August 27, 1998 | Read Time: 6 minutes
Few foundation trustees carefully monitor the contents or performance of the funds in their trust. That is because most trustees regard themselves primarily as program advisers whose main role is to formulate broad grant-making policy and philanthropic mission. They have little interest or experience in investing and are less familiar with the language of finance. Indeed, at most foundations, investment management is a totally separate function that takes place in another building, city, or state.
Most trustees simply want their investments to earn more money, since more money equals more grants. Never mind if the dividends paid to a foundation by major polluters exceed all the funds the foundation provides to environmental organizations that try to combat the same company’s transgressions. Because of the separation of program and investment functions, only a few trustees are even aware of the companies in which the foundation holds stocks.
If foundation trusteeship were strictly interpreted, foundation leaders, as fiduciaries, would embrace the view that investment strategies are integral to overall mission. When a foundation’s mission and its fiduciary responsibility are both viewed as key elements of philanthropic purpose, then grant making and asset management can become mutually reinforcing instruments of change. And change, most philanthropists agree, is what foundations should be all about.
Cases abound in which foundations’ portfolios contain investments that contradict the missions they are entrusted to pursue. Environmental grant makers like the Pew Charitable Trusts with large holdings in oil, chemical, timber, and mining companies represent an especially striking paradox. Other instances are less obvious — such as when a foundation committed to racial justice holds shares in companies with wretched equal-opportunity records.
Discrepancies between a foundation’s grant-making mission and investment practices may seem to be the natural province of liberal foundations that support organizations critical of corporate actions. In practice, however, there’s more than enough “dissonance” to cover philanthropy’s political spectrum.
Consider the case of the Lynde and Harry Bradley Foundation, a $500-million institution that is widely viewed as one of the most effective grant makers to conservative organizations and causes. The foundation is generally viewed as an upholder of conservative cultural values. Yet its endowment contains millions of dollars’ worth of stock in entertainment behemoths like Disney, Time Warner, Viacom, News Corporation, and Harrahs, whose business lines and products routinely outrage Bradley’s conservative grantees.
The clash between grant making and investment policy often reflects a fundamental misinterpretation of standards governing foundation investments. Those standards — rooted in federal and state statutes as well as accumulated case law and regulations — clearly require fiduciaries to earn a return on the foundation’s investment portfolio and avoid unfair personal gain or other shady practices. But the standards also have grown increasingly hospitable to mission-friendly investment strategies.
The granddaddy of fiduciary guideposts is the prudent-investor rule, which basically requires a fiduciary to manage a trust as if it contained his or her own money. Accompanying the federal law governing private trusts is a statement by the American Law Institute that says that a trustee’s ultimate duty to beneficiaries “is to invest and manage the funds of the trust as a prudent investor would, in light of the purposes, terms, distribution requirements, and other circumstances of the trust” (emphasis added).
Prudence, then, is measured not by individual investment decisions and overall portfolio performance but by the totality of the trustees’ investment strategy. Moreover, a large body of empirical literature suggests that portfolios screened for investments that are not at odds with a foundation’s mission need not sacrifice financial returns, even for foundations that seek to preserve perpetually the buying power of their corpus, or initial endowment.
Foundations are also held to the business-judgment rule, a standard that previously applied only to directors of business corporations. The Uniform Management of Institutional Funds Act, now adopted in 39 states and the District of Columbia, stipulates that “members of a governing board of charitable institutions shall exercise ordinary business care and prudence under the facts and circumstances prevailing at the time of the action or decision. In so doing they shall consider long- and short-term needs of the institution in carrying out its educational, religious, charitable, or other eleemosynary purpose [alongside] its present and anticipated financial requirements, expected total return on its investments, price-level trends, and general economic conditions.”
Nothing in that standard, which clearly applies to philanthropies, would seem to prevent foundation fiduciaries from screening out stocks and bonds that contradict grant-making programs, making mission-related investments, or engaging in shareholder advocacy.
When it comes to shareholder advocacy and exercising their voting rights, most fiduciaries simply defer to their money managers, who either toss the proxies in the wastebasket or vote the company line. Some foundation boards refrain from voting altogether as a matter of policy. In so doing, foundation trustees are in effect giving up their power and responsibility to insure that the organizations in which they invest are run according to the values in which they believe. Do foundations not have an obligation to see that shareholder resolutions for companies in which they own stock are voted appropriately?
The Ford Foundation is one of the few foundations that routinely votes its proxies. However, the foundation has a policy of refusing to reveal exactly how it voted on any proxy ballot. Such a policy, of course, limits the clout a large foundation could exert.
For a handful of small foundations, shareholder advocacy has become part and parcel of their overall mission. Going beyond merely voting on issues that come before them, some even use their shares to initiate or to support shareholder resolutions that challenge egregious corporate practices or policies. To date, however, no major foundations, some of which have substantial holdings in the country’s worst-behaved corporations, have initiated shareholder resolutions.
Still another way in which foundations can use their investments to further their missions is through community-development loans, loan guarantees, or other so-called program-related investments. Yet all but a handful of grant makers forgo opportunities to devote even a small portion of their portfolios to such investments, even though P.R.I.’s clearly fall within the Internal Revenue Code and can be treated as grants and credited toward the minimum 5 per cent of assets that foundations must distribute annually.
Why have program-related investments remained such an underused phenomenon in the philanthropic world? A number of reasons have been advanced, from prospective recipients’ preference for outright grants to the burden that loan management imposes on foundation staffs. Even so, despite their risks, such loans fall well within the standards of prudent investment that apply to foundations, and their limited use reflects a lack of imagination on the part of the boards of most large foundations that, unfortunately, spreads far beyond investments.
Floating in an $11-trillion sea of institutional assets, the investment portfolios of American private, corporate, and community foundations — which now total about $227-billion — represent a fairly small ship. But since foundations fulfill a unique purpose in our society, they possess enormous potential for thoughtful investor strategies that can further their missions. Is it not time that more foundations begin putting their money where their values are?
Mark Dowie, an investigative reporter, is working on a book about foundations. This piece is adapted from a report he produced for the Financial Markets Center, in Philomont, Va.
