Grant Makers Shouldn’t Follow One Approach

To the Editor:

As you noted in your November 1 issue (“Committee of Nonprofit Leaders Issues Set of Accountability Guidelines”), Independent Sector has issued its “Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations.”

The document was prepared by the Panel on the Nonprofit Sector convened by Independent Sector at the request of Sen. Max Baucus and Sen. Charles Grassley, chairman and ranking member, respectively, of the Senate Finance Committee.

While most of the recommendations are quite sensible, a number are of great concern to me and my colleagues at the Philanthropy Roundtable.

Some of the principles in the Independent Sector document represent an unwarranted intrusion into the operating freedom of foundations and other grant makers. They do this by applying a one-size-fits-all approach to charities and foundations that have diverse objectives and circumstances.

For instance, Principle 10 says that except for very small organizations, boards should “generally have at least five members.”

Principle 20 articulates a strong presumption against compensation of foundation board members: “Board members are generally expected to serve without compensation, other than reimbursement for expenses incurred to fulfill their board duties.”

These principles unnecessarily restrict the ability of donors and trustees to use their best judgment in carrying out their charitable objectives. There are many foundations, including most prominently the Bill & Melinda Gates Foundation and the Michael and Susan Dell Foundation, whose boards do excellent work with fewer than five members. Does anyone really think the Gates or Dell foundation would be more effective or better governed if it had six or seven board members instead of two or three? And if not, why is this one-size-fits-all rule in there?

As for compensation, within the foundation world there is a long and venerable tradition of volunteer board service, as well as a long and venerable tradition of compensated board service.

Philanthropic excellence is common in both traditions — as is philanthropic mediocrity — and principles of “good governance and ethical practices” should not favor one tradition over the other.

So long as the compensation is reasonable under the tax laws, whether to compensate board members of foundations is a decision best left to donors and the individuals to whom they have entrusted their charitable resources.

Principle 11 in the Independent Sector document states: “The board of a charitable organization should include members with the diverse background (including, but not limited to, ethnic, racial, and gender perspectives), experience, and organizational and financial skills necessary to advance the organization’s mission.”

At first glance, this principle seems unobjectionable. Who, after all, could object to a principle stating that boards should include members “necessary to advance the organization’s mission”?

But let’s examine a little more closely the implication that diversity of background and perspective on the board is essential for achieving an organization’s mission. In doing so, let’s initially leave aside the question of ethnic, racial, and gender diversity, and focus instead on different philosophical outlooks and life experiences.

It is not at all clear that a variety of perspectives is desirable on foundation boards. On the contrary, boards run best when there are common values and a shared sense of mission.

A grant maker with board members of radically different perspectives tends to get paralyzed. The grant maker either supports both approaches or neither and moves on to a different area where accord can be found. This paralysis sometimes occurs in family foundations where board members are demographically similar but have sharply opposing worldviews.

The goal should not be to diversify each board; that’s a recipe for sectorwide homogeneity. The goal should be a sufficiently vibrant sector with lots of different foundations representing lots of different interests, philosophies, and philanthropic strategies.

Now add the more specific question of diversity in race, gender, and ethnicity on boards. Implying that this kind of diversity is essential for achieving the mission of foundations would likely be destructive of the charitable spirit.

For instance, the presumption that a black philanthropist in Chicago is unable to make wise philanthropic decisions about strategies to reduce poverty in rural white America unless she has rural whites on her board is factually unmerited and would have the unintended consequence of encouraging philanthropists to focus their charitable resources only on the communities where they are personally most familiar.

By the same logic, no American foundation could give to distressed communities overseas unless those communities were represented on its board.

Independent Sector insists that its principles are voluntary, and that charities and foundations should feel free to conclude that certain recommendations do not apply to their operations. Its rationale for the principles allows for considerable flexibility on the part of individual organizations.

There is a danger, however, that some of the more problematic Independent Sector principles will not remain voluntary but will be codified into law or regulation, if it is perceived that there is a wide consensus in favor of them within the charitable community.

This is no idle threat. Senator Grassley has made it clear that he is not finished with his legislative agenda for foundations and charities, and there is a good chance he will look to the language of the Independent Sector principles as a guide for future legislation.

There is also a risk that the Internal Revenue Service will incorporate some of the more problematic principles into its own regulations.

Earlier this year, the IRS published a draft document, “Good Governance Practices for 501(c)(3) Organizations,” which stated that “charities should generally not compensate persons for service on the board of directors except to reimburse direct expenses of such service.”

This language, which made no distinction between public charities and private foundations, is very close to the Independent Sector principle on this subject.

Philanthropists who have reservations about specific principles in the Independent Sector guide should therefore be very cautious about endorsing the entire document, lest they allow others to convey the impression that there is a widespread consensus for all of its recommendations.

Adam Meyerson
President
Philanthropy Roundtable
Washington