People in the world of philanthropy are loathe to admit it, but there are times when it may make sense to put your foundation on the path to extinction. The vast majority of donors do not limit the life of their philanthropic foundations, and trustees are seldom inclined to spend down their foundation’s assets. Spend-down occurs occasionally in small family foundations—often because family members either can’t or won’t serve on boards—but almost never occurs in larger foundations.
A foundation that did elect to spend down its assets is the Whitaker Foundation, which was established in 1975 on the death of Uncas Whitaker, the founder of AMP Inc., the world’s largest producer of electronic connecting devices.
The document establishing the Whitaker Foundation did not specify any program areas; this decision was left to the committee (the governing board) named in the creating instrument. Whitaker did not mandate a limited life for his foundation, but he did state in the trust document that “settlor desires, but does not require, that the entire principal and income of [the] trust be completely distributed within 40 years following his death.”
As its primary field of interest, the committee selected biomedical engineering, a relatively new discipline in 1975. Only a few major research universities had developed programs in the field and many resisted accepting biomedical engineering as an academic discipline. In the early 1990s, the Whitaker Foundation decided to close the gap with multi-million dollar grants to universities that were prepared to create new biomedical engineering departments or substantially enhance existing ones.
This presented the foundation with a problem. Whitaker spending would have to double or triple to underwrite the cost of hiring new faculty, renovating laboratory space, developing courses, and supporting graduate fellowships. To finance the new programs, the committee decided in 1992 to initiate a spend-down strategy that would distribute all of the foundation’s assets by 2006, 36 years after the death of Uncas Whitaker.
The results speak for themselves. Some 80 universities, among them some of the most prominent universities in the country, now have biomedical engineering programs, and it is generally recognized in the biomedical engineering community that the foundation was the catalyst in the rapid expansion of such programs over the past decade. This in turn was possible only because the foundation’s committee was prepared to utilize both income and principal to advance its mission.
Positioned for Impact
Julius Rosenwald would have approved. In 1913, Rosenwald, the president of Sears, Roebuck Co., warned, “Permanent endowment tends to lessen the amount available for immediate needs; and our immediate needs are too plain and too urgent to allow us to do the work of future generations.” In 1927, he added 20,000 shares of Sears, Roebuck Co. stock to the Julius Rosenwald Fund, but required that the fund terminate 25 years after his death.
Rosenwald laid out his “Principles of Public Giving” in a 1929 Atlantic Monthly article. In the article, he pointed to the likelihood “that as trustees and officers of perpetuities grow old, they become more concerned to conserve the funds in their care than to wringing from those funds the greatest possible usefulness.” Other advocates of limited life note the inevitable abandonment of donor intent, the growth of foundation bureaucracies, and the frequent change in program directions as factors that can lessen a foundation’s long-term impact. Still, many have paid lip service to Rosenwald’s ideas, but few have followed his example.
Why is there such reluctance to increase substantially the level of foundation spending? Some argue that it is necessary to preserve and increase the foundation endowment so that it can serve future generations. But no one can predict future needs or know what resources will be available to address them. Why not spend down the assets of the foundation if it will enable the foundation to achieve its goals and objectives? After all, a foundation’s legacy should not be how much money it accumulates, but the extent to which humankind has benefited from its programs.
In order for a foundation to increase spending significantly or elect to spend down its assets, it must have a clear and focused strategy. Giving money away effectively is never easy; at higher spending levels the problem is only compounded. In order to do so, foundations need to develop a mission and position themselves to accomplish it.
In a 1990 article in the Harvard Business Review, authors Michael E. Porter and Mark R. Kramer stress the importance of limiting “the number of social challenges that the foundation addresses. The foundation must determine where it will make its impact and how.” Porter and Kramer discuss “positioning,” which includes focus and strategy. “Ultimately,” they state, “positioning revolves around asking the question, How can our foundation create the greatest value, given everything that we know about our foundation’s culture, passions, expertise, and resources, and about what other funders have done or are doing, and about the problems we wish to address?”
In the case of the Whitaker Foundation, Uncas Whitaker’s expressed desire to have the principal and income of his foundation distributed within 40 years of his death, coupled with the clear goals provided by the committee, made it easier to adopt a spend-down strategy. The boards of both large and small foundations would do well to consider whether their foundations might have a much greater impact on their fields of interest if they substantially increased spending levels, even if this resulted in a spend-down of the assets.
Otherwise, foundations will continue to aggregate wealth. The danger of this growth is clear: With foundation portfolios bulging, Congress may move to increase minimum distribution requirements on all private foundations, regardless of their mission. Perhaps there are worse fates than spending yourself out of existence.
Miles Gibbons Jr. is past president and CEO of the Whitaker Foundation. He is currently executive director of the Helen F. Whitaker Fund and the Franklin H. and Ruth L. Wells Foundation.