How Foundations Should and Should Not Be Held Accountable

The great strength and weakness of philanthropic foundations is their limited external accountability. According to a common definition of accountability, “A is accountable to B when A is obliged to inform B about A’s . . . actions and decisions, to justify them, and to suffer punishment in the event of eventual misconduct.”
Foundations are accountable in this sense to government authorities for compliance with the tax laws. This is not a light obligation. Foundation officers cannot use foundation assets to finance their daughters’ weddings, to provide more than reasonable compensation to family members, or to support their favorite political candidates. The assets of a foundation have to be used for genuinely charitable purposes, and if they are not, foundations and their officers can expect serious punishment.

In addition, a growing number of donors are establishing accountability mechanisms in the by-laws of the foundations they create, giving external organizations or individuals the authority to intervene and, in some cases, the standing to sue foundations if their trustees violate donor intent.

But otherwise, so long as foundations obey the law, they are accountable solely to their trustees. Unlike elected officials, they are not accountable to the voters. Unlike businesses, they do not have to meet a market test. In line with the instructions established by their initial donors, the trustees have the freedom to determine both the charitable objectives of a foundation and the best ways to carry them out.

This limited external accountability is the great strength of foundations. It gives foundations the independence and freedom to do something bold, unpopular, unconventional.

If the Julius Rosenwald Fund had been accountable to voters or customers, it would not have been able to assist in the construction of 5,000 schools for African-American children in the Jim Crow South. The John M. Olin Foundation would not have been able to help create the Federalist Society or establish law and economics as a flourishing field of academic study. The Pew, Hewlett, and Packard foundations would not have been able to alert society and government to the dangers they see in climate change.

Thanks to their independence, foundations have been able to enrich our political debate. Foundations have been at the forefront of both advocacy for and opposition to causes such as marijuana legalization, gay rights, school choice, embryonic stem cell research, and abortion. Leaders and organizations beholden to markets or to elections are often reluctant to push the envelope on controversial issues such as these.

Independence allows foundations to investigate unconventional hypotheses in medical research, to support new energy technologies with uncertain market prospects, and to finance innovative social enterprises such as Teach For America long before they become wildly popular.

Independence also enables foundations to take a fresh look at their grantmaking and decide to do things differently. Some critics of foundations say they should be accountable to broader stakeholder communities such as the grantees they fund. But if the Edna McConnell Clark Foundation had been accountable to its historic grantees, it could not have embarked on its recent strategy of taking to scale successful programs such as the Nurse-Family Partnership and Harlem Children’s Zone.

This freedom from a market or political test can of course be a great weakness for foundations. Since there is no penalty for a law-abiding foundation that is ineffective in its philanthropic strategy, limited external accountability can and frequently does lead to laziness, complacency, insularity, arrogance, and mediocrity in grantmaking.

It therefore becomes all the more important for foundation donors and trustees to set and enforce high standards of excellence for their governance and grantmaking.

The world of philanthropy can also benefit greatly from efforts to multiply sources of outside influence on individual foundations. These include self-assessment tools, voluntary codes of conduct, high-level journalism about philanthropy, and vigorous debate about the performance of individual foundations by academic experts, strategy consultants, and watchdog groups representing diverse points of view.

In addition, individual foundations can benefit greatly from active engagement with the communities where they make grants, and with thoughtful critics who will offer outside analysis of the funders’ objectives and strategies.   

But it is one thing to say that foundations should be open to outside perspectives. It is quite another to require that they should be accountable to outsiders, that outsiders should have the authority to determine what foundations can and cannot do.

Independence of foundation action is central to a free society, and it is central to philanthropic creativity. We lose it at our peril. 

From Fall 2009 issue of Philanthropy magazine

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