I'll Have My Beer For-Profit, Please

I was in northeast Portland over the weekend and decided to stop in at a brewery that Yelp users said not only had good beer but "it's a nonprofit too!" I assumed they just misinterpreted the brewpub's joke about its inadequate revenue. But no, the owners of Ex Novo Brewing Company, not far from a barbecue joint called The People's Pig, really do describe their business as a nonprofit organization. Their website explains that "After covering our costs and building a small reserve fund, we distribute all of our net profits" to various charitable causes.

But any of us can claim that, after we cover our self-determined costs and set aside some savings, we are generous with the remainder (if there is a remainder). That is not the definition of a nonprofit organization. For beer, fortunately, it doesn't really matter: there is no need for the consumer safeguards built into a true nonprofit corporate structure.

The single most important distinguishing feature of a nonprofit entity is that there are no owners. The decisions about the costs themselves, what to do, and how to raise and spend money, are under the control of unpaid volunteers who are prohibited from taking any of the spoils. They can allocate resources to hire staff, put funds in a reserve, rent office space, borrow money, and otherwise pursue the organization's mission, but they cannot vote themselves a dividend or sell shares. The entity does not belong to them, and they are not allowed to behave as if it does. They are the organization's trustees: they can give but not take.

Non-owner control is messy and imperfect, but it helps to ensure that an organization that claims to be dedicated to a cause is actually committed to that cause. Think about it. If the Girl Scout moms who control the organization were taking a cut, wouldn't you worry that their claim that cookie-selling builds character is just a charade? Corralling the mass labor of little girls is a perfect example of where owner control would, in all likelihood, lead to problems.

At Ex Novo, while I was sipping a tasty Paddy Wagon Irish Stout and reading the New York Times, I came across a fascinating example of how eliminating owners can steer a business in a direction that is not only different, but much better, than any attempt at a for-profit version of the enterprise: Wikipedia.

While Facebook and Google and other investor-owned Internet companies have all decided that they must take and sell our personal data, Wikipedia has, remarkably, respected users' anonymity. While most online information sources undermine their own credibility by taking advertising or promoting paid links, Wikipedia, incredibly, does not. The user-created online encyclopedia is far from perfect, but it has integrity, and that is awesome. Wall Street types, meanwhile, think the people who run the organization must be completely nuts. Salivating over Wikipedia's billions of page views, one analyst detailed all of the ways that Wikipedia could earn boatloads more money, from selling advertisements to t-shirts. He calculated the web site's lost revenue at $2.8 billion a year, 46 times the organization's current income.

Who would leave that kind of money on the table? People who are not allowed to take it. If Wikipedia had owners, the temptation to grab two billion dollars would be impossible to resist, even though it would destroy Wikipedia as we know it. Wikipedia has been able to keep consumers' interests at the forefront because it is a nonprofit organization. Running a successful nonprofit can be more challenging than a for-profit, as the Times op-ed I came across attests. But the internal squabbles at Wikipedia are about the best way to pursue the mission, not about dividends or stock splits. Operating without investors altered the decisions that would have been made if it had the DNA of a for-profit business. Users benefited.

When the mission of an enterprise involves goals like building character, finding God, offering objective information, or developing critical thinking skills, consumers are particularly vulnerable. In the for-profit realm, they are outmatched by owners seeking to keep costs low while maximizing revenue. That's why for-profit schools can be so profitable and so awful; it's classic market failure, as I have explained previously . Students cannot know if their education was a good value until it's too late to do anything about it. Nonprofit governance is frequently confused as just a tax matter; at its core, though, it is a consumer protection measure, muting the profit motive to protect users from the predatory instincts of owners.

Beer, however, is different. In the case of brewpub and client, the owner's instincts are a pretty even match with the consumer's ability to judge quality, so the overall market outcome is a positive one for pourer and drinker alike. Trustees can't take money from their nonprofit, but they can, when they're in Portland, have themselves an excellent IPA at the not-really-not-for-profit Ex Novo brewpub, at a fair price. There, ownership has served us well. And to top it all off, some of the profits go to charity, after the owners are taken care of.