Public Accountability at Conversion Foundations

By HARRY SNYDER

A new type of foundation is transforming the face of American philanthropy — and raising new questions about how best to ensure standards of community responsiveness and relevance for all grant makers.

Over $15-billion is now held by foundations that were endowed through the conversion of non-profit health-care institutions to for-profit status, and many more millions are expected to go to such organizations in the future. What’s more, hundreds of millions of dollars are flowing to foundations that resulted from the change of student-aid lending organizations to for-profit businesses.

The so-called conversion foundations are unusual because they weren’t created by a single donor or a corporation, as are most private foundations.

Instead, they were formed as the result of government standards that require all assets held by a non-profit organization to stay in the public trust — and to be used for purposes similar to those to which they were initially dedicated. That means for the most part that the new conversion foundations need to concentrate on health or education.

Conversion foundations created from health-care institutions have a special obligation to be responsive to the public. After all, their assets were largely created by donations of time and money from individuals, corporations, foundations, and government agencies that wanted to support their local health-care institution. What’s more, the health-care institutions benefited from years and years of receiving exemptions from taxes — a major subsidy from the community where they operated.

Because the public has participated in creating the value of the non-profit health-care institution, it has a significant stake in how non-profit assets are used in a conversion. The organization that receives the assets has an obligation to ensure that there is community participation in all aspects of foundation planning, development, and operation.

Public accountability is a struggle for many foundations. Business enterprises, government, and most non-profit organizations have external forces holding them accountable: shareholders for businesses, voters for government officials, and donors for charities.

But a permanently endowed private foundation can bypass public support and do pretty much as it pleases as long as no laws are broken. Although most foundation board members take their duties seriously, there is no clear standard of performance that they must satisfy.

That is evident from the way some conversion foundations have already begun to operate. Many do not make grants to community groups, but instead set their own agendas and run all of their own programs. And in one instance, a foundation tried to amend its mission statement in a way that put the organization’s focus at cross-purposes with the needs and desires that had been clearly expressed by community leaders and included in the foundation’s articles of incorporation.

Some of the conversion foundations have also appointed board members with severe conflicts of interest — people who ended up directing grants primarily to benefit their own organizations or the company that purchased the non-profit health-care organization in the transaction that led to the creation of the conversion fund.

One way to mitigate such problems is to build community accountability into conversion foundations from the start.

While it is essential that accountability measures play a key role in conversion foundations, it would also make sense for all private foundations to consider such standards.

Donors to those foundations were given significant tax benefits when they transferred their funds to their non-profit organizations, and those institutions will have the privilege of being exempt from taxes for as long as they give away money. Almost no private foundations do anything at all, however, to gather sufficient community advice about their programs and their effectiveness.

Among the strategies that hold the most potential in the health-care arena:

• Make the planning and forming of a new health-care-conversion foundation a public process that is based on the advice and expertise of consumers and health-care advocates. The process should encourage plenty of dialogue, engage diverse elements of the community, and foster consensus about local health-improvement goals. Government officials can ensure an effective public process by overseeing the foundation planning and holding public hearings to gather suggestions from the public and review the foundation’s operating plan.
• Develop a mission that holds true to the purposes of the non-profit organization whose assets are being used to create the new foundation. Local groups should resist attempts by government regulators to force the new foundations to support a wide array of causes. Doing so does not meet the legal requirement that charitable trust assets be used for the purposes for which the former non-profit group was initially created.
• Establish a foundation board of directors that is truly independent. Members should not be drawn from the hospital or other organization that was sold to a business. Trustees should be selected to reflect community diversity and to provide the appropriate expertise and experience to guide the new foundation. To deliver the maximum benefit to its community, the new health foundation must act impartially. No trustee, executive, or staff member from the business that bought the non-profit institution should serve in any capacity with the foundation.
• Ensure continuing community involvement. Foundations should actively seek the public’s views when they set grant-making criteria, shape new programs, and evaluate the influence of the foundation’s work. The California HealthCare Foundation, for example, uses community advisory committees to shape and carry out major programs. Other foundations, such as the Caring for Colorado Foundation, rely on community advisory committees to nominate board members.
• Establish strict limits on terms of service and strong conflict-of-interest policies for board members and other advisers. Those provisions serve to encourage board and staff members to view their term of service as an opportunity to put foundation resources to their highest and best use.
• Emphasize the achievement of health-improvement goals over steps to maximize the value of the foundation’s endowment. Many foundation leaders seem to believe that annual spending on grants and management of the foundation should be limited to approximately 5 percent of the value of the asset base. They are forgetting that the 5-percent standard is the federal government’s minimum requirement for how much grant makers must distribute annually — not a ceiling on spending. Much higher payouts can benefit the community without jeopardizing the ability of the foundation to meet future needs. Increasing the size of the endowment is not usually a community priority.

Other requirements that preserve public accountability include opening meetings of the foundation board to the public and creating appeal channels for decisions on grants.

Foundations can go further by conducting periodic independent surveys of grant applicants and grantees. While the survey results should be made public, the non-profit groups surveyed should be guaranteed complete anonymity. The foundations should also be evaluated by community groups as well as by private grant makers working in the same region where the conversion foundation is based.

What’s more, foundations could do much to show they understand their grantees by basing grant-making staff salaries on the same scale as those used by the foundation’s grantees. Compensation should also reward staff members for meeting defined goals.

Over 60 years ago, after three decades of what we would today call “public interest” work, Mahatma Gandhi warned of the problems that can happen when permanent endowments operate with little accountability.

In his autobiography, Gandhi wrote: “A permanent fund carries in itself the seed of the moral fall of the institution. A public institution means an institution conducted with the approval, and from the funds, of the public. When such an institution ceases to have public support, it forfeits its right to exist. Institutions maintained on permanent funds are often found to ignore public opinion, and are frequently responsible for acts contrary to it.”

Foundations of all kinds must avoid the kinds of problems that Gandhi warned about — but let us hope that the newest additions to philanthropy will lead the way by making conversion funds truly accountable.

Harry Snyder is senior advocate at the West Coast Regional Office of Consumers Union, where he directs the Community Health Assets Project, a partnership with Community Catalyst in Boston. This article is based in part on the project’s new handbook, Building Strong Foundations: Creating Community Responsive Philanthropy.