Friday, December 17, 2010

What Are Foundations?

Private Foundations are in effect limited in their ability to raise funds and engage a large population of stakeholders. This often prevents them from gaining broad public support, but also enables broad discretion with regard to funding strategy, choice of projects, and organizational mission. Foundations can embrace the opportunities afforded to them by their unique legal status and become change-agents to better understand the world, promote groundbreaking new ideas, and educate the public.

Under United States law, donations to private foundations are not tax deductible. This limits many fundraising options and all but ensures that the foundation will be funded by no more than a few donors (essentially the founders themselves.) A lack of broad public support can lead the public to mistrust foundations in general: one common misconception frequently heard is that foundations provide a tax shelter for the extremely wealthy. This limitation can often lead foundation managers to adopt an adversarial “us-and-them” attitude with the public. In order to boost their public image, foundations often make large, conspicuous donations to universities, museums, and the arts.

Since fundraising options for foundations are limited and/or nonexistent, a foundation must rely on its endowment to fund its annual operations. While a traditional nonprofit with a $20 million annual budget can fundraise to meet those costs, a foundation must tie up $400 million in a corpus to ensure ongoing annual operations of the same size. This represents a staggering financial constraint for a foundation with no steady stream of revenue.

While these laws can impose significant limitations on a foundation, they provide significant opportunities for a foundation willing to take risks. A lack of broad public support decreases the number of stakeholders, leaving the foundation basically autonomous. Unlike the PTA, where any tax-paying parent can attend a public meeting and feel entitled to demand concessions, a foundation has virtually no one to answer to. Since the mission, vision, and values represent the interests of a small, select group of empowered people, instead of a broad public audience, foundation managers can engage in innovative, risk-taking initiatives not yet embraced by the general public.

This autonomy allows a foundation to lead the way in establishing needed new innovations. Foundations can gather experts and resources needed to truly understand an issue; they can breathe life into groundbreaking new ideas and give them the resources and guidance they need to scale; they can also mount large community-education initiatives to help the public be more informed. In short, foundation managers are independent agents for world-changing innovation…if they choose to be.

Unfortunately, many foundations are locked into a stable, conventional strategy that focuses more on risk-avoidance than change-making. The prevalent “us-and-them” mentality promotes cynicism and even disdain for grant requestors. This leads to the creation of bureaucratic hoops, lengthy grant application forms, and an extremely slow turnaround for funding. If foundations entrench themselves in a slow, predictable routine, they lose the ability to respond to world events and become insular and reactionary.

In recent months, Bill Gates and Warren Buffett have convinced billionaires around the world to collectively pledge over one half-trillion dollars for philanthropic causes. This tide-shifting allocation of wealth, coupled with the explosive changes taking place in virtually every corner of the world serve as a call to action for grantmaking institutions. Grantmakers can choose to embrace the numerous opportunities for research, innovation, and education available to us to actively change the world for the better, or they can entrench themselves in a routine that preserves the status quo. I hope that in the coming years, all grantmaking institutions will continue to make changes to become more flexible, adventurous, and innovative.