Non-profit Organisations: Reasons for Existence, Regulatory Models and Corporate Governance
Nonprofit organisations, reasons for their existence, regulatory models and their corporate governance are the themes addressed by this Volkswagen Foundation funded Institute project which is being lead by Klaus J. Hopt with the participation of Thomas v. Hippel and Susanne Hartnick. The project began in June 2002 and will run for a period of three years.
Broadly speaking, nonprofit organisation denotes all organisations that do not distribute residual income to their residual owners. Many of these organisations are favourably taxed (e.g., as public interest institutions).
To date, nonprofit organisations have been studied by economists, sociologists and political scientists. However, the need also exists for their examination from a legal perspective. Therein one finds company and organisational law questions intersecting with questions on the taxation of activity in the public interest. Taking inventory of nonprofit organisations, one sees quite heterogeneous groupings that clearly differentiate themselves in terms of size, determination of aims, activities, legal form, organisational structure and financing. Nonetheless, modern economic and social science literature crudely assume that nonprofit organisations represent a discrete entity that can be distinguished from both state organisations and for-profit-organisations.
Before this backdrop, the project concentrates on the following questions:
1. To what extent do similarities and differences exist between individual nonprofit organisations?
2. Do particular dangers for abuse or problems of supervision arise from the conception of nonprofit organisations as an institution that do not distribute residual profit?
3. In what manner may nonprofit organisations be economically active alongside commercial businesses?
4. Should the state support the activities of nonprofit organisations that advance the public good and in such cases to what extent?
5. Is a competition among national legal systems or standardized regulations (e.g., for European foundations) preferable at the European level?
Correspondingly, the following starting points and objectives emanate:
1. In order to make the similarities and differences clear, the inquiry lends itself to the compilation of a typology.
2. With regards to questions of corporate governance, much can be said for the hypothesis that the absence of a targeted profit function has a negative effect on efficiency vis-à-vis the achievement of goals. Therefore, to the extent they can serve as a substitute for a profit motive, tax mechanisms and regulatory assessments of a legal and non-legal nature are essential. This purpose suggests taking up considerations found in the interdisciplinary and international discussion on “corporate governance,” i.e., the improvement of supervisory structures of for-profit organisations, and exploring how to extend them to organisations that are not profit-driven. Possible foreign solutions are also to be embraced though a comparative law approach.
3. With regard to their commercial function, grounds standing in the way of such economic activity should be examined (e.g., creditor protection, competition law). Here also, international experiences viewed from a comparative law perspective will prove instructive.
4. Tax provisions benefiting nonprofit organisations often do not produce sufficiently focused effects. Most likely, the chief cause thereof lies in the contradictory conception of the law of the tax-exempt organisations and the murky justification for preferences allotted on an individual, fact-specific basis. International models (e.g., the USA and other EU member-states) could provide valuable assistance for the development of a harmonious solution.
5. A complete standardisation of regulations in the EU member-states seems less realistic since the national cultural structures are very different. In contrast, something is to be said for a certain degree of harmonisation (e.g., with regards to the problem of supervision) bearing in mind also that a competition among legal systems is desirable in order to avoid a potential “race to the bottom”.