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Cambodia Set to Pass New Law Governing NGOs

August 18, 2011

This article in The Guardian highlights the NGO community’s concerns about a new law that proposes to regulate civil society organizations in Cambodia.


Governments: Want to Eliminate Tuberculosis? Partner with the Private Sector

July 29, 2011

In response to a request by India’s Government Knowledge Portal, I contributed this blog entry on the government’s role in mitigating tuberculosis.  It explains how the Government of India is using a social enterprise with close ties to local communities to deliver treatment in places the government can’t reach.

What American Social Entrepreneurs Need to Know About the Foreign Corrupt Practices Act

July 22, 2011

With new allegations emerging every day, including the arrest of former chief editor Rebekah Brooks, the News of the World phone hacking scandal is still heating up.  It is alleged that, among other things, newspaper employees bribed U.K. police officers to obtain information for publication in the paper.

The experts are now weighing in on whether they think News Corp., a corporation that is traded in the U.S., may be held liable under the U.S. Foreign Corrupt Practices Act (FCPA) for the newspaper’s actions.  (News of the World is owned by foreign company News International, which is a News Corp. subsidiary.)  Attorney and FCPA expert Richard L. Cassin thinks there “probably is” FCPA jurisdiction over News International and the alleged actions by News of the World, and law professor Mike Koehler has said “I would be very surprised if the U.S. authorities don’t become involved in this [News International] conduct.”).  With the scandal still brewing, I thought this would be a good opportunity to post about a topic that social entrepreneurs need to know about.

What it Says

The FCPA is a U.S. law that applies to all entities, for-profit and non-profit, that are either organized in the U.S. or have their principal place of business in the U.S.  This includes corporations, limited liability companies and nonprofit organizations formed in the U.S.

This law prohibits entities from giving anything of value to a foreign official for the purpose of influencing a foreign government to help it obtain or keep business.  It also applies to payments made to an employee of a public international organization such as the United Nations. 

When the FCPA Applies to You

If your venture is incorporated in the U.S. and operates abroad, you are required to comply with the FCPA.   But even if your venture was created in another country, it may still be subject to the FCPA.  For example, if you have a foreign company that is owned by an American company or nonprofit, your organization is also subject to the FCPA.

This is why, in the case of Rupert Murdoch’s news empire, it won’t be enough for News Corp. to prove it was not aware of the alleged bribery at News International.  As was demonstrated in the Securities and Exchange Commission’s 2004 case against U.S. pharmaceutical company Schering-Plough, a U.S. parent company can be hauled into court for bribes paid by its foreign subsidiary – even when there is no evidence that the U.S. parent company knew about the bribes.

What You Need to Know

Based on the wide net cast by the FCPA, there are plenty of social enterprises that are subject to the FCPA.  If you are a management employee in one of these ventures, you need to understand what your obligations are under the FCPA.

To begin with, it is probably obvious that you’re not supposed to pay a bribe to a foreign official in exchange for a government contract.  But the FCPA prohibits much more than this.  It also prohibits you from bribing an official in exchange for something that would bring you, or keep you from losing, business.  In the case of News of the World, for example, it is enough that reporters paid police for information that would allow the paper to publish juicy tidbits that would presumably result in increased newspaper sales.  So, whether you’re looking for a government contract or you’re just trying to increase your business from elsewhere, payments to foreign officials to help you accomplish your goal are illegal.

The Exceptions

Of course, as a social entrepreneur operating in a foreign country, you will likely encounter plenty of legitimate situations that require you to pay a foreign official to do something that will eventually help your business.  For example, it is entirely likely that you will need to apply for permission to operate a business, and there may be an application fee attached.  The FCPA contains an exception for payments made  to “facilitate” or “expedite” a “routine governmental action.”  This exception allows U.S. businesses to pay the fees associated with typical government services like processing a visa, remitting taxes, and supplying electricity.

The Gray Areas

But as you might imagine, the “routine governmental action” exception becomes gray around the edges.  What about paying an official something extra to do what he or she should be doing anyway?  And what about paying an official to move an application to the top of a pile, essentially bribing him to do something he was supposed to do, but faster than it would otherwise have been done?  For a small social enterprise trying to prove its model, it may not be feasible to wait six months for a business registration application to be processed.

There is certainly room to argue over the application of the FCPA in reality.  But what’s clear is that for social entrepreneurs doing business in countries where corruption is the way things get done, running afoul of the FCPA presents a very real risk.

Note: This article is not intended as legal advice and does not create an attorney-client relationship.  If you are seeking legal advice, you should contact an attorney for advice regarding your specific situation.

IBM v Carnegie Corporation: The centenarians square up

July 10, 2011

In this article, the Economist considers the social impact of two American institutions. For purposes of the business vs. philanthropy debate, behemoths IBM and the Carnegie Corporation serve as proxies for their respective sectors. Who has changed the world more? An interesting article worth a read.

Social Entrepreneurs, It’s Time to Start Charging

June 28, 2011

It is hardly news that social enterprise is hot right now. So hot, in fact, that if you are a successful social entrepreneur, you can expect celebrity status at university lectures, meetings and international conferences.  The more successful your model, the more popular you will be as a social entrepreneur, and the more others will want to connect with you.

This ultimately adds up to a lot of external requests for your time. It’s a good thing! People who know you and those who don’t will want to meet with you to discuss partnering with your enterprise, to ask your advice, to bring you to speak to their class or educational program, to seek an internship, to gain an understanding of the sector in order to write an article or start a competing enterprise, and possibly, to consider funding your work.  But suddenly, your time is even scarcer than it was before.  This means it is increasingly valuable too.  One way to make sure that those who are requesting your time are respecting the value of your time as much as you are is to inform those who would request your time that there will be a fee involved.

That’s right, I am suggesting that successful social entrepreneurs consider charging for their time.  After all, there are plenty of consultants who charge hundreds of dollars per hour to offer their knowledge, insight and advice to others.  CEOs of traditional businesses are selective about time they spend giving feedback and information to others when there is no articulable benefit for the company.  Why should the time of social entrepreneurs, and the wisdom they have gained in this emerging field be any less valued?

The Legal Issues for For-Profits

There is certainly no reason why you cannot charge for your time if you are a for-profit.  One issue to watch out for, though, is who should receive the income for your time: you or your company.  As a general rule, if you are using time that you would otherwise spend on your company to consult with someone who has agreed to pay for your time, it is your company that should invoice for your time, rather than you personally.   If, however, you are meeting with someone during time that is your own – if it’s a night or a weekend, this is probably at least supposed to be your own time – then you can invoice the person using your own personal letterhead, and receive payment personally.

The Legal Issues for Non-Profits

If you are a non-profit, and the time you are charging for belongs to your nonprofit, you will need to consider the legal issues this entails.  Typically, consulting services are the province of for-profit companies.  If carried out on a regular basis, the type of consulting services discussed in this article would probably result in tax liability, as they would result in unrelated business income.  By itself, this is fine – even with the tax, charging for your time can leave your organization with extra income.  What’s more important is that you refrain from spending so much of your time on income-generating consulting services that these activities become “substantial” in relation to your exempt purpose.   (See here for a discussion of when unrelated business activities become “substantial.”)

When it Doesn’t Make Sense

Of course, there will be times when charging for your time doesn’t make sense.  Some social entrepreneurs have expressed apprehension that they will offend would-be contacts by asking them to pay for their time.  Such policies should be enforced with care.  It helps to explain the reason why you are charging for your time.  You can also offer that the person who wants to meet with you can first meet with another representative of your organization to see if his or her questions could be answered without the need to meet with you individually.  I have noticed that CEOs and Executive Directors are often contacted personally not because there is no one else in an enterprise capable of answering the questions and discussing the issues, but because these are just the first people anyone thinks of when they seek out an organization.

Finally, instituting a consulting fee policy doesn’t mean you have to enforce it.  You can always waive this policy for someone you truly want to meet, or where there is a potential funder or partner involved.  But simply having a policy may give you as a social entrepreneur the comfort of knowing you can use it when giving your time to others is not profitable for you.

What Nonprofit Boards Can Learn from Greg Mortenson

May 12, 2011

It is too early to know exactly which of the allegations against Greg Mortenson and his Central Asia Institute are true. But we do know that the laws governing tax-exempt organizations were designed to prevent the kinds of financial mismanagement that have been alleged against the organization. Nonprofit boards of directors should take this opportunity to evaluate their own governance and oversight practices.

Click here to read the article just published by SEE Change Magazine in which I make this argument and present several indicators that nonprofit boards can use to evaluate themselves.

“Just Enough”: The Case for Low-Profit Legal Services

April 22, 2011

A Scandinavian friend once told me that in Sweden, there is a word that encompasses a core Swedish ideal: lagom, “just enough.”  The concept of lagom represents the Swedish attitude toward social strata and the balance of rich and poor.  It is reflected in the country’s progressive tax brackets and relative lack of status symbols.  It means that one’s life should be lived in moderation, and that people should strive to have not too much, not too little – just enough.

The concept is quite un-American, actually.  But in the shadow of overindulgent consumerism that led to America’s current economic hangover, perhaps it’s about time for a dose of lagom.

I posit that the growth of the social enterprise movement, and the increasing need for legal representation among social entrepreneurs, represents an opportunity to put lagom into practice.  This is in the provision of legal services for mission-driven organizations.  Until now, legal services in the United States have generally been delivered under one of two cost structures: full price or pro bono (free).  This makes sense for for-profit businesses and individuals who can pay for legal services.  It also makes sense for nonprofit organizations and poor individuals who simply cannot.  But the existing model for pro bono legal services is inadequate to meet the needs of social enterprises.

The problem is particularly acute for startup for-profit social enterprises that may not have sufficient capital to afford the services of a traditional law firm, but which – due to their for-profit status – do not qualify to receive pro bono services from the various public interest legal services organizations that provide them.  In other words, if a social enterprise has formed as an LLC, or even an L3C, it will likely be foregoing some amount of financial profit in favor of a social benefit.  Which means that the extra financial padding that could have been used to purchase professional services in the open market is not available.  At the same time, however, the social enterprise is ineligible to receive pro bono services because it does not have a 501(c)(3) tax exemption.

One solution to this problem could be the establishment of low-profit law firms that would cater to social enterprises regardless of their choice of entity.  I would be interested to hear comments from anyone who has seen this work – or not work – as the case may be.  Can a lawyer or a law firm survive if its hourly rates were $100, rather than $400?  What would be different about a firm like this?  And, could professional services firms such as law firms actually embrace the idea of covering expenses with just enough profit on top to make it worth pursuing this work?