More-Effective Foundations: Making the Dream a Reality

To the Editor:

I like to dream, and that’s one reason I liked Michael E. Porter and Mark R. Kramer’s “Philanthropy’s New Agenda: Creating Value” (“Two Publications Question Foundation Benefits,” Press Clippings, November 4). They thoroughly explore how foundations fall short of their potential and how society would be better off if foundations approached charitable giving strategically (in the many ways that Mr. Porter defines strategy).

They also gently warn foundations that society is entitled to better results given the enormous price that it pays by conferring 100-per-cent tax deductibility when wealth is transferred to foundations but only receiving annually 5.5 per cent of the wealth transfer and 14 per cent of the tax revenue foregone as annual payouts to charities.

The wish for a value-creating orientation to philanthropy is a dream because the philanthropic sector is the least accountable sector of society, and the sector lacks incentives to reform its ways. The pressures felt by foundations are few and weak: complying with I.R.S. payout requirements, pleasing board members, the self-respect and consciences of hard-working staff members who want to make a difference, and personal and organizational reputations. Compared to the reputational incentive in academia and similar fields, however, those in the foundation world are weak because there are no equivalents to peer review, tenure committees, and prestigious journals from which to be rejected.

So how will the authors’ dream of value-creating foundations become a reality? Although the authors cite some eight or so foundations that have narrowed the focus of their giving to become expert at what works in certain fields, these important foundation innovators do not yet exert effective informational pressure on their unaccountable brethren.

What is needed is the development of comparative measures of effectiveness on a significant scale in some 10 or more of the top fields of philanthropic giving. These comparative measures would become a “return on subsidy” shorthand for what “best practice” really means. Indeed, return on subsidy should become to the non-profit sector what return on equity is to the private sector. If a good body of comparative measures is developed, this “objective” information could lead to reform of the sub-optimal practices of today’s foundations.

Do dreams come true? Given that the tendency to become more accountable is contrary to human nature, such measurements are unlikely to be developed by established foundations that are professionally managed. Self-reform and self-policing are oxymorons. These needed changes, if they do come at all, are more likely to come from new philanthropists who are tenacious about measurable effectiveness.

Imagine what philanthropy would look like if the field was organized to identify and support the most-effective charities, and if there was a lot of agreement on what “effective” meant? If one believes that stronger comparative information could lead to a more results-oriented approach to philanthropy, it is alarming to contemplate what the opportunity costs of today’s predominantly unaccountable philanthropy are. Just think of the social problems that are not being solved or are not being addressed as quickly as they could be, and the human suffering that, unfortunately, is being prolonged.

That foundations have funded very valuable social improvements is not in dispute. What is at issue is how much more foundations could do with the same resources if they actually behaved as if they were trying to maximize their and society’s ”return on subsidy.”

My fantasy is that 10 years from now, philanthropy will be largely transformed. Foundations will be more accountable because foundations’ results and those of their grantees are readily measured. The return-on-subsidy measures that are developed will be accessible to other funders, other grantees, journalists, policy makers, and the public. Funders will feel strong informational and reputational pressures to perform at or above the standards of cost-effectiveness in numerous fields. There will be general agreement as to which funders and which grantees get the best bang for the philanthropic buck. Prestigious awards will be conferred upon the best funders and grantees and, more importantly, the “best” charities will attract more resources.

Michael K. Gallagher
San Francisco