Friday, July 06, 2007

The Fourth Sector

Altrushare Securities is a brokerage firm, engaged in the sort of things you might expect of a Wall Street outfit, like buying and selling stock, and providing research on companies. Unlike its peers, however, the firm is majority-owned by two charities that each control about one-third of it.

So is it a for-profit business? Or a nonprofit fund-raising machine?

In fact, like hundreds of new businesses starting up around the country, it is both. Altrushare is an example of the emerging convergence of for-profit money-making and nonprofit mission.

The result is a small but budding practice — what some label the fourth sector — composed of organizations driven by both social purpose and financial promise that fall somewhere between traditional companies and charities. The term “fourth sector” derives from the fact that participants are creating hybrid organizations distinct from those operating in the government, business and nonprofit sectors.
I like this concept of the fourth sector. Instead of having companies that are just thinking about profit and pushing environmental and social costs on to government and NPOs, it would be cheaper for society to have the businesses just deal with the problems directly.

Fourth sector businesses are also more sustainable than similar non-profits as they have revenue coming in to pay for their expenses and don't have to be worried about obtaining donations to continue their work.

Who invests in fourth sector companies?
Most common program-related investments, or P.R.I.’s, are low-interest loans that foundations provide to nonprofits. The Ford Foundation, which helped pioneer the concept in the late 1960s, has some $170 million in assets sunk into program-related investments in 99 nonprofit groups, including the loan fund.

Investors and others are pushing to expand the use of such loans, perhaps through changes to the tax code that would make them available to businesses as well as nonprofits.
Instead of investors trying to maximizing their rate of return and then donating that money to NPOs, they can get more bang for their buck by investing in 4th sector companies as it is cheaper to fix the root cause of the problem than to deal with it later.

What is holding the 4th sector back?
Still, whatever participants call it, the fourth sector faces challenges. Current legal and tax structures draw strict lines between for-profits and nonprofits, and fiduciary obligations prevent asset managers from making investments with any aim other than maximizing profit. The social benefits that fourth-sector firms seek to unlock are not easily quantified and often take decades, not quarters, to attain.

“What we are constantly coming up against is our tax laws and our culture,” Ms. Berry said. “The whole fabric of society wants us to make money on one side and do good with it on the other. What we’re saying is: What if we did both things at once?”

She and others argue that current laws, tax structures and definitions of fiduciary responsibility encourage companies to shift costs onto society. “We have created cheap food by investing in huge agricultural conglomerates — but is it really cheap?” she asks. “No. Look at the pesticides those businesses use and then look at the cleanup costs to society. Look at the health costs.”

Ms. Berry, Mr. Murphy and others like them want tax breaks to offer incentives that compensate businesses for absorbing the social costs of their activities.
If a 4th sector company is able to employ someone that otherwise would be on welfare, it would cost less to taxpayers to subsidize this job than to pay for welfare. Seems like it would make sense to offer the company a tax break or a subsidy to allow them to hire more people are reduce the welfare roll even more.

On the other hand, for those whose motivations are not quite as pristine, such tax breaks seems like an easy way to defraud the government, as it will be hard to determine who would otherwise be on welfare.

Overall, the trend towards more 4th sector companies and is a good thing and I hope to see it continue.

via NY Times