Remarks by Susan V. Berresford at the University of Southern California’s Center on Philanthropy and Public Policy
Los Angeles, California February 13, 2003
I am grateful for this opportunity to share some of my thoughts on philanthropy in this distinguished forum. I admire the Center on Philanthropy and Public Policy. Its research and activities help the philanthropic community become more effective and better understood.
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. They make clear that humankind suffers tragic self-inflicted wounds. But we also demonstrate, in part through philanthropy, humankind's creativity and will to right wrongs and to pursue more fruitful paths.
Will philanthropy continue to be an effective instrument of positive change in the future? That is not an idle question. Nor is it a rhetorical device to set up a lyrical hymn to how wonderful we all are. Because philanthropy, like the world in which it functions, is changing. Over the past decade for example, there has been explosive growth in the numbers and assets of foundations. And as the Center's recent report "California Foundations: Trends and Patterns" documents, the fastest growth has been in sectors such as community and family foundations.
This is a heartening development. It signifies 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. It demonstrates people's desire to use their assets as instruments for the common good.
But the growth of our field also means that philanthropy no longer flies below the radar. It is now subject to increased attention from the media and from decision-makers and political figures worldwide. Some of this is sparked by the large-scale philanthropy of such well-known public figures as Bill Gates, George Soros and Ted Turner. But most is the inescapable result of rapid growth in foundation numbers and assets.
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 to better, we increase our chances of being valued as a resource for the future. But if our discussions leave people misinformed or confused, we increase our vulnerability. We can be subject to misleading media coverage (as we saw in 9/11) and misguided regulatory policies. This is a particular risk when the U.S. economy is slumping and people are suspicious of institutions, especially those perceived as centers of wealth and supposed 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 begin by addressing the distinction between charity and strategic philanthropy and the debates as to which is more valuable.
For many people, philanthropy is synonymous with charity. 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 like you and me dig into our pockets or checkbooks to alleviate human suffering. We give to local organizations whose work we value and admire. Some larger foundations also allot resources for "charity". Ford, for example, has made grants to NGOs in the aftermath of natural disasters 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 that aim at the root causes of problems. Such grants are common at larger foundations such as Ford, Gates, Rockefeller, Hewlett, and others. 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.
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. To me, the need for both kinds of philanthropy is obvious. But, we sometimes hear charity defined as "good" and strategic philanthropy defined as meddlesome "social engineering." The term "social engineering" is often used to disparage a strategic or activist philanthropist. Sometimes, it is heard as a critique of "liberal" philanthropy. From others, often professional philanthropists, we hear charity defined as wasteful and strategic philanthropy as wise. This can be a form of professional snobbery. The truth is we need both kinds of philanthropists and should support donor's choice to be one or the other. Then we should focus on whether either type of donor is adequately listening to the intended beneficiaries of their work about their views and their priorities. That does not occur often enough and philanthropy's effectiveness suffers as a result.
A second issue arises from strategic philanthropy: Philanthropy should embody reasoned risk.
Institutions and organizations with established track records get the vast bulk of philanthropic funding. That is understandable since there should be trust between donor and grantee and there is an indisputably higher comfort level when an established institution is involved. But time and again we find solutions coming from people on the margins, creative people with promising ideas who fall through the grantmaking cracks. They may not have fancy credentials or affiliations. They may be idea generators with little ability to actually make something happen. We need to explore their risky or unproven new ideas to get results.
Let me give you an example from Ford's experience. It concerns a man from Bangladesh named Mohammed Yunus, who returned home after earning an advanced degree in the U.S. One day in the 1970's he turned up at Ford's office in Dacca. He was puzzled that what he learned in graduate school about economic development did not seem to apply to Bangladesh. He asked for a small sum—I think it was about $12,000 a year for two years—to explore why this was so and search for ideas that might work better. Two years later he returned with an idea for a new banking system; one built on village-based loan groups in which group members would guarantee each others' small-scale borrowing. As you may know, this later became the much revered Grameen Bank. It now has hundreds of millions in assets for the illiterate and poor. Its new approach to rural poverty reduction prompted thousands of adaptations around the world and is one of the great development success stories. Many people thought Yunus was a starry eyed and unrealistic idealist when he rejected development theory and searched for a new concept.
Here is another "idea from the margins." Based on his research and interviews with welfare recipients in the US. Michael Sherraden, a professor at George Washington University, proposed a way to help very low income people accumulate savings which they could use to improve their lives. He theorized that savings would open options and change people's minds. The result is what is now known as IDA's, or Individual Development Accounts. IDA's took root in communities across the US where churches, credit unions, community banks and others make them available. Low-income people's periodic savings are matched 1 to 1, 2 to 1, or 3 to 1, and held for several years as they grow. At the end, withdrawals are permitted for- buying a house, investing in a business, or for education. Now, federal and state legislation is helping these system savings grow. Ford and others are funding evaluation studies and support a test of a similar matching system for children's accounts. Professor Sherraden is not a banker or an anti-poverty activist. But his idea captured people's imagination and generated change.
Risk-taking philanthropy cannot only support individuals. It can also include helping marginalized groups of people, including people in social movements whose expressions of anger and frustration sometimes antagonize. Activism requires zeal that can generate tense confrontations. But tension and chaos can prompt serious dialogue, and ultimately, new ways of understanding and resolving problems. Think of the huge changes brought about in the last century by movements dedicated to human rights, civil rights, women's rights, and the environment. While many of these movements' accomplishments are made in the political arena, philanthropy can offer support to activist movements without becoming ensnared in politics and other prohibited activity. In each of the social movements just noted, foundations funded research to establish facts about problems needing reform; conferences where the ideals and strategies of the movement were discussed; travel costs for emerging leaders to meet counterparts in other regions or countries; and media productions about the movement experience. More philanthropists might be willing to embrace work of this kind if they understood how powerful its results can be and how it fits naturally in the range of permissible philanthropic behavior.
Let me offer one example of such work from Ford's experience: Back in the early 1970s, Gloria Steinem, Betty Friedan, and women labor leaders urged Ford's then president McGeorge Bundy to help the women's movement in the same way the Foundation was supporting the US civil rights movement. With strong encouragement from women within Ford, Ford funded pioneering feminists worldwide in labor, in academia and think tanks, in local development projects and in legal advocacy groups. As their work grew, it took stronger and stronger institutional form. We moved from grants to individuals, to project support, to institution building and now 30 years later to a number of endowment grants. Such grants to reinforce social movements can have powerful effects. They build on the natural energy and efforts of millions of people and resonate throughout society, and sometimes the world.
So funding creative individuals with innovative ideas and supporting activist movements can be good philanthropy, not just risky. But this grantmaking takes us to the third issue I want to touch on today, and that is our field's possible over-reliance on a business model of philanthropy. That model transfers to philanthropy criteria that seem to create success in business: sharply focused goals, substantial investment, measurable benchmarks, clear timeframes, and elimination of losers.
There is value in this approach. In many respects it is what the best philanthropic institutions have been doing all along. Strategy, investment and bottom line measurements are basic components of good management anywhere. But we know that social change is complex. Swift termination of disappointing projects may work in some business arenas governed by near term bottom-line considerations. Measuring social change outcomes is different—it can be difficult especially in short periods of time. Trying to do so can lead to a mechanistic, by-the-numbers approach that miniaturizes philanthropy and reduces, rather than enhances, our effectiveness in solving social problems.
Here is another 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, even some at Ford, questioned the usefulness of this idealistic grantmaking and questioned whether resources could be used elsewhere and with more results. 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. That experience guides Ford's human rights work today.
Social progress is a messy process that takes place over long time spans, sometimes generations. That is why Ford supports creative individuals and new social movements with patience. We have learned that while some of their initiatives may fizzle or explode, passion driven trial and error and persistence are key to progress. That lesson has parallels in business, where many successful ventures are based on extended R & D, experimentation and risk-taking.
I worry that our field sometimes fall prey to overly rigid use or simplistic understanding of business techniques. Success in philanthropy, like success in business sometimes requires "patient money" in long-term investments. So let's be sure we don't oversimplify the business model or use it too rigidly.
The fourth policy issue I want to touch upon concerns foundation payout levels.
This is a much debated issue and a favorite among critics of foundations. Federal law requires that 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. At one time there was no mandated payout level for foundations. After trying several payout policies for a few years, in 1981, Congress instituted the 5% rule.
The recent stock market boom and non-profits' pressing needs for support, increased calls for higher mandated payout levels above 5%. Now, with markets in reverse and assets of many foundations 20-30 percent lower than they were a few years ago, the calls for higher payout are somewhat muted. But the issue lingers. Now that the debate is less heated, it is a good time to think hard about this issue.
Perhaps the best way to do so is to focus on essentials. I believe the core issue is this: if we want to enable donors to create a foundation that will last in perpetuity we must keep the payout 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 erosion caused by inflation, which can be double digit! There is a striking fact from Ford that makes this point. After the oil shock of 1973, and the market's downturn, it took ford 26 years to recover the 1973 purchasing power of its endowment. And of course, since the high after 26 years, we have lost considerable ground again.
Payout above 5% undercuts the freedom of donors to create institutions that outlive them in perpetuity. That vision of a trust for the future motivated philanthropists who created foundations 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. After all, one generation's concerns may not be what drives the next generation. So erasing on earlier generation's foundation may deprive us of their long term support for important work. Removing a key part of our diverse universe of non-governmental organizations may not serve the public. 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.
Related to payout is the fifth issue of foundations' administrative costs. Critics say that administrative costs should be capped at a given level to avoid excessive salaries 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 either disallow or tax administrative costs over a certain level. Superficially, these sound like sensible suggestions. No one wants to see assets squandered, leaving less for grantmaking.
But framing the cost issue in this way, "a one-size-fits-all cap," 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 wouldn't work unless it was quite high. Regulated caps could have negative unintended consequences. They could drive foundations toward giving more of their grants to the most established and easy-to-work-with grantees. Individuals and smaller organizations could be frozen out, something that would strike at the heart of some of our most important work. 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.
Instead of a cap, a far more sensible alternative would be to invest in research and dialogue among professionals and experts in the field about reasonable administrative costs for institutions whose scope, vision, and missions are very different. That would help develop several different benchmark cost models that foundation boards and senior staff could adapt to their own circumstances. And, of course, healthy debates and analysis in the media on this subject can do more to bring about positive change than rigid rules.
Finally, a word about another issue we hear so much about these days—accountability.
With the growing suspicion of institutions, I expect we'll hear even more about foundation accountability in the future. Foundations are often criticized for not being accountable. 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 flaccid, self-serving, and ineffective. Or, absent market or political accountability, foundations may become a rogue force, a tool of special interests or a social meddler.
In fact, foundations are accountable. They have at least three layers of accountability, starting with their own boards. Those boards 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 so, Trustees are indeed a powerful and valuable presence and a force for accountability.
Then 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. At the state level, state Attorneys- General offices 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. For example, I spend a slice of my time learning what members of Congress worry about with respect to foundations and trying to respond to those concerns.
Then there is a third level of informal but important accountability. The Council on Foundations works to help its members understand and comply with best practice and relevant laws, and it has a procedure for bringing laggard members into line. 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. Foundations now do polling and focus groups to get feedback and we all get a stream of emails and letters with positive and negative comments. 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 marketized 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 often 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. They recognize that foundations, museums, cultural groups, neighborhood associations, independent schools, and others, need freedom to do their important work and that they should do so 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. Let us be sure then to safeguard the freedom of choice available to donors:
- freedom to create perpetual institutions whose assets work far into the future or to create self-liquidating short-term institutions,
- freedom of those institutions to devote themselves to charity, to strategic policy change, or a combination of the two,
- freedom to operate by strict outcomes measurements or to apply trial and error methodologies with patient money
- and freedom to adopt cost structures appropriate to our work.
These are healthy philanthropic characteristics that need our protection.
Thank you for this opportunity to share these opinions with you.