Philanthropy Information Retrieval Project

Report #112: April 11 – May 7, 2003

The Philanthropy Information Retrieval Project aims to identify and report, in a timely fashion, new ideas and other developments that might significantly affect the field of philanthropy in the years to come. In contrast to other bulletins that usefully report on today’s breaking news, this newsletter tries to look “over the horizon” and identify issues early in their life cycle. The newsletter was begun by the John D. and Catherine T. MacArthur Foundation in 1996 and was transferred to the Aspen Institute in 2003. Burness Communications, Bethesda, Maryland, prepares the copy. As the publication’s editor, I welcome your comments and suggestions at: abramson@aspeninstitute.org. – Alan J. Abramson, Director, Nonprofit Sector and Philanthropy Program, The Aspen Institute

1. PERTURBED BY NEWS REPORTS, CONGRESS INCREASES ITS SCRUTINY OF FOUNDATIONS; CONSIDERING CHANGES TO PAYOUT RATE, EXCISE TAX

Apparently provoked by recent media scrutiny of foundations and nonprofits, several members of Congress are threatening to crack down on the sector. On May 7, Rep. Roy Blunt (R-Mo.) introduced a bill that includes a provision to exclude administrative expenses from being factored in as part of foundation payout calculations, as is current practice. Representative Blunt’s action seemed to validate a May 5 email alert from the Donors Forum of Chicago, which reported that several members of Congress are considering proposals affecting foundation payout rates. According to the Donors Forum, these proposals would require foundations to increase their annual payout in one of three ways: by raising the current minimum of 5 percent to at least 6 percent; by excluding executive compensation from payout rate calculation; or, as Representative Blunt has proposed, by eliminating administrative expenses from payout calculations. The Donors Forum also reported on efforts to reduce the excise tax on net foundation investment income to a flat 1 percent, a change that Representative Blunt also proposed in his charitable giving bill. (To access the bill go to http://thomas.loc.gov and search for bill number HR7.)

The May 1 San Jose Mercury News reported that Sen. Charles Grassley, R-Iowa, was one legislator particularly outraged by a report of what he called a foundation executive’s “excessive” retirement package. The newspaper reported details of this package a few days earlier. Senator Grassley actually had considered offering proposals to lower the foundation excise tax and raise the payout rate as far back as December 2001 (see our Report #92). Still, this time it could be for real, according to the Council on Foundations’ Dorothy Ridings. In an April 28 speech at the Council’s annual meeting, Ridings referred to “news stories of excessive compensation, ethical lapses, conflicts of interest and downright self-dealing,” reminding her audience that “this is the same behavior that brought on the 1969 Tax Act,” the last time Congress took significant action to regulate the foundation sector.

2. GREATER NONPROFIT ACCOUNTABILITY NEEDED, WASHINGTON POST COLUMNIST SAYS; GREATER GOVERNMENT OVERSIGHT TOO, REPORT ADDS

Nonprofits are no more transparent than businesses, and nonprofit boards of directors are no less “compliant and clueless” than the boards of scandal-plagued corporations, according to a May 7 Washington Post business column. As Congress shows increased interest in the nonprofit sector, demands for greater accountability in the nonprofit sector grow louder, most recently from newspaper columnist Steven Pearlstein, who calls for a culture of candor to take root among nonprofits. Nonprofits should overcome their instinct to reveal only what is flattering, and donors and the public should encourage that honesty, he wrote in his column and in an online chat the same day. Pearlstein was writing in response to a three-part series that the Post had run earlier that week about controversial activities at The Nature Conservancy, the nation’s largest environmental organization. While some participants in the public chat called for greater government oversight of the sector – and more media investigations into nonprofit behavior – Pearlstein disagreed, contending that the real priority should be for nonprofit “stakeholders,” particularly funders, to insist on and allow for more candid assessments of grantees and grantee self-evaluations.

Increased self-regulation is important, according to a new Aspen Institute publication, but strengthened regulatory oversight is ultimately what is needed. Especially important are sufficient resources and enforcement authority at the Internal Revenue Service and the state offices responsible for charities. The Aspen Institute Nonprofit Sector Strategy Group’s pamphlet, Foundation Accountability and Effectiveness, also offers other recommendations to increase foundation accountability, from broadening board composition to increasing evaluations of grantmakers, not just their grantees.

3. MCKINSEY CONSULTANTS RECOMMEND FOUNDATIONS INCREASE PAYOUT, ADOPT 'SOCIAL INVESTOR' MINDSET TO MAKE NONPROFITS MORE EFFICIENT, EFFECTIVE

Foundations should strongly consider increasing their annual payout rates, and they should adopt a “social investor” mindset, according to McKinsey & Company nonprofit consultants. Former Senator and McKinsey adviser Bill Bradley co-wrote, with McKinsey’s Paul Jansen and Les Silverman, an article in the May Harvard Business Review that estimated at least $100 billion more a year could flow from charitable assets if the nonprofit sector were more efficient and effective. The authors wrote that the rise of donor-advised funds and grantmaking affinity groups and larger, longer-term grant commitments are positive developments that help reduce nonprofit funding costs. Further, the article said grantmakers should think about making annual payouts of at least 7 percent of assets and reconsider the value of endowments lasting in perpetuity, arguments that Bradley and Jansen have been making on repeated occasions over the past year. In this Review article, they also wrote that foundations, acting as social investors, would benefit grantees by providing expertise, suggesting collaborators, or introducing other potential funders. Foundations can bring “market forces” to bear on grantees and squeeze under-performers out of business, the authors noted, perhaps by encouraging the creation of a mutual-fund-style rating service. The article can be purchased online from the Review’s Web site.

4. FOUNDATIONS WORKING TO SUBVERT CAPITALISM, STIFLE NEW PHILANTHROPISTS ENCROACHING ON THEIR TURF, COMMENTATORS SAY

Large, mainstream foundations are working to subvert the American system of capitalism, as well as trying to rein in new philanthropists who are threatening their turf, according to several recent articles. Investor’s Business Daily featured an editorial last month that lambasted those foundations the Washington Times had reported a few days earlier were funding “radical” anti-war organizations. Such funding not only works to “undermine our efforts in Iraq,” the newspaper editorialized, but is part of a 40-year-long effort by foundations to remake America and undo, or “hang,” capitalism. Meanwhile, William Schambra, formerly of the Lynde and Harry Bradley Foundation and now with the Hudson Institute, suggested that the push for greater collaboration among foundations is not just a benign effort to coordinate like-minded funders to achieve greater impact but also reflective of the interest of major, national foundations in “herd[ing] the cats of new philanthropy.” Schambra wrote in the Philanthropy Roundtable’s recently issued March/April Philanthropy magazine that the Bradley Foundation’s most significant initiatives would have never happened had it “surrendered to the siren call of collaboration.” The push for collaboration, he suggested in his article), is a thinly-veiled attempt by the largest foundations to reassert authority in an ever-widening, decentralizing field.

5. ADVERTISING IS AN UNDERUSED VEHICLE FOR NONPROFITS TO COMMUNICATE WITH THE PUBLIC, FOUNDATION REPORT SAYS; NEWS MEDIA IS OVERUSED

Foundations and nonprofits should rely less on the news media to tell their stories and make far greater use of direct communications vehicles, such as advertising, according to a recent report. This report from the Century Foundation, written by former Joyce Foundation president Paula DiPerna, assesses media coverage of charitable giving in the aftermath of September 11, 2001. The report cautions foundations and nonprofits to avoid overly technical language or jargon when talking to the press and the public, especially when criticized, and to steer clear of known media polemicists and talk show hosts who work to undermine their interviewees and guests. It also notes, in its case study of the September 11 Fund of the New York Community Trust and the United Way, that nonprofits, especially those under fire, should avoid being “gun-shy” of the media when they have important news to share. The news media is not generally interested in nonprofits when nonprofits are doing what people expect them to do, the report says, or when nonprofits are clear from the very beginning about their intentions. According to the report, philanthropic leaders in New York felt that some of the negative stories about their post-Sept. 11activities were fueled by the media’s deeper questions about how those working in philanthropy get to decide how to give away money.

6. FOUNDATIONS FORM PARTNERSHIP TO HELP MINORITIES AND IMMIGRANTS; NCRP BEGINS NEW RESEARCH PROJECT ON SOCIAL JUSTICE PHILANTHROPY

Several foundations have formed a partnership to help minorities and immigrants in an effort that seems in line with what one foundation watchdog group advocates as the most cost-effective form of grantmaking. The Racial Justice Collaborative will award an estimated $2 million per year for the next three years to community groups to help them litigate in support of their causes – from education to voting rights to immigrant labor rights – as well as organize citizens and engage in advocacy, according to an April 16 Rockefeller Foundation press release

The collaborative seems to be the kind of social justice philanthropy that the National Committee for Responsive Philanthropy will study in a new project (http://www.ncrp.org/social_justice_pr.htm). In April, NCRP issued a paper that kicks off its new project and offers a definition of social justice philanthropy as the funding of nonprofits that are working for “structural change” to achieve a more equitable society. Social justice is an “ideal” to strive for, and giving for it is the “right thing to do,” according to the paper, which provides a theoretical framework for the project and identifies challenges, chiefly the current political climate, that it says must be overcome to truly succeed in social justice grantmaking.

7. CURRENT POLITICAL CLIMATE IS NOT CONDUCIVE TO CIVIC RENEWAL EFFORTS POPULAR WITH FOUNDATIONS, OR IS IT? TWO WRITERS DISAGREE

Though grounded in pragmatism, projects to revive civil society, which are popular with foundations, have a “utopian ring” in a “cynical, post-9/11 political world,” according to an Indiana University political science professor. Jeffrey Isaac reviewed several books on the subject of civil renewal in the April 11 Chronicle of Higher Education, writing that broader questions of social and economic vulnerability are now trumped politically by homeland security concerns. But Jay Hein of the Hudson Institute disagrees. Hein wrote in the Winter issue of the Institute’s American Outlook magazine that last decade’s welfare reform has resulted in an atmosphere favorable to the renewal of civil society, one that seeks to improve the performance of nonprofits. The next step in this renewal process that began with welfare reform, according to Hein, is to transform charity by creating more incentives for nonprofits to assume many of the responsibilities formerly the charge of government. Hein’s article is the first of a four-part series in the magazine on the subject of civil society and welfare reform. The magazine’s Summer issue will focus on “Rethinking Charity.”

8. FOUNDATIONS SHOULD DROP TOP-DOWN APPROACH TO GIVING, BE MORE CREATIVE, TO TRULY IMPROVE SOCIETY, FORMER FOUNDATION LEADER SAYS

One of the leading proponents of the movement to encourage foundations to make their investment policies consistent with their grantmaking missions argues that foundations should do far more than that to help improve society. Stephen Viederman, former president of the Jessie Smith Noyes Foundation, wrote an article about how he sees the future of philanthropy for a recent issue of Souls: A Critical Journal of Black Politics, Culture and Society, published by Columbia University. In his article, Viederman identifies shifts in foundation practice that he sees as not beneficial, including foundation efforts to create their own institutions that are responsible only to them or to focus grantmaking on symptoms rather than core problems. Foundations, he contends, should drop their top-down approach to giving and use their assets creatively, through loans or by providing affordable housing or office space, to help grantees and community organizers increase their access to capital. Email Viederman (email: stevev@igc.org) to get a copy of this article and others he has written on the subject of mission-related investing. Viederman is the co-director of the Initiative for Fiduciary Responsibility.

Of Related Interest

Former American Diplomat Calls on Corporations to Use Philanthropy for Better Positioning Abroad

American corporations should engage in “preemptive positioning” and use their philanthropic efforts to help sway the international tide against American foreign policy and general globalization efforts, according to a former U.S. diplomat in the Clinton Administration. Charles Stith wrote an April 15 Wall Street Journal column that calls on corporations to focus on their image, in part by funding non-governmental organizations and initiatives that show their commitment to the values of freedom and opportunity. Such philanthropy will “accentuate the positive influence they represent in the global community,” Stith wrote.

New Resource

Database of Foundations Supporting “Capacity-Building” Efforts of Nonprofits

A first-of-its-kind database provides users searchable information on foundations nationwide that provide capacity-building funding to assist nonprofits in carrying out their missions. This Philanthropic Capacity-Building Resources database) is a project of the Human Interaction Research Institute, with funding from the John S. and James L. Knight, Ewing Marion Kauffman, Eugene and Agnes E. Meyer, and Bruner Foundations.

Note to Readers

We would appreciate your offering us information that we can include in future editions. If you have an item you believe would be helpful to your colleagues, please e-mail it to Doug Rule at drule@burnesscommunications.com. Thank you in advance for your cooperation.

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