Foundation Giving: What Can We Expect, Given?

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As NPQ approached its annual issue on philanthropy, the stock market nose-dived, the president was toying with a preemptive war against Iraq, and federal and state budgets were hanging out “closed for business” shingles. Moreover, we may see huge shifts in American civil rights due to our nation’s preoccupation with fighting terrorism abroad and at home.

Does any of this make a difference to America’s foundations? Mark Dowie, author of American Foundations: An Investigative History, believes that many will be painfully slow to respond to our rapidly changing circumstances; he thinks this is unfortunate because, in the words of the late Paul Ylvisaker, former public affairs director of the Ford Foundation, foundations are “America’s passing gear.”

We decided to ask 12 foundation insiders and observers about the likely tenor of the foundation response to unprecedented political and societal changes. Will foundations live up to Ylvisaker’s expectations, or shift into low-gear–or might they simply stall-out on the shoulder of the highway.

Our environment is as unstable as most of us have ever seen it–this creates both threats and opportunities. Will foundations be in the forefront of positive and strategic social change? For that matter, will most nonprofits? How do we all need to change in order to create an effective “passing gear?”

Of course, we recognize that there’s great diversity in foundation types and practices, and lots of exceptions to even the boldest prognostication. As one of our experts quipped, “If you’ve seen one foundation, you’ve seen one foundation.”  Nevertheless, our respondents have joined us in making some overarching statements about the philanthropic response to these changes.

One problem, according to Mark Dowie, is that most foundations don’t play a passing gear role–even when they think they do. This is because foundations “are in the midst of a massive identity crisis and no institution acts confidently or intelligently when this is the case.” The identity question, as he portrays it, is whether foundations are essentially private or public institutions. He contends that, because of tax breaks, they are essentially public and that their governing systems should be more inclusive or “democratic.” He argues that because decision-makers in many foundations tend to be the monied elite they are constrained from crafting fully informed, effective, powerful strategies.

As a result of their insulation, Dowie talks of foundations having a “drag anchor effect,” slowing the pace of social change. “Social change is really a challenge for plutocracy,” he says. “And, as far as I can determine, foundations are beneficent engines of plutocracy. They are doing some good things but they are, nonetheless, protecting private wealth.”

He sees this as an obstacle to the exciting potential of foundations, “anticipating social problems and looking for their root causes and doing something about them. That has always been the stated goal of foundations in general, and it is to me the heart of their failure.”

Dowie’s critique raises some concern among those believing that the logical conclusion of his proposal would be additional regulation of charitable contributions resulting in a chilling effect on giving in general.

Addressing the public policy problems of civil liberties and government accountability, budget cutbacks and massive tax reductions, Pablo Eisenberg, senior fellow at the Public Policy Institute at Georgetown University, believes that we are in serious trouble unless non-conservative foundations move to a “less neutral position” in society.

He describes the current situation as unbalanced. “We have,” he notes, “a very conservative government that is trying support the country’s wealthiest people through the tax system, defending a free market system that is out of control, and trying to cut back on government regulation in every area. The only way to respond is through galvanizing large numbers of people who are well informed and organized and speaking out.

“Unfortunately most foundations are just scared to death of influencing public policy and government decision-making. They have to be willing to do what the conservatives have done, that is to back an agenda dedicated to bringing about necessary social and institutional changes.”

Again, our experts cautioned that there are notable exceptions to all of these critical characterizations.

The vicissitudes of the stock market play havoc with the portfolios of foundations. Foundations typically limit their spending to the legal minimum, five percent of net assets. Spending is frequently averaged over a three to five year period. This, obviously, affects the level of grantmaking, theoretically evening out spikes and dips in assets caused by Dow or S&P. As we talked to our experts, the stock market was plunging to new lows.

The Surdna Foundation’s executive director, Edward Skloot, predicts a decline in foundation assets of anywhere from 10-30 percent. While he believes that many foundations will try to hold to their current payouts as long as they can, he warns that if the market continues to tank, grantees must expect reductions or stretch-outs.

Cynthia Gibson, program officer for the Strengthening U.S. Democracy program at Carnegie Corporation of New York, agrees: “Increasingly, there are a lot of alarms about the current market being sounded among foundation staff and these will likely roll out into reduced money being available for grantmaking if the market continues to nosedive.”

Overall, NPQ’s expert respondents agreed. It seems prudent to expect less money from most foundations over the next three to five years.

But Eisenberg thinks that a reduction in grants should not be a given in this situation. He believes that foundations are obligated to function, at least to some extent, counter-cyclically. “In these difficult times of federal program cutbacks, lowered taxes for the wealthy, a recession economy and corporate scandals, it is incumbent on foundations not to reduce their efforts to maintain an active civil society. They should increase, not decrease, their payout in grants.”
Will foundation grantmaking simply follow the market and take a dive, or act “counter-cyclically” and come out fighting when their support is most needed?

Changes in foundation leadership may be a powerful variable in the way foundations will act in the next few years. Many such shifts in larger institutions have happened recently.

“In my opinion, leadership turnover is the most powerful indicator of change in most foundations,” insists Elizabeth Boris, director of the Center for Nonprofit and Philanthropy at the Urban Institute. “When the CEO changes, the board changes and there is a program review, frequently new program directions or completely new areas of interest. Some nonprofits benefit from the changes and others are left behind.”

Loren Renz, vice president for research at the Foundation Center notes that overall foundation grantmaking did not decline in the past year–in fact it rose five percent–and may not fall off significantly in 2002. “This is a year when many grant makers are trying to keep giving levels steady, recognizing that many nonprofits in their communities are struggling,” Renz says. However, a year like this one sets the level for a five-year average; we may be looking at an extended period of fewer resources. She believes that many foundations are still very unsure about what their grantmaking capacity or priorities will be in the immediate future.

Renz and Gibson agree that the declines in grant budgets are made somewhat worse by the fact, that during our recent economic boom, many foundations made larger multi-year commitments that will need to be honored even in the context of squeezed budgets. This could, however, cause a great deal of difficulty for newer projects and organizations seeking new funding. At the same time, recipients of multi-year grants should anticipate that these commitments might be paid out over longer periods than originally scheduled.

Edward Skloot agrees that there will be a significant pinch; adding that we should expect foundations to drop grants that are not central to their guidelines. This may show itself in less money being available for experimentation and pilot programs.

Gibson anticipates that the pressure on foundation staff will be to deal with reduced grantmaking budgets, which in turn will force staff to be more focused in their overall program strategies and the organizations they will support. She thinks that program officers will be required to provide increasingly tight justifications for particular grants and, in some cases, entire funding initiatives.  This could have both positive and negative consequences. On the one hand, it could prompt more accountability among foundations. On the other, it may put more pressure on grantees to produce more measurable and quick outcomes–accountability measures that are not always relevant to the many nonprofits addressing complex issues not easily measured.

But Skloot is hopeful that funding constraints might spur more funding collaboration, where foundations will begin combining resources to support various kinds of initiatives. “The deepest issue is that foundations don’t see themselves as part of a system; their worlds are hermetic. They seldom share data and knowledge, despite an obvious need to do so. With the market bubble bursting, a better way of thinking and acting may now result.”

Emmett Carson, president and CEO of the Minneapolis Foundation, believes that many foundations are still “in a state of shock” and have not yet rethought their spending and grants policies. He foresees significant reductions in grantmaking and internal debates over whether (and how much) to cut back on staff and operating costs. Carson expects that foundations will be asking themselves “at our core, are we a direct-service-supporting kind of foundation or are we a systemic-policy kind of foundation?” The answer will necessitate some tough decisions around which priorities to support.

There’s no easy summing up of the situation, because there are so many different types of foundations in the over 80,000 counted by the IRS. The Ford Foundation’s Christopher Harris characterizes foundations as “not even apples and oranges, [but] apples, shoes, and auto parts.” He contrasts three kinds of foundations: a large international funder like Ford, supporting women’s groups in Mexico, legal studies in Vietnam and minority Rights in India; a robust community foundation like the Boston Foundation that has a long track record in the issues of social inequity in that community, and a small family foundation in Seattle focused on addressing the disease lupus. He concludes that, “it is impossible to look generically across those three and predict behavior in light of the current economic and political environment.”

Yet, there is an understandable desire to identify trends among foundations. But even in terms of the issue of asset reductions, while most foundations have experienced reduced assets (like Ford Foundation which has seen a 30 percent reduction) there are a few, due to a recent infusion of funds or remarkable good fortune, do not face that problem.

Are there opportunities in the midst of these bleak circumstances?  Ford’s Harris describes the current environment, clearly with an eye to post-September 11th issues, as “a time of unique complexity but also opportunity.”

Edward Skloot thinks that the political and economic issues present great opportunities for foundations to rethink philanthropy’s role in at least three issue areas:

  • Focusing on ethics and accountability in government and in business associated “with our ability to function as a healthy and inclusive democracy; a new, more effective, tri-sectoral balance must be created.”
  • Resisting privatization, which is often “an attempt to offload onto nonprofit organizations or the private sector what should be the role of government…distracting us from what we should be doing, which is driving government to greater responsibility for ensuring equity and social justice.”
  • Dropping our distancing mechanisms toward nonprofits in order to vastly improve working relationships. “We need to spend the next few years supporting active participation in an engaged civil society, locally, state-wide, regionally, nationally, globally, or in any combination of those,” Skloot maintains. “Not only do I encourage this as an opportunity, but I would argue that it is a responsibility of foundations right now.”

Mark Dowie discerns a more progressive tendency among foundation staff and trustees. Like Skloot and Eisenberg, he calls for nonprofit leaders to “make it their business to get to and convince program officers and foundation trustees that they have to invest more money in advocacy, organizing and the things that really work strategically for social change.”

Dowie believes that if foundations become more democratic institutions “because the public deserves more input into what is half their money,” foundations “will work better and produce far better results.”

Although Dowie argues that all foundations should be more publicly accountable, for community foundations, a special category of foundation, the notion of being answerable to the “community” is built into their mission and funding strategies–at least in theory. From their origins in the early 1900s, community foundations conducted community needs assessments to determine grantmaking priorities and incorporated community leaders onto their boards of trustees. Modern community foundations are hybrids comprised of various types of charitable instruments.

In the last decade or so, community foundations have found themselves competing with charitable gift funds such as Fidelity and Vanguard, and with local United Ways for their “market share” of donor advised funds, which has become their largest growth area. The massive growth of Fidelity, for example, has thrown many community foundations into a tailspin of anxiety and reorganization. Do community foundations have a different role to play, a different future, within the context of the social, economic, and political upheaval affecting foundations and nonprofits generally? 

“We have just come out of a period in which money and wealth was created at a rate never before experienced in this country (at least in anyone’s memory), and by a greater number of people than ever before,” notes Emmett Carson. He worries that “in an effort to capture that wealth, some community foundations have begun to change their entire raison d’etre. This next period will test our basic philosophy as it has never been tested before. Too many are heading down the road of being purely transaction-oriented; they are in danger of becoming mere charitable banks and losing their distinction.”

Mark Murphy, executive director of the Fund for New Jersey, expressed severe misgivings in a recent July 25th, article in the Chronicle on Philanthropy, about the notion of “donor sovereignty,” an emerging trend in community foundations. In particular, he is concerned that this will result in public foundation grantmaking becoming further isolated from community input and a comprehensive understanding of community concerns. In a subsequent interview he expanded on this point.

“I believe that we are essentially cowering before the specter of donor designation,” Murphy asserts. “It has become a specter because we have become threatened by the so-called competition from the Fidelity Gift Funds and the United Ways of the world. Both are pursuing the same donors as community foundations traditionally do, and both promise essentially free rein on designation of gifts. Our language is largely defensive–we use phrases like ‘not a penny will be misused’–this sends a terrible message that does not honor the intelligence and integrity of our partners among nonprofits. Blindly going where donors lead does not constitute following another line of logic.”

Carson and Murphy agree that there is nothing wrong with donors wanting “a deeper sense of engagement…and connection and personal experience” with their philanthropy, in Carson’s words. But that does not obviate Murphy’s admonition that “that placing donor control above all else constitutes shrugging and abdicating our responsibility as public charities. Going down this road will end up making us into institutions whose bottom-line is really just to raise as much money as possible. This is not our traditional role, nor is it a new role with a healthy, well thought out philosophical base. It is simply a retreat from the part of our job that requires us to do the research, the convening and the advocating that result in crafting effective, strategic and collective responses to complicated and interconnected community issues.”

To be sure, the next few years are not likely to be pretty. But the dozen NPQ-convened experts provide some ideas that every nonprofit leader should take to heart. First, we emphasize that most of our interviewees felt that there should be additional time and money spent on the type of advocacy and organizing efforts that leads not just to effective policy change but to community engagement in that policy change. It is everyone’s individual and collective responsibility to ensure that this occurs.

Perhaps Dowie is correct that there is some latent progressivism sprouting up among institutional funders–we need to pay attention to this trend and to support it, particularly as it relates to more inclusion in setting direction.  On the foundation side, with a historic commitment to community, public foundation leaders like Carson, Murphy and Taketa (see next article) can, perhaps, withstand the “donor is God” trend and create a more democratic and inclusive form of philanthropic grantmaking.

But this also requires a radically different form of behavior from many nonprofits. As Harris noted, “we say that we want a ‘vibrant civil society’. Well that means a bunch of people mixing it up and struggling with what we want our society to be and how best to get it there.”

“Mixing it up” may be difficult in light of the strange and complicated power dynamics that infect many conversations between nonprofits and foundations (and, for that matter, between nonprofits and their communities). Nonprofits are often far too focused on the shopping cart approach to foundations: trying to make a sale, rather than influencing overall approaches to an issue or community. At a time when foundations are reassessing their priorities, reconsidering their levels of spending and grantmaking, and weighing their operating costs against their grants, nonprofit leaders have to begin engaging foundation program officers, CEO’s and board members on the issues. That requires taking note of the differences between foundations; but even more importantly, it requires that nonprofits, themselves, act differently. Skloot calls this approach an act of “co-creation,” where “givers and getters increasingly share what they know and the strategies they adopt.”

Institutional self-interest must yield to broader, strategic responses to longstanding problems, which promise to worsen over the next few years without radically new approaches. This implies greater collaboration and visioning with the communities most deeply affected by those problems, as well as more comprehensive approaches to interconnected problems.