Carl Schramm has a history of taking risks, but he may have underestimated the risks of taking over a large foundation in a mid-sized town. Since he was hired in April 2002 to serve as president and CEO of the Ewing Marion Kauffman Foundation in Kansas City, Missouri, he has seen controversy flare over changes at the $1.6 billion foundation. Critics claim the foundation is turning away from its historic commitment to the local community, while Schramm and others reply that local funding has gone up and that the changes have only focused giving more effectively in the two areas, education and entrepreneurship, that the founder intended to support.
The foundation’s namesake entrepreneur started a pharmaceutical company, Marion Laboratories, out of his home, giving it his middle name so customers wouldn’t realize it was a one-man show. By the time he sold it in 1989, the company had annual global sales nearing $1 billion, and Mr. Kauffman was known as the man who brought Major League Baseball back to the Kansas City.
Schramm came to his job with an extensive background in entrepreneurship and scholarship. He has founded several companies, including Greenspring Advisors, Inc., a Baltimore merchant-banking firm that supports business development in health care and insurance; and HCIA, Inc., once the nation’s largest provider of data to the health care industry. Even in academe, Schramm has played entrepreneurial roles, founding the Johns Hopkins Center for Hospital Finance and Management and serving as entrepreneur in residence at American University’s business school. He has received two five-year National Institutes of Health scientist awards and written over 60 refereed journal articles and two books.
PHILANTHROPY: Have there been any models, in business or philanthropy, that have been especially helpful in reshaping Kauffman?
MR. SCHRAMM: I think of the breakthroughs engineered by Rogers and Blendon, in the early years of the Robert Wood Johnson Foundation, when they decided to outsource the administration of projects. In many ways, they followed a business model. Second, I think this foundation’s work resembles an intellectual property business—a drug company or a software company, say—in the sense that ideas and innovation must drive our work. We must have a huge intellectual capacity to lead. A software or a drug company is only as good as the edge it keeps for its customers, and that’s a model I carry in my head.
PHILANTHROPY: What is your greatest long-term challenge as head of Kauffman?
MR. SCHRAMM: It will be the same as in many intellectual property industries—renewing the intellectual property fast enough. This is a business in which you can never be content with today’s success or breakthrough or insight. A certain restlessness must characterize an organization like this. The minute you have an insight you must say, “Now, what do we do with it, and what new insight does it prompt? Which partners can we ask to develop this, to test this, to tell us that this is foolish or genuinely significant?” Part of this involves constantly working with our partners to make sure we’re all moving at the same speed.
PHILANTHROPY: Speaking of partners, let’s consider Kansas City. First, has the foundation decreased its contributions here?
MR. SCHRAMM: No, we’ve significantly increased our grantmaking in Kansas City.
PHILANTHROPY: How has that grantmaking been reshaped?
MR. SCHRAMM: The single largest change we’ve made is to retreat to one of our signature programs that has had enormous success, a program once called Project Choice, now called Kauffman Scholars. We have established in Kansas City a new college scholarship program for disadvantaged kids that is kicking off this September. Another part of the reshaping has involved looking at smaller areas where we were working. With our Freedom Schools here in Kansas City we decided our best contribution would be to take this great idea and see if we could help scale it up, both locally and nationally.
Our only other major change has been to look at our work in the area of community development, determine that some of it has strayed far from the donor’s intent, and begin a slow and respectful process of withdrawing long-term support from this relatively small area of our work.
These changes have been driven by a review from the trustees, and much of what I’ve done has followed declared statements of intent by the trustees which I had to execute. One, obviously, was to reduce overhead. And one involved Kansas City, where we seemed to be spread a mile wide and an inch deep where the city’s youth were concerned. We want to concentrate our resources where we know the intervention will have measurable, scalable impact.
PHILANTHROPY: How would you describe Mr. Kauffman’s intent in establishing the foundation?
MR. SCHRAMM: Unlike a lot of other foundation founders, Mr. Kauffman left a deposit of writings that were extensive and explicit about his aspirations. I’ve been guided by that, as has the board.
Mr. Kauffman came from very modest means and became one of the nation’s richest men. He never forgot whence he came. And he wrote passionately about his hope that people could gain economic security through a good education and then go on to establish businesses that would let them be creative contributors to America.
PHILANTHROPY: From the beginning, Kauffman has given locally and nationally. How do you hope to balance the two and make them work together?
MR. SCHRAMM: Mr. Kauffman said we had two missions: We had to be a national foundation and influence the nation’s thinking about the economic dimensions of entrepreneurship. And he said we should help improve the lot of kids, particularly disadvantaged kids in Kansas City. He didn’t give us any specifics on the ratio. Some have tried to answer the local/national question by looking at trustees and whence they come, but from the beginning there have been more “national” trustees than “local” trustees.
The historical precedent has been that in rough times about 55 percent of our giving has been local. In my first year, that jumped up to 64 percent because of our commitments to the new programs I mentioned earlier. In youth development, about 80 percent of our giving has been in Kansas City, 20 percent nationally. In entrepreneurship, 80 percent of our giving has been at the national level, with about 20 percent going locally. That’s been the formula for a long time, and I expect it will continue.
PHILANTHROPY: The changes at the foundation have caused a controversy to erupt. How did the controversy start?
MR. SCHRAMM: It began when three former officers of the foundation—a former chairman of the board and two past presidents-wrote a letter highly critical of my management of the foundation. They sent this letter to the board chair, who distributed it to the rest of the directors (now called trustees). This letter also somehow found its way to the Kansas City Star. Much of the criticism had never been vocalized to me. As a person who’s been in many political and executive roles in my life, I’m not entirely tone deaf. So I was astounded to encounter criticisms I had never gotten wind of.
The letter created a huge wave of anxiety in the local grant community, because it suggested Kauffman was losing its commitment to the city, which just plain isn’t true. The press coverage scanted the increased financial commitments we had been making through my first year.
PHILANTHROPY: Has anything else surprised you in the way the controversy has played out?
MR. SCHRAMM: The composition of a false story impugning Brian O’Connell, a board member, staggers me and every other person of good will. Anyone interested in the truth should look at Brian’s letter in response.
I’m hopeful that reasonable people will put all of this in a rational context and recognize that our commitment to Kansas City is stronger than in the past and that our trustees are dedicated to governing the foundation well. This was really a quarrel about the future of the foundation, which is a valuable debate to have, both for the folks who stayed and for the folks who fought so hard and chose to leave.
PHILANTHROPY: Is that debate now mostly settled?
MR. SCHRAMM: I think some people may never be satisfied. But I’m hopeful that the dialogue is opening up and that the actions we are committed to will prove to reflect enormous fidelity to Mr. Kauffman’s aspirations. That’s what motivates me and everyone who works here. It is certainly the upper-most concern of every trustee.
PHILANTHROPY: The state attorney general has also jumped into the controversy.
MR. SCHRAMM: I don’t believe the attorney general had much choice once the press gave life to the trumped-up charge regarding Brian O’Connell. But I think much of your readership knows Brian O’Connell is incorruptible. His reputation for moral conduct on a board is without parallel in the United States.
PHILANTHROPY: How would you compare running a business to running a foundation?
MR. SCHRAMM: Running a foundation is more difficult in some regards. Although all our resources are already in our hands, there are few metrics to help us manage. A business can look to increasing sales, growing revenue and earnings, improving measures of customer satisfaction. Even a nonprofit like a college can watch SAT scores go up, applications increase, faculty prestige grow. In a foundation, accountability and the ability to measure are much more difficult.
PHILANTHROPY: How have you tried at Kauffman to increase your ability to measure success?
MR. SCHRAMM: We’re trying several different ways to put metrics into our programming, but it’s a struggle. I think in another few months we will have established for most of our programs a sense of what they should be accomplishing in terms of such things as number of individuals served, quality of service, and the effect each program should have on the problem it addresses.
Of course, we do have some business measures here related to how much it costs us to make grants. We’re making progress lowering what was very high overhead.
PHILANTHROPY: Speaking of measuring success, we last interviewed Tom Vander Ark, who’s in charge of education funding for the Gates Foundation. The metric he most wants is a true graduation rate in high schools, where they focus their funding. But they can’t find honest numbers; so they’re making grants to researchers who will try to figure out the true rates.
MR. SCHRAMM: That’s great. In our case, we’re planning to fund work at the National Academy of Sciences to improve government statistics on business starts and entrepreneurs—such as job growth related to new businesses, the number of entrepreneurs, the number of new businesses being formed, and the life cycle of these businesses. The existing government statistics are dreadful. This sizable grant will help us measure our effectiveness in fostering entrepreneurship. Gates is right—sometimes you have to give basic research grants just to get the right measurement of what you’re trying to do. This is an important role for philanthropy.
PHILANTHROPY: How has your business experience helped you in your philanthropy?
MR. SCHRAMM: Businesspeople are often characterized as hard-nosed because their drive to understand—it’s life and death for them. In foundations, the sense of life and death doesn’t exist, which can mean the loss of the edge and discipline that come from worrying about the market test of your work. My training suggests that we foundations must find a way to create the appropriate discipline for our work. In Kauffman’s case, we’re trying to be certain our interventions achieve the express aspiration we articulate at the beginning of a grant.
PHILANTHROPY: You have an extensive academic background.
MR. SCHRAMM: I was a professor for 14 years at Johns Hopkins—a large chunk of my professional life.
PHILANTHROPY: How has your academic experience influenced your philanthropy?
MR. SCHRAMM: As a professor at Johns Hopkins, I was lucky enough to have my research supported by nine or ten foundations, including Robert Wood Johnson, Ford, Commonwealth, Milbank, the Abell Foundation, and the Pew Charitable Trusts. A whole mess of folks have been very good to me in the past, foundations. I was a Ford Fellow a long time ago as well. I have a lot of experience on the other end of the grant, and that informs my views about how the foundation has to treat grantees, work with them as partners, and how it can trust grantees.
My most formative experiences were with the Robert Wood Johnson Foundation. Twice they asked me to run national programs; so in a sense I worked as a program officer. The lesson I took away is that if you’ve got the right partners, you can trust them completely.
PHILANTHROPY: What has surprised you most in the philanthropy world?
MR. SCHRAMM: What surprises me most is how shallow the theory is—how little has been written about the way foundations operate and their role in society. There’s Waldemar Nielsen’s landmark book The Golden Donors, but that’s a critique as opposed to a theory of the foundation. It’s hard to find a theoretical work that explains this extraordinary social institution.
PHILANTHROPY: Bill Schambra has written a piece for Philanthropy critiquing the idea of doctoral degrees in philanthropic studies, largely because there isn’t yet a definite field of expertise. (See p. 26.)
MR. SCHRAMM: I would join that critique. For a new discipline to emerge, there should be a corpus of knowledge and writing that’s agreed upon, a canon students would critique and contribute to. There are only a few books on foundations I’d ever tell anyone he could read with profit.
PHILANTHROPY: What thinkers and books on entrepreneurship have influenced your thinking the most?
MR. SCHRAMM: Let me widen the question a bit. A few books have been critical to my formation and influenced how I think. One is Henry Steele Commager’s The American Mind. One is Michael Novak’s The Fire of Invention. And one is Thomas Sowell’s The Vision of the Anointed. Amar Bhide of Columbia, who’s one of our best advisors, has written the seminal book on entrepreneurship: The Origin and Evolution of New Businesses. Bill Baumol’s The Free Market Innovation Machine is terrific. And an old standard has had a huge influence on my thinking: Max Weber’s The Protestant Ethic and the Spirit of Capitalism.
PHILANTHROPY: What are the most important obstacles—regulatory, political, cultural—to new businesses forming and growing?
MR. SCHRAMM: Our legal system lets a new business be formed immediately. The real issue is culture. There are people who are entrepreneurs but don’t know it, and they can’t get support, mentoring, or education because they don’t know it exists. We have a cultural mindset that entrepreneurs are a strange breed who live in Silicon Valley, when in fact the empirical data—much of it done at the University of Michigan under Kauffman’s sponsorship—suggest that it’s as common to create a business in your lifetime as it is to marry. The United States really is a nation of entrepreneurs. So I think the biggest barrier is self-awareness.
And then there are other powerful forces, probably discriminatory. If you look at the rate of new businesses formed by women and African Americans, they are so low that there must be some implicit or explicit barriers to business starts.
Lastly, there’s an economic barrier: lack of access to capital. Venture capital is very restricted at the small end; it’s almost impossible to get a $500,000 or a $200,000 commitment in venture capital. Somehow our capital markets are partly dysfunctional.
PHILANTHROPY: Does the Kauffman Foundation have a strategy for helping entrepreneurs overcome these obstacles?
MR. SCHRAMM: These questions are so poorly understood that our very first commitment will be to basic research. We have to know the problem before we can figure out the intervention. That’s where I go back to Thomas Sowell and Michael Novak. In America, we often run out with a solution and make the problem worse because we didn’t study the underlying difficulty and reach the correct solution in the first place.
PHILANTHROPY: Entrepreneurs make a lot of mistakes; the ones who succeed learn from their mistakes. What mistakes has the Kauffman Foundation made, and what has it learned from them?
MR. SCHRAMM: I don’t think foundations in general have a culture that talks about mistakes, but we are trying to engender that kind of culture here. Going forward, we intend to have our grantmaking committee autopsy mistakes we’ve made by omission and commission, but I’ve only been here 16 months, and we don’t have that process entirely in place yet.
PHILANTHROPY: Mr. Kauffman was an impressive entrepreneur himself. What can philanthropists learn from his life?
MR. SCHRAMM: I see three lessons: First, he was explicit that his foundation should have an entrepreneurial culture and take risks. Second, he thought we should seek leverage more from ideas than from money. And third, Mr. Kauffman believed that research is critical to understanding problems and that you should research to discover mistakes as well as success. This last idea especially reflects his experience in pharmaceutical entrepreneurship. He ran a drug company, where making things better means you constantly focus on what didn’t work right. We want that idea to be woven into the fabric of this foundation.