Wrong Ideas About What Foundations Need to Do Better

To the Editor:

In your issue of February 26, Pablo Eisenberg presents a long list of reforms he asserts are needed “to improve foundation responsiveness to today’s needs” (“Now’s the Time to Push for Changes in How Foundations Operate,” Opinion). As he sees it, the impact of the current economic crisis provides the occasion for dealing with problems “that have long plagued the foundation world.”

Unhappily, some of the reforms he proposes are wrong, and some of his arguments are unconvincing. Among the concerns:

Increase the minimum distribution. Raising the required payout has been proposed repeatedly by Mr. Eisenberg and many others. Although the objective of increasing the total amount of foundation grants is clearly desirable, the case he makes relies on dubious premises. “Federal rules that require foundations to give 5 percent of their net investment returns,” he observes, “have not been changed for almost two decades, despite the enormous increase in foundation assets.” What either the age of the regulation or the larger total constant value of all foundation assets (fueled by new capital) has to do with the minimum distribution rate is, at best, obscure.

Mr. Eisenberg then asserts that because most administrative costs can be included in the 5-percent minimum, “taxpayers are cheated by foundation donors who have received enormous tax benefits for their contributions.” How taxpayers are cheated by this rule is not at all clear. Would taxpayers not be cheated if the minimum payout were 6 percent or if administrative expenses were excluded?

The existing rule is by no means sacred, but any change should be considered in the context of all private philanthropy. Is private foundation spending significantly different from spending based on other private endowment funds? Should the same minimum apply to current spending of endowment income by universities, colleges, museums, orchestras, hospitals, and other nonprofit institutions? If not, why not?

Limit the maximum size of foundations. The emergence of the Bill & Melinda Gates Foundation, amplified by Warren Buffett’s huge pledge, has stimulated many strange reactions. Proposing a ceiling on the size of philanthropic endowments to prevent the distribution of large amounts of money “without any public discussion or political process and without public accountability” is one such reaction. A serious rationale for the freedom given to foundations is that the resilience of our democratic society is reinforced by the existence of funding sources not directed in detail by our political process. They foster a diversity of ideas instead of a single line of reasoning that is acceptable. Societies lacking diverse ideas (like the former Soviet Union) become brittle and lose the capacity to adapt to changing circumstances.

Many constructive actions, such as civil-rights struggles, and the creation of new institutions, have been advanced in America as a result of the independence of our foundations. Their ability to support unpopular causes is a crucial justification for their existence (even if they don’t do enough of that). The famous Myrdal study, An American Dilemma: the Negro Problem and Modern Democracy, sponsored by the Carnegie Corporation the early 1940s, is a good example.

While large amounts of money may be transferred by wealthy Americans to foundations and charitable institutions in coming years, the likelihood that other new foundations will approach the size of the Gates foundation is both small and irrelevant. The Gates foundation has its flaws, but the idea that it poses a threat to democracy is bizarre.

Require family foundations to shut down within a specific period of time if they do not add outsiders to their boards. This is another case of overkill. Family foundations with substantial assets frequently add nonfamily members to their boards because it is a good practice. Mr. Eisenberg would prescribe the size and membership of family foundation boards to bring “adequate perspectives and points of view to the grant-making process.” What constitutes that adequacy must reside in the eye of the beholder. His concern that family boards “often are insular and their grant making focuses primarily on family interests” doesn’t strike me as a problem. Local charitable interests and intergenerational involvement with particular nonprofit institutions are often meritorious aspects of the rich diversity of American private philanthropy.

Make grants throughout the year, not just at a few specific times. This proposal sounds sensible, but presents real problems. Making grants at announced intervals is a useful practice, which allows foundation managers and boards to compare proposals and to consider how their grants support each other in the pursuit of institutional objectives. Rolling deadlines make mere lists of more or less related grants, as opposed to carefully constructed programs of mutually reinforcing grants, more likely to occur. Responding to emergency needs that can’t be handled sensibly at quarterly board meetings should be exceptional. Orderly procedure may well be a critical distinction between foundation giving and personal philanthropy.

Build career ladders for young people. Although I see some marginal improvement lately, careers in private philanthropy are almost impossible, largely because foundation work is not perceived as a profession. The standard assumption is plainly that the jobs are cushy and that anyone with half a wit — or the right personal relationships — can be a foundation executive. What could be easier than giving away money? How many foundation leaders are selected from candidates who were successful in managing other foundations? Rare is the university that will hire a president or senior executive with no prior experience in higher education, but the reverse applies consistently to private foundations. The Ford Foundation recently hired a new president with no previous employment whatever in the nonprofit sector. Some foundations place term limits on the employment of program officers or other executives, suggesting that foundation work is inherently corrupting, that new ideas always require new people, and that experience is a negative. How can career ladders be built in that environment?

Despite Mr. Eisenberg’s complaints, foundations seem to be very popular these days (stylish, in fact). Large donors have been featured on magazine covers and widely praised. Some overenthusiastic observers have even suggested that the last 10 or 15 years have been a “golden age of private philanthropy.” In these circumstances, pervasive reform seems a remote prospect.

While I disagree with many of his proposals, the questions that Mr. Eisenberg raises about the strange and wonderful world of private foundations are worth thinking and arguing about — regardless of the current economic meltdown. His list of proposed reforms offers some useful points for launching needed arguments and clearer thinking about these important (but not all-powerful) institutions.

Dan M. Martin
Washington

Mr. Martin spent 26 years as a grant maker before he retired.