need to compartmentalize profit and charity. Keenly aware of the Bible’s warnings regarding the difficulty rich men would have in obtaining salvation, The Calvinist Puritans quickly developed an answer in the form of Puritan charity as a means to assuage capitalist guilt. This view of charity differed little from the Catholic sentiment that penance for sins should commonly take the form of charitable activity to help the less fortunate, save that the Catholic penance was a ritualized removal of guilt for sin, while charity in early America allowed those early businesspeople to compartmentalize any guilt they felt for gaining riches while those around them suffered from want.

Unfortunately, that distinct separation between the way the Puritans conducted their business and the way they conducted their charities remains with us to this day. Businesses were expected to accomplish their goals through savvy market decisions, an expansive mentality, and keen investment strategies. Charities were expected to accomplish their goals through what was, in essence, organized begging. Four hundred years later, little has changed.

Today’s charities

The history of charitable entities in the United States has not served to impede the growth of such entities. In fact, there are currently more than 1.4 million recognized charitable enterprises in the country – or more than one charity for every three hundred people. Though some might find that number excessive, the truth is that the scope and reach of most of these enterprises is far more limited than the average citizen might think. Hamstrung by archaic rules that prevent the recruitment of top talent, adequate long-term investment strategies, and direct investment in for-profit enterprises, most non-profit companies are left scrambling for scarce resources to accomplish their mission, while simultaneously scrambling to retain their most talented employees.

The religiously-inspired differences in the way for-profit and non-profit enterprises conduct their affairs would, on the surface, seem to have little validity in today’s marketplace. Where Christian society once recognized a divine command to set aside 10% of all earnings in the form of a tithe that was designed to aid churches in their mission to care for the poor and infirm, recent trends demonstrate that actual charitable giving falls far short of that mark. It is obvious that a ten trillion dollar economy should see charitable giving of at least one trillion dollars each year – a number more than three times the actual amount of U.S. annual charitable giving.

Given the disconnect between the religious underpinnings of charitable contributions and the modern practice of giving, non-profit enterprises have become more reliant than ever upon government grants, corporate endowments, and hastily-constructed fundraising efforts. The law’s prohibitions against profits have caused most non-profit entities to look no further than the next quarter in their financial planning. Indeed, most are called to task every twelve months to account for how the previous year’s monetary capacity has been managed.

How much more successful could these organizations be if they were allowed to take a more long-range view toward the capitalization of their mission? How many more people in need could they reach if they were given the freedom to take greater risks and reap greater rewards in their efforts to build capacity? In other words, are there not ways in which society at large would benefit from non-profits being allowed to pursue capital expansion through many of the same means which for-profit enterprises use to increase their profitability?

 A change in direction

Any solution to non-profit capacity building will not flow from policy makers in Washington D.C., nor is it likely that the individual States will take up the cause any time soon. What is needed is a fundamental shift in the paradigm that there must always be an inseparable wall between business and charity. Though that wall once served a religious compartmentalization purpose four centuries ago – business is what you do to make money, while charity is what you give as penance for making money – the need for it no longer exists. Unfortunately, the illusion that non-profit poverty somehow equates to purity and greater ethics still persists in our culture, and more importantly, in our law.

One of the most obvious solutions would be to permit non-profits to more directly invest in the profitability of for-profit ventures. The limitations with respect to non-profit investment in capital ventures are at present so restrictive as to almost preclude this possibility. Yet it remains one of the most viable means by which non-profits could make sound investments in the marketplace, thereby building greater capacity to accomplish their mission and serve their constituents.

One obstruction to such investment can be found in the aversion to risk that many non-profits share. With limited funding – and outside skeptics who oppose any use of charitable funds for investment purposes – most charitable boards are understandably reluctant to take even the mildest of risks in the pursuit of capacity. Because non-profits have to acknowledge donor concerns about how money is allocated, the majority of charities suffer from chronic shortages of funding.

To change the status quo and enable non-profits to seek greater capacity through sound investments, one solution involves finding a way for these charitable institutions to bypass the concerns of their donors, and directly invest in the future profitability of various for-profit enterprises – unencumbered by the need to immediately spend every donor dollar they receive to avoid any appearance of impropriety. Of course, the question immediately arises: is such a strategy even possible?

Fortunately, it is. As restrictive as the laws are with respect to how non-profits may and may not invest in other firms, those restrictions provide opportunities as well. In fact, they provide the very means by which non-profits can directly benefit from the profitability of private companies undergoing public offerings – with relatively small risk to the charity or its donors.

 The Solution

The accomplishment of these goals involves a straightforward strategy of allowing a non profit the ability of incubting a for profit enterprise.  In return the for profit entity alligns itself with a charity (purpose drive corporation) by donating stock to the non profit which in turn utilizes its stakeholders base and tax bracket as an underwiritn vehicle for the corporation at hand. 

The tas deduction of the non profit status acts as a mitigation tool of risk of the stakeholders whle the charity becomes the ultimate beneficiary of gain and groowht of the enterprize it incubates.

This solution takes advantage of an alignment of interests from the various parties involved. For the corporation itself, the process enables the raising of capital necessary to take the company public; for the non-profit, it provides a means for investment that does not involve funds that are otherwise needed for the missions operations of the charity; for the donors and investors involved, it allows them to promote and support their chosen charitable endeavor while retaining the opportunity to profit from their investment.

Today we need more than ever the allignment of our greatest financial minds in creating the next generation of financail instruments.  Not for the purpose of using computer programs to arbitraige profit potential, but rather to create the new instruments which will once again create value for our country.