The GC Book Report – January 2011

January 1, 2011 at 4:57 AM

The Foundation: A Great American Secret: How Private Wealth Is Changing the World by Joel L. Fleishman.

First published in 2007, Fleishman’s The Foundation provides an overview of private foundations’ role in American civic life, describes how foundations operate (when they do well and when they do poorly), outlines the steps and attributes projects need to succeed, and urges several reforms to increase foundation transparency, accountability, and effectiveness going forward.

The author, a public policy professor at Duke University who has worked with many foundations (most notably The Atlantic Philanthropies), bases his conclusions on dozens of case studies and interviews, focused on what works and what doesn’t work in the private foundation world.

SUMMARY

Part One: What Foundations Do – and How They Do It

Despite the crucial place they hold in America’s civic sector, most do not understand how foundations operate, why and how they pursue their philanthropic goals, or the ways they affect society when successful.

Foundations…are among our most powerful, least accountable, and significantly tax-benefited institutions, so it is all the more unacceptable that they are also among our least understood institutions.

In part one, Fleishman describes the foundation’s role in society and details the principles and practices they take up their missions.

FOUNDATIONS: WHAT THEY DO AND HOW THEY DO IT

Fleishman begins by citing several examples of high-impact societal changes that began as foundation-funded efforts: The 911 emergency system (first set up in 1968 in Alabama), public television and radio, Pell Grants, and others.

Just as private investors and venture capitalists spark the creation of new products and services in the for-profit sector, foundations provide the capital that powers innovation and diverse experimentation in the civic sector.

Foundation Roles: Foundations can play three different roles:

  • Driver – Here the foundation directs the effort, granting to those who will carry out the project the foundations’ way.
  • Partner – Strategy is a mutual effort between foundation and operating grantees.
  • Catalyst – Some problems have no obvious solution; when strategy is impossible, foundations can fund diverse efforts and hope something works.

Fleishman, noting that these roles aren’t always clearly delineated, offers compelling examples of foundations working in each role.

Limits of Foundation Power: Fleishman then addresses the limits of foundation power, saying that some problems are too pervasive for foundations to do much about: elementary/secondary education, the health care system, poverty are examples.

When a social problem is not discrete and well-bounded, when it permeates large segments of society, or when it is created by dug-in interest groups, a foundation can usually do little…beyond ameliorating some of its symptoms and suggesting…some directions in which ultimate solutions may be found.

THE THIRD GREAT FORCE: AMERICA’S CIVIC SECTOR

Here Fleishman describes foundations’ place in the US civic or nonprofit sector.

The Scope and Diversity of America’s Civic Sector: America’s civic sector is unique for its size and diversity:

  • Comprises approximately 2 million groups, 1.6 million of them certified tax exempt by the IRS.
  • Among those are some 300,000 religious organizations.
  • Accounts for nearly 10 percent of American GDP.
  • Includes 8.1 billion volunteer hours a year (well, in 2006, by one estimate anyway)

America’s civic sector is a true reflection of our nation: remarkably varied, contentious, cooperative, energetic, resourceful, and creative.

The Origins of America’s Civic Sector: Fleishman says the diverse and fiercely independent nature of our civic organizations is rooted in America’s colonization:

  • The settlers arrived well before any kind of service-providing governments did.
  • Many of them had fled religious oppression and cemented their religious independence by turning their congregations into service organizations as well.

America’s preference for independent charitable and civic organizations was established.

Social Support for the Civic Sector: Fleishman here argues that our civic sector benefits from being supported by individuals and not government. Diversity of efforts could be threatened by:

  • Government censorship
  • Voters demanding we stop funding “unworthy” nonprofits that (seem to) serve only…some smaller number of voters, we suppose.

The Civic Sector as Mediating Force: As a “wide-open venue for citizen action without government sanction or control” our civic sector serves as mediating force as big transformational changes take place. No need to riot; you can start a special interest group instead.

Foundation: The Operational Secret of the Civic Sector: Here Fleishman places foundations in the context of our civic sector as the capital behind social change:

The operational secret is the priming role foundations play in starting new civic sector organizations, in nurturing them into self-sustainability, and in providing a continuing supply of social venture capital to the civic sector.

Two Kinds of Foundation Giving: Fleishman presents the distinction so:

  • Instrumental giving – “strategic,” directed toward achieving a specific goal
  • Expressive giving – shows the donor’s concern but doesn’t expect a particular impact

This latter is seen more with small foundations and individuals (although people can donate to efforts they hope will let them collectively do something “instrumental”).

The truth is of course that many groups and people are satisfied doing merely expressive giving: it’s easier, it expresses who you are, and it makes you feel good.

Fleishman argues that smaller foundations can be instrumental; they need to address issues with manageable scope however. His interest in the book is in discussing and reforming instrumental giving to make it more effective.

The Variety of American Foundations: Foundations vary by different factors, including:

  • Size
  • Culture (as shaped over time by its founders and leaders)
  • Risk tolerance
  • Decision-making processes

Despite this, our intrepid author offers some generalizations: Despite not proving immune to bad ideas of damaging fads (like eugenics), foundations have generally been ethically and efficiently run, and on the whole a big benefit to society. If foundations didn’t exist, he says, we lose a “powerful engine” for the civic sector’s efforts.

WHY THEY GIVE

“They” in this context refers to the rich who establish foundations. “A complex mixture of self-interested and altruistic motives prevails” here, Fleishman says, when we ask why the give:

  • “To give back” – the most common reason
  • Out of religious obligation
  • For fame and adulation
  • For a sort of immortality
  • From a desire to repair one’s negative image (which the author rejects as an important factor)

And why a foundation? Reasons here are clearer:

  • Uncertainty about where or how to give.
  • Wanting not to leave excessive wealth to heirs.
  • In some cases, the donor is so rich he has no idea what to do with all that money.
  • Estate planning and tax issues.

Fleishman however concludes:

One overarching motivation remains paramount for most donors: the desire to create a vehicle for promoting large-scale, lasting social change.

THE FOUNDATION’S MISSION: THE HIGHEST USE OF PHILANTHROPIC CAPITAL

In this chapter Fleishman argues for instrumental over expressive giving. He defends expressive giving but urges foundations to do better; four reasons they should feel obligated to so:

  • Scale – foundations have so much capital, they must strive for impact
  • Justify your tax breaks – foundations have an obligation to provide value in return
  • Lack of accountability – the freedom enjoyed by foundations creates another obligation to be effective
  • Advantages foundations enjoy – the author seems to mean foundations have little competition for donors’ dollars

Foundations can’t afford to settle for “doing good.” They must “do the best,” using the financial capital they control most effectively in pursuit of the highest possible goals.

FOUNDATION STRATEGY IN PRINCIPLE AND IN PRACTICE

Being strategic means following the founding philanthropists’ attempt to bring the scientific method to grant-making:

  1. Research the problem; know the facts.
  2. Identify the problem correctly.
  3. Study different plans of action.
  4. Identify who you need to enlist (or work around).
  5. Develop a plan with clear goals, benchmarks, and evaluation tools.

Key is determining the ends before looking to the means; then choose the latter to suit the former.

Benefits and Costs of Strategy: The benefit, Fleishman says, is that “it significantly increases the impact of the foundation’s spending.” There are costs, however:

  • Can be a straitjacket when unexpected but promising ideas pop up.
  • Strategy narrows focus; a foundation might have more impact when spreading the money to different ideas (catalyst style).
  • Can impose restrictions on imaginative grantees; more open-ended grants let them experiment more.
  • Worst, Fleishman argues: “A too-rigid approach to strategy can also make it difficult for a foundation to alter its approach to grantmaking based on what it has learned from previous experience.”

How does the foundation follow strategy in practice? Fleishman claims there are actually very few, distinct strategies successful foundations have employed. For each, however, there are many, many tactics. The author provides examples of each.

Strategy 1 – Creating and Disseminating Knowledge: Foundations can fund research to add and spread knowledge, whether for specific goals or for knowledge’s own sake. They can:

  • Found an institution to support basic research.
  • Found an institution to promote public policy awareness.
  • Found an institution to promote specific reforms.
  • Found an institution to research and solve a particular issue.
  • Sustain a traditional field of scholarly inquiry (like an endowed chair at a university)

Strategy 2 – Building Human Capital: While hard to prove their impact, the author says, he efforts to build human capital have had positive impact. Tactics here include:

  • Scholarships for leadership development.
  • Fellowships for graduate study.
  • Fellowships for post-graduate writing or research.
  • Fellowships for adult leadership and creative expression (like the MacArthur Foundation’s genius award – eagerly anticipated here at Giving Click).

Strategy 3 – Public Policy Advocacy: This usually involves funding another group already doing the advocacy:

  • Support an existing advocacy organization.
  • Launch a new advocacy initiative.

Strategy 4: Changing Public Attitudes: Examples include the Robert Wood Johnson Foundation’s your antismoking campaigns.

Strategy 5: Changing the Law: Foundations were long reluctant to lobby for changes to the law, but mid-century they changed course as they got involved in desegregation and fighting unfair housing laws.

Tactics for Any Strategy: Well, perhaps not any; but Fleishman lists some tactics applicable to some diverse selection of strategies:

  • Holding conferences and meetings.
  • Creating blue-ribbon commissions.
  • Offering an annual prize or award.
  • Launching pilot programs.
  • Financing litigation.
  • Building institutions.
  • Catalyzing partnerships among foundations.
  • Engaging various media.

Part Two: Understanding the Impact Foundations Can Make

In this part Fleishman, while admitting the difficulties faced in detecting impact, describes ways to recognize it and tracing it to foundations’ efforts. Then he presents twelve cases from his 100-case study of highly effective and impactful foundation projects as examples.

Practical Difficulties in Detecting Impact: Note that outcomes do not show impact. To detect the impact of a foundation initiative requires:

  • Time – impact often only manifests in the long term.
  • Geographical scope – comparing to areas outside the scope can show impact.
  • Defining the “object of change” – you need to distinguish the goal clearly from the means.

Even then, foundations still face two other obstacles to proving their project’s impact:

  • Causality – did the work of the foundation really cause the measured change?
  • Counterfactuality – would the change have occurred even without the foundation initiative?

These are thorny issues and not all foundations have the means to set up control groups essentially to test against these. Nevertheless, Fleishman lists ways to recognize impact; these are the kinds of effects foundations should aim for:

  • Major benefits to the public.
  • Outputs and benefits created (e.g., the nearly 5,000 schools for black students the Julius Rosenwald Fund built in the south before desegregation).
  • Expansion of knowledge.
  • Helping launch a movement.
  • Helping an existing organization find new direction.
  • Catalyzing an urgent social change.
  • Taking an initiative to scale

Fleishman then asks a provocative question: Given their frequent disinterest in measurement, unwillingness to share their goals and methods, and avoidance of any study of their past efforts, do foundations really want to make an impact?

I think the only conclusion we can reach is that many foundations are less interested in achieving real impact than in showing the world that their hearts are in the right place…I hope that I’ve made it abundantly clear that more should be expected from foundations, which are…often the only institutions in a position to introduce significant social change.

He follows by including twelve of the 100 case studies that constitute one of the pillars of his book and the author’s arguments for reform. We won’t recap them here; these studies are available online and in Fleishman’s companion volume, Casebook for the Foundation.

He does list the lessons to be learned from these cases, which include:

  • Foundation founders or executives must be engaged, focused, and talented.
  • Donor passion is indispensable.
  • When it comes to tactics, keep it simple.
  • Be patient – sustained commitment of money and talent is usually required for real change to result.
  • Be open-minded about new solutions.
  • Effect social policy by building institutions (think tanks, for example) to develop and train new advocates.
  • If you engage in strategic partnerships, make sure you share goals and agree on strategy first.

Part Three: How Foundations Succeed and Fail; Paths to Reform

In the third part, Fleishman examines foundations, describing their problems as her sees them: the lack of transparency and accountability. Taking his lessons from the case studies, he details how foundations can succeed and have high impact, and how foundations fail. He then submits his views on how foundations can best pursue reform and rededication to their goals.

WHAT AILS THE FOUNDATIONS

Fleishman first examines the (sometimes unfair) criticisms foundations have received over the years, including the “besetting sins” of foundations:

  • Arrogance
  • Discourtesy
  • Inaccessibility
  • Arbitrariness
  • Failure to communicate
  • “Attention deficit disorder”

Fleishman argues these sins can usually be traced to a lack of accountability and transparency. Operating nonprofits have stakeholders to answer to: colleges answer to faculty and students, for example.

By contrast, foundations have no external stakeholders with effective influence on them, which means that the virtually unhampered freedom that foundations enjoy deprives them of such external oversight, feedback, and constraints.

This can make them seem arrogant, inaccessible, etc.

The Invisibility of Foundations: This lack of accountability also leads to the public being mostly unaware of foundations, what they do, and how they influence the civic sector. Several factors play a part:

  • The press does a poor job covering philanthropic news.
  • A “culture of diffidence” keeps foundations from publicizing their efforts.
  • Some choose silence out of respect for donors and grantees.
  • Many shun publicity to avoid embarrassment for failed projects.

The Scholarly Void: Fleishman says there is a “sparseness” of scholarly study of foundations, their giving, and their results. He considers these factors part of the reason:

  • Data on foundations is difficult to find.
  • Scholars may fear criticism could mean a cut-off off funding.
  • Scholars may not think foundations are a big deal worth their time to study.

He does cite some good books and studies but the list is short. He also notes new efforts like that of the Independent Sector – sort of lobbyists for foundations, we take it – to give foundations a voice in policy debates.

The Culture of High Stewardship: Fleishman argues that despite the validity of many criticisms, foundations have by and large managed to “rise above” their lack of external oversight to work efficiently and ethically. He credits this to a “culture of high stewardship.”

[Foundations] have recruited demanding trustees and high-performing program staff with a strong commitment to social benefit, a keen sense of self-discipline, and a deep awareness of the obligations of stewardship.

STEPS TO ACHIEVE HIGH IMPACT: A COMMONSENSE APPROACH TO STRATEGY

In this chapter Fleishman outlines the steps he believes a foundation must follow to implement an effective strategy.

Step One: Defining, Documenting, and Diagnosing the Problem: “Empirical research targeted to particular social problems is often a key component of high-impact grantmaking.”

Step Two: Identifying Key Factors That Impede a Solution: Special interest groups deriving some benefit from the problem could be an obstacle, for example. Other times, there may be no real obstacle but a general unawareness that the problem exists or can be solved.

Step Three: Formulating a Problem-Solving Strategy: Before starting, the author says, foundations should answer the following questions:

  1. Have we identified the problem?
  2. Is the problem ripe for solution?
  3. Is our strategy plausible and scaled to the issue?
  4. Does the mission fit our size and focus area?
  5. How long with this take, and will we invest the time needed?
  6. What can we do alone, and what do we need help with?
  7. How will know if we’re making progress?

Step Four: Selecting Tactics: The key here is laying out the logic model, i.e., “making explicit how any tactic under consideration is expected to contribute to the overall strategic goal.”

Step Five: Drafting an Implementation Plan: He provides a high-level view of such a plan as an example.

CHARACTERISTICS OF HIGH-IMPACT PROGRAMS

Fleishman here pinpoints several characteristics he believes crucial to foundation impact.

Major Issues: These are “systemic and managerial issues foundations should (try to) achieve:

  • Focus
  • Alignment
  • Due diligence about the problem
  • Due diligence about the solution
  • Intelligent talent selection
  • Due diligence about prospective grantees

He then lists factors of “managerial style and spirit” that characterize well-run grantmakers:

  • Entrepreneurial risk-taking
  • Opportunistic thinking – “striking the right balance between strategic focus and opportunism.”
  • Independence – He notes two kinds of “resource leveraging,” 1) giving matching grants and 2) setting aside funds specifically to attract other foundations to pool theirs with yours, but argues that foundations are most effective working alone.
  • Effective grantee selection and management
  • Long-term thinking and long-term commitment
  • Maintaining focus and alignment

HOW FOUNDATIONS FAIL

Having looked at successful strategies and characteristics, Fleishman turns to the question of how foundations fail. Note that failure is not all bad news:

If a foundation doesn’t experience some failures in the its grantmaking, a persuasive case can be made that is either not tackling sufficiently challenging problems or not undertaking high-risk solutions to solve them.

On the other hand, foundations are loathe to admit failure, making it impossible for others to learn from their mistakes. The author claims in all his case studies he hasn’t found more than a dozen foundations in the United States that have given a failing grade to any project.

He notes the Robert Wood Johnson Foundation is a major exception: They put reports on all their completed grants on their web site, including failed initiatives.

The Weakest Link: A flaw in any part of one’s strategy can lead to failure. Fleishman fingers these as the possible missteps that can poison a whole grantmaking initiative:

  • Lack of a guiding strategy
  • Mismatch between problem and strategy
  • Lack of a credible logic model
  • Weak grantee commitment
  • Lack of relevant grantee experience
  • Incompatible grantee partners
  • Failure to include all the relevant stakeholders
  • Failure to specify the desire outcomes precisely
  • Relying on inadequate leadership
  • Fragmented leadership and uncertain collaboration
  • Inadequate market research
  • Unanticipated consequences

The author provides interesting examples for each. He also reiterates his concern that ignoring or hiding failures is keeping foundations from learning and letting other learn from that experience.

THREE ESSENTIALS: DISCIPLINE, BOUNDARIES, AND PERSISTENCE

Discipline starts at the top, with the donor. As examples, Fleishman describes five founders and their shaping influence, briefly profiling Edward S. Harkness (the Commonwealth Fund), Paul Mellon, Andrew Carnegie, Robert Wood Johnson, and Alfred P. Sloan, describing how their leadership in the past still effects their foundations today.

Founder-Imposed Constraints: Next the author outlines the benefits of founder-imposed constraints, the chief one being the focus it lends to grantmaking: “Ironically, then, the more constrained the trustees, the better their performance is likely to be.”

He follows up by discussing what happens when the founder leaves no constraints. The lesson of this lengthy discussion, using the Rockefeller and Ford Foundations as examples, seems to be that if the founder doesn’t impose constraints, the board has to do so itself, a surprisingly difficult process.

What’s the downside of donor constraints? Problems include:

  • Requiring the foundation invest only in the founder’s company (ask the Packard Foundation).
  • Founder self-indulgence, like building nice offices for his foundation staff, can lead to a culture of privilege.
  • Some donors have no idea what they’re doing; they can be bad judges of what foundations can and should do.

Advice for the Would-Be Donor: Be Precise, Careful, and Prayerful: Fleishman then offers his counsel to would-be donors (current and future billionaires in the Giving Click audience, please take note):

  • Craft your will, etc., very carefully.
  • Tailor your focus to the size of your fortune.
  • Appointing trustees? Pick those with substantive knowledge of your foundation’s focus area.
  • Don’t put your kids on the board. Okay, you can put one kid on the board. But it might be better to give each child his own foundation to play with instead (see: Warren Buffett).
  • Pray.

SHOULD FOUNDATIONS BE PERMITTED TO EXIST IN PERPETUITY?

With this provocative question, Fleishman begins discussing potential reforms that he feels will improve foundations’ ability to impact society favorably.

The author argues that there is a trend away from foundations established in perpetuity toward life-limited foundations (e.g., The Atlantic Philanthropies) and donations that stipulate their use during the donor’s lifetime (e.g., Warren Buffett’s $31 billion dollar donation to the Gates Foundation came with a stipulation it be paid out within several years).

Reasons for this trend include:

  • Donors’ faith that future generations will have their own munificent philanthropists to aid society when the time comes.
  • Donors’ belief that it’s unfair to endow future generations when there is plenty of need now.
  • Current donors aren’t crazy about how perpetual foundations are being run by later generations.

My assessment is that the lack of confidence in the good stewardship of their successor philanthropic administrators is the dominant motivation for establishing a time-limited rather than perpetual foundations.

For his part, Fleishman offers several arguments in favor of perpetual foundations:

  • They can be a “countercyclical force…to policy-making and problem-solving,” taking the longer view while others might get caught up in shifting focuses and solutions.
  • They will invest in generating basic knowledge (which may only be applied to problems later) while life-limited foundations will focus of applying knowledge in hope of solving problems quickly.
  • They serve as a steadying influence for social activism; they are a vehicle for social change to happen gradually and peacefully, without requiring sudden revolution.
  • By exerting influence over the decades, perpetual foundations also serve as both “a prod and a counterweight” to the government.

While he seems to applaud life-limited giving, the author concludes that perpetual foundations a clear-cut benefit to society:

The clear lesson of most of the high-impact cases documented for this book is that significant social benefit can be conferred only by foundations that persist over a long period of time in working on problems and implementing solutions.

ENHANCING FOUNDATION EFFECTIVENESS: SOME NOT-SO-MODEST PROPOSALS

Here Fleishman explains what kinds of reform he thinks is needed, and offers specific suggestions to achieve them.

It seems fair to say that in his suggestions, two themes emerge:

  • First, there is one foundation attribute that must be maintained: independence:

It has been the unfettered freedom of foundations that has enabled them to confer the extraordinary benefits on society that they have over the past century. The independence of foundations from both the marketplace and the voters empowers them to add to the richness and complexity of America’s polyarchy, and protects them, in serving the wider public interest, to be effective critics of, as well as counterweights to, both government and for-profits.

  • Second, there is one attribute frequently lacking that foundations must embrace: transparency:

[S]ecretiveness has prevented foundations from benefiting from external criticism and therefore from performing at the highest possible level of which they are capable; it has kept other foundations and the wider nonprofit sector of operating charities from learning how and why foundation initiatives succeeded and failed; and it has contributed to the cocoon-like culture within foundations that allows smugness and arrogance to influence the way foundation officials treat outsiders.

He further notes that this lack of transparency represents a threat to foundations’ independence, as it tends to invite political efforts to force the door open from outside.

Fleishman then details specific reforms he suggests will allow foundations’ to keep their independence but also be more constructively transparent:

  • Taking his cue from Marcus Owens, former IRS Exempt Organization Division head, the author says charity oversight should be removed from the IRS; Congress should instead create a private, nonprofit organization related to the IRS the same way the regulatory National Association of Securities Dealers is related to the SEC.
  • Greater cooperation between states and the IRS on charity oversight.

Most of his reforms depend on self-policing by foundations. He suggests:

  • Foundations should agree upon a “transparency and accountability code” and require each other to meet its standards.
  • Alternatively, the Council on Foundations could create a code like that and make meeting it a requirement for members.
  • All foundations above a certain size employ an ombudsman to deal with complaints the foundation is not disclosing documentation.
  • Foundations should fund a “Foundation Transparency Rating Board” to rate others’ transparency scores and publicize their findings.
  • Establish a peer-review system, much like academic or scientific research employs.

He encourages foundations to act now, essentially suggesting that foundations are better off reforming themselves than waiting for the federal government to do it for them, as this could threaten their independence.

A Prophetic Epilogue

In his “prophetic epilogue,” Fleishman first retraces the history of innovation in modern philanthropy, from private foundations to community foundations, donor-advised funds, supporting organizations, and corporate foundations and corporate social responsibility.

He then discusses current trends of “venture philanthropy” and “social entrepreneurship” before making three predictions for the 21st century:

  1. America’s charitable giving will increase greatly in this century.
  2. Philanthropy will continue the evolution and diversification we have seen in form over the past century.
  3. Venture philanthropy and social entrepreneurship will gradually come to dominate philanthropy in this century.

IMPRESSIONS

Fleishman’s The Foundation tackles a crucial topic and convinces at every turn. The author’s assertions, arguments, and conclusions – on what foundations do, how they succeed, and how they come up short when they fail – are built on two solid foundations of data: Over 100 case studies of successful (and some not-so-successful) foundation initiatives, and dozens of interviews with current and former foundation executives, donors, academics, and others.

In addition, the author and his experience lend further credibility to the reforms and predictions offered. Fleishman not only studies public policy from his professorship at Duke University, he has also served in the charitable sector directly, as program staff, trustee, and chairman of various organizations. Rather than sniping from the peanut gallery, he urges reform of foundations as one who supports their core mission whole-heartedly. As a Wall Street Journal reviewer noted, the book really constitutes “tough love” from a stalwart advocate.

The wisdom of the reforms he suggests should be debated, and undoubtedly will have their critics, but it is hard to dismiss his worry that reforms are needed and should be made by foundations themselves, sooner rather than later.

The Foundation is essential reading for anyone with an interest in America’s nonprofit sector, and recommended for anyone with an interest in understanding the country’s civic life.

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