This entry to the One Post Challenge comes from Dahna Goldstein. Dahna is the Founder of PhilanTech, provider of the PhilanTrack online grants management system for foundations and nonprofits. Prior to starting PhilanTech, Dahna worked for venture philanthropies and as a producer of interactive eLearning programs. She is a member of the board of the I Do Foundation.
By Dahna Goldstein
Thank you for issuing this challenge. I’ve been thinking about these issues for a while, and haven’t been able to make the time to write frequently enough to warrant my own blog. This challenge provided just the push I needed to start writing.
Foundations should be more like public companies. Now before you start arguing that foundations aren’t and shouldn’t be like public companies at all, and before you quickly point to Enron to make your point, let me say two things: (1) the point of the One Post Challenge is to encourage conversation, and (2) I’m going to amend my statement slightly – foundations should be more like good public companies.
If you’re still reading, you either like a good fight, or perhaps you think there might be something to this comparison.
In the interests of time and blog post length, I’m going to limit my comparison to three areas: public disclosure, customer service, and shareholder vs. stakeholder responsibility.
Public disclosure: Public companies are required to make not only quarterly and annual disclosures to the SEC, but also to report any material information. If they disclose good news, they are rewarded for it (generally in the form of an up tick in stock price). If they disclose bad news, they are frequently judged by how well they react to and resolve issues.
Where’s the parallel, you ask? Well, it’s not perfect, but it’s something like this: foundations are required to file 990 PFs with the IRS, but they should disclose more material information – and disclose it more broadly. What made a project or grant successful? What elements of the foundation’s grantmaking or of the grantee’s program are replicable and could be reproduced with similar success in another community, for example? Equally, if not more, important is sharing failures. Some foundations (notably the Irvine and Hewlett Foundations) have begun to do that, and they should be applauded for those efforts. They should also be emulated. By sharing failures and the causes of those failures with the philanthropic community, foundations can help ensure that bad projects, bad initiatives, and (dare I say it?) bad nonprofits aren’t repeatedly funded only to generate the same bad results. On the flip side, they can help magnify the impact of good projects, good initiatives, and good nonprofits.
Customer service: A good company has good customer service. It’s really that simple. Companies need customers. A company with bad customer service loses customers as soon as there is a substitute product available. You might argue that foundations don’t have customers. That perception is a fundamental problem with philanthropy in this country. Foundations are seen – by both the foundation and the nonprofit – as sources of funding, not as service providers. Yes, nonprofits need foundations. But foundations need nonprofits, too. Funding nonprofits (or, more broadly, funding philanthropic and charitable activities) is foundations’ raison d’etre. It is in exchange for that obligation that foundations, charitable trusts, etc. are entitled to be tax exempt organizations. Foundations need nonprofits – and need happy nonprofits – just as much as corporations need happy customers. Grants are a product of philanthropy, and nonprofits are the customers. I don’t know too many nonprofits that would switch to another foundation because of bad customer service, but that doesn’t entitle foundations to deliver bad customer service. Some foundations have started to be more responsive to their customer base, as is evidenced in things like the Center for Effective Philanthropy’s Grantee Perception Reports. More foundations need to get on this bandwagon.
Shareholder vs. stakeholder responsibility: Companies have faced significant pressure in recent years to be accountable not only to their shareholders (by maximizing shareholder value) but also to their stakeholders – including their employees and the communities in which they operate (by acting in socially- and environmentally-responsible ways). Many in the philanthropic sector would no doubt agree that corporations should be socially and environmentally responsible. But what does this have to do with foundations? Like public companies, foundations have “shareholders” – their donors (living or not) and their boards of trustees. But they also have stakeholders – members of the communities in which they operate, and society at large. Foundations have a duty to be responsible actors in society, and that has to go beyond simply making grants. This responsibility is heightened when one considers the tremendous public trust that is invested in the success of foundations by virtue of their tax exempt status. Foundations should contribute to growing the field, to building on past successes and failures, to sharing those successes and failures so that others can learn from them, build upon them, and ensure that the public trust is honored. Foundations collect vast amounts of information about how pressing social issues are being tackled – most foundation grants over $10,000 require the grantee to at least submit a year-end report. Those reports, if used well – and if shared with others – could provide significant insights into what is working and what isn’t in addressing social issues. Sharing that information could not only help funders to learn from other funders (from their successes and their failures), but could also help nonprofits learn from other nonprofits. Who else is addressing a similar issue? What is working for them? What isn’t? What lessons can be learned and applied to the problems a given nonprofit is facing and to the social issues it is trying to address? By not sharing candid, detailed feedback about funded programs and grantmaking initiatives, foundations are violating their stakeholder responsibility. Good public companies are now acknowledging that maximizing stakeholder value should be pursued alongside maximizing shareholder value. Foundations should, too.
So what do you think? Should foundations be more like good public companies? If you don’t buy the comparison, why not? If you do, are there other areas in which you think foundations should be more like good public companies?
Well, I read this with an open-mind, but I think you put too much stake in private foundations, Sean. I disagree on 2 points and agree on one.
First, private foundations are just that, private. They don’t have to disclose, nor should they. So they file 990.. it’s a requirement. Their donors are not the general public, so with all due respect.. they get to do with their funds what they like. It’s a private matter and let’s face it, most don’t set up private foundations to change the world – it’s ideally on the advice of their attorney as a good vehicle to help achieve both financial and charitable goals.
You write:…This responsibility is heightened when one considers the tremendous public trust that is invested in the success of foundations by virtue of their tax exempt status. My response, you put too much stock in this. Private foundations don’t have to have public trust. With the exception of a handful of biggies, I don’t think the public has an interest or really cares. They may read about what the big foundations do and think – Oh that’s such a good thing! Also, trust and disclosure only applies to to public charity (foundations). I am not one to have an ‘interest or trust’ in the McManus family foundation (fictitous for this reply)- it’s their $, their decisions and hope they are good people making good decisions with their philanthropy.
You write: Foundations collect vast amounts of information about how pressing social issues are being tackled. OK- Maybe the big guys do, but let’s face it, most private foundations don’t do this.
What I Do Agree With: Sharing information could not only help funders to learn from other funders (from their successes and their failures), but could also help nonprofits learn from other nonprofits.” I don’t think financial info is the most important, rather the issues are.
I think foundation success is not measured by the dollars given but buy the issues addressed and even solved.
So, in my opinion private foundations don’t have be like public companies much like private companies don’t have to. I don’t think it should be a mandate and again, if their a private not publc fdn – they aren’t violating stakeholder responsibility.
However, I agree with every point you made if you were referring to public charity (foundations).
I do think their should be an invitation for all private and public charity foundations to share practices, knowledge, and even strategies. This I think is very, very important. Roundtables, webinars, forums, etc… at a local, regional and national level. RAG’s are an excellent resource for this – but they ‘might’ could do it better on some level.
Foundations, as with other nonprofits, should use performance measurement more regularly. Some foundations have no strings attached, some are more strict. Perhaps some guidelines for reporting such as the ones private companies have.
Maggie, thanks for your comment. Just to be clear, I did not write this post. This post was written by Dahna Goldstein as an entry to the One Post Challenge.
Maggie, thanks for your thoughtful comment. I agree completely about the opportunities to share practices, knowledge, etc. And I’d like to dig a bit deeper into the distinction you draw between private foundations and public charities. The point that I am trying to make with this post isn’t a function of the source of support (typically a single source with an investment portfolio/endowment in the case of a private foundation, typically multiple sources, passing the public support test, in the case of a public charity), but rather a function of the reason that tax exempt status is granted to these types of entities. In other words, it is the tax exemption, and the benefits thereof, from which the public trust and corresponding public responsibility is derived.
But, private foundations are not 501 (c) (3) under the IRS Code. So, their exemption is very different and in some ways faults your point.
Dear Dahna and Sean,
Would you mind if I included this entry in November’s Giving Carnival? The topic is what business practices nonprofits should adopt to maximize their resources. Your entry fits in well.
The New Jew: Blogging Jewish Philanthropy
I’m not a tax expert, but my understanding is that private foundations are, in fact, classified under section 501(c)(3). From IRS publication 4220 (“Applying for 501(c)(3) Tax Exempt Status”): “Every organization that qualifies for tax-exempt status under section 501(c)(3) of the IRC is further classified as either a public charity or a private foundation. Under section 508 of the IRC, every organization is automatically classified as a private foundation unless it meets one of the exceptions listed in section 509(a).
For some organizations, the primary distinction between a classification as a public charity or a private foundation is the organization’s source of financial support. Generally, a public charity has a broad base of support while a private foundation has very limited sources of support.”
I agree completely with your point that foundations are frequently set up to achieve both financial and charitable goals for their founders/investors/donors. Part of the point that I’m trying to make is that the tax exempt status that is granted to foundations obligates them to go further than the goals of their donors – that tax exemption brings with it a responsibility to “be organized and operated exclusively for exempt purposes” (from the IRS website), which implies a public responsibility.
What do you think?
Sure! The more conversation, the merrier…
Well, without being too legal-eeze about it, public responsibility is applicable when your funding source is more than 1/3 from the general public.
The tax exempt status for private foundations, whose source of funds is essentially themselves, the tax status is an incentive. They have no accountability to others. Their responsibility is to themselves, the IRS and on some (stewardship)level the right to do good how they see fit. So, I am not on the same page.
Maya, you’re welcome to republish this post.
Regarding public foundations, I agree completely with Dahna’s point about more complete disclosure on success or failures of projects. The Hewlett Foundation report on its collaborative efforts in the Bay Area is hugely interesting and instructive to other funders considering similar strategies. I’m not sure what the forum for this reporting should be — I don’t think it necessarily fits with the 990, but it would be fascinating to see more foundations industry wide complete public evaluations of their programs, on an annual basis.
As for the more customer-service/partnership oriented approach — I think we’re still a long way from that, but it is a great goal to continue pushing. I think some of the newer or more venture philanthropy models — such as Echoing Green and Draper Richards — to a terrific job of parntering with their grantees. I think there’s a lot ot learn from their models.
As someone who spent 10 years in the corporate sector before transitioning to the non-profit sector, I couldn’t agree more with Dahna’s views. Information sharing, and increased collaboration could help make every foundation dollar granted have greater impact. In my experience, the most successful foundation-grantee relationships have elements of Dahna’s suggestions and insights.
Dear Dahna and Sean,
Thanks for your participation in November’s Carnival of Giving.
If you would like to learn more about what other participants have said, their submissions can be found here.
The New Jew: Blogging Jewish Philanthropy
I had 3 rather lengthy thoughts in response to Dahna’s piece, so I posted my reaction at the EPIP Blog, available at http://epip.blogspot.com/2007/12/foundations-contradictions-of-customer.html . I hope this adds to the discussion. Rusty