When the Association of Small Foundations gathered in Minneapolis this past May 19 for a three-day conference, it seemed only natural to ask Emmett Carson, CEO of the local community foundation and board chair of the Council on Foundations, to welcome conference attendees. But his remarks were something less than welcoming. For he took the occasion to argue that many small foundations—those with less than $1 million in endowment—should simply not exist.
The problem, he insisted, is lack of accountability. As he wrote in a subsequent Chronicle of Philanthropy op-ed, fully 70 percent, or 50,336, of the 71,541 informational tax returns filed by private foundations in 2001 came from such small funders—far too many to be monitored adequately by the IRS. Simply eliminating them is one “simple, low-cost” approach for Congress to consider, he said, as it attempts to regulate more tightly a field that has been shaken by recent widespread reports of self-dealing and corruption. Donors, Carson added, would still be able to make small gifts either directly or through donor-advised funds and community foundations.
Carson was, of course, simply speculating about the degree of abuse and corruption among the smallest foundations since, as he points out, we possess so little by way of objective information about most of these entities. The Association of Small Foundations (ASF) does conduct an annual survey of operations and management among their membership, 20 percent of which would be eliminated by Carson’s edict. From these admittedly limited studies, we can conclude that very few of the smallest philanthropies have paid staff or compensate board members for routine service. Most of them are managed by an unpaid CEO who is also a board member. Furthermore, they do considerably better on average than the legally required pay-out of 5 percent of their assets: In the 2004-05 survey, foundations with under $1 million in assets gave away an average of 7.3 percent of assets annually. (A more recent ASF study of 375 random North Carolina foundations with under $1 million in assets found even higher average distributions.) By contrast, the nation’s ten richest foundations in 2003-2004 gave away an average of 4.1 percent. The data we have, in short, suggest that small foundations work hard at giving assets to charity, rather than directing them into the pockets of board members or staff.
Carson’s suggestion that most corruption occurs among the smallest foundations is particularly ironic because virtually all of the press stories about philanthropic corruption involved foundations larger than—often considerably larger than—$ l million in assets. The story that set off the latest round of reports, for instance, was the San Jose Mercury’s coverage of excessive salaries and perquisites at the James Irvine Foundation of California, with over $1.5 billion in assets. The most notorious case unearthed by the Boston Globe’s series in 2003 involved the Paul and Virginia Cabot Foundation of Boston and its wildly overpaid CEO. But its assets at the time were around $5 million.
Just as Willie Sutton supposedly robbed banks because “that’s where the money is,” so one might conclude that the foundations most likely to invite abuse are those that have reasonably large and tempting endowments. After all, it’s hardly worth risking even the remote possibility of being nabbed by the IRS for the minor sums to be extracted from a foundation with less than $1 million in the bank. And as Tim Walter, the president of ASF, points out, the tax filings by the smallest foundations are short and easy to read, which makes concealing illegal activities fairly difficult. By contrast, figuring out what lurks in the phonebook-sized returns of large foundations is no simple task, as the newspaper investigators discovered.
But Carson is really concerned about something more than corruption. He argues that there is a proper and acceptable—not just a legal—way to go about philanthropy. He concludes that only larger foundations are likely to be respectful of that orthodoxy. Smaller foundations, he points out, don’t hire much staff, don’t publish annual reports or guidelines, and don’t join professional associations, “so they don’t often get exposed to training sessions and educational materials that would help them understand changes in laws governing nonprofit organizations and learn how well-respected, effective grant makers operate” (emphasis added).
These remarks betray the hold that progressive, “scientific philanthropy” continues to have on the field of philanthropy, even though there’s no empirical evidence that hiring staff, publishing annual reports, or attending Council on Foundations meetings prevents corruption or leads to more effective grantmaking. The view of scientific philanthropy, nurtured by the twentieth century’s first large, modern foundations like Carnegie, Rockefeller, and Russell Sage, held that grantmaking is too complex and sophisticated to be left in the hands of well-meaning amateurs, but is rather a demanding profession to be mastered only by trained experts. Sophisticated donors transcend petty, localized charitable activity and work on the “root causes” of social problems through large, complex, collaborative social engineering projects, designed by professionals steeped in the latest social science research.
In this view, small foundations’ true problem is not corruption, but dilettantism. They ignore the professional norms prescribed by larger, “well-respected” foundations, and fail to do their part to sustain the elaborate institutional apparatus built around those norms. They don’t provide enough employment opportunities for graduates of the burgeoning nonprofit management training centers so enthusiastically funded by the larger foundations. Nor are they likely to subordinate their idiosyncratic views to the collaborative consortiums sponsored by regional and national associations, which are designed to bring order, efficiency, and rationality to otherwise wasted smaller donations.
Put more bluntly, Carson’s proposal can be understood simply as an effort by the guild of larger, established foundations to erect a “barrier to entry,” protecting the guild’s intellectual and institutional hegemony against obstreperous smaller upstarts. Indeed, Carson explicitly appeals to the restrictive guild mentality when he argues for his ban on smallness on the grounds that “foundations would have more prestige if their creators were a far more exclusive club—one reserved for people who have substantial assets to give away.”
Carson notes that, once they’re forbidden to establish their own private foundations, smaller donors may nonetheless give freely through other avenues, including direct contributions, donor-advised funds, and community foundations. Critics have pointed out that this is yet another case of special pleading on Carson’s part, given his leadership of one of the community foundations that would benefit directly from this new disposition. However worthwhile community foundations are, the fact remains that a donor in a donor-advised fund is just that—an advisor, while the final legal authority for grants rests with the community foundation’s staff and board of directors. Furthermore, a donor within a community foundation comes under the same pressure exerted by a professional membership association (like the Council on Foundations), namely, to pool otherwise isolated, idiosyncratic, smaller grants into larger, collaboratively funded initiatives created and administered by the foundation’s professional staff—all, of course, in the name of ensuring the most efficient use of community resources in the public interest.
Indeed, in other circumstances, Emmett Carson has been quite clear about the need to subordinate personal donor preferences to encompassing social purposes. In Foundations News and Commentary (January/February 2005), for instance, Carson decried precisely the “donor-focused model” he sees spreading from commercial donor-advised funds into community foundations. This approach is “in conflict with the idea of collectively raising and directing resources to address common community problems.”
Carson argues that community foundations “have the ability to determine the cause of social inequities and to correct them at the source,” and should therefore focus on “promoting social justice in their communities” by altering “the power relationships that exist between citizens and their relationship to government, business, and the nongovernment sectors.” The problem with permitting wealthy individuals to set their own philanthropic agendas, he suggests, is that they have done well in the private sector; so “it is difficult to imagine that they would consent to be at the vanguard for wholesale changes to the entire system.” Consequently, Carson argues, community foundations should rededicate themselves to “the accumulation of unrestricted assets over time directed for the common good rather than individual donor interests,” though this may require that we “leave behind those who are wedded to the path of being charitable bankers rather than social change agents.”
Viewed in this light, Carson’s animus against small private foundations has little to do with corruption or inefficiency. It rather reflects his conviction that any grantmaking directed chiefly by the donor’s wishes—even when it’s conducted through commercial or community foundation donor-advised funds—is deeply flawed, because it is insufficiently inclined to press for “wholesale changes to the entire system.”
Smaller grantmakers are indeed likely to fall well short of Carson’s standard of ideological engagement. From the ASF surveys, we know that foundations with less than $1 million in endowment give an average of 16 grants per year, typically $2,500 per grant. Among all ASF members, two-thirds of the grants were awarded locally, and over 50 percent of the grants involved site visits as part of the grant application process. Some 60 percent of grants were made to projects in education, health, and human services. Only 1.5 percent of grants went to public policy or foreign affairs. It’s safe to conclude that most giving by smaller donors goes in small, targeted amounts to specific, concrete charitable undertakings in their own backyards, rather than to broad public policy initiatives aiming at systemic change in the name of “social justice.”
Students of Alexis de Tocqueville’s understanding of civil society will recognize and appreciate this state of affairs. For Tocqueville, the fact that there are over 50,000 small foundations—most giving close to home, for tangible projects that donors were personally visiting—would have been neither surprising nor a cause for alarm. Rather, it would have been a hopeful indication of robust civic health. The fact that the smallest grassroots nonprofits have a chance of attracting support from locally oriented, hands-on donors—a chance they don’t have with the larger, policy-oriented foundations—is another plus for civic vitality. That some grant dollars are “wasted” by duplication, inefficiency, or even occasional self-dealing would have been viewed as a price well worth paying for such widespread, active engagement by so many citizens. By contrast, Carson’s preference for the concentration of wealth behind a small band of professionals pursuing doctrines of radical egalitarianism is precisely the sort of malignant political impulse that Tocqueville feared in the new age of democracy.
We can only hope that Congress and state legislatures grasp the larger principles at stake in this debate and resist Carson’s seemingly innocuous call to “tidy up” the sector through the elimination of the smallest foundations.
William A. Schambra is directior of the Hudson Institute's Bradley Center on Philanthropy and Civic Renewal. Krista Shaffer, research assistant, contributed to this article.