Public Obligations of Foundations
Remarks by Susan V. Berresford, Stanford University, Stanford, CA, April 19, 2004
I am pleased to be part of your Philanthropy Discussion Series to talk about The Public Obligations of Foundations. I will speak about public accountability but also about foundations as private entities. Foundations have a variety of public and private stakeholders and constituents, from donors to regulators. The balance between private and public deserves our attention today.
Three general goals comprise the public obligations of foundations. Foundations should:
- comply with foundation related law,
- use philanthropic dollars fruitfully,
- and build public knowledge about philanthropy's role in our democracy.
A consensus about these goals holds even as interest in the foundation world by the media, legislators, and the public is growing. Their interest has focused less on the work foundations do or foundations impact on our society, but on financial abuses. Examples of mismanagement and media coverage of them have undermined the reputation of our field in some quarters and cast a shadow over the vast majority of foundations that honor their legal and ethical obligations.
This situation has contributed to calls for stricter government regulation of philanthropic institutions. Some of the suggested remedies are reasonable, others seem unreasonable to me—or just ineffective. And I believe we should also be alert to political or ideological agendas that can distort even well-intended reforms.
So that is the context in which I will look at those three large goals—compliance, effectiveness, and public understanding. Let me begin with the issue of compliance with foundation related laws.
The biggest challenge to effective compliance comes from the sheer numbers of foundations—over 60,000. Half didn't exist 20 years ago. The vast majority are small entities created by a lawyer to help a wealthy family pursue its charitable interests. Most support local community institutions and do not require professional staffs or facilities. My 30-plus years of experience in philanthropy leads me to guess that most of those foundations do well in expressing a donor's generosity and interests and doing so legally.
At the core of the compliance issue are the minority of foundations that operate improperly. Some do so from disrespect for the law, and others hold to a mistaken belief that the money is "ours to do with however we wish." Finding and changing behavior of these scofflaws will be tough, given the currently limited resources of the IRS and State Attorneys Generals' charities bureaus. Let's remember that often the scofflaws also fly under the radar of the field's infrastructure groups. As our field is currently organized, perhaps one in ten foundations will ever be engaged in one of those membership organizations that provide technical assistance and emphasize legal compliance. Even one in ten is optimistic.
We have the ability to change this picture —and a responsibility to do so. While government has the prime responsibility for enforcing its laws and regulations, of course, the foundation community itself has an important role to play. In the larger evolution of our sector, philanthropy is at an important crossroads where we must aggressively address compliance issues.
First, a public-private strategy is called for. Stronger law enforcement is an obvious remedy. Current law imposes an excise tax on foundation assets. When the tax was first passed in 1969, it was earmarked to support IRS and other oversight activities. Instead, the money just went into the federal general fund. Everyone agrees that state and federal agencies charged with overseeing foundations and charities have neither the money nor the staffing to do the job. So this is one problem for which the solution is self-evident: apply the proceeds of the excise tax to those agencies' enforcement and compliance activities, as originally intended.
We also need reliable data on our field that can be analyzed so we can separate reality from myth. For example, currently, private foundations are required to file a 990PF form. Whether through a revised 990PF or some other reporting mandate, we need to gather more reliable information than we now have so that we can compare foundation finances, administrative costs, and operations. Alongside that, the private foundation community needs to develop a set of flexible and sensible standards against which all foundations can be measured. I use the word "flexible" because there is a wide range of foundations of different sizes and missions, and there is no one-size-fits-all formula for spending.
The issue of administrative costs, for example, can be misunderstood unless size and scope are taken into account. Some observers mistakenly assume that higher administrative costs equate with waste. Such generalizations are simplistic and misleading. Ford's budgeted costs, for example, include 13 offices around the world in Asia, Africa, Latin America, Russia and the U.S. Our administrative costs therefore differ from those at foundations with a single office and work confined to one state in the U.S. In addition, our staff and program officers work closely with grantees to provide technical assistance and help make grantees' work more effective, and to design evaluations to determine the effectiveness and replicability of programs we fund. For Ford these administrative expenses are inseparable from responsible grant making.
We saw many ideas about spending played out in the debates in 2003 about how much foundations should be required to spend. Some legislators favored excluding administrative costs from the mandated annual payouts. As they saw it, administrative costs ate into money earmarked for grants. They believed that excluding administrative costs from payout could act as a brake against runaway operating costs.
In fact, as I noted a moment ago, a significant part of those costs support the work of grantee organizations, both directly and indirectly. So legislators need to take great care as they decide these very basic rules related to foundations' operations.
Compliance issues should be addressed with legal and regulatory mandates and codification of professional standards of administrative and operational practices applicable to different kinds of foundations. This is something the foundation community should help develop.
What are our resources for doing so? We're all familiar with such groups as the Council on Foundations and the Philanthropic Roundtable. Both are national membership organizations dedicated to compliance and good grantmaking. The Council has recently beefed up its outreach and education programs and its process for correcting improper donor behavior. And the Roundtable has strongly emphasized enforcement related to donor intent.
Also there are several new organizations that provide outreach and materials to help smaller foundations improve their effectiveness. The 5-year-old Association of Small Foundations, for example, has 2,900 members and is using a Ford grant to experiment with how-to materials reaching another 1,000 foundations. A new network, the National Center for Family Philanthropy, has over 7,200 subscribers. And there are 29 regional associations of grantmakers across the U.S., all dedicated to good practice and information sharing. These associations are growing fast and with assistance can create an effective nationwide network.
These and other infrastructure groups need to be brought together in a strategy so that more of their growing capacities can be directed toward compliance issues. The time is ripe for an organized, nationwide compliance campaign in which different infrastructure organizations play to their own strengths. Such an effort could be designed in cooperation with our state and federal regulators. A well-planned, adequately funded campaign of this sort can help nip many compliance problems in the bud, and reinforce the sector's commitment to accountability.
The importance of concerted action within the field brings me to the second issue I want to address, foundation effectiveness.
Often, "effectiveness" is taken to mean programmatic results, the sooner the better. Some have called this the business model of philanthropy, since it introduces corporate conceptions of investment and measurable results into social change processes. We all would like to see positive results sooner rather than later, but the real world doesn't always work that way any more than business does. The best philanthropy is committed and consistent, and operates in a time frame appropriate to its community and institution building mission rather than near term bottom lines.
The enormous growth of new foundations and new donors requires that we give them access to the field's best practices. Many newcomers enter the field with fresh and valuable new ideas and an informed interest in a particular area or two in which they want to make a difference. But as they get deeper into what it takes for a donor to be effective, they realize they can learn from others' experience.
Several of the larger foundations and the field's infrastructure organizations have begun to consolidate and present their "lessons learned." The Association of Small Foundations, for example, is distributing training materials through its website and holds Trustee Leadership Seminars around the country. Even with a small budget and staff, it has offered its products to thousands of foundations.
Ford has vigorous outreach programs to disseminate grantmaking skills and best practices. Our major project is called GrantCraft. It collects and distributes practical grantmaking know-how from Ford and others. Ford's GrantCraft has a Web site filled with guides, teaching cases, and videos—based initially on Ford's experience but with growing contributions from grant makers both in the U.S. and abroad. They cover a wide range of program and managerial issues that foundation practitioners face. Here are a few of the GrantCraft titles: Working with Start-Ups, When Projects Flounder, Inheriting a Grant Portfolio, Building Financial Strength and Program Quality, Scaling Up Successful Work, Saying Yes, Saying No to Applicants.
GrantCraft is grounded in the experiences of real world grantmakers and how they function. It conveys the grantmaking experience in ways that are practical and real, rather than abstract. It is a body of practice and reflection in the field that newcomers can tap into. GrantCraft is an open web site—anyone can access it. GrantCraft's web site has had over 40,000 visitors who downloaded 30,000 guides. Registration is required to download some materials, but everything on the site is free. I invite everyone here to login to GrantCraft.com and see for yourself what we're doing.
Materials like these could be aggressively marketed to targeted donors, by infrastructure organizations working with the sense of urgency we all have about accountability. Early stage pilot efforts would precede any larger regional or national campaign.
The third and final challenge I want to speak about is the need to build wider public knowledge about foundations' role in our democracy.
We know from survey data that the public starts with generally positive attitudes—when asked, people on the street say that foundations are good for our country. But few can name only one foundation, if even one, and very few can recall an accomplishment they tie to a foundation. In part, that reflects reality—grantees in the third sector do the work that brings about change, while foundations usually remain more in the background, providing funding and consultation. But these attitudes mean that we have a complex educational job ahead.
Our country is fortunate to have a flourishing third sector composed of more than 1.5 million non-profit groups. In many places, we are totally dependent on these non-profits for essential services, care of needy people, reform voices and cultural expression. But although the organizations are central to our lives and communities, few Americans grasp the idea of a third sector. Even fewer understand how the vital contributions of the third sector to our life as a society often rest in part on philanthropic dollars. Only a tiny number clearly see the connection between philanthropy, the third sector and our country's democratic ideals. Happily, we have the Independent Sector, an organization led very ably by a new CEO, Diana Aviv, and she and her colleagues will help advance the public's knowledge of these points.
It would be good if more of the public recognized the ways that foundations reinforce democratic traditions. For example, we and the I.S. could remind the public about such truths as:
- foundations strengthen the diversity of perspectives by supporting groups that range from "establishment" to "underdog" and points in between.
- foundations help support organizations through which men, women and children participate in civic affairs.
- foundations help marginalized groups gain a foothold on the success ladder.
- foundations are society's R+D arm, helping test models for urgently needed social innovations before they are ready for prime time in public policy debate.
- foundations reflect the idea that not everything needs to be driven by markets or politics to be useful.
Philanthropy reinforces democratic principles and practices. But doing so can generate criticism and doing so blends public and private agendas in interesting and complex ways. Not everyone wants to hear the "underdog's" voice or see newcomer populations get scarce jobs or housing. Sometimes people are made uncomfortable by social change. So foundations get criticized for doing this work. But our history suggests that democracy benefits when new ideas and energy rise to the surface and find their place, even when that process involves conflict.
Controversies and conflict are part of the landscape traveled by almost any institution with public obligations. It may be useful to re-examine that landscape to see if some of its features should be rethought. There is an interesting thesis advanced by Peter Frumkin at the Hudson Institute's Bradley Center. He says that after the Tax Reform Act of 1969, which includes many of the basic provisions that regulate foundations today, foundations responded in two major ways not required by the law. One was to accelerate professionalism and openness to counter the abuses highlighted in that period. The other was to redefine the field from private institutions operated by private individuals to a concept of private resources held in "public trust" for public purposes. It may now make sense to revisit that latter point, to think harder than we have about the implications of the "public" definition of ourselves.
As we go farther and farther down the "public" road, we open the field to all sorts of requirements and expectations that may be inconsistent with private entities. It is within the realm of possibility that some day those mandates may come to include government appointing representatives to boards, sunshine requirements akin to those of government agencies and very formal peer review processes for grant selection. It is not far-fetched to envision the danger of our independent foundations transformed into quasi-governmental institutions. Do you believe this would help foundations be more effective and innovative? I don't.
We should be able to preserve the balance at the center between the two poles of public and private—or to vary the metaphor, a middle path that blends both ways of thinking about private foundations' public obligations. It would be a path labeled: private foundations working to fulfill private visions of the public good. That label, by the way, reflects the truth about our organizations and our work. It not only acknowledges the reality of what foundations are, but also defines their contribution to democracy.
For pluralism is a core value of democracy—it is the freedom of people to hold a variety of views and visions and to work for their favored solutions to the problems of society. Democracies gain from differences. Through multiple viewpoints and free, open debate and research, problems can be freshly analyzed and addressed —and democracy enhanced.
America's core values include private initiative and independent citizen organizations neither controlled fully by government nor driven exclusively by profit motives. We should be pleased that aspects of our democratic society are not marketized or politicized. Our independent third sector is something others around the world seek to grow as they build democratic self-expression and free societies. We need to value it and protect it.
More of us in the sector should speak and write about this intersection of philanthropy, democracy and freedom. It is a subject that could be thoughtfully explored in social studies curricula and by academics and journalists. Doing so can protect basic freedoms we value in philanthropy. We want donor freedoms such as the freedom to spend down or choosing to set up a fund in perpetuity, the freedom to give alone or in association with other donors, the freedom to support causes that we feel strongly about, even unpopular ones.
This is part of our American dream. Thank you.