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How-to Library • Featuring articles from past issues of Contributions

An Insider's Take...

Are Today's Charitable Foundations Pulling Their Weight?

We recently sat down with Martin Teitel, Executive Director of Boston’s Cedar Tree Foundation and author of Thank You for Submitting Your Proposal, published by Emerson & Church. We posed to him a range of questions about the performance of today’s charitable foundations.

Do you think society would be better served if foundations expended the bulk of their resources on current challenges and let future philanthropy take care of what comes down the pike?

Teitel: This question is a perennial on foundation boards, and in fact during my 30 years of work in foundations, I’ve never known a foundation that didn’t try to address the tension between current needs and the future.

After having been around the maypole so many times with this issue, I’m less interested in the outcome for a given foundation, and more in who gets to answer it. Overall, grantmakers - who feel the press of stewardship obligations - tend to take the longer view, while grantseekers understandably are sweating out their current budget.

The U.S. government weighed in on this question in the Tax Reform Act of 1969, which mandates that foundations preserve their endowments for the future by being prudent, and requires a 5 percent minimum payout every year, even if return on investment is less.

I like those provisions of the Act, and would only wish the 5 percent rule was seen as an absolute minimum, with the actual payout indexed to some indicator like the S&P 500. That way if foundations have a good year due to their ability to earn high rates of return on their investments, their grantseekers can share in the good fortune too.

The commonly held view that foundation giving mostly helps the poor and augments the government’s efforts to address social needs is considerably wide of the mark. Some recent studies show that elite institutions get most of the money. Why is this and can it be changed?

Teitel: People tend to give money within their comfort zone, and that’s sometimes defined by foundation gatekeepers as people who resemble them - physically and in terms of factors like social class and culture. I suppose one way to address this would be to get people to change how they think and act. But another way that seems easier to me would be to change who the gatekeepers are.

Back in the late 1970s, Jim Joseph of the Council on Foundations provided creative leadership to challenge the homogeneity of gender, race, class and sexual orientation amongst foundation staff. Due to the efforts of many people and groups, including the Council, foundation staffing began the steady change from a profession made up mostly of older white men to a group of people that better reflects the populations it serves. We need another effort in the 21st Century to bring foundation gatekeepers – staff and board – along to a new level that better reflects their public.

It seems that foundations face little regulatory oversight. As long as they pay out their 5 percent they're free to do pretty much what they want, even if it means ignoring nonprofits’ actual needs. Does that isolate them from the marketplace, namely, the organizations that depend on them?

Teitel: The financial debacle of the last several years has shown that we do need regulation, and also that “the marketplace” tends to represent the interests of a small group of people, not the general public that subsidizes all foundations.

So I wouldn’t leave foundations to be regulated by the marketplace, since we’ve seen how poorly that mechanism serves us. And one wonders, oversight by whom? The IRS provides a minimum in certain areas such as the 5 percent payout.

But I’d sure like to see state attorneys general and secretaries of state do more to stipulate and enforce standards of practice in the grantmaking profession and also – what about a voice for grant seekers? Since the financial clout of grantmakers gives them disproportionate power, formal mechanisms to give a voice to the public and to grantseekers would help everyone – including grantors – to do a better job.

Most foundations recognize the value of working to mitigate the power imbalance with their grantees. But in your opinion do many take real steps to do so, such as proactively recruiting people with nonprofit experience to sit on the foundation board?

Teitel: Every person who works for a foundation should have nonprofit experience as a minimum requirement to be interviewed for the job. Boards on the other hand are more difficult to mandate, since many foundations have extraneous qualifications, like being a member of a family or other category.

I think the power imbalance between grant makers and seekers is intrinsic in the relationship and in the transaction. If that’s the case, I wonder about more work being done on codes of ethical conduct – not just ringing phrases from professional associations, although that’s nice – but actual requirements that are enforced by third parties, just as professional standards are codified and enforced in various professions by state agencies and boards of review.

And by the way, I don’t see why ethical conduct enforcement can’t run both ways. Grantees have trouble dealing with high-handed program officers, but funders have a little recourse when faced with serial liars and scammers from the grantseeking community.

Foundations are picky about what they allow grantees to charge for overhead, yet many of these very same foundations count their administrative costs as “charity” and include it in the 5 percent they must pay out annually. Is that defensible in your opinion?

Teitel: There’s no reason why the IRS can’t mandate an overhead percentage for all flavors of nonprofits, including those who give money and those who seek it. It just needs to be done well.

Some years ago the IRS experimented with mandating a foundation overhead percentage. Put simply, the IRS limited foundation overhead spending to 15 percent (later raised slightly) of assets. At the time I thought it went well and was sorry when they dropped it. All the bellyaching from a few foundations made me suspect the IRS was on to something.

The problem was the rule was written without enough subtlety. Pass-through foundations that grant out 100 percent of assets and income each year were put in a terrible position, and not nearly enough attention was paid to defining overhead, to avoid both unfairness and the instant creation of loopholes you could drive a leased Escalade through. But instead of fixing the rule they didn’t extend it.

Overall, just because dealing with overhead would be tough doesn’t mean we shouldn’t stick with it until we’re close to getting it right.


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