The practice of “due diligence” —grantmakers following up with grantees to ensure that money is being used appropriately—is still not as widespread as it should be. And even philanthropists who make it a priority are eager to learn from their peers about some of the ways in which it can be done well, as a session at The Philanthropy Roundtable’s recent annual meeting revealed.
Barbara Johnson, president of the Brewster West Foundation in San Francisco, remembers a grant her group made to a nature conservancy. The money was to be used for binoculars and for nameplates that would identify the birds that could be viewed. Walking around the site with the executive director of the conservancy after the work was done, Johnson was surprised to hear that her foundation was the only one that had bothered to come back and see what its grant money had accomplished.
Due diligence takes many forms. And as Johnson and Henry Beukema, executive director of the McCune Foundation in Pittsburgh, demonstrated in their presentations on the topic this November, flexibility and persistence are the keys to successful oversight. When foundations are diligent, good things happen. And on occasion, the unintended consequences of following your grants lead to even greater results than could have been imagined.
Even though due diligence concerns what happens after the grant has been made, the process of making the grant sets the tone for how effective subsequent contact with the grantee will be. This critical first step makes due diligence possible. At Brewster West, good due diligence involves knowing what has changed—being able to compare how things were before the grant is made, with how things turn out afterwards.
Brewster West has no staff. Each grant originates with one of the foundation’s six directors. Each director, Johnson explains, “goes out and looks around the community for things that might fit our mission statement.” These ideas are then brought back for the group as a whole to consider.
Once the foundation board decides a project is worth pursuing, the prospective grantee is contacted by phone. This is followed with a site visit made by at least two directors from the foundation—the director who identified the project as one the foundation should consider, and a second director who is neutral on the subject. Financial information is gathered during the site visit, and a full report is then made to the board of directors. At this point, a decision on funding is made. By using at least two directors, Brewster West helps ensure objectivity in the process, which is essential if its compare-and-contrast model for due diligence is to work.
The McCune Foundation is equally rigorous in screening applicants. It, too, recognizes that the process a grantee goes through to receive funding will set the tone for due diligence once the grant has been made. The emphasis McCune puts on the screening process is readily apparent in the foundation’s definition of due diligence: the process that establishes the rules of engagement for the relationship, both explicit and implied, between grantor and grantee. It defines mutual expectations, benchmarks, outcomes, and the criteria that will be used to assess the work once it’s completed.
McCune depends heavily upon its website to screen applicants. When an initial request comes through the website, the applicant is required to enter a zip code. If the zip code doesn’t fall within the foundation’s area of service, the application is kicked out and the applicant is given a number to call.
Applicants are also expected to make use of web materials when preparing their applications. On McCune’s site applicants can find follow-up reports on previous grants, so they know what will be expected of them throughout the process. Beukema says his group gets some criticism for making applicants jump through hoops, but jumping through hoops is something everyone must do in life. And it’s not without purpose. The foundation writes 190 grants a year and receives about 900 requests. With just three people dealing with the grants, “we need some sort of vetting process,” Beukema says.
If the grantmaker has been upfront with the grantee about expectations, the road to due diligence is much smoother. Brewster West takes a two-tier approach to making sure their money goes for the purpose intended. Usually three to six months after the grant has been made, Johnson or one of her associates will call the grantee to get some sense of progress made to date. Approximately twelve months from the date of the grant, a second site visit is made. Again, at least two directors make the visit, and each has a checklist of questions so nothing is overlooked.
At this point, Johnson explains, you can really judge progress—is there a marked difference in the place you’ve funded? One place Johnson’s foundation funded was an afterschool facility for immigrant children. Before receiving the money, the building was run down, the carpet literally smelled of mold, and the lighting was poor. Following the second visit, the money had unmistakably been well spent. Fresh paint, new carpet, and fluorescent lights had transformed the building into a place where the children could feel comfortable and work in well-lit conditions on their assignments.
Occasionally, it isn’t necessary to wait for the second site visit. Another grant made by Brewster West went to St. Charles School in San Francisco, which is located in a Victorian-era building. The foundation got involved with a local contractor group which devoted many hours to restoring the facility. The foundation paid for an iron-work fence, while the contractor arranged for friends and volunteers to repair the structure. Throughout the project, the contractor took before and after photos of the school work, scanned the results, and sent them with a letter of explanation and appreciation. It allowed the best and most-effective due diligence.
For the McCune Foundation, keeping score begins with the grant contract itself. In addition to mailing contracts to award winners, the foundation may invite award winners in to sit down and go over the specifics. This accomplishes two things: It creates a rapport with the grantee, and it ensures that all parties understand the conditions associated with the money.
When things go wrong
Despite everyone’s best efforts, occasionally projects do not develop the way they should. Both the Brewster West and McCune foundations believe there is a window of opportunity in the process. Because both groups work diligently to develop a relationship with their grantees, and both see due diligence as a process that starts even before grants are awarded, both are in a position to help reverse problems when they arise.
For example, the Brewster West Foundation had made a grant to a historic home for the express purpose of preserving a recent gift of marine artifacts. Johnson made a phone call several months after the grant to see how things were progressing. The call was not answered. Neither was the second. On the third call, she left a message with the following statement: “What have you done with our money?” Shortly afterwards she received a return call. To date, nothing had been done because the property had been unable to hire a qualified person to do the work.
Johnson explained her board meeting was fast approaching and strongly encouraged the group to step up its candidate search. Within two months, a person had been hired and the collection preserved. Johnson learned about the problem because she stayed on top of the grant. And she learned that sometimes generating a little heat is all it takes to get the necessary response.
What happens if things don’t go according to plan? Then, say Johnson and Beukema, adjustments are needed, though they urge donors not to try to micromanage grants. When things go wrong, Beukema stresses, it’s critical to re-engage the grantee. “We don’t want to ride in and ‘fix’ the problem,” he says, because people don’t respond to that. Instead, the McCune Foundation tries to agree to some terms for working out the issues. The most important, warns Beukema, is not to hide a problem from the foundation board, whose members may know the very people who can help resolve it.
An excellent example of re-engagement involves a grant by the McCune Foundation to an organization that was rebuilding its campus. McCune made a grant to help with the predevelopment portion of the campaign in 1998. Six months later, no progress report had been received and phone calls were not returned.
Six months further on, the second progress report was also late. It showed the plan was slowly getting off the ground, with lots of money spent on architects but no board agreement on the final design of the facilities.
A year later, the public drive had started, but the report filed to the foundation, which again came late, showed that despite an initial rush in fundraising, no new funds had been raised in 12 months. A second grant had been approved, but as building had not started, the grant money was held.
At the end of 2001, it was clear the board receiving the grant was in disarray. It requested a one-year extension. The foundation granted it six months. Shortly thereafter, a new chairman from one of the grantee’s board committees came to the foundation and reported nothing new. The foundation informed the chairman of the board that the second grant was being rescinded and provided a list of things they could do to have it reinstated.
This stern measure led to an unintended consequence. The grantee’s board chairman thanked the foundation for pulling the funds. He informed McCune that his board had been in a logjam, and he hoped that this loss of a grant would break it. Since then, the grantee has made some progress and the grant’s reinstatement is being considered by McCune.
The long haul
Due diligence is a grant-long process. By laying the groundwork before distributing any funds, and by staying in touch with grantees throughout the life of the grant, the chances for failure are reduced. And when problems do crop up, the chances improve that some resolution can be found.
Flexibility is another important trait. Some problems will require little more than a phone call, others a much more dedicated commitment. Whatever the scenario, practicing due diligence greatly enhances the effectiveness of grants for the recipients, and even improves the overall strength of donors as well.
Visit almost any gathering of philanthropists today, and one thing is almost sure to grab you—the growing contingent of young people. Some are the heirs to their parents’ and grandparents’ wealth, much of it generated during the boom years of the 1980s and ‘90s. Others are the generators of the wealth themselves, dot-comers now interested in investing their profits in people and ideas, not just their business. Still others are the up and coming officers who will one day sit on the boards that guide foundations.
Some of these people find themselves leading foundations having received no training or preparation. Others undergo rigorous “boot camps” to prepare them to lead when the donor is no longer around to oversee grantmaking. The challenges each faces are varied, but common concerns arise. In addition to the mundane aspects of grantmaking (990 forms, sunset vs. perpetuity, due diligence, investments), today’s young philanthropy leaders are concerned for their souls. That is, remaining true to one’s self and one’s principles. These young leaders are also concerned about donor intent, and what it means to carry on the tradition of the founder.
Tracy Gleason is one of the new generation of philanthropy leaders. Born into the family that operates Gleason gears, a world leader in gear-production technology, today she finds herself one of the family’s foundation leaders, whose 2001 assets totaled $136 million. The challenges of running the Rochester, New York, foundation are significant, and they are responsibilities she takes seriously. But as she told a session at The Philanthropy Roundtable’s recent annual meeting, among her concerns are the personal challenges that face a person who, in her words, has the “power to make dreams come true.” Being able to make people’s wishes come true is an intoxicating responsibility, and she urges her fellow young grantmakers not to be overcome by its lure.
It’s a heady experience, Gleason admits, but the grantmaker’s challenge is to keep her role in perspective. Though grantees frequently try to make her feel otherwise, Gleason has learned that the grantmaker is not the most important person in the process. Instead, grantmakers are a part of the puzzle. As the people with the funds, she says, “we’re lucky, but we’re not supreme.”
Grantees, Gleason explains, “want more than just your money.” Writing the check isn’t the only point: “Organizations want you to believe in what they’re doing.” An excellent example comes from Bangalore, India. The Gleason Foundation funds in the places where the Gleason company has plants, and Bangalore is one of these. The community needed a school for the mentally retarded. They had no building; so the Gleason Foundation provided the funds to build one. The school was built and a grand opening held, but the foundation’s directors were unable to attend. The school’s supporters, to Ms. Gleason’s surprise, were upset. “They felt,” she says, that “we were part of their mission, and that we should be there celebrating right along with them their accomplishment.” Several months later, when the directors could attend, the school re-did the entire grand opening. What mattered, Gleason recalls, is that the grantees wanted the foundation to understand fully what they were doing. “They didn’t just want the check,” Gleason recalls, “they wanted our hearts and our compassion, too.”
Perhaps the most difficult personal struggle, however, is learning to deal diplomatically with friends within your inner circle who make requests for money. “I had to learn that you can’t blame people for asking,” Gleason says, “but you can be prepared when they do.”
The trick is to learn how to be polite, but not in such a way that people confuse polite interest with a show of support for the project. “You should arm yourself with an assortment of diplomatic rejection responses, and these responses should be as legitimate as possible.” When an inner circle request does pique your interest, have the asker send more information. But be very cautious, she warns, because “it’s awkward to feel that you have misled someone.”
A number of today’s young leaders are people who have not inherited the responsibility for leading their family’s foundation. Rather, they are moving through the ranks and being groomed for leadership positions down the line. Sheila Johnston Mulcahy is one such person. A program director at the William E. Simon Foundation, she is one of a growing number of young leaders who will eventually become foundation leaders themselves.
Mulcahy had the good fortune to go through what she calls William Simon’s “philanthropy boot camp.” For the three to four years before his death, Simon spent his time actively training the next generation of leaders at his foundation.
While Mulcahy took away many lessons from her training, perhaps the most important was that donors must make their philanthropic intentions and philosophies clear to the next generation. Simon knew that doing this was not an easy matter. Leave too many instructions, and they’re quickly outdated by a changing world. Leave too few, and the potential for conflict between those people entrusted with the wealth increases.
Simon began with a clear principle—“Helping people to help themselves.” But as Mulcahy notes, there’s a lot of room for interpretation in that idea. To clear the ambiguity, Simon spent a lot of time at early board meetings working closely with the staff to present proposals that demonstrated his interpretation of his philosophy. This way, the staff not only knows his philosophy, but they also have the benefit of seeing the philosophy applied. They now have a clear map to follow, yet room enough to use their own judgment when making decisions.