What Grant Makers Really Need

Steve Gunderson
Incoming Chief Executive Officer
Council on Foundations
Washington, D.C. 20036

Dear Mr. Gunderson:

Congratulations on your appointment as the new chief executive of the Council on Foundations. You are assuming the leadership of an organization with great potential.

No other association holds the same degree of influence over American foundations, which together hold $600-billion in assets and command great sway over nonprofit organizations throughout the world. In short, you have a mighty lever with which to advance social progress. It is, however, a lever that has not been used to its full potential.

The council has worked assiduously for many years to preserve the privileged tax status of foundations by shielding them from government interference.

By selecting a new CEO who brings the experience of a distinguished 16-year career in the U.S. House of Representatives, the council’s board members have unequivocally demonstrated that this remains their highest priority.

Your qualifications suggest you will handle this responsibility admirably, but your potential to influence nonprofit organizations depends on how you go about it.

There are two ways to defend foundations from Congress: protectionism or demonstrated merit. Like many interest groups, the easy answer has been to rely on protectionism in the past — avoiding controversy, suppressing bad news, and maintaining a low profile in the hopes that Congress will not ask any questions about foundations. When Congress has raised questions, foundations have worked behind the scenes to use their political clout to lobby against legislative changes. This approach has worked uneasily for three decades, although the difficult battle over the least two years to defeat Sen. Charles E. Grassley’s efforts to impose tighter regulations on foundations has exposed its weaknesses.

Even when it works, however, protectionism is a mixed blessing.

Protectionism slows down the pace of progress and innovation and, ultimately, undermines the performance of philanthropy. Foundations are already insulated from the demands of customers, investors, or constituents.

Their great freedom, which seems such a virtue, can easily lead to the dead weight of complacency. And if foundations are unwilling to court controversy, they undercut their power to achieve social change.

Above all, protectionism abhors scrutiny.

Foundations have therefore shied away from any serious attempt to appraise their value and impact on our society. They have lacked the will to develop tools that might effectively measure their performance. Without such tools, foundations can never be found wanting — but neither can they demonstrate their merit or find ways to improve their effectiveness and advance the work of the nonprofit organizations they support.

But philanthropy is changing, and its changes provide a new opportunity for you and the council.

A movement is afoot to focus on foundation effectiveness. A handful of foundations have begun to finance research that takes a candid look at foundation performance, even publicly acknowledging defects, for the sake of building credibility and discovering new ways to become more effective.

The council, under your leadership, has a chance to lead this new movement, defending grant makers on their merits by creating the tools and cultivating the resolve necessary to candidly assess their own strengths and weaknesses. The result of adopting this merit-based approach would be not only a stronger political stance, but also higher-performing foundations, energized donors, and a more vibrant and successful civil society.

It is instructive to look at the example of Independent Sector, the association that represents national charities and major grant makers, under the leadership of Diana Aviv, who took over in 2003.

In response to Congressional hearings, Independent Sector responded within a matter of months by conceding the need for greater self-regulation, forming a commission, and drafting a report that sets meaningful standards of performance for nonprofit organizations.

Foundations participated in this process, of course, but took no similarly rapid and aggressive action to set standards for themselves.

Suggesting that the council take a stand on issues of foundation performance may seem like opening Pandora’s box. After all, foundations are so diverse as to be almost impossible to categorize.

The council’s all-encompassing mission “to advance the common good” seems broad enough to satisfy everyone, but the problem is, each of us has a different idea of what the “common good” is. In this age of blue and red states, the differences in definition seem to be increasingly profound. In reality, many foundations support projects that are primarily intended to nullify the results of projects supported by other foundations.

Yet regardless of how the common good is defined, people in philanthropy can all recognize outright abuse when they see it.

In 2003, two investigative reporters at The Boston Globe compiled a database from foundation 990-PF tax filings and, with a simple search, identified foundations whose administrative expenses greatly exceeded their grants.

Many had good reasons — after all, foundations can achieve a great deal of impact through the work of their staffs and by conducting their own research — but others were shocking cases of abuse, which the Globe reported on its front page, to the great consternation of many grant makers.

The best way to prevent such harmful coverage in the news media is not the wishful thinking of protectionism, but to conduct this kind of analysis before government officials or journalists do, then report to the Internal Revenue Service those who misuse foundation funds for personal gain and prohibit such grant makers from membership in the Council on Foundations.

By failing to aggressively investigate and act on foundation abuses, people in philanthropy are condoning such behavior, tainting by association the entire philanthropic world, and unwittingly encouraging greater Congressional oversight. Merely enforcing the bare minimums of acceptable practice would be an easy place for the Council on Foundations to begin.

But the council has an opportunity to go much further. Foundation practices, even when legally acceptable, are not all equally desirable or effective.

Many foundation leaders I meet would sincerely like to know how their foundation measures up, or how they might improve its performance.

Organizations such as Grantmakers for Effective Organizations and the Center for Effective Philanthropy (which I helped to found) have recently sprung up to try and fill this need, but each struggles for attention and money. None has the council’s national mandate or $15-million annual budget to stand behind its work. Only the council has the authority and resources to act as the primary force to encourage foundations to undertake rigorous efforts to assess and improve their performance.

Defending foundations on their merits by creating the tools and instilling the will for grant makers to candidly assess and increase their effectiveness would be a new role for the council to play.

It will take bold leadership to bring about such a change. But the reward would be great: Foundations would have greater impact on the pressing social needs of this country and of the world, strengthening nonprofit enterprises and ultimately improving the lives of millions of people in need.

Every new leader gives an organization a fresh start. I urge you to seize this opportunity and use it to its fullest potential.

Mark R. Kramer is a senior fellow at Harvard University’s John F. Kennedy School of Government, a founder of the Center for Effective Philanthropy, a nonprofit research organization, and managing director of the Foundation Strategy Group, an international consulting firm. He is a regular contributor to these pages. His e-mail address is kramercap@aol.com.