Category Archives: Philanthropic Investment Strategy

Tactical Philanthropy as a Growth Industry

August 18, 2008 – 10:11 am

Recently Wealth Manager magazine wrote a very nice article about the growing trend of wealth management firms specializing in serving philanthropists and positioned my firm, Ensemble Capital Management, as being on the leading edge.

Strategy without tactics is the slowest route to victory, wrote Sun Tzu in The Art of War. Twenty-six centuries later, acknowledging, accepting and exploiting the distinction as a business model is the new new thing in philanthropy.

Strategic philanthropy refers to the big-picture goals, which is to say the popular image of organized giving. Ending poverty, curing cancer, etc. fall under the heading of strategy. The financial plumbing that supports such causes and primes the money pump is tactical philanthropy. The two sides have always been a part of philanthropy, of course. What’s different is the growing specialization of services for each—particularly when it comes to the tactics.

“Philanthropy is broadly understood as the giving of money for social purposes,” says Sean Stannard-Stockton, a principal at Ensemble Capital Management, a Burlingame, Calif. shop that specializes in philanthropic-related money management and financial services for wealthy individuals. “And yet,” he adds, “ there’s been almost no attention to how you structure those financial transactions.”

Until recently, that is. Attention is very much on the rise when it comes to the financial aspects of philanthropy, which Stannard-Stockon and others tag as tactical philanthropy. There is increased focus on the financial processes that make strategic philanthropy possible, he reports. In fact, the trend is so compelling that it convinced Ensemble Capital to re-brand itself four years ago as a specialist wealth manager in the burgeoning niche of tactical philanthropy…

…Arguably, the leading edge of the philanthropy boom is represented by the independent firms that are embracing a philanthropic-centric business model. Consider Ensemble, which was founded in 1997 as a traditional wealth manager, but four years ago began specializing in providing philanthropic services for individuals. Related efforts have since spilled out into the wider world: Stannard-Stockton started his blog, TacticalPhilanthropy.com, in late 2006, raising his profile and leading to his monthly Financial Times column “On Philanthropy.”…

… If the business model of philanthropic planning is compelling, it’s only a matter of time before debate begins in earnest on best practices. One of the emerging topics under discussion includes the question of how to provide philanthropic planning in a way that minimizes—if not eliminates—conflicts of interest. Framing the subject that way recalls the debate over fees versus commissions that first began bubbling in the wider financial services community in the early 1990s. A similar dialogue appears to be forming in tactical philanthropy as it relates to individual clients.

Stannard-Stockton has already staked out his position. “Just as we advise on investments in a non-sales format, we advise on giving in the same way,” he says. “We get paid for managing assets, so we have no conflict in helping people decide between the various vehicles.”

You can read the full article here.

By Sean Stannard-Stockton | Also posted in New Philanthropy, Philanthropic Capital Markets, Philanthropy | Comments (2)

The Foundations of Tax-Efficient Giving

May 15, 2008 – 9:00 am

This is my most recent On Philanthropy Column for the Financial Times. You can find an archive of past columns here.

The Foundations of Tax-Efficient Giving
By Sean Stannard-Stockton
May 10, 2008: Link to original story on FT.com

Many people think of charitable giving as an item in their annual budget, and measure it as a percentage of income. But if you own financial assets such as real estate or a portfolio of stocks and bonds, you should consider an endowment approach to your philanthropy.

Ultra-wealthy philanthropists have long created family foundations, which they fund with a single, large gift. From then on, their charitable giving is done out of the foundation – typically at a rate equal to about 5 per cent of the assets in it. Today, the falling costs of administering a foundation, or the alternative vehicle known as a donor-advised fund, mean that anyone who gives at least $500 a year to charity should consider taking a similar approach.

The tax benefits of endowing your charitable giving are significant. Donors receive an income tax deduction when they make a gift to a private foundation or donor-advised fund. This means that by “front-loading” your charitable giving by shifting assets equal to multiple years of expected donations into a charitable vehicle, you obtain multiple years’ worth of income tax deductions today.

The concept of present value says money received today is worth more than equal amounts delivered in the future (for instance, you would rather I gave you $100 today than promise to pay it in 10 years). By endowing your charitable giving, you will pull the income tax deduction that you would normally receive in the future into the current tax year.

Once in a charitable vehicle, your assets are shielded from taxation (assets in donor-advised funds owe no taxes on capital gains, dividends or interest and assets in foundations pay only a 1-2 per cent “excise tax”). Just as IRAs and 401ks allow individuals to save for retirement in a tax-advantaged account, endowed charitable vehicles give a similar benefit to philanthropists. But if, instead, you keep your assets in a taxable account and make annual gifts to charity, you will have to pay taxes on the capital gains, dividends and interest generated each year.

Endowing your philanthropy makes it much easier to follow the golden rule of tax-smart charitable giving: always donate with your most highly appreciated asset. When you give cash to a charity, you receive an income tax deduction. But when you give an appreciated asset (shares of stock that have gone up in value, for example, or a piece of real estate bought years ago), you receive the same income tax deduction and avoid capital gains tax on the appreciation.

You can also achieve this advantage simply by replacing your annual cash gifts to charity with transfers of appreciated assets. But if you make numerous charitable gifts each year, or your most highly appreciated asset is not something you can easily give fractional interests in (such as real estate), then using a private foundation or donor-advised fund will make following the golden rule much easier.

Using a charitable vehicle also means that you can separate the tax aspects of your giving from the personal and emotional reasons that drive philanthropy. When endowing your giving, you can work with your accountant and financial adviser to select the assets that make the most sense to fund your donations with and to time the gift for the highest financial benefit.

Once your charitable vehicle is funded, the gifts you make to non-profits will not have tax consequences. You will be free to make your donations in the amounts and on the timeline that does the most good in the world.

For maximum financial advantage, you should fund your charitable vehicle with 20 times the amount of your annual giving. However, if your asset base does not allow for a gift of this size, donating any amount greater than one year of giving will enhance your financial situation.

The suggestion of funding with 20 times annual giving comes from the fact that if the assets in your philanthropic vehicle are invested to achieve 8 per cent annual returns, you will be able to make annual grants of 5 per cent (one 20th) of the assets and increase your giving by 3 per cent each year to keep up with inflation. Barring unexpectedly bad investment performance, your charitable vehicle will be able to sustain this level of giving forever, without any additional funding from you.

Most people find that endowing their giving has many non-tax related benefits as well. With a private foundation, for instance, you can name relatives to join the board and make it part of your family tradition to come together and talk about what charitable causes are important to you and why. By organizing your giving, you may also find that you focus it on a smaller set of causes that are deeply important to you. Focused giving is a trait that most philanthropic advisers encourage their clients to adopt to maximize impact.

While at its core philanthropy comes from the heart, by being financially savvy you can reduce the cost of your giving and do more good in the world.

The writer is a principal and director of tactical philanthropy at Ensemble Capital Management and author of the blog TacticalPhilanthropy.com

By Sean Stannard-Stockton | Also posted in Financial Times Column, Philanthropy | Comments (0)

Ensemble Capital is Hiring

February 21, 2008 – 5:56 pm

Those of you who are regular readers know that I am a partner in an investment management firm that serves philanthropic families. The last couple of years has been quite a ride as our growth and media exposure has increased.

Now we need some new people to join us. If you or anyone you know would be interested in either of the jobs listed below, email me a resume and cover letter. As a reader of Tactical Philanthropy, your interest in the conversation here has both directly and indirectly contributed to the success of Ensemble Capital. As always, thanks for reading and for everything you contribute to the conversation.

Investment Advisor

Ensemble Capital Management is looking for a research analyst/junior
portfolio manager to join our team. This is an ideal job for someone
who has experience in security analysis who would like to work with two
experienced investment advisors and grow into a senior advisor position
over time.

Ensemble Capital is a small (5 employees, $200 million under
management) but growing (30% growth last year with faster growth
expected in 2008) investment management firm in Burlingame, CA, which
focuses on serving philanthropic families. Our founding partner has 40+
years of experience in the investment management industry, including
the presidency of a regional brokerage firm. Our other managing partner
is a columnist for the Financial Times and authors one of the most
influential and widely read philanthropy blogs.

We are seeking an investment professional who can work with our two
portfolio managers to analyze financial markets, manage client
portfolios, provide outstanding customer service, and become a member
of our investment committee over time. Our firm provides both
traditional investment management and philanthropic planning services.
While knowledge of philanthropic tools is not required, we are looking
for someone who is willing to learn the process of integrated
philanthropic planning and wealth management.

You can find the details of this job listing here.

And just as important to our future success:

Investment Management Operations

Ensemble Capital Management is looking for an intelligent, driven
person with experience in investment management operations. We are in
the early stages of significant growth and would like to find someone
who can lead the build out of our operational infrastructure.

For this job, who you are is more important than what you know. We are
a small firm where every member of our team is willing take on whatever
tasks are needed to get the job done. This is not just a job, it is an
opportunity to help build a growing investment management firm with a
unique focus on philanthropic clients. We are looking for a
self-directed, ambitious individual who can handle the day-to-day
operations of the firm. While the day-to-day responsibilities are critical in the near term, the individual we hire must be able to direct and manage the expansion of our operational infrastructure. Over time, the job would include the management of administrative or operation associate-level employees.

You can find the details of this job listing here.

By Sean Stannard-Stockton | Also posted in Philanthropy, Philanthropy Jobs | Comments (2)

Charitable Lead Trust Trend

October 29, 2007 – 9:12 am

My most recent column in the Financial Times discusses the coming boom in charitable lead trusts and how they can be used to prepare children for responsible oversight of wealth.

I don’t write the headline of my columns, so I laughed out loud when I saw the headline writer had titled my column “Children need not be taxing”. As a father of two young kids, I can tell you that statement is objectively false!

Children need not be taxing
By Sean Stannard-Stockton
October 26, 2007

An old philanthropic planning technique is ready to explode in popularity. Parents have long used charitable lead trusts to make tax-free gifts to their children while using philanthropy as a way to prepare them for wealth. But as life expectancies rise and people become wealthier sooner, this obscure trust is enjoying a renaissance among young millionaires.

Affluent families used to either inherit wealth or earn it over a long career. Today, most wealthy individuals are self-made and an important subset, especially in the technology sector, is making millions before starting a family. Those who inherited wealth in the past often did so while building their own financial security. Now, some do not receive their inheritance until…

Read More »

By Sean Stannard-Stockton | Also posted in Financial Times Column, Philanthropy, Tactics | Comments (0)

Philanthropic Planning Models

August 24, 2007 – 8:37 am

Phil Cubeta recently had an insightful post about the three types of “advisors” that philanthropic families usually turn to for help:

People use the same terms to describe different things.  When I ask those who call themselves philanthropic planners to describe their process they all say,

  • I meet with clients to set goals.
  • Then we discuss tools and techniques to achieve those goals.
  • Then we implement.
  • Then we monitor.

But what financial advisors mean by goals and what fundraisers mean by goals and what grant-consultants mean by goals are quite different. Likewise the tools and techniques may be different. Typically,

  1. Fundraisers go from goals to gift without going through an analysis of the clients overall estate and financial plan. The gift, from an advisor’s perspective, is out of context, not integrated, an appendage.
  2. Planners generally take goals to be centered on self and family with a glance to a tax reduction strategy called "philanthropy." They may also set and achieve goals around investment strategies, to increase return, reduce risk, and fund specific dollar outflows.
  3. Grant making consultants or gift consultants (like Tracy Gary or The Philanthropic Initiative) start with goals for society or a specific cause, and match that passion with appropriate giving grant making strategies, whether the grant comes from a checkbook, a donor advised fund or a foundation. But they don’t back that gift up into the financial and estate plan of the donor. They deploy the existing giving budget, and maybe nudge the client to increase it, but they do not work at restructuring the client’s finances to increase that giving budget, while also taking into account the donor’s many other non-philanthropic goals.

In other words, fundraisers represent the nonprofit they work for and gift consultants represent the public good and/or the client’s philanthropic urge. Financial advisors represent the client as a consumer. They represent the side of the client that is concerned with financial stability and spending power. But who represents the client as a whole? Why can’t clients be advised as whole people who have personal spending needs, children they would like to pass part of their estate to, and philanthropic interests that they would like to support? Last November I wrote about the need for a comprehensive understanding of the philanthropic family that does not compartmentalize the personal and social uses of their financial assets:

All of the assets that you accumulate during your life can be thought of as falling into two buckets. The assets that you use to finance your own lifestyle or those that you pass on to your heirs are your personal capital. The assets that you give back to society – either by default through the tax system, or proactively through direct transfers to nonprofits – are your social capital.

Most people understand the need to manage your personal capital proactively. There are numerous websites, books, advisors and other resources that encourage the tactical management of personal capital. What is often missing is any kind of strategy for personal capital. Why are you accumulating all of this money in the first place? What are your goals in life? How are you going to use your personal capital to truly benefit yourself and your heirs? There are certainly plenty of philosophical, self-help and spiritual resources to help guide your way. However, people rarely address the strategic goals and the tactical decisions around personal capital collaboratively.

Social capital suffers from the opposite condition. Lots of people and resources encourage us to utilize one strategy over another. The very act of deciding which nonprofit to fund is a strategic act, so every donation solicitation can be understood as an appeal for you to decide on a specific strategic direction. However, few people think of their social capital tactically. When tactics are discussed, they are generally viewed as a way to reduce the distribution of your social capital in favor of your personal capital. Most people think of the tax break from giving as a way to retain personal capital, rather than understanding its ability to redirect social capital away from the tax system and to your favored nonprofits.

My expertise is in tactically managing personal and social capital collaboratively. At the tactical level, personal and social capital are identical – they are fungible financial resources. At the strategic level, personal and social capital may be used quite differently. However, at their root they come from the same pool of financial resources. How you dip into this pool and allocate your capital to personal or social projects is a strategic decision. Tactically, your personal and social capital is one and the same. You must manage all of it as a comprehensive whole.

By Sean Stannard-Stockton | Also posted in Effective Giving, New Philanthropy, Philanthropy, Tactics | Comments (0)

Social Return on Investment

July 20, 2007 – 11:22 am

When an investor makes an investment, they can calculate their return with absolute precision. How much money did she put in, how much did she get back and how long did it take? That’s it. The answers are all numerical and can be calculated out to the fifth decimal place.

But what about the Social Return on Investment? If a donor makes a gift to a nonprofit, what is the “return” on that gift? How much “good” was achieved? The dollar amount given is easy, but “calculating” the “good” done is tough. First because knowing what “good” means is hard, secondly because relating “good” to dollars is like translating a symphony into organic chemistry, and third because identifying cause and effect is tough (did your grant create more jobs, or did the economy just happen to get better?).

I don’t think we’ll ever be able to honestly make statements like “My $10,000 donation achieved a 9.2% SROI”. That would be like calculating that The Great Gatsby was a better investment of your time than Freakonomics. However, humans constantly make decisions about what works and what doesn’t. We confidently make decisions about whether we should spend our Sunday afternoon rock climbing, volunteering, playing with the kids or going to the office without any sort of numerical framework to help us. That’s because we use a narrative context.

Kevin Jones, blogging at Xigi.net is working on a project he calls StoryIndex:

Social value is best understood in narrative form. Financial value is best understood in numerical form. Both are valid ways of encapsulating fungible value. Our StoryIndex project is trying to create a way to quantify narrative to accelerate the flow of capital to good.

In another post, he writes:

Here is what we are doing: mapping the new nascent exchanges, composing a glossary and translation table of how they define value in other than monetary terms

He’s got a great slide show about StoryIndex that you can find here and a map of the Blended Value Market Place here.

By Sean Stannard-Stockton | Also posted in Mission Related Investing, New Philanthropy, Philanthropy, Social Entrepreneurship, Venture Philanthropy | Comments (1)

Social Finance Careers

July 12, 2007 – 7:56 am

The Forex Blog brings us a really nice intro to careers in social finance. If you’re a Tactical Philanthropy reader who is in college or thinking about moving into social finance, this article is a great primer:

If you’re interested in a financial career, you might be curious about how your interests can lead to reconciliation between your job and your belief system. Social finance might open the door to several solutions for your dilemma. While social financing might seem new, it’s been around since the first individual took a stand against profit at any cost…

… No matter your direction once you get your feet wet in this field, you may learn that financial opportunities don’t always lead to gluttony, lust, and depravity. Nor will they all lead to living without the needs vital to survival. Whether you lean toward nonprofit or for-profit careers in social financing, you can find an area that needs your support and interest. You may find that your new career will help you "do good" and do well.

Read the whole article here.

By Sean Stannard-Stockton | Also posted in Mission Related Investing, Philanthropy, Social Entrepreneurship, Venture Philanthropy, Youth | Comments (0)

KLD Blog

July 3, 2007 – 7:42 am

KLD Research & Analytics, Inc. is an independent investment research firm providing management tools to professionals integrating environmental, social and governance factors (ESG) into their investment decisions.

I saw their co-founder Peter Kinder (who also co-founded Domini Social Investments) speak at this year’s Investors’ Circle conference. Last week KLD launched a new blog, which is co-authored by a number of employees, including Peter Kinder. As someone who focuses on the asset management side of philanthropy, I’m pleased to see KLD throw their hat into the blog ring.

By Sean Stannard-Stockton | Also posted in Giving Blogs, Mission Related Investing, Philanthropy | Comments (2)

The Giving Carnival: Edition One

June 27, 2007 – 4:00 am

I’m on vacation this week. This post originally appeared on January 23, 2007. This first edition of the Giving Carnival brought together many of the philanthropy bloggers. Bill Schambra created a panel discussion at the Hudson Institute about aligned investing after reading the Giving Carnival posts and invited Allison Fine and Lucy Bernholz to sit on the panel.

I’ve morphed the Giving Carnival into my podcasts, but if any other philanthropy bloggers want to revive the Giving Carnival in its original format, let me know and I’d be happy to hand it over.

The Giving Carnival: Edition One

Welcome to the first edition of The Giving Carnival. The topic of this edition is the debate surrounding the LA Times coverage of The Gates Foundation investment policy (you can read the two part article here and here).

Thanks to everyone for sending in your submissions. The response was so positive that I’d like to make The Giving Carnival a bi-weekly event. This is going to be a traveling carnival meaning that future editions will be hosted by other Giving Blogs in addition to being hosted here.

By Sean Stannard-Stockton | Also posted in Giving Blogs, Philanthropy, The Giving Carnival | Comments (0)

Philanthropic Capital Allocation

June 1, 2007 – 8:43 am

My friend Daniel Ben-Horin, founder of CompuMentor/TechSoup (the nonprofit behind NetSquared), took issue with the “Some nonprofits just suck” comment of CompuMentor board member Mike Brown and my subsequent post on the subject.

Daniel (this is an excerpt of his comment, read the whole thing here):

Mike is my good friend and our Board member at CompuMentor/TechSoup, but I think this remark is unfortunate and I likewise disagree with your gloss on it, Sean.

I think it’s essentially a matter of distinguishing between content and context. The content here is self-evidently true, in the sense that more or less ipso facto a subsection of every group is the least qualified in that overall group…

The context is another matter. If you’re standing in front of the NRA and want to say "Gunowners suck," than I say, "more power to you and excuse me while I get out of range." Truthiness to power; good for you. But if you stand up, from a position of authority, and tell a group of people who have in many cases worked for nothing or very little to try to accomplish something beneficial that some of them "suck", I am not very impressed. It feels like piling on. Is it possibly true that anyone in the nonprofit world doesn’t already know that some nonprofits do a poor job in some (or many) areas? I don’t think so.

I think Mike’s real point is that some nonprofits really have no claim to be taken seriously as business models. And I think that’s actually a pretty interesting point and more nuanced than it might appear… The trend toward a more business oriented approach to social maintenance and improvement is a relatively recent development. I won’t take the space here to describe it, but will just note that one of the unintended consequences of this trend is that nonprofits that can’t spell bizness modl now feel obliged to claim that they have one. That doesn’t mean they suck! It means they are confused about where they fit into the present funding climate and are climbing on the latest buzzword…

Knowing Mike and what a warm, fuzzy and empathic individual he is (most of the time), I believe he misread the room. Obviously he struck a chord with you, Sean, and I’m sure some others, but for many of the people there (based on the feedback I’ve heard; I wasn’t present myself) it felt like a person in a position of power, a VC, an "Expert Reviewer", a board member of the host organization, taking the opportunity to state the obvious in an unnecessarily belittling way.

Mike Brown responds (again, this is an excerpt, you can read his whole comment here):

…One of the major challenges in the non-profit sector is that the efficient markets principle we hold dear in the private sector doesn’t hold as well in the NPO world. In the for-profit world we value the fact that resources tend to accrue to the organizations that generate superior returns…

…Unlike in other realms where competition channels resources to the most efficient or effective consumer of resources, in the non-profit sector resource allocation and efficiency/effectiveness are not always or easily correlated. Efficient /effective NPO’s don’t always thrive and inefficient or mismanaged NPO’s sometimes consume resources better allocated elsewhere…

Yesterday, I made the point that any organization (foundation, NPO, or for-profit) must set some criteria or filter for its resource allocation to ensure that the resources are deployed as effectively as possible. I provided the example that if my goal is to provide housing for people and my resource is hammers, I should offer the hammers to the builders that can build more housing than the builders who are slower or lazier (all else equal)… Most people understood that I was making this point clearly yesterday when I said, "Some non-profits suck; just like some for-profit businesses suck" as I then spent the next five minutes explaining exactly what I meant. The people who understood this point told me so directly after the NetSquared panel I moderated. Apparently, some took offense to my "inflammatory" remark. Those who took offense felt that I was undermining the hard work of good people in all NPO’s who have dedicated their careers to helping others. To them I say, learn the meaning of the term "hyperbole" and stop being so sensitive. Obviously I care deeply about the sector and appreciate the great work effective NPO’s are doing. Why else would I spend the time that I do supporting NPO’s with my time and resources?

My take on Mike’s comment at the conference was:

In a world with limited resources, we need to get comfortable with the idea that nonprofits that are trying hard and have lots of passion — but aren’t cutting it — don’t need a pat on the back. They need to be ignored and we need to let them go out of business.

Personally, I do not buy into the hype that nonprofits should behave more like for-profit businesses. At least not in the sense that they must create business models based on earned income strategies or that being dependent on philanthropic funding is somehow a deficiency. But I do feel strongly that there is only a limited sense in our culture that nonprofits can and should be expected to be highly effective organizations. Certainly many people in philanthropy establishment get this, but it is not a widely held concept.

In the investment management industry that I work in and the venture capital industry that Mike works in, success is defined by the results of how we allocate capital. No one cares about how slick of a concept a company has, or how big they are. The metric is “what was your return?”. Measuring the “return” on money invested in a nonprofit is a very difficult concept. But at the least, we need to have a framework where pointing out that some nonprofits aren’t any good at what they do and resources allocated to them is a waste, doesn’t inspired a debate or hurt people’s feelings.

Here’s the thing about Mike’s comment, it wasn’t directed at nonprofits. Nonprofits know that some of them are effective and some aren’t. His comment, or at least my take on it, was directed towards allocators. We measure what we care about and in philanthropy we tend to measure how much capital is given, not how effectively it is allocated. This is why “Some nonprofits just suck” was such a powerful line. Mike wasn’t speaking from a position of power down to the nonprofits in the room. He was talking about how the sector, all of the players (and the room was a diverse cross section), allocate capital.

In the for-profit sector, market forces drive poor companies out of business. Therefore, we don’t need anyone running around reminding people that some for-profit companies suck. But this hasn’t always been the case. In the late 1990’s, the technology bubble, an event of mass psychological hysteria, broke the efficient market system for awhile. During that time, capital allocation was terrible. Companies that destroyed value were given massive amounts of capital. Anyone who questioned these allocation decisions were told that they didn’t understand the New Economy. During that time a website called F**ked Company came about. The site pointed out companies that Mike Brown might say “sucked”. At that time, the for-profit sector desperately needed this pointed out to them. With the lack of market forces and the lack of reliable outcome metrics in the nonprofit sector, we still need to be reminded that just because a company has 501c3 status doesn’t mean that giving them money does any good at all.

By Sean Stannard-Stockton | Also posted in Effective Giving, Philanthropy, n2y2 | Comments (5)

Mission Related Investing

May 31, 2007 – 7:46 am

Lucy Bernholz suggested recently that we should radically scale back the preferential tax treatment given to private foundations.

Lucy:

And here’s a thought - we should align the tax benefits for charitable giving with the amount of money that actually goes to charity. For example, the full corpus of an endowment is exempt from taxes, even though most foundations only spend a small percentage (around 5%) of their endowment earnings on charitable purposes. So the actual tax benefit ought to align with the charitable dollars - the 5% given in grants, not the 100% of the endowment which is in market rate investment vehicles.

If endowment managers can demonstrate alignment between their investment policies and their charitable missions, then the tax benefit would be extended to those investments. If a foundation invests 10% of its corpus in companies that serve a public benefit purpose in line with the foundation’s mission, then the tax exemption would extend to include the 5% it pays in grants and the 10% of its endowment that it is using to achieve its mission. The other 90% of the endowment would be taxed.

After all, why are taxpayers subsidizing market-rate investment capital? Shouldn’t public benefit tax exemptions be granted for public benefit activities?

I’ve talked a lot about effectiveness and transparency and other issues where I’ve called for change in the way that foundations and philanthropy as field conducts itself. The Aspen Institute Philanthropy Letter has discussed my work as an example of how blogs can be used to criticize foundations. On the other hand, I’ve made a lot of friends at big foundations. The Council on Foundations invited me to cover their conference this year and later said that the Council was “very pleased” with the coverage. Edna McConnell Clark Foundation CEO Nancy Roob has publicly thanked me for my coverage of one of their projects and said she’d “love to continue the discussion” with my readers. I say all this because I don’t think of myself as either a partisan supporter of philanthropy establishment nor am I an active critic.

In the interest of full disclosure, my firm Ensemble Capital provides investment management services for philanthropic families. We do not currently offer Mission Aligned Investing services (for some of the reasons mentioned below) however, over time as the field matures, I’m sure that we will enter this space.

Lucy is someone who I really admire. I think her book Creating Philanthropic Capital Markets is a “must read” and I’ve enjoyed our conversations each time we’ve met. Lucy is a very cutting-edge thinker. Her proposal actually makes some sense to me, but it is probably at least a decade too soon.

Currently US tax law views contributions to private foundations as being tax deductible at the point of contribution rather than when money is sent out to nonprofits. The law actually views contributions to foundations less favorably than those made to public nonprofits, but we can ignore that for this discussion. Assets in the foundation can be invested and face a tax rate of 2% rather than the 15% federal (plus various state tax rates) that capital gains and dividends face outside of a foundation (with even higher rates on interest income). This means that the foundation is viewed as providing a public benefit, not just based on the dollar value of grants they make, but also from the value that arises from having an institution whose very existence is designed to benefit the public.

Lucy suggests that the assets that a foundation invests should only enjoy preferential tax treatment if those assets are invested in companies that serve a public benefit in line with the foundation’s mission. However, the field of Mission Related Investing (MRI) is still in its infancy. There simply isn’t MRI opportunities available to absorb the half a trillion dollars in foundation assets. In fact, there isn’t even a shared agreement about what qualifies as an MRI. For instance would an investment in a mutual fund that tracks the Domini 400 Social Index qualify (a leading “socially responsible investing” market index)? How about an investment in Microsoft, the largest holding of the Domini index? Is there any investment in a for-profit company that would qualify? The law requires that corporations serve the interest of shareholders, so how can they be said to be serving a “public benefit” (I think that for-profit companies can further a foundation’s mission, but working through how to demonstrate this is still needed)? Must an investment be tightly linked to the mission of the foundation? If so, how might a foundation whose mission is very narrowly defined invest all of their endowment in a diversified way?

I understand Lucy’s urge to suggest radical changes to accelerate the advancement of philanthropy. But the danger in her argument is that if we require things from philanthropic entities before an infrastructure is in place, we will do nothing but water down the very concepts we hope to support. Imagine what would happen if a new law was announced that levied a special tax on non-organic food? Would we see a huge shift towards organics? No, the country is simply not currently able to make that kind of move over night. Instead, we would see a dramatic decline of what the word “organic” even meant. As food producers struggled to move towards organic food, they would have an incentive to get the definition of “organic” to be as broad as possible. When new concepts are forced into adoption too quickly, they always get watered down.

MRI is an exciting area. But we are years away from having the shared infrastructure and vocabulary we need to have widespread adoption of the concept. I’m don’t think I would agree with Lucy’s suggestion even if we did have all the needed elements in place. But I am sure that we are far too early in the evolution of MRI to contemplate making it mandatory. Doing so would hurt the MRI movement, not accelerate it.

I met Stace Lindsay at the Investors’ Circle conference. Stace has been hired by the Blue Moon Fund to help them move to having 25% of their endowment in MRI investments. Stace gave an incredibly humble presentation at the conference where he discussed the process he is going through to try to develop an effective strategy. At 25%, Blue Moon would be a leading MRI foundation. Rather then threaten foundations with new taxation, let’s find ways to support the efforts of people like Stace and develop this exciting practice together as a field.

By Sean Stannard-Stockton | Also posted in Foundations, Mission Related Investing, Philanthropy | Comments (4)

Tactical Philanthropy Podcast: Clara Miller

May 2, 2007 – 3:32 am

Today’s interview is with Clara Miller. Clara is president and CEO of Nonprofit Finance Fund. NFF helps nonprofits match their passion and dedication with financial strength and sustainability. They provide impartial analysis, and flexible, frequently unsecured financing that nonprofits typically can’t get from other sources. Clara was voted one of 2006’s Power and Influence Top 50 by the Nonprofit Times. She has written and spoken extensively on nonprofit capitalization, and is the author of a number of articles on the subject.

I just got back from the Council on Foundations conference where I saw Clara speak. In this interview she explains the challenges that nonprofits face when trying to grow and how NFF is able to finance their expansion.

Expand this post using the link below to read the transcript.

Read More »

By Sean Stannard-Stockton | Also posted in Philanthropy, Resources, podcast | Comments (0)

Getting Xigi With It

February 15, 2007 – 7:32 am

Xigi.net is pretty cool. Not only are they mapping the emerging philanthropic capital markets, but they are on their way to becoming the first stop for anyone who wants to understand who is involved in the new philanthropic landscape.

I got this email from the founders this week and encourage you to check them out listen to their conference call this Friday:

What is xigi? It’s a global landscaping tool for an emerging market that invests in social enterprise, microfinance, community development, fair trade — the myriad of social purpose activities. You can add yourself and your organizations into the growing map!

Camp onto a conference call to learn more. The next one is:
THIS FRIDAY at 9 PST/12 EST, FEB 16TH, 641-297-5900 - Code 94110#

We’re inviting a few hundred people from 36 countries to come post comments, enter data about themselves and see the map of the social capital market begin to emerge from our collective intelligence. What you should do first:

ACTION ITEM #1 - REGISTER AT XIGI
Go to: http://www.xigi.net/index.php?register=register
Simply enter your name and email, and a password will be sent to you. This will allow you to post both to the "blog" and edit to the database.

ACTION ITEM #2 - PUT YOURSELF ON THE MAP Search under people, see if you’re in there. If you are, feel free to edit yourself. If not, click "New Person." As you’re putting some info about yourself, add "Related Entities" to your profile at the bottom. See if your organization is there already. If not, simply put in your entity’s name and pick your relationship to it (then after, you can pull up this new entity and fill in its information and its organizational relationships). Then hit "Network Map" to see how you show up.

So, you’re invited to put yourself on the map, make connections to others, talk about what you’re doing! Questions, comments, ideas? Email mailto:info@xigi.net

Best Regards from the xigi Steering Committee,

Mark Beam http://www.collectiveintelligence.net
Kevin Jones http://www.goodcap.net
Sara Olsen http://www.svtgroup.net
Tim Freundlich http://www.calvertfoundation.org

P.S. As always, we extend our thanks to the growing list of visionary funders and partners that are supporting xigi in the early stages: The Lemelson Foundation, RSF, Tangle Capital (a Calvert Giving Fund), Doug and Audrey Miller, Omidyar Network, Good Capital, SVT Group, Collective Intelligence and Calvert Social Investment Foundation (our 501c3 fiscal agent).

By Sean Stannard-Stockton | Also posted in New Philanthropy, Philanthropy, Resources, nptech | Comments (1)

Socially Responsible Investing

February 12, 2007 – 7:45 am

OnPhilanthropy has an essay posted titled “Socially Responsible Investing: A Foundation’s Duty?”. Personally, I wonder how investing in a generic “socially responsible” fund does anything to further the mission of most foundations. I do see how doing so might make a foundation board feel like they were doing something. But the fact that the essay has 11 comments shows that there is a lot of interest in this concept.

Far more compelling to me than socially responsible “screening”, is the emerging market for “mission aligned investments”. One such vehicle is the Bay Area Equity Fund. I met with one of the fund managers recently (my comments should not be seen as a recommendation to buy or sell any security). The fund is a venture capital fund that invests in private companies in the San Francisco Bay Area that are located in or near low-income communities. The companies they are investing in are for-profit entities that they believe are good financial investments and who measure their results with a double bottom line. Unlike Good Capital, which strives to produce below market rate returns that are augmented with social returns, the Bay Area Equity Fund believes they can achieve full market rate returns. I don’t think there is anything better or worse about shooting for market or below market rate returns (or zero financial returns for that matter). There is likely a market for investments that produce returns all along the spectrum of financial and social returns.

Right now, the philanthropic capital markets are far from mature. But over time I can clearly see how foundations may begin to commit a portion of their capital base to investments that further their mission. To me, this kind of mission aligned investing holds far more interest than simply screening publicly traded stock to avoid investing in “bad” companies.

By Sean Stannard-Stockton | Also posted in New Philanthropy, Philanthropy, Tactics | Comments (0)

Jed Emerson Podcast Interview

February 9, 2007 – 5:30 am

Today I am happy to release the first interview of the new Tactical Philanthropy Podcast series. Every other Friday I will be releasing an interview with someone involved in philanthropy.

Today’s interview is with Jed Emerson, who has done some fascinating work on Blended Value. You can click here to listen to the podcast and you can read the full transcript here.

I would like to emphatically thank Britt Bravo for the generous gift of her time to get me up to speed on podcasting. Any glitches or quality issues are my own and any hint of professionalism is due to her tutoring. Her Big Vision Podcast was my original inspiration. Corey at 501c3 Cast also offered me some great advice.

By Sean Stannard-Stockton | Also posted in Philanthropy, nptech, podcast | Comments (2)