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Chapter 3: Philanthropy & Public Policy

Philanthropy’s Role in the Four-Sector Society

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Creative ideas often emerge from the interaction of a tangible problem with resources – including accumulated knowledge, money, and experience – in an arena of open debate and discussion.

The philanthropic sector provides the space in society for these moments of inspiration, when need meets resources and know-how. The charitable sector is free, open, and generative. There is a “can-do” spirit, energized by a deep belief that by working together, the world can be a better place. The sector encourages individuals to take on the responsibility to help shape it.

In the typical situation, an individual feels passionately about a problem. His or her enthusiasm attracts other like-minded people to the issue. The conclusion of the group is that “someone” must do “something” to solve the problem. Each person in the group contributes some money to fund their activity in order to do “something.”

They realize they don’t have enough money, so they seek others to contribute. In order for less engaged contributors to receive a charitable deduction for their gifts, provide structure for their work, and accountability for contributions, the group forms a nonprofit, charitable organization under Section 501(c)(3) of the United States Internal Revenue Code. For more about generative thinking, collaboration, and risk-taking in Michigan’s philanthropic infrastructure, see Chapter 1: Be Fearless, Be Patient.

Services and advocacy

Many nonprofits begin by delivering a good or service to a population in need. Some continue with this focus on service and decide not to engage in advocacy or public policy change. For example, church volunteers who serve meals to those in need may never engage their local legislators in changing policies for the poor. Some nonprofits will provide a service and they will also advocate for social change. The service base not only helps people, it also provides the organization with legitimacy – they know the challenges intimately. They have stories to tell of real people facing real problems. Other nonprofits organize for the purpose of educating and working for new public policies and do not have a large service component. Mothers Against Drunk Drivers or the many groups focused on improving and protecting the environment would be examples of this type of nonprofit activity. It should be noted that 501(c)(3) organizations are able to publicly advocate for issues of interest to their organizations; for example, “funding for research into cures for cancer.” They are not allowed to participate in partisan politics; for example, “vote for X because he is a member of our board.”

VideoVideo: Craig Ruff discuss advocacy in nonprofit organizations.


Role of the nonprofit sector in working out social agreement

The group’s advocacy becomes a means for educating the public and government policy makers to effect change in the current situation. This advocacy may take many forms: educating the public; informing elected and appointed officials; lobbying for new laws or changes to existing laws; conducting nonpartisan research; or organizing peaceful means of protest. Another organization of people with a competing point of view may be formed. Where there is a lack of consensus in society, these organizations with competing visions will continue to try to change the minds of the majority until a consensus (or at least a sizeable plurality) of the population agrees with them. When there is social consensus of at least 51% of the population, public policy is enshrined in law or regulation based on the consensus point of view. To convince the majority of people of the need for change, the nonprofit will: engage in research; debate and hone their ideas; reach out to related interest groups; and generate new knowledge. It is the openness and freedom of the sector that allows new ideas to generate and flourish.

VideoVideo: Leaders discuss all the small steps needed to make big change.


Four-sector society

4-sector-societyNonprofit theorists frequently write of the characteristics of a three-sector or four-sector society in the United States. All agree there are three sectors in our society, as shown below:

  1. The private business or corporate sector
  2. The public or governmental sector
  3. The public, non-governmental, not-for-profit sector

Other theorists add the family as a private, fourth sector to our understanding of the general spheres of organization in society. The four-sector theory is based on defining how “goods and services” – tangible products and support for humans – occur in culture. To understand philanthropy’s role in public policy, it helps to have general agreement on the characteristics of each of the other sectors. The third sector – the public, non-governmental, not-for-profit sector – is usually defined as a contrast (what it “is not”) to the other well-defined segments of society.

VideoVideo: Leaders discuss the relationship between the private, public, and nonprofit sectors of society.


Business or corporate sector

The purpose of private, for-profit corporations and businesses is to provide goods and services to customers in order to generate a profit for the owners of the company. There are several characteristics of businesses that are important in a discussion regarding the role of philanthropy. The Merriam Webster Dictionary describes a business as the activity of making, buying, or selling goods or providing services in exchange for money.

First, businesses are operated for private purposes. Even “publicly held companies” share profits with only that part of the public that has bought shares of corporate stock – not the general population. These businesses exist within a milieu of corporate laws and regulations provided by the government, but they are owned and operated outside of government.

Second, businesses exist to provide goods and services that generate a profit for the owners and stockholders. A business that consistently loses money goes out of business and ceases to exist.

Third, businesses, because they are private, can provide goods and services to niche customers. There isn’t a need for social consensus (assuming the area of business is legal) as long as there are enough customers to support the business in making a profit. There are businesses focused on the interests of collectors of baseball cards, the needs of exotic animals, or providing crystal balls for astrologers. In fact, serving a niche audience is frequently a primary business strategy for making money.

If a profit can be made, a private company probably is already providing the goods or services to capture that profit. The United States, in particular, supports entrepreneurial efforts to meet a need through private enterprise. But some things, such as serving the poor (who, by definition, can’t purchase goods or services at costs which generate a profit) typically are not provided by business.

The need to generate profit and operate a business efficiently also requires the ability to put a price on a “unit” of goods or services offered. Business is stymied in situations where a “free rider” is possible. A “free rider” is a good or service that is available to everyone and cannot feasibly be turned into a commodity.

The free rider problem arises when, given a collectivity trying to produce a common good, a member rationally calculates that, assuming a collective good will be produced anyway, it is better for him or her not to contribute to the cooperative effort. In this fashion, the individual is taking advantage of the hard work of others. – “Free-Rider Problem.” International Encyclopedia of Organizational Studies. Ed. Stewart R. Clegg and James R. Bailey. Vol. 2. SAGE Publications, 2008. 525-527. Gale Virtual Reference Library. Web. 11 June 2014.

An example would be a person who is protected by a work place union, but refuses to pay dues or participate in work stoppages. Another, frequently cited, is national defense where everyone in the United States is protected without an individual contribution required for any instance of protection. A contemporary example would be those who use the Foxfire search engine, or Wikipedia, but don’t make a voluntary financial contribution for this service.

One intersection of the nonprofit sector and the business sector is the role wealth plays in supporting philanthropic efforts. Corporations turn raw materials into goods and services, or intellectual capital (ideas and inventions) into wealth. In the United States, and increasingly in other cultures, there is an ethic to share this wealth for the purpose of improving the lives of others, or for supporting causes that improve the world. The nonprofit and foundation sector that we know in the United States could not exist without corporations and generous wealthy donors who voluntarily contribute their money to support efforts that enhance life for all of us.

VideoVideo: Watch leaders discuss collaboration between the for-profit and nonprofit sectors.


Public or governmental sector

The governmental sector is the public component of a democratic society where, based on agreed-upon principles, laws, regulations, and processes for solving disagreements, people come together to provide common goods and services. The Merriam Webster Dictionary describes government as the process or manner of controlling a country, state, etc. According to the Business Dictionary the public sector is the part of national economy providing basic goods or services that are either not, or cannot be, provided by the private sector. It consists of national, state, and local governments, their agencies, and their chartered bodies.

A characteristic of the public sector in a democracy is that it can only provide goods and services when there is at least 51 percent consensus by all of the electorate that the government should act in a certain way. The need for consensus constrains the government from meeting niche interests, or from acting when there is disagreement in society over a service or issue. Government is the primary vehicle for common action when there is general consensus by those governed and when issues need to be addressed without regard to free rider problems.

As the legitimate authority to speak for the majority in a democracy, the government relates to the nonprofit and foundation sector by establishing the “rules” by which organizations and individuals in the sector operate. These include, for example, the process for qualifying as a nonprofit charitable organization (IRS Section 501(c)(3) of the Tax Code). The 501(c)(3) charitable legal status allows individuals who make donations to an organization to receive a generous tax deduction for their gift. The nonprofit is exempt from paying most (but not all) taxes, and the IRS regulates some of the business practices of the organization.

VideoVideo: Leaders discuss collaboration between the public and nonprofit sector.


Private (family) sector

Many goods and services are provided by family groups – child care, elder care, recreation, and even formal K-12 education when there is home schooling. Family systems are private and internally focused, yet the outcomes from family care have a profound community impact.

The family provides the first experience for the infant and child in how to live in a civilized community. The presence or absence of love and affection, nurturing, and how basic needs are met shapes the child’s ability to become a generous, trusting, and philanthropic individual in the future. Families also provide the first experiences in volunteering and service. Internalized definitions of a “good person” that include giving and serving are set by parents, and other family members as role models, early in the child’s experience. Not only does the family provide goods and services to other family members, it shapes the character of the individuals who will participate in self-governance, business and work life, and the philanthropic sector in the future.

Nonprofit sector

The nonprofit sector has many names. Each is based on a characteristic of the sector; each has its virtues, although none is fully inclusive or wholly satisfying.

VideoVideo: Leaders discuss the nature of the nonprofit sector.


Organizations in this social space do not distribute any excess income to shareholders. While they can earn income, all proceeds are reinvested into the mission of the organization. The term “nonprofit sector” differentiates the sector from the business or corporate sector, and it ultimately tells us what this sector is not, rather than what it is. Other proposed names for this sector include:

1. Third sector

This references the relationship to the governmental and business sectors, without considering the family sector. While this term avoids the problem of defining by negation, it is so vague that it ultimately does not define anything at all.

2. Charitable sector

This refers to the missions of the organizations in the sector. The major areas of focus for the charitable sector are, for example: the arts; education; human services; all of religion; environmental protection; health; and similar efforts to enhance the common human experience. It also refers to the fact that donations to organizations in the sector receive a tax deduction from federal income tax for the donors. While this term gives a good sense of the work that most nonprofits do, it does not cover all. For example, most people would not consider a state university or an encyclopedic art museum to be charities.

3. Philanthropic sector

This name is often used to describe a subset of the sector – the grantmaking foundations. In fact, philanthropy refers to the love of humankind (Find out more about the philanthropic sector in Chapter 1) and all segments of the nonprofit sector. While most nonprofits do conduct philanthropic activities, the word philanthropy is generally used to refer to gifts of money. Grantmaking is the mission of only a small subset of nonprofit organizations.

4. Volunteer (or voluntary) sector

This name refers to the human capital that is provided by unpaid volunteers within the sector. While there is paid staff, they work alongside and support an army of unpaid volunteers who desire to improve their communities. The missions of many nonprofits could not be carried out without the efforts of volunteers. Still, there are many nonprofits without a single volunteer, and these are left out by this definition.

5. Nongovernmental organizations (NGO)

This name is frequently used in European, African, Central and South American, and Asian nations. Not surprisingly, the most broadly used definition for this sector in the United States (Nonprofit) compares itself with corporations, whereas the nations with long histories of government-delivered services compare the sector to government (Nongovernmental Organizations). While this term has great global resonance, it is not a good cultural fit in the United States – and again, it defines by negation.

6. Tax-exempt sector

This refers to the tax status of organizations in the sector that are exempt from paying income, sales, property, and other “business” oriented taxes. They are responsible, however, for payroll and similar employment taxes. While this term makes some intuitive sense, it also defines by negation; ultimately, it has a fatal flaw in that every “tax-exempt” organization pays some kinds of taxes.

7. Social sector

This term, coined by the late Peter Drucker, aims at differentiating the role played by nonprofits from those played by business (which creates wealth) and government (which creates law and order). Nonprofits create social cohesion, thus the term “social sector.” While this term provides a positive definition of the sector, it fits some subsectors (education or human services) better than others (arts or health care).

However one references the nonprofit sector (philanthropic, charitable, voluntary, tax-exempt, social, third, or nongovernmental), these organizations play an important role in interaction with the other three sectors and are a key component in moving forward public policy agendas.

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