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Current Issue : Fall 2009

The Risks of For-Profit Philanthropy

The for-profit philanthropy model raises an array of concerns for those steeped in the traditions of for-profit and nonprofit law alike. Drawing first on for-profit legal sources and debates, the model represents a formidable challenge to the shareholder primacy norm. As a for-profit corporation, the primary objective of Google is to make profits for its shareholders. Google, of course, is pursuing profits doggedly, but not exclusively. It is also pursuing philanthropic goals through Google.org. The debate over whether and to what extent corporations should expend funds and resources for purposes other than increasing shareholder value has raged for decades. The creation of a division specifically devoted to pursuit of social rather than shareholder returns raises these issues more pointedly. Moreover, Google’s governance structure is especially shareholder-resistant, making shareholder primacy concerns even more vivid.

These concerns can be met, however, by a series of persuasive arguments. First, establishing Google.org may contribute to shareholder value, due to its alignment with Google’s branding as an innovative company committed to avoid “be[ing] evil.”10 Additionally, Google.org can be defended as one high risk, potentially high return part of a diversified portfolio of Google’s corporate investments. Although Google remains committed to keeping any Google.org profits in the philanthropic stream, it appears willing to use the philanthropy division in an investment research and development capacity for Google. For example, recent reports suggest that following Google.org’s investment in renewable energy startups, Google began considering similar, larger-scale investments on behalf of its for-profit business.11

Nonprofit legal sources and debates raise more weighty concerns about the for-profit philanthropy model. Placing philanthropic activity inside a for-profit entity immediately sparks questions about enforcement, a major preoccupation of nonprofit law and scholarship. This structure deliberately puts philanthropic activity outside the oversight of both state attorneys general and federal tax regulators traditionally charged with monitoring philanthropic organizations. For-profit accountability mechanisms like shareholder suits offer little promise for keeping these entities focused on their missions, though they may prevent or punish embezzlement or other direct self-dealing harms if they ultimately impact the for-profit’s bottom line. Importantly, though, this enforcement concern is tempered by the fact that nonprofit regulators are infamously under-resourced, and standing limitations prevent the public from engaging in enforcement litigation. In this environment, Google.org’s decision to opt out of enforcement likely creates relatively low accountability costs.

Several other mission-based concerns may be more serious. For-profit philanthropy’s embrace of business methods may prompt overemphasis on performance metrics, which are notoriously slippery and contested in the nonprofit context. Moreover, what begins as a philanthropic mission could, as a result of it being embedded within a business, become biased toward alignment with the goals of the for-profit company. This is not to suggest any nefarious intent. Rather, a for-profit philanthropy division’s position within the larger organizational culture, along with its desire to take advantage of its direct access to the for-profit’s resources, could well cause a drift in mission toward the service of for-profit goals. Some commentators suggest that both business and social goals can be enhanced by integrating philanthropy with overall corporate strategy.12 Yet, if “philanthropic” expenditures are made to improve the lot of the corporation and its shareholders, they are hardly a gift to humankind. More importantly, if this drifting effect skews deployment of philanthropic resources to only those social issues that neatly align with for-profit imperatives, there is real cause for concern.

The ultimate mission-based fear raised by the for-profit philanthropy model is that resources contributed toward the achievement of philanthropic aims could, one day, be recaptured by the for-profit and used instead for profit-making purposes. Such recapture is not possible if resources are gifted to a separately-incorporated nonprofit. Of course, Google.org and its leaders vehemently object to any suggestion it would happen there.13 Perhaps not, but no legal obstacle would prevent Google.org from doing so. Moreover, future adopters of the for-profit philanthropy model might not be so willing to dedicate their resources irreversibly to their philanthropic stream.

The possibility of recapture, of course, will not necessarily reduce overall corporate expenditures on philanthropy. The ability to recapture these assets for profit-making purposes at a later time might increase corporate willingness to fund philanthropic activities in the current period. It might expand the range of social aims companies are willing to bankroll. Still, meeting philanthropic goals often requires sustained attention and stability. The risk that funds might be cut off at any time could curtail the scale of for-profit philanthropists’ efforts, or undesirably limit their goals’ scope. In addition, the recapture possibility elicits real concerns about how for-profit philanthropists describe and publicize their activities. Without a real commitment to restrain recapture of ostensibly donated funds, the for-profit philanthropy concept risks casting future adopters of the model as unduly charitable. If for-profit philanthropy free-rides on the positive associations of the philanthropic community, it could mislead the public, damaging these associations at a time when they are already showing wear.14

10. See Google Inc., Letter from Founders: “An Owner’s Manual” for Google’s Shareholders, (Amendment No. 9 from Form S-1), at 27, 32 (Aug. 18, 2004).

11. See Miguel Helft, Idealists and a Green Agenda, N.Y. Times, Oct. 28, 2008 at B1.

12. See e.g., Michael E. Porter and Mark R. Kramer, The Advantage of Corporate Philanthropy, Harv. Bus. Rev. at 57 (Dec. 2002).

13. See Hafner, supra note 2.

14. See Suzanne Perry, Public Confidence in Nonprofit Groups Slides Back, New Survey Finds, Chronicle of Philanthropy, Apr. 3, 2008, at 3.