Program on Philanthropy and Social Innovation (PSI)

Report #120 Supplement - March 1, 2004

The Philanthropy Information Retrieval Project (PIRP) reports on new ideas and other developments that may affect the field of philanthropy in the years to come. In contrast to other publications that cover today’s breaking news, PIRP generally highlights emerging issues that may be visible only on the horizon.  In line with its role as an early alert system for the field of philanthropy, PIRP intentionally includes items that are critical of current practice and policy as well as reports that are supportive.  PIRP was started in 1996 by the John D. and Catherine T. MacArthur Foundation and was transferred to the Aspen Institute in 2003, where it is currently funded by the Robert Wood Johnson Foundation, the Northwest Area Foundation, and The Philanthropic Collaborative.  Burness Communications, Bethesda, Md., prepares the copy.  As the publication’s editor, I welcome your comments and suggestions. – Alan J. Abramson, Director, Nonprofit Sector and Philanthropy Program, The Aspen Institute


MORE INFORMATION ON RECENT GEORGETOWN UNIVERSITY PANEL DISCUSSION ON FOUNDATION ACCOUNTABILITY

We reported in the most recent issue on the Jan. 29 panel discussion organized by Georgetown University’s Center on Public and Nonprofit Leadership that touched on several aspects of foundation accountability: board governance; the adequacy of the IRS reporting form for foundations; self-regulation in the sector vs. government oversight, and specifically IRS oversight; and media scrutiny. Below are summaries of the key points made by the seven panelists at the discussion. A transcript and video will be posted soon to the forum sponsor’s web site.

FOUNDATIONS NEED TO DEMOCRACTIZE BOARD GOVERNANCE STRUCTURES
The strongest comments on the subject of board responsibility came from William Josephson, the lead governmental regulator of the nonprofit sector in New York State. “The problem of getting boards to focus, of getting effective, well-informed boards is the most crucial problem that philanthropy faces,” Josephson said, adding that if the sector can’t solve this problem, perhaps the board governance structure that’s traditional in this country is in need of reform. He noted that the problem derives in large measure from the fact that many foundation boards are either too big or too small. Also, family foundation boards include too many lawyers and accountants and other highly paid professional friends of the family, but too few of the donor’s direct descendants. Lance Lindblom of the Nathan Cummings Foundation said that the foundation sector and the boards of foundations need to provide real leadership, asking the hard questions about the ideal size of boards and foundations. He also suggested that some number of board seats may need to be set aside for non-family members, as a reminder that foundation assets are not the family’s money but the public’s. Foundation boards also need to be more democratic and include non-wealthy non-elites, Georgetown’s Pablo Eisenberg said. Dean Zerbe, senior staff counsel of the U.S. Senate Finance Committee, stressed the need for boards to understand that they should not be representing their own interests but those of the taxpaying public, their donors and nonprofit beneficiaries.

IRS REPORTING DOCUMENT NEEDS TO BE MADE CLEARER
Reporters and the public are paying increasing attention to foundation tax returns, according to New York Times philanthropy correspondent Stephanie Strom.  As a result, Strom suggested, it’s become more difficult for foundations to continue to play “fast and loose” in reporting on their activities, confident in the knowledge that no one would look at their tax forms. But that is a problem, according to several on the panel, since the IRS Form 990 PF that foundations use is “a bad reporting form.” Everyone seemed to agree that the form needs to be overhauled to make it easier to understand and fill out. Congress is interested in revising the Form 990 PF to make it clearer, according to Congressional staff member Dean Zerbe. New York’s William Josephson, though, suggested the 990 PF is no more daunting to fill out than personal income tax forms; the real problem with the form is that foundations reflexively report they aren’t involved in self-dealing or other sensitive matters even when their other tax documents clearly show they are.

TO AID SELF-REGULATION, AN ACCREDITATION SYSTEM COULD BE DEVELOPED
Senate Finance Committee staff member Dean Zerbe said that the prospect of greater self-regulation in the sector is one that is “of tremendous interest” to members of Congress. He cited one idea under consideration in Congress that would require foundations to be members in good standing of one or more accrediting organization in order to maintain or gain tax exempt status. Ralph Smith of the Annie E. Casey Foundation stressed that the responsibility for cleaning up problems in the foundation world lies squarely with the foundation sector itself. “While the IRS has a role, an important role…it’s absolutely irresponsible for us to pretend as if the IRS has the solution to our problem.”  Foundations need to take the issue of self-regulation seriously, beginning now, he added. Dorothy Ridings of the Council on Foundations briefly mentioned her organization’s new two-year initiative, “Building Strong and Ethical Foundations: Doing It Right,” which she described as a two-pronged effort involving education and enforcement. But Georgetown’s Pablo Eisenberg countered that there has been noise about self-regulation for years, with nothing to show but an increase in questionable foundation activity. He argued that self-regulation is no substitute for what is really essential: regulation and enforcement by federal and state governments.

FOUNDATIONS NEEDS TO REALLY ‘PUSH’ FOR GREATER ENFORCEMENT
The Council’s Dorothy Ridings said that the enforcement mechanisms in place have never been effectively used, but she senses little interest among legislators to correct that. Dean Zerbe, of the Senate Finance Committee staff, admitted that there are a lot of roadblocks in gaining greater enforcement, but also implied that the foundation sector hasn’t done enough to push for this. “If people are serious, I think we can try to make it happen,” he said. The sector itself could help regulators, he continued, by telling them, “This is an acceptable level for trustees’ fees,” and so on. He also mentioned an idea under discussion to have the IRS provide money for states’ attorneys general to increase their oversight of foundations. New York’s William Josephson said that greater coordination between the IRS and state charity regulators is needed. He also reported interest in filing criminal cases against egregious foundation offenders; “I’m getting tired of all these negotiated settlements.”

FOUNDATIONS COULD PAY AN ANNUAL FILING FEE TO FUND IRS OVERSIGHT
There’s long-standing interest in having revenue from the excise tax that foundations pay set aside for IRS oversight purposes, but Congressional staffer Dean Zerbe noted that this is a difficult proposition. It’s not easy legislatively to dedicate funds to specific purposes, such as IRS oversight, he said, though he quickly added that Congress is seriously considering the idea. But New York’s William Josephson said there are clear alternatives if that should prove unworkable, including requiring foundations to pay when they apply for a tax exemption, or when filing their forms 990 PF. He cited precedent for this in the fees paid to the Securities and Exchange Commission by those who benefit from its services.

FOUNDATIONS’ DEFENSIVE, DEFLECTIVE POSTURING HURTS THEM
The New York Times’ Stephanie Strom said that it is difficult to assess how widespread foundation malfeasance is.  However, the perception that bad behavior is significant will only increase as local news organizations around the country continue to look at what’s going on in their own backyards. She added that she thinks part of the problem is the way foundations react to media interest in them: they avoid controversy at all costs and talk only about what they’re funding, not the reasons or motivations behind the funding.  Foundation staff members also do not make themselves available for stories about themselves. Dean Zerbe, of the Senate Finance Committee staff, echoed Strom’s comments, saying that “one of the most stunning things” about the recent critical media coverage of foundations is how many foundation leaders immediately went on the defensive, asking the reporters: “’What are you calling me for? How did you get these records? This is not my responsibility’…At least Enron and other folks had the [sense] to kind of run,” he said. Georgetown’s Pablo Eisenberg said that in some ways the media coverage and legislative activity about foundations have helped the foundation sector by turning the insider’s debate about foundation activity into a matter of public discussion, which it should be.


Note to Readers

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