posted on: Thursday, May 27, 2010

By Pablo Eisenberg

There is an old ethnic saying that states “before I talk, I want to say something”. So I would like to make two introductory points. The first is that my comments tonight will treat foundations from a national perspective and not reflect specifically on Chicago’s philanthropic institutions.

The second is that, in my view, the greatest weakness of philanthropy is the lack of critical analysis directed at its priorities, procedures and structure. Nobody wants to say anything negative or bad about it. It is too often assumed to be so good that it is beyond criticism. Until recently, with the exception of the National Committee for Responsive Philanthropy, only a handful of nonprofits dared to raise any concerns about or critiques of philanthropic institutions. Happily, the consumer movement in philanthropy is picking up steam…but only slowly. Until there is a full-throated discussion and debate about how philanthropy can become more relevant and effective, neither foundations, nor individual donors, nor nonprofits will be able to meet their enormous potential.

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Foundations have had a notable track record in maintaining our civil society and its institutions. But they are not having the impact on our nonprofit sector and on our country that they are capable of exerting. The same can be said of wealthy individual donors.

Their response to the financial crisis and recession that substantially reduced the budgets of so many nonprofits was less than generous, their protestations notwithstanding. Though their assets have rebounded impressively during the past year, foundation payout rates remain moderate at best. Priming the giving pump in hard times is apparently not part of the philanthropic DNA.

If there ever was a time when foundations needed to bolster the budgets and capacity of small and mid-sized, local nonprofits, it was during the past couple of years. Instead, many of them are now pushing small nonprofits either to merge or go out of business… not an admirable policy.

The inequities in our philanthropic system seem to be growing. The overwhelming amount of foundation money continues to go to the large established institutions of higher education, health and arts and culture, while small nonprofits and grassroots organizations appear to have suffered most during the recession, especially those serving low income, minority and other marginalized communities. Nor have foundations in general reached out to nonprofits -- particularly small ones -- in regions like the South, Southwest, plains states and northwest that are seriously under-served by philanthropic institutions.

Individual wealthy donors have not changed their pattern of giving. They give almost all of their money to universities, medical schools, arts programs and museums and provide little or nothing to local and national anti-poverty, advocacy and social service organizations. A look at the grants and contributions by wealthy donors listed by The Chronicle of Philanthropy in every issue tells the sad tale: 25, 50 or 100 million dollars going to favorite colleges or arts groups, but little or nothing to scholarships for needy students or programs to permit low income people to visit museums or concerts with high entrance fees.

Philanthropy, as a whole, appears to have widened the gap between the have and have-not communities and the have and have-not nonprofit organizations. Will this trend continue? Should and can it be reversed? This is a serious issue that needs to be addressed by the foundation community and its trade associations as they prepare for the next two decades. They face other major concerns as well.

Should and can foundation governance be democratized? Foundations are the most elite institutions in our nation, a throwback to the days of Louis XVI and Marie Antoinette. Their boards are composed of the wealthiest and most highly paid professionals in the country. While a growing, substantial number of trustees are women and people of color, they nevertheless resemble their white, male, professional and corporate counterparts. The fundamental issue, then, is one of class. There are only a very few trustees who are ministers, community activists, social workers, teachers or union members…people who represent the real cross section of American society. No wonder foundation giving is so tilted toward the establishment community.

What can be done to change the composition of our foundation governance structures? Unless this happens, it is difficult to imagine that foundations will truly reform themselves to meet our most important public priorities.

Somewhat connected is the growth of mega foundations like the Gates or Walton foundations. If some expert predictions are accurate, we are likely to see 50 to 100 of these huge entities emerge over the next 30 years, foundations with assets of 50, 75 or even 100 billion dollars. Is this good for democracy? Do we want such foundations, run by two or three family members, to determine what are essentially public priorities without any public discussion and outside the political process? If not, what should we do about it?

Many of us believe that foundations today are not addressing some of our most urgent public needs. What are they? What will it take for foundations to move in new directions? Similarly, foundation practices and procedures do not seem to be meeting the requirements of their non-profit grantees, because they are too bureaucratic, inflexible, too focused on short-term objectives and not responsive to nonprofit priorities.

These are all serious concerns, but what is more troubling, and inexcusable, is that the foundation community is giving little thought to them. Nor, I might add, are nonprofits whose vested interests are at stake. While it would be harsh to accuse foundations as a whole of being intellectually challenged, it is nevertheless true that they have paid little mind to the large problems and obstacles that are blocking their path to, and vision of, an enlightened future. Hopefully, this will change. The Council on Foundations and regional associations of grantmakers should be leading such an effort at introspection and debate, but unless their members, as well as other foundations, pressure the Council and regional associations to do so, it is not likely to happen.

Some of us, including the National Committee for Responsive Philanthropy, have called on foundations to change many of the ways they do business, so that they can better serve their grantees. These include the following:

• Providing much more general support, which is the life blood of healthy nonprofits, especially in these tough financial times when they need all the flexibility they can get.
  
• Investing in the long term stability of nonprofits by making multi-year grants.
  
• Devoting a greater percentage of their grants to advocacy and organizing activities.
  
• Increasing foundation payout to at least 6%, all in grants.
  
• Simplifying the application process.
  
• Treating grantees with the respect and decency they deserve.

Rather than dwelling on these well publicized suggestions for change, I would like to mention several other areas where foundations could make a significant difference.

1)The first is a substantial increase in the funding of watchdog organizations, a priority that foundations to date have largely ignored. Our democratic system is founded on a system of checks and balances, nonprofits serving as the sector that tempers the power and excesses of both government and the corporate/business community. While this is nice in theory, in practice it has not happened, because there are too few nonprofits that serve this purpose and too little money available to finance such activities.

In recent years, we have seen federal and state regulations flouted and enforcement efforts weakened as a result of the pressure of special interests. This has been the case in the environmental field; in the management of our natural resources – the oil spill in the Gulf being only the most recent manifestation--; in consumer protection; in various industries like mining; in the health field; in our financial world; in the Department of Defense; and in the activities of some large nonprofits. And we have been unaware of or tolerated abuses and ethical lapses at every level of government, costing us billions of dollars as well as the damaging impact of poor policies and programs.

There are, of course, some excellent watchdog organizations that do great work despite limited budgets. Yet they are far too few. And there are many areas of activity that are largely uncovered by these groups, such as corporate America, local government operations and institutions of higher education. Here, then, is a fertile field for foundation involvement.

2) The second area which requires much greater foundation support is community organizing. Strong community based groups that can mobilize large numbers of people are one of the few checks that citizens can exercise on the power and authority of large, established institutions, such as banks, government agencies, corporations and, indeed, some large nonprofits.

In recent years, there has been a notable growth in community organizing across the country. In many communities grassroots groups have established themselves as strong advocates for low and moderate income constituencies, minorities and immigrants; as community development and housing entrepreneurs; as social service providers; and as public policy makers. While foundation money to these groups has increased slightly during the past few years, the latter remain grossly underfunded, and new efforts at organizing are often stymied by the lack of foundation seed money.

As the National Committee for Responsive Philanthropy has demonstrated in its studies of the impact of organizing and advocacy in local communities, foundations receive far more bang for their buck in supporting activist organizations than they do in funding many, more traditional nonprofits

3) Foundations need to invest more money to support the public accountability of the nonprofit sector. Nonprofits are still riddled with excessive compensation, self-dealing, inappropriate expenditures, conflicts of interest and poor governance, abuses that were first documented almost ten years ago by the print media, especially daily newspapers. This coverage led to useful Congressional hearings, some regulatory changes and tougher scrutiny by the IRS. Contrary to the optimistic view of some commentators within the nonprofit community, there are many rotten apples in the nonprofit barrel. The sooner we get rid of them, the better off the sector will be.

For some time, the media has been the only effective mechanism for public accountability of nonprofits. The IRS has had neither the resources nor the will to do a good job in overseeing and policing the sector. Self-reform, the preferred solution of both foundations and some of the large operating nonprofits, has been a dismal failure. Those of us who have been involved in nonprofit work for forty years or so can’t point to more than one or two, if that, instances of self reform that brought about serious institutional changes.

The demise of daily newspapers and the loss of investigative journalism means that there is likely to be little or no oversight of the sector. How will we maintain the public accountability of nonprofits?

The internet is potentially one answer, but all the blogs form a hodge podge of information with little quality control. The newly emerging centers for investigative journalism and alternative news centers are a promising development, but most so far have not done much to cover the nonprofit community.

Ideally the most effective way to ensure continued oversight of the sector would be to support and strengthen our daily newspapers. Ailing papers could be bought by major foundations and wealthy donors and converted to nonprofit operations with endowments, thereby ensuring their stability and solid investigative reporting. To date, unfortunately, no major donors have stepped up to the plate.

Clearly the one “do-able” reform would be to strengthen IRS’s oversight and enforcement efforts, as well as strongly support the work of state attorneys general. Both lack the funds they require to do their jobs effectively. To date, both foundations and nonprofits have been reluctant to push the Congress to appropriate more funds for the tax exempt unit of IRS, as well as money to state regulators. This must change. Foundations should finance a campaign by nonprofits to pressure Congress to allocate the money necessary to assure nonprofit accountability.

The foundations will need to answer these and other big questions in the coming decade: how and what to change, how to work more effectively with grantees and other nonprofits and how to get more money out their doors? Nonprofits cannot afford to be bystanders in this process. They must stop acting like beggars at the philanthropic trough and become equal, active partners in the philanthropic process. If they do, I am confident that foundations will emerge as an even more relevant and influential force in our society.

Hopefully, we will be able to share the enthusiasm and optimism of British Admiral Horatio Nelson who, at the Battle of Trafalgar, looked at the enemy through his telescope with his blind eye and said ” I see victory in sight”.


This speech was delivered at the 7th Annual Philanthropy For All Seasons Reception
at Loyola University Chicago on May 20, and reprinted with permission from the author.

Pablo Eisenberg is a senior fellow at the Georgetown Public Policy Institute and serves on NCRP's board of directors.