A Tale of Two Letters, and Two Sectors

Here’s an idea: Let’s agree to stop referring to “the nonprofit sector.”

That’s because, in reality, there are two nonprofit sectors.

The first is comprised of the hundreds of thousands of charitable organizations that provide actual services. The second is made up of funders: foundations, donor-advised fund sponsors, and corporate and individual donors.

The priorities of these two nonprofit sectors are different. The first nonprofit sector – I’ll call them “the charities” for short – is focused on meeting mission: feeding, housing, educating, and counseling people; saving the earth and animals; curing diseases and healing the sick; producing community theater and running art classes; rescuing, feeding, and supporting families displaced from natural disaster; and generally doing what they can to keep this frayed and fragmented society of ours from falling to pieces.

The second nonprofit sector – “the funders” – genuinely cares about all of that. But the funders are also concerned with their own institutions’ and donors’ well-being, tax advantages, budgets, and privileges. And the interests of the funders are often in conflict with those of the charities.

There is a significant power imbalance between the two nonprofit sectors. This would seem to be an obvious point, but it’s one that generally is not acknowledged, at least not publicly. Charities need money. Funders have money, and consequently they have all the power in the relationship. I know very few funders who consciously lord it over charities, and most funders would be sincerely upset to think they ever do. But inequality is baked into the relationship. Funders can and do tell charities how to do their work. Charities never tell funders how to do theirs. Or if they do, it’s in a whisper, and at their peril.

This power imbalance and the conflicting interests of the two nonprofit sectors came to light in a pair of letters sent to the Senate Committee on Finance over the last few months (“Nonprofit Leaders Strike Back at Suggestion of Time Limit on DAF Payouts,” Chronicle, September 8, 2017). The topic was donor-advised funds (DAFs), and whether the federal government should change the rules governing how DAFs are run. This is a hot topic, because donor-advised funds – and the Wall Street firms that run many of them – have distorted charitable giving in America and changed the face of philanthropy. But let’s also recognize that donor-advised funds lie on the fault line between the two nonprofit sectors: funders love them, while charities hate them. And the exchange of letters highlighted in the Chronicle article highlights how power and money are aligned with the funders, while virtually no nonprofit associations – not even an organization whose explicit mission is to represent the full nonprofit sector – publicly speaks on behalf of the charities.

The first letter was sent on July 17 by Ray Madoff and Roger Colinvaux, professors of law at Boston College and Catholic University, respectively, to the Senate Committee on Finance. Madoff and Colinvaux make two recommendations regarding donor-advised funds. The first is to introduce a requirement that money in donor-advised funds be distributed to charity within a fixed number of years after being contributed. This proposal speaks to the frustration of charities that there is no spending requirement whatsoever for donor-advised funds: once the gift is made (and once it has earned a charitable tax deduction for the donor), the funds can literally sit in a DAF forever. Madoff and Colinvaux are essentially advocating that money be required to pass from the funders to the charities after a certain number of years.

The second recommendation from Madoff and Colinvaux is that private foundations be prohibited from counting grants to donor-advised funds toward their five-percent charitable distribution requirement. Why does this matter? Because private foundation grants to DAFs make a mockery of current law. The federal government requires private foundations to distribute at least five percent of their assets each year for charitable purposes, a requirement that stems from the 1969 Tax Reform Act. That legislation divided charitable organizations into private foundations and public charities. Congress clearly wanted to keep its eye on private foundations, which typically remain under control of the donors and their families, and thus are more easily manipulated for their personal benefit. Congress was essentially saying: we don’t really trust private foundations, so a) we want money to go out the door every year, and b) we want every grant (and other financial information) to be subject to public scrutiny.

But donor-advised funds live in a netherworld where they are considered part of the public charities that sponsor them, while remaining (in all but the legal sense) under the control of the donors. That means that grants from a private foundation to a donor-advised fund can be used to meet the private foundation’s five-percent charitable distribution requirement, but the funds then remain, essentially, under the private foundation’s trustees’ ongoing control through their presumed role as advisors over the donor-advised fund. Meanwhile, the eventual charitable beneficiary – if there even is one – is kept secret, because the donor-advised fund (as part of a public charity) does not have to reveal the grants it has made. This scheme clearly undermines the intent of the private foundation five-percent distribution rule.

In their letter, Madoff and Colinvaux were essentially coming down on the side of the charities. They advocated that money be required to pass from donor-advised funds (the funders) to operating nonprofits (the charities) within a reasonable period of time, and that private foundations (again, the funders) stop playing games by making grants-that-aren’t-really-grants to donor-advised funds.

Madoff and Colinvaux identified problems with donor-advised funds that charities are well familiar with, and they offered reasonable solutions. But this did not play well with funders. A few weeks later, a coalition of four organizations sent a twelve-page response to the Senate Committee on Finance. In a tone that I would describe as vehement and belittling, the letter declared that the Madoff-Colinvaux proposals were “misguided and misleading” and “harmful.”

So who are the forces that wrote this angry response?

Three of the groups clearly represent the funders. The first is the Council on Foundations, whose community foundation members rely upon donor-advised funds as its most popular product. The second group in the coalition, the Community Foundation Public Awareness Initiative, is not an organization at all, but a Washington lobbying effort funded by, and working on behalf of, community foundations. (According to OpenSecrets.org, the lobbying firm Van Scoyoc Associates has received over $2.3 million for this effort since 2012.) These two groups represent the interests of community foundations, defined narrowly as keeping the donor-advised fund status quo.

The third organization also represents funders, though it is more ideologically driven: The Philanthropy Roundtable. Despite its benign name, the Philanthropy Roundtable is highly political and has ground its ideological axe for decades, using philanthropy to promote conservative causes. The Philanthropy Roundtable has historically advocated for unfettered and non-transparent donor-advised funds, which fits their philosophy that donors know best, and that a government that regulates charitable activities in any way serves to undermine private initiative and the public good.

The fourth and most troubling member of this coalition is Independent Sector, which claims to represent both funders and charities. Donor-advised funds are an issue over which Independent Sector’s members are utterly divided: the funders (particularly DAF-sponsoring organizations) love them, and charities (quietly, but utterly) resent them. I would have assumed that, given the breadth of its membership, Independent Sector would have sat out this fight. But instead, Independent Sector publicly aligned itself with the funders.

I doubt that Independent Sector made much of an effort to understand the charities’ point of view on this issue. If it had, Independent Sector would have learned that charities are aghast at the growth of the donor-advised fund industry and the way DAFs now dominate the listing of the country’s largest fundraising organizations. It would have found that charities consider the profit motive driving the explosive growth of commercial DAFs to be morally troubling. It would have discovered that charities feel undermined by the way DAF sponsors and the financial services industry have a vested interest not only in attracting gifts to donor-advised funds, but in keeping the funds invested, rather than distributed for charitable purposes. And Independent Sector would have learned that donor-advised funds have added complexity to nonprofits’ relationships with donors – particularly around accepting gifts for multi-year pledges, gala tickets, and other charitable commitments.

I’m not surprised that the Council on Foundations, community foundations, and the Philanthropy Roundtable attacked suggestions for reforming donor-advised funds. These are organizations whose mission is to protect the interests of funders. But for Independent Sector to jump in with both feet on this issue was both sad and illuminating. Independent Sector should know better, and if it truly represented charities as well as funders, it would know better.

The coda to this exchange was last week’s stunning-but-not-surprising news that Fidelity Charitable – already the top fundraising “charity” in the country – experienced a sixty-eight percent jump in contributions in its most recent fiscal year, to $6.85 billion. Surely this news is yet another indication that something is askew in philanthropy, that far too much money is going into, and remaining in, donor-advised fund accounts, and that the recommendations of Ray Madoff and Roger Colinvaux might in fact be an effective way to recalibrate DAFs.

Congressional staffers and members of the media studying donor-advised funds would do well to recognize that there are two distinct nonprofit sectors, not one. They should understand that the public’s interest does not lie in supporting the preferences of the richest and most powerful funders and donors, but rather in strengthening the charitable organizations delivering vital services to the community. And perhaps eventually one or another organization that purports to represent the interests of nonprofits – which is to say, charities – will take a deep breath, stand up, and actually do just that.

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Do More

[This article was co-published on October 4, 2017, by the Maine Association of Nonprofits]

When I was a 27-year-old, freshly promoted, and utterly under-qualified executive director (back in 1985 we didn’t think to call ourselves “CEO” or “President”), I met with a man named Richard who had raised tens of millions of dollars in his nonprofit career. My goal in setting up the meeting was to pick Richard’s brain about nonprofit management in general, and fundraising in particular.

Richard must have been 45 at the time, which seemed venerable to me then. After a few minutes of getting to know one another, Richard, who was as friendly and welcoming as he was knowledgeable, asked me how often the board of my organization met. “Monthly!” I responded, thinking it was a pretty obvious and logical answer.

Richard scowled – well, no, he didn’t scowl, he was too polite for that, but he grimaced just enough to make his disagreement known. “I think that’s a problem,” he said. “Meet less. Do more!”

I think of Richard – and how right he was – nearly every week.

For example, I recently was talking with a nonprofit CEO, and I asked her what the expectations were for members of her board. She started by calling the roll on all the meetings board members were expected to attend. There was the monthly board meeting. And board members needed to serve on at least two committees, each of which also met monthly.

My head hurt thinking about the time commitment required from volunteer board members simply to attend these meetings. And, of course, I knew that each meeting required staff to be in attendance, to prepare the agenda and reports, to take minutes, and to follow up. And then the next month, it all happens again – to what end?

This leads me my First Law of Volunteer Involvement: “If a nonprofit organization requires board members to devote countless hours to unexciting and unproductive board and committee meetings, they will find themselves with a board that is itself unexciting and unproductive.” I’ve written recently about how to run an effective, efficient, and productive board meeting. Good meeting management is indeed critical for engaging board members and for moving an organization forward. But not only do we have to avoid having bad meetings. We also have to avoid having too many meetings.

Most boards that meet monthly really don’t need to. Yes, if it’s a purely volunteer organization – a small town historical society, say – and all the work is actually carried out by board members, then monthly meetings make sense. But if there’s a professional staff in place, and the board is truly providing governance, and not managing the organization, then holding quarterly or every-other-month board meetings should not only be adequate, but vastly better than monthly meetings.

The reason to reduce the number of meetings is so that board members have the time to do what’s actually important. A board member’s purpose is not to attend meetings, though, of course, that’s a big part of what she or he does. No: A board member’s role is to represent the charitable organization in the community; to identify, cultivate, and thank financial supporters; to give generously to the organization; to ensure that the organization is ethically and legally operated; to see that funds are used well, and in support of the mission; and to hire, monitor, support, evaluate, and, when necessary, to replace the CEO.

None of this requires monthly board meetings and monthly committee meetings. And having too many meetings actually keeps board members from being truly effective.

That’s because of what I’ll call my Second Law of Volunteer Involvement: “If n is the number of hours a nonprofit can reasonably expect a board member to devote to its cause each month, the organization cannot expect that board member to dedicate 2n or 3n hours, except in times of crisis or transition, or unless it is actively promoting board member burn-out, frustration, and/or premature resignations.”

Let’s play this out. You are delighted that Craig Connected has joined your board. He’s smart, thoughtful, well-regarded, and he knows everyone. He’s a major donor, and he’s friends with other potential major donors. Craig is also a busy guy: he runs his own business, travels a lot, and values his time with children and grandkids. You want Craig to arrange lunches to introduce friends to the organization, to throw a friend-raising house party, to make an introductory phone call to an old classmate of his who is the president of a private foundation. But Craig is already devoting six or eight hours a month to the organization simply going to board and committee meetings – maybe more, including the prep and travel time. There’s no more time in Craig’s schedule. He’s not going to put your organization ahead of his business or his grandchildren. You’re using up his available volunteer hours, and not well.

If your organization shifted to a quarterly board and committee meeting schedule, then Craig would find himself with a few dozen extra hours a year to do things for you that are actually important and helpful. He’d make connections for the organization, raise lots of money, and, in the process, feel more satisfied with his involvement because he’d be accomplishing something beyond sitting in meetings.

My sense is that at most organizations the rite of monthly board meetings dates back decades to a time when the organization might have been much smaller, less well staffed, and more dependent on operational support from board members. Monthly meetings also draw from a different cultural time, before 24/7 wireless connectivity, when people weren’t on call at all hours, and when working parents weren’t so harried patching together childcare coverage. People are really busy today, and the kind of people you want on your board are especially busy. So it’s incumbent upon nonprofit leaders to minimize the frequency of meetings, and instead to ask board members to take on the activities that really matter for moving their organizations forward.

So how will you use your board members’ time? That’s your call. But I know what my old friend Richard would say – and, from my point of view, he’d be right.

Copyright Alan Cantor 2017. All rights reserved.

 

 

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Peak bagging

As someone who likes to be taken seriously, I probably shouldn’t begin this post by publishing such a goofy picture of myself. But here I go, happily sharing this photo, as a way of illustrating a point about goal-setting.

This picture was taken on July 2nd atop Mt. Isolation, an obscure and (true to its name) difficult-to-reach New Hampshire mountain that has an elevation of either 4,002, 4,003, or 4,004 feet, depending on the guidebook. Regardless of its exact altitude, the fact that the summit is 4,000-and-something feet high makes Mt. Isolation one of forty-eight 4,000-foot peaks in the state. And the reason you see me so exultant, relieved, and, well, just a bit inebriated, is that climbing Mt. Isolation meant that I had now climbed all forty-eight mountains, and that moment was the culmination of a personal eight-year quest. I was at long last a member of the 4,000-Footer Club. Continue reading

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The Phrase “Great Board Meeting” is Not a Contradiction In Terms!

I used to say that a bad nonprofit board meeting was like root canal surgery, but I don’t say that any more. Why? Because last year, for the first time, I underwent a root canal procedure, and it really wasn’t so bad.

The surgeon played great music and told funny jokes, and the anesthesia was, well, kind of pleasant. And it was all over in an hour. In terms of interest, entertainment, and, shall we say, mood enhancers, root canal surgery is actually better than a bad nonprofit board meeting. (At the very least, it’s shorter.)

That said, it really is possible to have great board meetings – and, for organizations to be successful, it’s critical. So how do you make good board meetings happen? Continue reading

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Thoughts on the Nonprofit World