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Could New Breed of 'Low Profit' Firms Save Our News Media?

Canada has yet to allow hybrid ownership models operating in US and UK.

By Tom Barrett 9 Apr 2009 |

Tom Barrett is a contributing editor to The Tyee.

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Former CRTC commissioner Grauer: 'community based' media.

If big media are falling apart, one solution could come from an innovative business model being tested in the U.S. and U.K.

These days, the word "robust" doesn't spring to mind when you think about the big-business model of media ownership. Newspapers are dying in the U.S. TV stations are shutting down in Canada. It's anyone's guess how bad it's going to get.

Last week in The Tyee, Steve Anderson asked: "If news financed by big business is failing, what alternatives do we have?"

One suggestion Anderson made was that "foundations, labour groups, NGOs and individuals can a role in renewing journalism by financing public trusts or specific charitable journalism funds that could support innovative journalism projects."

As Anderson concedes, there's less foundation money in Canada than in the U.S. But some people are looking closely at a model that would combine charitable capital and private capital in a hybrid that could support journalism.

Underway in US, UK

In the U.K., they're called Community Interest Companies, or "CICs," and they've been around for several years. In the U.S., they're called Low-Profit Limited Liability Companies, or L3Cs, and they're just getting started.

Both models have characteristics of both for-profit and non-profit companies. Both fall within a broad concept called social innovation.

There's nothing like CICs or L3Cs in Canada today; our laws don't allow for such structures. But there are a number of people in this country who are working to change that.

Cindy Grauer, a Vancouver management consultant, former CRTC commissioner and longtime Liberal party activist, thinks hybrid businesses could work very well with Canadian media.

"They lend themselves to a whole lot of applications," she told The Tyee.

"Because they're also designed to be really community based, they really lend themselves to starting a newspaper" for example, she said.

Community-rooted media

A hybrid business model could allow foundations to invest in a community project, rather than simply give it a grant. The enterprise could sell advertising, but its profits could be limited and the owners could be prevented from flipping it to make money.

"Community ownership is what it is," said Grauer. "But right now you can be either for-profit or you're not-for-profit. There's very little in the middle."

The for-profit model "has its limitations" given the media meltdown going on these days, Grauer noted. And the not-for-profit model doesn't really lend itself to activities like newspapers that are essentially commercial enterprises, she said.

A hybrid enterprise could offer some of the advantages of both models, she said. It might be particularly apt for newspapers and community radio, she said.

"It's a different model if the current one isn't working."

As Grauer notes, models like CICs and L3Cs can be used for many initiatives besides media. Both the U.K. and U.S. structures are designed to benefit communities.

In Britain, for example, more than 2,600 CICs have been set up, promoting everything from health care to arts and sports.

New set of rules

According to an analysis by Richard Bridge and Stacey Corriveau, a would-be CIC must provide the government with a "community interest statement" that includes:

"Subsequent annual reports are required to confirm that the CIC continues to meet the community interest requirement."

CICs may raise capital by issuing shares, but any dividends are capped at a level set by the government. Under what is known as an "asset lock," assets and profits must be retained by the CIC for the benefit of the community.

"They are subject to fewer regulations than charities, and may be established for purposes that do not meet the legal test of charity," write Bridge and Corriveau. "But CICs do not enjoy the same favourable tax treatment that charities receive. They are taxed in the same manner as other businesses."

Leveraging new sources of capital

In the U.S., L3Cs have been authorized under state law in Vermont for almost a year now. Similar legislation is being worked on in Georgia, Illinois, Michigan, Montana, North Carolina, Oregon and Wyoming, as well as at the federal level.

"The primary goal of these legal changes is to introduce market solutions to community needs by providing 'access [to] the vast pools of market-driven wealth to make socially responsible investments in so-called nonprofit areas,'" say Bridge and Corriveau.

L3Cs themselves are exempt from federal income tax. However, income paid to investors is taxed.

"Very importantly, L3Cs are able to attract private capital for their works through the sale of shares and other securities, various forms of loans, or other commercial financial arrangements," Bridge and Corriveau write.

Capital from charitable foundations can be used "to attract or leverage other capital (from pension funds, institutional and individual investors, banks, insurance companies, etc.) to undertake community projects that make sound business sense."

Bridge and Corriveau conclude that "the essential strength of the L3C innovation appears to be the capacity to attract capital by issuing shares, as CICs do.

"Canada does not possess the same pools of foundation capital that exist in the U.S., but the potential to combine foundation capital and private capital for community projects is very attractive and potentially powerful."

Tax act changes would be needed

Creating such hybrid companies in Canada would require changes to the federal Income Tax Act and provincial trust laws, the lawyers say.

They propose that Canada adopt a Community Enterprise Act, based on the best features of the U.K. and U.S. innovations.

"In Canada and elsewhere, limited access to capital is a major obstacle to community or social enterprise, such as affordable housing, rural or urban community economic development, and environmental initiatives," Bridge and Corriveau write. "Some social enterprises are capable of being self-sufficient once established, but too often do not succeed due to lack of access to capital.

"These projects often fall outside the realm of charity, so they cannot be supported by charitable donations. For projects that can receive charitable donations, this source of funding is often too unpredictable and unsustainable to support many worthy community enterprises...."

"Enabling new community enterprises to tap into private capital by issuing shares is a powerful feature of the proposed new Act."

The L3C concept has already attracted the attention of groups in the U.S. that are proposing the structure be used to promote journalism. If a free press is essential to democracy, they ask, doesn't that mean good journalism has a social benefit?

[Editor's note: For the record, The Tyee is a for-profit enterprise that has yet to make a profit. Some of its content has been funded by donations from readers and philanthropies.]

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