November 13, 2008 | Read Time: 3 minutes
The global financial crisis is creating severe hardships for individuals and reducing government budgets for relief. The crisis has placed great stress on nonprofit organizations and reduced the assets of both philanthropists and foundations. How should grant makers respond?
First, we need to stay focused on the commitments and long-term strategies we have already adopted. Whether we are working to improve the life chances of disadvantaged children, mitigate the catastrophic consequences of climate change, or alleviate poverty in Africa, these problems will be with us over many economic cycles. They can be solved only through perseverance, and this argues against switching directions just to deal with short-term crises. That does not entail being hardhearted toward those in immediate need, but it does require some hard thinking about the consequences of diverting significant attention and resources from long-term goals.
Second, as unpleasant as it may sound, we need to recognize that the stress on nonprofit organizations provides opportunities for efficiencies and consolidations.
Unproductive groups feel little pressure to change their practices in flush times. This is a time for some sorting out. So while we all want to help strong nonprofits weather the current crisis, it’s a time to consider redirecting money from marginal organizations to ensure the survival of high-performing ones.
Third, we must think strategically about how to deal with the decline in our own assets. The variables in our control include how much of our assets we spend to make grants and cover our administrative expenses.
Most foundations design their budgets to allow for distribution of 5 percent of their assets. Although that is the minimum percentage required by the Internal Revenue Service, many foundations treat it as a ceiling, as if their primary goal were perpetuity rather than solving social and environmental problems.
Restricting the amount foundations distribute to 5 percent should not be sacrosanct. The real question for foundations is whether they will make more of a difference to society by spending now or by husbanding resources for the future.
The answer may be different depending on the problems we seek to solve. Grant makers that focus their money on perennial causes, such as education and the arts, may find that distributing 5 percent of assets is just right. But in realms such as global warming or nuclear proliferation, where prevention is vastly cheaper than cure, spending only the minimum now may be wildly counterproductive.
Then there is the question of administrative expenses. Our job in managing foundations is to spend money effectively. Lavish internal budgets, oversized staffs, and self-indulgent processes work against this. But the opposite extreme is also counterproductive.
Our ultimate goal is to achieve our missions most effectively, and this is not cost-free. If we didn’t care about making an impact, we could easily give away our philanthropic capital in one day — even Bill Gates and Warren Buffett could.
Giving money effectively, especially for complex causes or to aid distant countries, requires an expert staff, great skills in getting to know people working on the ground, and strong intelligence networks. The cost of staff members and other administrative activities is justified so far as they help achieve our social missions. We should use this time to check and see how much of our administrative budget is adding to the quality of the foundation’s work and how much might be trimmed.
Our bottom line: In periods of financial stress, don’t lose sight of your fundamental goals and strategies, and make sure that your assets are deployed to achieve them most effectively.
Paul Brest and Hal Harvey are the authors of Money Well Spent: A Strategic Plan for Smart Philanthropy (Bloomberg Press, 2008). Mr. Brest is the president of the William and Flora Hewlett Foundation, and Mr. Harvey is president of the ClimateWorks Foundation.
