Why You Can’t Be a For-Profit and a Nonprofit

    I am a huge fan of the New York Times, although I’m mostly a Sunday Times guy—there aren’t enough hours in the week to keep up with it seven days running.  It is almost enough to make you long for a nice long commute by train to some remote corner of Connecticut.  I love the Times and the mission and the mantle it assumes, paper of record for the entire nation. That would be especially true now that it is practically the last entity standing in the shredded ranks of investigative journalism.  According to a 2005 Arizona State University survey, roughly 37 percent of the top 100 papers in the nation have no investigative journalists.  Hard to believe, but there it is.  I imagine that percentage is notably lower today.

            But a senior editor of the New York Times made what was to me a strange statement last Friday.  As reported at PoynterOnline, Craig Whitney, assistant managing editor at the Times, launched the trial balloon that the paper is considering approaching foundations for support to underwrite its investigative journalism.  "We've begun to ask ourselves whether it would be possible to get the kind of support that NPR does from foundations for its journalism," he said. 

            Foundation support for investigative journalism is normal.  Investigative journalism serves the public interest in the same way libraries do.  It is a good cause.  In addition to NPR, the nonprofit investigative journalism center ProPublica is funded in such a manner.

            The one, huge, glaring contradiction related to Whitney’s statement is that the New York Times is a for-profit company.  NPR is a nonprofit organization.  The Times is owned by the New York Times Company, a publicly traded company controlled by the The Ochs-Sulzberger family trust, which owns roughly 88 percent of the company's votable hares.  NPR is governed by a board of trustees that represents the interests of the community it serves.  That is, they hold the enterprise in trust for the public at large.  They serve without compensation, as a community and philanthropic service, giving of their time and their treasure, as the old saying goes.  The New York Times is funded by revenues from operations and from investors looking for a return on their investment.  NPR is funded by grants and contributions from a wide variety of sources, as well as fees paid by affiliates for the use of NPR content.  These fees are in turn supported by grants and contributions at the local level.

            One of the perks that come with service to the commonweal is the ability to accept contributions and offer tax deductions in exchange for private support.  Private foundations that represent the interests of wealthy endowers and their estates are required to pay out grants to qualified nonprofit organizations. 

Just because you don’t make a profit doesn’t make you a nonprofit

            So why would the flagship paper of the nation decide that it now wants a piece of the philanthropic pie?  There can only be one reason:  a desperate need for cash.  Did they just forget that whole bit about the nonprofit ethos of holding the enterprise in the public trust in a manner devoid of the profit motive.  Are they saying, “never mind that this is a bedrock value of the nonprofit sector—we’re broke”?

            Clark Hoyt, public editor of the Times, wrote last Sunday in an article entitled, “One Newspaper, Many Checkbooks,” that the Times has embarked on a series of joint projects with the nonprofit ProPublica.  In this manner, the paper benefits indirectly from the largesse of private, philanthropic support for investigative journalism.  No problem there.  ProPublica does part of the reporting and benefits from the stellar platform provided by the Times.

            But Hoyt also wrote, “Times executives and editors have even discussed seeking foundation support to underwrite sections of the paper or categories of news, like Science Times…” So, what’s for-profit and what’s not-for-profit?  Sports—profit, News—not so much?   That the Times would seek to blur the clear distinction between the nonprofit and for-profit sectors based on such a flimsy categorization is beyond me.  They should know better.

            Others blur this distinction, too, most notably the health care industry.  In any list of the most highly compensated CEOs of nominally nonprofit organizations, the health care industry dominates the first tier.  I am talking about organizations like Partners HealthCare System, in Boston, whose CEO earned $1,371,399 in 2007.  Such excesses have drawn the ire of powerful critics like Iowa Senator Charles Grassley.  Just last month he was aggressively questioning whether nonprofit hospitals were earning their tax breaks.

            So how would the Times pull off such a funding coup?  Public universities are an example of public institutions that set up nonprofit 501(c)(3) foundations to facilitate giving, but their purpose is already exempt as agencies of the state.  The Times could rely on individual journalists to find their own donors.   This was the subject of Hoyt’s article.  It amounts to small potatoes, a proposal that was a non-starter.  No, the big money is in the big foundations:  the Ford Foundation, the Bill & Melinda Gates Foundation, and so on.  But the Times is legally barred from setting up a foundation in direct support of a for-profit company. Nonprofits don’t fund for-profits (although it is obvious they can make payments to for-profit entities to further their exempt purposes, say, in exchange for an ad or for services rendered).  And foundations must award their grants to 501(c)(3) organizations.

            The Times could be sending up a trial balloon that ultimately might lead to a legislative initiative—one that could change the nonprofit sector as we know it—and allow the Times to compete in a manner that would be unfair to true nonprofits. 

            Or they could, as Hoyt indicated, partner.  Let’s look at how that might work…

The Golden West / ProPublica / New York Times Connection

            ProPublica, a nonprofit center for investigative journalism based in New York, is a bona fide example of a nonprofit journalism corporation.  Its objectives, methods and products are laudable.  Its leading executive, Paul Steiger, has an excellent Wall Street Journal pedigree.  The ProPublica website states, “many news organizations have increasingly come to see investigative journalism as a luxury …” Thus, some observers have come to regard ProPublica as one viable future incarnation of serious investigative journalism.

            Their funding picture, and their governance picture, however, is clouded.  ProPublica is funded almost exclusively by The Sandler Foundation, a private foundation established by Herbert and Marion Sandler of California.  In 2008, 93% of ProPublica’s $8.6 million budget came from The Sandler Foundation—this according to ProPublica financial statements.  In addition, Herbert Sandler is the chair of the ProPublica foundation board. His business?  Up until 2006, Herbert and Marion Sandler’s business was the Golden West Financial Corporation, which they effectively owned since 1963.  Their business was mortgage loans. Some of those—you could say a lot of those—were pay-option mortgage loans.  According to the Federal Reserve Board, these are loans through which you:

(1) pay only the interest on the loan during the first few years of the loan term or (2) make only a specified minimum payment that could be less than the monthly interest on the loan.

Simply put, these loans are financial instruments of mass destruction. Many of these loans were made through Golden West’s World Savings Bank subsidiary—a once-stodgy S&L based in Oakland.  In a world of nasty loans, I believe World’s were some of the nastiest; they did not reset to fire drill level until the amount of negative amortization reached a level 25 percent above the original loan amount.

The Sandlers, always highly regarded in the industry, at least up until 2007, make much of how their companies operated according to high ethical standards.  They are benefactors of the highly regarded Center for Responsible Lending.  However, I maintain that offering these loans, even if they were but a smattering of the total loan portfolio, which they were not, is prima facie evidence of unethical business dealings, at least as I would define them.

The Sandlers sold the company to Wachovia in 2006, in a move Marion Sandler characterized as:  “If you were fatalistic, you would say this was meant to be.”  Er, yes, but not in the way she meant. The loan portfolio transferred in the sale was largely responsible for the failure of Wachovia and its subsequent sale to Wells Fargo.  That’s right.  Golden West’s portfolio was like an IED for the mortgage industry.  It blew Wachovia to smithereens.

The Sandlers were the subjects of the famous Saturday Night Live “banned skit,” a bailout satire that aired in October 2008.  NBC pulled the skit from every identifiable web outlet after the Sandlers complained. Lorne Michaels apparently said he didn’t know they were “real people,”  As you know, Saturday Night Live never goes after “real people.”

 Today, the Golden West acquisition is the subject of class action lawsuits and government probes directed at current owner Wells Fargo according to the Birmingham Business Journal and other sources.

The Sandlers, whose politics are avowedly liberal, were just two of the thousands of mortgage meltdown mavens who have a story to tell you about how they are not responsible for the meltdown.

Nevertheless, the Sandlers’ policy at ProPublica is strictly hands-off.  Except for one small detail.  When one party is both the largest donor and chair of the board, there is no way to avoid undue influence and even, at the extreme, coercion.  The arrangement inherently carries the risk of de facto self-dealing.  This is as inevitable as the iron law of oligarchy.  And the influence is as pervasive as it is subtle.  Trust me on this; I worked in nonprofit fund raising for 25 years, where my responsibilities included direct responsibility for dealing with boards and top donors.

If an investigative reporter were to ask me if this was an unusual model of funding-slash-governance for a nonprofit, I would say it is an especially sensitive matter for an organization that provides investigative journalism in the public interest.  I don’t care how many editorial advisory boards the organization has.  ProPublica may be the Sandlers’ shot at a second act—or redemption—but make no mistake, it is their show.  If they take their marbles and go home, the game is over.  That is indisputable, despite the fact the John S. and James L. Knight Foundation has recently offered seed money to help diversify the organization’s funding base.

Thus, a business partnership between nonprofit investigative journalism and the New York Times is born. 

It should be emphasized that the Times wrote an unflattering, if slightly inaccurate account of the Sandlers’ business dealings in December 2008 here.  Suffice it to say the Sandlers do not pal around with honchos from the Times.  Still, it all echoes the legacy of the robber barons, whose tainted money funded thousands of good causes in the late 19^th and early 20^th centuries. 

Next month, we enter a new era as the NYT devotes the entire Sunday magazine to a joint reporting project with ProPublica.  Where does it lead, and where does it end?  I really don’t know.  But this particular trial balloon for direct foundation funding is made of lead.  And the partnership?  For my money, dirty money is too close to the nation’s paper of record.  As Cyndi Lauper once sang:  money changes everything.

As to ProPublica, Herbert Sandler needs to resign his position of chair of the board immediately.  In addition, he should resign from the board until such time as the investigations into his toxic loan portfolio and methods are complete, the lawsuits settled, and the ProPublica board is properly diversified.  After all, the product the New York Times and ProPublica are peddling is integrity, or so I would prefer to think.