Category Archives: Grantmaking

What Drives Philanthropic Success?

March 12, 2010 – 8:31 am

Peter Frumkin is the author of Strategic Giving, an excellent book that I reviewed last year. Earlier this week, Peter wrote a post on the Philanthropy Central blog calling into question some of his own assumptions about what drivers are most important to successful philanthropy.

Peter wrote:

…I am increasingly troubled by a recurrent worry. It is a worry about what actually drives philanthropic success.

Let’s define two categories of philanthropic processes. The first is technocratic, rationalistic, and ordered: It includes program positioning and issue research, alignment and coordination across initiatives, logic model drafting, white paper or concept paper development, proposal reviewing, adapting and applying new information technologies, program evaluation design and implementation, and all the other day-to-day professional work that goes into modern philanthropy…

Now consider what might be called the more humanistic, interpretive, and adaptive work in philanthropy, which really comes down to judging the capacity, character, resilience, intelligence, and resourcefulness of the people who seek philanthropic funds. This is the kind of ill-defined and untheorized work that comes down to judgment and gut assessment by the donor of the person sitting across the desk from them. Call this Category Two work.

Now to my worry: What if Category One philanthropic work really only explained a small part of philanthropic effectiveness and social impact? What if Category Two work explained a vastly larger percent of outcomes? If this were a social science morel, we might ask what the r-square statistics of these two types of philanthropic work are if the dependent variable is effectiveness. The r-square statistic ranges between 0 and 1 and tells us how much variation in the dependent variable is attributable to changes in the independent variable (here, that would be Category One and Two philanthropic work).

My concern is that the growing philanthropic industrial complex—made up of consultants, researchers, trainers, and advisors—believes, earnestly believes, that the r-square statistic for Category One work is high, perhaps up to .75, and this justifies the substantial amounts of money invested in building up and supporting this work. But I have come to doubt this assumption over time and now think the r-square statistic might actually be very low for Category One work. I am more and more of the belief that Category Two work has the big r-square and explains a lot more of the achieved social impact than anyone wants to admit. The problem is that Category One work has an army of salespeople out and about selling tools and frameworks, while there is virtually no infrastructure to support Category Two work.

What I think the field really needs is a systematic guide to the difficult art of assessing the innate ability and capacity of grant seekers  to conceive wisely a vision and then actually carry out their plans. If donors cannot judge character and capacity correctly, all the tricks of the philanthropic trade will not help them achieve their goals. What such a guide would look like I do not know, but I doubt the current philanthropic industrial complex has the will to design and deliver it.

This is a dramatic declaration on Peter’s part. Peter is the kind of academic who talks about r-squared statistics in blog posts. For him to write that the “untheorized work that comes down to judgment and gut assessment… explains a lot more of the achieved social impact than anyone wants to admit,” is a shot across the bow of the philanthropy industry from someone who should more naturally side with the philanthropic process folks.

Personally, I think Peter is right. It isn’t comfortable to believe that the intangible art of judgment and gut assessment is the most important driver of philanthropic success. It would be far easier if we could all just learn specific, repeatable processes, that while complicated, insured that our giving was effective. But I think the evidence from other fields fully supports the importance of judgment over process.

In investing, Warren Buffett has a process, but it is his intangible gift for spotting value that makes him great. If the reverse was true, then anyone who read the vast literature covering the process that Buffett uses could fully expect to replicate his success.

In writing, novelists around the world study the writing styles of the greats. But The Elements of Style won’t make you Ernest Hemingway.

In economics, thousands of men and women run rigorous studies in an attempt to predict how the economy will behave. Yet we know that this process fails them time and again and fails to even adequately explain historical events.

This is not to suggest that process doesn’t matter. In the book Blink: The Power of Thinking Without Thinking, Malcolm Gladwell explains the incredibly important role of judgment and gut assessment in expert decision making. But he does not declare process and rigor is not important. In seems to me that systematic processes are necessary but not sufficient building blocks on which to develop effective philanthropy.

Unless we heed Peter’s warning that “judgment and gut assessment… explains a lot more of the achieved social impact than anyone wants to admit",” all the efforts to build a more effective philanthropy will do nothing more than create elegant mental models that sound great, but fail to make the world a better place.

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By Sean Stannard-Stockton | Also posted in Effective Giving, Impact Measurement, New Philanthropy, Philanthropy | Comments (6)

Social Innovation Fund Comments

December 21, 2009 – 8:35 am

On Friday, the Corporation for National & Community Service released a Draft Notice of Funds Available (NOFA) for the Social Innovation Fund. This document lays out the application process for the $50 million in grants to be available in 2010 from the Fund.

The document is pretty user friendly and at 24 pages is certainly digestible by anyone who is interested. Note that this is only a “draft”. The Corporation is soliciting comments from the public until January 15. The final NOFA will be released in February 2010.

In July, I wrote a post explaining what the Social Innovation Fund is and another about why I think it matters. What I’d like to do now is kick start a public debate on the NOFA. If you plan to offer comment on the document directly to the Corporation (which simply entails sending them an email at SIFinput@cns.gov), then I’d like to suggest that you forward me a copy of your comments for publication. Rather than simply have the comment process be one of the public sending responses to the Corporation (who understandably has said they won’t respond to each comment), let’s turn the process into a public conversation.

I realize that this week and next will be dead quiet on this blog and others. So I’ll plan to kick start this conversation in January. In the meantime, if you do submit a comment on the NOFA, please forward me a copy at sean@tacticalphilanthropy.com.

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By Sean Stannard-Stockton | Also posted in Capital Market Philanthropy, Cross-Disciplinary Conversations, New Philanthropy, Philanthropy | Comments (3)

Paul Brest & Paul Shoemaker Debate General Operating Support

November 20, 2009 – 9:36 am

In my last post, I profiled Paul Brest’s new annual letter about the merits, or lack thereof, of general operating support grants. In the weeks before the annual report was released, Paul emailed a copy of the essay to a group of people who work in philanthropy. Paul Shoemaker of Social Venture Partners replied with extensive comments and a debate ensued between Shoemaker and Brest.

With the permission and encouragement of both Pauls, I’m republishing an excerpt of the debate below. Just to be clear, any emails sent to me are strictly off the record unless permission is requested. Brest’s email was a private email among a group of people. I republish it here only after Paul B. suggested the idea and Paul S. gave his permission.

Please see yesterday’s post for the “medical school example” referred to below. Note that Shoemaker does not write in all caps because he is yelling at Brest, but to distinguish their remarks during inline comments within the emails (although Shoemaker does love using all caps, emoticons and bold, italicized text in most of his emails!).

Paul Shoemaker: In the scenario, e.g., where the funder is interested in cancer research within a medical school, who else then funds the overall school’s “overhead,” administrative, etc. expenses?

Paul Brest: That’s just what overhead rates are for. In the case of universities the overhead rates are well defined.

Paul S: “OVERHEAD” RATES, IMHO, ARE LARGELY A FALLACY. NO ONE HAS ANY DEFINTION OF OVERHEAD THAT IS REMOTELY CONSISTENT. AND ONE PERSON’S OVERHEAD IS ANOTHER PERSON’S INVESTMENT IN HUMAN CAPITAL. EVEN IF SUCH RATES WERE DEFINABLE, HOLDING A NON-PROFIT TO X RATE, PRE-DEFINED, IS ARTIFICALLY CONSTRAINING AND LESSENS THE NON-PROFIT’S ABILITY TO ADJUST ITS SPENDING BASED ON CURRENT CONDITIONS AND OPPORTUNITIES. I JUST DON’T THINK OVERHEAD RATES ARE A VALID, USABLE, TRULY DEFINABLE THING.

Paul S: I know the analogy never translates 100%, but one thing I constantly recycle in my mind is some entity – VC, bank, individual investor, etc. – putting money into a private sector company but telling them they can only use the money for X, but not Y. How does that company ever build a whole, fully-functioning company, even if only some of their investors attach such requirements?

Paul B: The nonprofit and business sectors aren’t identical. If I were to use a business analog, though, a project grant is more like purchasing services than investing in the company.

Paul S: THEY ARE CERTAINLY FAR FROM IDENTICAL, I AGREE. BUT EVEN WHEN I AM PURCHASING GOODS OR SERVICES FROM A FOR-PROFIT COMPANY, I CANNOT THEN TELL THAT COMPANY HOW TO SUBSEQUENTLY AND SPECIFICALLY USE THOSE FUNDS (E.G. USE MY MONEY FOR R&D, BUT NOT SALES & MARKETING). AND IF THE FOR-PROFIT WORLD DID WORK THAT WAY, IT WOULD BE SIGNIFICATLY LESS SCALABLE AND EFFECTIVE THAN IT IS TODAY (AND NO, I DON’T THINK CAPITALISM / FREE MARKETS ARE “PERFECT” BY ANY MEANS J). THE FUNDAMENTAL PROBLEM WITH ANY KIND OF RESTRICTIONS ON FUNDING ARE HOW MUCH THEY HANDICAP AND CONVOLUTE THE NON-PROFIT’S ABILITY TO OPTMIZE ITS OWN SPENDING TO ACHIEVE ITS GOALS AND SOCIAL OUTCOMES.

Paul B: And now a question for you. If you made, say, a $1000 GOS [general operating support] grant to a university the chances are that about a penny would go to cancer research. So what should someone who wants to support a university’s cancer research program do?

Paul S: THE WAY I WOULD HOPE THE WORLD WOULD WORK IS THAT A NON-PROFIT / UNIVERSITY, ETC WOULD BE VERY CLEAR ABOUT THEIR GOALS, WHAT THEY INVEST IN, HOW THEY WILL USE THEIR FUNDS, ETC. AND THEN A  FUNDER WOULD MAKE GOS / UNRESTRICTED GRANTS BASED ON THAT INFORMATION. IF ALL FUNDERS BEHAVED IN THAT WAY, THEN ULTIMATELY MY GOALS FOR CANCER RESEARCH WOULD BE MET.

I WOULD NOT BE ABLE TO SAY MY $1,000 LED TO X, BUT THE ULTIMATE PURPOSE FOR MY $1,000 WOULD BE MET. AND IF I LATER LEARNED THAT THE UNIVERSITY WAS NOT INVESTING IN THAT RESEARCH EFFECTVELY, I WOULD DECIDE TO DISCONTINUE FUNDING (UNLESS THERE IS SOME OTHER “PRODUCT” THAT I STILL VALUED). MAKING MY GRANT FOR CANCER RESEARCH A “PROJECT GRANT” DOES NOT, ON THE WHOLE, MAKE MY GRANT ANY MORE EFFECTIVE WHILE IT DOES RESTRICT / CONSTRAIN THE ORGANIZATION’S ABILITY TO BUILD A FULLY-FUNCTIONING ORGANIZATION.

Paul B: [referencing the medical school example] A grant to Stanford Medical School is not GOS under the IRS definition; only an unrestricted grant to Stanford University as a whole is. Stanford will allocate a GOS grant among millions of activities based on what it sees as the needs of the time: teaching Italian, particle physics research, the women’s lacrosse team, the law school, overseas campuses, you name it. Even if Stanford had the best cancer research center in the world, the institute would only receive a trivial part of a GOS grant to the University, given these other needs. If a donor particularly interested in cancer research could only give GOS, he or she would wisely seek an institution that only does cancer research so all of the funds would go for that purpose.

The way Stanford keeps its core operations functioning, even when most grants are restricted, is by charging overhead costs. With respect to government grants, overhead is defined extremely precisely by OMB Circular A-21 and the rates are negotiated with universities. (There’s a similar circular for nonprofits other than universities.) Individual donors and foundations try, usually successfully, to circumvent the overhead rates. Well, shame on us! I tried to get IS [Independent Sector] interested in the overhead problem some years ago, but it never caught on. It would be great if organizations like SVP [Social Venture Partners] and GEO [Grantmakers for Effective Organizations] got interested. They’d certainly have my support.

Paul S: OK, within a monolithic / huge institution, especially public, like a university, I see some of your logic for non-unrestricted support. Yes, an unrestricted grant in such a scenario has the potential to be spread across a great range of potential purposes. I will say that, taken to the extreme, if EVERY funder to a university ONLY funded their piece of research, etc. they wanted to focus on, we would be back to the same fundamental problem of “who will sufficiently fund the administration, infrastructure” then?”

But on institutions of significant complexity / diversity of work AND scale, I can see some logic, Paul. I am almost ready to say I’d be willing to live with the downsides you correctly describe in return for the upsides of completely unrestricted funding (with explicit organizational, published goals and institutional accountability). I also confess I’m too ignorant about funding streams for large public educational institutions

I will say that “With respect to government grants, overhead is defined extremely precisely by OMB Circular A-21” is an expression that, prima facia, seems doomed to inaccuracy, inaccuracy, severe rigidity, and a lack of understanding that will lead to all kinds of debilitating handicaps and restrictions. Same goes for “a similar circular for nonprofits.” And if in fact, they often successfully circumvent the overhead rates, and we all know they do, then what a ridiculous waste of time and resources in the first place.

For 98% of non-profits. I’ll stand my ground J (and I know you’d stand with me on much of that). I will also add that so many of these discussions about GOS / unrestricted vs. project-specific grant focus on the negatives and risks of unrestricted grants and not enough on the significant positives and benefits. Much less staff resource wasted, much greater flexibility in resource allocation / optimization, trust placed in the hands of non-profits who are closer to the real work, ability to fill in gaps in infrastructure, etc. There are more. And the ultimate purpose for unrestricted funding is it is a significant advantage of helping a non-profit build a much stronger, sustainable and salable organization.

Paul, when you say “I tried to get IS interested in the overhead problem some years ago, but it never caught on. It would be great if organizations like SVP and GEO got interested. They’d certainly have my support” I was vaguely aware of that, but I’d love to hear more and in fact, maybe we are ready to take that on collectively

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By Sean Stannard-Stockton | Also posted in Cross-Disciplinary Conversations, Philanthropy | Comments (3)

Paul Brest on General Operating Support

November 20, 2009 – 9:11 am

The newly released William & Flora Hewlett Foundation’s annual report includes an essay about forms of philanthropic support from the foundation’s president Paul Brest. In the essay, Paul pushes back against groups such as Independent Sector, Grantmakers for Effective Organizations, and the Nonprofit Finance Fund, who have advocated strongly for funders to provide nonprofits with general operating support rather than offering them restricted grants that can only be used for certain programs. On this blog, I’ve frequently argued in favor of general operating support as the default grant type that funders should use.

Brest writes:

For all of the value of general support, however, there are often good reasons to fund specific projects. Proponents of unrestricted support tend to be so single-mindedly focused on its benefits that they forget that it is not an end in itself but rather one of a number of tools of philanthropy, useful for some purposes but not others.

This essay is premised on the belief-or at least the hope-that if funders better understood the rationales for different forms of philanthropic support, they would behave in a more nuanced way. It argues that the appropriate form of funding depends mainly on the alignment of a funder’s goals and strategies with the grantee’s mission and activities. Alignment is a function of the breadth of a funder’s goals and is also affected by the substance of its goals and the time horizons in which it pursues them…

Alignment Between Funders and Grantees

There are two essentially different forms of philanthropic funding. When a foundation provides general support-also known as unrestricted or core support-its funds back the grantee’s entire mission. Alternatively, a foundation may support specific programs or projects carried out by the organization. Here is a simple example:

  • A funder interested in promoting medical education and research in general might give general operating support to a free-standing research institute or medical school. (A grant to a medical school within a university would not constitute general support, because it would not provide unrestricted support for the institution as a whole-though most universities would be quite pleased to have an unrestricted grant to one of their major schools.)
  • A funder interested in cancer research might provide project support to a cancer center within a medical school or a medical institute, or provide general support to an institution whose sole mission is cancer research.
  • A funder interested in supporting research on a particular form of cancer might provide project support for the work of an identified researcher or her research group in one of these institutions.

General support is the most effective grantmaking tool when an organization’s mission is essentially identical with, or contained within, the funder’s goals in a field. Clearly, a funder interested in cancer research would greatly dilute its grant by providing general support to a university, which devotes only a tiny fraction of its work to this research. But the funder could achieve its goal through either a project grant or through general support to an institution exclusively devoted to such research.

You can read the full essay here.

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By Sean Stannard-Stockton | Also posted in Foundations, Philanthropy | Comments (3)

Fixing the Power Imbalance in Philanthropy

October 26, 2009 – 9:44 am

It is a recurring complaint in philanthropy that the huge power imbalance between funders and grantees skews the behavior of nonprofits in negative ways. This was one of the points made by reader Aaron Stiner in his critique of David Hunter’s essay on social investing:

I still have some concerns that the model you are presenting runs the risk of continuing the power imbalance funders hold over nonprofit organizations. This power imbalance is a mutual issue for both nonprofit organizations and funders – and I object to the implication in David’s comments that funders should continue to perpetuate that imbalance. I think nonprofit organizations need to do a better job of representing the voice and needs of their recipients to funders and I think funders need to do a better job of listening.

I actually believe that social investing can be a strong force for rectifying the negative effects of the power imbalance. Reader Emily Gerth made this point so well that I offer her explanation rather than write my own:

“The social investment movement is not designed to make nonprofits change, but to support high performing organizations. ”

I think that’s the key statement here. Social investors hope to change the sector by supporting high performing organizations (and, by default, not supporting other nonprofits). Rather than remaking nonprofits or telling them what to do, they want to focus on what’s working well now.

So I strongly disagree with Aaron that what David suggests perpetuates the power imbalance. I think it has the potential to rectify the imbalance a great deal. Of course, capital will flow to some organizations and not to others. That gives donors no small amount of power, but I don’t think that’s what causes the imbalance of power that can be so detrimental to nonprofits. The power imbalance is caused when foundations and other donors decide that they know what works well and they impose agreements/requirements/conditions on nonprofits. Social investors simply withdraw funding when the organization isn’t performing, which is a strong signal for the nonprofit to change, but doesn’t come with the assumption that the investor “knows” how to change the organization.

Maybe I can state it more simply: The investor asks, “Can show you me that this works? If yes, I will give you funds to do it.” The more traditional donor/grantor says, “I know what works. Is that what you do? Because I will only give you funds to do that.” As a nonprofit, it seems obvious to me that first question invests you with great deal more control and authority.

Having received both online and offline feedback on this string of posts, I do want to offer one clarification. Investors, both for-profit and social investors, are not actually interested in whether an organizations has been or is a high performer, but rather if they will be a high performer in the future. Past success is interesting only to the extent it helps predict future performance.

It is through the lens of future high performance that we can understand why a social investors may invest in an early stage organization that has limited evidence of outcomes and limited performance based systems. For-profit investors who invest in early stage companies are almost always investing in companies that are currently losing money and have never earned a dime. But they only invest in companies who they think will prove to be high performers.

One last point of clarification: I do not think that social investing is the only good approach to philanthropy and in fact at Tactical Philanthropy Advisors we frequently work with clients in ways that do not reflect the tenants of social investing. For instance, providing funds to support the efforts of individuals working on local community issues, supporting efforts to raise awareness of certain issues or providing support to strengthen the ecosystem of a community can all be very effective approaches that may not fall within the tight definition of social investing.

I offer my positive endorsement of the social investing framework laid out by David Hunter not in an attempt to condemn all other approaches, but because I believe that 1) it is a hugely useful approach for the majority of grantmaking activity, especially for major donors and 2) because it offers a results focused framework and way of thinking about philanthropy that can help guide other philanthropic activity.

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By Sean Stannard-Stockton | Also posted in Capital Market Philanthropy, Effective Giving, Impact Measurement | Comments (8)

Social Investing & The End of Charity

October 19, 2009 – 8:53 am

In my recent writing defining the difference between Tactical and Strategic Philanthropy, I’ve focused on the concept of the Strategic Philanthropist as a social problem solver and the Tactical Philanthropist as a social investor. So I’d like to draw your attention to an article by David Hunter in the brand new Philadelphia Social Innovations Journal titled The End of Charity: How to Fix the Nonprofit Sector Through Effective Social Investing.

In the article, David (a consultant to grantmakers and nonprofit agencies and the former Director of Evaluation and Knowledge Development at the Edna McConnell Clark Foundation, a key practitioner of social investing) puts forth an excellent argument for what social investing is and what the implications of the approach are for the social sector. I encourage you to read the full article.

David starts with three “Unpleasant Truths”:

Unpleasant truth number 1: While nonprofits work incredibly hard, with passion and dedication, and often in incredibly difficult circumstances to solve society’s most intractable problems, there is virtually no credible evidence that most nonprofit organizations actually produce any social value.

Unpleasant truth number 2: Because so few nonprofits are willing to face this fact and ask themselves whether they are doing any good at all, or even as much good as they may be doing harm, we cannot rely on direct service nonprofits to fix themselves without a serious push.

Unpleasant truth number 3: In general, nonprofits do what their funders tell them to do. When funders make demands, more often than not the vision, mission, goals and objectives of nonprofit organizations give way. As the saying goes, We are what we eat. . . . and most nonprofits are what their funders make them.

He then goes on to give examples of a number of organizations who he says are actually destroying social value (either by spending money that results in no positive change or actually encourages the opposite of the intended outcomes – such as a violence prevention program that has been show to actually increase violent behavior).

David believes (as I do) that a social investing approach can greatly increase the social value production of the nonprofit sector and he lays out an inclusive definition of social investing:

  • the use of rigorous selection criteria to choose nonprofit organizations to support,
  • structuring investments to strengthen organizations in which investments are made in order to enhance their ability to provide effective services reliably and sustainably at high levels of quality,
  • tracking performance and providing non-financial supports as indicated, thus helping these agencies become more effective and efficient in helping the people they serve to measurably improve their lives and life prospects,
  • diminishing transaction costs to help these organizations stay focused on achieving their respective missions, and
  • helping nonprofits to build reliable revenue streams that will support them sustainably at the appropriate level of scale — before terminating the investment.

As part of the selection criteria for investing in a nonprofit, David believes that social investors must ask the following questions:

  • Who, exactly, is the organization serving and what are their needs?
  • How many and what percentage of the people they serve finish the programs or receive a large enough and long enough exposure to services so that they can benefit?
  • What empirical basis is there for believing that an organization’s program(s) and service(s) are effective — that is, producing outcomes for the people they serve?
  • What are those outcomes, what are the indicators used to assess them, and what is the rate of success for program participants in reaching them?

This is where the rubber hits the road. According to David:

“In my experience, the majority of nonprofits cannot answer these questions… in this new age of accountability, nonprofits that cannot answer these questions will find it harder and harder to attract funding from social investors. And social investors will increasingly represent the larger sources of revenues flowing into the nonprofit sector… Social investing, if widely adopted, will help channel funding streams that are directed by measurable performance rather than feel-good stories, habits of giving and rank sentimentality. And social investing has the potential (yet to be realized) to advance a selection process that either forces poor performers to evolve and improve, or weeds them out.”

I agree with David on the way he has described social investing and the implications of it being widely adopted as an alternative to traditional charitable giving. I greatly applaud the clarity with which he describes the process. However, I must also reject the nihilistic claim that most nonprofits and the social sector as a whole is not currently producing social value.

To put this claim in context, realize that 8% of US workers are employed by nonprofits and the sector receives and spends roughly $1.5 trillion in revenue each year. Now I believe that the amount of social value creation in the nonprofit sector can be significantly increased. I believe that currently, as a country we are getting far less social value per dollar spent than we would if social investing became a dominate approach in philanthropy. But just because we have limited evidence of impact does not mean that the sector is not producing positive social value.

I point out this disagreement because I think that David’s starting point is shared by many analytical thinkers who hope to create a more robust social capital market. But I believe that painting this picture of the current social sector actual impedes the development of social investing because it 1) Flies in the face of the experience that most donors and nonprofit employees have and allows them to then dismiss the need for social investing and 2) It greatly lowers the bar to lay claim to being a successful social investor. If in fact the social sector is currently creating no social value, then any investment that creates social value, even a minimal amount, could be seen as having been successful.

David is a super smart guy. He’s also not afraid to say what’s on his mind, such as when he suggested earlier this year that I did not have a “smidgeon of knowledge” about evaluation and that I needed to get a “solid grounding” in social investing issues before I wrote any more about it(!). He’s also a member with me of the Alliance for Effective Social Investing.

What do you think? Is social investing needed? Will it lead to a more effective nonprofit sector? If you work for a nonprofit, are David’s criteria for social investments questions that you feel are relevant and important items for you to be able to answer (I certainly do)? If you are a funder, would you describe yourself as practicing social investing? If not, why have you chosen to use another approach and what flaws are their with the social investing approach?

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By Sean Stannard-Stockton | Also posted in Capital Market Philanthropy, Effective Giving, Impact Measurement, New Philanthropy, Philanthropic Capital Markets, Philanthropy, nonprofits | Comments (23)

Can Increasing Payout Rates Save the Day?

September 28, 2009 – 8:56 am

One of the responses to my post on Friday, in which I argued that staffed foundations should share their knowledge to offset the decline in their investment assets, was from people suggesting that foundations should also increase their payout rate. As a general prescription, this is probably a bad idea.

Foundations are required to pay out 5% of their investment assets each year. Why 5% and not some other number? One of the reasons is that there is a rule of thumb in finance that says that a pool of assets invested in a diversified manner has a very high likelihood of sustaining a 5% payout rate forever without depleting the assets. The 5% minimum is essentially the highest level that can be required of foundations without eliminating their option to exist in perpetuity.

I don’t think that all foundations should plan to last forever. But I do think their are valuable benefits to institutionalizing knowledge and creating long lasting organizations. That being said, there are also good arguments to be made for foundations to elect higher payout rates. While doing so may force them to spend down and disband the organization, they may be able to achieve more impact through this strategy.

Too often, proponents of higher payout rates pretend that their is no trade off involved. They imply that foundations can simply pay out higher levels of grants with no impact on future giving. In the comment below, Aaron Dorfman, the executive director of the National Committee for Responsive Philanthropy makes the case for higher payouts. Personally, I think Aaron’s argument ignores the hard reality that foundations that follow his advice are making a simultaneous decision to increase the likelihood that they spend down. But Aaron and NCRP are well positioned to lead the charge on this issue and I’m happy to highlight his views.

Aaron wrote:

For me, your post reinforces the necessity for everyone in our philanthropic community to create an expectation that private foundations do more than is legally required of them.

There was a moment when the recession’s effects first began to be felt when foundations were debating what to do. A few put a halt to grantmaking entirely, realizing that legally they didn’t actually have to make any grants this year to meet their payout requirement. But then nonprofits became more vocal about the threat to their operations in a time of increasing demand and decreasing revenue. A few courageous grantmakers started making public there commitment to maintain grants payout for 2009 at 2008 or 2007 levels. And they did this even though it means their payout rate for 2009 may be 7% or 9% of assets or higher. And this responsible approach became the most socially acceptable response in foundation circles.

We need to start now working to ensure that it becomes unpalatable for foundations to consider cutting back their grants payout in 2010, even if it would be legally permissible. Nonprofits will still be struggling financially well into next year, and they’ll need grantmakers to step up to the plate.

The moral obligations of private foundations go far beyond the legal requirements. Leaders of many private foundations realize this and will act responsibly. We need to highlight their stories and challenge other grantmakers to follow their lead.

Philanthropy requires making tradeoffs. There are good arguments for why foundations should engage in countercyclical grantmaking (giving more during bad times and less during good times). There are also good arguments for planning on spending down. But simply raising payout rates doesn’t tap into a pool of free money. We don’t want to create an environment where it is “unpalatable” for foundations to preserve their very existence. We want an environment where philanthropic actors make tough decisions based on a thorough understanding of the tradeoffs involved.

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By Sean Stannard-Stockton | Also posted in Foundations, Philanthropy | Comments (6)

Why Would You Give Money to Bill Gates?

September 21, 2009 – 10:48 am

In June I wrote a post about Olivia, a 7-year-old girl who had given $35 to the Gates Foundation. Last year, the Gates Foundation received $10.4 million in gifts from donors like Olivia. In the post, I pointed to these unusual gifts as evidence that individual donors are focusing more and more on the impact of their giving.

At the time, I wrote:

Why did Buffett give money to the Gates Foundation? He thought they were better donors. Why did 7-year-old Olivia donate to the Gates Foundation? She thought they were better donors.

The Gates Foundation actual encourages people to give money directly to their grantees rather than to the foundation. But at least some donors seem to think that entrusting their money to the Gates Foundation is the best way to go. When these donors think that the Gates Foundation is a better donor, what does this mean? That the Gates foundation knows which nonprofits are better than others.

Investors regularly entrust their money to professionals with the belief that these professionals are better at managing it then they are. There are reasons that I think most donors will not want to do this with their philanthropy. But I do wonder whether large private foundations might become high profile “brands” that represent excellent giving. If they could attract outside donations, they could commit more capital to the organizations they fund. In fact, they could permanently increase their payout rate.

Now Jacob Harold of the Hewlett Foundation addresses this concept (which he calls “regranting”) in a recent article in Alliance Magazine:

In the US alone, there are over 97,000 foundations and grantmaking public charities. About 5,000 of them have paid staff. Like all institutions, they vary in effectiveness. But in that group are some superb professionals – people with decades of experience on the world’s most complex social issues, who are plugged into vast networks that include the best of the old and the new, the North and the South. They are not necessarily smarter, but they are better positioned to make philanthropic decisions than an average donor – no matter how brilliant that donor may be in her day job as a teacher or doctor or cabinetmaker…

US foundations are required by law to publicly disclose their grants, but disclosure is not enough: donors also need tools and products to make information usable and regranting easy.

For example, a ‘side-by-side fund’ could allow a donor to mimic the giving of one programme area of a particular foundation. Like an index fund, it would distribute dollars in proportion to another portfolio, in this case a foundation programme area. Or donors could skip the middleman altogether if they could easily find out where and why institutional givers gave their money. Organizations including Nonprofit Knowledge Network, Partners for Change and Root Cause are working to design such products.

…Most individual donors are not yet inclined to give up control of their giving. But with better information and more convenience they just might. Every year, millions of people give up control of their financial investments to professionals. Outsourcing to professionals is just another form of control: you pick the person or the institution instead of feeling overwhelmed by the choices before you.

I believe that there is deep knowledge about good philanthropy in the professional grantmaker community, but that there are few incentives and minimal structures in place to share their knowledge with individual donors. What that means is that the knowledge is being used to influence the 13% of charitable dollars that foundations control, but not influencing the 82% of charitable dollars that individuals control. Transferring this knowledge from professional grantmakers to individual donors is something we’re working on with the Tactical Philanthropy Knowledge Network.

One of the core ideas behind Jacob’s piece is that the knowledge of which nonprofits to fund is the fundamental knowledge that is valuable. I think this is one type of valuable information, but practicing effective philanthropy means much more than just picking nonprofits to fund. Given a nonprofit landscape that includes well over a million nonprofits and given that donors don’t want to just “do good” in general, but instead want to focus on specific issues (from economic development in Africa to supporting disabled veterans in Modesto, CA), it is more important that we transfer the knowledge of “good philanthropy” rather than offer “good picks” of nonprofits to fund.

But sidecar funds or regranting as Jacob pictures it are important tools that deserve to be more widely used. The biggest obstacle to my way of thinking isn’t getting people to “give up control of their giving” as it is “branding” the regranting opportunities in ways that offer donors the emotional satisfaction and connection that making a grant to a single nonprofit does. The Gates Foundation has developed this brand whether or not they meant to intentionally. For the people who gave Gates $10.4 million last year, it was emotionally satisfying to support the foundation. You might suppose that these givers were robotically, logical donors, but there’s no doubt in my mind that 7-year-old Olivia felt emotional satisfaction from her gift to Gates.

Successful portfolios of the type that Jacob describes will not be simple pass through entities, they will be groups like New Profit and Acumen Fund who have established themselves as entities worth investing in not simply as a regranting opportunity, but as a worthwhile direct investment.

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By Sean Stannard-Stockton | Also posted in Effective Giving, Foundations, Individual Giving, Information Sharing, New Philanthropy, Philanthropy | Comments (2)

Investors & Researchers in Philanthropy

August 7, 2009 – 7:15 am

In his guest post, John MacIntosh of SeaChange Capital Partners made an important point:

The tools for evaluating for “impact” and “performance” come from different disciplines. “Impact” is a concept from social science where ideally we define the treatment, develop measures of impact (wages, employment rates, test scores, etc.), identify a comparison or control group, worry about selection and omitted variable biases, organize for large Ns, and hope for p-values above 2.0!

“Performance” is about leadership, culture, management information systems, accounting, unrestricted net assets, opportunities for donor engagement, and the like. Few people I have met are equally comfortable in these two domains; very, very few are masters of both.

I would argue that philanthropic institutions are currently geared towards thinking of themselves as impact researchers instead of performance investors. As I’ve tried to make clear, the goal is the same. Both disciplines are needed. A high performance organization that implements ineffective, poorly researched programs will fail to achieve impact. A poorly performing organization that tries to implement proven programs will fail to deliver them with fidelity and/or fail to grow.

But what would happen if funders thought of themselves primarily as performance investors and relied on a mix of internal, external and independent researchers to prove program effectiveness?

I think we’d finally be able to lay real claim to the idea that we are social investors. Calling a grant an “investment” would no longer be just the trendy way to describe what’s always been done. Grants truly would be investments because they would come in reaction to the capital needs of high performance organizations.

Remember the guest post by Kathleen Enright, the head of Grantmakers for Effective Organizations, during the Council on Foundations conference? It was titled The Need for Speed and reflected on the urgency of solving some of our most pressing problems:

This theme of speed and urgency reminded me of an observation that Ami Dar made when he spoke at the GEO/NFF Money Matters conference. He observed that whenever he’s in foundation offices, he never sees anyone walking quickly. The comment drew laughter from the crowd, but the point is an important one.

We need to start asking ourselves what it will take to infuse the kind of urgency in our own work. As it stands, our current modes of operating may get in the way of our ability to play an important role in solving our most pressing problems.

But speed isn’t always a good attribute. I certainly wouldn’t want someone researching the long term effect of multisystemic therapy on youth with behavioral issues to “rush” the study. I wouldn’t want to go into a social science research outfit and find people running down the halls. But investors do appropriately move at high speed. The timing of delivering capital is critical. If an organization needs money today, 9 months from now might not work.

Interestingly, for-profit capital providers work under this model. The vast majority of them focus on understanding companies. The definitely consider whether a company’s products and services “are effective,” but the best investors (like Warren Buffett) tend to assume that the company’s management knows what they are doing and trusts them to make the right decisions about whether to change their product mix or not.

These for-profit capital providers also depend on outside researchers at universities, independent consultants and firms with specialized expertise in areas like retail or biotechnology. The model does not downgrade the importance of academic research or systematic evaluation. It just asks the capital providers to play the role of investor instead of researcher and positions the role of researcher in the hands of other players in the system.

To be clear, there are also specialized for-profit investors who focus on only one niche market (oil and gas companies or media companies for instance). These groups do hire researchers and it is their industry expertise that sets them apart rather than their company evaluation process.

I’ve often heard people say that philanthropy is the research and development (R&D) of the social sector. But I wonder if that is wrong. Maybe we have a different role to play. Maybe we don’t have to invent anything. Maybe we just need to be social investors, providing capital to the most promising nonprofit organizations.

In a comment yesterday, reader Hildy Gottlieb worried that I was pushing a system “of rewards” where “funders decide from the top down what is best for a whole community".” But I actually think that my model aligns the interests of funders and grantees because suddenly rather than directing nonprofits to try different interventions and dangling money with the requirement it be used to the funders satisfaction, funders become deeply interested in providing capital in a way that best helps a nonprofit build a strong organization. In addition, we know from the for-profit market that while capital providers hold the power over early stage companies, it ends up being the investors who chase the highest performing companies and compete for the opportunity to provide them capital.

Nonprofits aren’t laboratories for funders to experiment in. The best are high performing social good generators. It is the job of funders to be the best at finding these organizations and helping them grow. We should take pride not in designing programs, but in being the smartest funder who always seems to find the best nonprofits before anyone else and whose portfolio of grantees thrive and change the world.

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By Sean Stannard-Stockton | Also posted in Capital Market Philanthropy, Effective Giving, Foundations, New Philanthropy, Philanthropy, Venture Philanthropy | Comments (7)

The Link Between Performance & Impact

August 6, 2009 – 9:54 am

In my first post on the topic of High Performance vs. High Impact, I stated that Impact was the holy grail of philanthropy. It was something to journey towards and High Performance organizations were the best way to get there.

But to get to High Impact, we need to know not just that we have a robust, high performance vehicle to travel in, but that we’re headed in the right direction. Unfortunately, High Impact is not a single destination that all organizations are driving towards. And there’s no fully featured map to get there. But some issue areas have better maps than others and some approaches are known to work or not.

How then do we know if a high performance organization is on the right (or best known) track?

A high performance nonprofit must constantly evaluate whether its efforts are resulting in positive outcomes. This is critical. In Paul Brest’s presentations about his book Money Well Spent, he talks about King Ferdinand and Queen Isabella as being “strategic philanthropists” in their funding of Columbus. My argument to Paul has been that the best thing to do is not study how to get to India (but actually end up in America) and then set out on that exact path with the exact tools needed according to your theory, but instead to build the most robust seafaring fleet possible. A high performance exploring team that is geared up to face the uncertain journey.

But if that “robust seafaring fleet” does not bother to evaluate if it is on track and make adjustments as needed, it dissolves into a Monty Python skit of a navy rowing (very efficiently!) in circles or even off the ends of the earth.

I should have made this point more clearly in my originally posts. But on the other hand, this point is so blindingly obvious that explicitly pointing it out seems superfluous.

But on examination, the need for pointing this attribute out reveals a fundamental difference between for-profit and non-profit organizations. Not one that needs to be fixed, but one that needs to be overcome because it is here to stay.

Note that in Warren Buffett’s set of criteria for a high performance for-profit he never says something like, “Companies must constantly evaluate whether their business activities are resulting in revenue and profits.” He doesn’t have to say this because there is a self-reinforcing mechanism at work. For-profit firms whose business models work (result in revenue and profits) make money and are able to grow. Companies whose activities don’t work (even those that are High Performing) do not generate enough revenue and profits to stay in business and they shut down.

This link doesn’t exist in the nonprofit world.

A nonprofit can be a high performance organization that implements a weak intervention. Its programs can be total failures, but implementing them does not directly affect the nonprofits revenue or ability to attract capital.

So in the nonprofit sector, we can’t just assume that any high performance nonprofit organization will result in impact. We must demand (and the nonprofit must demand of itself) that a constant focus is put on whether the organization’s efforts are turning into positive outcomes.

This focus isn’t a definitional aspect of a high performance organization. But it is the critical link between high performance and high impact.

Side note: Interestingly, for-profit companies sometimes forget about this critical link between high performance efforts and high impact (in their case, profits). In the late 1990’s, many dot-com companies ignored this link completely, believing that if they just attracted enough attention, the profit would take care of itself. That of course didn’t work out very well.

We’ve seen the link break down recently when mortgage companies began responding to very short term profits, while ignoring the fact that long term liabilities were piling up on their balance sheets. That of course didn’t work out very well either.

So ignoring this link, not tracking whether efforts are resulting in outcomes, is an attribute of both for-profit and nonprofit companies. But in the for-profit market, it cannot be ignored for long until the consequences become dire. But this short circuiting mechanism doesn’t exist for nonprofits. That makes their job all the more difficult. The only solution is for funders to put the mechanism in place themselves. Give more to high performance organizations who measure the results of their efforts and give less to other nonprofits.

Doing so will transform the social sector into a robust, high performance, high impact creator of social good.

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By Sean Stannard-Stockton | Also posted in Capital Market Philanthropy, Evaluation, Impact Measurement, New Philanthropy, Philanthropy | Comments (5)