The Anatomy of Nonprofit Control of Business Enterprise Ofer Eldar† & Mark Ørberg††
Nonprofit control of operating businesses has long been a feature of European corporations such as Novo Nordisk, Ikea, Carlsberg, and Rolex, which are governed by enterprise foundations—nonprofits with charitable missions explicitly permitted to hold controlling stakes in businesses. In the United States, nonprofit control is becoming more prominent due to recent legal developments, with companies like Patagonia and OpenAI under nonprofit ownership.
Despite this growing interest, the economic rationale behind nonprofit control remains poorly understood: why would nonprofits with social missions choose to control businesses that sell products and services? We identify two primary models of nonprofit control. The income generating for-profit is controlled by a nonprofit to generate funding for the nonprofit’s charitable mission, ensuring steady long-term cash flows and mitigating systematic risk.
The socially oriented for-profit is controlled to ensure the operating business adheres to the nonprofit’s mission. Unlike simplistic accounts that treat all nonprofit-controlled businesses as uniformly purpose-driven, our analysis clarifies the benefits and risks of these models and provides a framework for evaluating legal regimes governing them.
Our comparative analysis of legal systems in Europe, the United Kingdom, and the United States highlights significant differences in how nonprofit control is regulated. European and U.K. laws support incomegenerating for-profits through enterprise foundations and trading companies while incorporating oversight to ensure socially oriented forprofits remain mission-driven. U.S. law, by contrast, imposes strict limits on private foundations while allowing other nonprofits to control businesses with few safeguards against outside-investor influence. We propose an optimal legal framework to facilitate income-generating for-profits where mission drift risks are relatively low while also imposing…
Read the full article at
https://www.yalejreg.com/wp-content/uploads/Eldar-Orberg-Article.-43.2.pdf
