Shifting into Foundation Overdrive
Grantmakers' singular focus on payout as usual won't take the sector where it needs to go.
Last year, there was a great debate regarding the payout level of U.S. foundations. Federal legislation, H.R. 7, was introduced, which stipulated that administrative expenses would no longer be counted against that annual payout.
Then the legislation stalled and the so-called threat to foundations faded. But guess what? The problem remains. On June 22, public hearings began on the role of nonprofits in American society. A follow-up roundtable was held July 22, and we can be sure the question of what role American foundations play will be raised once again when Congress returns from recess.
Amidst the various scandals at American foundations during the past few years and the smoke around the introduction of H.R. 7, we missed a major opportunity to shift the conversation from aspects of grantmaking to a more important question: Is our vision for philanthropy adequate to the task and challenges of coming decades?
New Millennium Open Roads
For the past century, we have focused upon philanthropy's role as fundamentally one of grantmakingproviding annual charitable gifts to those in the trenches confronting the problems of our day. Yet, we have ignored the fundamental reality that payout is not the problem. Just as poor people cannot spend their way out of poverty, but must be engaged in a variety of strategies to build personal assets (both financial and otherwise), foundations cannot simply engage in grantmaking as usual and pretend such efforts will take us where we need to go.
We must re-engineer our understanding of the role of philanthropy in the world, moving from the first gear of grantmaking up through second, third and fourth. Only then can we hit the ultimate in energy efficiencyfoundation overdrive. If we're going to reach our next destination, we must leave the tight turns and relative safety of familiar streets and head out to the unknown open road.
It is high time we stopped pretending our annual grantmaking and lengthy, extensive analysis of each grant proposal are the best ways to drive foundation vehicles. We must shift our thinking to an understanding of philanthropy that allows us to draw upon every gear in the gear boxall the assets we have the potential to usein addition to simply practicing good grantmaking. We must envision and then move to create the foundation of the twenty-first century.
Aligning Your Wheels
The best philanthropy of this century will be steered by foundation strategies that drive our charitable vehicles using all the gears at our disposal. Yes, we need grantmaking. But to execute the tightest power skids through the turns to come, we need to understand how to use each gear in the gearbox effectively. When you pop open the gearbox of modern philanthropy, the assets upon which foundationslarge and smallmay draw include the following gears:
Let's consider each of these gears.
Asset alignment speaks to the obvious point of making sure all available resources are moving in the same direction and working in sync with each other. One aspect of alignment is ensuring the other gears are working with one another to achieve our goals, but another is ensuring that the financial assets of the foundation are aligned with the institutional goals of the organization. For the majority of U.S. foundations, this is not the case. Since most foundations consider themselves to be grantmaking institutions, they understand their greatest resource to be their grants and guard their financial assets accordingly. That is problematic in two ways.
First, annual charitable gifts of U.S.-based foundations constitute less than three percent of the annual capital flows in the nonprofit sector. While this funding is vital to grantees, we should not kid ourselves about the importance of our rolenor should we misunderstand that our greatest role may not be in cash flow, but in leveraged assets. We must pursue strategies that do more than position us as philanthropic ATMs, kicking out the charitable equivalent of $20 bills.
Second, by focusing solely on our grantmaking, we are not investing enough in value creation. Are we fulfilling our fiduciary responsibility by allowing five percent of our assets to drive 100 percent of our institutional mission, while 95 percent of our assets are either neutral or, in some cases, actually working against our mission? I think not.
We should seek to explore all the ways we might leverage our financial assets while simultaneously protecting those assets for future use. Whether through purchasing community investment notes instead of traditional certificates of deposit, or investing in community venture capital and clean tech funds (like the pension fund of the State of California) as opposed to mainstream hedge funds, there are a variety of ways we can best leverage that 95 percent of our assets.
Yet, the vast majority of foundations don't even consider asset alignment. As a result, they will always underperform relative to the potential of the engine under the hood. To paraphrase an old saying, if your only tool is a grant, then the whole world will look like a charity case. It's no wonder we aren't getting the desired traction when our foundation tires begin to spin.
Mapping Out the Course
The second gear we may engage is that of strategic grantmaking, a major source of energy for moving foundations forward. Much has been penned about this ever-popular term, but the fundamental point with regard to strategic grantmaking is that it actually is strategic. You look out the windshield to see what direction you are heading and then, you steer the car and shift the gears in a way that will take you where you want to go. You draft behind other vehicles to save fuel (i.e., you co-invest with other funders and build on other people's work, instead of announcing historic grantmaking programs that point you down twentieth-century dead-ends). And you position yourself on the road to avoid potholes, road kill and the errors of the drivers ahead of you.
Strategic grantmaking must be a core element of how we drive. While that term is much bandied about, many foundations still do not actually understand how best to engage in this practice. Regardless, I do remain hopeful increasing numbers of foundations will seek to learn how to drive their vehicles in a more strategic manner.
Being Responsible Drivers
The third gear we must move into is that of engagement, transparency and accountability to stakeholders. If we are going to successfully steer down the world's freeways, we must first understand that we are not the only driver on the road. There are other cars, trucks, bicycles and many pedestrians of whom we must be aware. They have to be able to see us and we need to be able to see them. That will only happen if we, as funders, tell people how we are driving, where we are going and the route we are taking. Again, this seems like an obvious point, yet the majority of foundations do not even issue annual reports that are more than promotional tools, much less seek to engage their various stakeholders in meaningful discussions regarding the best roads for funders to take.
Out of this process of discussion and debate, having driven some distance down the highway, we will learn much that will be useful to other driverseven those who decide to turn off onto different side streets and byways than the routes we have chosen. Indeed, given the limitations of the direct financial contributions we make to the world, knowledge and emerging understanding may be the greatest contribution we may make to others.
Revising the Drivers' Manual
Therefore, the fourth gear we should shift up to is that of development and dissemination of intellectual capital. What we too often forget is the great amount of learning and innovation that takes place both within foundations and at those organizations we support. In addition to investing in the actual work at hand, we must also find ways to expand upon and leverage the knowledge developed from that work. Within our areas of focus, we have incredible opportunities to disseminate the knowledge and new approaches that arise from our efforts. We must seek to build new understanding of how our fields of practice may best be advanced.
Yet the point is not simply to inform other drivers how best to drive, but to educate the people on the sidewalks who watch our cars drive by. We must also engage in education, policy development and advocacy. This means taking the driver's manual that we've developed in the course of our work and turning it into something others may read, understand and apply. We must work to communicate what we've learned to others. We must use that knowledge to change the level of discourse in the public arena and challenge those who do not presently understand what we see through our windshields as the scenery goes by and the landscape begins to change. In sum, if we engage others early and often, there will be less perceived need for public hearings and proposed regulations, such as H.R. 7.
Finally, while we are part of a historic flow of global traffic, moving toward the horizon, we must recognize that our highways are built upon a planet in decline. Each day, we lose more species of animals. Each morning, we wake to a world that is something less than the one we inherited. Any foundation strategy worth its salt has got to include steps to leverage environmental value. We might do this by challenging (and then supporting) our grantees in efforts to operate green organizations or by investing our corpus in clean tech development. If we seek to invest in people, yet fail to invest in the planet, we will be empowered communities of self-interest who are eventually left with a cinder of what was Earth. We must turn our philanthropic cars into hybrid vehicles capable of carrying all of us into the future.
I first learned how to drive nonprofits before I was street legal, but have now spent more than 30 years negotiating the side roads and highways of philanthropy and the social sector. While I can't claim to have seen it all, I am of an age to have seen some incredibly bad drivers and some pretty awful accidents. And I'm experienced enough to know that some drivers should be tooling along in the slow lane. Those drivers will also arrive where they want to gothere is certainly room on our autobahns for drivers of various sorts. Though there are certainly some excellent drivers in our ranks, I wonder if it isn't time for more of us to get out of first gear and crank up our engines on the open freeways.
This article is based on "The 21st Century Foundation: Building Upon the Past, Creating for the Future," a paper available for download at www.blendedvalue.org.
Jed Emerson is senior fellow at the William and Flora Hewlett Foundation in Menlo Park, California.