Nonprofits are reeling right now from the twin pressures of increased demand and decreased revenue as the nation faces at least five major crises: a global pandemic; economic recession; a racial justice reckoning (and a White House stoking racism); serious threats to our democracy and democratic institutions; and unprecedented wildfires and other catastrophic weather events fueled by climate change.
Many foundation leaders seem to agree with both the nature of the challenges and the need to do more.
In a recent survey of more than 200 mostly large foundations conducted by the Center for Effective Philanthropy and scheduled to be published later this fall, more than 70 percent of those who said they had made a decision one way or another indicate they have or will increase 2020 grant making beyond what was previously budgeted. This is great news. But we know some of those increases are quite modest and that the country’s multiple crises are unlikely to dissipate in 2021. Still, several foundations, including some of the largest, are holding out, arguing that it’s not sustainable to increase spending even a little bit from a typical year.
This is no time to hold back. Endowed philanthropic institutions, by virtue of their long time horizons, have a unique opportunity to step up their giving. Now is the time for foundation boards to think differently about how they manage their $1 trillion in assets.
Most foundation endowments are theoretically managed to keep the principal intact over time. But some foundation governing boards take an even more conservative approach, believing falsely that they have a fiduciary responsibility to ensure the endowment is as large as possible. As a result, many foundation endowments have grown sharply in recent decades while payout rates have often stayed at the federally required minimum annual distribution rate of 5 percent.
Because charitable foundations are often managed to exist in perpetuity — or forever — foundation boards have concluded that they must jealously guard resources for the future.
Among the more thoughtful proponents of this view is Larry Kramer, president of the $10 billion William and Flora Hewlett Foundation, a major donor and client of the Center for Effective Philanthropy, which one of us leads.
“It’s important to recognize … that you cannot escape the choice between people today and people in the future,” Kramer recently told Alliance magazine. “The easier course is to spend more today: We can do that and have everyone praise us and why should we care about people in the future or our successors?” But, he argues, future recipients and those they serve will pay the price.
This argument has at least two problems. First, it seems to assume there will be no future wealth creation when, in fact, the amount of money sitting in endowed foundations has increased dramatically in recent decades. For nonprofits on the receiving end of foundation grants, the size of any one particular foundation is much less important than the total grant making of all foundations.
Second, Kramer’s argument assumes that future problems will be as massive as the present ones — and that the current crises can be surmounted without unprecedented effort and resources. We’re not so sure. It isn’t clear our country will come through this period as a vibrant democracy with the peaceful conditions required for the economy to grow and thrive. Put another way, what’s the point in managing an endowment to be as large as possible at some future date if that very future is in doubt?
A New Calculus
We aren’t trying to be alarmist, and we don’t think foundations should liquidate their endowments entirely. But we are arguing for meaningful increases during a time of crisis, which could last several years. We believe the spend-now versus spend-in-the-future calculus is fundamentally altered by today’s events.
Foundations, for example, need to recognize that the power of compounding is meaningful in a social as well as a financial context.
This is what we mean: A nonprofit’s value to a community increases more rapidly over time if a foundation helps it survive and thrive during a time of overwhelming need. It can deepen trust with those it serves and develop more effective practices.
To paraphrase Fred Rogers, those helped often go on to become helpers themselves as the effects of giving compound again. The results from this type of compounding may be harder to calculate than those of a financial nature, but they are no less real.
Even those making financial arguments for holding the line on payouts have a much weaker case now than during the early days of the pandemic when markets were crashing.
Some foundation leaders argued that they didn’t want to “lock in losses” that could permanently shrink their organizations. But equity markets have rebounded to near where they were at the beginning of the year, suggesting that spending more during this time of crisis will not have the compounding negative effect many feared. In fact, acting now will allow foundation leaders to gain access to capital at what may be near peak values for the foreseeable future.
Spending Now Is Less Damaging
Those concerned that future returns may be lower in the next five years than they were in the previous five should consider that spending more now is less damaging to long-term endowment values than it would be if future returns are higher. In other words, if you knew your $100 today would be worth $150 in five years, you’d be less likely to spend it then if you knew it would still be worth just $100. Spending more now is not just the right thing to do; it is cheaper than when markets were tanking.
This year we’ve seen heartening examples of foundations stepping up their giving levels. They range from the Ford Foundation, which committed a billion dollars in new grant making above and beyond its norm, to the Langeloth Foundation, which in June committed $10 million of its $88 million in assets to “leveraging civic participation to address election challenges facing the United States amid the Covid-19 pandemic and ongoing civil unrest.”
These are inspiring examples, but foundations should continue to push to do more in 2021. The boards and investment committees of this country’s endowed foundations should keep in mind Abraham Lincoln’s words in 1862 during another profound moment of national crisis: “The dogmas of the quiet past, are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise — with the occasion. As our case is new, so we must think anew, and act anew. We must disenthrall ourselves, and then we shall save our country.”
Now is not the time for dogmas masquerading as fiduciary responsibility. Now is the time for bold action.
Disclosure: The Hewlett Foundation is a financial supporter of the Chronicle.https://www.philanthropy.com/page/gift-acceptance-policy