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PART 2 – Should Nonprofits Strive to be Profitable?

Columbia University 2In Part 1, I talked about the importance of small nonprofits managing their finances as if they were for-profit and using some or all surpluses to build an endowment fund, if they are to survive what appears to be the beginnings of a long-term trend in “under-funding” (100% to mission, 0% to administration).

Profitability, however, is no easy feat if your organization is small (whether you’re a for-profit or a non-profit). I was struck by a recent statistic claiming that of the 28 million for-profits tracked by the Small Business Administration in 2013, only 6 million (21%) were actually profitable. Only 21%!!

As difficult as it is to be profitable if you’re small, many large nonprofits do a phenomenal job at it. Consider my wife’s alma mater Columbia University (CU) here in New York City. CU posted an operating profit of over $230 million in its most recent filing (period ended June 30, 2014) on gross revenues of $3.8 billion. The market value of Columbia’s endowment funds now exceed $9 billion, which generated nearly $350 million in unrestricted income. In keeping with one of its nonprofit missions, CU awarded just over $200 million of non-government University money in financial aid grants to deserving students with great potential, but who were unable to afford the tuition (current needs). And most telling for the purposes of this blog post, CU transferred $17.4 million of its 2014 operating surplus back to its endowment funds (future needs). Way to go Columbia!

Here is a random sampling of other large nonprofits that are highly profitable (as measured by their operating surplus in their most recent filings):

National Resources Defense Council, $17.4 million profit

Environmental Defense Fund, $18.2 million profit

Smile Train, $28.4 million profit

Feeding America, $14.4 million profit

Habitat for Humanity, $15.3 million profit

Smithsonian Institution, $193 million profit

Planned Parenthood, $127.1 million profit

Boy Scouts of America, $37.7 million profit

Clearly, many large nonprofits know how to make a profit, so I’m not worried about them. But I do worry for the hundreds of small nonprofits with wonderful causes that make our communities so much better, yet struggle month to month.

That’s why you should really pay attention to how the large tax-exempts do it. If you dig into their financials, you’ll notice their “for-profit mentality” at work: robust fundraising departments to drive current (and future) revenue; continuous expansion of their endowment funds for future revenue; and an unrelenting focus on cutting expenses wherever possible.

If you are a small struggling nonprofit, perhaps you should emulate the large ones — drop that nonprofit “deficit mentality” and really strive to be profitable.

Good luck, and thank you for making our world a better place!

April 20, 2015 Posted by | New York | , , , , , , , , , , , , , , | 32 Comments

Are U.S. Nonprofits with Operations in Latin America Subject to FCPA?

Nonprofit 3I’ve been consulting for more nonprofits lately, and I’m finding that they tend to make the same basic mistakes when it comes to managing the business side of doing good.  Because of their very nature (usually a lot of their funding comes from well-meaning donations that are specifically restricted for programs, but not overhead), nonprofits typically keep administration, accounting and compliance expenses to an absolute minimum — not realizing until it’s too late that this could be a fatal mistake. As laudable as their program missions might be, nonprofits should not under-budget these often-neglected, non-programmatic departments.

Take the case of U.S. non-profit organizations (NPO’s) doing good in Latin America. Many of them have never even heard of the Foreign Corrupt Practices Act (FCPA), much less set up robust compliance departments to help them navigate the treacherous waters of operating down there.  Yet U.S. nonprofits are very much subject to this law, just like regular for-profit companies.

That’s why I’m sharing the following edited post from the FCPAméricas blog (www.fcpamericas.com) about what U.S. nonprofits operating in Latin America should at the very least understand about FCPA compliance:

“…Risk Assessment

As with for-profit entities, the first step in grappling with FCPA compliance is for a nonprofit to conduct a risk assessment…including whether they operate in high-risk jurisdictions and the degree to which their operations require contact with government officials. Nonprofits often work as contractors for government agencies, often competing with private companies for these contracts. These transactions present FCPA compliance risks…

Other key risk assessment points for nonprofits include:

  1. Local staff or agents. Many nonprofits hire individuals or organizations (often local nonprofits) to carry out their work and act as their agents. As with for-profit organizations, such local hires present heightened FCPA risk and should undergo due diligence. In addition, nonprofits should be alert to corrupt or fraudulent practices from local nonprofits, such as attempts to fund administrative costs by requiring kickbacks from contractors hired to do specific projects.
  2. Management/oversight structure. Many international nonprofits disperse their decision making widely to their people on the ground. At the same time, given the resource constraints facing nonprofits, many have minimal oversight/management resources. Such structures significantly increase FCPA risks while simultaneously limiting the tools available to address them, e.g., internal controls, training, auditing and reporting. Similarly, many nonprofits lack FCPA expertise or even general compliance expertise. This may blind nonprofits to the risks they are facing and inhibit internal reporting…

Reputational Risk

An important factor that may motivate nonprofits to address FCPA risk is reputational risk…[which is far] greater for nonprofits than they are for corporations, since a corruption scandal at an NGO can dry up funding and threaten its existence. Such scandals can arise from engaging in bribery. If a nonprofit is a repeat victim of corruption, this could also suggest mismanagement. Taking steps to reduce FCPA risk will reduce the potential for both types of corruption…

…Technical points

Nonprofits are treated the same as corporate entities under the FCPA. However, nonprofits should consider the following legal wrinkles:

  1. Accounting provisions. Because nonprofits are not “Issuers”, they are not subject to the accounting requirements of the FCPA. Nevertheless, they are well advised to have accounting controls similar to those required of Issuers under the FCPA. Internal controls significantly reduce the risk that an employee or agent of the nonprofit will violate the FCPA’s anti-bribery provisions. Perhaps more importantly, such controls also reduce the risk that nonprofits will be a victim of corruption or embezzlement.
  2. Business Purpose Test. The FCPA prohibits corrupt payments or promises made for a business purpose, which the daring might suggest exempts the activities of nonprofits. That argument is a non-starter, however. In Opinion Release10-02 (2010), the DOJ stated its interpretation that the business purpose requirement would cover nonprofit work. Similarly, as discussed here, the “business purpose” element of the bribery prohibitions included in the UNCAC and the OECD conventions also covers the business of nonprofits…” 

The opinions expressed in the shortened and edited post above from the FCPAméricas blog are those of the author Matthew Fowler in his individual capacity, and do not necessarily represent the views of anyone else, including the entities with which the author is affiliated, the author’s employers, other contributors, FCPAméricas, or its advertisers. The information in the FCPAméricas blog is intended for public discussion and educational purposes only. It is not intended to provide legal advice to its readers…FCPAméricas encourages readers to seek qualified legal counsel regarding anti-corruption laws…

In conclusion, if you are a U.S.-based nonprofit with operations in Latin America, your senior management and Board of Directors should pay close attention to the organization’s FCPA compliance. As you can see, there are several important issues that an NPO must keep an eye on to avoid problems down the road.

If you’re wondering how you’re going to pay for a compliance department (or even just 1 compliance professional or outside consultant, given the preponderance of restricted donations), you should consider modifying your fundraising plan to seek specific support for compliance-related matters. The support could be in the form of grants, of course, but don’t overlook valuable pro-bono training and/or legal advice.

Who are possible donors, you might ask?  Consider calling on larger NPO’s with global operations, international foundations, multinational corporations with large FCPA departments and, especially, U.S.-based international law firms with FCPA experience.

Another possible group of potential donors are multinational firms that have run afoul of FCPA regulations that resulted in severe sanctions. There are many companies that fall under this category (Ralph Lauren Corp., BizJet International, Siemens, Ball Corp., SNC-Lavalin, Helmerich & Payne, Chiquita Brands, Stryker Corp. and Walmart just to name a few). As these firms re-structure to comply with the terms of their government settlements (which usually include MAJOR personnel & procedural changes), these sanctioned companies might be open to the idea of sponsoring the compliance department of a nonprofit like yours, in a contrite attempt to clean up their tarnished images. It would be good PR for them and a great source of funding for you!

November 9, 2013 Posted by | New York | , , , , , , , | Leave a comment

   

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