Melissa Sampson McMorrow chairs the Tax Department at the law firm of Nutter McClennen & Fish and co-chairs Nutter’s Nonprofit and Social Impact Practice Group. In this episode we talk about models of governance structures for Impact Philanthropy Enterprises – ranging from Newman’s Own to Patagonia. We also discuss Massachusetts guidelines for diversity, equity, and inclusion on the boards of Massachusetts charities.
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About Nutter – Nutter McClennen & Fish is a Boston-based law firm that was founded over 150 years ago by Supreme Court Justice Louis Brandeis. The firm carries on his legacy today by providing high-quality legal counsel to industry-leading companies, entrepreneurs, institutions, foundations, and families across the country.
Changing landscape of Impact Philanthropy – As the world has become more complicated and as the profile of donors has evolved, you see more engagement from donors, and you see donors drawing on different tools and approaches to accomplish their charitable objectives.
Donors want to give more than money – .. What you’re really seeing is donors, many of whom are successful entrepreneurs, really wanting to use those skills and know-how and apply it in world of philanthropy where they can really make an impact, not just giving money, but with aligning with their goals.
Newman’s Own Model – Newman’s Own was Paul Newman’s company and anyone who walked down the salad dressing aisle of a grocery store knows that Paul Newman gave some percentage of the profits that his for-profit company made to charity every year.
Fast forward to his death, how does he keep this going after he’s gone? Well, what he did was he, bin very simple terms, gave his company to his charitable foundation…
A wise mentor of mine once said to me, if you don’t like the law, change it, and that’s what they did. They lobbied Congress and they changed the law, and so they were able to end up with a structure that is available to everyone, not just Newman’s Own, that would allow a foundation to continue to operate a for-profit business.
How the Patagonia Model is Different – There are a few aspects that distinguish what at first blush might seem like a similar arrangement to the Newman’s Own arrangement, with few key distinctions. The first distinction of the Patagonia example is that the family is able to maintain control of the business. They don’t own it or have an economic ownership interest in it, but there is a control element that is not present in the Newman’s Own situation.
Massachusetts Guidelines on Diversity, Equity, and Inclusion for Non-Profits -Massachusetts has had a guidebook for nonprofit organizations, particularly charitable organizations, for a long time. It was most recently updated in 2022, and I think it’s really interesting where they chose to put the focus in their updates.
Really, it’s on first, education, second paying attention to the financial workings of the organization and then third -and arguably most important -, paying attention to how you build your board and how that board carries out its duty in executing the organization’s mission.
Louis Brandeis on Progress – If you’ll permit me a quote by the founder of our firm, Louis Brandeis, our DEI strategic plan is guided by a quote of his as follows, “In differentiation, not in uniformity, lies the path of progress,” and I think that rings true today as well.
Joe: [00:00:00] Hello and welcome to On Boards, a deep dive at what drives business success. I’m Joe Ayoub, and I’m here with my co-host, Raza Shaikh. On Boards is about boards of directors and advisors in all aspects of board governance. Twice a month, this is the place to learn about one of the most critically important aspects of any company or organization; its board of directors or advisors, as well as the important issues that are facing boards, company leadership, and stakeholders.
Raza: Joe and I speak with a wide range of guests and talk about what makes a board successful or unsuccessful, what it means to be an effective board member, the challenges boards are facing and how they’re addressing those challenges, and how to make your board one of the most valuable assets of your organization.
Joe: Our guest today is Melissa Sampson-McMorrow. Melissa chairs the tax department at the law firm of [00:01:00] Nutter McClennen & Fish. She co-chairs the Nonprofit and Social Impact Practice Group and serves as a member of the firm’s Executive Committee. She advises businesses, tax-exempt entities, and individuals on federal, state, and international matters.
Raza: Prior to law school, Melissa was an analyst in the tax analysis division of the US Congressional Budget Office and the US Senate Budget Committee. She previously served as the inaugural co-chair of the Boston Bar Association’s Tax Exempt Organization Section, and currently she serves as the co-chair of the working group which is leading the efforts to update the Commonwealth’s nonprofit statute.
Joe: Among other recognitions, the National Law Journal has selected her as a Trust and Estates Trailblazer. She has been named to Best Lawyers in America and Super Lawyers Rankings for many years, and [00:02:00] was selected as the nonprofit Charity’s Law Lawyer of the Year in 2022. Welcome, Melissa. Thank you so much for joining us today on On Boards.
Mellissa: Hello. Thanks for having me. It’s such an honor to be able to participate in this important programming where you’re elevating issues that are really crucial to companies, nonprofits, and society in general, so thank you very much for doing the work you’re doing.
Joe: Well, thank you so much for the kind words, Melissa. We appreciate that. Before we begin to talk about Impact Philanthropy, it would be helpful if you’d give the listeners an overview of your law firm and maybe then we’ll talk a little bit about the practice group you lead, the Social Impact Practice Group.
Mellissa: Yeah, I’d be happy to do that. Nutter is a Boston-based law firm that was formed over 150 years ago by Supreme Court Justice Louis Brandeis, and we carry on his legacy today by providing [00:03:00] high-quality legal counsel to industry-leading companies, entrepreneurs, institutions, foundations, and families across the country, and our main goal is helping them achieve what they want to accomplish.
Joe: What about the Social Impact Practice Group that you lead, tell us a little about that, if you would.
Mellissa: Sure. Nutter’s Nonprofit and Social Impact Group, it draws from the multidisciplinary expertise that we have here at Nutter from corporate governance to tax expertise, to estate planning, and everything in between. What we do is we combine those resources and dedicate them towards achieving the goals of philanthropists, entrepreneurs and operating nonprofit organizations on every size of the scale and in every industry that is covered in the nonprofit sector.
Joe: Thanks. For a long time, charitable giving has been an important part of the social structure in America. But something seems to be happening in that it is evolving in some respects to [00:04:00]something that is referred to as impact philanthropy. In my understanding, it is social entrepreneurs and families wanting to donate their money so that they will make sure they have an impact that they want to accomplish. Is that a fair way of summarizing kind of this evolution of one aspect of charitable giving?
Mellissa: It very much is. If you go back decades or even centuries, when you think about traditional charitable giving or traditional philanthropy, donors and philanthropists would be making grants to operating nonprofit organizations and trusting those organizations to carry out the charitable objectives of their organizations.
Donors or philanthropists may form a foundation or partner with a community foundation, but traditional charitable activity was charitable. As the world has gotten more complicated and as the profile of donors has evolved, you really [00:05:00] see more engagement from donors and you see donors drawing on different tools and different ways to accomplish their charitable objectives.
Giving money is really just one of those tools in the toolbox now. What you’re really seeing is donors, and many times they’re entrepreneurs who have been successful in their own private endeavors, really wanting to use those skills and take that know-how and move it into the world of philanthropy and really make an impact, not just with giving money, but with really aligning with the goals and using all tools available to them to make an impact in a way that causes them to work side by side with the charitable organizations or other types of nonprofit organizations.
Joe: Part of it is a change in the attitude of the donor. Is part of it also because the accumulation of wealth has really become so significant that the money that they’re now giving can have a profound impact [00:06:00] on one or more areas in which they might be interested, like the Gates Foundation, I’ll just say as an example that people know about?
Mellissa: In the Gates Foundation, they have been, and they continue to be leaders. They engage in a form of impact investing called program-related investments where instead of just giving money to charitable organizations, they actually will structure their giving in a way that’s in the form of a loan or in the form of a direct investment in a company that is focused solely on achieving the charitable objective that they’re trying to accomplish.
There are various forms of that, but the Gates Foundation is a great example of that and there are others as well. And again, it’s not the first time in the US history where there’s been an incredible accumulation of wealth. You can go back to the Gilded Age and there was an intense amount of philanthropy going on in that era as well. I think you’re right, Joe, you cannot ignore the changes that are going on in the nonprofit [00:07:00] sector. You cannot divorce those from the changes that are going on in the economy and how the wealth is being distributed, and you’re seeing the effects of that in the philanthropic sector.
Joe: Let’s talk about an example that a lot of folks are familiar with, which is Newman’s Own, Paul Newman’s company that he started, and during his lifetime, he gave the profits, as I understand it, all to charity. Talk about a little bit about what happened after Paul Newman died and how the giving evolved after that.
Mellissa: Yeah, sure. Newman’s Own was Paul Newman’s company and anyone who walked down the salad dressing aisle of a grocery store knows that Paul Newman gave, I think it was 10% or some percentage of the profits that his for-profit company made to charity every year. If you wanted to put a label on that, that is called what we commonly call in the industry Cause Marketing, using your profits as a means of giving for charitable [00:08:00] purposes. We see that in all different types of areas now, but Paul Newman really made it popular.
Fast forward to his death, how does he keep this going after he’s gone? Well, what he did was he, basically in very simple terms, gave his company to his charitable foundation.
Now, because of some complex rules that we won’t get into that limits the ability of a foundation to own a company, they had this timeline ticking where they had a maximum of 10 years to basically sell the company, this is they being the foundation, because there’s a limit on how long a foundation is able to own a company that is donated to it.
A wise mentor of mine once said to me, if you don’t like the law, change it, and that’s what they did. They lobbied Congress and they changed the law, and so they were able to to end up with a structure that is available to everyone, not just Newman’s [00:09:00] Own, that would allow a foundation to continue to operate a for-profit business and why would a foundation want to do that? Well, because the for-profit business generates profit that then can be applied towards achieving the foundation’s charitable objectives.
Really, the goal here is, from the legislative side and these laws are federal tax laws that need to be followed in order to keep your charitable 501(c)(3) status, and so really what the foundation has to abide by and what any foundation that wants to preserve a business and dedicate its profits to charitable endeavors is really making sure in fact that all the profits do go to your charitable endeavors, and then also setting up a structure that does not allow too much control by the foundation of how the business is operated.
That’s where the governance comes in because you have to set up a structure, you have to have trustees or board members who understand and are knowledgeable about the [00:10:00] structure, and then you have those set of individuals that have to follow the structure.
But once you set it up and you operate it and you implement it, there’s a lot good that can come out of keeping a business dedicated to charitable causes.
Joe: In this case, essentially, the sole shareholder of the company is the foundation, right?
Mellissa: Yes. Mm-hmm.
Joe: As I understand it, at a very high level, those that control the foundation, there can’t be too much overlap with those that are running the commercial entity.
Joe: What’s the purpose of that?
Mellissa: The crux of this is when you make a donation to a 501(c)(3) charity, you presumably get a tax deduction for that, and one of the requirements of getting a tax deduction is that you, the donor, lose control of the assets, you give up control of the assets.
Paying attention to what the structure is and the relationship is between the foundation and the company, the people that run the foundation, the people that run the company, is [00:11:00] really aimed at getting to that concern and objective of making sure that there is not still the ability to control.
Joe: Let’s fast forward to a more modern example of impact philanthropy from Newman’s Own, and that would be Patagonia, where the founder, Yvon Chouinard, did something very different than others had done because essentially he found the Newman’s Own model too constraining, as I understand it. What did he do that created a different model than Newman’s Own?
Mellissa: Yeah, sure. There’s a few aspects that distinguish what at first blush might seem like a similar arrangement to the Newman’s Own arrangement, and I think there’s a few key distinctions. The first distinction of the Patagonia example, which we’ve talked about the fact that there’s a great article in the New York Times outlining what the goals were and how they accomplished them, but the main one is that the family through a structure that involves a trust and a [00:12:00] nonprofit corporation that is not a 501(c)(3), it’s what’s called a 501(c)(4), basically the family through the structure is able to maintain control of the business. They don’t own it. They don’t have an economic ownership interest in it, but there is a control element that is not present in the Newman’s Own situation.
The other important difference to pay attention to between the Newman’s Own model and the Patagonia model is that there was no charitable tax deduction in any way, shape, or form that was received to my knowledge by the Patagonia transaction, so that’s a con for some people.
But the pro to that is that you have much more flexibility. The nonprofit organization that now owns 98% of the company has the ability to lobby, engage in advocacy activities that a charitable foundation is not able to engage in and also has [00:13:00] the ability to engage in political campaign activities that a charitable foundation is not able to engage in.
You give up monetary benefits, but you gain what I would call two additional tools in your toolbox to be able to make an impact.
Joe: He and his family wanted to run the company, didn’t care about the charitable deduction or any positive tax implications, and wanted to maximize profits for charitable purposes essentially.
Mellissa: That’s right, and so then that takes us back to we are in a new era. We are in a different era where, for a while, for a long time, you would see charitable deduction, charitable tax benefits, driving people’s philanthropic objectives or driving people’s philanthropic decisions.
We are now in a world of accumulated wealth, perhaps, where the charitable tax deduction is not as important to people anymore, and it’s almost [00:14:00] trending that people are willing to and have the unbelievable means to forego the charitable tax deduction to get the benefit of the ability to have these other tools in their toolbox to accomplish the impact that they want to achieve.
Joe: Essentially, they are more focused on having the philanthropic impact that they want to achieve than worrying about such minor things that the rest of the mortals have to worry about in terms of trying to reduce their taxes.
Mellissa: Yes. And you’re starting to see that more than you might think.
Joe: Even once is more than I would’ve thought to tell you the truth, but I understand it and actually it’s pretty compelling.
Raza: Joe, it also sounds that they are then truly doing it from the goodness of their heart and not because they’re getting a tax deduction so that’s also great.
Melissa, it also seems like there are variations of these models where people have done this without the constraints of what a foundation would entail.
Could you talk about maybe Mark [00:15:00] Zuckerberg or Pierre Omidyar of eBay and their model and them wanted to create an “enterprise for charitable good”. What does that look like?
Mellissa: Sure. In between when Newman started his food company and when the Patagonia company went through their restructuring, you’ve had lots of other things going on in between and two examples that got a fair amount of press, maybe one a little bit more than another, are transactions or the structures that were created around the Facebook enterprise, the Zuckerberg enterprise as well as the charitable network that Pierre Omidyar, the founder of eBay has created and is often referred to as the Omidyar network, and really at their essence, there are distinctions between the two of them, but really the goal there is creating a philanthropic enterprise.
You’ve got multiple vehicles. They’re really multiple organizations. Whether they’re [00:16:00]corporations or trusts or limited liability companies, you take the tools available to you and you create multiple entities, and really what you get out of those philanthropic enterprises is the ability to get the best of all of the worlds.
I was talking to you about the pros and cons of Patagonia and the pros and cons of the Newman’s Own structure. Well, you can create multiple entities and get the benefits of the structures. You can a charitable foundation, a 501(c)(3) foundation, and there’s different variations of 501(c)(3)s that have a sliding scale of benefits.
In that, you can carry out your traditional charitable activity, you can be a little bit fancier with some of the more advanced charitable activity that’s allowed through those entities, but at the end of the day, when you make contributions to those, when you fund those entities, there is a tax deduction available to you. Again, there are various different ways you can set those up and you can set up more than one.
Then you can also create non-charitable vehicles where you’re dedicating[00:17:00] the assets to some type of social welfare goal, but you’re retaining more control than you would be able to if you had a 501(c)(3), in operation.
You also have the ability to lobby at any level of state or federal or local government, and you also, in certain circumstances, have the ability to impact political campaigns. More and more people see those tools is very crucial to being able to make the impact that they feel is needed. I think if you pick your cause, the environmental cause or any other social goal, people more and more are seeing that you need more than just charitable dollars to make your impact.
Raza: Melissa, it sounds like that there are then even more examples from Hershey to Bose, and then looking ahead from all of these examples, is there a trend emerging in terms of how these governance entities are being formed? Is there a pattern? How does the future look like?
[00:18:00] We already talked about that we know that it does seem to be increasing, but is there a kind of like a standardization going on for this or are people going to try what’s best for them?
Mellissa: The bottom line is you sit down with your advisors, and it’s often a lawyer, a financial advisor strategy consultant, you have a whole team, and you map out your strategic plan and then you back into what you need to get there, and if everyone’s on the same team, you’re going to get the right customized result.
I think the trend is, it’s really what we were just talking about and saying it’s not just one answer. You can have a suite of answers and they can work in concert, and in doing that, you’re making a greater impact.
You can still do traditional giving. If that’s still most of what’s going on, but the trend is really customizing your governance structure and your enterprise, as I like to call it, in order to achieve your specific strategic charitable or social [00:19:00] welfare objectives.
Joe: Would it be fair to say that to some degree, the shift from 501(c)(3) to sometimes 501(c)(4)s kind of reflects the difference between “I’ll give it to a charity and they’ll know what to do with it and I’m doing a good thing and then I move on” to “No, I’m a successful person. I’ve made a lot of money. I know what result I want to achieve, and the more flexibility I have in achieving that, the more likely it is that it’s going to happen the way I want it to happen”.
Mellissa: That’s right. We haven’t even talked about lots of states have created things called benefit corporations and L3Cs and things like that, and so the world is getting more and more complicated. It’s getting more and more interesting and arguably, people would say there’s more and more of an impact being made by the nonprofit sector and the ecosystem around it. That does of course then bring about [00:20:00] more interest from regulators.
Joe: Yeah, of course.
Mellissa: You always have to keep that in front of mind as the lawyer and making sure that the structures are optimizing in that way as well.
Joe: Thanks. Let’s just talk for a couple of minutes about diversity, equity and inclusion initiative in Massachusetts charities. I know that recently there were some board diversity guidelines that were promulgated and published. Can you talk about what they are, where they came from, and I guess to what extent they were either based on or mirrored or driven by, for example, what NASDAQ has adopted.
Mellissa: I just mentioned the regulators, so your two main regulators in this space are the IRS and State Attorney General’s Offices, and really more and more, and you’ve seen this over the past 20 years, they’re caring more and more about how these organizations are governed. The bottom line is that a well-governed organization is [00:21:00] far more likely to carry out its objectives and far less likely to get in trouble, and so that is why both at the federal level and at the state level, you see the focus on governance.
Many states have guidelines for board members of nonprofit organizations. There are a few states that stand out in this area; Massachusetts, New York, California, Minnesota has a great one, and they really pay attention to trying to educate people who govern these types of organizations in order to, number one, try to enhance the impact, and number two, try to keep these organizations out of trouble.
Massachusetts has had a guidebook for nonprofit organizations, particularly charitable organizations, for a long time. It was last updated in 2015, but in 2022, it got a refresh, and I think it’s really interesting where they chose to put the focus in their updates.
Really, it’s on education. It’s on paying attention to the financial [00:22:00] workings of the organization, and then third, and arguably most importantly, paying attention to how you build your boards and how that board carries out its duty in executing the organization’s mission.
Central to that message that Massachusetts just delivered was really focusing. on DEI, in the composition of your board and also in your grant making and in the execution and in the operations of the organization’s activities.
On the diversity side, it’s also all types of diversity; gender ethnic but also what stood out to me in this most recent update was making sure that you had someone on the board that has lived the experience of the focus of the organization. Whether that be people who worked, who have expertise in that area, but also, in people who have been there as well, people who have been beneficiaries of the services of the organization. So I [00:23:00] think that, that’s taking the DEI to a level that people don’t always think of taking it to, and I think it’s an important add that they made.
Joe: Well, I’m going to interject because I think what’s important to remember is at the end of the day, the goal is to make the board better. It’s not just diversity for the sake of diversity. We talk on this show all the time that a diversity of perspectives on a board is what makes it best. If you have everyone, no matter how smart they are or how accomplished or what their skills may be, but they’re all the same, it’s just not going to be as formidable as a group of people with a varying number of skills and expertise and attributes.
As an example, when looking at risk, one of the most important functions of a board, a more diverse board is more likely to identify and understand and be able to manage that risk than a group of people who are all from the same neighborhood, let’s say, or who are all just a bunch of my friends who I got [00:24:00] together for this charity. That isn’t a good board.
I would just say sometimes people look at this and say, “Oh, they’re making us have diversity.” Yeah, in order for the charity to be as effective as possible and for their boards to be effective, their board should be diverse. The best for-profit companies do it, and it’s absolutely true that the best charity should do it as well.
Mellissa: Yeah. And it creates better outcomes. If you’ll permit me a quote by our founder, the founder of our firm, Louis Brandeis, we have here at our firm, our DEI strategic plan is guided by the quote he made saying, “In differentiation, not in uniformity, lies the path of progress,” and I think that rings true today as well.
Joe: Beautifully said, it’s really a great way to look at it. Thank you for that. Melissa. It’s been great speaking with you today. Thank you so much for joining us,
Mellissa: Thank you to both of you. It’s a pleasure to be here.
Joe: And thank you all for listening to On Boards with our guest, Melissa Sampson-McMorrow.[00:25:00]
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Joe: Please stay safe and take care of yourselves, your families, and your communities as best you can. And we hope you’ll tune in for the next episode of On Boards. Thank you.