Philanthropy advisers warn that foundations’ structure may hinder their mission success--and urge them to optimize for mission success via impact investing.
“Obsolete” is usually a word we use for technologies, not institutions developed for addressing society’s most intractable problems, which are built to stand the test of time. Or are they? In a Chronicle of Philanthropy article, William Burckart and Steven Godeke, advisers to philanthropic foundations, say the traditional operating model that governs the running of most foundations is in danger of becoming obsolete. In the interconnected modern world, foundations that fail to innovate run the danger of negatively impacting their own mission goals.
Among the cross-purposes that are raising questions:
Federal law requires grant makers to distribute at least 5 percent of their assets every year, but this coupon-clipping leaves the other 95 percent of assets disconnected from the foundation’s mission. In fact, the investments often are in direct conflict with the mission, as the Rockefeller Brothers Fund felt.
Foundations that are established to operate forever set their investment strategies to make sure they will always have enough money. That drives boards and donors to decide how much to spend based on investment policies, rather than on the urgency of the problems their foundation wants to solve.
With the focus on perpetuity, things can get even worse when the economy is in a downturn, as we learned in the Great Recession. Charities are in more desperate need of money from foundations, but grant makers are generating less income and so tend not to give as much, lest they risk going out of business in the future.
Foundations are created mostly by the 1 percent — America’s wealthiest — as a tax-savvy place to park surplus wealth. They don’t exist solely, or even mainly, to achieve social good, yet that is what society expects from them. We could view today’s golden age of philanthropy as the result of a new gilded age of inequality.
The escape from obsolescence toward maximum mission impact, say Godeke and Burckart, is for foundations to expand beyond grants into the many financial tools available for impact investing—and adjust internal processes, staff, and culture to optimize the foundation’s ability to use them. The traditional foundation structure, unfortunately, makes this difficult:
They hire technocrats who are focused on social science and policy to make the grants and on technocrats who understand money and capital markets to invest. The grants executives and the investment executives work in different units and report to different people with the idea that this specialization leads both to better grant making and to sharper investing. But if we learned nothing else in the recession, we should have learned that we need stronger connections between the money managers and those who care about the whole of society.
The authors share common steps foundations take toward impact investing, tensions between social and financial investments, the appeal and danger of seeking to provide catalytic money, and more in the full Chronicle of Philanthropy article.
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