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29 May 2003Remarks by Susan V. Berresford at the Association of Baltimore Area Grantmakers' Luncheon Baltimore, Maryland May 29, 2003
I am grateful for this opportunity to share some of my thoughts on philanthropy in this distinguished forum. I'm especially pleased to be part of your 20th Anniversary celebration. The Association of Baltimore Area Grantmakers clearly has helped the philanthropic community become more effective and better understood over these two decades.
ABAG can be important in the next 20 years too. This is crucial because so many problems require philanthropy's attention: poverty, hunger, unemployment, housing and health care, and issues like racism, sexism, the environment, peace and justice, among others. Philanthropy is one part of the necessary response to these problems.
But we have to ask ourselves: will philanthropy continue to be an effective instrument of positive change in the future? The signs are good. We certainly have more philanthropic capacity. Over the past decade, there has been explosive growth in the numbers and assets of foundations. Maryland is no exception to that pattern. And, as ABAG's research shows, even in tough economic times, Maryland's philanthropies extended their reach and generosity. Your study showed that they increased giving by 20% between 2001 and 2002 while assets fell 9%. Now giving may level off—but the pattern is heartening. It shows the continued strength of America's tradition of generosity and citizen involvement in community improvement. It reminds us that people do care about each other and want to make their communities strong.
But growth doesn't guarantee effectiveness. It does mean that philanthropy is now subject to increased attention from the media and from decision-makers and political figures worldwide.
And now, in particular, our field is in the news because of proposed legislation affecting us and media coverage of alleged excesses. To a large degree, this unaccustomed, new-found interest is healthy. Scrutiny based on accurate information about who we are and what we do can make us more effective. If forums like this one help to demystify philanthropy and generate ideas about how we can work better, we increase our chances of being valued as a resource for the future. But if people are misinformed or confused about philanthropy, we are vulnerable. We can be subject to misleading media coverage (as we saw after 9/11) and misguided regulatory policies. These risks are great when the U.S. economy is slumping and people are suspicious of institutions, especially those perceived as centers of wealth and power.
So today I want to briefly discuss and, I hope, clarify some of the issues being debated within and about the philanthropic community. I will touch on six in all.
Let me start by addressing the distinction between charity and strategic philanthropy.
For many people in this country, philanthropy is synonymous with charity. Most non-specialists understand philanthropy in this way. It provides resources to deal with immediate needs such as sheltering the homeless, feeding the hungry, healing the sick, and other acts of basic generosity. Such giving accounts for the overwhelming proportion of American philanthropy. People dig into their pockets or open checkbooks to alleviate human suffering. This is what non-specialists think about when they are asked whether they admire American philanthropy. They overwhelmingly say yes.
Some of the very large foundations also allot resources for "charity.quot; Ford, for example, has made grants to NGOs in the aftermath of natural disasters at home and overseas. And we helped non-profits in New York and Washington respond to the terrible events of 9/11.
But there is also another kind of philanthropy—strategic philanthropy—involving experimental or policy oriented giving. This form of philanthropy supports the search for new ideas and programs that aim at the root causes of problems. Such grants are common at larger national foundations such as Ford, Gates, Rockefeller, Hewlett, and locals as well. To cite one of many Ford examples, we support loans and research to test whether very low income families with poor credit ratings can take and pay down home mortgages and build equity through home ownership. If these experiments prove successful, banks would change their policies and begin to make such loans routinely; and secondary market organizations would change their policies and buy the loans, thus releasing bank assets for new loans directed toward the poor.
I would guess that about 10 or 15 percent of all American philanthropy is of this strategic or policy oriented character. This is a very small proportion and we need to enlarge it if we want to help solve America's problems.
ABAG itself, as you know, fosters this type of giving with its admirable donor collaboratives in Baltimore neighborhoods and the Maryland Service Funding collaborative. And many ABAG members use their philanthropic dollars to support people working on policy issues of great importance, or give money to programs addressing root causes. Over ABAG's 20 years you have increased your focus on this kind of work- on excellent use of resources.
These two faces of philanthropy—charitable and strategic—are complementary. The charitable aspect is essential since human societies are imperfect and people remain in need. But strategic philanthropy is also essential, for it offers the prospect of curing, rather than simply alleviating problems.
So ABAG, each of its members, Ford and others have to help more people see the value of strategic policy oriented philanthropy. One way to help donors form coalitions and other arrangements that make such grantmaking available to unstaffed foundations. They also help overcome reluctance to work on policy matters—a fear of getting into political waters that are off limits for foundations. We who believe in both types of philanthropy—charity and strategic—can help less experienced donors do this work effectively and within existing laws and regulations.
A second issue arises from strategic philanthropy: Philanthropy should embody a degree of risk. It helps to talk carefully about risk.
Risk comes in many forms: topics that are risky to work on because they are politically or socially sensitive, such as research on human sexuality, gay rights, the International Criminal Court or advocacy for basic human rights; organizations that are risky because they are new and have no track record to predict probable success; organizational leaders who take risky controversial stands on issues; and grants that have to be very large to have impact so they also risk being a big flop. All of us see these risks. The question is: are we willing to take them on?
Let's look at one of these points—the topics most philanthropic dollars flow toward. You probably know that most philanthropic dollars are given to religious and educational organizations. These are very worthy concerns and we should be pleased philanthropists choose to direct their funds to such vital activities and institutions. They are vital to our values and our competitiveness. But we should also be concerned that some other areas are so poorly addressed in our field. Areas like criminal justice, the problems of immigrants and refugees, and drug abuse treatment to name just a few. Just as I hope we can get a better balance between charitable and strategic giving, I also hope we can get a better balance between philanthropy focused on familiar and unfamiliar problems. ABAG and the leaders of Baltimore's foundations can help this happen.
Whatever fields we work in, the familiar or unfamiliar, donors need to explore the risk aspects of philanthropy. After all, if we aren't willing to take risks, who will? Let's encourage our Regional Association of Grantmakers to highlight patterns of giving and examples of reasoned risk, hold discussions about and visits to exemplary risky projects and create funding partnerships that help share risk. After all, we are not governmental officials with the ever present specter of elections and a skeptical media covering us. Nor are we businesses with a relentless near-term bottom line measurement by stockholders and the market. We can afford to take risks that could make real contributions to positive social change. We need to keep asking ourselves, what are our riskiest grants; who are the leaders, what are the ideas that may be high risk but promise high return?
Speaking of business, and a near term bottom line brings me to the third issue I want to touch on today, and that is our field's use of the business model of philanthropy. In recent years, philanthropic consultants have urged us to transfer to philanthropy criteria that seem to create success in business: sharply focused goals, substantial investment, measurable benchmarks, clear time frames, and elimination of losers.
There is value in this so-called "business approach.quot; In many respects it is what the best philanthropic institutions have been doing all along. Having a strategy, thinking like an investor and using bottom line measurements are basic components of good management anywhere.
However, you and I know that social change is complex. Swift termination of disappointing projects may work in some business arenas governed by near term bottom-line considerations. Social change can be different—and very difficult to measure in short periods of time. Trying to do so can lead to a mechanistic, by-the-numbers approach that miniaturizes philanthropy and reduces our effectiveness in solving social problems.
Here is an example from Ford to illustrate this point. Ford and others supported courageous individuals in Eastern Europe in the '50s and '60s. These brave grantees distributed human rights materials and literature, struggling for freer societies. Donors also fostered the exchange of ideas between people in repressive countries and freer ones. Foundations assisted people building regional and international human rights organizations to advance the cause of people in countries who couldn't speak for themselves. For nearly two decades, the outcomes were sparse, as brave grantees lost their livelihoods and sometimes their lives.
People, including some trustees at Ford, questioned the usefulness of this idealistic grantmaking. But after the Berlin Wall fell, many of the people and organizations we funded had played important roles in bringing freedom to the fore. We are proud that we stayed the course.
My point is that social and political change involve messy processes that sometimes take place over long time spans, even generations, when results are meager. Let's be sure to remember that this is true, as well, in business. Many successful ventures are based on extended R & D, experimentation and risk-taking.
I worry that philanthropy sometimes falls prey to overly rigid use or simplistic understanding of business techniques. Success in philanthropy, like success in business sometimes requires "patient moneyquot; in long-term investments driven by beliefs and values not numbers. So as we support people working on complex and sometimes unpopular causes, let's be sure we don't oversimplify the business model or use it too rigidly.
The next issue I want to touch upon concerns foundation payout levels. This is a much debated issue and now the subject of proposed legislation in the House of Representatives. As you know, federal law requires that private foundations pay out 5% of each year's average asset value. This requirement is intended to prevent foundations from hoarding money rather than spending it for the common good, a reasonable and worthy aim. You may not know the history, however. At one time there was no mandated payout level for foundations. After trying several higher payout policies that did not work, in 1981, Congress instituted the 5% rule.
The stock market boom of the 90's and the pressing needs of non-profits today increased calls for higher mandated payout levels—above 5%. Now markets have been in reverse, assets of many foundations are 20-30 percent lower than they were a few years ago. But we still hear calls for higher payout to help address rising needs as governments cut back and the economy is limp. And the recent revelations of alleged wrongdoing by philanthropists intensify the force for change. So, it is a good time to think hard about this issue.
Perhaps the best way to start is to focus on essentials. I believe there are two core issues related to payout: 1) if we want to enable donors to create a foundation that will generate grants into the far distant future for the charitable activities the donors care about, the payout needs to remain at around 5%. Most fund managers will tell you that drawing more than 5% from an endowment will ultimately eat away the capital. In fact, many advise clients to draw out less than 5%. Five percent is a tougher standard than university endowments generally meet, and universities have a constant influx of new contributions that many foundations don't have. And let's not forget that to keep its purchasing power, the foundation has to make 5% on top of the cost of producing income and the erosion of capital caused by inflation.
Payout much above 5% undercuts the possibility that philanthropic institutions can live into the distant future. The vision of a trust for the future motivated philanthropists who created well known and respected foundations here today and elsewhere such as Rockefeller, Hewlett, Carnegie and many others. The value of their work over generations should make us question what society gains from limiting donors' vision and freedom and the work of organizations they support. After all, one generation's concerns may not be what drives the next generation, and many problems need attention over multiple generations.
Removing a key part of our diverse universe of non-governmental organizations may not serve the public well. And remember, just as there are donors who envision perpetual foundations, others choose to make their foundations self-liquidating over time and they are free to do that. Donor choice is a great strength of American philanthropy. Higher payout mandates could end it.
Closely related to payout is the fifth issue—foundations' administrative costs. This topic is now the subject of legislative proposals in the House of Representatives—namely to exclude all administrative costs from payout calculation. Critics say that administrative costs need to be capped to avoid excessive salaries and costs in foundations and ensure that money reaches needy organizations and people. Several proposals have been suggested. One is to allow only grants to count towards the 5% payout. That creates natural pressure on administrative costs, since more than 5% eats into the base capital at an unacceptable rate. Another plan would disallow costs over a certain percentage level of payout. Superficially, these sound like sensible suggestions. No one wants to see assets squandered, leaving less for grantmaking. And we all read about alleged abuses of the use of administrative monies here and there.
But framing the cost issue in this way, "a one-size-fits-all approach or cap,quot; ignores a given foundation's purpose, vision and activities. One example should suffice. Think of two foundations of roughly the same size. One makes large annual grants to two local universities and two local cultural organizations. The other grants the same total amount but supports 50 local grassroots groups in twenty states. The number of staff required by the two foundations, for travel costs, back office grant processing and grant monitoring, are wildly different. Both do important and valuable work, but their cost structures are simply not comparable.
So a cap could work if it is set at a reasonable level. A rigid cap set too low could have negative unintended consequences. It could drive foundations toward giving more of their grants to the most established and easy-to-work-with grantees. Individuals, smaller local and grassroots organizations could be frozen out, something that would drive us away from some of our most creative and important change agents in communities. And the essential functions of accounting, legal review, audit and the like within foundations could be severely constrained. That could generate a decline in the integrity of foundations' internal operations—something no one wants to see.
Finally, that brings us to the issue of philanthropic abuse and the matter of donor accountability. With the growing suspicion of institutions (business, the church, government, etc.), we'll hear even more about foundation accountability in the future. Foundations are often described as "unaccountable.quot; They don't have to answer to a bottom line the way business does, or to an electorate that can vote them in or out of office. It is argued that without these external checks, philanthropy can become corrupt, flaccid and ineffective. Sometimes people in our own field say these things. I am always surprised!
In fact, foundations are accountable. They have at least three layers of accountability, starting with their own boards that are the stewards of the foundation. Boards have changed the executive, dismissed staff, altered program directions, and otherwise steered operations. Most foundation executives will tell you that they spend significant time consulting with their boards and trying to develop consensus on strategy and grantmaking so, trustees are indeed a valuable presence and a force for accountability.
But boards can go wrong now and then. So there's the governmental regulatory system, a second type of accountability. Each foundation reports to the Internal Revenue Service and is subject to audit. Expanding the IRS's capacity to study and audit foundations makes more sense to me than writing more regulations. Directing excise tax funds that foundations pay to the IRS's exempt organizations unit would help fortify their very important oversight efforts.
At the state level, the offices of state Attorneys-General actively monitor charities and foundations. Their annual meeting regularly covers the investigation of abuses, and recent actions in California, New York and Hawaii among others show that these public officials are indeed a force for accountability.
And, foundations are also accountable to Congress, whose tax committees determine how foundations function, are regulated, and taxed. Our field works hard to address legislators' concerns and is currently engaged in a lively dialogue about the proposed legislation affecting payout and administrative costs.
Then there is a third level of informal but important accountability. Organizations like ABAG and the Council on Foundations work to help their members understand and comply with best practice and relevant laws. These informal pressures and resources make a difference, as you know here in the city. What you may not know is that the Council on Foundations also has a procedure for bringing wayward members and non-members into line with the law and good practice. The Council is now going to strengthen this procedure and make it more widely known. Regional associations may want to take on similar processes. The Foundation Center and the media are other informal forces for accountability. Finally, a powerful source of informal accountability is the grantee and non-profit community. Increasingly, foundations do polling and focus groups to get feedback and we all get a stream of emails and letters with positive and negative comments. In my experience, such information is taken seriously by foundation managers.
So we are subject to formal and informal measures of accountability, which is as it should be. It is true that our field is not market driven and that foundation executives are not elected by the public. But that is also as it should be. Not everything needs to be "marketizedquot; to be worthy. Markets can bring their own abuses, as recent corporate scandals make clear. Nor should everything be politicized. Politics often encourages short-term fixes at the cost of longer term solutions. Lawmakers themselves will tell you that they don't often have the chance to think broadly.
We are fortunate that our laws create the legal and practical space for non-profit, non-governmental institutions to flourish. Our lawmakers recognized that foundations, museums, cultural groups, neighborhood associations, independent schools, and others, need freedom to do their important work and that they should be relatively immune from political pressures.
That underlines a theme that binds together all of the six issues I have discussed today. Philanthropy needs a high level of flexibility and freedom to do its work well. American philanthropy is not perfect, by any means. But it embodies some of our most important values such as freedom and participation in social problem solving. To preserve our freedoms, the founders devised a governmental system of three branches to serve as checks and balances on each other. As America developed, we similarly valued institutional diversity in a free society. It is another kind of checks and balances system. Philanthropy is part of that diversity; part of a non-profit sector founded on voluntarism and citizens' freedom of choice to pursue ideas and goals they admire.
Other countries admire this system and often seek to adapt to their own situations - with good reason. For it is an expression of our political freedom but also a contributor to equity and economic progress. I hope we can continue to be donors working on significant social problems, in diverse ways that mirror our diverse beliefs, and help create the just and fair society I know we can be. ABAG is part of the future of philanthropy.
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