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Commentary: When Nonprofits Go After Profits


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Commentary: When Nonprofits Go After Profits

The College Board wants to get rich. For years, the prestigious nonprofit organization has watched companies such as Kaplan Inc. and Princeton Review rake in the big bucks by tutoring students for the board's own tests, notably the SAT. So this fall, the century-old board, based in New York, is launching a dot-com to woo outside investors and teach more kids how to ace its tests, too. What's more, as a for-profit subsidiary, the 70%-owned Web site can dole out stock options and make its shareholders rich without harming the parent's tax-free status. It even hopes to go public next summer.

Good idea? As collegeboard.com prepares to go live this fall, rivals don't think so. They argue that letting an association of colleges profit from preparing people for its tests is a conflict of interest. They also say that the board's plan to move most of its nonprofit services--from selling books to registering students for tests--to the dot-com through service contracts will in effect hand over its captive audience to the for-profit. "If they can shift services to the for-profit that easily, why were they ever tax-free in the first place?" asks Andy Rosen, Kaplan's chief operating officer. College Board President Gaston Caperton defends the move, saying: "We needed the capital and stock options to compete for the very best in the field."DEEP POCKETS. The College Board is just one of a slew of nonprofits rushing to cash in on their names and assets. After years of sitting on the sidelines as the economy boomed and the stock market roared, everyone from New York's Museum of Modern Art to the National Geographic Society to Columbia University has decided that people will toss more money into a potentially lucrative investment than into a good cause. So they're trying to reach into those deep pockets by setting up Web sites, selling insurance, and otherwise hawking their names and services (table).

But nonprofits' newfound lust for riches raises a host of troubling issues. Legally, nonprofits are free to do almost anything they want as long as they pay a so-called unrelated business income tax on commercial activities that don't relate to their central mission. But forays into the private sector can distract a group from its core agenda, alienate donors, or propel it into areas where it has an unfair edge over rivals. Money-making ventures also raise ethical questions. Society forgives taxes from the country's 1.1 million nonprofit organizations because their missions achieve some social good. Why should such groups be allowed to use a brand built with taxpayer dollars to enrich shareholders? "I'm concerned that these nonprofits are morphing into the market," says Mark Rosenman, a vice-president of Union Institute in Cincinnati. "There's supposed to be a special role for [them] that goes beyond providing services like a business."

Nonprofits have long dabbled in business. Many of the groups that have nonprofit status under Section 501(c) of the federal tax code sell unrelated products or services to raise money or lend their name to the products of others in return for royalties. The American Cancer Society earns millions each year from allowing its name to appear on products sold by private companies, such as SmithKline Beecham Corp.'s Nicoderm gum. Sure the gum, designed to curb the desire to smoke, relates to the society's nonprofit mission. But critics have long objected to nonprofits taking money by seeming to endorse one product over others just like it.OUTRAGE. The lines are blurring even more, though, as nonprofits join the rush to tap large flows of capital in search of a return. Perhaps the starkest examples have occurred in health care, where hospitals and Blue Cross groups have shed their nonprofit status. Angry citizens have demanded that the providers pay back some of the tax breaks accumulated over the years to fund alternatives for the uninsured, who have depended on their services. In Massachusetts, citizen groups are aiming for a referendum this fall that would, among other things, temporarily ban nonprofit hospitals' conversion to for-profits.

Rather than risk their tax-free status, most nonprofits establish subsidiaries when they want to get into commerce in a big way. But that leaves big questions as to where the earnings should go. To Daniel Langan, director of public information at the National Charities Information Bureau, there's no question that "the profits should go back to the nonprofit that founded it."

But that's not what always happens. For example, the American Medical Assn. and other medical societies have started Medem Network Societies Inc., a Web site launched on June 12 that links doctors and their patients. The nonprofits own 80%; the rest is controlled by a mutual fund, Medem employees, and outside investors, who hope to get rich from the startup. "The advantages the societies bring to Medem is immeasurable," argues Medem CEO Edward J. Fotsch, a physician who's now working on his third "e-health" company.

But ask the heads of many nonprofits why some activities should be taxable and others should remain tax-free, and they have a difficult time answering. A growing number of universities, for example, are setting up for-profit Web sites to cash in on the boom in online education. Temple University is setting up Virtual Temple--with private investors--to produce and market online courses worldwide. Given that the Philadelphia institution already offers continuing education online alongside its traditional courses, what is the role of Virtual Temple? "We're trying to sort out where one begins and the other ends; it's still pretty muddled," concedes Joseph W. "Chip" Marshall III, chief of staff to the university president and chair of the search committee for Virtual Temple's CEO.

Culture clash is another problem. In 1995, the National Geographic Society set up National Geographic Ventures Inc. (NGV), a for-profit unit that has gone into television and film production, a mapping service, and a licensed store at Reagan National Airport that sells the same items as the nonprofit one at the society's headquarters in Washington. The move has caused tension among the nonprofit staff, who see priorities shifting to the for-profit side. They also fear the society's scientific mission is being tarnished by NGV's desire for flashy stories that sell on commercial TV. NGV struck an alliance with Rupert Murdoch's Fox Entertainment Group Inc., which kicked in two-thirds of the U.S. channel's investment. But NGV President Rick Allen points out that National Geographic retains editorial control.

But the tension hasn't eased as NGV picks up speed. "Clearly, there's money to be made," says one staffer, "but that's not what we're supposed to be about." Magazine Editor-in-Chief William L. Allen figures society members don't care if something is for-profit or nonprofit. "The big conflict is the battle for people's time; the whole idea [of the for-profit activities] is to get the most educational outreach we can."MONKEY DO. Trying to go for-profit can also be a big distraction. The Jane Goodall Institute has spent a few months talking to investment bankers about an Internet portal built around the personality of the chimp researcher. Goodall Executive Director Stewart Hudson says the group doesn't really need extra money right now: It recently received several $1 million gifts, swelling its endowment to $6 million--on top of the $2.6 million annual budget it maintains, thanks to some 50,000 supporters. But a for-profit Web site could make tens of millions of dollars, so Hudson plunged ahead. Now, with the market downturn, backers' enthusiasm has waned, he may drop the push if it "takes attention away from other things, like our endowment drive," says Hudson.

True, for-profit ventures can provide a steady source of income to provide a hedge against the vagaries of traditional fund-raising. But nonprofits risk besmirching their good name if money-making becomes an end in itself. "I would be concerned if the motivation here were equity-building instead of building on our mission," says David E. McKinney, president of New York's Metropolitan Museum of Art, which has 16 stores outside the main museum and a fast-growing Web site--all of which are under the nonprofit. Other nonprofits would be wise to go slow as they rush into commercial territory.By Diane Brady; Brady Covers Corporate Strategies from New York.Return to top


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