Foundations, For Better or For Worse

Most of us don’t question the basic operating procedures of private foundations. They are what they are. But if not for a turn of events a century ago, the common business model for foundations could have evolved in a much different – and, to my mind, much better – way.

Historian Benjamin Soskis tells the fascinating story of the origins of the Rockefeller Foundation in a recent post on the History of Philanthropy website. Soskis describes how in 1910 John D. Rockefeller tried to get Congress to approve a charter for the Rockefeller Foundation. At the time private foundations were a totally new idea. Rockefeller was already one of the largest philanthropists in America. He was also arguably the most despised man in the country, having accumulated an astonishingly large fortune thanks to his take-no-prisoners approach to competition, his general disregard for the public good, and his near monopoly on the extraction, refinement, and distribution of petroleum.

Congress – which, incidentally, along with the judiciary was investigating Rockefeller and Standard Oil at the time for anti-trust violations – was deeply suspicious of this new kind of entity, the private foundation. Many congressmen feared it would effectively give Rockefeller a new platform for ruling the world. (To give you a sense of Rockefeller’s popularity in the halls of Congress, during the debate one representative repeatedly shouted the word, “Viper!”)

Enter a fellow named Edward Devine, who proposed a logical set of restrictions on the proposed foundation. Devine was a leader of the New York Charity Organization Society, and he had been a pioneer in the founding of the social work profession. Devine suggested safeguards for the proposed Rockefeller Foundation that would have maximized the public benefit while recognizing and encouraging John D. Rockefeller’s philanthropic impulses.

First, Devine suggested that the size of the foundation be limited to $100 million (the anticipated amount of Rockefeller’s contributions over the first few years), with all capital appreciation to be distributed as it accrued. Second, the foundation could be disbanded by Congress after 100 years. Third, a group of designated prominent public citizens could, by a majority vote, have veto power over the selection of new trustees.

Rockefeller officials actually agreed to many of these amendments, but Congress could not stomach giving “the viper” his new philanthropic vehicle. They rejected the charter. Three years later, Rockefeller found the state legislature in Albany to be more amenable, and consequently New York State issued a charter for the Rockefeller Foundation without any of the restrictions discussed in Congress. The Rockefeller Foundation became the model for the tens of thousands of foundations that followed.

And what is that model?

Let’s start by looking at how foundations are governed. Private foundation boards choose new trustees without public input. For family foundations that means members of the founding families either comprise or control the board membership, a control that often passes from generation to generation. For example, the billion-dollar Surdna Foundation takes pride in noting that its board members now include a fifth generation of descendants of John Emory Andrus, the man who established the foundation in 1917. On one hand, that seems like a meaningful way of carrying on family philanthropy. On the other hand, it severely limits the pool of potential board members and minimizes the opportunity for finding trustees who would bring diverse world views, racial backgrounds, and skills to the board table.

The number of trustees at a private foundation, moreover, can be tiny. In contrast to the boards of operating nonprofits, which in many states require at least five unrelated people, private foundations can be overseen by two spouses, or a pair of siblings, or simply a single person, period. In fact, the Gates Foundation, the largest foundation in the world by a factor of three, has only three board members, two of them husband and wife: Bill and Melinda Gates, plus Warren Buffett.

Second, the assets of foundations (except for a few outliers that spend down their principal) get larger over time. Foundations are required by law to direct the equivalent of five percent of their end-of-last-year principal toward charitable purposes. This five percent includes both their grants to nonprofits and the foundations’ internal expenses for carrying out their grantmaking work. Because, over time, market returns have exceeded five percent, and because the majority of foundations stick to giving out the minimum, and no more, foundations have grown ever larger.

Third, the presidents and other executive staff of the largest private foundations are extremely well compensated. I’ve written before about how private foundation executives are overpaid, particularly given that they don’t have to deal with the thorniest challenge of the nonprofit world: balancing revenue with expenses. (Foundations don’t have to worry about income for the obvious reason that they already have their money.)

How does this all play out? Let’s look at the Barr Foundation, the largest private foundation in Boston. Barr is overseen by a three-person board comprised of the founding couple and the CEO; it nearly doubled in size between 2008 and 2013 to $1.5 billion, distributing (and using for grantmaking operations) only five percent a year, and not a penny more; and it pays its CEO $725,000 a year in salary and benefits. Nonprofits quietly resent every aspect of this arrangement – the small and insular board, the hoarding of the principal and returns, and the high salaries – but they don’t say a word, because the power imbalance between nonprofits and foundations is so great. Nonprofits that criticize their funders are not long for this world.

And our pals at the Rockefeller Foundation? Well, rather than the principal being limited to $100 million, as was discussed in 1910, and the foundation possibly winding down operations by 2010, the foundation’s assets now weigh in at over $3.5 billion. The Rockefeller Foundation president got paid nearly a million dollars, including benefits, in the most recent year whose records I could access. (The Chief Investment Officer was paid even more, which says something about institutional priorities. But we can save that story for another day.)

In short: At too many foundations there is an inexorable tendency for assets to accumulate, for salaries to bloat, and for board members to remain insular and disconnected from the societal problems they are supposed to be fixing.

And there’s another problem, worthy of a separate column: How in many cases, as when mega-foundations like Gates, Walton, and Broad throw their money around in discussions about public education, they take on an outsized influence over the course of public policy. And unlike politicians, foundations cannot be un-elected. They can grind their axes in perpetuity.

This is not to say that private foundations don’t make good things happen. When foundations make grants, that’s obviously good for society, and foundations often take on an important leadership role, raising important issues and funding unpopular but vital causes. Nor are foundation staff and board members bad people: they are for the most part smart and well intentioned.

But private foundations would have been vastly more effective and efficient over the last century had Edward Devine’s suggestions for the Rockefeller Foundation been adopted, and if other foundations had then followed suit. Money would have gone out the door much more readily. Foundations would have made much more aggressive investments in people and causes, rather than leaving their assets in the securities markets in perpetuity. There would have been no presumption that foundations were permanent entities. Foundations would not have grown so large, so expensive to operate, and so intimidating to nonprofits and public officials.

Of course, this is counterfactual history. This is not the way foundations developed. And, frankly, that’s too bad.

Copyright Alan Cantor 2016. All rights reserved.