If Foundations Want to Encourage Transparency, They Should Look in the Mirror
Foundations say they like transparency. This is more than a passing fad. They have extolled its virtues for 70 years — ever since Russell Leffingwill, then board chair of the Carnegie Corporation, used the phrase, “glass pockets” during a 1952 congressional hearing to encourage transparency in the philanthropic world.
Foundations champion transparency on the part of grantees as well, insisting on metrics for effectiveness, program performance, financial management, and evidence that grant dollars are used efficiently.
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Foundations say they like transparency. This is more than a passing fad. They have extolled its virtues for 70 years — ever since Russell Leffingwill, then board chair of the Carnegie Corporation, told a 1952 congressional hearing scrutinizing philanthropy that “foundations should have glass pockets” to ease suspicions about their work and ensure their value to society was clearly understood.
Foundations champion transparency on the part of grantees as well, insisting on measures for effectiveness, program performance, financial management, and evidence that grant dollars are used efficiently.
They also push for transparency in government and business. Some, for instance, have called for greater transparency in the tech industry to weed out inequitable and discriminatory practices.
Most grant makers, however, fail to live up to their professed transparency standards. They strictly control data and narratives about their own performance in areas such as investment, staff, strategy, and allocation of funds. They generally do little more than the bare minimum required by the IRS and state charity regulators, which means making their latest tax returns, and sometimes their audited financial statements, available.
Compare this to public companies, with which foundations — especially the large ones — share ample public benefits, including favorable tax treatment, prestige, resources, and regulation that enhances their ability to raise funds.
For-profit public companies provide extensive data about their business and financial strategy, and performance on their 10-K report to the Securities and Exchange Commission — information necessary to make an informed decision about investing in the company. Foundations that both enjoy generous public benefits and insist on transparency from others should meet a similar standard.
How can grant makers stop flirting with transparency and embrace it? By providing the public with the equivalent of a foundation 10-K. They owe nothing less to their constituent investors: taxpayers, regulators, grantees, and fellow donors.
The foundation 10-K would disclose the workings and financial aspects of the entire operation, including obstacles standing in the way of achieving its mission. It would go beyond recitations of spending on grants and related administrative expenses and would include information about endowment investments, which produce most, if not all, of the foundation’s assets and income.
Most foundations provide no useful information about their investment portfolios, and the largest are the murkiest. According to Foundation Mark, which tracks foundations’ endowment performance, large foundations — those with more than $500 million in assets — typically invest about half of their endowment dollars in undisclosed private assets such as mortgage-backed securities, private-equity shares, and foreign stocks, making them especially opaque.
Full transparency would allow organizations such as Candid or the Center for Effective Philanthropy to provide robust analysis and comparisons to peer organizations. Investment strategies could be examined alongside giving to see if they square with the foundation’s mission, and grant makers would have a venue to explain their choices, strategies, and challenges. Reports on potential risks to achieving missions could include an analysis of whether the resources the foundation has put toward accomplishing its goals are adequate, how its resources complement those provided by government and other donors, and whether grant spending and endowment investing are working at cross purposes or adding power to one another’s approach.
Alongside such analysis could be what’s known as an MD&A, or management discussion and analysis, which adds context to financial audits or other quantitative reports. For foundations, this could cover how the organization is addressing potential challenges to its mission goals, investment policies and strategy, and progress on pledges in areas such as diversity, equity, and inclusion.
Sound like a lot? That’s just part of what public companies disclose in their 10-Ks. And it’s typical of the volume and nature of information provided by nonprofit grantees.
To establish this new transparency, foundations could start by reporting on a common form that builds on and goes beyond current IRS filings, audits, and annual reports. Using aspects of the 10-K would be possible, although the level of detail and frequency could be adjusted. Above all, the reports would honor the public pledges and rhetoric on the virtues of transparency touted by the field.
Barring the IRS changing its rules and demanding more of this type of information from foundations, this would be voluntary for now and would likely need to be coordinated by a group such as Candid. But if more large and prominent grant makers sign on in a very public and, yes, transparent way, peer pressure could lead many more to follow.
The reasons for full transparency are clear: Openness improves performance. Without such openness, foundations are unable to credibly assess their own value and are stuck in an unproductive narrative loop about their worthiness and effectiveness.
To be sure, transparency and the scrutiny it brings can be threatening. I learned that years ago when I served as CEO of the Nonprofit Finance Fund, a community development financial institution. The CDFI world came up with a system for comparing the organizations’ operations, impact, financial data, and efficiency called CDFIs Side-by-Side. We did this, of course, with grants from several large foundations.
My peers and I had to accommodate — and then embrace — this unwelcome transparency. We not only survived, but greatly benefited from the new level of accountability. By learning about the operations of others, we discovered how our own work could be improved. We were able to see opportunities for cooperation that transcended program divisions and competition. The field grew in stature. It was a tonic.
Similarly, when the Heron Foundation, an antipoverty grant maker I led, looked closely at its endowment portfolio, we were forced to confront some uncomfortable surprises. We learned, for example, that we had a stake in the Corrections Corporation of America, the largest private prison owner and operator in the United States, now rebranded as Core Civic. Prison time is disproportionately served by people with low incomes and reliably destroys future wealth-building and job opportunities. This was hardly a good investment for a foundation whose mission is “helping people and communities help themselves out of poverty.”
We decided to be fully transparent about our discovery, along with our portfolio. We wrote about the investment on our website and eventually sold our stake in the company. We also embraced a strategy of investing in companies we thought made a larger net contribution to our mission. To ignore that deep contradiction, we thought, would undermine the work of Heron’s grantees. Core Civic’s lobbying budget, for example, exceeded grant dollars available to some grantees many times over.
The rewards that can come through such transparency are, for now at least, largely in the hands of individual foundations. Foundation Mark uses publicly available data to compare the investment performance of different foundations. The Center for Effective Philanthropy compares the grant making of foundations who sign up for an audit to that of their peers based on their own criteria. But since the reports are typically undisclosed and are funded by foundations, the organization rarely functions as a full-throated critic.
Despite the best of intentions, Candid’s Glasspockets project — its very name reflecting Russell Leffingwell’s aspirations for the field — has made little progress in its 12 years of operation. Even if the universe of foundations is reduced from the approximately 83,000 large enough to file with the IRS to the some 8,300 with websites, only about 100, or 1.2 percent, have provided the information necessary to receive a rating. And Glasspocket’s list of what’s needed to merit a check mark for transparency includes such low-bar items as “contact information,” “mission statement,” and “board of directors list.”
Candid and Glasspockets deserve applause for trying, but the participation rate and quality is a barometer of the indifference, even hostility, of its constituents toward such endeavors and one more indicator that foundations’ embrace of transparency doesn’t extend to themselves.
At a time when the internet and social media have made vast supplies of information (and misinformation) readily available, there is no excuse for philanthropy to continue constructing walls around its own operations. Foundations can gain in stature and credibility by revealing themselves to the world as public companies do. And large grant makers have a special responsibility to lead the way.
When foundations crack open their protective, closed world — even just a little —the fresh air will do them and the whole field a world of good.