Shape Shifting: What Justifies the For Profit to Nonprofit Transition?

A classroom for error / Pedro Ribeiro Simões

July 5th, 2017; Mercury News

Lately, we have noticed a lot more discussion of the nonprofit “form” as a choice that entrepreneurs can freely adopt. In those discussions, there is little ink devoted to the central covenants that nonprofits should observe, including community ownership, governance, and accountability. For some, of course, the transition is a straight measurement of pros and cons in their most transactional senses, but that is not what this sector is supposed to be.

Today, we found two cases in the news to illustrate the public benefit that should be present as a core requirement of such a switch.

The first is a 62-year-old bookstore in Menlo Park, California. Kepler’s Books has decided to spin off its cultural and educational programming as a separate nonprofit, Kepler’s Literary Foundation. For now, the foundation will be under the fiscal sponsorship of the Silicon Valley Community Foundation, where it will live in close proximity to many well-heeled local tech donors.

The foundation, which is now funded entirely by community donations, will take on producing events and community programs associated with the bookstore, which over the years has become a local cultural hub.

The for-profit bookstore, led by CEO Praveen Madan, is very healthy, with a five-year lease and a minimum wage of $15 an hour even before profit sharing, which brings the frontline up to $16.44. This is an 82 percent increase over the $9 an hour wage Kepler’s paid five years ago. Turnover is down.

“By having people with longer tenures,” Madan told Mercury News, “that experience translates into stronger business performance. It also helps that we’re the best-paying bookstore in the entire Bay Area, probably the entire country at this point…We’re playing catch-up. People have been underpaid in this industry for a very long time.”

According to Mercury News,

Madan said while much of the vision of the Kepler’s 2020 Project launched in 2012 has now been met, missing pieces remain the lack of a “living wage” for many employees and a way for the community to have ownership in the bookstore.

The foundation has its own lofty visions. “We have a team where our sole focus is on creating really great literary experience for people,” said Jean Forstner, the foundation’s newly installed CEO. “If we bring in a Nobel physicist, we’re going to find somebody at SLAC (National Accelerator Laboratory) who can speak that language and create that conversation…something that a person (attending) will not forget.”

So does it ring true that this social enterprise would develop a nonprofit to spin off some of its rich work? Absolutely! But in Minnesota, we see a very different picture emerge after a for-profit that provided services for elderly and disabled people chose to change to a nonprofit status.

In this case, Michael Tobak, the president of Golden Valley-based International Health Care Services (IHCS), has just been sentenced to two years in prison for embezzling approximately $3.3 million in funding and falsifying records and tax returns.

IHCS started in 1993 as a private corporate providing assistance to seniors and others with ongoing care needs. Tobak transitioned the business into a nonprofit in 1999. The nonprofit receives Medicaid and Medicare funding for the services it provided.

Twin Cities Business reported,

An investigation into Tobak and IHCS began in August 2016. The Minnesota attorney general’s office discovered, according to its filing, that Tobak and his family used money from IHCS to cover shopping trips to Saks Fifth Avenue and Neiman Marcus.

Salaries for Tobak and other family members also received a significant bump. In 2013, Tobak was paid $73,000 to run the nonprofit. That increased in 2015 to about $683,000. Annual pay for his wife Irina nearly tripled during the same period to $140,000.

At one point, IHCS “loaned” $10 million of its “charitable assets” to Tobak, according to the filing from Attorney General Lori Swanson’s office. “He promptly lost $9 million of this amount in a single futures trade.”

In this case, Tobak clearly had no intention to operate the nonprofit for public benefit. He saw himself as entitled to the corporation’s money. The organization, in contrast even to the for-profit bookstore discussed above, was under unaccountable, unitary ownership.—Ruth McCambridge