Tax Protection for Social Results, Not Social Missions

Lucy Bernholz had another though provoking post last week in which she suggested there should be some sort of “consumer protection” oversight of nonprofits and social businesses.

“From the donors’ perspective we need something more than metrics and annual reports that cements the organization’s commitment to social good. Nonprofits have typically relied on (been given a pass by) their corporate structure and the public accountability of their boards. I’d say both of these are not strong enough. Social businesses, particularly those that meet the standards of a B Corporation, are beginning to document and commit themselves contractually to social good. This is a step toward mission insurance, but the B Corporation* standards are written mostly to protect business owners, then the investors, then the customers. We need something that will work for downstream investors or donors.

And there is nothing available to ensure customers – be they the borrowers from a microfinance organization, the teen employed by a job training company, or the working mom seeking a new credential to better her job prospects – that the services they are getting are being designed and delivered with a measurable, enforceable commitment to bettering lives and communities.”

Lucy’s proposal was made in the context of her thinking about how we might insure that social enterprises, both for-profit and nonprofit, actually achieve their social mission. But I was struck by the way that the concept illustrates so perfectly the current paradigm shift in philanthropy.

Whereas philanthropy has historically been about the gift as a moral act by the donor, today more and more people think about philanthropy in the context of the results achieved by the gift. This historical view is embedded in the legal obligations of nonprofits. Nonprofits actually have no legal requirement to achieve results. Instead they need only have a socially beneficial mission and ensure that no benefit incur to the donors that support them.

The focus on results and the emergence of for-profit social enterprises turn this understanding of philanthropy on its head. What we need now is a legal understanding of social businesses that requires them to achieve social beneficial results while recognizing that having financial benefit accrue to supporters may in fact increase and accelerate social impact.

In a comment on Lucy’s post I wrote:

“We know there are documented examples of nonprofit programs creating harm (for instance it is well documented that the DARE program to "keep kids off drugs" has no positive impact and some evidence suggests that it increases drug use).

In the world of consumers, this would be stopped. If a drug designed to decrease the drug cravings of addicts was found to have no effect and possibly to increase cravings, it would be recalled immediately.

While I think it might be hard to "insure" that a social mission is met (just like it would be hard to "insure" that a for-profit became and stayed profitable), it seems very doable to "insure" to some degree of conviction that social programs meet minimum standards. The meeting of this hurdle would then flow upstream and greatly increase the chance of mission success.”

Today, the tax protection that nonprofits enjoy is dependent only on them having a social mission and ensuring that no financial benefits flow to donors. And yet we wonder why “evidence-based” social activity, performance management and the measurement of results is so rare.

While the challenges of measuring results are real and should not be underestimated, imagine the positive transformation that would occur if tax protection was dependent on the achievement of socially positive results and whether investor/donors benefitted from the organizations activities took a backseat from a regulatory standpoint.

Which entity should receive tax benefits? A nonprofit whose programs exacerbate the problems of the people they intend to help, or an organization – either nonprofit or for-profit – that actually helps people?


  1. Dan Elitzer says:

    The tax protection nonprofits enjoy needs to be tied to criteria that the IRS is capable of evaluating. No institution, especially not the IRS, is anywhere close to being able reliably determine on a large scale which organizations are actually helping people.

    Furthermore, I’m not convinced it’s even a good idea in the abstract to tie tax benefits to whether an organization is measurably helping people. What if a program is designed for long-term impact, which can’t be confirmed for years or decades? Do we want to deny those organizations tax benefits until their impact matures?

    I’m greatly heartened by the evidence-based movement in philanthropy. However, I believe this movement will help funnel resources to the best (i.e., most impactful) organizations by educating individual and institutional funders, not by having the IRS attempt to filter out organizations that are not able to demonstrate results. Funders will eventually start to weed out the under-performers on their own.

    • Even though you’re arguing against my point, I generally agree with you. That’s why I highlighted the difficulty in measuring results. However, we really can’t expect social enterprises to work to maximize social results if we insist on defining them only by what they say they’re trying to do and what they are not doing (turning a profit).

      I think the heart of this post is the idea that we would never give tax deductions to a pharmaceutical company that sold drug addicts something that increased their addiction even if they wanted the drug to work, right?

      Measurement is hard. But I do think that the regulatory structures need to catch up to a paradigm shift in philanthropy that is moving from the gift being the focus to results being the focus.

  2. Dan
    I agree with your point about long term impact and the difficulty in determining its value. I also strongly agree with your comment that the IRS doesn’t have the capacity to oversee, regulate, pay attention to, or sanction work in this regard.

    All of which is why this is such an exciting moment – more and more communities have the capacity to weigh in on these issues. I’ve written about the idea of having communities be involved in establishing nonprofits (see this post in the first place. With mobile, crowdbased, constituency voice approaches ( we are beginning to have the tools to engage communities DIRECTLY in both determining what they need and if the organizations built to respond to those needs are working on their behalf.

  3. Thanks Sean for this thought-provoking piece. Your post struck me with its similarity to a recent op-ed by the the former Swedish secretary of schools in which he discussed the decision to reform the public education system to that of a market-driven school choice system (thus improving academic performance).

    At the heart of both issues is the idea that results are what is most important, and not so much the structure of the organization. If a nonprofit organization can deliver on its mission–great! If a for-profit organization can also deliver socially positive results–great!

    Like Lucy, I’m hopeful that this type of questioning of our assumptions will lead to more people receiving high quality, appropriate services. Evaluation is one part of the journey, and organizations also need to be committed to learning and continually re-evaluating their strategies.

    “Sweden is a model for American school choice options,” can be found in the Washington Examiner (