The Costs of Making Grants: Well Worth It

Foundation critics, be careful what you wish for.

Many critics not only want foundations to be required to spend more than 5 per cent of their assets each year on grants; they also argue that foundations’ costs to carry out their grant programs should not count toward meeting that requirement. The critics’ concern is that including administrative expenses as part of the legal minimum lowers the amount of money that goes to charitable causes.

While the appropriate payout level is subject to legitimate debate, removing program expenses from the payout calculation is a misguided notion. It reflects an inadequate understanding of both the benefits derived from those expenditures and the attitudes of many foundations about such expenses. In fact, changing the law in that way would harm support for new ideas, non-traditional activities, and small start-up groups — many of the same causes that advocates of higher rates support.

Contrary to stereotypical images, most foundations — even many with considerable assets — have small staffs and otherwise restrain the budgets that support grant-making activities. Rather than spending too much, many of those foundations spend too little. As a result, they overly restrict the kinds of grants they can responsibly make, as well as the ways in which they can assist non-profit organizations.

Indeed, money carefully spent to conduct a grant-making program helps determine the very nature of a foundation: the types of projects it can support, the amount of assistance it gives to less-sophisticated organizations, and the kind of relationships it maintains with grant seekers and grantees.

In developing their approach to grant making, some foundations begin with the assumption that the less expense they incur, the better — a view shared by some observers outside the foundation world. Certainly there is no excuse for wasteful expenditures, but foreclosing important grant-making options by an unwillingness to pay for certain important services is another kind of waste. Most budget decisions should involve a hard-nosed assessment of the benefits of any proposed expenditure and a clear-eyed recognition of what a foundation may sacrifice by avoiding certain costs.

Although a foundation can give away huge sums with little expense, it can do so only by severely restricting its grant making. The more a foundation moves away from traditional forms of support to mainstream organizations, the more it needs competent staff members or consultants to investigate proposed projects and to monitor grants.

Providing funds for new ideas and unorthodox activities is one of the highest forms of foundation philanthropy, but doing so without adequate consideration is reckless and irresponsible. Foundations should take risks, but only with careful analysis of projects and clear recognition of what those risks are. Such preparation requires many hours of staff time.

What’s more, if a foundation wants to make its resources available to smaller, less-experienced organizations, it must be able to work with those applicants in ways that go beyond a mere review of submitted proposals. Although some of those organizations submit excellent proposals, others sometimes obscure their sound ideas with poor presentations. It takes time and effort to recognize the merits of a poorly written request and to help an applicant develop a proposal worthy of support.

Maintaining contact with a new or small organization during the course of a grant is another benefit that a grant maker can provide. A foundation’s willingness to discuss unexpected problems and possible solutions with a grant recipient may improve the chance of successful fulfillment of a particular project, shore up the grantee’s confidence, and help it avoid experiences that would discourage support in the future from other sources of funds.

Trying to maintain open and helpful communications with applicants of all sizes and levels of sophistication not only allows a foundation to obtain a better understanding of the issues it is asked to support, but it also makes applicants’ grant-seeking efforts more efficient. Opening the lines of communication removes some of the difficulty that charities sometimes experience in trying to approach foundations. And, more often than not, more dialogue produces better proposals.

Obviously, there are limits to how much any grant maker can practice those behaviors. Foundations can’t help every struggling organization, support every new experiment, or spend as much time as is desirable with every group that wants to talk with them. But a foundation should think about how important such practices are to its core values. If they are important, then sufficient funds should be expended to implement them to a reasonable degree.

To be sure, an insufficient number of foundations currently are making those kinds of grants, or are as open and helpful as they could be. But disallowing grant-making expenses as part of the payout would make that situation even worse by further discouraging some foundation boards from spending more to improve their grant-making programs. The result would be that more foundation funds would be concentrated on well-established, traditional causes and organizations — a style of grant making that many advocates for changing the payout rules clearly would not want.

Charles S. Rooks is executive director of the Meyer Memorial Trust, in Portland, Ore. This piece is adapted from an essay that appeared in the trust’s most recent annual report, which can be found on the Internet at http://www.mmt.org.