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Mission Impossible

The inadequate funding of administrative infrastructure in nonprofit organizations is the single most important constraint on third sector mission effectiveness.

As Lee Draper notes (in "100% Goes to Charity," January/February), the administrative side of the typical nonprofit is starving, and this is a direct result of the reluctance of many foundation, corporate and public sector funders to support the administrative costs required by the programs and projects they wish to see carried out. Nonprofits must make up the difference by raising unrestricted dollars from the general public, but here they face the false expectations created by the unrealistic, 100-percent-goes-to-program fundraising appeals that Lee highlights.

In recent years, foundations have increasingly focused on meaningful program outcomes and recognized the link between organizational effectiveness and mission effectiveness. The time has now come for foundations to realize that their grantees will achieve neither organizational nor mission effectiveness without adequate funding for administration. Foundations, as the funders of innovation in our sector, ought to lead the way in changing the practices of all funders with regard to administrative costs. As Lee notes, such leadership ought to begin by example, but the job won't be complete until corporate and public sector funders sign on, and the general public demonstrates a willingness to support reasonable administrative costs.

Recent work by the Association of Chief Executives of Voluntary Organizations in the United Kingdom has focused on allocating all administrative and fundraising costs to program outputs in a sensible, defensible and transparent way. The association found, and research in this country confirms, that flat percentages for indirect costs are a significant source of the suspicion and mistrust that surround administrative costs. Such improved cost accounting, along with research to establish adequate levels of administrative costs, will likely be important parts of any successful effort to change funding of administrative costs generally.

Kennard T. Wing, Project Director
OMG Center for Collaborative Learning
Philadelphia

A Judgment Call

(Reader response to "Bring Out the Outcomes," Dr. Frank L. Frable, November/ December 2002 Feedback.) Regarding your letter to the editor, while I respect your diligence as a board member, I would like to call your attention to the fact that outcomes are important and aren't easy to capture all the time.

For example, the fourth largest recipient of philanthropic money in the United States is the American Cancer Society, and I have yet to find someone who knows what they do with the money—and I have consulted at 265 community foundations in North America and the United Kingdom. In other words, donors give on emotion and faith, with no specific outcome other than "do something about cancer."

Some large foundations evaluate carefully who should get money but then do not evaluate how it was used, relying on their initial evaluation. Evaluation is a judgment of who should get money and an assessment of how they spent it.

Some thoughts to consider:

• Give a one-time-use camera with grants to depict how the grant was used.   
• Require narrative and budget reports, but keep them commensurate with the size of the grant—don't ask for a dissertation for a $2,000 grant.   
• Develop trust throughout your foundation, i.e., board–staff, staff–CEO, foundation–applicant. If you have trust, evaluation moves more smoothly.   
• Take on a full-time, summer college intern to do some analysis of your grantmaking with a questionnaire to some grantees, site visits and a review of grantee reports.   
• Trust your intuition. We give money to agencies dealing with the poor "to use in meeting the emergency needs of your clients." The agencies give us a log of how the money was given out, and that is satisfactory.

Evaluation systems that give a score are hogwash. It isn't that simple.

Professionally, I am more concerned with evaluating foundation performance because there is room for improvement. For example:

• Good philanthropy is good timing, and yet, most foundations give at their convenience.   
• With trust, one can experiment with "paperless giving," and yet, most foundations are swamped in paperwork.   
• Most foundations wait for the mail, instead of getting out of the office and finding outstanding people to fund.   
• Most foundations suffer failure poorly, instead of being willing to venture out in grantmaking and have some failures.   
• Almost no foundations use third parties to evaluate their work.   
• Many foundations have a large board with multiple committees, and the staff ends up with an inordinate time commitment to the board and its committees versus serving the public. Reconsider the size of the foundation's board.

Stop saying, "This is what we do," and start asking, "What more can we be doing?"

Bill Somerville, President and Founder
Philanthropic Ventures Foundation
Oakland, CA
www.venturesfoundation.org

Ignorance, Arrogance, Incompetence

The words expressed by Jody Curtis ("Reduced," November/December 2002) were accurate and echo concerns that face many foundations and endowment organizations today.

The most amazing thing that I see as an investment advisor to institutional pension funds, which include foundations and endowments, is board members and directors unwilling to step up and make the tough decisions to enact positive change for foundations and the entities they serve.

Curtis spoke of the numerous foundations who are paying out substantially less in grants and gifts and those who are drastically reducing their staffs because of stock market losses.

While a good number of personnel do a tremendous job for the organizations that they represent, the irony is that, in my experience, an overwhelming percentage of the directors and executives of many organizations are inept, uninterested and lack the passion and commitment required to effect change within their own portfolios. They pass the buck to their consultants, who are supposed to be full-service advisors providing all asset classes as options to their clients, and yet, do not offer real estate and other quality alternative investments (energy, private equity, hedge portfolios) that could be assisting the foundations in meeting their funding requirements and expenses.

While the stock and bond markets have been losing a significant portion of money from foundation portfolios over the last three years, one would imagine that a quality Private REIT investment (stability or principal) or Public REIT portfolio (liquidity) would be a welcome addition to a portfolio, all the while providing a consistent, predictable quarterly cash yield to the investor in the 6 percent to 9 percent range, on average.

Unfortunately, just the opposite is true. Instead of embracing balance and stability and capturing solid cash dividend yields, the directors and their consultants continue to commiserate about the poor economy. Hey, why rock the boat when one can continue to do nothing, versus possibly putting their nice, cushy position on the line in the attempt to capture needed cash and do some good?

I hear this, as well, from many of the personnel within these organizations who witness displays of ineptitude from their bosses on a regular basis. Clients have been led to believe that real estate is risky and a bad investment so that advisors do not have to act beyond stocks and bonds. The fact is that the majority of consultants are not equipped to offer real estate. Their world consists of stock and bond investments only, and because their brokerage firm or consulting firm does not get compensated for bringing in outside professionals who specialize in other asset classes beyond their advisors' limited realm, who really is responsible? And who is still getting handsomely paid to advise? You have it—the consultants. Hey, it's not their money! And yet another year of stock and bond portfolio losses accrue, while real estate continues to perform well.

If the families only knew what a terrible job was being done by the people who they have put their trust and confidence in or even by the consultants who their appointed directors hire, they would be utterly amazed. Ignorance, arrogance and incompetence. Take your pick. I have witnessed it all.

Difficult questions have to be asked and addressed. Changes need to be made. If your foundation portfolio has been suffering; if you can benefit from 8 percent yields; if you seek greater diversification and stability and you do not have a dedicated percentage of your portfolio allocated to real estate (5 percent to 15 percent), then ask why.

Do you realize that many consultants have made more money in the last three years than the organizations that they advise? Where are the pay-forperformance fee mandates? Organization leaders have been passing the buck and failing to make change. Who is going to stand up and do something? If my experience of calling on directors and consultants is any indication, then unfortunately, you already know the answer—no one, and that's a shame.

Brian J. Barriger, President
CTE Pension Advisors
Northville, MI
Call 248/465-0300 x230