More and more, foundation leaders are voicing concern that America has too many charities.
In response to the economic crisis, a growing number of foundation leaders are calling on nonprofit groups to merge operations and pressing for an effort to intentionally weed out weak organizations. They say that the growth of charitable organizations has resulted in inefficiencies and spread limited resources too thin. And because grant makers receive so many applications for money, some say they struggle to make informed decisions.
Too many nonprofit groups, however, is not the problem. Rather, the endemic undercapitalization of even the strongest nonprofit groups is the more pressing problem grant makers should try to solve.
To be sure, the number of nonprofit groups is growing, but increased quantity does not lead to reduced quality. Since 1996, the number of groups classified under Section 501(c)(3) of the Internal Revenue Code has increased by 81 percent, from more than 654,000 to nearly 1.2 million.
That expansion was fueled by the overall growth of the nation’s economy, which led to an increase in wealth as well as an increase in disparities between rich and poor. As a result, unmet needs grew in communities across the country, and nonprofit groups sprung up to fill the gaps. As the economy has weakened further, demand for nonprofit services has continued to skyrocket.
While the number of nonprofit groups is determined in part by market forces and the needs of communities, the same cannot be said for foundations.
No market forces prevent individuals of wealth from setting up their own philanthropies In fact, the number of foundations over the past 15 years has increased far faster than the number of organizations that are eligible to accept foundation money. According to the Foundation Center, in 1994 there were nearly 39,000 foundations; by 2007 that number had grown to 75,000 — an increase of more than 95 percent.
While many foundation leaders want to see mergers of weak charities, others have expressed skepticism about promoting new alliances.
Emmett D. Carson, chief executive of the Silicon Valley Community Foundation — itself a product of a merger — has cautioned that mergers can be expensive and disruptive and may not always result in stronger organizations. Better is to leave “weeding out” to market forces, says Mr. Carson. Weaker organizations unable to sustain their operations will fold. Stronger groups, he says, will expand to serve new needs.
Similarly, Jeffrey Solomon, president of the Andrea and Charles Bronfman Philanthropies, challenged nonprofit “merger mania” in an opinion article he wrote for The Chronicle in June. Mr. Solomon reminds us that most mergers fail. Shareholders might be willing to accept this risk, but nonprofit groups can’t, given the cost of failure to the beneficiaries of needed services, he said.
While the amount of money available to nonprofit groups has shrunk due to the recession, reducing the number of nonprofit groups would not guarantee a better use of existing dollars. Foundations themselves are a leading culprit in the less-than-optimal way money is distributed. Many grant makers provide highly restricted dollars over the short term, and of a size that is inadequate to the problems they hope to solve. Accepting the grant money often requires nonprofit groups to comply with time-consuming and highly idiosyncratic application and reporting requirements.
The strongest nonprofit groups know best how to use precious resources to advance the social changes they and their grant makers want. Foundations can succeed only if they tap this knowledge and apply it to courageous decision-making.
Rather than railing against “too many” nonprofit groups, grant makers might reflect on the role they play in creating and perpetuating the current system in which even strong organizations struggle to meet their budgets.
Foundations might consider:
- Routinely and strategically combining their capital with that of other grant makers to ensure that high-performing nonprofit groups have the money they need to succeed.
- Rethinking highly restricted grant support that does not cover general operations. Grantees often are not encouraged — or worse, are not allowed — to invest funds in the long-term health of their organizations and leaders.
- Streamlining the grant-making process so that charities can devote more time and money to fulfilling their missions and less to completing applications and reports. And they might redirect money away from grantees that habitually underperform and toward those that consistently produce results.
Those and other changes to the way that capital flows to nonprofit groups will prove powerful responses to the problems that ail the nonprofit world.
Kathleen P. Enright is chief executive of Grantmakers for Effective Organizations, a coalition of 350 institutions. Jonathan Spack is executive director of Third Sector New England, a group that provides management advice to charities.