The International Journal
of Not-for-Profit Law

Volume 8, Issue 1, November 2005

By Herrington J. Bryce1

The worldwide growth of nonprofit organizations has given citizens a greater capacity to improve the quality of their lives and to establish peaceful cross-border networks. But, of course, the legal frameworks within which these organizations operate differ across countries, as well as within those countries with federal or decentralized systems. The laws may vary in such matters as the requirements for incorporation; the restrictions on organizations’ operating powers; the rules on reporting, dissolution, and forms of reorganization such as mergers and divestitures; the requirements for public accountability and transparency; the restrictions relating to public support and financial transactions; the designated measures of performance; the extent of political participation allowed; the fiscal benefits, such as tax exemptions and eligibility for government grants, available to some or all nonprofits; and the scope of formal and informal penalties that can be imposed on organizations, their leadership, supporters, and members.

Is there a single conceptual lens – one that operates regardless of an organization’s mission, capacity, and location – through which we can view NGOs, craft model laws, assess their performance, and thereby render common assistance? What is the common platform upon which all of this might be built?

The underlying commonality cannot be that they are charities, for some nonprofits are not. It cannot be that they do not have a profit motive, for increasing numbers of them do–although, by American law, this cannot be a principal motive for their existence.2 Some nonprofits (cooperatives, for example) even pay “dividends” of a sort to their owner-members.

In this article, I seek to articulate a common feature of nonprofits, applicable to nonprofits of all types, whether in developed or underdeveloped countries, and whether in long-established democracies, newly emerging democracies, or non-democratic countries. A common feature might help us develop a framework for making meaningful cross-cultural comparisons of NGOs and the legal frameworks in which they operate, transferring lessons, and, in general, providing a common theoretical basis for analysis.

In my recent book,3 I argue that that common underlying feature of all nonprofits is that (a) they are social capital assets, (b) they exist to be agents of the public, (c) they advance their purposes through the public policy process, as explained further below, and (d) their purpose and their performance are best viewed through the principal-agent concept from contract and employment law. Thus, every nonprofit can be described as a social capital asset and agent of the public in a structured (principal-agent) relationship with the public it serves. Let me explain.

All Nonprofits Are Social Capital Assets

All nonprofits are social capital assets in several distinct senses. They are “social” because their assets (and the benefits that flow from them) are owned by a group, a community, or a society, and not a single private person. They are, therefore, social in a property rights sense. This element carries implications involving control, alienability, transferability, and rules that allow an NGO to serve beneficiaries who are not necessarily the community or group that collectively founded, operates, or funds it.

They are also “social” in sociological and political senses. They are endowed with sociological and political social capital that differentiate them in behavior, capacity, brand, and effectiveness from other entities. These forms of social capital include networks, common adherence to a mission (“pursuing a common good”), and common adherence to norms of interaction that facilitate transactions, expectations, communication, production, and cross-border linking.

All Nonprofits Are Public Agents for Public Purposes

Incorporated nonprofit organizations obtain a charter to perform a specific purpose or a specific class of purposes (for example, education).4 These purposes are, without exception, intended to promote a public interest – either directly, as in the case of organizations holding status under Section 501(c)(3) of American tax law, or indirectly, as in the case of associations and other nonprofits. These latter (such as medical associations) act on behalf of their members, but with a traceable public benefit (better public health) as the end objective.

How is the nonprofit empowered as an agent of the public? A charter is an instrument of empowerment – a license, so to speak to perform a specific class of functions. Hence, all nonprofits, through the act of seeking and receiving a charter, offer and promise to perform the functions specified therein–their mission. These purposes in turn are specified in legal codes as among those serving the general public’s interest, thus justifying tax exemption and other benefits conferred on the organization with not-for-profit status, as opposed to a for-profit organization. Put otherwise, these benefits can be seen as consideration for the nonprofit’s promise to perform the public purpose specified in its charter on behalf of the general public. Every nonprofit is therefore a voluntary agent of the public.

All Nonprofits Operate through the Public Policy Process

Nonprofits carry out their missions principally through the public policy process, just as firms carry out theirs mainly through markets. The public policy process in which nonprofits are engaged covers the breadth of public decision-making and action. In the United States, for example, political parties and political action committees are tax-exempt nonprofits under Section 527. Only these organizations may engage in politics–defined in the Code as affecting election outcomes. Their exclusive purposes are to propagate and influence political philosophies, and to work to choose and elect political candidates. The successful candidates proceed to make public policy.

Through the exercise of their First Amendment rights, all nonprofits retain lobbying powers. These lobbying powers are defined in the Code as the power to influence policies (domestic and foreign), the naming of public administrators, the crafting of bills, the passage of laws, and the rules by which laws are implemented and adjudicated. Through lobbying, hence, nonprofits help to shape the policies of those whom they (or their rivals) helped to elect and appoint, and the environment and fashion in which those policies will be implemented.

This is the case because other nonprofits are doers–implementing programs or purposes specifically defined in the Code as advancing the public welfare. According to the Code, this public welfare might relate to science, religion, culture, health, education, welfare, the arts and culture, and even sports. Nonprofits operate in times of war and peace. In short, from beginning to end of the public policy process, nonprofits are significant players.

The Principal-Agent Paradigm, Contract and Employment Law, and the Nonprofit as an Agent

The principal-agent paradigm is the framework in which the nonprofit performs as social capital and public agent. In a democracy, the people (as a collectivity or the public) are the principal, and the government is an agent of the people. When the government grants a charter to the nonprofit and oversees compliance, the government takes on the role of managing agent for the public, with all nonprofits being operating agents of the public.

This relationship is modified but not nullified when the nonprofit has a specific contract (say, to feed the poor) with the government.5 Note that the nonprofit in such an instance is an agent of the government, whereas in the absence of a specific government contract, the government (as an instrument of the people) merely licenses the nonprofit to work for the people. In either case, the public is the ultimate principal.

Every contract constitutes a promise that is proffered and is accepted. The mission statement, then, is a contractual promise, voluntarily entered into by the nonprofit, with the expectation of compensation of some sort, such as donations from individuals and organizations, exemptions from particular taxes, and eligibility for government grants and contracts. A specific contract, of course, will entail additional consideration or payment for performance of particular acts.

A nonprofit’s mission has all of the ingredients of any other contractual promise when accepted by a principal. In exchange for the nonprofit’s promise, the principal – that is, the government, acting on behalf of the public – confers implied, expressed, derived, and inherent powers and discretion, generally accompanied by obligations and restrictions. The powers and discretion conferred have all sorts of potential consequences.

Thus, this question is always germane: Is the nonprofit serving the public? This question crosses borders and missions and differs only in its details.

Consequently, Some Common Challenges

The most important concept in this universally applicable lens is that the nonprofit is a form of social capital6 asset that exists exclusively to serve the public’s interest, through the process in which that interest is collectively determined, formulated, attended to, and disposed of – the public policy process. The nonprofit in a democracy is not an agency of the government, not part of the government’s process at all, but rather a part of the public’s process of determining priorities and outcomes. Unlike government agencies, consequently, nonprofits are not in a master-servant relationship with the government; rather, they are in a principal-agent relationship with the public–the citizens who voluntarily created them and on whose behalf they serve. If all nonprofits fit the basic mold described in this article, then all nonprofits share particular systemic challenges regardless of mission, purpose, or location.7

A common, universal challenge of legal codes, therefore, is to enable nonprofit organizations to accumulate social assets, devote them to public purposes, and participate in the public policy process as agents of a group, community, or society to whom they are ultimately responsible by the terms of their creation. From this common purpose and paradigm, perhaps, can emerge a shared platform for international cooperation and sharing.

Certain concepts are given fresh and powerful meaning in a principal-agent paradigm. These include responsibilities of agents to perform specifically as expected by the principal and the remedies available to the public when the organization as agent fails. Also reinforced are custodianship, stewardship, accountability and the utilization of organizational capacity as duties; and support is compensation or incentive to provide a public service rather than a mere “subsidy.” These concepts have common and universal applicability in understanding and elevating the role of nonprofits. While space does not permit their exploration here, I deal with them in the book I cited.

Notes

1 Herrington J. Bryce, herrington.bryce@business.wm.edu, is Life of Virginia Professor of Business Administration at the College of William and Mary, Williamsburg, Va. 23185. This article is based on his recent book, Players in the Public Policy Process: Nonprofits as Social Capital and Agents (New York: Palgrave Macmillan, 2005), https://www.palgrave-usa.com/catalog/product.aspx?isbn=1403968292. He is also the author of the comprehensive legal and operational guide, Financial and Strategic Management for Nonprofit Organizations, (San Diego, CA: Jossey Bass, 2000). Bryce has worked or lectured on nonprofits in Russia, Estonia, the Republic of Georgia, Romania, China and South Korea.

2 See Trinidad v. Sagrada Orden, 263 U.S. 578, 581 (1924).

3 Players in the Public Policy Process: Nonprofits as Social Capital and Agents (New York: Palgrave Macmillan, 2005).

4 Unincorporated organizations such as trusts may have deeds requiring the same thing. Other “unorganized” organizations may not have such papers, but the contract is implicit and understood.

5 The government holds the ultimate power of involuntary dissolution in both cases. For a discussion of the differences in governmental powers, see Players in the Public Policy Process, especially pp. 54 and 71-72.

6 In this short article, I have not defined “capital.” But the word is used consistently with “capital” as a long-term benefit-producing asset. See ibid., esp. pp. 33-58.

7 For a discussion and illustration, see ibid., pp. 121-79, 219-35.