5 Issues Foundations Must Confront to Stay Relevant

Bill O’Leary, The Washington Post, Getty Images

Despite what you may have read in the wake of Mark Zuckerberg’s announcement that he will do his giving through a limited-liability company, it’s hardly the case that foundations have become obsolete. They will remain crucial players and influencers in the nonprofit world.

That said, they should not be complacent, and they must focus on changing to accommodate new realities. Here are five issues that should be front and center for America’s grant makers.

Confront mounting criticisms of foundations and major donors. Compared with big business, Congress, the press, and so many other parts of society, we should be happy that nonprofits continue to enjoy a high level of trust among the public. But foundations should not assume that the trust the public places in operating nonprofits applies to them as well. As historian Benjamin Soskis noted, we have come out of a “brief, balmy” season — which he argues is a historical aberration — when major donors and foundations received little scrutiny. It is increasingly clear that season is over.

More and more publications — Linsey McGoey’s controversial new book No Such Thing as a Free Gift is one recent example — are questioning the motivations and the efficacy of big donors and major foundations. Former Ford Foundation executive Michael Edwards has been among the most eloquent and consistent critics of those, such as The Economist’s Matthew Bishop, who have written glowingly of “philanthrocapitalists.” Mr. Edwards argued recently in The Chronicle of Philanthropy that “philanthropy is supposed to be private funding for the public good, but increasingly it’s become a playground for private interests.”

Many of the recent critiques raise fundamental questions about whether major donors and large foundations should be able to wield influence on policy in the ways they do (or aspire to do). Nowhere has this played itself out more vividly than in education, where critics like Diane Ravitch have questioned the role and policy influence of what she has dubbed the “billionaire boys club.”

Concerns about foundations’ role in policy debates are not new, but they appear to be on the upswing and coming from both ends of the political spectrum. The critiques of philanthropy are happening in an environment in which anything deemed “establishment” is under fire — the very word has become a political liability. The simmering disaffection that manifested itself in the Occupy and Tea Party movements has now gone mainstream.

One foundation colleague put it this way to me recently, “We fund a lot of movements, but we can be mistaken for the oligarchs.” Indeed, sometimes foundations have acted too much like the oligarchs. Grant Oliphant, president of the Heinz Endowments, noted in a recent article about his organization that strategic shifts involving top-down approaches may have worked in a different era. But not anymore. [Disclosure: Mr. Oliphant chairs the board of Center for Effective Philanthropy, which I head.]

Endowments are no longer just about investing but about social change. For the past century, foundations have tended to default to the same endowment-management approach, one that sees the endowment and grant-making sides as separate, with endowments invested to maximize returns to support the foundation’s existence in perpetuity.

But that may be changing. Put another way, it’s not your grandpa’s endowment anymore.

True, there is nothing new about limited-life foundations (see Sears founder Julius Rosenwald’s philanthropy in the 1920s and early 1930s), impact investing (see the Ford Foundation in the 1960s), or screening of investments seen to conflict with values or goals (see the South Africa divestment movement of the 1980s). Also true that there is much more of an increase in rhetoric and discussion than there is real change, as a CEP benchmarking report made clear last year. But there are increasing signs of a shift.

Major foundations like the Atlantic Philanthropies are in the final years of spending themselves out of existence and are actively attempting to influence other foundations to make the same choice they have made.

There’s action on the impact-investing front, too. The McKnight Foundation, for example, has committed to investing $200 million, or 10 percent of its $2 billion endowment, “in strategies that align more closely with McKnight’s mission.” New IRS guidelines have reduced the risk for foundations worried that accepting a lower return would result in penalties, removing a potential barrier that some foundations have cited as a reason for not doing more.

In January, the F.B. Heron Foundation, which seeks to use “every dollar” at its disposal for impact, took the unusual step of issuing a news release urging its peer foundations “to jettison outdated operating models that leave resources untapped in the face of systemic social ills.” Clara Miller, Heron’s president, argues in her essay “Building a Foundation for the 21st Century” that “money and mission were never meant to be apart.”

Although the practice remains rare among large foundations, the past several years have seen some significant examples of major foundations pledging to divest from entire industries. There was, for example, the much-publicized decision of Rockefeller Brothers Fund to divest from fossil fuels. Others, such as the California Endowment, have recently divested from for-profit prisons.

Grapple with the complexities of strategy and measurement.

Strategy and measurement have never been — and will never be — easy in philanthropy. But this is now increasingly understood.

Why did we ever think otherwise? In part because the business-knows-best crew — including consulting firms and business-school faculty with a newfound interest in philanthropy — made it out as if it were easy. Strategy was discussed and defined in ways that worked in a competitive business context but that made little sense for work in complex systems in which there were no such dynamics. Now even those who promoted this view seem to have recognized the error of their ways.

Measurement, too, was dumbed down in recent years. The charts looked good, but what meaning did they really convey? One nonprofit leader who helped found an organization that serves homeless children told me a few years ago of a denial of funding — after a grueling process — by a self-styled “venture-philanthropy fund” because his organization’s “cost per child served” was too high. But, of course, none of the comparison organizations served homeless children! His frustrated response? “I can give every poor child a [expletive] lollipop if you want a low-cost-per-lives-served number! But that won’t create impact.”

Examples like this are real but, thankfully, rarer today than a decade ago. After years in which the fantasy was perpetuated that “social return on investment” — surely the right theoretical idea but not the right practical measurement approach — could actually be calculated with precision, we are beginning to see more of an embrace of the reality of foundation performance assessment.

The right approach to assessment isn’t simple or monolithic. It flows from the goals and strategies of the foundation and varies based on context. What is the foundation holding itself accountable for? Changes in outcomes on the ground? Finding and “scaling” new solutions to tough problems? Strengthening nonprofit organizations working in certain areas? Simply getting money out the door? All of the above? The answer tells us which measures make the most sense.

Foundations that want to help bring a new, promising approach “to scale” or wide adoption need to ensure that the approach, in fact, works. In these situations, the most rigorous testing possible should be employed — yes, even randomized, controlled trials. However, if something has been shown to work, there is no need to test it again and again (although it’s dangerous to assume faithful implementation and a constant context, so some retesting may be necessary). If something is a new, innovative approach that seems promising, by all means fund it — but fund it in a way that provides support for the data collection and analysis to see if it works and under what conditions.

Whatever the approach to assessment, nonprofits need to influence it — even guide it. Too often, foundations don’t support nonprofits in their efforts to collect the data that both parties need to improve.

Foundation performance assessment is about the outcomes a foundation seeks, but it also has to be about the way the foundation works. It should pierce the “bubble of positivity” in which foundations often comfortably reside, and the best way to do that is through comparative, candid feedback.

Learn to collaborate.

Little can be achieved on the problems foundations seek to solve with a single institution acting alone. This should not be a new insight.

Look at the Civil Marriage Collaborative, which spent $153 million over 11 years to push for marriage equality for gays and lesbians, a remarkably effective effort in a short time span. Or the collaborative efforts of major foundations on climate change, begun in 2007 by the William and Flora Hewlett, David and Lucile Packard, and McKnight foundations and then restructured and expanded more recently.

But while these are just two of many examples of grant makers aligning efforts over the decades, such examples are more rare than they should be. Here, too, “bizplaining” — blogger Allison Carney’s term — has gotten in the way, as a focus on uniqueness and brand has been unhelpfully imported to philanthropy, creating barriers to collaboration.

It’s extremely difficult to align efforts effectively. It requires, as Sylvia Yee of the Haas Jr. Fund has said, “putting egos aside.” Easy to say, hard to do because so many career incentives encourage the claiming of credit — individual and institutional. We talk of “brand identity” and “leadership,” but what is sometimes needed, as Harvard’s Barbara Kellerman has argued, is smart followership.

Working together in a way that really creates impact requires us to get over ourselves. We can’t all look good all the time. We can’t all lead all the time. We can’t all “punch above our weight.” We can’t always be the ones “creating leverage” or attracting disproportionate dollars to our ideas. Sometimes the best way to have an impact is to follow someone else who’s succeeding.

Understand what grantees really need. After a period in which grantees were often seen by foundations as akin to contractors or vendors, paid to produce “outcomes,” there is a growing recognition that nonprofit organizations need to be supported and strengthened and relationships attended to if foundations are to achieve their goals. I am hearing less often from foundations the idea that “grantees are just a means to an end” and that “if grantees don’t like working with us, then we must be doing something right.” (I am not making this up.)

Maybe, finally, as the Whitman Institute’s John Esterle and his colleagues put it, relationships are moving from the “kids’ table” to the “adults’ table” in the conversation about impact. There’s also reason for optimism about greater interest on the part of foundations in supporting organizations. While the overwhelming proportion of grant dollars are still program restricted, there is movement here.

The efforts of the Ford Foundation, Citi Foundation, Chicago Community Trust, and others to provide more six-figure and greater multiyear, unrestricted general operating support to grantees — the kind of support that research by the organization I lead has shown to be correlated with higher perceived impact — are hopeful signs. While grant makers such as the Hewlett Foundation have promoted this kind of support for a decade or more, there seems to be real momentum now. These efforts may finally push the proportion of general operating support well beyond its relatively flat recent rate of about 20 or 25 percent of foundation grant dollars.

The focus on building stronger organizations need not be just about expansion. Many nonprofits are local and small, and this isn’t always bad. We can encourage more sharing of what works across organizations: Jeff Bradach of the Bridgespan Group has written about the potential of “aligned-action networks” as an alternative to the tight control of either “program replication” or so-called collective-impact programs that gather everyone in a region to tackle a big problem.

Supporting organizations means supporting their administrative expenses — and not dismissing anything related to investment in strengthening an organization as “waste” or “overhead.” Although nonprofit and foundation leaders have been railing for decades against the overreliance on administrative spending ratios as a terrible proxy measure for effectiveness (I’ve been one of them), there is increasing momentum on the topic, too.

If grants must be tightly restricted, then grant makers can at least allow for more support of overhead. Tim Delaney of the National Council of Nonprofits has been among the leaders on this front, successfully arguing for a change in the rules for federal grants to support more overhead. Grantmakers for Effective Organizations, National Committee for Responsive Philanthropy. Bridgespan, and others have also lent their voices to this cause. Some major foundations have re-examined and changed their rules on overhead, allowing higher proportions.

Spending on “overhead” isn’t irrelevant. We should all be concerned about nonprofits that hire for-profit fundraisers who keep 50 or 75 cents on the dollar without donors knowing it. But overhead ratios have been overemphasized. Jacob Harold of GuideStar, Art Taylor of BBB Wise Giving Alliance, and Ken Berger (formerly) of Charity Navigator deserve credit for arguing that we need to reject “the overhead myth.”

These issues raise many, many questions for foundations, and the answers will differ based on context and priorities. While other matters are probably just as important, I think it’s crucial to engage these five, which compel foundations to think hard about how they can be most effective in a context that is changing significantly.

Phil Buchanan is president of the Center for Effective Philanthropy and a regular columnist for The Chronicle. This column is adapted from the essay “Big Issues, Many Questions” available on the center’s website. Some of the foundations mentioned support the center or are among its clients.