The following was originally published on the Latest from Alliance blog on 29 June 2015. The original article can be found here. For more information about Alliance magazine, please visit www.alliancemagazine.org.
By Brad Smith
America’s foundations do not easily use the word “inequality.” This may seem surprising in the wake of the Ford Foundation’s recent announcement that it will refocus 100 percent of its grantmakingon “inequality in all its forms,” but perhaps it shouldn’t. Out of close to four million grants made by American foundations and recorded byFoundation Center since 2004, only 251 use the word “inequality” in describing their purpose. Moreover, the geographic focus of many of those grants is countries such as El Salvador, Nigeria and Malaysia — or it’s simply “global,” which in the parlance of most foundations means the rest of the world. More common are terms like “opportunity” and “poverty,” which can certainly be viewed as related to “inequality” but hardly are synonyms for it.
Nevertheless, inequality is an inescapable fact of our world: while extreme poverty in many regions of the globe may be declining, recent research suggests that the gap between rich and poor is fast becoming a growing threat to peace, economic prosperity, the environment, public health, democracy and just about any other major challenge you can name. Indeed, one of the 2030 Sustainable Development Goals developed by seventy nations (with the direct participation of 7.5 million people around the world) is to “reduce inequality within and among nations.” So, why don’t more foundations embrace the term?
Inequality is controversial. In most camps, the word “inequality” is not neutral. It is a concept that implies a search for causes rather than the treatment of symptoms. It requires the kind of work that Carnegie Corporation board chairRussell Leffingwell so eloquently described in his McCarthy-era testimony to Congress: “I think [foundations] are entering into the most difficult of all fields….They are going right straight ahead, knowing that their fingers will be burned again, because in these fields you cannot be sure of your results, and you cannot be sure that you will avoid risk.” It is also difficult for a single foundation, or even a coalition of foundations, to know where to begin. Oxfam reports that eighty-five ultra-high-net-worth individuals hold as much wealth as the poorest half of the world’s population. How do you tackle such a challenge? Besides, this simply isn’t the kind of work that most foundations do. More than 60 percent of the giving by U.S. foundations goes to mainstream causes in the fields of health, education, and the arts.
That said, a third of foundation giving, according to Foundation Center data, is intended to benefit the “economically disadvantaged.” Could that giving be even more effective if it focused on the drivers of inequality in addition to its devastating consequences?
Foundations are the product of accumulated wealth. Poor people may be charitable but they do not create foundations: the wealthy and super wealthy do. Foundations emanate from the top 1 percent of American households, a cohort whose share of household wealth rose from 7.1 percent in 1977 to 22.8 percent in 2012. Over that same time span, the number of foundations in America grew from 22,152 to 86,192, while their collective assets mushroomed from $35.4 billion to $715.5 billion. Wealth and privilege are deeply encoded into the DNA of philanthropy.
What’s more, foundations tend to be governed by wealthy people. In family foundations, the direct owners of the wealth that made the foundation possible, or their descendants, typically control the board. In endowed, independent foundations, it is not uncommon to find CEOs of large corporations, successful entrepreneurs, and/or investment managers serving as trustees. While wealth does not automatically make one insensitive to inequality, it cannot help but influence the worldview that one brings to decisions about how to invest assets, establish program priorities, and determine which grants (and organizations) are safe and which entail risk.
Foundations live off investment income. Under IRS regulations, foundations are required to spend a minimum of 5 percent of the value of their assets to benefit the public good. In the field, this is known as “payout,” a complex subject that has been extensively studied by Foundation Center. Unlike universities and other kinds of nonprofits that may have multiple sources of earned income, however, the only source of revenue for an endowed foundation is the income generated by its investment portfolio. As a result, foundations traditionally have erected a kind of firewall between their investment activities and the strategic priorities they pursue through their grantmaking programs. More often than not, the operating principle has been to maximize return — it’s harder than you think to consistently earn an inflation-adjusted 5 percent in the public markets — in order to maximize their budgets for grantmaking.
This is slowly changing as notions of mission-related investing and impact investing gain traction in the field. The F.B. Heron Foundation, for one, has decided to devote all its assetsto mission (endowed assets and grantmaking budgets), while more recently a coalition of foundations and nonprofits has launched a campaign to divest themselves of their holdings in leading fossil fuel companies and invest those resources in “climate solutions.” The argument against doing so offered by the majority of foundations is that foundation assets are insignificant in relation to the trillions of dollars coursing through the veins of the global financial system, and that their investment income — as well as the funds available for grantmaking — will decline as a result. Impact investors, on the other hand, would argue that it is still possible to earn market-rate returns with your assets invested in potential solutions to the world’s problems.
Foundations must disclose their financial holdings in their tax returns — a document known as the 990-PF — that are public information. In the near future, the IRS will make these available as machine-readable open data, meaning it will be easier than ever for watchdog groups to call out what they see as inconsistencies between what a foundation does with its grants budget and where its money is invested. In turn, this could accelerate the trend of more foundations devoting at least a part of their investment portfolio to mission.
Despite these apparent obstacles, foundations are ideally suited to tackle inequality!
When I was interviewing for my first job with the International Division of the YMCAs of the USA, my very wise future boss said to me: “There is one thing I want to know: Are you comfortable living with ambiguity?” Philanthropy’s intimate relationship with inequality does not have to tie its hands. Foundations simply need to learn to live with ambiguity, embrace the contradictions inherent in their privileged position, and proceed full speed ahead. Foundations are private institutions created to serve the public good. Their endowed nature insulates them from short-term market pressures, electoral politics, and the vagaries of fundraising. Compared to virtually any other institutional form in American society, they are free to take risks, experiment, support innovators, and stick with seemingly intractable challenges for the long haul. This makes them ideally suited to tackle what may be the most intractable challenge of all – inequality.
To finish where I began, some of the grants I found in the 251 that mentioned inequality were creative, like the one made by the Marguerite Casey Foundation“to support integration of issues of systemic inequality into mainstream venues, specifically children’s museums.” Others were innovative, like the one “to create, test, and disseminate a suite of free, evidence-based assessment tools to help groups find common ground on controversial issues, such as climate change and inequality” made by the Nathan Cummings Foundation. Some were bold, like a grant from the Healthcare Georgia Foundation “for the television program, Unnatural Causes: Is Inequality Making Us Sick?” And others, like the Smith Richardson Foundation’s grant to conduct research on “economic well-being, inequality, and the middle class,” were brainy.
All these foundations have the same intimate relationship with inequality as the rest of the sector, yet they are finding ways to forge ahead. Isolated examples or the start of a trend? Time (and the data) will tell.
Brad Smith is president of the Foundation Center.