Tuesday, March 29, 2011

Decline and Fall of the Vanguard Public Foundation

Richard Cohen is an excellent, thoughtful writer and I am always pleased to feature his work here.  This is a long article, however, it is very instructive.  Often we think of "ponzi schemes" only happening in "for-profit" enterprise, when the truth is, nonprofits are ripe for this kind of use and abuse, maybe even more so since nonprofits are not measured by money earned but by services provided.  Additionally, boards of directors of nonprofits may not conduct the due diligence of boards of directors of for-profit corporations.  Whatever the cause and effect, the real pay off in this article are Richard's conclusions at the end.  Bunnie

(This article is reprinted with permission from Blue Avocado, a practical fast-read magazine for community nonprofits. Subscribe free by sending an email to editor@blueavocado.org or at www.blueavocado.org.)

Decline and Fall of the Vanguard Public Foundation 
by Richard Cohen

Once acclaimed as a pioneer in philanthropy and an important force for social justice, the Vanguard Foundation is no more. The full story will take years to emerge, but we report here in Part I on some of the clues to its sorry demise. A link to Part II is at the end of the article.

In San Francisco, the Vanguard Public Foundation is out of business, its nonprofit status suspended by the California Secretary of State, its website down, its assets apparently gone. Federal and state court lawsuits involving donors, investors, staff, and trustees question what happened to millions of dollars that flowed through the foundation to progressive causes.

But nonprofits and foundations go out of business all the time, particularly in this nonprofit-devouring recession. What makes the Vanguard Public Foundation worth special inquiries? Is it because of the celebrities associated with Vanguard -- Danny Glover, Harry Belafonte, and United Farm Workers co-founder Dolores Huerta, among others? But the glam factor is not the story.

The Vanguard Public Foundation (not to be confused with the Vanguard Charitable Fund related to the for-profit Vanguard), was lauded in its heyday as a new wave of philanthropy, a generational shift, an exemplar, and a model.

The famous people associated with the foundation are neither the story nor the cause of the foundation's demise. Rather the story may be one of organizational hubris, board narcolepsy, and the disease of our time: the siren song of the get-rich investment plan which, like Bernie Madoff's ponzi scheme, was just too good to be true.

A new generation of philanthropy

Established in 1972, the Vanguard Public Foundation was among the first of the social justice foundations established by the young scions of wealthy families, inheritors of corporate fortunes who were devoted to supporting a progressive, very liberal social and political agenda. One of the first of the "rich kid foundations," Vanguard was heralded as an inspiring model of a new generation's remaking of philanthropy.

Vanguard rose as a leader among some two dozen new progressive public grantmakers that became members of a network called the Funding Exchange. Largely modeled on Vanguard are the Haymarket People's Fund in Boston and the Liberty Hill Foundation in Santa Monica. In 1977, Vanguard produced the bible for these funds, Robin Hood Was Right: A Guide to Giving Your Money for Social Change, re-issued by the Funding Exchange 25 years later.

Vanguard's grantmaking role remained distinctive, putting money into social movement causes, often before they became politically acceptable and often to organizations and actions that were never going to generate mainstream support. Among the often controversial groups that benefitted from Vanguard grants:
  • Act Now to Stop War and End Racism (ANSWER)
  • Astraea National Lesbian Action Foundation
  • Center for Third World Organizing
  • Emilio Zapata Oakland Street Academy
  • Free Mumia Abu-Jamal
  • KPFA (Pacifica Network Free Speech Radio)
  • National Immigration Project of the National Lawyers Guild
  • Rainforest Action Network
  • School of Unity and Liberation (SOUL)
  • Solidarity Info Services
  • Southern Poverty Law Center
  • Young Worker Project
Vanguard was a friend to emerging causes which often went on to become more accepted by the public and more fundable by mainstream foundations. Donors also gave funds to such causes through Vanguard, enabling unincorporated groups to receive donations.
These are the kinds of grants that cause heartburn for the likes of Glenn Beck ("Marxist foundations of the 'social justice' movement") and Bill O'Reilly ("pinheads!").

Are progressive foundations in general suffering?

Is Vanguard's demise reflective of a downturn in these foundations of young (and in many cases, now no longer young) progressive rich people? While just about every public foundation has experienced the downturn while raising money from wealthy donors, the members of the Funding Exchange look healthier than one might expect, even in many cases increasing their grantmaking over a period of many peaks and troughs in the economy. For example, grantmaking grew between 1998 and 2008/9 at Liberty Hill, the Appalachian Community Foundation, Bread and Roses Community Fund (Philadelphia), the Headwaters Foundation for Justice (Twin Cities), and the McKenzie River Gathering (Oregon).

Others have shrunk over the years, perhaps as the big community foundations offered themselves as social justice competitors for donor-advised funds, others perhaps simply due to changes in leadership and management. The Southern Partners Fund in Georgia, Haymarket, and even the North Star Fund in New York City are significantly smaller than they were a dozen years ago, but they still exercise influence in their communities and within the philanthropic sector.
Unlike many of its peer progressive foundations, the Vanguard Public Foundation dissolved into nothing -- other than litigation. Why?

Mouli makes the world go 'round

In 2002, Vanguard leadership met an exceptionally intriguing entrepreneur named Samuel "Mouli" Cohen. In addition to his glamorous background, Cohen reportedly promised to achieve astonishing financial returns using Vanguard's funds as investments.

The Israeli-born Cohen (no relation to this author) and his wife Stacy lived the lifestyle of the rich and famous in a mansion in Belvedere, California. A master of self-promotion, Cohen's multiple personal websites, Facebook page, and press releases reveal him to be anything but modest; he describes himself as a "brilliant visionary," "business tycoon and magnate," "world renowned philanthropist," and "super entrepreneur."

Given the charges and countercharges now swirling around Mouli's relationship with the foundation and its leaders, some of his self-promotion is unintentionally humorous and ironic, particularly this from his Mouli Cohen on Business webpage: "(I)ntegrity is one of the most important characteristics for any investor. Investors, customers, employees and partners will reward you endlessly if you always act with complete integrity, according to Mouli Cohen."
It's hard not to give him one-name celebrity status, like Cher, Bono, Usher, or Madonna; his over-the-top persona demands it. As a philanthropist, Mouli's exploits, mostly known from press releases and philanthropic blog posts that he seems to have generated, didn't sync with Vanguard's values, mission, or funding priorities.

For instance, representative of Mouli's philanthropic activities were support for the European Center for Jewish Students, which works to increase the Jewish population of Europe against the threat of intermarriage and assimilation; a Jewish orphanage in Odessa; facilities development at the Ukraine tomb of a Lubavitcher Hasidic rabbi; and a library and museum in Israel affiliated with the Lubavitcher Hasids. In addition, he claims to be a leader and donor to several organizations which mention him nowhere on their websites, including Camp Okizu, Seva Foundation, and Soroko Medical Center.

Regardless of these differences in philanthropic goals, Vanguard became interested in Mouli for his investment acumen. A self-described technology entrepreneur, he claims to have founded or led business ventures which have generated some $3 billion in shareholder value. One of his more recent activities was a digital entertainment firm called Ecast, which provides services to bars and nightclubs.

The picture blurs

Now the story gets murky with a mix of charges and countercharges, and of course, litigation. Apparently, in 2002, Mouli met Vanguard CEO Hari Dillon and actor/activist Danny Glover. According to complaints filed in state and federal courts, Mouli said he would help the foundation by allowing Vanguard and its individual donors to buy shares in the privately owned Ecast. Dillon and Glover formed general partnerships through which they purchased several million dollars worth of Ecast -- or thought they did. The Contra Costa Times reported that Vanguard donors ultimately put in over $20 million more in philanthropic money and personal investment cash. How much of this was Vanguard money repurposed through Mouli is unclear.

The story gets even murkier. The investors -- now plaintiffs -- say Mouli stated that Ecast was to be acquired by Microsoft, which would generate a return on investment, according to the Times, of 1,000 percent. And according to peHUB Wire, the deal was to buy Ecast stock at $3.50 a share, but get paid off in Microsoft shares after the purchase at $23 per share. But something or other kept putting off the miracle. The Microsoft acquisition reportedly got delayed over EU rules, which generated a need for more fees to cover transaction costs. Then there were reports that Ecast was considering a competing bid from Google, further delaying the deal. Ultimately, there was no Microsoft purchase, no Google bid, and the money disappeared ("stashed" in Cohen's secret accounts and distributed to family members like wife Stacy, according to plaintiffs), and the investors were, one might say, aggrieved.

Mouli's attorney denies it all.

Even Ecast sounds aggrieved, stating that Mouli Cohen left Ecast in 2002, roughly when these dealings began. An Ecast attorney told Vending Times that the firm has had "ongoing" legal problems with Cohen, including two cases filed in 2003 and 2004 against Cohen about "very similar" charges that were settled out of court. If it was true that Dillon, Glover, and the Vanguard Public Foundation investors thought they were buying Ecast stock, they were doing so with a guy who had been out of Ecast's picture for years.

Transforming a social justice foundation into what?

But questions of questionable management and governance decisions at the foundation do not seem to have been limited to this speculative multi-million dollar investment with someone of dubious provenance. Why didn't someone notice the following?
  • Annual operating deficits: $427,000 deficit in 2003, $1.33 million deficit in 2009 and $1.37 million deficit the subsequent year
  • Deficit of $1.95 million in 2006, nearly equal to the $1.99 million received in contributions, gifts and grants
  • In its last publicly accessible Form 990 in March 2007, Vanguard had total assets of $453,000 and total liabilities of $3.59 million
  • That same 990 showed $1.25 million in loans from officers and directors and $1.8 million in mortgages and other notes
The operating deficit dropped to "only" $1.2 million on its final Form 990, but by then the foundation was living on fumes -- or loans.

By 2007, loans from officers and directors included $5,000 from Danny Glover, $100,000 from board member Susanne Moore, and $600,800 from CEO Hari Dillon. In Vanguard's 990 for the fiscal year ending in 2008, Dillon's loan to the foundation had grown to $1,172,511.
The Vanguard Public Foundation was living on borrowed funds largely from the CEO, whose salary and benefits at the foundation combined do not appear to have ever topped $90,000 annually. But the foundation didn't appear to be thinking about belt-tightening during this period of financial stress. Travel expenses skyrocketed and salaries grew as significant funds were used to send CEO Dillon, senior staff member Gus Newport, and others on "projects."

A grantmaking foundation was turning into an operating foundation, running its own programs instead of making grants to nonprofits. In its last available 990, the foundation lists $3.35 million in total expenses, including the following:
  • $600,000 from Vanguard's donor-advised funds to the Peninsula Community Foundation
  • $103,000 from non-donor-advised funds to Gathering for Justice c/o Belafonte Enterprises (singer Harry Belafonte is one of Vanguard's founders)
  • Only $129,000 in other non-donor-advised grants
In the fiscal year ending March 2007, Vanguard's total expenses were almost exactly what it owed in loans. The foundation was investing, borrowing, and spending itself out of existence.
Oddly, the partnerships established by Dillon to invest money in Mouli Cohen's Ecast scheme made him personally fully liable for the funds. Typically, a general partner would never expose himself to such risk, unless perhaps the deal was a sure thing with a big upside. But the foundation's investments and the donors' additional funds didn't yield a nickel, at least perhaps to anyone other than Mouli Cohen. This left Dillon on the hook. In 2010, Dillon filed for personal bankruptcy, listing assets of $836,000, primarily from the value of his home, secured claims of $721,000 (probably a home mortgage), and unsecured claims totaling a whopping $21.6 million.
Lessons from Vanguard's demise

These are all clues to a story for which we have neither an end nor a satisfactory answer about motivations and choices. More of the Vanguard Public Foundation story will emerge in the months ahead as lawsuits wend their ways through the courts, but some lessons are discernable now:

1.      Too good to be true: The lesson of Mouli Cohen, like the lesson of Bernie Madoff, is to be careful about schemes that will make your nonprofit or foundation rich. Mouli's deal was better than anything Bernie Madoff ever pitched. It should have been obvious.

2. Character counts: Dillon and many of the Vanguard people are hard to find now or won't speak on the record, but Mouli continues to issue self-congratulatory pronouncements on his website. It's hard to imagine that the philanthropic values of Mouli Cohen (or his wife, the author of the Kosher Billionaire's Secret Recipe) were any kind of comfortable match with those of the foundation.
3. Non-attentive trust in the CEO is not a healthy governing model: With warning signals in abundance, observers suggest that the board was even a little mesmerized by the CEO and his celebrity friends. And board meetings were reportedly very rare.

4. Give the grants to nonprofits, not yourself: It's so easy for foundations -- even progressive foundations -- to decide they should run their own programs rather than give grants. Whether one agrees with Vanguard's agenda or not, a legacy of giving grants to causes it believed in would have been one to be proud of . . . rather than one dirtied by using the funds on its own activities.

5. Are progressive groups especially vulnerable to disengagement? Some have suggested that Vanguard's moves to turn over some decision making to community leaders left donors disengaged, and resulted in board members who were less attentive to grantmaking decisions and governance responsibilities.

6. Sleepy press, sleepy government: How does a public grantmaker disappear and garner so little attention from the press -- including the nonprofit press -- and no attention from the government? The Internal Revenue Service? The Attorney General?

There are many stories to be found in the rise, decline, fall, and aftermath of the Vanguard Public Foundation, and this article only touches on one of them. Tragic stories have at least as much to teach us as the rosy, jargon-filled stories about themselves that foundations pump out by the thousands. The Vanguard story is one from which we will be learning for a long, long time.

Note: Part 2 of this story was published in the October 5, 2010, issue of Blue AvocadoHere

Tuesday, March 15, 2011

Nonprofits: Don't Get Caught Naked (Licensing)

The subject of chapters and affiliates is near and dear to my heart.  I have served as a national field director and an executive director in organizations that had chapters and affiliates.  I developed handbooks and rules for chapter and affiliate behavior and association.  An organization always runs the risk of having chapters and affiliates "fly out of formation."  But it is a risk that I think is worth taking as long as the necessary precautions are put in place.  At some point there is always the issue of who speaks or acts on behalf of the organization.  In this article by Andrew Price, the subject is how does an organization retain its trademark when it allows its members (or chapters or affiliates) to use it without written permissions or guidelines.  This may sound esoteric until it's your organization that has members running amok and using your trademark with abandon.  In the future I will tell you the story of members who got a grant in the name of the organization without the organization knowing about it.  Gulp!  Bunnie

Nonprofits:  Don't Get Caught Naked (Licensing) 
by Andrew D. Price, Esq., Venable LLP

Nonprofit organizations often allow others to use their trademarks – such as their logos – without much control.  This was not a major problem years ago when nonprofits were less aggressive in disputing trademarks and had charitable missions that made courts more tolerant.  Today's nonprofits are different.

The Wall Street Journal noted the rise in trademark battles among nonprofit organizations in a page-one story on August 5, 2010.  As I told the Journal, "The days are probably over when nonprofits just said, 'We'll just get along with anybody who's a nonprofit because we're all trying to do good here.'" 

More recently, in November 2010, a federal appeals court, in a case called Freecycle[1], found that a nonprofit abandoned its trademarks because it engaged in what is called "naked licensing."  Simply said, naked licensing is when a trademark owner allows another party to use its trademarks without sufficient control.  All trademark rights are lost when abandonment occurs.

The amount of control required to avoid naked licensing depends on the circumstances, though Freecycle provides some guidance.  The big-picture mistakes of the trademark owner in Freecycle would apply to most trademark owners.  In Freecycle, the court found the owner failed to have an overall system of control.  Specifically, the owner (1) failed to retain express contractual control over use of the marks by its members, (2) failed to exercise actual control over use of the marks by its members, and (3) was unreasonable in relying on the quality control measures of its members.  Thus any trademark owner should establish control in writing, exercise actual control, and not rely on members to control themselves, as discussed further below.

To determine what type of control is needed within this system, it is useful to understand the type of mark being challenged in Freecycle.  In Freecycle, the marks (e.g., FREECYCLE) appeared to be traditional trademarks (i.e., marks that identify the source of goods/services); the owner sought to register its logo as such.  The marks did not appear to be certification marks (i.e., marks that certify the quality of goods/services) or collective membership marks (i.e., marks that just signify membership in an organization).

Arguably collective membership marks require less – or at least a different type of – quality control compared to traditional trademarks and certification marks.  This is because collective membership marks just signify membership in an organization.  These marks do not signify that goods/services come from a particular source (like the traditional trademark THE NATURE CONSERVANCY on a magazine) or that a product is of a certain quality (like the certification mark UL on an electronics device, which shows approval by the nonprofit Underwriters Laboratories).  This distinction is important in considering how to treat marks used by the members and chapters of nonprofits.  It may help to treat such marks as collective membership marks to avoid naked licensing.
Often a nonprofit wishes to allow members and chapters to use the nonprofit’s primary logo as a sign of membership, though the nonprofit does not wish to manage a certification program like UL or a traditional trademark license (e.g., as used in merchandising).  In that case, the nonprofit should take three steps.

First, the nonprofit should ensure the mark does not make the impression of a certification mark or traditional trademark, but instead makes the impression of a membership mark.  An effective way to convey this to the world is to add the word "MEMBER" (for members) or "CHAPTER" (for chapters) to the mark and apply to register the mark as a collective membership mark with the U.S. Patent and Trademark Office (USPTO).

Second, the nonprofit should change its bylaws and/or policy manual in such a way that will license the mark to members and chapters, and automatically bind them to specific controls for use of the mark.  The specific controls would include a requirement not to use the mark other than as a sign of membership (except that chapters could provide limited services the nonprofit expects from a chapter).  The controls would also require members/chapters not to change the mark, and to stop using the mark when member/chapter status is lost.

Third, the nonprofit should actively enforce the trademark terms of the bylaws and/or policy manual.  (Note that, barring an instance of a nonprofit's members agreeing to be bound by the terms of a policy manual as a condition of membership, only a nonprofit's bylaws are contractually binding on members of the nonprofit – if the organization has bona fide members – so that if the provisions are included in a policy manual, you will want to cross-reference that fact in the bylaws.  For non-membership nonprofts, there will need to be some affirmative agreement to the terms and conditions, such as an online click-and-accept feature.)  

As a final point, it is important to note that the trademark owner in Freecycle alleged that a 1993 case called Birthright[2] stood for the principle that loosely organized nonprofits, which share "the common goals of a public service organization," should be subject to less stringent quality control requirements.  The court in Freecycle said that even if it were to apply a less stringent standard, the trademark owner in Freecycle would not meet the lower standard (and that even a lower standard would still require some monitoring and control, consistent with Birthright).  The court did not take the chance to say whether the "less stringent" requirements should still apply to nonprofits in today's world, though the court seemed skeptical.

We would expect a modern court that takes a position on the Birthright issue will say the "less stringent" requirements for quality control do not apply to nonprofits in today's world – especially nonprofits without charitable missions.  The party in Birthright provided charitable, emergency services for women with crisis pregnancies.  Many nonprofits today are not focused on charity but are more like businesses.  Many nonprofits today have the size, professional staff, and resources to manage their trademarks like any for-profit company.  Thus nonprofits today should be prepared to be viewed like for-profit companies for trademark law purposes.

Even if nonprofits happen to be subject to "less stringent" requirements, they should be prepared to face aggressive adversaries in trademark disputes.  Thus nonprofits should rise to meet basic quality control requirements by establishing control in writing, exercising actual control, and not relying on members to control themselves.  In any case, it may help nonprofits to treat certain marks as collective membership marks and take appropriate steps to ensure the marks are treated that way by consumers, the USPTO, and courts – or risk getting caught engaged in naked licensing.

*    *    *    *    *

Andrew D. Price is a partner at Venable LLP in the Trademarks, Copyrights and Domain Names practice group who works frequently with the firm’s nonprofit organizations practice.  For more information, please contact him at adprice@venable.com or 202-344-8156.

This article is not intended to provide legal advice or opinion and should not be relied on as such. Legal advice can only be provided in response to a specific fact situation.

[1] FreecycleSunnyvale v. Freecycle Network, 626 F.3d 509 (9th  Cir. 2010).
[2] Birthright v. Birthright Inc., 827 F.Supp. 1114 (D.N.J. 1993).

Wednesday, March 9, 2011

Reflections from Ethiopia: Is Philanthropy Killing Africa?

I found this article fascinating.  It spotlights a very tough but necessary discussion.  When does "charity" stifle entrepreneurial effort and economic growth?  Is it that saying "Give a man a fish, he eats for a day.  Teach a man to fish, he eats for a lifetime"?  Todd Johnson seems to suggest that too much NGO involvement can stifle an economy.  It feels counter-intuitive, after all, NGO's are often at the front of the battle line against disease and despair.  Although it also reminds me of the "micro-lending" that I have taken part in where you put up a small amount of money to loan to an enterprise in a developing country and the business pays back the loan with a small amount of interest, meanwhile allowing the business to flourish and grow.  This is one that will be thought provoking and like Todd, I welcome your comments.  Bunnie.

Reflections from Ethiopia: Is Philanthropy Killing Africa?
by R. Todd Johnson*, Partner, Jones Day

I just returned from my seventh trip to Ethiopia. After only 120 days spent in Africa, I'm hardly an expert on anything that is happening or has happened there. And yet, I have a few impressions that seem worth sharing, particularly around how business can assist in the elimination of extreme poverty.

While there, I saw some incredibly encouraging relationships and budding opportunities for sustainable business models.  For example, products from Stanford's Extreme Affordability course are selling and creating business opportunities for local entrepreneurs. These include the d.light, the Mighty Mitad and, most recently, a budding joint relationship for the production of manual well drilling equipment for rural well drilling businesses targeted for vocational school graduates.

Unfortunately, these are small and isolated examples of business opportunities (outside of the rural staple of subsistence farming and the urban staple of selling retail necessities). More often, instead, I bump into those places where well-intentioned philanthropy produces a long-term, unintended negative consequence. The following are a few examples.

BOGO Should Be A NoGo!

The "Buy-One, Give-One" (or "BOGO") model has become increasingly popular for companies here in the United States, particularly for places like Africa which, over the past decade, has become the "cause du jour." Whether it's shoes, flashlights or computers, you can find many retail products that are produced by U.S. companies (often in Asia) where the purchase price paid by a U.S. consumer includes the cost of sending a second such product to Africa.

"What's wrong with that," you might ask?

On the surface, nothing.

Take shoes, for example. Africans need shoes. In fact, shoes are critical to issues of health, nutrition, education, healthy pregnancies and much more. Take the critical issue of child malnutrition in Ethiopia. Most children there take in too few calories for healthy growth and for healthy education. And when women are malnourished, their under-developed bodies often lead to complicated pregnancies and, in the worst cases, to still-born deliveries after three days of labor and fistulas that leave them incontinent.

So how does that have anything to do with shoes?

Well, let's assume that you could provide the approximately 60 million rural Ethiopians who are living on less than $2 per day with the appropriate levels of nutrition for healthy development, but not shoes. Well, in all likelihood, those Ethiopians would still be under-developed due to the prevalence of worms and other parasites, all of which could be treated with medications, but that would continue to recur if they walk around barefoot through rural areas stepping in animal droppings.

So it's clear -- shoes are important in rural Africa.

Now comes the real issue: Should shoes be donated by Western companies, or should they be produced in country and sold?

This is where the BOGO model, while well-intentioned, appears to me to be hurting a long-term, sustainable solution for Africa.

First, as long as rural Africans have an opportunity to potentially receive free shoes donated by a U.S. shoe company, why would they want to pay for shoes? Second, as long as rural Africans are unwilling to pay for shoes, how can local African shoemakers hope to have a flourishing local business?

The NGO Economy Is Killing Entrepreneurship

Let's face it, we've drifted far afield from the original concept of “charity.” Rather, as a matter of public policy, we instead seem fixated on the idea of tax subsidies for the rich with our tax deductibility system. The result shouldn't surprise us: over time, while philanthropy increases (measured as total aggregate of dollars donated in the form of tax deductible contributions), the world's gap between the rich and the extremely poor grows.

"So what," you might ask? I mean, after all, wouldn't the gap just be much, much worse if there weren't philanthropic dollars flowing to Africa, encouraged by tax deductibility? Just because some people save their charitable giving for museums or building naming rights, doesn't mean that African AIDS orphans would receive more funding if we drew the tax deductibility line closer to charity.

And you would be right, as far as that argument goes. But arguing that we shouldn't be using our tax policy to encourage wealth redistribution doesn't deal with the real learning to be gained from a look at our tax policy, namely that it creates incredible dysfunction of unintended consequences in the developing world by encouraging too much money to Africa in the form of charity and not enough in the form of investment dollars for the creation of businesses.

Outside of direct relief aid and some of the amazing health and education research and development, much (perhaps most) of what is done in the developing world through non-profits and NGO's, could actually be accomplished through a business model, even if it would be harder to raise investment funding. Instead, someone begins selling tax subsidized and donor subsidized water pumps in Africa, because it is easier to raise the funding through tax deductible donations rather than through the rigors of proving out the business model for investment dollars, with the great result of increased deployment of inexpensive water moving technology in the developing world to aid rural farmers, but the negative results of (1) killing the market for future indigenous entrepreneurs attempting to sell water pumps at a profit and (2) locking a potentially valuable distribution channel in a non-profit, making it difficult for other for-profits to use.

And that’s before we ever get to the biggest issue facing the African entrepreneur.

Last year, while in Addis Ababa, I visited with my friend Sammy, an Ethiopian entrepreneur. Interested in how his new venture was going, I've long since learned that if you want the straight scoop from an entrepreneur, you don't ask "how are you doing." They are simply too optimistic to ever provide a meaningful answer. Instead, I asked Sammy about his greatest challenge in his new SMS content platform business. His two word answer? The "NGO economy."

Sammy noted what should have been intuitive to me after so many trips to Africa, that Africans are naturally entrepreneurial -- many have been making something from nothing all their lives, just to stay alive. But what Sammy said next rocked my world.

"Africans don't see a reward system in place for being entrepreneurial. In fact, they view it as a matter of survival, not an opportunity to lift themselves out of poverty. Rather, what they learn at a very early age, is that in order to make good money, they should learn to speak English incredibly well and then maybe, just maybe, they can get a job driving for an NGO. In a few years, if they play their cards right, they might be able to land an NGO job as a project manager and even advance further."

Sammy's point was simply this. As a struggling businessman creating new start-ups, he could not compete with what NGO's were paying for some of the best and brightest. And even worse, he said, "by the time the NGO's are done with them, there isn't an ounce of entrepreneur left."

Add to that, the typical underpaying of talent in the developed world, creating non-sustainable NGO economies in the developing world, and the brain drain that NGO’s create by attracting the best and the brightest away from business to work for NGO’s, you can begin to see some of the dysfunctions that arise from our philanthropic dollars.

And so, it seems right to ask the question:

Is philanthropy killing Africa?

I'd love to know your thoughts.

*Todd is a partner at the law firm of Jones Day, where he founded their Silicon Valley Office and runs their Renewable Energy and Sustainability Practice. The views expressed in this column are solely Todd’s personal views, not the views of Jones Day or its clients, and the information provided as to his affiliation with Jones Day is solely for purposes of identification and may not and should not be construed to imply endorsement or even support by Jones Day of the views expressed herein. © R. Todd Johnson, 2011. The thoughts, ideas and words expressed in this column were originally posted on Todd's Business for Good (sm) blog at www.businessforgood.blogspot.com, and are the property of R. Todd Johnson and may not be otherwise used or reprinted without express permission from Todd.