November 4, 1999 | Read Time: 2 minutes
As the assets of American foundations have ballooned in recent years to more than $330-billion, the social value that the funds provide has not kept pace, argue the authors of separate articles in two publications.
“Does the good that foundations do justify society’s investment in them?” asks Nelson W. Aldrich, Jr., in Worth (November). He notes that foundations now “cost” the country more in lost tax revenue every year than they distribute to good causes — a gap that has widened with the runaway stock market. By 1997, he says, foundations were giving $16-billion to charity, but lost tax revenue that year totaled $23.7-billion.
Indeed, foundations “are an expensive way to allocate dollars to social enterprises,” write Michael E. Porter and Mark R. Kramer in the Harvard Business Review (November-December). Not only do they spend an estimated $2-billion a year or more on administrative costs, but they also distribute just 5.5 per cent of their assets each year, on average, while their donors can often get tax deductions up front for their entire gifts.
“We as a nation pay up front for deferred social benefits,” the authors write. Justifying that payment is easiest when foundations create added value in their giving — something too few grant makers do, they contend.
Mr. Porter, a Harvard Business School professor, and Mr. Kramer, a lawyer, venture capitalist, and Chronicle columnist, have recently established the Center for Effective Philanthropy to help foundations increase their value to society. Their article suggests several ways that can be done: selecting the best possible grantees, using matching funds to attract other donors, helping grantees improve their performance, and advancing the knowledge and practice of a particular field by supporting research and innovative practices, for example.
Foundations have plenty of resources besides financial ones, the two authors say: professional management, freedom from political pressures, and potentially long-term commitments. But most of them spread their resources much too thin, are too little engaged with their grantees, and are too preoccupied with the minutiae of grant making to capitalize on their assets, the authors say.
Mr. Aldrich, for his part, sees several possible solutions to the current situation, in which he says the government collects too little from foundations in taxes, and foundations distribute too little in grants.
The charitable deduction might be lowered, for example, or the government could start taxing foundation income and capital gains, he says. Or, foundations might be required to give away all their income every year.
“It is in the public’s interest,” Mr. Aldrich writes, “that as much of their money as possible be put to work as soon as possible.”
The Worth article is available on line at http://www.worth.com; information on the Harvard article is available at http://www.hbsp.harvard.edu/products/hbr/index.html.
