Instilling Healthy Competition

Overhaul at Robert Wood Johnson designed to freshen its programs

Throughout the eight years that Steven A. Schroeder has been president of the Robert Wood Johnson Foundation here, he has kept on his desk a framed quotation that reads: “Nothing so gives the illusion of intelligence as personal association with large sums of money.”

ALSO SEE:

Care at School Health Clinics Flourishes, but Foundation Support Dwindles

Growth in Assets of the Robert Wood Johnson Foundation, 1980-98

How the Nation’s Biggest Foundations Have Grown in the 1990s

3 ‘Core Commitments’ Guide Robert Wood Johnson Fund

At a Glance: The Robert Wood Johnson Foundation

The quote, by the economist John Kenneth Galbraith, was given to Dr. Schroeder when he took over the country’s largest health philanthropy, but it has taken on increasing significance as the foundation’s assets have grown from $2.9-billion to $7.8-billion.

Robert Wood Johnson is now the fourth-largest foundation in the United States, and next year it expects to give about $440-million — nearly five times the amount awarded in Dr. Schroeder’s first year on the job.

Dr. Schroeder says he keeps the quotation nearby as a reminder of the pitfalls that can befall foundations — especially those that have swelled rapidly in size. Such growth, he acknowledges, “can breed arrogance, insularity, and complacency.”

Fending off any such tendencies is why this week, after a year’s worth of soul searching, Robert Wood Johnson officials plan to announce a major structural overhaul. The fund plans to decentralize its grant making by creating two separate units: one to oversee grant making that affects the provision of medical care, and another that concentrates on improving the overall health of Americans.

The foundation says it hasn’t made a major change in its spending priorities, but it hopes that the shift in structure will put health issues like preventing smoking and drug use on equal footing with health-care issues such as health-insurance coverage for the poor.

Currently, the foundation makes about two-thirds of its grants to health-care issues and one-third to health causes. Dr. Schroeder hopes that eventually both types of projects will receive equal amounts because, he says, good health has as much to do with the choices people make about eating, drinking, sexual, and other behaviors as it does with their access to health care.

Starting in 2000, each unit will compete for funds based on the quality of its past and current projects. One new grant-making program already under consideration by the health division is increasing the amount of physical activity that Americans undertake. Over all, the goal of the new units is to encourage staff members to develop fresh ideas for programs, emphasize those that achieve their purpose, and increase the foundation’s interaction with grantees.

“We hope to instill a little healthy competition,” says Dr. Schroeder, who says he began the review after seeing signs that the endowment growth was causing the foundation to slip in its ability to respond quickly to proposals and to encourage as much staff involvement in debating proposals as has long been the foundation’s hallmark.

“Continuing to work in our old style has become more difficult,” says Dr. Schroeder. His executive vice-president, Lewis J. Sandy, puts the effects of growth more simply. “It was beginning to stress our work,” he says.

The review process Robert Wood Johnson undertook is likely to be watched closely in the foundation world, since many other grant makers are also trying to figure out the answers to questions that Dr. Schroeder asked outside experts and staff members to consider. Among the key issues: How does a big foundation avoid becoming too bureaucratic while continuing to make sure it holds grantees to high standards? How does it keep spending on administrative and staff expenses low without burning out its employees? And how does it emphasize collegiality and creativity as it becomes a grant-making behemoth?

To get answers to those questions, Robert Wood Johnson leaders had extensive discussions internally and consulted with officials from other large philanthropies, especially those that had also experienced big growth recently. The foundation also talked with veteran philanthropy observers, and it hired the McKinsey & Company management-consulting company and the Philanthropic Initiative, a Boston consulting company, to spark far-ranging debate and make sure that all the pros and cons of all ideas were weighed fairly.

Ideas that were considered, but rejected, as part of that process: increasing the number of grants made to help charities pay for general operating expenses and to build endowments, and splitting into two separate foundations.

The foundation also considered getting into biomedical research, but decided that it couldn’t justify entering the field since such research was already generously financed by institutions such as the National Institutes of Health and the Howard Hughes Research Institute, which pour billions of dollars each year into biomedical studies.

And for a time, the foundation tossed around the idea of making grants overseas, which it has never done. But the fund decided that expanding internationally was not prudent because of the persistence of health problems in the United States, such as a rise in the rates of people who smoke or drink, and the growing number of people who lack health insurance. “Once we get our house in order here, then we can branch out more,” Dr. Schroeder says.

Throughout the process, one thing was clearly off the table: making any change in the foundation’s focus. Heeding the instructions of its founder, Robert Wood Johnson, the fund makes grants exclusively for projects related to health.

And, while the first question that was considered was whether to expand into new kinds of health projects, the foundation soon realized that what was most important was to make sure its operating structure was sound.

“The original question was, ‘What are options for awarding more grant dollars?’” Dr. Sandy says. “We reframed the question to, ‘How do we improve our performance and ability to achieve the foundation’s mission of improving health and health care?’”

Robert Wood Johnson’s growth has been fueled primarily by the rapid rise in the value of its holdings in Johnson & Johnson, the health-care products company that the foundation’s creator turned into a worldwide business.

Several major foundations that hold a majority of their assets in the corporations created or operated by their founding families also are seeing explosive growth in their asset values due to stock-market gains. The Lilly Endowment, the nation’s wealthiest foundation, was worth about $14.6-billion as of last week, largely because of growth by the Lilly pharmaceutical company.

But some others have suffered major declines, most notably the W. K. Kellogg Foundation. The foundation, which is heavily invested in the cereal company created by its founder, lost $1.8-billion since last year as the value of Kellogg Company stock declined. Previously the fourth-wealthiest foundation, Kellogg dropped one notch, switching places with Robert Wood Johnson, and is now No. 5 with a $5.8-billion endowment.

For the foundations that have been growing, the stock-market surge in recent years has presented major challenges — especially as they seek to comply with federal law that requires them to give away at least 5 per cent of their investment assets each year.

For Robert Wood Johnson, the challenge has been not simply how to increase grant making to that level, but how to do so in a way that preserves an institutional culture that both insiders and outsiders say is unusually open and effective.

However, the strains on that culture have become apparent as the number of grants the foundation makes has increased from 360 in 1990 to over 1,000 this year. The average size of grants has also grown, from about $250,000 to about $400,000 in the past year alone. And, until very recently, the foundation was able to gather all its staff members in one big conference room and debate grant proposals that had been reviewed by small groups of professional staff members. Now that the foundation handles so many more proposals, it needs to find other approaches to allow it to maintain collegiality.

Foundation leaders have also been concerned about the effects on grantees as staff members attempted to deal with an increasing workload. The foundation had long prided itself on deciding on about 98 per cent of grant proposals within three months after they were submitted. Meeting that standard was getting harder, as a few grants were beginning to take longer — something that greatly bothered Dr. Schroeder.

While one solution to the expansion in assets might have been to hire more employees to handle the increased volume of work, Dr. Schroeder and the foundation’s trustees have long struggled to keep the size of the staff low, hoping to avoid excess bureaucratization. Robert Wood Johnson now has 153 employees, only 33 more than it had in 1990.

“By running with a relatively small professional staff — almost half the size, proportionally, of the other large foundations — we have been able to avoid some of the problems of stagnation and bureaucracy that characterize too many of them,” Dr. Schroeder told the trustees last year. “I worry that we will be unable to maintain the sense of loyalty and identification with our mission and goals if we get too much larger. I also worry that we will become less nimble.”

As Dr. Schroeder looked into the best ways to accomplish more without increasing the size of the staff, he delved into the foundation’s history and discovered that the founder, Robert Wood Johnson, had been a big advocate of decentralization and of splitting up his business into many different companies.

Several of the foundation’s trustees, some of whom had worked for the donor, also liked the idea of finding a way to translate Mr. Johnson’s business philosophy into his foundation.

James E. Burke, president of the Partnership for a Drug-Free America, and chairman emeritus of Johnson & Johnson, says that Mr. Johnson “stimulated a highly decentralized environment in the corporation and wanted people to argue out the best solutions.”

He adds: “Even though there’s some obvious inefficiencies, the creative energy released by it was one of his passions.”

Mr. Burke, who is also a trustee of the foundation, says he hopes that by setting up a separate unit for health and another for health care, the foundation will avoid the bureaucracy that is part of “the malaise” of all big organizations.

Initially, when contemplating the decentralization theme, officials considered the idea of spinning off an entirely new foundation. But they ended up rejecting that idea because they feared that it would hinder collaboration among staff members at the foundation.

The new organizational structure, which is far less drastic than a spin-off, is designed to encourage the foundation to work flexibly. Staff members will dedicate most of their time to one of the two units but will have opportunities to float back and forth, depending on their interests, skills, and changes in grant-making priorities. For example, one team might deal with college binge drinking and might come up with a new grants program, or the team might disband if it decided it wouldn’t achieve anything by starting new awards.

Because the two units will be competing for money based on their performance and their creativity, Dr. Schroeder says he hopes new ideas will flourish. A director of each unit will be appointed and will report to Dr. Schroeder.

One reason Robert Wood Johnson officials are optimistic about the potential of the decentralized approach is that it builds on a structure that has already produced many benefits for the foundation.

The foundation has long relied on charity leaders or others in the health field to run many of its national programs. The program directors, who continue to work at universities, charity headquarters, or other similar places, are not employees of the foundation but instead often receive a subsidy through the grant program that they run. That means that when a grant-making program ends, the foundation does not end up stuck with employees whose skills may no longer be needed. The foundation currently employs 55 experts, posted at organizations throughout the country, to help run its grant-making programs.

“Having a staff structure that can ebb and flow with changes in allocations is pretty critical,” says Nadya Shmavonian, former executive vice-president of the Pew Charitable Trusts, and now a foundation consultant in Philadelphia. “If you have a very large staff with a high degree of specialization, then those people are going to be more inclined to continue to support their areas even if the money is not there.”

The foundation’s reorganization, while emphasizing flexibility, does not necessarily signal that Robert Wood Johnson hopes to start adopting only the latest fads. It has long been praised for its willingness to continue to finance worthy programs long after their initial trendiness has worn off, and Dr. Schroeder says the foundation plans to continue that approach when appropriate.

The foundation has, for example, worked for the past two decades to create health-care clinics in schools around the country.

“The foundation took an area of interest and, through a variety of approaches and programs, stuck with it for more than 20 years,” says Julia Graham Lear, director of Making the Grade, a national grant program that the foundation created in order to encourage states to find financing for health-care clinics in schools. “At bottom that is why the foundation gets pretty high marks from most people. It recognizes that if you are trying to have a measurable impact, it doesn’t happen in two years or four years. You get incremental progress.”

While the structural change that the foundation is making is so new that very few charity leaders have been able to assess it, some are optimistic about the effort to elevate the prominence of health-promotion programs.

“It will open new vistas of thinking,” says Jim Firman, president of the National Council on The Aging, and a program officer at Robert Wood Johnson from 1981 to 1984. “Opening up this other division will allow particular public-health and behavioral health approaches to really flourish: the health of older people, exercise, nutrition, health promotion — all of the topics which clearly did not fit within the foundation’s thinking.”

He adds: “It will elevate those issues, and will provide people with ideas a place to go to pitch them.”

However, Mr. Firman says he hopes the foundation will use the new structure to go further and take bolder steps that lead to more experimentation and more risk taking in its grant making.

“They can afford to fail more,” Mr. Firman says. “It’s not a financial barrier, but a psychological barrier. I’d like to see them take more risks — make more mistakes that lead to success.”

He adds: “Foundations, in general, can do a better job at celebrating failure and making it safe to fail — and in telling grantees that they’re welcome to come back and get another grant.”