Foundations Can Expect Increased Attention From State Officials

Whenever the Ford Foundation gets into hot water (as it regularly seems to do), the rest of the philanthropic world might be forgiven a bit of schadenfreude, for taking quiet pleasure at the latest misfortune of a grant maker known for its huge size and ambition.

But foundations of all sizes and approaches should pay attention to the investigation of Ford by Michigan’s attorney general, because it signals that states are getting more aggressive in their oversight of grant makers. While Congress seems to be stalled in its efforts to pass new laws to regulate foundations, the states are forging ahead, and they are likely to push foundations to demonstrate that they are accountable to their founding donors.

In the case of Ford, Michigan’s attorney general, Mike Cox, says he is concerned that the foundation is not following the intentions of the Ford family, which incorporated the foundation in Michigan in 1936 and once gave a large share of its grants to charities in the state.

Today the Ford Foundation is a sprawling organization, with offices around the world and grant making to match, and it is clear that serving the public good does not mean doing what the Ford family would have wanted, but rather using its resources to deal with the most pressing issues of the day.

Indeed, in 1953, the foundation left Michigan for New York and since 1977, when Henry Ford II resigned from its board, complaining about the direction it was taking, no family member has been a trustee of the foundation. Yet, ironically, its fate could now rest upon decisions of the Michigan legal system.

Although state attorneys general have long been responsible for representing the public’s interest in the workings of the philanthropic world, it is the federal government that plays the major role in overseeing the activities of nonprofit groups. The Internal Revenue Service has responsibility for granting tax exemptions and determining what charitable deductions donors can take on their income taxes, as well as any conditions (such as payout requirements) attached to the privilege of tax deductibility. As a result, state attorneys general saw little need to put a lot of resources into monitoring charities and foundations.

But lately, attorneys general have stepped up their efforts to police nonprofit groups, primarily against fraudulent fund-raising campaigns and misuse of charitable assets for the personal benefit of donors and their friends and relatives. The sale of nonprofit organizations to for-profit companies, especially in the health-care industry, prompted increased interest as well.

Additionally, some attorneys general have trained their sights on organizations that they thought were operating at odds with the objectives for which they had been established.

The most publicized case involved a 2003 review of the Ewing Marion Kauffman Foundation by Missouri Attorney General Jeremiah W. Nixon, who sought to determine if the grant maker’s new leadership remained as committed to supporting projects in its Kansas City home as its donor had been. Eventually, the foundation created a formal local-giving program and made changes in its governance that satisfied state officials.

Similar questions have also been raised about other organizations, including the Daniels Fund in Colorado, which planned to close its offices in neighboring states, and the Terra Museum in Chicago, whose directors wanted to relocate its American art collection to Washington, D.C. But the proceedings against the Ford Foundation represent the most ambitious attempt yet to hold executives and trustees accountable not just for their stewardship of a nonprofit organization’s assets, but also for their faithfulness to its purposes, or what legal scholars have termed the fiduciary duty of obedience.

Partly because determining those purposes is often no easy matter, this standard is a controversial one and difficult to apply. Although Attorney General Cox contends that the Ford Foundation’s grant making during its donor’s lifetime demonstrated that its aim was to provide support for Michigan charities, the foundation’s charter does not explicitly say the institution’s purpose is to do so.

Furthermore, after Henry Ford’s death, the foundation’s assets grew substantially, leading its trustees to broaden its grant-making into new areas — areas it has pursued for several decades without legal objections. To Ford Foundation officials, the attorney general’s investigation looks like an effort less to enforce the “duty of obedience” than to impose his own interpretation of the donor’s purposes in place of theirs.

In any case, insisting on faithfulness to the goals of an organization, as specified in its founding documents, strikes many as potentially hurting the ability of nonprofit groups — and grant makers in particular — to adapt their missions and programs to meet changing circumstances. Obedience to a donor’s desires may not always be a virtue, nor disobedience a vice. And requiring charities to remain true to their original purposes can be a prescription for waste as well as a safeguard against misuse.

For those reasons, legal experts going back to the days of English common law have warned against letting the “dead hand” of the past weigh too heavily on the affairs of the present.

If the investigations undertaken by the Michigan attorney general and some of his colleagues signal a challenge to this view, that might be a positive development. For by leaving their goals too broadly defined, nonprofit groups have exacerbated the difficulties of effective oversight, whether by government officials, their constituencies, or their own governing boards.

And by failing to specify their objectives clearly, grant makers have wound up on the defensive over how much they spend, on what, and for how long. As a result, both federal and state regulators have fastened on other benchmarks (such as the amount of money spent in a particular place or during a year) to judge whether the public’s interest is being served, rather than the more revealing and important matter of whether a charity is doing what it was set up to do.

In light of the Ford Foundation’s long separation from the Ford family, Attorney General Cox’s investigation may not succeed in holding it to a new standard of fiduciary duty, one based on obedience to a founder’s will. But if debate over charitable regulation is now shifting from Washington to state capitals, questions about the use of philanthropic resources, not the kinds of tax incentives donors deserve for their giving, are apt to loom large in the future.

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