You are nearing seventy. Your body and your doctor have finally convinced you you’re mortal. Coming from modest circumstances, you have created a business empire and vast wealth. Your legacy — and gratitude to the nation and the economic system that made your success possible — is much on your mind. Several close friends with similar histories have created foundations, which has started you thinking. I’m a trifle older than you, and have had some experience organizing and running a foundation. Perhaps what I learned may help you up the learning curve while you’re still in the thinking stage.
The Perpetuity Temptation
Nearly all the large foundations — Ford, Rockefeller, Carnegie — were created by men and women who could not resist the shade of immortality that is conveyed by creating an institution with perpetual life. Perhaps you feel the tug of the same temptation. A word of caution, however: in the majority of foundations and charitable trusts granted an unlimited existence by state legislatures, their grants now aid a fulsome roster of causes the founder (that would be you) would never have supported.
Here is how it typically happens. In a surprisingly short period after its establishment, your foundation is prone to fall under the control of its staff and/or its staff-selected trustees. For example, the last of the children of Joseph N. Pew, who established the Pew Charitable Trusts, died in 1979. By the 1980s, the Pew giving program had been completely transformed. From a program oriented heavily toward giving for religion and physical plant, the foundation’s programs have been increasingly oriented toward social activism. Staff control is made almost inevitable if the founder leaves only vague or no instructions about the programs he wishes the foundation to fund. After Henry Ford’s death, his executors and lawyers searched for months through everything he left in print and could find no mention of the Ford Foundation’s program. The result can be seen today in the Ford Foundation’s giving, which bears little resemblance to the philanthropy of Ford, who, during life, was a tithing Methodist famous in Detroit for his innovative giving in the black community.
In the early years of this century, granting foundations perpetual existence — that is, limitless tax-exempt status — and the related topic of the hole left in the tax base by this huge and growing pile of untaxed capital, were widely debated. That perpetuity remains an option in U.S. law is due to the inability of legislators and lawyers in the early 20th century to realize that there are dramatic differences between business boards and charity boards. This is something worth keeping in mind as you contemplate your own foundation: business people on charity boards frequently approve decisions that ignore the very sense and insights they use in their own businesses.
Choosing a Field
If you don’t have well thought through ideas about the focus of your foundation, don’t create it. And if you’re still in the searching stage, try this: wait for a windy, sunny day in late April and enter New York’s Central Park at 90th Street and Fifth Avenue. Walk either north or south along the horse track, noting the thousands of walkers and joggers and admiring the magnificent cherry trees in full bloom. One answer to your dilemma will soon become apparent: parks are a durable and rewarding charitable investment. Andrew Carnegie regarded public parks as one of “the ladders upon which the aspiring can rise,” a charitable gift “by which men are helped in body and mind.”
Carnegie’s libraries were a similarly simple, enduring charitable endeavor. Free libraries were, for Carnegie, the best and highest form of philanthropy, but they came with a cost. Carnegie believed that local communities must be required to maintain and develop the thousands of libraries he built across the country. To ask less, he believed, was to risk the institution losing touch with the people and falling prey to a clique of elites. Foundation people call such a requirement of matching public effort “leverage.” A word of caution, however. Exercising “leverage” in giving can impose costs that communities become unwilling or unable to bear.
In public policy, education is arguably the number one challenge facing the United States, and a deserving recipient of your foundation’s focus. The nation is clearly dissatisfied with many, but not all, public school systems. Some bright minds in the best think tanks have generated innovative answers to the crisis in public education. An excellent way to begin your search for the best and the brightest would be to visit the Center for Educational Innovation at the Manhattan Institute in New York. Another great source of ideas is the Hudson Institute’s Modern Red Schoolhouse Project in Indianapolis. Both work with public schools.
Another area worth examining is U.S. foreign policy. During the Cold War, when most funding options in this area involved different ways in which to advance the non-communist position vis-a-vis the former Soviet Union & Co., this was a no-brainer. Today, foreign policy issues are more complex, and it is my impression that we in the philanthropic community are neither as concerned nor as clever as we should be in our funding of solutions. An ambitious new philanthropist could begin to correct this by having a conversation with Harvard Professor Samuel Huntington. He has taken as his mission the training of the American strategic thinkers of tomorrow in the mold of Navy Rear Admiral Alfred Thayer Mahan and Germany’s Carl von Clausewitz, both long range thinkers of the realist foreign policy school. This is a good thing, as we seem beset by officials who can’t strategize beyond the next press conference and seem unaware of how dangerous the world has become.
Although finding a focus is important, avoid the impulse to limit your giving to too narrow a policy niche. In some foundations, a great deal of attention, reams of paper, and countless hours of staff time are devoted to ever more narrowly defining the foundation’s interests. This is a huge waste of money and staff time because it’s impossible to foresee where the choice of an area of interest will eventually take you. An example: at one point in my career, I was involved in making grants in U.S. foreign policy. We began with grants to educate tomorrow’s strategists, as I have recommended above. But soon we found ourselves quite far afield, financing a samizdat desk-top publishing operation in Eastern Europe and the construction of a radio station on the east coast of Sweden that allowed the Polish labor union Solidarity to by-pass communist government censors. In a program aimed at promoting the development of a legal, money economy in Latin America, where the majority of the population is often locked out of the “above ground” economy we funded an armored vehicle to provide mobility and safety to an individual whose life was threatened by both communist rebels and commercial elites. I still have a photo of the vehicle after a mortar shell changed its exterior shape. The point is, all were worthwhile programs, funding opportunities we would have missed had we confined ourselves only to the creation of the Kissingers and von Clausewitzs of tomorrow.
Funding Research In Public Policy
This in many ways is the most difficult — and potentially rewarding — area in which to make a contribution. Many large foundations imagine themselves to be subsidizing research when in fact their programs have degenerated into mere advocacy.
Apart from the seemingly irresistible, ideologically driven impulse felt by many in the foundation world to abandon the pretense of objectivity and simply lobby (which is, after all, more fun), many foundation-funded research programs descend into advocacy simply due to impatience. Research that leads to worthwhile solutions to real public policy problems takes time, of course, and for many foundations the impetus to not only change the world but change it now precludes such an investment. In my second incarnation in nonprofitdom at the Smith Richardson Foundation in the 1980s, we funded research on community policing, school vouchers and the then equivalent of charter schools. But it is only now, in the late-1990s, that these concepts are being seriously considered. The point is that public policy research can take years before yielding discernable results. Some foundations simply can’t stand the suspense, and focus their efforts on advocacy, which tends to produce more immediate gratification — and wrong outcomes.
But should you decide to wade into the murky waters of public policy research funding anyway, you will find two general options awaiting you. The first is to fund projects generated by think tanks. Until you have confidence in the person you hire as “Director of Research” (the common title for the person below the level of president and your primary resource in questions of programming), you are better served making use of the established public policy groups in your area and the nation’s major cities. Devolution has created a new version of the think tank, one that focuses on the problems of local governments. As local and county jurisdictions begin to spend more and take on more responsibilities from the states and the federal government, corresponding attention must be paid to the search for public policy solutions on the local level. Many small towns, for instance, have huge debt investments in recycling plants for garbage and are discovering that the markets predicted by eco-enthusiasts simply aren’t there. Solve that problem and you’ll be a hero from New York to California.
There are, in addition, many brilliant policy scholars in universities and some affiliated with neither thank tank nor university. This is a realm to explore after you’ve captured some experience in your area of focus and are better able to judge programming options.
An Advisory Device
Another way to separate the wheat from the chaff when engaged in public policy research funding is to form a board of recognized experts in the public policy area in which you operate. Call it a Board of Governors. If you are conservative, you may want to have conservative governors, but do include one or two bright liberal thinkers and vise versa if you are a liberal.
The beauty of this devise is that when you meet with fellow trustees and staff to consider grant proposals, your board of experts will have already read the proposals and questioned staff about them. And between meetings your staff will have access to these men and women in the generation of grants. You will discover in time that grant quality will improve and, eventually, more grants will be generated by your staff, in-house. You will find as well that, for the most part, experts are delighted to serve in this capacity and the additional cost will be less than you suppose.
Reaching Out
Suppose, however, you have a conception of a program for your foundation, one well attended in your thoughts. Don’t by shy about seeking out knowledgeable people to supplement your thinking. You will be astonished how willing people will be to give free advice.
An example: during my first tour as a foundation executive at the Smith Richardson Foundation in the 1950s, when I was still in my twenties and new to the game, I had convinced myself of the importance to American foreign policy of the Foreign Policy Research Institute at the University of Pennsylvania. At that point, we were its only source of funding. The problem was, by 1957, I was preparing to return to the business world and needed to find a qualified judge of the Institute’s output, someone capable of convincing my board chairman (my father, as it happens, H.S. Richardson) of the necessity of continuing its funding. With a twenty-something’s enthusiasm and naivete, I chose then-Chairman of the Joint Chiefs of Staff Rear Admiral Arthur Radford.
I secured an appointment with Radford, presented myself at the Pentagon in my best suit and was ushered into a huge waiting room. Presently the Admiral’s aide, an army colonel, came in to inform me that the Admiral tended to be short spoken and my meeting with him likely would last no longer than 3-5 minutes. Close to catatonic, and expecting very little, I went in to meet with Radford. The outcome? We talked for 45 minutes, established a cordial relationship, and he agreed to evaluate the Institute’s output. He subsequently flew to New York and gave my trustees a favorable opinion. What’s more, after his retirement, Radford joined the Institute’s board. In all your experience in the business world, I’ll bet you never got advice of that caliber for the cost of a round-trip ticket to Washington. But as a newly minted philanthrapoid, you’ll have experiences like this.
Choosing Trustees
You doubtless have bright business associates. Resist the urge to decorate your beginning board with such folk unless they share your objectives and match your enthusiasm for whatever philanthropic endeavor you choose. There are many business executives whose conduct on charity boards betrays an apparent belief that activities outside business do not merit the full use of their brains. These men and women frequently join a foundation board for the sole purpose of having it fund their favorite charities, thereby enhancing their reputation as fund raisers.
Assembling a Staff
The Council on Foundations, the trade organization of the largest foundations, has promoted the concept that making grants is a profession whose practice results in the making of more effective grants. There is a superficial logic here that quickly collides with reality. In fact, it’s far more than experience making grants you need in your first hires.
The most important criterion for picking your new staff seems obvious but warrants emphasis: brain power. In those instances in which a single foundation made a major contribution to the nation’s well being, it was brains and vision that won the day. Early in this century the Rockefeller Foundation revolutionized the teaching of medicine. It did so because its management realized and took advantage of the genius and ability of medical historian and Rockefeller board member Abraham Flexner. He studied the medical schools of Europe and made detailed recommendations that transformed medical education in America. The Rockefeller Foundation’s lesson for you is that it takes men and women of intellect to see this trait in others and employ them. Look for the same kind of wits that you’ve noticed in the business executive who takes over a failing major company and turns it into a stock market winner. All too often people in your position turn the management of their foundation over to a retired boyhood chum who managed the shipping department in one of their companies. Shoot for more than this.
Tax Considerations
The debate over the taxation of foundations has revived because many foundations and charitable trusts are treating their mandatory yearly minimum payout of 5 percent of their average capital as the maximum they must spend to keep their tax-free status. Included in the 5 percent minimum payout are operating costs (save for investment management and custody fees) and grants. While the concept of perpetuity has been attacked, it seems unlikely that even a minority of states will legislate against it. What is more likely is that Congress will increase the mandatory payment of 5%, perhaps taxing capital gains.
The only tax of importance paid by foundations is a 2 percent excise tax on net investment income. Foundations pay no capital gains tax, a fact worthy of great consideration in these bull market times. A firm I know recommends investment managers to large investors. In 1996, top managers achieved an average 20-30 percent return, with second tier managers averaging about a 17 percent return. While foundations can no longer be used as they once were to retain control of a business, the capital created by such large returns permit making start up investments which can be very lucrative indeed.
The Gospel of Wealth
Andrew Carnegie had one of the sharpest business minds of his time. When he turned that mind to philanthropy, he realized effective philanthropy is a complex subject, so much so that he spent the last decade of his life thinking and writing about it. He considered philanthropy not just his duty, but his privilege. “Poor and restricted are our opportunities in this life, narrow our horizon, our best work most imperfect; but rich men should be thankful for one inestimable boon. They have it in their power during their lives to busy themselves in organizing benefactions from which the masses of their fellows will derive lasting advantage, and thus dignify their own lives.”
I wish you well, pray you find philanthropy a joyful challenge and hope that you will join that small company of donors who do it right.