But what about the role of philanthropy as a whole within society? A philanthropic investor might fund organizations that seek to create value using market driven solutions while another may fund organizations that view the market as the cause of social problems and seek to correct for its excesses. Is there a framework we can develop that helps us understand this difference and shed light on the various ways that donors view the role of philanthropy? This framework would need to holistically describe the values behind giving, without regard to issue area.

During the debates about Philanthrocapitalism between Matthew Bishop and Michael Edwards, I observed that the two men had fundamentally different world views which rendered their debate impossible to resolve. Edwards seems to view the market and capitalism as the root cause of social problems while Bishop views the market and capitalism as the force most responsible for increasing standards of living. It is therefore not surprising that Edwards sees adapting the tools of the market to philanthropy (what Bishop calls Philanthrocapitalism) as a terribly idea while Bishop sees the trend as fantastic news.

In the political sphere, the terms Right and Left are used in an attempt to describe what is believed to be two prevailing views of the role of government in society. But this shorthand framework fails to capture the differences between libertarians who believe in lower taxes as well as limited regulation of social behavior and conservatives who believe in lower taxes but an expansive role for government in regulating social behavior. It similarly fails to differentiate on the Left between Joseph Stalin and Mahatma Gandhi. In an attempt to build a better model of the beliefs around the role of government, The Political Compass has been created.

The Political Compass creates a two-axis grid that allows a given political view to be charted on a spectrum of economic and social thought rather than a simple Left-Right.

In this case, political belief A believes in a limited role for the government in regulating the economy, but a expansive role in regulating social behavior. Belief B believes in limited government roles in both the economy and regulation of social behavior. Belief C is for a limited social role, but an expansive economic role. Belief D believes the government should have an expansive role in regulating both the economy and social behavior.

Might we create a similar compass for philanthropy that describes the various beliefs that donors have about the role of philanthropy in society?

I first considered this idea during a conversation with Peter Frumkin during which I posited that the appropriate axes might be Optimization-Transformation and Creation-Distribution. My thought was that philanthropy can be seen as a tool to make the current social system work as well as possible (Optimization) or as a tool to create a new social system (Transformation). A separate, uncorrelated axis would look at philanthropy’s working relationship with the market economy. A donor might believe that role is to enhance the market by creating social value (Creation) or they might believe the role is to correct for the excesses of the market by focusing on how social value is distributed (Distribution).

This loose framework led to the Tactical Philanthropy Forum debate titled Unconstrained Philanthropy in which we discussed whether donors and funders should see their role as one of correcting and optimizing existing social systems or if they have an opportunity to remake the social fabric.

However, I was never convinced that these axes holistically captured the full range of various viewpoints.

In recent days I’ve been discussing this topic with reader Matt Lee, formerly of Bridgespan and now a doctoral candidate at Harvard Business School. We’ve gone back and forth a bit on the general framework and agreed that the Political Compass works because rather than focusing on specific issue areas, it maps out beliefs about the overall role of government in the economy and society. We think the same should be true of a Philanthropy Compass.

The Political Compass allows users to answer a series of questions about their beliefs and then locates them on the compass. Public statements by politicians have been used to answer the questionnaire and thereby locate public personalities on the compass as well. A strong Philanthropy Compass framework should allow for a similar process and Matt has expressed interest in working with colleagues at Harvard to build a functional Philanthropy Compass tool if we can figure out the best axes to use.

So now I open the floor to you. What axis can be combined to best capture the huge, multifaceted set of values that drive philanthropic behavior? The only requirement is that the two axes describe a set of beliefs about the role of philanthropy and that when combined a large majority of donor behavior can be logical explained by the donor’s position on the Compass.

Please share your thoughts in the comments section!

Michael might think I don’t get civil society and I might think he’s got a shallow view of capital markets, but he ends his most recent post on the Philanthropy Central blog with:

On that, at least, we both agree!

Today I want to turn my attention to the most recent post from Michael Edwards. Edwards is a former long time employee of the Ford Foundation and author of the philanthrocapitalism critique Just Another Emperor and the new book Small Change: Why Business Won’t Save the World.

In his post titled Why "Social Capital Markets" Could Be a Really Bad Idea, Edwards presents what I believe is an extremely limited view of social capital markets. I’ve very sympathetic to the concept that the social sector is different from the business sector and so social capital markets should not simply mimic financial markets. For instance, I particularly liked Jacob Harold’s piece in Alliance Magazine arguing that a robust social capital market might be more like a farmers’ market than Wall Street. But Edwards’ post today argues against a straw man.

The social capital market Edwards describes is a shallow, mechanical market that has little resemblance to how real markets work. For instance when Edwards suggests that social capital markets will dictate which causes are most important and writes "Who is to say that saving the rainforest deserves more support than ending gun crime or racism?" The answer is "No one". There is nothing about the concept of the social capital market that implies that certain types of social good are superior to other types.

When Edwards writes that social capital markets will force "nonprofits to compete with each other for scarce resources," what does he think that nonprofits are already doing? We certainly don’t have unlimited resources and last I checked, nonprofits were competing fiercely to convince donors to support them.

When Edwards writes "variations in… metrics may not reflect meaningful variations in performance, since two organizations may be dealing with similar issues but in totally different contexts," I would respond "Of course!" Sophisticated investors in traditional financial markets do not base investment decisions on simple mechanical rankings. In fact, financial professionals that purport to have a simple formula for producing investment returns are seen as charlatans.

Smart investors use metrics as inputs into the messy process of trying to select their investments. Markets are not driven by metrics and simplistic rankings. They attempt to absorb vast quantities of quantitative and qualitative information in order to allocate scarce resources. I’ll admit that some supporters of the social capital markets concept hope for a day where we can easily allocate resources based on standardized rankings, but that ideal has more in common with how centralized planning works (or doesn’t) than to financial markets.

It is critical that as we build robust social capital markets, that we create vibrant, human markets, not some sort of mechanical sorting machine. Readers who are interested in a more holistic view of financial markets, than the quantitative, machine-like caricature presented by Edwards might be interested in the book Investing: The Last Liberal Art by Robert Hagstrom. The book lays out the ways in which investing in financial markets requires the building of a "latticework" of information that is gathered and processed with mental tools borrowed from the fields of psychology, philosophy, biology, sociology and literature. I think the book offers a holistic, human based vision of capital markets that might shift your thinking about the potential for the social capital markets.

I’ve previously mentioned Hagstrom’s book (which is largely based on the investment philosophy of Warren Buffett’s right-hand man, Charlie Munger) when I rejected an overreliance on tools borrowed from the hard sciences in philanthropy evaluation and when I responded to Albert Ruesga’s worry that evaluation was the “math-anxiety” of philanthropy. Hagstrom is also the author of The Warren Buffett Way, which I drew on extensively last summer when I offered a “robust definition of high performance” for the nonprofit sector.

Praise for Philanthrocapitalism as “extremely well written” from an unexpected source – our old sparring partners at Gates Keepers. True, they do also take us to task for being too soft on Bill Gates, but that’s not really a surprise.

The really surprising thing about the review is that, having attacked the idea of philanthrocapitalism for several months, the Gates Keepers admit that have only finally got around to reading the book!  We are getting used to that, having already been subjected to one pre-emptive strike from Michael Edwards, albeit now updated (sign up required). Edwards also confesses to have enjoyed the book, when he finally read it. Ho, hum.

Recently George Overholser suggested the term ROPE as a measurement of the performance of venture philanthropy funders. I pointed out that the phrase did not have the financial markets “baggage” of the phrase SROI (which is similar to the financial metric ROI).

Language is important. When the financial crisis first hit, a number of people asked if I would change the way I wrote about philanthropy because I often use concepts from financial markets. My response then and now is that I’m not going to change my position based on what goes in and out of style. But I’ll always change my position if I come to the conclusion that I’ve been wrong in some way.

Philanthrocapitalism was a huge debate last year, probably because of the word itself. It seems a shame to me that people have such knee jerk reactions to things based on what they are called instead of what they are. But that’s the reality of humans. So it seems to me that we need to be careful what we call things.

“Nonprofit” and “tax-exempt organizations” compared to “social enterprise” and “social entrepreneurs” is probably a good example of this. The first two are horrible words that say nothing about what the organizations do. The second two are far more engaging and dynamic. What words do you use that you think you should change?

But while both men made their points well, it was Carla Javits, the president of REDF and a panelist at the debate, who managed to reconcile the two sides and provide the most insight. Below is a shortened version of Carla’s speech:

By Carla Javits

Matthew Bishop’s and Michael Edward’s writings are welcome because, by staking out their ground, they’ve inspired debate, forced people to think critically, and hopefully spurred positive action.

But as it’s been framed, the debate at hand reminds me of the 1980’s when I worked for the City of San Francisco. Every other week someone came up with a silver bullet that they argued — often fiercely — would be the solution, the elixir to solve the problems we confronted. But the one size fits all suggestions – thick and fast as they came – were a complete mismatch with the complexity and durability of the problems at hand.

There is not one simple answer – it’s not business or philanthropy; capitalists or civil society. Progress on social issues will require every entity to contribute — business, government, philanthropy, nonprofits, labor unions, academia, groups that organize, advocate and educate – and individual citizens.

One sector, one method won’t work. There is pressure on governments around the world to keep taxes relatively low, the NGO/philanthropic sector is still relatively small, there are myriad challenges to civil society of inclusion and effectiveness, and business fundamentally focuses on financial profitability.

While all have contributed to social progress, the truth is that neither the market, nor the social sector, nor civil society, nor government is immune to the pressure of big money, human foibles, bankrupt values, or dysfunction.

The critical question is not “is philanthrocapitalism good or bad?”. But how to harness all sectors and their methods to contribute to the improvement of social conditions for everyone – not just for a few. And, in those instances where institutions choose to position themselves in the crossroads between public good and private benefit, to assess how to balance specific private interests with broader social goals

The notion of philanthrocapitalism has really become a proxy for other tensions such as the merits of the application of business practices to philanthropy or social goals. What’s been most beneficial about business practices influencing philanthropy? Primarily the implementation of practical approaches that solve problems – social enterprises that earn income to create jobs for people who have been incarcerated or homeless, or dropped out of high school; public-private capital investment vehicles to create affordable and supportive housing.

What’s less beneficial is when ‘business practices’ drive nonprofits to prioritize ‘net revenue’ over other important goals, to deemphasize the importance of collective social action and the development of culture and social networks, or constrain challenges to mainstream business or government practices that have themselves had negative effects on the human condition.

While business practices’ can help cure or solve problems by working more efficiently and effectively, they have limitations when it comes to root causes or systemic transformation. Of course missing root causes is not the sole provenance of business – nonprofits and philanthropy can and often are also caught up in short term Band-Aid solutions rather than longer term transformation.

Or as Paul Brest and Jacob Harold in their recent publication eloquently described it, without a real theory of change, or a way to measure whether or not they are making progress.

A major area of vulnerability has been the promotion of earned income strategies as a savior for nonprofit revenues in the face of constrained public and philanthropic resources – an even greater hazard now. The most viable earned income strategies are generally those that align with the organization’s core mission and theory of change; rather than the ‘let’s start a restaurant to support the day care center’ school of earned income.

A more central, urgent unresolved tension is the persistent suspicion, hostility or indifference with which one sector views the other; ultimately leaving the whole world blind.

To work together, however, it is not useful nor possible to conflate sectors. Each has different basic motives, goals, constraints. And methods from each must be adapted, not swallowed wholesale.

We can inject new vitality into our efforts to solve basic human problems by more consciously finding and actively seeking out the intersections of interests and leverage points across sectors for aligned, coherent action. “Forces for Good” – the Crutchfield, McLeod Grant book makes a forceful case that the highest impact nonprofits actively pursue such cross-sector alliances.

Additional benefits include increased transparency, accountability, and challenges to orthodoxy that result from exposure to diverse people and methods. And of course the fundamental values challenge made by the social sector through its insistent focus on the common good and the public interest.

What can we do to foster cross-sector work?

• Convene across sectors – fewer sessions w/ only one sector at the table;
• Become “multilingual”;
• Tolerate and understand sometimes clashing interests and motives;
• Be prepared to walk away without burning bridges;
• Suspend disbelief and prejudice,
• Don’t assume the silver bullet.

President Lincoln was walking in a dark and stormy evening when a huge lightning bolt struck the ground near him. He fell to his knees and prayed for “a little more light and little less noise”. Amen.

But Strategic Giving is one of the best philanthropy books I’ve read.

I don’t usually take notes while I read, but my copy of Strategic Giving is now unfit to pass on to anyone else. Frumkin covers a lot of ground, including one of the most thoughtful, well reasoned critiques of venture philanthropy that I’ve seen. But it is Frumkin’s Five Elements of Philanthropy that lays down a framework useful to anyone interested in understanding philanthropy.

To Frumkin, there are five purposes that animate philanthropy:

• Change: Using private funds to create social and political change.
• Innovation: Locating and supporting important social innovations.
• Equity: Striving for economic equity through redistributive giving.
• Pluralism: Supporting the civic virtue of pluralism.
• Expression: Supporting the self-actualization of donors.

This framework is extremely helpful in putting into context many of the debates that rage in philanthropy. For instance, when Michael Edwards and Matthew Bishop debate the validity of Philanthrocapitalism, it is important to understand that Edwards sees Equity as the main purpose of philanthropy while Bishop is more strongly driven by the Innovation purpose.

In addition, the framework reconciles the public benefit of giving with the private benefit that donors get from using the Expression element in search of self-actualization (a purpose that I explored in the Stanford Social Innovation Review last year).

Unlike many philanthropy books that either examine recent trends in philanthropy or argue in favor of a certain approach, Strategic Giving is a lucid, compelling exploration of the art and science of philanthropy.

It is a must read book and it earns a place in the Tactical Philanthropy Bookstore.

In the investment world, lots of great investors and investment companies release annual letters. But the release of Warren Buffett’s letter is a huge event. The days leading up to the release are filled with speculation. The letter itself is covered by the press and dissected by bloggers and investors around the world. The letters are considered so outstanding, that they have been collected into book form. The letters draw such attention because they are not simply reviews of the past year, they are an imparting of wisdom from one of the great investors of all time. And they are written with the folksy charm that is so characteristic of Buffett.

According to my contact at the Gates Foundation, Bill’s letter is “loosely modeled on and inspired by Warren Buffett’s” letter and indeed “it was Warren Buffet who encouraged Bill to write [it].” But The Economist magazine, which apparently has a preview copy of the letter writes today:

The idea for the letter came from his old friend and philanthropic partner Warren Buffett, boss of Berkshire Hathaway, whose annual letter to his shareholders is a highlight of the business calendar. Whether letters from Mr Gates will come to be awaited as keenly as missives from the “Sage of Omaha” remains to be seen. If they do, it will not be for the jokes. In the first paragraph of his first epistle, which will be released on January 26th, Mr Gates says he will not try to match Mr Buffett’s famously folksy humour: “I won’t be quoting Mae West.”

…Mr Gates promises that his annual letters will be candid and self-critical, which should provide some comfort for those who criticise his foundation for being unaccountable.

…Yet as well as being candid about himself, Mr Gates should in future be more candid about the performance of others without whom his philanthropy cannot succeed, especially politicians. In the first letter, he points only one finger—at the Italian government, led by Silvio Berlusconi, which is reneging on its promised development aid—while giving other governments the benefit of the doubt that they will honour their promises.

The Economist article also talks about the idea that “Nice Bill”, as seen in his role at the foundation, is not the “Real Bill” who engaged in heat disagreements with other executives when he was building Microsoft. Personally I hope that over time, Gates’ annual letters allow the “Real Bill” to come out and that they capture the spirit, if not the folksy wisdom, of Warren Buffett.

You can sign up to receive the annual letter by clicking here.

A new book, “Uncharitable,” seethes with indignation at public expectations that charities be prudent, nonprofit and saintly. The author, Dan Pallotta, argues that those expectations make them less effective, and he has a point.

…Mr. Pallotta argues powerfully that the aid world is stunted because groups are discouraged from using such standard business tools as advertising, risk-taking, competitive salaries and profits to lure capital.

“We allow people to make huge profits doing any number of things that will hurt the poor, but we want to crucify anyone who wants to make money helping them,” Mr. Pallotta says. “Want to make a million selling violent video games to kids? Go for it. Want to make a million helping cure kids of cancer? You’re labeled a parasite.”

…In the war on poverty, there is room for all kinds of organizations. Mr. Pallotta may be right that by frowning on aid groups that pay high salaries, advertise extensively and even turn a profit, we end up hurting the world’s neediest.

What Pallotta gets right in his book is his broad theme that the social benefit sector is hamstrung by a cultural belief that people who do good should do so in a sacrificial way. This belief confuses the act of doing good with the actual good that is achieved. Our cultural belief system implies that a person who goes to work for little pay, in a nonprofit organization that is barely surviving is more admirable then someone who is highly paid, working in a robust organization regardless of what good each person actually achieves.

Imagine for a moment an imaginary nonprofit that is working on homelessness in a major city. It is staffed by intelligent, hard working people who care deeply about alleviating human suffering. They work in a dingy office in a warehouse district and depend on donations and volunteers to help them survive. But year after year, the homeless problem gets worse.

Now imagine a new organization comes to town. It is a for-profit homeless relief agency! The group has devised a program that dramatically reduces homelessness, not by driving people out of town, but by putting into place the elements that actually get people out of the cycle of homelessness and into a stable living environment. The organization’s offices are in the penthouse of a downtown skyscraper and the CEO makes millions.

If you are like most people (including me) the first organization warms your heart and the second one makes you feel a little sick. But at the end of the day it is the second organization that actually relieves homelessness! Shouldn’t that warm our heart more, regardless of how it actually gets done and how much money the people doing the work make?

If you’ve read this blog for awhile, you know that I don’t believe there are a lot of profit opportunities in social problems. I don’t write much about for-profit business that are doing good. My focus in on traditional grantmaking to nonprofits. My point here is NOT to suggest that nonprofits should turn a profit. But to highlight the way that as a culture we embrace a certain way of achieving good at the expense of actually doing good in the world. The core of my column on nonprofit salaries was not an argument that nonprofit employees “deserved” more or that they “should” be paid more, but that doing so, or at least having it be morally acceptable to do so, would result in higher impact.

That’s what we need to care about. Not how hard we try, not how nice we are, not how much we sacrifice, but how much good we actually achieve. Anything else is downright selfish.

Readers of Uncharitable will find many things they disagree with. Pallotta’s past was in running a for-profit company that raised money for AIDS research. He created the hugely popular AIDS Rides before public outcry over his company’s profit forced him to close down (see Pallotta’s comment regarding why his company closed). My friend Robert Egger is quoted in a recent Chronicle of Philanthropy review of Uncharitable saying that “[Pallotta] strip-mined the cause. He did a tremendous disservice.” Another friend of mine who does charity evaluation work emailed me after reading Uncharitable (at my suggestion): “Oy vey!!!!!! I have gotten to page 10 and can not believe how much I disagree with the guy!”

I urge you to read Uncharitable not as a list of suggestions that I think you should agree with, but as a challenge to the assumptions you make about charity and social good. The benefit you should take from the book are not prescriptive actions but a cracking of dogmatic beliefs you don’t fully realize you hold.

Pallotta opens the book with a quote from George Bernard Shaw: “All great truths begin as blasphemies,” and another from John Kenneth Galbraith, “All successful revolutions are the kicking in of a rotten door.”

So go out and read Uncharitable. You’ll have some of the rotten doors in the way you think kicked in, but you’ll also hear some blasphemies!

A selection of the editorial board’s responses to the financial crisis:

Lucy Bernholz Blueprint Research and Design, USA
Two areas of potential impact of the crisis concern me. First, will fear about the future make people turn away from community, look for ‘others’ to blame, and be divisive and destructive to civil society? Certainly history can provide plenty of examples of this type of civil withering. We can also find examples in which uncertainty brings out the best in people. Have we learned anything about fostering the latter and avoiding the former? Second, while individual philanthropic impulses always continue, what will happen to the ‘business of giving’ in view of the scale of current uncertainty? Assumptions about large-scale transfers of wealth have to be re-examined, as plans for retirement, medical care and family financial security are radically realigned. We also don’t know whether and how online giving marketplaces, social enterprise, social investing and other innovations born in good times will stand a downturn, short or prolonged, and how those changes will ripple across longer-standing practices.

David Bonbright Keystone, UK
What can we learn from this crisis to prevent recurrence? What is the role of philanthropy and civil society in curbing the excesses of our economic system? Looking backwards, can philanthropy ensure that we get an unbiased forensic analysis of what happened, and a ‘truth and reconciliation’-type process that will enable the victims to judge the executioners? Looking forward, can we imagine new models of regulatory oversight in which civil society plays a more robust role? Can philanthropy help to ensure that we have a more effective early warning system when investors go on their next binge, as history tells us that they surely will?

Andrew Kingman Micaia, Mozambique
We will no doubt have to watch carefully the ‘new’ funds and intermediaries that have relied on the hedge funds and other financial instruments that are now under such pressure to see if they are badly hit. However, these funds are dwarfed by foundation assets that will, one would assume, be reasonably well protected. I suspect that the most significant impact might well lie in the area of changing funding priorities for the major donors over the next few years.

If we consider the social and economic impact of the financial crisis on low-income communities in the US and Europe in particular, it may be hard for foundations to resist taking on new or expanded programmes to provide short and longer-term support. In turn this could affect funding for more ‘marginal’ issues – international giving, environmental justice, etc. Add to this scenario the likely downturn in individual and corporate giving, and a significant portion of civil society may face a severe funding crisis.

Barry Knight CENTRIS, UK
Philanthropy is the child of capitalism. Put yourself in the place of the child whose father has just had a major heart attack and can no longer work. What is she to do? She urges him to change his ways: to cut out excesses of diet, to take gentle walks in the woods, to enjoy the beauty of the planet, and above all to find a new sense of meaning. She supports him in this new life, helps him to find a new way, and scolds him if he tries to go back to the bad old ways.

Peter Laugharn Firelight Foundation, USA
In late September, while the global financial crisis was unfolding, I was visiting community-based organizations in Malawi funded by my foundation. You can picture it: a foundation from the North instructing painstakingly well-run shoestring village organizations in prudent financial management, while the people and institutions charged with managing and growing huge sums of money had been so breathtakingly reckless, with such disastrous consequences. If there was ever a moment to turn the tables in our discussions of accountability, and to require from the sources of our funding the same transparency, good faith, and reliable results that we require from our grantee partners, this was it.

For foundations themselves, I would remind them in the present crisis that the most useful foundation contribution is likely to be a combination of our two strengths: long-term vision and commitment, and short-term flexibility. Let’s use these two well, to complement government initiatives that are understandably focused on the very short term but may also take a while to roll out.

This article is being republished with the permission of the Chronicle of Philanthropy. You can find the original article here.

The Strengths and Weaknesses of ‘Philanthrocapitalism’

By Phil Buchanan

Sometimes, a book release conflicts with world events in such a dramatic way that you have to feel some sympathy for the authors, whose observations look dated before the printing press even finishes churning. Such is the case with significant portions of Philanthrocapitalism: How the Rich Can Save the World, by Matthew Bishop and Michael Green, which chronicles the “new philanthrocapitalists” who seek to “apply the secrets behind their money-making success to their giving.”

Those who wish to dismiss this book, pointing to the recent financial market collapse as evidence of the frailty of unfettered capitalism and business thinking, will have an easy time doing so.

Passages that note, for example, that “in investment banking, it is taken for granted that decisions about how to use capital are based on rigorous research into performance” are now ripe for ridicule.

“While some are skeptical about the invasion of the M.B.A.-enabled executives in suits into the Birkenstock world of charity,” the authors write, “many philanthrocapitalists believe that the world of giving could benefit at least as much as business from a bigger role for professional intermediaries and advisors, and from the sort of transparency and accountability that exists in financial markets.”

Where, the reader is left to wonder, are the guys from Lehman Brothers when you need them?

But this book, despite its weaknesses, is important and deserves to be read. Mr. Bishop, American business editor of The Economist, and Mr. Green, an economist, write in a compelling, breezy voice. Their impressive list of sources (which the authors say is in “no particular order”) begins with Bill Gates, Ted Turner, Bill Clinton, George Soros, and Bono.

Although the authors often seem star-struck, the (mostly) men they write about deserve much of the praise Mr. Bishop and Mr. Green heap on them for their dedication to creating lasting social impact, and their voices are powerful. One of the greatest virtues of the book is its potential, in bringing these voices to readers, to inspire others among the “superrich” to give more and dedicate themselves in the same way to results. This seems to be an explicit objective of the authors, and it’s a laudable one.

From the work of individuals like Mr. Gates, Mr. Turner, and Mr. Soros — and the foundations they established — to smaller-scale efforts like the Impetus Trust, in Britain, the authors extensively chronicle an array of innovative attempts to make more of a difference with philanthropic dollars. In so doing, they provide the most convincing evidence compiled in one place that philanthropy is going through a fundamental shift. They tell the story of a growing emphasis on results and an increasing embrace of goals, well-executed strategies, and rigorous performance indicators. The tide is changing.

While there is considerable truth in this, the authors oversimplify in an attempt to prove their point.

First, they give short shrift to both the degree to which the earliest foundations, like Carnegie and Rockefeller, were focused on assessing results and the successes of the philanthropy that preceded their book’s protagonists.

Second, they try to draw a distinction between the “philanthrocapitalists” and what they regard as the “ineffective philanthropy” of old, without acknowledging that some of the very efforts they hold out as exemplars — such as those of the Edna McConnell Clark Foundation — were led by staff members who spent their careers in the nonprofit world, have no M.B.A.’s to their names, and certainly are not among the “superrich.”

Third, their writing is often fawning: They are less critical of their subjects and less willing to acknowledge the shortcomings of these new approaches than are some of their subjects themselves.

Fourth, they retroactively categorize great thinkers, such as the management guru Peter Drucker, as philanthrocapitalists. When I read that they dubbed Mr. Drucker the “high priest” and “original guru” of philanthrocapitalism, I wondered what Mr. Drucker would say if he were alive today, or whether the authors ever read Mr. Drucker’s great 1989 Harvard Business Review article, “What Business Can Learn From Nonprofits” (and, no, I didn’t transpose the words in the title of that article).

The biggest mistake comes in equating all of this emphasis on “impact” and “strategic philanthropy” with “business” and “capitalism.” It’s as if these words are all synonyms to the authors.

Ironically, this is the same mistake made by the Ford Foundation’s Michael Edwards, who published in March a highly entertaining, much discussed — and blogged about — pre-emptive rebuttal to Mr. Bishop and Mr. Green titled Just Another Emperor? The Myths and Realities of Philanthrocapitalism. Mr. Edwards, director of governance and civil-society grant-making programs, asserts that terms such as “high-performance,” “results-based,” and “data-driven” are codes for “business thinking.”

But it is wrong to suggest that a focus on performance and results is somehow the sole province of business. Both Philanthrocapitalism and Mr. Edwards’s book approvingly quote Jim Collins’s Good to Great and the Social Sectors: Why Business Thinking Is Not the Answer to support their arguments.

But neither seems to have taken seriously the points Mr. Collins makes in his manuscript, which opens with this line: “We must reject the idea — well-intentioned, but dead wrong — that the primary path to greatness in the social sectors is to become ‘more like a business.’”

Mr. Collins goes on to point out that most businesses are somewhere between mediocre and good, asking, “Why would we want to import the practices of mediocrity into the social sectors?” (Disclosure: Mr. Bishop and Mr. Edwards are debating each other at a conference next spring for foundation executives that my organization is hosting, and Mr. Collins is also on the program for that event.)

Those of us who have worked in corporations and nonprofit groups, as I have, know all too well that Mr. Collins is right that there is greatness and mediocrity — and all shades in between — to be found in both business and philanthropy. We also understand how much more difficult it is to know what results you are achieving in the nonprofit world because of the nature of nonprofit organizations’ goals.

Nonprofit performance cannot be judged simply based on universal measures, like profit, found in financial statements. That doesn’t make performance assessment less important; indeed, it makes it more important — but a lot harder.

So we’re better off acknowledging the differences rather than creating a word — “philanthrocapitalism” — that is essentially an oxymoron. If businesses and government could successfully solve all our challenges, or meet all our needs for association and expression, we wouldn’t need nonprofit organizations. As Warren Buffett put it shortly after he made his gift to the Bill & Melinda Gates Foundation, “In business, you look for the easy things to do. In philanthropy, you take on important problems, and it is a tougher game.”

And, let’s be clear: At least some of the social problems philanthropy seeks to reduce are ones corporate interests helped create in the first place as they pursued profits for their shareholders. So, for all the talk within the halls of institutions like Harvard Business School about the positive effects of “blurring the boundaries,” for all the made-up vocabulary that seeks to marry business and philanthropy, I think we’re better off with some clarity on the distinction. Tension between nonprofit groups and corporations in the pursuit of different interests isn’t just healthy, it’s vital.

About 270 pages into a book that argues for employing the tactics of business in philanthropy, Mr. Bishop and Mr. Green try some semantic gymnastics as a way to deal with this critique. They say that critics of their worldview are “mistakenly confusing being businesslike with becoming more like a business.” I had to reread that sentence three times before giving up, concluding that, to the authors, “businesslike” is just a synonym for “effective.”

But it’s not, and it shouldn’t take the headlines of the last few weeks to make that clear. The challenge — worthy of all our attention — is to develop the right language of effectiveness for philanthropy, which can and must improve its performance. Yes, nonprofit groups can sometimes usefully look to business for approaches and frameworks. But they can also learn from other nonprofit organizations. And businesses can learn from nonprofit groups. It’s time to get beyond the “sector wars” and focus on results.

At the organization I lead, we have developed tools to allow foundations to get confidential, comparative feedback about their performance from grant recipients and others. People widely assumed we used customer-satisfaction surveys in the corporate world as our model, but we did not; our model, in fact, was the comparative reports based on student survey results put together for decades by a consortium of nonprofit colleges and universities.

The reality is, many (though by no means enough) nonprofit groups in this country are models of effectiveness — and they were not all founded in the last decade by the protagonists of Mr. Bishop and Mr. Green’s book.

Despite the book’s flaws, Mr. Bishop and Mr. Green deserve credit for expertly chronicling an important trend, even if they mislabeled it. The push for greater results and for better approaches to achieving them is vitally important. My hope is that nonprofit organizations respond to this book with a strong and clear voice — and do not cede ownership of crucial concepts like strategy and performance assessment to anyone.

Phil Buchanan is president of the Center for Effective Philanthropy, whose headquarters are in Cambridge, Mass.

I just read the great book When Markets Collide. Published this year, the book comments on events that were occurring in the financial market as recently as the spring of this year. Author Mohamed El-Erian is the former head of  the Harvard endowment and current co-CEO of PIMCO, one of the largest investment managment companies in the world (he also spent 15 years at the International Monetary Fund). In the book, El-Erian says that when asked what career he would suggest a young women go into he replies “structured finance” without hesitation. His point is that while we are in a cyclical move away from structured finance due to excessive risk taking, the stuctured finance movement will continue to dominate financial markets over the long term.

All of this brings me to a great session I attended yesterday in which my friend George Overholser of NFF Capital Partners described how grantmakers can injected capital into a nonprofit debt financing deal to make it more attractive to for-profit lenders. The idea is that if a profit seeking lender will only lend to a nonprofit at a 10% interest rate, they may be willing to lend at a lower rate if a philanthropist puts up capital that will act as a “first loss” cushion. Let’s say that for example the loan is for $5 million. The philanthropist might put up $500,000 that the lender could lay claim to if the nonprofit was unable to fully repay the loan. This reduces the risk to the lender and therefore lowers the interest they are willing to accept to complete the loan. The philanthropist is willing to put up the money because the injection of a relatively small cash cushion can unleash much larger new cash flows into the nonprofit system. While the provider of the “first loss” cushion can acheive a maximum financial return of 0% (just getting all their money back if the nonprofit doesn’t default on the loan) and a maximum loss of 100%, this actually compares favorably to the guarenteed 100% “loss” that occurs when you make a grant. While a first loss capital cushion is not superior to making a grant, it is another tool to be considered by high-impact grantmakers.

This brings me to a recent announcement by Schwab Charitable (the national donor advised fund) of its pioneering program to allow their donor advised funds to put up capital to guarantee microfinance loans. The program is being run in collaboration with the Grameen Foundation. According to the press release:

“We are excited to be partnering with Schwab Charitable to expand the reach of microfinance loan programs around the world,” said Alex Counts, President of Grameen Foundation. “Historically, guarantee programs have only been open to large foundations or to the very wealthy. This program opens up participation to a much broader range of donors, democratizing access and building a solid base of ongoing support.”

…Donors who agree to participate will recommend that up to 10 percent of their Charitable Gift Accounts be set aside for a period of 24-36 months to help guarantee microfinance loans. Any funds used to guarantee microloans will stay in their accounts, will continue to be invested for the entire period and will be applied to the guarantee only if the microfinance program has losses in excess of reserves. In addition, Schwab Charitable will report back to participating donors on the social and economic impact that these microfinance loans provide to their various recipients.

Like all tools, structured finance can be used in inappropriate ways. As El-Erian points out in his book, the “securitization” of home loans (pooling them and reselling the loans to investors) was a positive development. However, misaligned incentives encouraged excessive risk taking that is now coming back to haunt the mortgage markets. Structured finance is a powerful tool and powerful tools can be dangerous, but I think the development of social capital markets towards more sophisticated forms of structured finance is inevitable. Let’s work on getting it right.

Consilience in Philanthropy
Wednesday, January 16, 2008
By: Sean Stannard-Stockton

Have you ever heard someone say, “We need to get out of our silos and work together”? The silo effect is one of those over used metaphors of the business world, but the issue it raises is real. In short, silo thinking refers to a situation (common in most organizations) where people do not communicate across departments.

In large private foundations, there has long been a silo effect across program and investment staff. But recently, some foundations are trying to overcome this barrier and encourage the two departments to work together.

I believe the key to unlocking the potential of philanthropy is to break out of our silos and embrace consilience. Consilience means “unity of knowledge” (or more literally the “jumping together” of knowledge). The phrase was popularized by famed biologist Edward O. Wilson in his aptly named book Consilience: The Unity of Knowledge. What consilience recognizes is that every field of study captures only a snapshot of reality. While economists might believe that economics is the study of the production, distribution and consumption of goods and services, the fact is economic theory does not actually describe reality until you begin to take into account the biological, psychological, and sociological behaviors of humans. Even then, a broader systems approach is needed to understand how the market affects the environment and human culture, as well as the moral implications of market outcomes.

Today, philanthropy is faced with the coming together of traditional models of giving with market based social good production. While this systems based approach to philanthropy is promising, too often it seems that those schooled in for-profit business models assume that their knowledge can be directly applied to philanthropy. At the same time, many people who understand giving at a deep level fail to recognize the potential of market based approaches to social good creation. For philanthropy to realize the potential being presented in the 21st century, the trick will not just be to bring economists, sociologists, technologists, biologists, etc to the table, but to truly forge a consilience of knowledge across all domains. The whole is more than the sum of its parts. The first step to this goal must be simply to encourage people with varied knowledge to speak with one another. Not lecture at each other, but to truly create a conversation.

This idea of crafting a conversation across knowledge silos has been a core principle of my blog, Tactical Philanthropy. I myself straddle the for-profit and nonprofit sectors with my schooling in economics, training in the financial markets and application of this knowledge to help philanthropists through my firm, Ensemble Capital Management. In November of this year, I got a glimpse of what a consilience conversation might look like. Through a project called the One Post Challenge, readers of my blog were encouraged to submit their blog posts for publication with the goal of encouraging a cross-disciplinary conversation.

The conversation generated 36 reader essays and over 200 comments (excluding one post that generated 700 comments from around the world and inspired refugees to dance in Africa, but that’s another story). The authors included; foundation staff, nonprofit consultants, nonprofit employees, volunteers, social entrepreneurs, wealth advisors, web 2.0 gurus, authors, angel investors, tech entrepreneurs, magazine publishers, fundraisers, venture capitalists, activists, community foundation employees, academics, and public relations professionals. This was a group of people who would never find themselves in a room together. Yet to solve the complex problems facing humanity, all of their knowledge is needed. While each of them knows something important, it is not simply collecting this knowledge that is key, it is understanding how it all fits together. It is the “jumping together” of their wisdom that results in breakthroughs.

The One Post Challenge was an experiment in cross-disciplinary conversations. As wide as the group’s expertise was, it did not include experts in government, economics, sociology, or international relations.  The conversation must grow.

We often refer to our field as the Third Sector. But philanthropy and nonprofit activity do not exist apart from for-profit markets and government. We all operate within a single system. It is only in bringing together the many parts and encouraging them to interact that we will begin to understand the whole.

• Paul Brest, president of the Hewlett Foundation
• Matthew Bishop, US business editor of The Economist magazine who coined the word “philanthrocapitalism”
• Jed Emerson, one of the founders of the movement towards understanding “blended value” or the fact that both nonprofits and for-profits create both social and financial value
• Jim Fruchterman, CEO of Benetech
• Jacqueline Novogratz, founder and CEO of Acumen Fund

That’s only a handful of the incredible group of people on the Council. Now the World Economic Forum was founded by Klaus Schwab who also founded the Schwab Foundation for Social Entrepreneurship. There’s no doubt that the world view of the World Economic Forum is centered around the idea that business and business thinking is a force for good. I’m not surprised to see that Michael Edwards, formerly of the Ford Foundation and author of Just Another Emperor: The Myths and Realities of Philanthrocapitalism, is not on the council.

The first meeting of the Council will be at a conference being held in Dubai (see some of the unbelievable pictures of Dubai here. 25% of the world’s construction cranes are hard at work building a shocking array of projects). The conference proceedings are strictly off the record, but I’ll certainly be blogging about my general reactions and my trip to the Persian Gulf.

I believe that the role of business thinking in philanthropy, the concept of Philanthrocapitalism, and the future course of social entrepreneurship are all topics still very much up for debate. More than anything, I think the topics are cursed by a rather limited agreed on set of definitions and the fact that people on each side of these issues seem to inherantly distrust each other.

I’ve never sought to be a spokesperson for “business thinking” in philanthropy. Personally I believe that like many issues in life, the issues up for debate here are not black and white and we must seek to identify the elements of value in various world views.

Yesterday in response to my post about how banks could start launching no minimum donor advised funds, Ruth Lando of the Community Foundation of Sarasota wrote:

Why couldn’t this be done through the more than 700 community foundations nationwide? We already know how to do donor advised funds having done them most of forever…and we have a track record with Merrill Lynch for their clients through their Community Charitable Fund…

I think this would be a huge mistake for community foundations. In the future I expect the competition between the commercial donor advised funds (Fidelity, Schwab, etc) and community foundations to subside. This will only happen once the community foundation/donor advised fund business model is segmented into three areas:

1. Transaction based, low cost providers that offer no advice to client/donors.
2. Transaction based, premium priced providers that advise their client/donors on giving.
3. Discretionary grant managers who are paid for their expertise in high impact grant making.

Model #1 is currently characterized by Schwab and Fidelity. Realize that Charles Schwab & Co made their name by being a “Transaction based, low cost provider that offerrf no advice to clients” in the late 70′s while all other stock brokers were pursuing model #2. For people who don’t want advice on where to give and simply want a financial account to hold their philanthropic assets, model #1 is a great choice.

Model #2 is currently being pursued by community foundations that offer donors advised funds. However, I would argue that community foundations should more clearly differentiate themselves from commercial donor advised funds by increasing what they charge, implement a relatively high minimum account size and then offer a premium advice service to help their clients decide how and where to give. This model is similar to a full service stockbroker where you pay more to place stock trades but receive advice on which stocks to buy.

Model #3 would be similar to the model being pursued by community foundations with their endowments as well as some public foundations like Ploughshares Fund. In this model, the entity is given full discretion to make grants using a methodology that is made clear to donors. Ploughshares Fund for instance is interested in building peace, security and a nuclear weapon-free world. They attract donors who have a shared philanthropic mission and recognize that Ploughshares is better positioned then they are to identify high impact grant opportunities.

If I’m right about this, it would be crazy for commuity foundations to partner with a bank to offer the no minimum donor advised fund. The bank model is a low margin, low cost, transaction based service. Community foundations have a massive competitive advantage in that they understand their local community’s philanthropic needs better than anyone. This is also a highly protected advantage that is difficult to duplicate by compeitors due to 1) the concentrated local knowledge base, 2) the fact that understanding the local situation is at least partially dependent on having a history in the community.

By raising minimums and increasing fees while at the same time focusing as much energy as possible on providing great advice to client/donors (I’m thinking every client/donor gets assigned a community foundation rep who calls them at least once a quarter to talk about their giving and understands the client/donor’s goals and objectives deeply), community foundations can differentiate themselves from the commercial donor advised funds and be recognized for their store of institutional knowledge about their local communities.

At the highest end (model #3), I think donors can be convinced to give a portion of their giving budget to expert organizations to handle on their behalf. While the first two models are reminisent of separate account management in the wealth management business, this third model employees the hedge fund or mutual fund as an anology. If you visit Ploughshares’ website you see that they’ve done an excellent job of creating a compelling case that they can do a better job than individual donors of making grants that seek to support peace and security.

The only way this last model works is if the fund provides outstanding donor communication that demonstrates the impact of their gift. A hedge fund or mutual fund can just report investment returns. But since a philanthropic fund cannot present statistical proof of their effectiveness, they must qualitatively explain to donors the impact that they are having. They must also view donors to the fund not as simply having made a one time transaction, but instead as long-term “stakeholders” whose gifts are responsible for the long-term success of the fund.

As it stands now, I see most community foundations making the classic mistake of being “caught in the middle”. They are trying to be both low costs providers that compete head to head with the commercial donor advised funds as well as making the argument that they offer more and better advice than Schwab and Fidelity.

This is a receipe for extinction.

Community foundations are a wonderful asset for communities across the country. It would be devastating to see their business model fail. For them to succeed in the Next Great Wave of Philanthropy, they must recognize that their competitive advantage is in their philanthropic expertise and not in transcation processing.

Remember, this story has played out before. Low cost, transaction based services are best handled by large organizations that can create economies of scale. High touch, personalized advice based services are best handled my small to mid-size providers who identify and seek out a niche client base.

If my models are correct, I don’t see why most community foundations won’t just outsource the administration of their donor advised funds to Schwab and Fidelity and focus their resources on hiring the most outstanding donor/client advisors and philanthropic research analysts that they can find.

I know that donors do not like to pay for giving advice. But if community foundations are going to survive, they will need to change that mindset with donors. I wrote just recently about how valuable grantmaking expertise is. I think that donors can be convinced.