A Question Not on the Agenda: How Long Should a Foundation Operate?

As the nation’s largest foundations gather in Seattle this week, one issue will not be

on the public agenda, even though many grant makers have been wrestling with it: whether foundations should exist indefinitely or spend their money in a short time and close their doors.

Although this is not a new question, wealthy families are increasingly attracted to the idea of limiting the lifetimes of their foundations, The Wall Street Journal noted in an article last month. The Foundation Center told the newspaper that 842 organizations ended their grant making in 2005, an increase of 55 percent from the number that did so in 1999.

It is not just the number of foundations that are making this decision that is so notable, but the fact that many big organizations are making this choice, including the Bill & Melinda Gates Foundation, which plans to close within 50 years after its current trustees have died.

Is this a sign that the days of the perpetual foundation are numbered? Or will the idea of limiting a foundation’s lifetime remain one that appeals to a minority of donors, perhaps including some very sizable ones, but not to most?

Julius Rosenwald, the businessman who built the Sears, Roebuck company, is usually credited with having popularized the notion that foundations should not continue making grants indefinitely.

In two essays at the end of the 1920s, he argued that foundations designed to live forever — as the recently established Rockefeller Foundation was — risked becoming too cautious and bureaucratic, preoccupied more with institutional survival and growth than with innovative and potentially controversial grant making.

Moreover, he thought it unlikely that the desire for lasting fame, which he believed motivated those who created perpetual foundations, would be fulfilled. Their personal accomplishments, he said, would inevitably be overshadowed — for better or worse — by whatever grant making was subsequently done in their names.

Mr. Rosenwald practiced what he preached and set up foundations that were renowned for their creativity, effectiveness — and short lives. But most grant makers followed the Rockefeller approach. Apart from any hopes for immortality they may have had, they viewed their foundations as permanent sources of private money for dealing with chronic social problems or new concerns that might emerge. Many donors also hoped their foundations would engage future generations of their families in charitable giving or provide continuing support for the communities or organizations with which they were associated.

However, central to the criticisms leveled against foundations throughout the last century was the fear that permanent and growing endowments under the control of trustees and staff members, accountable chiefly to themselves, were as much a threat to American life as extensive monastic land holdings were in Tudor England.

It fueled the federal investigations of the 1960s and ultimately led members of Congress to consider passing legislation to limit the lifetimes of foundations. Unable to muster the necessary votes, lawmakers compromised and decided to require foundations to distribute at least a set percentage of their assets each year.

Today’s interest in ending perpetual foundations owes little to those kinds of populist concerns. Although the current round of Congressional hearings on philanthropy began with proposals to increase the minimum percentage that foundations must distribute annually, it has moved on to the minutiae of Internal Revenue Service rules regarding noncash donations, supporting organizations, and the like.

While questions about the accountability of charities and foundations have been a major focus for legislators, no one has so far suggested that limiting the lifetime of foundations might be a step toward strengthening their integrity.

Instead, grant makers planning to close their doors seem to be doing so mostly in the hope of bettering their own efforts. Sometimes, they are seeking to respond to family disinterest or avoid family disputes, especially where donors and their descendants have differing political views. In other cases, the desire to avoid “burdening” future generations with the responsibilities of wealth may be paramount.

But for many, including Gates, the principal motive is probably strategic.

By distributing a big share of their assets in grants, they hope to make a greater impact than they would if they spent less and left their endowments to grow forever. And if focusing on “the challenges of our time” (to use the Council on Foundations’ theme for its Seattle conference) is so important, they may also believe that saving money for the unknown problems of a distant future seems foolish, if not irresponsible.

To be sure, most grant makers have still not reached that conclusion. Solid numbers are unavailable, but the odds are that more foundations opened their doors than closed them in 2005 (though some of those foundations may plan to limit their lifetimes too).

Spending all of the assets in a big endowment also takes considerable time; unless current plans change, the Gates foundation will have been making grants for almost a century by the time it finally stops operating. Moreover, to reduce their assets, foundations often make endowment gifts to universities, hospitals, and other kinds of charities, a practice that serves only to replace one perpetual fund with another, subject to many of the same risks.

Nor does spending lots of money ensure effectiveness. A poorly conceived approach to dealing with challenges such as poverty or health care is not enhanced because a foundation intent on going out of business is supporting it.

To the contrary, in theory, if not always in practice, grant makers that expect to be around indefinitely at least have the opportunity to learn from and correct their mistakes.

Still, the fact that more donors are considering limiting the lifetimes of their foundations suggests that the talk, especially from the newly wealthy, of pursuing different approaches to philanthropy has some substance. That is a hopeful sign, for of all the challenges the foundation world faces, the most difficult may be improving its own ways of operating.

Leslie Lenkowsky is a professor of public affairs and philanthropic studies at Indiana University and a regular contributor to these pages. His e-mail is llenkows@iupui.edu.