The graying of the non-profit arts sector? On what planet?

A large and generally very smart foundation recently published a really silly report. The basic premise is that non-profit arts organizations are facing a crisis of failure to attract the younger generations of adults as artists, staff or supporters. Therefore, the foundation argues, the non-profit arts sector must adopt "a systemic approach to the challenge of generational succession in the areas of governance, membership, advocacy, [and] financial support."

Heh. Are they kidding? Well no they're not, alas; rather, they are offering conclusions that are wildly unsupported by the fairly trivial amount of actual data offered. Andrew Taylor with The Artful Manager, and especially some of the commenters to his post, nicely point out some glaring logic flaws in the above argument. Best comment: "In reality, younger people have perfectly fine values of their own -- as well as finely honed bullshit detectors -- and the real challenge is for the arts to genuinely mean something to younger people. To be worthy of them, I might even say."

I can't do any better than that on the logic so I'll throw in two cents on the facts: if there is a sector of the U.S. economy that is doing better now at attracting young people than the arts I haven't seen it. I've been working in the non-profit arts sector for several years now, just did some empirical research on it actually, and that trend is blindingly obvious. Theater, dance, music, visual arts, whatever.

Training talented kids for those fields is a booming business at all levels, the number of U.S. tax returns listing artist as a paid occupation doubled in one generation, the biggest current theatrical hit on the planet is minting money around the country based on its appeal to young women ("Wicked"), and so on. In my day job I deal with small to medium sized arts organizations, the number of which has been rising at a crazy rate, and it's long since become a surprise to meet an artistic director or music director as old as 35.

That report notes demographic predictions of the rising average age of the U.S. and claims that this is a danger sign for the arts unless the sector gets organized to meet "increasing competition" for the attention of "a shrinking pool of younger people." You know what, if the shrinking pool prediction turns out to be correct I'm going to predict that it will be other sectors scrambling to figure out how to become as attractive to young people as the arts provably are, rather than the reverse.

U.S. foundation giving keeps surging, and changing

The Foundation Center, the best source of information on charitable foundations, has released its latest trend data. While the fact that foundation grantmaking continues to boom is hardly a surprise given various newspaper headlines the last few years, there are some changes underway which development directors and executive directors would be wise to think about.

The Center's data comes from the largest 1,100 foundations, representing about half of all foundation grant dollars awarded. Total grant dollars from those institutions are rising now at close to twice the rate of inflation: up about 6% in 2005 after a rise of 8% for 2004. (And the center predicts an even greater increase for 2006 thanks to various high-profile foundation gifts starting to turn into new grant dollars).

Those increases are in dollars awarded, though -- the total number of individual grants issued rose only half as much. So the average size of individual foundation grants is rising. At the top end, a record 308 individual grants were at least $5 million each in 2005.

The common accusation that foundations have limited attention spans is supported in some ways by this data. For example the largest grantmaking increases by subject area in 2005 were environmental and animal-related causes, two categories which had declined the previous three years.

Unrestricted grants rose by only 1% for 2005, meaning they declined as a fraction of all grant dollars. So that's one recurring gripe which is not yet being persuasive for many folks on the foundation side of the discussion (I'm one example of that, actually).

The Congressional spotlight is being focused

The Washington DC Examiner reported the other day that a Congressional Philanthropy Caucus is being organized in the House, co-chaired by North Carolina Republican Robin Hayes. The Democratic co-chair was not identified, and the newspaper didn't name its source for the story. Some quick poking around just now didn't turn up any denials, and the Chronicle of Philanthropy appears to believe it.

Such a move seems inevitable given the various non-profit and philanthropy related issues that have in recent years been the subject of Congressional bills or hearings, and the general increase in public awareness due to things like the Gates and Buffett philanthropies and some non-profit scandals. And it does seem clear from kludgy messes like last year's federal Pension Reform Act that a lot of Congressmen and Senators are not yet up to speed on what this sector does and how, and a defined caucus ought to help with that learning curve.

Nonetheless I can't help thinking of the prediction Joel Fleshman is going around making (out loud and in his book) about foundations: that if they don't define and adopt a new more-transparent version of the charitable-foundation social contract, Congress will eventually define it for them. I think he's right about that -- our society slowly but continuously becomes less tolerant of secrecy from all its public or civic institutions, including publicly-held companies, and there's no reason to expect foundations to be exempted from that.

And I would apply Fleishman's logic to the not-for-profit tax-exempt sector as a whole: the statute of limitations on permission to be a young industry is not yet defined but it's also not open-ended. In some ways we perform our role in society better than other sectors do and some ways we don't, at all; and we won't be allowed to avoid that fact forever.

The McCormick Tribune Foundation just moved into the bull's-eye

The Tribune Company is one of America's largest media conglomerates: owner of the Chicago Tribune, the L.A. Times, the New York Daily News, other newspapers around the country, the Chicago Cubs, WGN TV and radio, Metromix, and sundry related businesses. The company's ongoing corporate soap opera has a significant non-profit-governance element which has been overlooked or overshadowed...until now: Illinois Attorney General Lisa Madigan "has taken an interest" in the issue of whether the heavyweight Robert R. McCormick Tribune Foundation is being run properly as a charitable institution.

The source of this news is a front-page article in this week's issue of Crain's Chicago Business, the city's leading business newspaper. Madigan, who has previously put non-profit hospitals in her sights, seems pretty clear on the fact that being a tax-exempt organization in the U.S. is a legal and social contract not a blank check or inalienable right. Given the facts here, that does not look good for the foundation. Madigan's scrutiny may also may have an impact on the the ultimate fate of the media company, via a scenario explained in the Crain's article linked above.

That also does a decent job of explaining how the foundation and the company are so tightly linked and why, but the degree to which that is contrary to modern standards of non-profit governance and law doesn't really come across. The foundation remains basically a captive creation of the company, and that is one of the once-common practices that inspired the wholesale rewrite of federal charitable-foundation law in 1969. It also certainly violates the spirit, at least, of Illinois' not-for-profit incorporation statute.

The quote from Robert Sitkoff at Harvard could be correctly applied to the whole setup, not simply the specific transaction he's commenting on there. The foundation spokesman's rejoinder at the end of the article is feeble as a defense of the specific issue about responsible investing of the foundation's endowment, and that isn't the biggest odor about this anyway.

Counting non-profit arts groups

Today's dot-org entry is a bit of an infomercial, in the sense that it's about my own work.
The following "Dear Colleague" email went out from our offices late today to arts groups, funders, service organizations, and others around the Chicago area:

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The Gaylord and Dorothy Donnelley Foundation, in keeping with its longstanding mission interest in the artistic vitality of the Chicago region, has conducted a detailed comprehensive scan of active non-profit arts organizations in the region. The full written report on “The Arts Scan Project”, a two-page executive summary, and an Excel file containing the underlying data are now available for download.

Key findings of this effort will shortly be reported in the Chicago Tribune and it is scheduled for discussion on the "848" program on Chicago Public Radio WBEZ-FM (91.5) Tuesday morning. Highlights include:

-- As of summer 2006 there were about 1,158 arts non-profits active in the greater Chicago region.

-- About twice as many new arts non-profits were founded from 1997-2006 as from 1987-1996.
-- The creation of new arts non-profits today is more concentrated within the city of Chicago than was true a generation ago.

-- More than a quarter of all active arts non-profits in this region are focused on live theater and another quarter are focused on music.

-- While one-quarter of all active groups are concentrated in ten zip codes along the city's central and North Side lakefront, the enormous recent surge of new groups appears to include a number of new clusters in outlying areas of the city and suburbs.

We believe this to be the most comprehensive snapshot of this region's non-profit arts community ever assembled. We hope it will spark discussion about the region's artistic vitality and believe that such conversations are always most productive when rooted in real-world data.


P.S. YOUR THOUGHTS on this report would be of great interest to us and to the entire artistic community. Chicago Artists Resource [which, as an aside, is one of our current grantees] has created a public online forum for discussion of the Arts Scan and its findings, in which Donnelley Foundation staff [i.e., me] will answer questions about this research and report. We look forward to your comments about the Arts Scan and its implications. You can link to CAR's online forum from our website or by going directly here.
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The comments in that online forum will naturally be about the study's findings, that is, about the state of the non-profit arts world in Chicago. Here I'd be happy to respond to comments or questions about why and how we did the research, or perhaps about the reports' data regarding arts groups' budget sizes, more the non-profit inside-baseball aspects.

A familiar looking story

The other day someone asked me if I would comment here on the announced closure of a particular non-profit. It wouldn't be appropriate for me to do that by name given that I work for a prominent foundation in the same region.

It was not a group that I knew or have had any professional dealings with, meaning I have no more information to go on than their public statements, website, and annual tax returns posted on Guidestar. That's obviously limited data, in particular it offers no meaningful information about the impact of their programs. But then that limited public information seemed to paint such an obvious and familiar outline that I did write the following by email:

I see annual revenues veering wildly up and down the last few years [literally doubling and halving from year to year], which added to their public comments about loss of foundation funding strongly suggests they were still (more than a decade after their founding) largely reliant on foundation grants to exist. I see little evidence of any organization-building -- the mission and lists of accomplishments are all over the map, no evidence of any coherent strategic or business plan, etc.

It's the non-profit equivalent of looking at a 20-year-old restaurant and realizing that the owners were still running it like a 2-year-old one. I'm sure any program officer at any foundation would agree with that sad assessment, and hence I suspect that the foundations that had been incubating them finally gave up on it. A non-profit enterprise which after 15 years still hasn't done anything about diversifying its revenue stream has no more likelihood of succeeding than a 15-year-old law firm that still gets all its revenue from three repeat clients. Had I been asked a couple years ago for advice on this group it would have been basically, "You're failing because you're running the business into the ground, and the foundations will give up on you any day now."

Note I said "incubating", because that is what foundations do -- we are not a permanent revenue source and anyone who thinks we are is very new to this sector. Foundation grants are only an eighth of all charitable support in this country and corporate is only a bit more. Individual donors are where the long-term sustainable money is, and individual giving to nonreligious non-profits in this country is now close to $200 billion a year and still rising steadily -- so any non-profit with a reasonable track record of mission product can build an individual donor base, and doing so ain't rocket science. I can't tell why they failed to do that but it sure looks like they did....If more-detailed financials revealed sizeable individual-giving support and no more than half the annual budget coming from foundations then I'd have to change my diagnosis, but I'd happily bet you a nice dinner that they wouldn't.

I could have added that in addition to now analyzing non-profits regularly as a foundation officer, I know exactly whereof I speak on the above issues from direct sad experience. None of which is to suggest that I think the above analysis is anything but a quick gut reaction, it's certainly not based on anything close to the level of information that I'd collect in my professional capacity.

Now with the disclaimers out of the way, I believe some experienced folks read this blog a bit, so what do you think? Does it sound like I'm jumping too quickly to a conclusion, or does that off-the-cuff autopsy ring true?

For the Gates of art museums, 2006 was no fun at all

The J. Paul Getty Trust in Los Angeles just had the kind of year that could cripple a smaller non-profit; as the richest art institution on the planet they certainly have the resources to stabilize things but do they have the will? They've hired a guy from my hometown of Chicago to take over the captain's chair and find out.

The Getty consists of two large museums and a large grantmaking foundation, all devoted to visual art; their endowment alone currently stands at about $6 billion and a lot of the artwork in those museums is literally priceless (never mind the prime real estate). Early in 2006 Barry Munitz resigned as head of all that, under a large public cloud of accusations about lavish personal spending of Getty funds, steering grants to friends, and excessive pay while ordering budget cuts. The apparent lack of effective governance had caused the Council on Foundations to take the highly-unusual (and highly public) step of suspending the Getty's membership, which they restored a couple months after Munitz was forced out and the Getty board adopted various internal reforms. Several other top Getty staffers also resigned during the first half of 2006.

Meanwhile the Getty is having all sorts of problems with the issue of looted antiquities, mainly from Italy and Greece. It's fairly clear that well into the 20th century a lot of sculpture from the ancient world was ending up in major museums via, let us say, 18th- or 19th-century methods.
After years of pressure, the Getty Museum during 2006 agreed to return four major pieces to Greece and in October 2006 agreed to return 26 pieces to Italy. The Italian government, though, isn't interested in settling for half a loaf and is prosecuting a former Getty curator in Rome for criminal theft of national treasures; some newspaper reports say that the Greek government is contemplating similar pressure. For the Italians the fate of two of the Getty's best-known items, the well-known ancient statue of Aphrodite and the so-called "Getty Bronze", have apparently become deal-breakers.

The current director of the Getty Museum, Michael Brand, has an op-ed in today's Wall Street Journal claiming that the Italian government has gone back on an agreement and now won't even talk to him. Whether his version of those events is right or not seems to miss the real point, which is that those nations and others are no longer willing to accept the status quo of priceless indigenous works of art being kept on display halfway around the world just because they were dug up when no one was looking. Perhaps at some point the Getty board will realize that these issues are not going away and will just keep damaging the institution's reputation, and that the Getty has the resources to rebuild from the loss of even content of that caliber.

The "Slate 60" sounds off

Ten years ago, Slate editor Michael Kinsley was inspired (by something Ted Turner said in an interview) to create the "Slate 60": the philanthropy version of the Forbes 400 annual list of America's richest people. Arguably Kinsley was a bit ahead of his time in 1996, which was before Bill Gates and Warren Buffett and Gordon Moore started famously taking turns doing modern-day Andrew Carnegie impersonations. (For that matter so was Turner, who has a right to feel like he was doing billionaire philanthropy before it was cool.)

Anyway it was a good idea and the ten years worth of lists make for interesting reading; one can see things like the sources of vast new personal fortunes, what subjects and institutions have the attention of the super-rich, and of course the unprecedented new scale of individual philanthropy. (Despite personal wealth in the U.S. being vastly less concentrated today than in Carnegie's time Bill Gates has already given away in real dollars several times as much as either Carnegie or John D. Rockefeller did; and yet all the giving for a year by the entire Slate 60 is a small fraction of total American individual giving which is closing in on $300 billion per year.)

This past November, Slate gathered members of the Slate 60 from its first ten years for a public conversation. I like the NonProfit Times writeup which is both thorough and just a bit cheeky ("With their limos waiting outside, donors gathered at the conference to discuss..." Those would be hybrid limos staffed by salaried drivers receiving family health insurance, I trust?). For example their reporter quoted Bill Gates Sr. scoffing at the dot-commers' notion that philanthropy only just this second became entrepeneurial (he has a point in a generalized sense of that word, not so much if the narrow fiduciary sense of it is meant).

The Chronicle of Philanthropy writeup is drier, though probably does a better job of getting across the key messages of a couple of people like New York Mayor Michael Bloomberg. Slate meanwhile posted video and audio from the conference itself. (The conference also included prominent philanthropists who haven't personally made the Slate 60, such as Bono.)

The long tail of philanthropy is called DonorsChoose.org

My hometown newspaper recently put DonorsChoose.org on its front page, because for no obvious reason Chicago is the young organization's biggest market thus far. It belatedly occurs to me that we may all one day look back and see that DonorsChoose is to the staffed non-profit organizations as Napster was to the record labels: the specific vanguard of technology empowering customer demand that had until now been kept bottled up. In other words, the long tail phenomenon.

DonorsChoose is a service that matches up individual public-school needs (of a student or of a teacher) with individual donors. Charitably-minded individuals browse the site and if a specific need catches their eye they can donate to it right then. Students and teachers and principals post their unmet needs or projects at no cost; DonorsChoose is basically just being a highly-efficient middleman like eBay. That skips the whole vetting and sorting service for donors that is now provided by professional staffs of large non-profits and of foundations.

Whether that is overall a good or bad thing will quickly resemble the debate over whether citizens seeking news are better served with or without the sorting and ranking service provided by newspaper editors. At a minimum technology empowering such direct donor control might represent a new level of competition for the empowered donor's dollar which, frankly, a good number of current non-profits are not prepared for. On balance I'm all for this but anyone who doesn't think it could get real messy along the way might want to go talk to those record labels whose CD sales have crashed, or the Napster guys who they sued from here to eternity rather than figure out how to evolve their companies' business models to meet what their customer actually wanted.

More on foundation investment practices

The Wall Street Journal followed up yesterday with a small article about foundations which clarified for me that there are really three basic choices for foundations, not two as the L.A. Times portrayed it. (You can't read the Journal article unless you're a subscriber but a Chronicle of Philanthropy note on it is here, and Philanthropy 2173 has links to all the foundations mentioned in it.)

(If you're interested in this subject, go take Lucy Bernholz's online poll found on the right at the Philanthropy 2173 link above.)

The L.A. Times articles about the Gates Foundation talked about either letting mission-related issues influence decisions about buying stock, or deciding that getting the highest returns is all that matters. That's basically the same as the debate about whether Western nations should keep China at arm's length until it improves its human-rights practices, or have normal diplomatic relations so as to encourage change. (When I was in college the topical subject of that foreign-policy debate was South Africa.)

Buying stock in a corporation, though, is different: it's ownership. You get to actually vote on the policies of the thing you own part of, and to speak out loud at annual meetings where the management and all the other owners have to listen to you. Indeed if enough other owners feel the same way that you do about an issue like corporate practices, the company must follow your wishes. That's a whole different caliber of influence than any nation, even the U.S., gets by trading with China -- the U.S. State Department obviously does not get to speak, let alone vote, as a member of the Chinese Politburo or even the country's toothless parliament.

Upon reflection that's the path which seems to me to best leverage the latent power for change of big investment portfolios. So that's why I voted for option 4 on the online poll mentioned above. (I notice that the poll stacks the deck in its structure -- it lists three different flavors of the first strategic option and then just one version of the other two -- so there's little chance that anything but a version of "mission imperatives should change investment choices" will win.)

A thoughtful response from Gates

Thanks to reader Greg for a tip that the Gates Foundation has replaced the online announcement that replies to the L.A. Times articles. The new essay, still signed by Chief Operating Officer Cheryl Scott, is quite different from the one that was online for only half a day last week though it does still make the good point that Gates has been completely transparent about its investing.

The new essay makes a point of stating that "Bill and Melinda oversee the investment of the foundation's endowment", so it does look like they were annoyed that the previous posting and Scott's newspaper interview made it sound otherwise. It says that they give "guidance" to professional investment managers, which every non-profit watchdog would agree is the appropriate approach for a foundation board.

Perhaps the most-important substantive message of the new essay is that the Gates Foundation is not in the camp that says a foundation should seek only to maximize returns with its endowment. Rather, their reason for mostly declining to rank companies on moral grounds is the real-life complexity and contradictions inherent in that concept. "There are dozens of factors that could be considered...Many of the companies mentioned in the Los Angeles Times articles do a lot of work that some people like, as well as work some people do not like. Some activities might even be viewed positively by some people and negatively by others." They also note that some of the issues which the newspaper brought up as reasons not to invest in a company, such as lending laws or environmental regulation, are outside the foundation's charitable mission.

On the shareholder activism question they basically vote for reserving proxy voting for issues directly related to a company's carrying out its core mission, i.e. good management of the company itself. And they do note the one specific subject on which Bill and Melinda have thus far decided that the issues are clear-cut enough to decide not to invest at all: tobacco.

I don't personally agree with all of the above decisions but also don't find any of them to be out of the bounds of what reasonable people of good will might conclude. It does sound like the newspaper articles have provoked renewed focus on the subject over there, and that the Gates folks understand that its unique status in philanthropy inherently places some special obligations on them.

Gates Fnd: she maybe shouldn't have said that out loud

It may be that Gates Foundation COO Cheryl Scott is in hot water today, and the reason can be read between the lines of today's news coverage.

The L.A. Times today has a followup article which is obviously based on that press release that appeared and then disappeared from the foundation website yesterday. The newspaper is spinning that announcement as being about the foundation newly reconsidering its investment practices in reaction to their articles. I didn't get that from what they had posted, particularly, but since I still can't find a copy I'm not sure. They secondhand-quote Scott saying that such internal discussion was already underway long before the recent articles, which is completely plausible to anyone working in major foundations because it's not at all a new subject in that world.

Nobody at Gates is talking to the L.A. Times but Scott on Tuesday did talk to their hometown paper, the Seattle Times. To them she said on the record that the foundation's current method of investing its assets is "not 100 percent effective," and she did apparently say to that paper that the foundation will now newly review its investment practices. She had also in that press release written that the foundation would "formalize the process by which Bill and Melinda Gates analyze and review these issues."

That last part may be what ticked off one or more people named Gates. In effect Scott told the world that Bill and Melinda, personally, have not been paying much attention to or thought about the issue of where the foundation invests its huge endowment. Whether that is or isn't a fair characterization I dunno, but I can hazard a guess as to how well it was received by a guy who quit college at age 20 and built from scratch a huge global business and fortune.

Moore learned something, and Gates is being silly

I sat down this evening to write some complimentary things about the Bill & Melinda Gates Foundation based on an "announcement" from the Chief Operating Officer that was posted on their website a few hours ago. Cheryl Scott made, I thought, some good counterpoints to the nasty L.A. Times articles as well as pointing out how notably transparent the foundation is with both its grantmaking and its investing, which is true and they deserve credit for. Broadly Scott pointed out that choosing pure investments is a lot harder in practice than it seems to people who've never tried to do it, which I have no doubt is true, but I won't try to re-create her words. That doesn't make the issue of investing being aligned with mission go away, nor did Scott suggest that it does.

But now that reply has vanished from their website, gone without a trace. I can't find any cached copies of it online either, wish I'd thought to save it -- if anyone sees a copy, a pointer would be welcome here. This was, earlier today, the URL.

I suppose some public relations expert convinced somebody atop that food chain that any public response to the slanted newspaper articles simply dignifies the latter, or maybe somebody whose last name starts with a G didn't like what Scott said? If so then I think they're wrong but it's their party and they can cry if they want to. Seems a shame though, why not be the adults in contrast to the L.A. Times' adolescent cheap shots?

Regardless of that, I spent some time on their website and confirmed that they are more overtly transparent than almost any other foundation around. They not only have their entire list of grants on the web (which a fair number of foundations are now doing including the one I work for) with annual summary statistics, plus all the basic financials (ditto), they also put their full detailed tax return with all schedules up there -- meaning the complete list of their endowment investments. Which in their case is literally thousands of pages (big PDF files) and not a quick or easy read, but the point is, it's there in full. That's a standard of transparency everyone in this sector should aspire to.

Down the West Coast a ways, fellow dot-com billionaire Gordon Moore has by his own admission had some humbling experiences with his big new foundation. Like Warren Buffett and many others he has learned firsthand that doing philanthropy well is not nearly as easy as successful businessfolk often assume, and he says he's found religion with regard to transparency. Benefit Magazine's writeup is fairly long but worth the read.

Gates learns that being a poster child cuts both ways

The Bill and Melinda Gates Foundation has just been placed squarely in the bulls-eye of what has been a quietly-growing debate in the foundations world about mission-related investing of those big endowments. It's the same set of choices that hit home a while back for universities: is the highest investment duty to maximize returns and hence resources for the non-profit mission, or to accept lower returns (or higher risk) in exchange for the investing itself advancing the mission? Or at least not actively violating it?

The two long articles linked above appeared on the front page of the L.A. Times yesterday and today and are being picked up far and wide by newspapers owned by their parent Tribune Company. Many readers will be appalled to learn how many examples there are of Gates money going into stock of companies which are helping cause the very problems that the foundation is attempting to ameliorate with grants.

I have little doubt that most of the specific facts as presented are correct, and I'm not one of those who thinks that trying to balance investment success and mission purity has to mean "doing neither of them well." However the lead human-interest example of the second story is oddly unconvincing (a middle-class couple who got ripped off by a fast-talking mortgage salesman because they couldn't be bothered to read the loan documents they signed). And the newspaper committed several fairness and logic violations.

For example it is obviously just sensationalism to repeatedly list the Gates Foundation's asset value as $67 billion with a footnote that this figure includes the future expected Warren Buffett contributions (whereas the other endowments they compare Gates to are listed at present value). They mix and match examples which are obviously not comparable on merit. Also when rattling off horrible-sounding corporate behavior that Gates money has helped enable they seem to have completely lost track of that pesky distinction between being charged and being convicted (which some musty historical document or other mentions in passing right before some silliness about freedom of the press).

But for all that the core issue is real and foundations need to deal with it. And being by far the biggest such venture in world history, whatever its correct endowment total right now, means that Gates can't just ignore this kind of question. Hopefully someone who has their ear is explaining that right now to Bill, Melinda and Warren.

Shining a light on foundations

Transparency may be the reform theme of our time regarding the booming non-profit sector -- it keeps coming up both generally and specifically and is the primary driving impulse of new watchdog efforts like Charity Navigator. Now a well-known veteran of the institutional-philanthropy realm is focusing the transparency spotlight onto foundations.

Joel Fleishman in his about-to-be-published book argues that "although foundations play a vital role in the country's civic life, they must act quickly to mend their arrogant and secretive ways or risk increased public skepticism and government regulation....The only way for foundations to protect the freedom, creativity, and flexibility they now enjoy — and which they need if they are to serve society to their fullest potential — is to open their doors and windows to the world so that all can see what they are doing and how they are doing it."

That quote is from a Chronicle of Philanthropy article; Fleishman also did a live online chat with foundation and non-profit staff members which mostly seemed to find agreement with his thesis. It will be interesting to find out whether his prediction of agreement from industry-trade groups like the Council on Foundations and Independent Sector turns out to be correct. It does seem logical that the spate of foundation-related front-page news recently will attract or enable more attention from Capitol Hill for good or ill. (And some stories which are primarily about other issues include an element of questionable foundation practices, such as the big Princeton donor-intent lawsuit.)

Fleishman's prediction of full-on federal legislation aimed at foundations seems at least premature and I haven't found any actual political pros who expect it. But the overall direction seems clearly right; his specific ideas sound mostly sensible and if anything overdue. As Elizabeth Keating of Harvard notes when talking about non-profit overhead reporting, broadly the concepts on the table amount to simply requiring of tax-exempt entities the same sort of transparency which is the price of forming a legal for-profit corporation in this country.

The case against more gen-ops grants

NOTE: my first attempt at describing the CEP report was more truthy than accurate (see reader comments), and is now revised and hopefully better.

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There are a couple of "inside baseball" type subjects which keep coming up anyplace non-profit and foundation staffs gather, regardless of what the specific conference/workshop/briefing/luncheon is actually about. One of them is evaluation (of non-profits, of projects, etc.); the other is that foundations should make more general-operating grants rather than project grants. Say the words "program grant" at any such gathering and you'll quickly be surrounded by knowing sighs and frowning head-shakes.

However the Center for Effective Philanthropy recently assembled a bunch of data suggesting that grantees are not nearly so worked up about that issue as are the foundation staffs who fret about it at conferences. The CEP also reports that a lot of foundation CEOs think that more general-operating grants would be better, although they mostly actually issue restricted grants: funding which can be used only a specific project or program.

As the CEP reports, the top reason that foundation boards prefer restricted grants is one that I find perfectly respectable: to be able to track specific outcomes of grant investments. (Foundations no less than operating non-profits are tying themselves into knots these days trying to figure out how to track and document the results of their work and not simply the amount of work they perform.) And while the CEP notes the obvious fact that grantees prefer to get unrestricted grants and hate the paperwork related to restricted grants, their main point is that non-profit directors are actually far more concerned about the length and amount of a grant than about its strings.

My own beef with this whole debate is that the relevant context is often overlooked. Foundation grants altogether are no more than one-sixth of all philanthropy in the U.S. (according to Giving USA); it would take a dozen new Gates Foundations to change that ratio significantly. The vast majority of philanthropic support for non-profits (mostly from individuals) is unrestricted. So is the large fraction of non-profit revenues (anywhere from a quarter to two-thirds depending on specific sector) that comes from earned income. Hence no more than one-tenth of non-profit revenues is actually arriving with specific strings attached. That hardly seems like a crushing burden of red tape for the hardworking executive director; and wishing that the foundations' reasons for those strings weren't necessary doesn't render them invalid.

On a side note, the CEP report includes a sidebar quoting Elizabeth Keating on the "overhead game", whose interesting proposals on that subject were described previously here.

Non-profit growth as part of global social change

I recently observed a briefing hosted by the Carnegie Corporation at which the opening speaker was Alan Khazei. The specific subject at hand was youth development; Khazei's remarks ended up being partly about the global growth of the nongovernmental non-profit sector.

Khazei co-founded City Year, which recruits American college-age youth for a year of urban civic service (and which is now taking its service global). Via email I obtained his permission to report his remarks publicly here and he bravely didn't ask to review my notes, so all errors of interpretation are entirely mine.

He led off by applauding TIME Magazine's naming as its annual "Person of the Year", you. By that they mean the changes now being wrought by individuals acting directly instead of through institutions, of which most of their examples turn out to be young people. (Some folks are rolling their eyes at the magazine's decision.) Khazei suggested that the magazine's choice fits well with "two of the most widespread global trends of the last half-century, the march of democracy and the explosive spread of the civic sector". Khazei cited surveys by outfits such as Freedom House and The Economist, which recently concluded that in a historic first more than half the world's population now lives under some form of democracy. (Though the latter, at least, thinks that the spread of democracy has stalled.)

Those two broad global trends, Khazei said, have been in driven by the United States' cultural influence but have now spread beyond any single society's control. And, he argued, "both of these changes depend on empowered effective citizenship and can be undone by the lack of it. There is nothing inexorable about any of this; less than 100 years ago autocracy was the world's growth sector."

Khazei's related thesis is that "everywhere around the world, people are concluding that the limit has been reached in the ability of big government to directly solve problems." Not a theory that centralized government needs to vanish, but rather that "the list of things which government can be the effective solution to has been exhausted." The social entrepeneurship idea flows from this notion, he noted. From his travels around the world he reported that "this is not at all just a Western idea, it is the consensus in the grass roots everywhere." In place of big government, he said, is the emerging idea of 'big citizenship': individual action and the civic sector as the primary drivers of positive change. "Young people are very excited by this and take naturally to it."

Foundations, Khazei argued, can play a key role at this juncture, "can help empower this. You can help build capacities and build citizenship and nurture ideas; you are uniquely placed to convene people at key moments and places." Also, Khazei said, "we've got to start making some big bets. We need in the non-profit sector the kind of dynamism that the business world now has, where half of our 20 largest corporations are less than a quarter-century old. Most of the non-profit models taken to serious scale, like the Girl Scouts and Amnesty International and United Way, are several decades or a century old."

Spending it down

The Bill and Melinda Gates Foundation recently made a rather startling (at least in charitable-foundation circles) decision: to spend themselves out of existence rather than operate in perpetuity. They will take a while to do it -- they're saying 50 years after the founders' deaths -- but still this makes Gates by far the largest foundation to do that. (And not simply because it's the biggest foundation period: all of the other multi-billion dollar foundations are permanent.)

In a sense this isn't completely surprising, because Warren Buffett's recent decision to give most of his wealth to Gates was on the same basis: that Buffett's funds be eventually spent down not be a permanent endowment. This decision puts Gates on one side of a growing debate within institutionalized philanthropy, which actually traces all the way back to its two American godfathers John D. Rockefeller and Andrew Carnegie. Rockefeller pioneered the concept of endowing large-scale permanent grantmaking, while Carnegie preferred to see his "giving back" completed during his own lifetime.

Each approach has its advocates, but the fact that Rockefeller's concept has predominated is reflected in U.S. law: the "5% rule" for charitable foundations is explicitly based on the idea that most years that will leave the endowment continuing to grow. The high-profile Gates announcement may change that; for starters many lawmakers may not have been particularly aware that permanence isn't actually a universal standard for foundation philanthropy.

The Gates folks also announced that they will accept additional donations, raising the question of whether some more Buffett-scale gifts are in the works there.

Overhead: let's make it plain

One of the interesting sessions at the recent Grantmakers in the Arts conference, of direct relevance to folks working in all non-profits, was led by Elizabeth Keating of the Kennedy School at Harvard. She argues persuasively that the ways funders and grantees interact regarding overhead expenses is irrational for all concerned, and that more transparency would enable mutual improvement.

[All which follows is my version of Keating's ideas, any transmission errors are mine.]

If you're a program manager or artistic director who's ever had to debate with your own finance staffer about which grant can pay for which costs, she means you. Or perhaps, as in my case, you've been that grants administrator! For several years at a large complex organization in the 90s I was that spreadsheet geek trying to rationalize a dozen grants with differing rules and reporting requirements, and I'm sure our hard-working program staff didn't enjoy the process any more than I did. (If Laurel, Dave, Steve, Michael or Diane read this they will right now be either laughing or wincing.) Of course now I'm on the funder side of the conversation, to which role I bring direct knowledge of how the bodies get buried so to speak...

Which is not to say that I think the process was entirely time wasted -- actually it forced us as a staff team to deal with important decisions including programmatic choices. But it sure was awkward and messy and arbitrary, and some of the incentives were perverse: the honest answer to a funder's question "What are the overhead costs?" would be "It depends, what are your overhead rules?" Yecch. Many perfectly well-intentioned staff teams have had that experience, and many funders have felt misled.

That last is actually what Keating means by her slightly-unfortunate presentation title "Is There Enough Overhead in This Grant?" She's not particularly arguing that funders should be magically made to only issue unrestricted grants. (Which is good cause they ain't about to, and there are good reasons why not.) Rather she argues that the core of the problem is that there is no consistent definition of "overhead" in detail or even in principle, and that the two parties in the funder-fundee relationship aren't honest enough with each other about the subject.

Keating proposes that non-profits adopt the sort of transparency that is standard for corporations about their finances, and she's working on some promising tools (software, and report formats) for that. She proposes mandatory non-profit openness on this subject once they get big enough to accept project grants: "Once a non-profit has to figure out an overhead allocation for any one grant, they must make that data public as part of financial reporting or annual audits." In return, foundations would agree (locally or nationally) to standard definitions of what is overhead and how much of it is reasonable. We could as a sector have sensible conversation about how much is or is not too much, and have no more jerry-rigged 90-page spreadsheets which arbitrarily assign the copier lease to this grant and the office assistant's salary to that one. Works for me, and the sooner the better.

IKEA is a non-profit?

In yesterday's quick rogues' gallery I forgot to mention what is in dollar terms probably the largest non-profit scam in history: the fact that IKEA, the giant Scandinavian retailer, is wholly owned by a charitable foundation so as to evade taxes on its profits.

The Economist detailed this arrangement in its May 11, 2006 issue. "The parent for all IKEA companies—the operator of 207 of the 235 worldwide IKEA stores—is Ingka Holding, a private Dutch-registered company. Ingka Holding, in turn, belongs entirely to the Stichting Ingka Foundation. This is a Dutch-registered, tax-exempt, non-profit-making legal entity, which was given the shares of (IKEA founder) Ingvar Kamprad in 1982." Depending on who's doing the math, that foundation is on paper arguably the largest in the world, even bigger than the Gates Foundation's $30 billion in assets. The declared mission is to promote “innovation in the field of architectural and interior design” and “for investing long-term in order to build a reserve for securing the IKEA group, in case of any future capital requirements.”

A five-person executive committee, chaired by Kamprad, runs the foundation. "This committee appoints the boards of Ingka Holding, approves any changes to the company's statutes, and has pre-emption rights on new share issues. Mr Kamprad's wife and a Swiss lawyer have also been members of this committee..."

That sort of thing was once common in the U.S., albeit never at such a size, but was first addressed by a 1950s federal law and today couldn't be done at all because of the 1969 Tax Reform Act. But "Dutch foundations are very loosely regulated and are subject to little or no third-party oversight. They are not, for instance, legally obliged to publish their accounts [annual financials]." There is no minimum grantmaking requirement as U.S. foundations operate under, so despite receiving at least a half-billion dollars per year in IKEA dividends the foundation doesn't appear to be issuing more than a couple of million per year in grants, The Economist found. Something to think about the next time you're scoring one of those nifty $9.99 table lamps....