Fixing the Power Imbalance in Philanthropy

It is a recurring complaint in philanthropy that the huge power imbalance between funders and grantees skews the behavior of nonprofits in negative ways. This was one of the points made by reader Aaron Stiner in his critique of David Hunter’s essay on social investing:

I still have some concerns that the model you are presenting runs the risk of continuing the power imbalance funders hold over nonprofit organizations. This power imbalance is a mutual issue for both nonprofit organizations and funders – and I object to the implication in David’s comments that funders should continue to perpetuate that imbalance. I think nonprofit organizations need to do a better job of representing the voice and needs of their recipients to funders and I think funders need to do a better job of listening.

I actually believe that social investing can be a strong force for rectifying the negative effects of the power imbalance. Reader Emily Gerth made this point so well that I offer her explanation rather than write my own:

“The social investment movement is not designed to make nonprofits change, but to support high performing organizations. ”

I think that’s the key statement here. Social investors hope to change the sector by supporting high performing organizations (and, by default, not supporting other nonprofits). Rather than remaking nonprofits or telling them what to do, they want to focus on what’s working well now.

So I strongly disagree with Aaron that what David suggests perpetuates the power imbalance. I think it has the potential to rectify the imbalance a great deal. Of course, capital will flow to some organizations and not to others. That gives donors no small amount of power, but I don’t think that’s what causes the imbalance of power that can be so detrimental to nonprofits. The power imbalance is caused when foundations and other donors decide that they know what works well and they impose agreements/requirements/conditions on nonprofits. Social investors simply withdraw funding when the organization isn’t performing, which is a strong signal for the nonprofit to change, but doesn’t come with the assumption that the investor “knows” how to change the organization.

Maybe I can state it more simply: The investor asks, “Can show you me that this works? If yes, I will give you funds to do it.” The more traditional donor/grantor says, “I know what works. Is that what you do? Because I will only give you funds to do that.” As a nonprofit, it seems obvious to me that first question invests you with great deal more control and authority.

Having received both online and offline feedback on this string of posts, I do want to offer one clarification. Investors, both for-profit and social investors, are not actually interested in whether an organizations has been or is a high performer, but rather if they will be a high performer in the future. Past success is interesting only to the extent it helps predict future performance.

It is through the lens of future high performance that we can understand why a social investors may invest in an early stage organization that has limited evidence of outcomes and limited performance based systems. For-profit investors who invest in early stage companies are almost always investing in companies that are currently losing money and have never earned a dime. But they only invest in companies who they think will prove to be high performers.

One last point of clarification: I do not think that social investing is the only good approach to philanthropy and in fact at Tactical Philanthropy Advisors we frequently work with clients in ways that do not reflect the tenants of social investing. For instance, providing funds to support the efforts of individuals working on local community issues, supporting efforts to raise awareness of certain issues or providing support to strengthen the ecosystem of a community can all be very effective approaches that may not fall within the tight definition of social investing.

I offer my positive endorsement of the social investing framework laid out by David Hunter not in an attempt to condemn all other approaches, but because I believe that 1) it is a hugely useful approach for the majority of grantmaking activity, especially for major donors and 2) because it offers a results focused framework and way of thinking about philanthropy that can help guide other philanthropic activity.


  1. Emily said it very well; social investing has the potential to decrease the power imbalance. That said, it’s probably not ever possible to get rid of the power imbalance entirely – as long as organizations need to raise funds, they will try to please potential donors. That’s exactly why social investing is necessary to improve the effectiveness of the sector. If potential investors want it, nonprofits will try to do it. Let’s just make sure that organizations receive the necessary help to be successful.

  2. Jeff Mason says:

    Sean, great point about social investor interest in future performance as opposed to past success. This is precisely why identifying high-performing characteristics to inform a potential social investment is so important. If an org doesn’t have clear goals, established indicators for measuring progress, collect data to understand what works or doesn’t, and then make appropriate adjustments to continuously improve then the likelihood of future success is slim at best.

  3. Jeff Mowatt says:

    Until today, it was difficult to understand why this conversation has revolved around investors and nonprofits. Then I examined the details of our NHS Social Enterprise Investment Fund to discover that it’s exclusively for the benefit of nonprofit orgs.

    On the other hand we have social enterprise advocates, in politicians such as Tony Blair, Gordon Brown and David Cameron who’ve all become recent advocates of ‘Values-based”, “Moral” and “Kinder” capitalism respectively. It seems that they all equate this with the nonprofit form of social enterprise

    None of them seem to have grasped the point about reforming capitalism and business with a primary social purpose which some call “hybrid” nonprofits.

    I’m talking a different language, I now realise.

  4. I respect the conversation, but in my opinion, the focus on power imbalance between funders and nonprofits rehashes a tired paradigm of the “haves” vs. the “have-nots” and points to class divisions. This is a dangerous area to focus. In reality, foundation dollars are a very small percentage of the nonprofit budget. In the health and social services area for example, government dollars are the primary source of funding. Foundation dollars are often used to leverage these larger dollars. When I see the gross inefficiencies in government systems, it seems the focus on power differentials are misplaced and preventing a much more important conversation.

  5. John, you make a very good point about foundation dollars making up a very small amount of total funding. But they still hold a major carrot over the heads of nonprofits. I don’t tend to focus on power issues, but given the recent critique of social investing as potentially increasing the imbalance, I thought it was important to point out that I thought the opposite is true.

  6. Laura Deaton says:

    Does one really hold a carrot over one’s head? That’s a mighty big carrot, and gosh, might actually seem more like a stick when dollar bills are wrapped around it and withdrawing funds is the consequence.

  7. In my experience, foundation’s clearly do effect the ability of an organization to carry out its mission and/or program area. No question there is a power differential. My point is that that power differential is too often cast as negative reinforcing a sense of “them” against “us.” Philanthropy must keep that tension in perspective when collaborating with nonprofits. (It is my experience that most do!) The point I am trying to make is that for many nonprofits, the inefficient management of Federal/State dollars to nonprofits is one that foundations together with nonprofits should focus discussion. Focusing on power differentials distracts us from having that critical conversation. Check out Jeff Sachs article in October 2009 Scientific American on the subject