Funder Transparency: How Much and When?

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February 2014;

Transparency has become quite the buzzword throughout all sectors of our economy. There’s great demand for the ability to see that people and companies are doing what they say they are doing and that there are no shady dealings, especially when public investment or interest is involved. We do not demand quite as much transparency of a privately held business as we do, say, a nonprofit receiving funding from a government agency. But what of a private foundation? Foundations do not use government money; instead, funds from a private source are used to promote the common good. Should foundations be required to act in as transparent a manner as a nonprofit?

Last week, GrantCraft and Glasspockets released a new guidebook called “Opening Up: Demystifying Funder Transparency,” designed to help foundations understand the benefits of transparency and offer some suggestions and tools to make it easier. The arguments go beyond the legal one of needing to be transparent to demonstrate justification for the tax-exempt status foundations enjoy. The IRS already requires that foundations publish their financial information, and makes that information accessible publicly and for free.

There are, essentially, five main areas and reasons for transparency, according to this guidebook:

  • Providing information about the grant process. This will save time and energy, as there will be a clearer understanding of what the foundation is looking for, leading to fewer off-target proposals.
  • Sharing data to show if grants are making an impact. The benefits here are that nonprofits and other foundations can learn about other projects that are having a positive impact. But it can also start a conversation about the challenges facing society and what the ideas are that are making a difference.
  • Strengthening relationships with grantees and other stakeholders. Communication networks, once built, can share information between the foundation and the grantees, so they can learn from one another. This is also a way to help foundation staff share expertise they may have, thereby making a gift that is more than just money. Finally, it can promote dialogue among nonprofits that, too, can learn from each other.
  • Strengthening the practice of philanthropy by sharing good practices. Openly sharing ideas, successes and failures, and more with other foundations. This can prevent foundations from reinventing the wheel or making the same mistakes. They can learn from each other about trends, priorities, and more.
  • Building collaborative communication. By using the wide variety of communication tools available with modern technology, foundations can establish an open-door policy of sorts. They can distribute their learnings and their impacts to people who communicate in a variety of ways, thereby building trust in what they do and how they do it. In return, they can gain feedback from the community, learning about new trends and priorities “on the street.”

The book not only explains the value of transparency, but also provides examples of how others have done it, challenging the reader to push the envelope a little bit. Some of the ideas are basic and obvious, such as the example of posting application guidelines on a website so that prospective grantees have a clear idea of what the foundation is looking for. Beyond that, though, the guide recommends posting thoughts about assumptions the foundation is making and the reason they have set certain priorities. This can truly help grantees by giving them a sense of how the foundation thinks and why it makes decisions. But some of the ideas seem a little odd, and potentially only workable in a Pollyanna kind of world. One example is to have grantees post their applications openly, inviting feedback and advice from the general public and, potentially, other prospective grantees. The stated goal is to gain community feedback on the proposal and to help the nonprofit strengthen their request.

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There are always two sides to any point of view, and before encouraging foundations to dive headfirst into the murky waters of transparency, it might be valuable to look at the opposing view. Last year, Philanthropy Roundtable released Transparency in Philanthropy, a book by John Tyler, the general counsel for the Ewing Marion Kauffman Foundation. In it, Tyler argues that foundations should not be subjected to enforced and absolute transparency, although he does encourage organizations in the philanthropic community to reveal as much information as they think would be helpful to move the conversation forward. He suggests that there is no legal basis or moral imperative for funder transparency, and that in fact there may be some harmful, if unintended, repercussions. He identifies and debunks four myths that promote transparency:

  • Transparency as an end in itself. There is a tendency, Tyler says, for promoters to believe transparency is an independent value, like democracy or moral virtue. Instead, it is in fact a tool towards an end. In the case of philanthropy, what is the end we are trying to achieve with transparency? Do foundations need to be held accountable in the same way governments do
  • Transparency ensures that foundations serve “public” purposes. Although philanthropy’s aim is a public one, the funds used and the priorities being set as guidelines are purely private in a foundation. These are private resources being used for the public good, not a public service being provided using public funds.
  • Transparency to rebalance the seemingly asymmetrical power structure. Are grantees really in a less powerful position because they have to ask for money and may be declined? The system of philanthropy means there is an equation of sorts, with nonprofits, government entities, and donors each playing different but equal roles. It is true, Tyler admits, that foundation staff can abuse their position and forget that there is equality in the equation, but that does not mean there is an inherent power imbalance.
  • Transparency enables assessment of the foundation’s effectiveness. Foundations should be and are held accountable for ensuring that funds are used for charitable purposes to justify their exempt status. But what does “effectiveness” mean, and who is defining it? If a foundation’s grants are deemed ineffective or have not produced the desired result, is that the foundation’s fault, or the grantee’s? And are they going to be held accountable for that lack of effectiveness and suffer some form of punishment?

Glasspockets, as a project, is designed to promote transparency in the philanthropic community. Apparently, it is a project of the Foundation Center and takes its name from the testimony of a Carnegie Foundation board chair called to testify following a McCarthy-era investigation in the 1950s. He said that “foundations should have glass pockets” so that anyone could see in and understand how they work and their value. The Glasspocket website offers advice, learning, and tools to facilitate the process.

One page, designed as something of a marketing tool, lists foundations that use the service and shows which aspects of it they take advantage of, and so in what ways they are being transparent. Interestingly, most of the foundations use the tool to share their guidelines and their financial statements. Hardly any of them use it to share a roster of grants and grantees. It is a page that is worth spending some time on and identifying trends of transparency and its use in the philanthropic community.—Rob Meiksins

  • Elizabeth

    The difficulty of defining effectiveness does not bust the myth that greater transparency contributes to more effective grantmaking. And regardless of how we measure or characterize impact, we can’t do it without knowing what it costs. What foundations reveal is one thing; what they understand and how it shapes their practices is another. Nonprofit grantseekers are not outsiders wanting to see “foundations exposed”–they’re directly affected by grantmaking practices and share a large portion of their cost.

    I rarely see information on the net economic cost of grantmaking, including the value of time applicants spend developing LOIs, proposals, and reporting, and time spent by funders on review and selection. Social impact can’t be measured on a solely quantitative basis, but some basic math on the investment side is suggestive:

    -Thunder Funder makes 2 rounds of 10 grants per year, averaging $10k, for a total annual disbursement of $200,000
    50 nonprofits submit LOIs each round = 100 LOIs per year
    -100 LOIs @ 5 hours each @ $70/hour staff or contract time, including overhead = $35,000
    -Thunder Funder spends avg 30 min reviewing each LOI = 50 hours x $70/hour = $3,500
    -Thunder Funder invites 15 full proposals each round, or 30 each year
    -30 applicants spend 8 hours developing proposals @ $70/hour = $16,800
    -30 proposals get 3 hours review @ $70/hour = $6300
    -Ten awards are made each round, for a total of 20 per year
    -Each of 20 awardees spends 3 hours reporting @ $70/hour = $4,200
    -Thunder Funder spends 1 hour reviewing each report =$1,400
    -Thunder Funder spends an additional 80 hours on communication, data entry, reporting, and other admin tasks – $5,600
    -TOTAL COST = $72,800

    It’s a hypothetical example, with conservative hourly time requirements, and 36% net cost on a $200k investment might be acceptable. Plus, it’s no easier to determine if an investment generated $130k of social impact or $200k. Outcomes and net returns can rarely be accurately represented as dollar amounts, and if they are, it might take another 50 hours to calculate. Nonetheless, as “Opening Up” may suggest, why wouldn’t a foundation want to understand and reduce opportunity costs, regardless of how it measures effectiveness? These costs are shared by grantmakers, successful and unsuccessful applicants, and ultimately, our common constituents.

    Three steps would go a long way in saving time and money for all parties, none of them new ideas: 1) common applications and reports, 2) clear and specific priorities and requirements, and 3) converting the initial inquiry step to 3-5 line summaries rather than 3-page LOIs or lengthier proposals.