Grant Makers: Choose Democracy Over Elitism

By MARK DOWIE

Paul Ylvisaker, the legendary public-affairs director of the Ford Foundation, liked to describe philanthropic foundations as “America’s passing gear.” It’s an appealing metaphor that fits comfortably into the self-generated mythology of organized philanthropy, a mythology that is nurtured today by philanthropists likening themselves to venture capitalists.

The turn of a century, which is coincidentally the end of the first hundred-year cycle of American foundations, is as good a time as any for an allegedly open society to challenge the PR of foundation philanthropy and ask whether placing so much power at the disposal of a self-mythologized institution is an entirely wholesome development; and to ask: If foundations are indeed “America’s passing gear,” passing what, to get where?

The second century of foundation operation is likely to be very different from the first, in part because of the projections that organized philanthropy could become the fastest-growing segment of the economy in the next 50 years as the result of the intergenerational transfer of wealth.

Signs of change are very much in the air, as many elements of American society, including foundations themselves, are taking a long look at organized philanthropy, and asking: Is this experiment paying off? Could it be delivering more? What is required to make foundations more effective? What is the responsibility of private wealth protected by law from taxation? To whom are foundations accountable? And how should their work be evaluated — by whom, with what criteria, what standards, what goals, and with what sanctions? And from more adventurous thinkers: Do foundations deserve to exist?

With such questions being raised, one thing seems certain: To survive, foundations will find that they must evolve swiftly from essentially private institutions to unremittingly public ones. Pressure for such change will come from the news media, the government, and the taxpayers who are increasingly coming to realize that approximately half the assets of private foundations would have ended up in state and federal treasuries had they not been used for philanthropic purposes. That money, in effect, belongs to the public, whether it is in a private foundation or is paid to the tax collector.

As more people come to believe that the money in foundation endowments is “theirs,” they will demand greater accountability from foundations and will start asking why grant makers haven’t done more to improve public education; assure health care for the uninsured; protect the environment; preserve the well-being of treasured cultural, religious, and democratic institutions in our society; and deal with the other multifarious problems plaguing our nation.

If Americans look back to the first 100 years, they will find that organized philanthropy has often approached those challenges with a sense of urgency, but also with great caution. In many instances, organized philanthropy is slow to see problems coming, slow to respond, and quick to justify every decision. Thus, with the best of intentions, its remedies are often late and occasionally entirely futile.

The performance of 20th-century foundation philanthropy ranks a C-minus at best. Billions in foundation assets have been squandered on obscenely overendowed Ivy League universities, profit-motivated scientific research, hospitals where the rich and famous go to die, overpriced art collections, and architectural ego-spasms like “the Getty” in Los Angeles. And the use of 39 foundations as Central Intelligence Agency conduits during the 1950’s and 1960’s did serious damage to the alleged independence of all foundations.

Even though organized philanthropy has done some demonstrable harm during the past century, donors like Irene Diamond have proved that foundations are potentially a good thing. When AIDS bloomed into a national crisis, she invested in research that led to the development of drugs that offer the best hope of stopping the epidemic. Likewise, the Stern Family Fund helped transform our society with its support for voter-registration drives and other efforts to foster basic civil rights.

But the heroic role foundations have supposedly played at other times of national crises has been largely a self-generated legend. The truth is that most foundation trustees and executives have been well aware of impending disasters but reluctant to adopt a crisis mentality and hesitant to respond with innovative solutions.

Moreover, as the large 20th-century foundations became more established, more professionalized, and more bureaucratic, they tended to become sclerotic. With some remarkable exceptions, older foundations became, and have for too long remained, drag anchors on American social, political, and scientific progress, choosing to slow forward motion in order to avoid some perceived obstacle.

Founded as many of them were by men and women of enormous wealth who clearly intended to further their own and their families’ influence, foundations are not solely engines of philanthropy. Much of what foundations do and what they finance seems principally designed to protect and strengthen the professional and scientific classes and the institutions that produce wealth for future philanthropists.

While those are my views, based on interviews with 200 people who know how the philanthropic world works and my reading of scores of internal foundation documents, I have learned that opinions about organized philanthropy are easy to form but difficult to defend.

In truth, the ultimate benefits of organized philanthropy are completely in the eye of the beholder, and the politics behind those eyes are a pretty good predictor of one’s opinion about a specific grant or program. In fact, many of the same institutions financed or created by foundations are found on both best and worst lists, one list-writer’s triumph being another’s catastrophe. Most of the social-development programs of the Ford, Rockefeller, and Carnegie foundations, for example, are highly regarded by philanthropists, academics, and historians as notable achievements of American philanthropy, but they are seen by conservative pundits as shipwrecks of social engineering.

About the only generalization that can safely be made about foundations is that they possess the wealth and ability to affect the complexion and quality of American life.

The problem with 20th-century philanthropy has been that many of those empowered to make grants believe that they are qualified to solve serious crises. They discover eventually, however, that assuming the power to use money to lead the way into massive systemic reforms can be treacherous. The unanticipated social disruptions and ecological perturbations caused by the Green Revolution, the Ford and Rockefeller Foundation’s massive effort to develop wheat- and rice-growing techniques that would reduce hunger in developing countries, is a significant example. And the counterproductive role in energy restructuring played by the Energy Foundation, a collaborative project of three prominent grant makers, is being seen now in the serious problems facing California and other regions.

As the next generation of foundation leaders prepares to assume leadership, they need to find ways to make philanthropy work faster and more consistently for social progress. In the search for citizen approval, more and more foundations will promote their work in the news media more thoroughly and honestly than they do today. And with their informational tax returns online, they will become far more accessible and accountable to the public.

They also need to take several other steps to make organized philanthropy a far more productive and legitimate force, and if they don’t do it themselves, government will have to take action.

Among the most sorely needed reforms:

• No foundation should be allowed an endowment larger than $1-billion. No board of trustees, no matter how brilliant or progressive, should have control of more than a billion dollars in assets. That means breaking the Ford, Gates, Lilly, and Packard foundations into about a dozen funds each, each with separate boards. The result would be the creation of about 200 new foundations and 2,000 to 3,000 more trustees participating in the management and distribution of organized philanthropy.

  The operating expenses of a foundation and its program-related investments should not be counted in determining whether the foundation has met the federal requirement that it distribute at least 5 percent of its assets every year. The inclusion of expenses allows many foundations to give away less than 3 percent of assets, even in years when they grow almost 20 percent, and program-related investments are mostly loans, most of which are paid back with interest. They are therefore investments, and should not be booked as grants.

• Foundation trustees should serve limited terms, and people not connected in any way to the foundation or its founder should make up at least half the membership of all large foundation boards. At least a third of those trustees should be appointed by elected officials. Such boards would be quicker to respond to social crises and to deal with injustices. Besides, it seems only fair that if nearly half of foundations’ assets would otherwise have gone to government treasuries, the public should have a say in distributing those funds.

In sight is an opportunity for organized philanthropy to break with its elitist traditions and become a vital instrument of American civilization. The emerging foundation model, found today among community foundations, so-called health-care conversion foundations, and small, experimental cooperative foundations, with their citizen trustees, grantee advisory boards, and strong social agendas, signals a new covenant between society and philanthropy, a covenant that is gradually influencing traditional private, corporate, and operating foundations, none of which will ever be the same.

The ultimate question on democracy and philanthropy should not be about the rights and privileges of wealth but about whether the democratic process will make philanthropy more responsive, more effective, and more progressive. When people who have experienced economic hardship or injustice work alongside those who have not — but who, for whatever reason, seek justice and equality — the solutions undertaken by foundations will be more realistic.

The full potential of private foundations has yet to be achieved. They could have contributed much more than they have over the past century. And they could do so in the future. The infrastructure is in place; the money is there. All that is required is imagination, leadership, and faith in democracy.

Mark Dowie is the author of

American Foundations: An Investigative History (MIT Press), from which this article was adapted.