Can a membership organization compete against its own members?
Apparently so, judging by the actions of the United States Hispanic Chamber of Commerce
HISPANIC BUSINESS® magazine
Luis Briones couldn’t believe it. At a board meeting of the United States Hispanic Chamber of Commerce (USHCC) last August, he listened as directors discussed a proposal with Hispanic Publishing Corp. to publish a new magazine, Hispanic Trends. Under the proposed deal, members of Hispanic chambers would receive the publication as a membership benefit, and the USHCC would control half the seats on the publication’s editorial board. Financially, the chamber wouldn’t invest any money but would receive 6 percent of all advertising revenues. The board asked USHCC Counsel Tom Stahl to rework the legal language in the contract before they would approve it, according to official minutes. As publisher of Hispanic Journal, a regional magazine in Texas, Mr. Briones saw the new publication as direct competition. As a USHCC member who had provided ample coverage of the chamber in his publication, he wondered why his own business organization had suddenly turned against him. Soon other voices joined in a chorus of protest. Within weeks, the board of the Texas Association of Mexican American Chambers of Commerce (TAMACC) passed a resolution to oppose the arrangement, stating that the USHCC had “entered into an exclusive partnership with Hispanic Publishing Corp. that provides exclusive advocacy and promotion for that business which creates an unlevel playing field.” TAMACC demanded dissolution of the deal. On September 21, during the USHCC convention in Atlanta, the board of the National Association of Hispanic Publications (NAHP) approved a similar letter of protest against the agreement. The California Hispanic Chambers of Commerce (CHCC) also weighed in, asking that the USHCC adhere to an open bid process, according to CHCC Chairwoman Melinda Guzman. But by that time, the USHCC board had approved a final contract; the final vote was 14-0, with 10 board members absent from the crucial meeting on September 18, just one week after the terrorist attacks. Other than an announcement at the USHCC National Convention, held September 19-22 in Atlanta, no announcement to the general membership accompanied the decision, although the first issue is due in March. Few of the organization’s general members knew anything of the matter. In keeping with the organization’s bylaws on confidentiality, board members were told not to discuss the deal, according to sources. (For this article, Hispanic Business contacted 10 board members; the only two who returned repeated telephone calls and e-mails deferred to the chamber leadership. Chairwoman Elizabeth Lisboa-Farrow made a statement at the USHCC convention in Atlanta. USHCC CEO George Herrera referred the matter to COO Ramon Rodriguez, who in turn referred it to Counsel Tom Stahl. Mr. Stahl has not responded to telephone calls or e-mails.) The USHCC-Hispanic Publishing contract (view "Contract at a Glance") raises several concerns outlined in a letter Mr. Briones wrote to NAHP President Zeke Montes. First, an organization dedicated to advocacy on behalf of its members now competes against them. Second, the nonprofit chamber becomes partner in a commercial venture that will pay it as much as $300,000 per year, according to the agreement. Finally, Mr. Briones expressed a sense of betrayal, calling the agreement “a shameful sell-out of our members, an unethical use of power, and an unnecessary destruction of opportunities.” In a letter to Hispanic Journal, USHCC CEO George Herrera explained the chamber’s rationale for getting into the media business. “A business magazine is a natural extension of our television programming,” Mr. Herrera wrote, referring to the chamber’s syndicated TV show Hispanics Today. “The agreement approved by the board at the [September] meeting had its genesis quite some time ago, as the USHCC has always been interested in having an opportunity to have editorial participation. Acting in its most prudent fiduciary capacity, the board approved what they considered to be a good business deal as well.” USHCC Chairwoman Elizabeth Lisboa-Farrow also sees the decision as a business strategy. Hispanic Publishing, publisher of Hispanic magazine and Vista magazine, “will invest their own money, so it’s a no-risk opportunity for the chamber,” she told Hispanic Business. “The chamber made a business decision. It will continue to support all Hispanic publications. The USHCC is always going to support Hispanic companies, but that doesn’t negate what we do as a national organization. ...Our position is to represent all our members and have a relationship with them all.” Ms. Lisboa believes the new magazine will be an adjunct, not a competitor, to Hispanic Journal and other Hispanic magazines. “The fact that we are putting out a publication doesn’t mean we don’t support [other publications],” she says. “They are all important ways to tell our story through as many media as possible. There is not a monopoly in telling a story through whatever medium you can.” Even the appearance of an advocacy organization going into competition with its members “is a tricky situation,” says Daniel Borochoff, president of the watchdog American Institute of Philanthropy. “But nonprofits have a right to compete. The question is, should their [profit-making] be subsidized by nonprofit tax treatment? They have to show a public benefit commensurate with that tax saving.” The marketplace makes the proposition even trickier because a nonprofit may enjoy “unfair competition with the other group,” Mr. Borochoff says. For example, if the YMCA opens a facility in an upscale neighborhood, it will compete directly with the area’s for-profit health clubs. But tax-exempt status gives the YMCA an operational advantage on the bottom line. Anne Pasmanick, director at the Union Institute’s Center for Public Policy, says that for the most part, a nonprofit’s earned income must be focused on the organizational mission. Profit-making activities “are generally mission-related,” she says. (See accompanying story, "Accountable to Whom?") Problems arise when a nonprofit competes with its members, Ms. Pasmanick acknowledges. In the instance of a magazine, the flash point occurs when members perceive that the organization has special leverage to get advertising dollars unavailable to commercial publishers. Creating conflict “is a risk the nonprofit takes, although it should be concerned it is upsetting certain members,” she says. The USHCC has a special need to find revenue streams beyond its membership. Technically, a chamber of commerce is a business league, a type of nonprofit called a 501(c)(6) by the Internal Revenue Service (IRS). Under IRS rules, such a nonprofit organization must be primarily engaged in activities or functions that are the basis for its exemption, and the organization’s support must come primarily from membership dues and other activities that are substantially related to its exempt purpose. But according to the chamber’s Form 990, the equivalent of a tax return for nonprofits, membership dues account for only 9.2 percent of the USHCC’s income. Corporate sponsorships contribute 17.1 percent, the annual convention and other events bring in 64.6 percent, while “advertising” and “television income” add 8.9 percent. Moreover, in 1999, the chamber had revenues of $3.38 million against expenses of $4.17 million, resulting in a loss of nearly $800,000, according to the most recent Form 990 made available to Hispanic Business by the USHCC. The chamber’s major expenses included salaries and other compensation ($720,559), travel ($466,813), food and beverages ($573,933), “outside services” ($1 million), consulting ($162,196), and printing and publications ($218,269). Annual financial audits of the USHCC may be reviewed by board members at the chamber offices, the bylaws state. Legally, Mr. Herrera and the USHCC board have authority to make contracts on behalf of the organization. The USHCC bylaws state that the president may sign “what is known as an ‘affinity’ agreement or an ‘exclusive’ agreement,” as long as he has the consent of the board (see accompanying story, “A Magazine’s Secret History”). In fact, the chamber set up the magazine deal under a new entity called Media Ventures LLC, a subsidiary designed to operate as a for-profit corporation. It follows a pattern set by the Hispanics Today TV show, a joint venture between the USHCC and Trans World International, a program syndicator. But creation of these for-profit partnerships raises issues of how the leadership must account to its members for its actions. At press time, the protests against the deal continued in force. In November, the TAMACC board passed resolutions to send two letters -- one to the USHCC leadership restating TAMACC’s opposition to the magazine contract and a second to Marco Arredondo, J.R. Gonzales, and Maria Guadalupe Taxman, members of the USHCC board, expressing TAMACC’s dissatisfaction with their representation for Region III, which includes Texas. Local Hispanic chambers contacted by Hispanic Business expressed a range of views about Hispanic Trends. Joel Ayala, director of the Hispanic Chamber of Orange County (California), had not heard of the publication, but he did see why some groups would take issue with the publication, as some chambers feel the USHCC “steps on their toes sometimes.” On the other hand, Vincent Rangel, chairman emeritus at the Mexican American Chamber of Commerce of Illinois, called the magazine a “win-win situation for everyone,” saying it would provide the USHCC with a national platform to communicate its vision and to report on political issues relevant to Hispanic companies. If the USHCC goes ahead with its magazine plan, TAMACC Chairman Ricardo Calderon speculates that TAMACC “might have to entertain other options that would have significant implications for the USHCC.” He declines to provide any specifics. He says that in the interest of unity among Hispanic nonprofits, however, TAMACC would endorse a negotiated compromise. “A lot of folks in Texas are shaking their heads,” comments Fernando Gomez, an attorney for TAMACC. Given that the leadership of TAMACC and CHCC were instrumental in forming the USHCC, the latter’s stance on the magazine issue is “frankly an affront,” he says. Mr. Montes, president of the NAHP, has tried to broker a settlement. “We’re trying to persuade the USHCC to cease and desist on this agreement,” he says. Barring a settlement, Mr. Montes plans to launch a letter-writing campaign, asking NAHP’s 208 member publications and local chambers of commerce to voice their opposition to Hispanic Trends. “For years we have supported their local members and conventions, so we need the support of local chambers and the USHCC to help us on the issue of procurement [of corporate advertising dollars]. We need to work together to better serve the community. They aren’t doing so by creating an uneven playing field,” Mr. Montes observes. “We have made a final call before we send any letter to members and chambers to get their support that a trade organization shouldn’t be competing with its members.” Editor's Note: Four months of investigative reporting, involving multiple sources from across the country, went into the production of this article. Some of the documentation has been archived online as special Web exclusive content. The documents and links in this online archive provide context to the article and its subject: The decision by the United States Hispanic Chamber of Commerce (USHCC) to enter into a commercial publishing contract with Hispanic Publishing Corp. (HPC). Click here to access "Advocate or Competitor?" bonus content. Hispanic Business editorial staff, HispanTelligence, and freelance writer Frank McCoy contributed to this story.
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