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Guest Post: Is Maximizing Returns the Right Approach for Foundation Endowments?

phil buchananNote: As I mentioned earlier, I am taking a few weeks away from the blog to relax and reconnect with the world outside of social change. But I am leaving you in the incredibly capable hands of a rockstar set of guest bloggers. Next up is Phil Buchanan, President of the Center for Effective Philanthropy (CEP), the leading provider of data and insight on foundation effectiveness. He is also a columnist for The Chronicle of Philanthropy and a frequent blogger for the excellent CEP Blog. Here is his guest post…

When it comes to the debate about the social impact of endowment investments, college and university campuses – not foundations – seem to be where the action is. Foundations have hundreds of billions of dollars in assets but, today, most of the large ones appear to be placing no restrictions whatsoever on how their endowments are invested.

Divestment is hardly a new issue, of course. In the late 1980s, when I was deciding where to go to college, many campuses were racked by a heated debate over divestment from companies doing business in apartheid South Africa. In the 1990s, the issue was divestment from tobacco companies. Today, a similar debate is playing out over fossil fuels, for-profit prison companies, and other investments

True, most college boards are still refusing to limit their investment options much, if at all. From what I understand, the arguments against divestment that get made in college and university – as well as foundation – boardrooms include that divestment doesn’t accomplish anything, that it’s a board’s fiduciary duty to maximize returns, and that ruling out some investments risks a slippery slope in which an increasing number of industries are ruled out for moral reasons.

But it’s a very live issue in higher education and some institutions are, in fact, drawing boundaries around how their endowments can be invested. They are deciding — usually after sustained student and faculty pressure — that their monies should not support certain industries.

Stanford University divested from coal companies in 2014 and, this year, Syracuse University divested entirely from fossil fuels. “Syracuse has a long record of supporting responsible environmental stewardship and good corporate citizenship, and we want to continue that record,” said the school’s Chancellor. “Formalizing our commitment to not invest directly in fossil fuels is one more way we do that.”

Earlier this summer, Columbia University made headlines as the first college or university to divest from the for-profit prison industry, following a student campaign. “This action occurs within the larger, ongoing discussion of the issue of mass incarceration that concerns citizens from across the ideological spectrum,” read a University statement. 

But what about private foundation endowments — which Foundation Center estimates to be some $580 billion in total? Rockefeller Brothers Fund (RBF) received a lot of attention last fall with its decision to divest from fossil fuels. Was this decision part of a larger movement among funders?

Evidently not, or at least not yet, as the Center for Effective Philanthropy (CEP), the organization I lead, reported in Investing and Social Impact: Practices of Private Foundations. (The report was released in May and is based on a benchmarking survey of private foundations making at least $10 million in grants annually.) RBF is one of very few larger foundations to divest from fossil fuels, or from anything, for that matter — at least so-far. More than 80 percent of the 60 foundations that responded to this portion of our data collection effort said they screen nothing — not fossil fuel companies, tobacco companies, for-profit prisons, or anything else — out of their endowment investments.

Of the small proportion that do some screening, most exclude tobacco companies. Just three have divested their endowments from fossil fuels.

Time will tell whether the decision of RBF and a few others — and the accompanying publicity — will lead more foundations to reflect and then take this step. Of course, large foundations don’t face the kind of pressures colleges do — sit-ins by students, faculty votes, or pledges from alumni to withhold donations, for example.

Still, given all the discussion about aligning investing decisions and the pursuit of social impact, I was surprised how few foundations have placed any restrictions at all on their investments. I have spoken with some foundation CEOs and board members who make an impassioned argument that to do so would be irresponsible and pointless. Interestingly, though, few seem willing to make this argument against connecting investment decisions to social impact publicly.

On the other end of the spectrum in this debate is Clara Miller, president of the FB Heron Foundation, which invests “all our assets for mission.” Miller, who is quite comfortable making her case publicly, argues that foundations are doing “impact investing” whether they know it or not. “Foundations are investing 100 percent of their assets for impact; they just don’t know whether it’s positive or negative,” she said in this CEP conference session in May. “We have a duty of obedience to mission. And that applies to all of our assets.”

Wherever you come down on this debate, it’s probably fairly easy to agree that it’s an important one. I hope foundation boards will engage it.

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Fundraising’s Shiny Object Syndrome

shiny objectI have to be honest. I am so sick of hearing about the ice bucket challenge that I am loathe to write about it. But I wonder if many in the nonprofit and philanthropic sector are falling victim, yet again, to shiny object syndrome, so I feel compelled to say something.

To me the ice bucket challenge is yet another example of what happens so often in the world of fundraising. Nonprofit board members and staff hate fundraising, so they desperately search for a magic bullet to make it all go away.

Sometimes that magic bullet is “an endowment,” sometimes its “earned income,” more recently it has been “crowdfunding.” This month it’s a form of crowdfunding taken to the extreme, the ice bucket challenge. Some have been so swept up in the hype that they have gone as far to say that the challenge is “rewriting the charity model.

Oh boy.

The reality is that if you want to create social change you need to develop a sustainable financial model that aligns with your long-term goals. It’s not sexy, it’s not easy, and I’m probably one of the few people on this planet who thinks it’s fun. But there it is.

While many nonprofits are scrambling to figure out how to create their own ice bucket challenge, and some thought leaders are offering tips along the way, maybe we should all just take a step back.

Let’s be very clear. ALS’s close to $100 million windfall is not a revenue stream. It is a one-time infusion of money. Yes, ALS may try to replicate the ice bucket challenge on a regular basis, but the stars will never align in quite the same way, people will move on to the next shiny object, and the money will eventually fade.

Because this pile of money is not a revenue stream, ALS can’t and shouldn’t add long-term staffing or programming because the money won’t be there next year. At the same time, they probably can’t create an endowment because the donors’ intent was not for the money to sit in a bank account. Regranting the money is also tricky, again because donor intent was for it to go specifically to ALS. In all of this ALS will be under the microscope, because as Ken Berger of CharityNavigator cautioned, a year from now everyone will be asking where the money went.

One of the few paths that I see for ALS is to treat the money like capacity capital. This could be an opportunity to invest some of the windfall in building a stronger organization by investing in technology, infrastructure, and systems. And they could do the same for their affiliates. They could require capacity building plans and budgets and invest in those plans accordingly. They could, in essence, create a $100 million capacity capital investment fund for the ALS system.

But the point is that far from being a great thing that all nonprofits should strive to emulate, the ice bucket challenge creates a complex and potentially damaging problem.

So instead of spending board and staff time trying to dream up the next ice bucket challenge, please, please, please spend that time and those resources building your financial model, by creating a long-term financial strategy, raising capacity capital to build your revenue-generating function, developing a compelling strategic plan in which people will want to invest, and growing and educating your board.

These are the ingredients for a robust, sustainable financial model. Not a bucket of water, a video camera, and a social media stream.

Photo Credit: StoiKNA


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