A new spirit is enlivening perpetual foundations. This change is best epitomized by what the Kresge Foundation writes in its 2014 Annual Report:
Those of us invested in community—the public, private, nonprofit and philanthropic sectors—are stepping up, electing to participate beyond our traditional boundaries and areas of interest. What is emerging is a style of philanthropy that is visionary and strategic. It is unafraid to ask hard questions and fearless in the face of great challenge. Unlike our practices of the past, almost nothing is off limits today. We are willing to take risks and propose solutions commensurate with the size of the challenge at hand. This new way of working has become central to the ethos at The Kresge Foundation. We believe this approach represents the next generation of philanthropy for us and for the entire sector.… Bold is not a goal; it is a byproduct of collective effort. Bold is the urban future that awaits us.1
An example of this energy is the role that Kresge played, together with other large and small foundations, in helping the city of Detroit emerge from bankruptcy, as recounted in the same annual report:
In 2013, with $18 billion in debt, the city of Detroit entered the largest municipal bankruptcy in U.S. history. Rip Rapson, president and CEO of The Kresge Foundation, was on the front lines of efforts to bring about a speedy resolution, one that protected the pensions of city retirees and safeguarded the world-class art collection at the Detroit Institute of Arts, the city’s most valuable asset.
Rapson and 10 other philanthropic leaders, together with the state of Michigan and the Detroit Institute of Arts, created an $816 million fund, the Foundation for Detroit’s Future—what has become known as the Grand Bargain. The fund enabled the art to be sold to a nonprofit trust, with the proceeds nearly fully funding retiree pensions. Equally as important, it prevented litigation that would have delayed indefinitely the essential and imperative work of city building.2
The kind of dynamism represented by Detroit’s Grand Bargain—a willingness among foundations to depart from established practice and familiar roles and to seize opportunities to make a dramatic difference—reflects what the Kresge Foundation calls “Six Core Beliefs [that] have the power to reshape the philanthropic sector for the challenges of the 21st Century”:
• Belief #1: Philanthropy has to be prepared to cut from its safe and secure moorings to embrace a level of risk commensurate with the magnitude of the challenge at hand.
• Belief #2: Philanthropy, by shedding its territoriality, can multiply its efficacy by recognizing the potency of its undeniable interdependence.
• Belief #3: Philanthropic leaders must be willing to act; they must create space to hear and internalize the wisdom of our community’s collective voice.
• Belief #4: Philanthropy must increasingly become comfortable in engaging the vicissitudes and ambiguities of public-sector policies and practices.
• Belief #5: Philanthropy can find key acupuncture points that trigger the power of places to reflect community identity and create the map for vibrant, equitable civic life.
• Belief #6: There is a moral imperative for privately endowed philanthropies like Kresge to stitch together the other beliefs in ways that will improve outcomes for low-income people living in America’s cities.3
Other large foundations have begun to express the same aspirations. Julia Stasch, who in 2015 was elected president of the John D. and Catherine T. MacArthur Foundation, wrote an essay in her first annual report, covering the previous year, entitled “Time for Change.” The essay was posted on the foundation’s website in 2015 and includes the following:
[W]e need to change.… Be bolder and aim higher. Embrace independent, even unconventional, thinking. Act with greater urgency, even as we remain patient for the fruits of real, lasting change. Be more open, curious, and experimental, and take more risk. Set ambitious goals that are clear and practical, and seek significant, measurable progress.
In the future, we will work primarily through programs and projects that are larger in scale, time-limited in nature, or designed to reach specific objectives. We will place less emphasis on program areas with an indefinite lifespan.
While this solution-driven approach is a topic of debate in philanthropy, we believe it is right for MacArthur and the depth of impact we strive to achieve. Its application means focusing our not-unlimited resources, our leadership, and other assets in fewer areas where we believe real and lasting progress may be possible. More focus will require hard choices about some fields where we have long been active.
Higher ambitions also will require a greater tolerance for risk and failure. We will need to be even more flexible and innovative in our strategies and tactics in response to new circumstances, and ready to enter into alliances with unexpected partners. We will observe closely and listen carefully as we adopt an even more rigorous practice of reflection and learning.4
Other private foundations have expressed similar intentions, albeit without the trial by fire that Kresge and its Grand Bargain partners encountered in the furnace of Detroit’s financial collapse. But at this point, most of those intentions are just that—intentions—and it remains to be seen whether and how they will be translated into achievements. I quote Kresge at length because it has already demonstrated its determination to transform itself. The animating principles that emerged from and guided—indeed were shaped by—the achievements it reported in its 2014 Annual Report give its stated intentions greater credibility. The same might fairly be said about some of Kresge’s partners in the Grand Bargain, including the Ford, Knight, Mott, and Skillman Foundations and the Community Foundation of Southeast Michigan. Moreover, in Darren Walker’s first two years of leading the Ford Foundation, he has created a comparable degree of excitement and optimism about the changes taking place there, some of which are discussed in the following pages.
For all of the 100-year-long history of American foundations, the prevailing pattern of decision-making was to choose among grant proposals that “came in over the transom,” as newspaper and magazine editors used to say about unsolicited manuscripts. Leaving aside the fact that foundation offices no longer have any doors with transoms above them through which incoming proposals could come, the analogy as well as the practice continues to dominate foundation behavior. Clearly there are exceptions, as a growing number of foundations’ websites prominently advertise “unsolicited proposals not accepted.” Whether the proposals arrive randomly or are requested by the foundation, however, the criteria by which they are considered, granted, or rejected is based on the nature and quality of the particular substantive request and how well it fits with the priorities of the foundation considering it.
However, the Edna McConnell Clark Foundation has changed that grantmaking pattern, and its initiative seems slowly to be catching on. After becoming president of that foundation in 1996 and spending four years administering programs in five different areas, Michael Bailin came to the conclusion that, if social impact was to be the measure by which a foundation should assess its success, that foundation could achieve much more by honing its decision-making model. In 2000, he persuaded the foundation’s trustees to spin off or close down four of its historic programs and concentrate on only one: Youth Development, broadly defined.5
Then, instead of doing what foundations had done for years—letting others make the initial move to send in proposals—he decided to reverse course by having the foundation itself take the initiative. By soliciting a wide range of knowledgeable informants around the country, Bailin set out to identify those organizations within the Clark Foundation’s program catchment area that were demonstrably performing well already and then to help strengthen those organizations by providing general operating support and relevant consulting advice on strategy, management, business and financial planning, evaluation, board-building, and marketing, with the goal of enabling them to serve even more people at the same if not a higher level of quality. Obviously, rigorous evaluation criteria were essential for determining whether an organization was performing well in the first place and is achieving even more once support by the Clark Foundation kicks in.6
That change—shifting the focus of foundation grantmaking from the merits of a particular substantive program to the success of a whole organization, based on its established track record of success in delivering those substantive programs—was revolutionary. It has already begun to achieve traction, not only with other foundations but also with newly emerging institutions such as the Robin Hood Foundation in New York, the Tipping Point Community in San Francisco, and A Better Chicago—antipoverty funds supported mainly by the financial sector and concentrating on particular metropolitan areas. Robin Hood was founded by hedge fund manager Paul Tudor Jones in New York in 1988, Tipping Point by philanthropist Daniel Lurie in 2005, and A Better Chicago by Liam Krehbiel, a former Bain & Company consultant, in 2010.7
Solid evidence persuades like nothing else, including eloquent rhetoric. And, as in the Goldman Sachs example below, it was the Bridgespan Group that designed the evidence-generation system for the Edna McConnell Clark initiatives.8
Another example of how evidence-based data are influencing decisions to scale initiatives is Goldman Sachs’ 10,000 Women, an innovation discussed at greater length in a later section. Under the leadership of Chairman and CEO Lloyd C. Blankfein and Managing Director of Corporate Engagement Dina Habib Powell, the company established this initiative to identify, train, and facilitate the financing of women’s businesses in developing countries. Before it was launched, Ms. Powell engaged The Bridgespan Group, America’s preeminent nonprofit management consultancy,9 to plan and execute the program’s outcomes research and evaluation. By 2015, the data generated by Bridgespan documented achievements of the participants in 10,000 Women that were so impressive that the World Bank decided to join the cause. In fact, the World Bank upped the ante by creating a $600 million Women Entrepreneurs Opportunity Facility, which is expected to raise the number of target beneficiaries from 10,000 to 100,000 women worldwide. What made such a scale increase possible was the existence of carefully designed research that produced persuasive evidence of the success of the original initiative.
These days, it seems that “impact achievement” has become the goal of many philanthropists, especially the wealthiest ones. They seem to have become obsessed with achieving the greatest social impact, sometimes without much concern about which field or area of need benefits. Rather than striving specifically to feed the hungriest or to assuage the poor’s most pressing needs, they seek, in a variation on Jeremy Bentham and John Stuart Mill, to produce the greatest good for the greatest number. On December 23, 2015, for example, the Bloomberg.com website featured an article by Sangwon Yoon entitled “From Ackman to Musk, Charity Giving Takes on Stock-Picking Feel.”10 The article’s two subheadlines are “‘Effective altruism’ seeks to maximize returns from charity,” and “Gates and Gross fans of a data-driven approach to giving.” The author goes on to write the following:
Econometrics is the new buzzword in charity circles with a growing number of nonprofit organizations applying a more scientific methodology to lure the rich and powerful to give more. GiveWell, for example, studies academic research and data to test a given approach and applies metrics such as “cost per life saved” or “financial benefits to recipients per dollar spent by donors.”
“When the end of the year comes, people prefer not donating than donating badly,” said Alexandre Mars, a tech entrepreneur and venture capitalist-turned-philanthropist.
Which is why Mars set up Epic Foundation, where he manages a portfolio of 20 youth-focused social enterprises for donors. The idea is that high net-worth individuals may not have the time to do the homework themselves but want guarantees they are getting value for money. Mars vets the charities by analyzing their data, ranking them through an algorithm and producing reports for each based on on-site visits and interviews.
“We want to track what we’ve donated,” he said. “In the non-profit world, this doesn’t exist: You would have to wait six months or a year for a brochure or get invited to a gala you have to pay” to attend.
GiveWell, which was founded by two former analysts at Bridgewater Associates, have their top picks each year.11
In another article earlier in 2015, Bill Gross, former CEO of PIMCO, the huge fixed-income investment firm, was quoted as saying that he intends to devote his entire net worth to giving to those organizations, which appear to promise the greatest amount of social impact as measured by data, irrespective of the kind of social good the organizations are doing. Similarly, Elie Hassenfeld, a hedge fund manager and cofounder of GiveWell, sums up this attitude toward doing good by asking, “What charity will give me the biggest bang for my buck?”12
This all seems benign enough. Who can possibly object to donors striving to achieve maximum impact with their charitable dollars? But is impact the only criterion? Is the nature of the problem on which impact is achieved irrelevant? In Give Smart: Getting Results from Your Philanthropy, my coauthor Tom Tierney and I list “What do you really care about?” as the very first question donors should ask themselves before supporting an organization or cause. Unless a person believes that no hierarchy of human needs, as ranked by one’s own priority of values, is possible, how can one adopt a decision criterion based on quantifiable impact alone, without respect to the values one cares about?
A skeptic might reply that, while it is appealing to rank human needs according to a donor’s own judgment of priorities, it would be wrong to do so. Placing so much importance on one’s own particular values and beliefs, such a person might say, can tend toward narcissism. Someone who takes this view might go on to argue that tax-privileged philanthropic dollars are so scarce that any warm feelings the donor might derive from their use in one preferred field or another must pale in importance compared with the volume of benefit to humanity that could be derived from a dispassionate calculation of each dollar’s most productive use.
To me, however, a decision-making goal that elevates the quantity of impact above the substantive good of the impact seems to be the truer form of narcissism, motivated only by a competitive drive to be the “impact king” of the universe. It also seems inhuman, indeed downright robotic. Personally, I would prefer to be known as someone who cares deeply about feeding the hungry or about perpetuating the glorious legacy of Mozart, for example, than someone who simply wants to wring the most impact out of my charitable dollars. If all that counts in trying to do good is the achievement of maximum impact, without regard to what one achieves impact in doing, philanthropy will have emptied itself of its humanity.
If the utility maximizers were somehow to win the day and philanthropy became entirely bound up with calculations of social return, imagine what a depressing effect it would have on the propensity to give. What moves most human beings to give wealth for the benefit of others that they could otherwise have spent on themselves is rarely the quantity of impact their gift might achieve but rather their caring for other human beings; their sense of gratitude to institutions that gave them a break, educated or healed them; or in general for endeavors that uplift or benefit large numbers of other human beings in countless—and sometimes uncountable—ways.
The fact is that the institutional and individual philanthropists who are most effective in achieving beneficial impacts are those who possess a great deal of knowledge about the problem area they wish to tackle. They may have come into philanthropy with such knowledge, but, more often, they must acquire it by extensive consultation, research, travel, and learning. Is it likely that donors will invest the time and energy—both physical and intellectual—that acquiring this knowledge requires if the focus of their giving is not something of great personal, emotional, or philosophical importance to them? Those who lack such knowledge and experience tend to be easily swayed to part with their dollars by smooth-talking, charismatic leaders who promise greatly but are able to deliver little.
Finally, an exclusive focus on getting the biggest bang for one’s philanthropic dollars without regard to subject matter is bound to lead some prospective donors away from the most challenging problems and toward the easily solvable ones. That would undo one of the principal strengths of the civic sector and one of the principal rationales for exempting donations from taxation: the unleashing of myriad forms of human ingenuity and creativity in pursuit of elusive and neglected goals. My overall point is that not all philanthropy should be thought of as “effective” even if it aspires to a particular measure of effectiveness. We need collectively to consider what really matters about philanthropy and the causes that it supports rather than giving in to a reductive approach.
Like so many of the other changes in philanthropy over the past 25 years, the growing organizational focus on mission, goal, strategy, performance benchmarks, and measurable results can be traced back more than 100 years to Andrew Carnegie and John D. Rockefeller. Both men’s philanthropic credos were based on “scientific philanthropy,” designed to cure problems at their roots, rather than on traditional charity, which both of them regarded as merely palliative. Neither Carnegie nor Rockefeller gave their institutions “express organizational missions” to tackle any specific problems, but they did (at least implicitly) give their foundations a mission of tackling problems at the root. Today, however, thinking has evolved to the point that, if a foundation or nonprofit organization is to tackle a problem at its root, it must adopt an express organizational mission dedicated to doing so, as well as an articulation of one or more goals, the choice of one or more strategies whereby the mission-serving goal is thought to be capable of being implemented, along with mechanisms for generating benchmarks that reveal whether or not one is in fact achieving the intention presupposed by the organizational mission.
Like the idea of maximizing impact, foundations’ preoccupation with mission, strategies, and so on has both advantages and disadvantages. As a means of focusing an organization’s energies and building its knowledge of a field, the discipline of setting a few well-defined goals, charting paths to achieving them, and measuring progress along the way is an excellent management device. It can easily become an end in itself, however, with the mechanics of benchmarking and performance-tracking occupying more and more time, at the expense of firsthand observation, learning, and interaction with people on the front lines.
The idea of a mission-goal-strategy-benchmarks-measurable-results-logic model for nonprofit organizations and foundations was first spelled out in public and professional discourse in Peter Drucker’s 1990 book, Managing the Nonprofit Organization: Practices and Principles.13 Part One of that book is “The Mission Comes First: and Your Role as a Leader,” and Part Two is “From Mission to Performance: Effective strategies for marketing, innovation and fund development.”
Three years later, the idea of a mission-driven nonprofit enterprise was given a significant boost by a 1993 gift to Harvard Business School (HBS) from John Whitehead’s Fund for Nonprofit Management, which helped the school found its Social Enterprise Initiative (described more fully in Chapter 3). The dominant themes of the initiative, and of the HBS faculty’s teaching about nonprofit management more generally, were clarity and focus on mission and strategy. The creation of this initiative soon inspired similarly oriented programs at other elite schools.
In 1994, Jim Collins and Jerry Porras published Built to Last: Successful Habits of Visionary Companies, some of whose lingo—such as “Big Hairy Audacious Goals,” familiarly known as “BHAGs”—quickly jumped over from business to nonprofits and foundations. When The Atlantic Philanthropies went through its strategic planning process at the turn of the 21st century, the main mission the institution’s leaders assigned to the head of the working group was to come up with BHAGs—literally!
The next major step in the evolution of these concepts was the establishment of The Bridgespan Group in 2000 by Thomas Tierney, then Worldwide Managing Partner of Bain & Company, and Jeff Bradach, a professor at HBS, for the purpose of providing high-quality strategic consulting advice to foundations, individual philanthropists, and nonprofit organizations. Then in 2005 came Jim Collins’s book Good to Great and the Social Sectors, which has had a great deal to do with importing the usage of both “mission-driven” and “strategies aligned with mission” into the nonprofit mantras that they have become today. So have Bridgespan, FSG, Arabella Advisors, and the several business strategy consulting firms, which have pro bono nonprofit consulting practices.
This same period has also been a fertile time for philanthropic advising, starting with The Philanthropic Initiative, a nonprofit in Boston (now the TPI division of The Boston Foundation), founded in 1989 by the now legendary, as well as, alas, late Peter Karoff, and two years later in 1991 with the creation of Rockefeller Philanthropy Advisors, also a nonprofit, headed by Melissa Berman. The knowledge and training reach of all these organizations, as well as many others, has been greatly extended by the proliferation of webinars that focus on an infinite variety of skills useful in governing and managing philanthropy and nonprofits. I will have more to say about the nonprofit and philanthropic advisory industry in Chapter 3.
The steadily increasing focus on mission inevitably has led to an explicit quest by donors and foundations to ascertain nonprofits’ measurable results in fulfilling whatever mission they have been supported to pursue. The chain of steps starts with meticulous articulation of a goal, then to the development of one or more strategies for achieving the mission-serving goals, then to designing logic models that trace the nonprofit’s or foundation’s course in moving from the present state of a problem to the imagined state in which the problem has been solved, along with the generation of performance benchmarks along the way to reveal the extent of progress in achieving the goals, so that fine-tuning of the strategy can be done at any point if warranted by the benchmarks. For foundations, grantmaking initiatives can be chosen based, partly or wholly, on the expected measurable value of their results.
The quest to ascertain measurable outcomes has received a strong boost from the very recent creation of “social impact bonds” and other “pay-for-success” experiments. Those experiments promise financial returns to, or impose financial losses on, the for-profit and/or philanthropic investors who financed them, based on a venture’s ability to meet certain carefully measured and consensually agreed-upon metrics. In a typical case of social-impact bonds, for instance, a nonprofit organization receives an infusion of cash from investors in exchange for delivering a service that will, if successful, create some form of public benefit—even, perhaps, a reduction in some government cost. An organization might receive such an investment, for example, to run a program helping homeless adults find housing or jobs. If the program is successful—if, say, a rising number of formerly homeless people achieve a more stable life and cease to need city-funded shelter—the government would repay the investors and share a portion of the savings with them. If not, the investors would lose some or all of the money and presumably stop funding the service.
It is not yet clear whether these arrangements could really transform the normal pattern of funding for public services, and the skeptics are plentiful. But one result is becoming clear: all parties to the “pay-for-success” experiments acquire an entirely new respect for the determining power of hard data to justify the undertaking of social policy experiments.14
On the other hand, the skepticism about and resistance to the increasing focus on metrics of results have been growing for some time. Most large foundations are committed to measuring results, quantitatively if possible and qualitatively if not. However, virtually all foundations have declared an implied, even if not expressed, allegiance to Albert Einstein’s famous observation, “Not everything that can be counted counts, and not everything that counts can be counted.” The quest for metrics should not be allowed to deter foundations from grantmaking in fields for which metrics are not easily obtainable. James Canales, president and CEO of The Barr Foundation in Boston, summed up this concern admirably in a 2016 comment to The Chronicle of Philanthropy:
We have made a decision as a foundation to stay invested in a significant way in arts and creativity. Arts and creativity are not the first areas you’d think of when you think of hard metrics. Ultimately, we are making a judgment as a foundation that inspiring the kind of creativity that creates a thriving, dynamic region is important. Part of that is about nourishing the soul and part of that is about elevating our aspirations. Those are things that are hard to measure. If we were driven by metrics and needing to point to certain numbers to say we’ve made progress, that might not be the first place we’d gravitate.15
Even so, the tug of business-school doctrine on philanthropic thinking continues to draw foundations ever more deeply into the quest for performance and outcome measurements. Within the past 25 years, social entrepreneurship and venture philanthropy have become subfields of their own and appear to be gaining traction steadily. The former is the application of entrepreneurship skills to social problem-solving, and the latter is the application of venture capital skills to philanthropic decision-making. The faculty members teaching and researching in the HBS Social Enterprise Initiative are among the pioneers of both of these subfields, especially the late Professor Greg Dees, who later founded The Center for the Advancement of Social Entrepreneurship at Duke’s Fuqua School of Business. His pioneering paper, “The Meaning of ‘Social Entrepreneurship,’” is among the most frequently cited papers on that subject.16 Another influential paper on the subject is that of Christine W. Letts, William P. Ryan, and Allen S. Grossman, “Virtuous Capital: What Foundations Can Learn from Venture Capitalists.”17
As this book goes to press, foundations and corporations are slowly adopting another high-finance approach to philanthropy: practices that have been variously described as “mission investing” and “impact investing.” Both of those terms refer to investing a foundation’s or donor’s assets in ventures that pursue a public benefit rather than making grants to these institutions solely from the income on those assets. The antecedents of such practices reach back to the 1970s, when, under the leadership of President McGeorge Bundy, the Ford Foundation launched its program-related investments (PRIs) as a complementary category of Ford Foundation grantmaking support available to nonprofit organizations. Such PRIs were not grants but investments, which obligated the recipient organizations to repay the principal of the investment at some specified point as well as meanwhile to pay income to Ford, although at usually below-market rates. The resources used for PRIs could either be endowment assets or grantmaking budgets. Irrespective of the source of the resources used to make PRIs, they count toward a foundation’s minimum annual payout.
“Mission investing” and “impact investing” constitute PRIs writ large. At the time of this writing, only about a dozen foundations—notably The F.B. Heron Foundation and the KL Felicitas Foundation—have made significant commitments to the practice. Such investments may be made in the equity of individual corporations that meet certain criteria for contributing positively to society; in mutual funds holding such society-benefiting stocks and/or bonds; or in direct investments in eligible nonprofits or businesses that are substantively focused on programs of priority to the investing foundations. In short, the goal is to put into society-benefiting investments not only the mandatory 5 percent a foundation is required to pay out annually to eligible tax-exempt nonprofits, but some portion—in Heron’s case, eventually all—of the foundation’s capital assets as well.18
It is no understatement to describe the mission/impact investing trajectory growth of foundations as having been glacial until recently, but unquestionably it now seems to be steadily increasing. The Kresge Foundation announced in 2015 that it would invest $350 million of its approximately $3 billion endowment in what it calls its “Social Investment Practice,” which will use “tools including debt, equity, guarantees and deposits to make investments that further the foundation’s mission and programmatic priorities.”19 On April 5, 2017, the Ford Foundation announced “it is committing up to $1 billion from its $12 billion endowment over the next 10 years… to mission-related investing.”20
However, for-profit banks and investment management firms, with JPMorgan Chase in the lead, appear to be doing just the opposite of the hitherto slow-moving foundations. JPMorgan Chase is rushing to get into the mission/impact investing field with products designed to attract socially motivated investors. Other financial institutions that are now offering such products include Morgan Stanley, AXA, UBS, and BlackRock. So far as foundations are concerned, the pace of adoption is indicated by a Chronicle of Philanthropy article by Ben Gose: “Foundations Wary of Impact Investing.”21 It is amusing to note that, on December 1, 2015, when this article was first posted on the Chronicle of Philanthropy website, the headline descriptor was “cautious.” By the time the publication appeared in hard copy, the headline descriptor had changed to “wary.”
Undoubtedly, philanthropy has much to learn from Wall Street and the business schools—both the portion of philanthropy that manages endowments and the portion that distributes the proceeds to worthy causes. The management and financial innovations described here have all arisen from an earnest search for greater effectiveness, stricter fidelity to mission, clearer strategic thinking, and greater certainty about results and their value. But, it is essential to remember that many of these techniques and doctrines were designed for the very different environment of for-profit enterprise, with its mostly unambiguous reckoning of profits and losses, the disciplining force of competition and market share, and long-established means of calculating risk and return. In the nonprofit world, where such ideas have other, less consistently defined meanings and where many goals and values are difficult or impossible to value quantitatively, ways of managing and investing that have served businesses admirably may have unforeseeable and unintended consequences. In this context, some caution—if not outright wariness—is surely called for. If some of these strands of innovation are proceeding slowly, with only a few pioneers in the lead and many skeptics still on the sidelines, that may well be just as it should be.
For as long as I can remember, leaders and observers of the philanthropic and nonprofit sectors have criticized foundations for confining their grants to meticulously itemized budgets that support specific program activities but not the strength and durability of the organizations operating the programs. Critics castigated foundations for being unwilling to provide nonprofits with the budget flexibility that comes with general operating support and for refusing to reimburse indirect costs like executive and financial management, information technology, rent, fundraising, and other expenses that contribute to the success of whatever program is supported. Indeed, for much too long, foundations have been unreasonably rigid, even unthinking, in their micromanagement of how, upon what, and in what amounts their grantees spend foundation dollars, and they have been downright parsimonious in significantly underreimbursing the real costs to the grantee of carrying out the programs for which funds are being provided. At long last, those practices are beginning to change, again albeit slowly. According to a 2015 article in the Chronicle of Philanthropy, “Foundations are gradually awarding more general operating core support to nonprofits to strengthen their organizations: e.g. The Weingart Foundation in Los Angeles awarded $100 million in general operating support to some 90 nonprofits since 2008, and its unrestricted grants rose from $1.8 million in 2008 to $19.2 million in 2014.”22
The evidence is mounting. Darren Walker, the Ford Foundation’s president, wrote this in his Second Annual Letter in November 2015:
According to Nonprofit Finance Fund’s most recent State of the Nonprofit Sector Survey, the single greatest challenge facing organizations today is “achieving long-term financial sustainability.” So much of the feedback we’ve received echoes that sentiment.
In light of this, we have decided to invest in organizations as partners—and to give them the kind of trust, flexibility, and additional support they need to do their best work. As incubators for both individuals and ideas, organizations are essential to developing a robust ecosystem of actors addressing inequality around the world.
For this reason, we are aiming to double our commitment to supporting key anchor organizations in our six program areas. Over the next five years—from 2016 to 2020—our trustees have authorized us to allocate up to $1 billion for a concerted effort [called “BUILD”] to support stronger, more sustainable, and more durable organizations.
In some cases this may mean larger, longer-term grants that can be used more flexibly. In other cases it may mean support for wraparound services that help an organization develop, adapt to change, or even merge with others. Whatever form it takes—depending on context and the needs of each organization—our aim is to ask not, “How do we make this grant successful?” but rather, “How do we help make this organization successful?”23
Then, in a widely distributed letter to the public that same month, Walker revealed that the Ford Foundation would henceforth double the rate it had historically allotted to cover its grantees’ overhead costs. The foundation will, he wrote, now allow up to 20 percent of its grant award value to be used for such purposes, rather than the former ceiling of 10 percent. Most foundations have long imposed a very low cap on the amount of overhead they allow grantees to recover on program grants. Some foundations allow no overhead at all. Others arbitrarily impose a 15 percent to 20 percent ceiling on overhead. In announcing the change in Ford’s policy, Walker wrote:
All of us in the nonprofit ecosystem are party to a charade with terrible consequences—what we might call the “overhead fiction.” Simply put, because of this fiction, foundations, governments, and donors force nonprofits to submit proposals that do not include the actual costs of the projects we’re funding.
I recently learned of one local government request for proposals that gave extra points to applicants that submitted proposals with lower overhead, resulting in the winning groups receiving overhead payments of 5 percent—an absurd and self-defeating outcome.
The overhead fiction also results from well-intended metrics developed by nonprofit watchdog groups that have equated lower overhead with organizational effectiveness when, in fact, the opposite may be true.
At Ford, we have been willing participants in this charade. Our policy of 10 percent overhead on project grants in no way allows for covering the actual costs to administer a project. And, to be honest, we’ve known it.
This number does not reflect what it takes actually to manage a project; nor does it help those we support effectively to run robust organizations capable of executing projects. Thus, beginning January 1, [2015,] we will double our overhead rate on project grants to 20 percent. We hope to encourage more honest dialogue about the actual operating costs of nonprofit organizations working in the US and internationally.24
Foundations’ growing awareness of the “actual costs” of running successful programs may even mean they are paying more attention to—and in some cases, at least, providing more support to—voices in the field that have been clamoring for a more realistic approach to covering basic organizational costs. In October 2015, a group of major foundations made the surprising announcement that they had collaborated in awarding separate $1 million general operating support grants to two of the key infrastructure-strengthening organizations in the nonprofit sector: the Center for Effective Philanthropy and Grantmakers for Effective Organizations.25 Both organizations have been influential in drawing foundations’ attention to what Walker called the “overhead fiction” and inspiring more and more funders to confront reality.
On the surface, this trend may seem to be merely an adjustment—admittedly belated—to an almost self-evident reality: organizations that have too little to spend on management are likely to be poorly managed. If foundations want to fund excellence, then they need to fund excellent organizations, which does not come free. But I think there is more to the changing attitudes on this issue than just a belated reckoning with elementary organizational arithmetic. Many of the trends I have described thus far—the preoccupation with measurable performance, outcomes, and impact; the appetite for more sophisticated consulting services; the willingness to employ new and more complicated forms of financial support—all have at least one prerequisite in common: they demand better-run, more-data-savvy organizations that can make effective use of all the technical advice and the fancy financing and that can track and analyze and report on all the metrics demanded of them.
In short, it’s not just that foundations have suddenly awoken to their long-standing stinginess about operating expenses—although that would be a positive development all by itself. More to the point, they have come to the realization that well-run, well-equipped, technically up-to-date nonprofit organizations are the only way that foundations themselves can achieve the kind of philanthropic results they say they want and need. When funders see a value to themselves in providing adequately for organizational management, then perhaps the days of the “overhead fiction” may finally be numbered. This partnering approach can thrive when both recipients and grantmakers understand what being effective means. It is not the case when one side of the partnership—the grantmakers who asymmetrically hold the power due to their resources—are the only ones in the equation who deem what is effective.