Commentary

Being from the San Francisco Bay Area, with its Silicon Valley and its financial firms, I have long been one of the many who think of foundation dollars as the "investment capital" of the nonprofit sector.

Over the last months, however, I've had the good fortune to work out of a rural area up in the Colorado Rockies. As anyone who has spent time in the clear air and vast wilderness of the high country can attest, distance can give one new perspectives.

In March I left the mountains for the Bay Area to attend a conference on global philanthropy, hosted by Stanford University and sponsored by the World Affairs Council together with a number of foundations. There were many provocative presenters and there were interesting discussions regarding the perennial questions of foundation perpetuity payout strategies.

As one who has attended more than enough conferences, I was pleasantly surprised at how much I learned from and enjoyed this one. But the more I sat and listened to the speakers, the more I came to a sensible, "country" conclusion: Grantmaking is less like investing than it is like horse manure.

Now, hear me out! Fresh horse manure is rich and sweet smelling stuff! It is important as fertilizer for growing a healthy crop. Knowing how to use manure appropriately is one of the keys to agricultural success—too much burns the roots and too little doesn't get the job done.

And the same holds true for good grantmaking. Our philanthropic horse manure is critical to growing a global garden of civil society flowers able to beautify and enrich our world. And it is only right that we spend adequate time discussing how to best engage in sound philanthropic practice.

However, while perpetuity, payout policies and related questions of strategy are important ones deserving of our attention, if all we do is focus upon what comes out of foundations—if all we do is focus upon the manure—I would suggest we are working with the wrong end of the horse!

How Thick To Spread It

For starters, to maximize the productivity of the farm, the farmer has to coordinate the actions of the horse and plow with the application of manure. In addition, the work of farm hands and a number of other considerations also must be orchestrated to have the best shot at not simply a single productive season, but the creation of a fully sustainable farm for seasons to come.

The farmer knows that in between the questions of how to spread manure effectively and how long we should work the horse before putting it out to pasture there is an equally important question of how one should guide the horse during the course of its life.

For the philanthropic farmer, the question is: How do we best manage the total assets of the foundation in order to maximize its value as a resource?

A concern with "creating value" has long been at the center of most grantmakers' agendas, and its successful pursuit has contributed to a sector in which we can all (both grantee and grantmaker) take great pride. Yet, as is true of many things in our lives, we can do a lot more—in this case, we can manage our total assets more effectively.

In a phrase, we may work to more effectively maximize the "blended value" of our portfolio—consisting of both our philanthropic and market-rate investments—which, together with the human capital present in many foundations, is what really makes up our total foundation asset portfolio.

By focusing only on the issues of payouts, "effective" grantmaking strategies or perpetuity, we miss out on the whole point of grantmaking—in other words, of having a horse! You ride horses. You use them to plough new fields. And you guide them as they take you over mountainous ridges down into unexplored terrain. Even a first year 4-H kid knows that you don't just keep horses in stalls and collect their manure!

Payouts, at 5 percent, make up 100 percent of the resources most foundations apply in pursuit of their social mission. Too many foundations ignore the reality that 95 percent of foundation assets (what has traditionally been called "the corpus" or the income-generating side of the foundation) has been viewed on strictly financial terms—namely, the financial return being generated, which may then be redirected to grantmaking activities.

Under this arrangement, 5 percent of our resources are driving 100 percent of our social mission, and 95 percent of our resources are judged solely on terms of financial performance alone, regardless of whether those investments may actually be destroying the very social or other value we seek to create.

Over the years, others have also made this point, but let me put it in my own words: The unabashed truth is that most of us focus all our efforts on manure production and mucking activities rather than on whether or not our horses are headed in the right direction!

What's A Better Way?

Fewer than 15 percent of the more than 56,000 foundations in our country make any use of social or other "screens" to guide the investment managers of their assets. An even smaller number of foundations make use of program related investments or other strategies in attempts to leverage the long-term value of their philanthropic capital.

Only a handful of foundations engage their financial managers in creative discussions with program staff regarding how to maximize the foundation's social, environmental and other value-generating efforts.

By not pursuing a unified investment strategy—one that considers the total performance of both foundation philanthropic and market-rate investments—we leave significant potential impact (and social returns!) on the table.

By not engaging in total foundation asset management we are consistently missing the point of philanthropy, which is not grantmaking itself, but the application of precious resources to support the creation of a more whole, just and peaceful world.

Our goal should be the integrated use of financial and social tools applied to that purpose, not the use of one set of tools in the absence of the other.

Despite this fact, many foundations "only" make grants and virtually never bring their larger talent pool of finance and program staff together to discuss how they might collaborate to more effectively work toward the achievement of their shared mission.

Real World Examples

What are some foundations doing to explore how to use the whole horse to work the field instead of focusing solely on the manure left by the horse as it walks along?

• The Abell Foundation (Baltimore) manages a venture fund, investing in firms that make a commitment to locating or expanding within the Baltimore area, and it also makes grants to nonprofits working in those same communities.
       
• The F.B. Heron Foundation (New York City) envisions its endowment as a "private community investment trust" and is working to align its market-rate investments with its mission to complement its grantmaking and below-market investments.
       
• The Rockefeller Foundation (New York City) established the Provenex Fund, a social investment fund that provides critical venture capital to health-related companies developing products and treatments of greatest potential social benefit.
       
• And, of course, the Jessie Smith Noyes Foundation (New York City) continues what it has done for years—actively managing its socially responsible investment of its portfolio, together with the operation of a social venture fund and more traditional grantmaking practices.

The point here is not that there is a single model or approach. It is not simply that all foundations should engage in socially responsible investment of their corpus (although that would certainly be a good first step).

Rather, the point is that all foundations should take a long, hard look at where their capital investments are being placed and whether those investments are truly maximizing its blended value for the total returns sought by the foundation.

After all, at the end of the season when we come to harvest, our goal is to have the philanthropic equivalent of nutritious produce, healthy farms and sustainable communities—not the county's largest pile of manure!

The ideas presented in this piece are explored in more traditional terms in Jed Emerson's recently released paper, "A Capital Idea: Total Foundation Asset Managment and the Unified Investment Strategy."