Foundation boards are choking the life out of philanthropy. And if we don't fix them, much of the innovation happening around us will die on the vine.
People transitioning from the private sector roll their eyes at various aspects of philanthropy when they first show up. As someone with a foot in each world, I can see both sides. I’m not overly sympathetic to the old “this needs to be run like a business” trope. It’s often something an insecure person says to establish their “serious person” bona fides while they scramble to figure out what specific improvements they can actually suggest. But there is one element of “foundation shock” for which I have full sympathy.
Old Hand: Hey new guy, we are so glad to have you here at XYZ Foundation
New Person: Thanks so much. You know, I have been working in this field for 20 years, and I couldn’t be more excited to put my expertise and networks to work. I want to learn as much as I can and then make some really good grants.
Old Hand: Yeah, we’re excited to have you. You’re the cream of the crop, and your fellow program officers are also experts in their respective fields. Bob over there ran an elementary school out of a yurt for 5 years and speaks seven languages. Susan has two PhDs and invented coffee ice cream. We have great relationships with our grantees - we work hard to treat them with respect and learn as much as we can from them. They are genuinely amazing . . . ahem . . . well, most of them. Anyway, it’s a real privilege to work here. Except maybe those weeks we send out Board Books.
New Person: Board Books?
Old Hand: Yeah, they are these packets of memos our team of experts slave over and then send out to a group of strangers once a quarter. Then after a week or so that group of strangers, most of whom don’t read the packets, come in and make all the actual, you know, decisions. In a day. Four times a year.
New Person: Wait, what?
And . . . scene. (Note: XYZ Foundation is not an actual foundation. Hyperbole added for emphasis)
Most US foundations require board approval for every grant (or impact investment) they make. These boards usually meet 2, 3 or 4 times a year, and are comprised of family members, senior advisors like lawyers or the family office managers, and, most often, people who have been invited on to the board because they head a large company or non-profit in the community. These people are generally smart and take their jobs seriously. Sure, there are a few occurrences of malfeasance - self dealing, blatant patronage or other truly unethical behavior - but those examples are so few and far between that I am going to ignore them entirely for now. The changes I recommend are also good for catching the real bad guys, but I think foundations have much more of a “scared of their own shadows” problem than a bad guy problem. Well, except for LiveStrong.
Foundation boards are by nature conservative bodies (That’s “conservative”, not “Conservative".) Although most are technically structured as “majority rules”, every one I have encountered operates on a consensus-based approach. If one board member is vocally against a grant, it doesn’t happen. In addition, most board members are keenly aware of their role as stewards of capital that isn’t theirs. Their number one objective is to make sure the money isn’t being “wasted” or “misspent.” Those two characteristics taken together - consensus based decision making and a focus on avoiding mistakes - are already a recipe for institutional conservatism. But it gets worse.
Program officers are usually a non-profit’s main point of contact with a foundation. Program officers are judged by by different criteria at different foundations, but almost all of them are judged by whether most or all of the proposals they bring to the board are approved. Even if there is no punishment for failure, it often feels wrong to ask a non-profit or social venture to make the effort to make a proposal if you don’t know whether the Board will respond favorably. So, again, there is a natural incentive to present opportunities that are similar to those the Board has approved in the past. And there is a disincentive to spend time on projects that are new, different or have a high chance of failure.
From the applicant side, there is the double whammy of intermediation and delay. By intermediation I mean that your primary interaction is with a program officer who won’t be the final decision maker. You feed information into the PO hopeful that it will get to the Board members without too much distortion. You get minimal feedback back after a decision, often from a PO who reasonably doesn’t know, or doesn’t want to share, the deliberations of the board. The totality of the feedback is often, “Yeah, they were in favor of making the grant. I'll get the award letter to you by Friday” or “Some liked it, but a couple of board members thought you weren’t ready. Let's talk next year." Couple this communication issue with delay, the fact that often you wait several months for a response and you have a recipe for frustration. Many of the best people raising impact investment capital skip foundations entirely because they can't handle the 3, 6 or even 12 months it takes to get an answer.
Using the board as the primary decision maker doesn’t serve any of the three constituencies:
- Non Profits and Social Ventures - face long delays and black box decision making with minimal constructive feedback on applications. Those trying new, high risk strategies find it hard to get proposals in front of Boards because of the above-mentioned structural conservatism.
- Program Officers - are simultaneously disempowered and not held accountable for their recommendations because, at the end of the day, these are the Board’s decisions. Most POs I know go to great lengths to manage applicant expectations during the long “We’ll see how they respond to your proposal, I’m really hopeful they say yes” period, but it’s hard to not feel like a glorified waiting room attendant. Additionally, part of a PO’s job is usually babysitting a couple of “Board favorites”, long term grantees of the Foundation which Board members like but staff all know are not performing.
- Board Members - let’s not forget these qualified, good hearted people, most of whom are receiving no compensation for their hard work. They are being asked to approve a slate of grants (or impact investments), often many in one meeting, almost always without enough time or information to make a truly informed decision. After all, you spend one or maybe two days a quarter on this. And you have a legal duty to ensure that the foundation funds are being spent in keeping with the foundation’s charitable mission and in compliance with all applicable law. So, of course you are going to be conservative in your decision making, even if you have a nagging sense that the whole organization is ossifying before your eyes.
So if it is so bad, why are almost all foundations run this way?
Short answer, because this is how we’ve always done it. Slightly longer and snarkier answer, foundations at inception are built by lawyers, not by the people who will work there. A lawyer is paid to make sure nothing bad happens, not to maximize the potential for philanthropic innovation. From her perspective, the key question is: “How do I make sure that this new entity meets its legal obligations to spend money in keeping with its charitable purpose and in compliance with state and federal law?” The answer is, she will name five board members who are legally responsible for compliance with the law, and then she will have those five board members approve every pay out the Foundation makes. She will attend every board meeting as well and any time a board member asks her, “Can we do this?” her default answer will be, “It’s technically possible, but to be safe, I’d recommend we pass on doing that for now.” And she’s not wrong!! From her perspective, she has minimized the odds that any of these people will ever go to jail. That’s her job. But I would argue that it is a massive overreaction to a tiny tiny risk (the number of Foundation board members who have ever been charged with something other than knowingly criminal behavior . . . . it’s a short list, it may be a list of zero) It’s as if you decided to manage the risk of being eaten by a shark by never leaving your basement for the rest of your life. I mean, sure, risk managed, but there were easier ways to accomplish the same thing.
OK, smart guy. If you’re so smart, what’s the answer?
Ok, it’s going to hurt me to type this, but here goes . . . Foundations need to be managed more like businesses.
A corporate board of directors, when it is actually doing its job, basically does three things:
- Hires, evaluates and fires the CEO
- Votes on major strategic actions, often things like significant acquisitions, company strategy and any take-over offers from other companies
- Oversees an annual audit of the company, ensuring that it is complying with relevant law and fairly representing itself to investors and regulators
Stop laughing, I said “when it is actually doing its job”
The way I see it, foundation boards should get out of the grant approval business and get into the oversight business. They should:
- Hire, evaluate and fire (yes, fire) senior staff
- Debate and vote on foundation strategy and budgets
- Ensure compliance with all relevant law
Let’s take those one at a time. First, grantmaking power needs to be put into the hands of people who are closest to the organizations doing the work - whether that is program officers, staff committees, outside experts, peer reviewers or some combination of those. These people need to be given the freedom to take risks and use all of their knowledge and networks to be the most effective grant makers possible. That is step one. Step two: hold them accountable. There are a million ways to define effectiveness: performance metrics, peer reviews, external evaluators, even grantee surveys. The point is, the job of a board should be to hold staff accountable for performance, however it is defined. Evaluating performance is a much better use of a group of outsiders who meet one a quarter than making individual deployment decisions. If you don’t think your staff is capable of making individual grant decisions, or you don’t like the grants they’ve made, go find better staff. Most POs I know would gladly trade job security for more autonomy.
Second, debating and approving multi-year strategy and annual budgets. This gets to the heart of a board’s reason for existing - ensuring that the funds are being spent in keeping with the mission of the foundation. Strategic questions - thinks like “Given our experience over the past 10 years, should we expand our work in affordable housing?” or “Given our grandfather’s wishes when he set up this foundation, should we approve a new program working in developing countries?” - these are the kind of questions that a Board can and should dig in to with help from staff. The fact that they don’t work at the Foundation everyday can help because they have some critical distance. Answers to these questions naturally express themselves in the form of budgets. “We’re going to spend $2 million on affordable housing over the next two years. We’re going to evaluate it in this way, and we’re going to look at that information before we consider another allocation in two years.”
Third, the board should make sure the foundation is meeting all of its legal responsibilities - pay out, charitable purpose, compliance with relevant law. This is serious business but it is easily accomplished through audits and sensible financial oversight. To my earlier point about hiding in your basement, it is silly to build your whole process around it. In addition, in those rare cases of real malfeasance, a Board should be separate enough from day to day operations that it can look at them critically.
That’s it, that’s what a board should do. It gives them plenty of control over the direction of a foundation without disempowering staff and confusing the hell out of prospective grantees.
Why does this matter?
I believe we are entering an era of unprecedented philanthropic innovation. Just in my little corner of the world we have impact investing, benefit corporations, grants to for profits, pay for success programs, ecosystem service contracts, public private partnerships, and in any of these there are opportunities for great impact and a bunch of opportunities to royally step in it. For foundations to play the role we need them to in supporting innovation, they need to be able to actively participate in the iterative process of innovation and take sensible risks quickly, and that means pushing decisions out of the board room. Boards can then focus on the really big question: which of these innovations actually work?