Nonprofit leadership is old. Literally. In age and in thinking. And the world is changing faster than these leaders can respond or get ahead of in part because they lack diverse perspectives and aren’t prioritizing the engagement of younger generations.
When I suggested the engagement of younger persons (my reference for Millennials and Gen Z) as a theme for a legal conference, the idea was quickly dismissed because there wasn’t enough substantive law to discuss. Fair point. But I wanted to explore that further in this post.
What is charitable within the meaning of Section 501(c)(3) of the Internal Revenue Code? The Treasury regulations provide in pertinent part as follows:
Charitable defined. The term charitable is used in section 501(c)(3) in its generally accepted legal sense and is, therefore, not to be construed as limited by the separate enumeration in section 501(c)(3) of other tax-exempt purposes which may fall within the broad outlines of charity as developed by judicial decisions. Such term includes: Relief of the poor and distressed or of the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments, or works; lessening of the burdens of Government; and promotion of social welfare by organizations designed to accomplish any of the above purposes, or (i) to lessen neighborhood tensions; (ii) to eliminate prejudice and discrimination; (iii) to defend human and civil rights secured by law; or (iv) to combat community deterioration and juvenile delinquency.
Treas. Reg. section 1.501(c)(3)-1(d)(2)
But the IRS has also recognized 501(c)(3) exemption for organizations that promote health or protect and promote the preservation of the environment. There continues to be an evolution of what the IRS may consider charitable, though public benefit in and of itself continues to be an insufficient basis for charitability.
Would relief of historically discriminated groups of individuals without regard to poverty or distress now qualify as charitable? Would the sale of alternative energy sources for personal use be charitable even if at market rates? What happens when a traditionally charitable area of operation changes to a commercial area of operation? How will the 501(c)(3) private benefit and public policy analyses change as regulators’ perception of charitability changes?
We’re certainly seeing a number of high profile younger persons interested in investing in social good, But starting private foundations seems to be more old school. Younger persons have been using LLCs, donor advised funds (DAFs), and for-profit social enterprises to make a social impact.
Further, they have expanded the concept of philanthropy to include the giving of time, crowdfunding for individuals, the use of social media for causes, marches and protests, and even purchasing decisions.
Of course, there are laws regarding the formation and operation of different entities, and we may see increasing use of newer forms of legal entities like benefit corporations. As many for-profit entities have been moving on the spectrum from more profit-motivated to more social good-motivated, many nonprofits have been moving the other direction to raise more funds from business operations in response to a shrinking pool of active donors.
In response to this shift by nonprofits, how will the laws or enforcement of laws regarding unrelated business activities change? Will nonprofits look to greater use of taxable subsidiaries? Will some nonprofit leaders shift their jobs to starting and leading an affiliated for-profit? How will those affiliates be structured, governed, and tied to the nonprofits?
According to the Leading with Intent 2021 survey by BoardSource, 69% of nonprofit board members are 45 or older and only 9% are under 35 years of age. In comparison, only 42% of respondents to the 2020 U.S. Census reported their ages as 45 or older and nearly 14% reported their ages as 25-34. There are more alarming statistics regarding the failure of nonprofit boards to bring on Millennials (generally persons about 26-41 years old) despite this group becoming the most prevalent in the workforce with estimates that they will comprise 75% of the global workforce by 2025.
The failure of nonprofit boards to diversify their composition on many dimensions, including age, has long been a problem. For board members to meet their fiduciary duties, they must act with reasonable care and in the best interests of the organization. If they believe that their organizations are failing to address the changing demographics of the communities they serve or that that the board lacks perspective on issues, dynamics, and trends better understood by younger persons, they should be acting intentionally to address these gaps.
Yet there still are relatively few resources on addressing this issue. A couple of note are an article from Stanford Law School, Recruiting Young People to Nonprofit Boards (Jan. 10, 2022), by Aneliese Castro and Kylie Choi; and another from Candid, How to Recruit, Engage, and Retain Millennial Board Members (Oct. 3, 2018), by Erin M. Connell.
Technology is advancing rapidly, causing differences among generations in familiarity and preferences. While most persons of all generations active in the nonprofit sector have moved on from nondigital recording devices and fax machines, there are clear divides in the use of devices, the choice of social media, preferences in communication and collaboration channels, sensitivities to privacy, and risk tolerances.
Technology evolutions create new and often better ways to deliver, monitor, assess, and modify services, goods, work environments, investments, and social and environmental impact. Nonprofit with younger persons engaged in leadership positions are better positioned to create and take advantage of evolving technology. But, of course, technology is no panacea and can just as easily be created and used to the detriment of the broader public and particularly to the harm of marginalized communities. Sometimes such harm is unintended, but too often it is simply ignored by those in positions of power.
Because lawmakers and nonprofit leaders trend significantly older than the broader workforce population, laws and policies are almost always lag far behind new technology trends and tend to be most beneficial to and protective of those holding wealth and power. Greater engagement of younger persons in positions of authority is critical to assuring technology is developed and used for social good or minimally not unfairly at the expense of younger generations. Addressing issues earlier and adopting prescriptive policies designed to evolve should be the goals of nonprofit leaders and advocates. The intelligence and perspectives of younger persons are necessary to achieve these goals.
What laws governing technology will impact nonprofits in the near future? Data privacy, cybersecurity, blockchain, cryptocurrency, antitrust, and patent law are certainly evolving. Tax laws will also change in connection with broader policy changes. Will nonprofits be positioned to engage in how these laws will be created and changed so they and their beneficiaries are aided and not harmed? This may be challenging when big corporations and the very wealthy may act in their own best interests when throwing enormous sums of money to shape the laws to their benefit.
Fundraising strategies and laws have been evolving with changes in technology, philanthropic vehicles, cross border transactions, and social movements. Younger persons are driving many of these changes, but the laws related to the changes tend to lag far behind the changes, and that’s a huge problem. Often the development of new technology is dominated by a profit motive without adequate consideration of the impact on communities served by the technology or otherwise impacted by it.
Lawmakers are typically out of touch, particularly with the potential adverse impacts on marginalized communities and on children, and influenced by corporations and persons with wealth and power used to advocate for their own best interests. The nonprofit sector is expected by some to counter such forces and fight for the broader community, but the sector is also increasingly funded by the same corporations and persons with power that are more interested in their own benefit.
Fundraising trends also raise other legal concerns as nonprofit fundraisers face competitive pressure from those raising money from crowdfunding platforms to help specific individuals rather than charities, businesses proclaiming to do more social good than nonprofits, and entrepreneurs looking to both help charitable causes while creating for themselves an opportunity to earn substantial amounts of money. In addition to regulating charities raising money, lawmakers and regulators are understanding that they must also regulate those competing for funds that might appear to be for charitable purposes but are much more easily diverted for private benefit. We’ve written a little bit about California’s AB 488, which regulates charitable crowdfunding and goes into effect in 2023, and expect additional laws to be developed addressing new developments in fundraising.
As stated earlier in this post, the nonprofit sector is expected to advocate for the public good, often facing challenges from well-funded campaigns by corporations and persons of wealth and power. Since the Citizens United Supreme Court decision (see, e.g., Citizens United Explained) and the elimination of longstanding campaign finance restrictions, the challenge for nonprofits and marginalized communities they serve have grown exponentially.
This doesn’t mean, however, that charities lack the power to be effective and winning advocates on important issues. Lobbying is a far underutilized strategy for charities (see, e.g., Taking the 501(h) election), and private foundation funding of advocacy organizations, while growing, is still far short of what it could be to further their charitable missions (see, e.g., Private Foundations May Advocate).
In addition, nonprofits can use their investment assets to advance their missions other than to seek the highest investment return. We’ve seen a movement, still pretty small, towards impact investments, mission-related investments (MRIs), and more program-related investments (PRIs). While PRIs have been legally defined, there has been little guidance as to impact investments and MRIs. Will we see more laws related to how nonprofits invest their endowments and other investment funds? Should we? Should investments that conflict with an organization’s mission (e.g., lung cancer charity investing in tobacco, climate change charity investing in fossil fuel companies) be prohibited and not just discouraged?
Employment issues have been particularly hot topics in management due to demographic changes, remote work, recruitment and retention problems, pay equity, organized labor, continuing problems with sexual harassment and discrimination, shortages of certain types of skilled labor (e.g., healthcare workers, teachers), and threats to employee health. If nonprofit leaders are of touch with these trends and issues, they will fail to make informed decisions that could harm their organizations. Strategies that worked 20 years ago may no longer be appropriate for the current and future workforce.
There also is a movement towards more distributed leadership throughout an organization. Many organizations are struggling with this movement as there are clear and proven benefits with traditional hierarchies and the law is built on boards having ultimate responsibility and authority over the activities and affairs of their corporations. But there are shifts in power that are possible, and laws or regulatory guidance that confirm the appropriateness of certain delegations of authority may be helpful. What are some of the distributed leadership systems that would be helpful if recognized by sector leaders as good practice and by lawmakers and regulators as acceptable?
Finally, an organization’s mission and values should be consistent with its choices regarding employees. Nonprofit leaders can and should protect these dominant considerations in their governing documents and policies. This is consistent with the theme of Anne Wallestad’s article on Purpose-Driven Board Leadership published in 2021 in the Stanford Social Innovation Review and further analyzed from a legal perspective in my post, Purpose-Driven Board Leadership, Legally Speaking.