Economic stagnation and the decline in the stock market have hurt philanthropy in two ways. First, they have substantially diminished the assets of many of our country’s leading foundations. Second, and more important, the decline in personal net worth is reducing the size and number of future philanthropic ventures.
For the individual foundation, the down market forces trustees and staff to make agonizing decisions. In the rapidly rising market that characterized most of the 1980s and ’90s, many foundations had the resources both to sustain their traditional grantees and to embark on significant new initiatives. Now they must choose.
Even so, by historic standards, the assets of foundations and other philanthropic instruments are enormous. Many Associates of The Philanthropy Roundtable have told us they are guided by the following principles, as they work to achieve results in the current financial environment:
The fundamental challenge for the philanthropic foundation is not substantially different in a falling or a rising market. In both cases, the potential range of philanthropic expenditures vastly exceeds the foundation’s resources. In both cases, it is the responsibility of the trustees to determine rigorously the foundation’s priorities, to choose how and where the foundation will seek to make the greatest difference given the resources available. In both cases, as they set priorities, trustees should be guided by the values and instructions of the donor, and, if the instructions aren’t explicit, should determine how the foundation can most effectively achieve the intent of the donor in the changed circumstances of a new generation.
The 5 percent payout mandated by federal tax law is a legal minimum, not a maximum. If a foundation is achieving dramatic measurable results with its current philanthropic strategy, an important way to sustain momentum and influence during a period of falling markets is to raise the payout. If it is consistent with donor intent, foundations that want to maximize their current and medium-term impact may want to consider a policy of spending down assets over 15 to 25 years.
If a foundation is not currently achieving dramatic results, then the down market is an ideal time to reexamine priorities, strategy, and/or system of measurement. The current downturn is an especially good time for foundations that seek to expand opportunity for low-income families to reevaluate their philanthropic assumptions. Mainstream philanthropy must have been doing something very, very wrong for the last generation if 60 percent of low-income fourth graders cannot read, if there are more black men in jail or prison than in college, and if three-quarters of children in many neighborhoods are growing up without fathers. Getting the priorities, strategy, and measurement system right when times are tough means the foundation will be much more effective when the market recovers.
Down markets are inherently painful for nonprofits and the people they serve, but they also offer a good opportunity to redirect resources to the most effective grantees. In every field of nonprofit activity, some grantees achieve better results than others, or have the potential to achieve better results than others in the future. This is a great time for funders to examine which nonprofits need extra help now because their potential for the future is so enormous, and which groups should probably disappear or be merged into more effective organizations.
The current down market should remind the foundation world that it has a strong stake in vigorous, sustained economic growth. To judge from the conversation among all too many philanthropic and nonprofit leaders, one might think that the most important public policy objective for the philanthropic sector should be to stop government budget cutbacks in social services. That is a mistaken priority. The best way both to strengthen foundation finances and to shore up government revenue, and thus ensure the future of government social programs, is to get the market economy moving again.
Reasonable people can disagree about whether, say, tax cuts are the best policy to stimulate the market economy, and, if so, which tax cuts would be most effective. But there should be no disagreement among donors about the central importance of restoring vigorous private-sector growth, the ultimate source of public and private wealth.
Adam Meyerson is president of The Philanthropy Roundtable.