Foundations and the State

‘Charity as ordinarily practised, the charity of endowment, the charity of emotion, the charity which takes the place of justice, creates much of the misery which it relieves, but does not relieve all the misery it creates.’
Joseph Rowntree, 1865

Why do we continue to have endowed foundations? Do they exist primarily to enable their trustees and staff to ‘do good’, or to perform the vital role of changing the circumstances of the excluded and marginalized in society? Should we in fact see foundations as the funded conscience of the State, doing the things that we know need doing but which it is politically difficult for elected governments to do? This article proposes a new contract between foundations and the State, whereby they receive tax privileges in return for filling this vital role.

I am no historian but my understanding is that it was the Reformation and the closing of the monasteries in the early sixteenth century that led Henry VIII of England to redistribute the wealth thereby liberated for spending on Protestant causes. Thus, on one interpretation of history, in the UK at least, foundations began as political instruments of the State. The extent to which they have continued as such is something on which we might reflect. Most of us would recoil with horror at the very idea, but maybe foundations do indeed – or even should – serve the State’s purposes, albeit in ways that are not immediately obvious. I want to explore how far this is or should be the case and, to the extent that it is so, what the implications are for notions of accountability. At the outset, I want to make it clear that I accept that the relationship between foundations and the State will always be a tense one. I want to explore how a new contract between the two parties might make that tension a creative one.

Power in a democratic society

In democratic societies, the State represents all of us. It exists partly to ensure that our interests are not undermined by disproportionately powerful individuals or groups in society. That is why it has to be supreme. That is why we have rules, laws and regulations. At the same time, most of us want to make sure that the State itself is not too powerful, but is just powerful enough – and how powerful ‘enough’ is, is the basis of most political debate.

One form of power in society, which can affect us all for good or ill, is the power represented by the control of money. We can’t allow large corporations to go uncontrolled. If we did, we know from experience that they are likely to behave solely in their own interests, or in the interests of their directors or shareholders, even if that means big trouble for the rest of us. One has only to think of the likes of WorldCom and Enron. And when they do thus behave, we use the power of the State, legitimized in democracy by all of us, expressed through the power of law and the sanctions attaching to it, to bring them under control, and punish them as appropriate.

Let’s for a moment reflect on what endowed foundations are. These are also corporations of a kind: they are permanent agglomerations of wealth, made in different ways, dispensed in different ways by different groups of people. Because the use of wealth can affect what happens in society, it has the potential to threaten democracy. When people vote, they vote, in theory at least, for a set of priorities announced by prospective governments. They don’t vote for the whimsical fancies of wealthy individuals or their friends. Which is why foundations – these agglomerations of wealth – also have to operate within a framework of law, and why they can’t just be allowed to get on with it. There is no reason why they should not be subject to the same laws, the same control and regulation, as any other potentially distorting agglomeration of wealth, such as those found, say, in the corporate sector. Thus runs the argument from those who say that foundations must be accountable.

Accountability and purpose

It all depends, however, on what you mean by accountability. These systems of control are based on the idea that the organizations or individuals subject to regulation, and ultimately to penalties, have legitimate functions to perform, especially where what they do impinges significantly on the rest of us. They have a social purpose; otherwise we’d outlaw them altogether. It is interesting that you don’t find endowed foundations in societies ruled by dictators – and that as soon as dictatorship moves to democracy, societies start having foundations, albeit imported ones. The distinguished American theologian, James Luther Adams, made the same point:

‘One of the first things Adolf Hitler did after seizing power was to abolish, or attempt to abolish, all organizations that would not submit to control ... these mediating structures I came to see as ... indispensable ... in a democratic society.’[1]

The dictatorial State cannot, it appears, cope with the threat represented by foundations: many democratic States cannot manage without them.

So any system of control and accountability has to be functional for the purposes that foundations exist to perform. We cannot decide what’s appropriate in terms of accountability until we have agreed on the purposes of foundations in contemporary society. The questions we must ask are: why do we have endowed foundations? Why haven’t we abolished them? Why is one of the first signs of a democratic society the permission given for them to exist where this was not permitted before?

Why do we have foundations?

Paradoxically, it is because foundations have money which is substantially independent of State control that we value them. At some level we recognize that if we leave everything to the State then our capacity for doing various things will be limited.

To address longer-term needs
The essence of democracy is periodic elections. But periodic elections inevitably mean that the party in power has its eye on the next election. The complexity of modern life means that much that we need to achieve takes longer than a single electoral term. It may take 10 or 15 years, or longer. The present British government has a 10-year health service plan and a 10-year transport plan, and probably a few others. But we all know that it cannot go to the polls and say to the electorate: ‘Don’t worry about the fact that the health service isn’t working now, and that the railways are falling apart: we’ll make sure it’s all put right in 10 years’ time.’ They need to show quick results. Governments are inherently short-termist, in complex societies which often require long-term thinking.

Foundations represent one way in which we can address this contradiction. They can pay for some things that will take longer than one electoral term to come to fruition. I suggest that one part of the implicit contract which society makes – or ought to make – with foundations is that they are there to do this long-term work. It is what they can do distinctively, and therefore what they should do. What they should not do is what governments, driven by the short-term political imperatives of the ballot box, can and will do anyway.
 
To take risks that need to be taken
But that is only one element of the contract. It is in the nature of contemporary political culture that we don’t expect governments to get things wrong. In the UK at least, politicians who change their minds, albeit in the face of evidence, are seen as weak. This serves to reinforce the sense that governments can only back certainties. The constraints of democracy, then, make governments risk-averse. If experiments might fail, and be unpopular with the electorate, better not to embark upon them in the first place. But social, scientific, economic and other forms of progress depend on experiment. How else do we find out what works? Governments can sometimes be persuaded to support what works, particularly if it works in the short term, but first different approaches need to be tested, and by definition some will fail. And governments don’t like to pay for things that might fail.

So the second element of the contract we should be moving towards is that we allow foundations to exist because we expect them to pay for the risks which we need to take as a society in order to progress but which we know that governments can’t or won’t take. If foundations choose instead to pay for what we already know works, what we already know governments will pay for, then they are reneging on the contract and should be called to account.

To spend money on minorities
In contemporary political culture, dominated as it is by very influential mass media, and in the UK at least by a rather politically illiterate electorate, notions of populism and democracy get confused. Particularly in the UK’s primitive electoral system, based on ‘first past the post’, and with our still very class-based society, voting, if it’s still done (and the figures show alarmingly that it is dying out), is a largely tribal activity for most people. The outcome of elections is determined by a small number of swing voters. These tend not to be people whose first thoughts naturally run towards the protection of minorities, particularly if the nature of their minority status is to do with ethnicity or sexual orientation. Thus it is that governments in such a system tend to avoid responding to the needs of minorities. Were they to do so, they would need to spend the taxes raised from the majority on the needs of minorities who by definition may be unpopular with the majority. Endowed foundations, then, because they are not accountable in a political sense, can spend money on minorities – whereas governments know that they may well pay a political price for doing so.

Foundations as the funded conscience of the State

In one sense, all these things amount to one role – foundations as the funded conscience of the State, doing the things which in our hearts we know to be right but which we, the voters, make it very difficult for governments to do. I believe that it is wrong for foundations to spend money on the things that governments can do better. Accountability ought to be accountability for this. If foundations behave as if they were conventionally accountable – seeking to please the electorate, for instance – then they are failing in their real accountability.

The contract with the State that I have described is, thus far, an implicit one. I have tried to tease out why it is that we tolerate, or even need, foundations in a democratic society. But maybe the time has come to make this implicit contract explicit, and to cut through the contradictions and misunderstandings around the issue of the accountability of grantmaking foundations.

Accountability to whom?

Contradictions and misunderstandings there certainly are. In a famous article in the Harvard Business Review in 1999, Porter and Kramer[2] point out that foundations have the freedom to develop new approaches to social problems because they are ‘free from political pressures’. However, they also make the point that the money which accrues to foundations through their tax privileges belongs to us all and that foundations therefore have responsibilities to create real value for society. Their article ends with a plea for foundations to accept their accountability to society.

But I’m not sure what they mean by ‘society’. If they mean people at large, then accountability to society will certainly engage the very political pressures from which Porter and Kramer feel that foundations should be exempt. Gerald Freund[3] puts the issue more starkly, citing Vaclav Klaus, the former prime minister of the Czech Republic, who decries tax deductions for not-for-profits, calling philanthropy inherently undemocratic because it subverts the democratic inclinations of the State. There is little or no debate about the big question which, I repeat, is – why do we have foundations at all?

Why do foundations have tax privileges?

In the UK at least, the main expression of the foundation’s right to exist as acknowledged by the State is its tax privileges. The main – indeed, the only – sanction that exists if foundations fail to come up to whatever scratch we set them is the withdrawal of those privileges. This seems to be a rather simplistic approach to an inevitably complex relationship, with the State acting as both judge and jury – though I suspect that the threat is enough to keep foundations in line and that it is rarely if ever carried out.

Surely we can do better than this. How, in democratic societies, should we make decisions as to whether individual foundations continue to justify the receipt of fiscal privileges? What, in practical terms, should the State expect of foundations? And is there anything else, beyond fiscal privilege, which foundations should expect from the State?

What can we expect from foundations?

Transparency
The key to ensuring this kind of accountability on both sides is transparency. Before we can judge what’s happening, we have to know what’s happening. What should transparency mean in practice? First, in my view, it means that foundations have a duty to focus on the outputs and outcomes of the work they support, and to make them widely known. Otherwise, there’s no guarantee that society can learn from and benefit from the work which – through the fiscal privileges accorded to foundations – society is enabling to happen.

In practice, that means foundations should be required to publish full lists of the grants they’ve made and, when information is available, the extent to which those grants have been successful or not. As it is clearly nonsense for foundations to earn money in ways which go against their stated objectives, they should publish details of the sources of the income which finances the grants. We should know what the yield on capital is, and how it compares with their annual spend on grants, administration and other things. Given the powerful position of those who decide how to allocate funds, information about the trustees and their backgrounds should be available: if a trustee was at school with the recipient of a large grant, we all have a right to know that. We also have a right to know about the process which foundations use to make their decisions: do they consult experts? Do they vote? How far are the interests of individual trustees indulged? How are potential conflicts of interest dealt with? What steps do they take to formulate and reformulate policy? There is an argument at least for making minutes available, and for requiring larger foundations to do at least some of their business in public. Interestingly, the oldest trust in the UK – and one of the largest – meets in public.[4] And our Community Fund, which is not a foundation in the conventional sense but is the UK’s largest generalist grantmaker, publishes its board minutes on its website.

Evaluation
Further, I think it is time for foundations to focus on ways of evaluating how well they are performing. In a recent paper published by the Washington-based National Committee for Responsive Philanthropy, Jason Scott, writing about ways of measuring the effectiveness of organizations funded by foundations, says:

‘Wouldn’t it be wonderful to see which grant-makers had the best track record of solving the problems they outline in their annual reports?… At long last, we could begin to use quantitative measures to evaluate grant-makers …and perhaps we could put a few under-achieving foundations, program officers, and venture philanthropists out of business with the results.’[5]

I’m not sure that I would want to go as far as that – or down the performance/ quantitative route. Maybe Scott overstates his case for effect, but he has a point. The trouble is that foundations are immune from normal market pressures. Such pressures afflict even most grantseeking non-profits: while they may not have customers in the conventional sense, they are certainly liable to close down if they stop doing a decent job, because their funders will desert them even if their clients don’t.

But who is to tell a poorly performing foundation that it’s doing a bad job? In the market, dissatisfied customers vote with their feet. In the grantmaking world, voting with your feet means biting the hand that feeds you. Confidential qualitative customer studies may be an answer, but it takes a considerable degree of corporate self-confidence to undertake such a thing. If you think you’re doing good, you may not want to be told that you’re not doing it right – which is why so few foundations have commissioned customer satisfaction studies, and why those that have are probably not those that need to.

It seems to me that it is in the spirit of this new contract that all foundations should be expected, at regular intervals – say every five years – to engage an independent assessor to find out how well they’re doing. Of course, one would expect the scale of such an exercise to be appropriate to the scale of the foundation. A small foundation might carry out a rather modest exercise, simply involving someone speaking on the phone to a sample of grantseekers, whereas a larger foundation could reasonably be expected to go in for something much more substantial. Those few foundations which have carried out such exercises have usually learned something of value which they didn’t previously know.

What can we expect from the State?

So much for the expectations which I think we can reasonably have of foundations. But this is a contract – a quid pro quo – and it is time now to reflect on what foundations can reasonably expect of the State in return. There are several key elements to this, which may be summarized under the following headings:

• a supportive legal and fiscal environment;
• a hands-off approach;
• most important of all, a commitment to take foundation initiatives seriously, to be willing to learn from them and to take on board proven experiments.

A supportive legal and fiscal framework
What might this mean in practice? In the UK, there is no distinct legal form for grantmaking trusts. They register as charities just like any grantseeking charity. But they are not the same. They don’t suffer from the same pressures, on the whole they do a very different job, and their social purpose is different. This should be recognized in the shape of the legal form and context in which they operate. And if foundations feel that the best way to pursue their goals is through social investments, or programme-related investments, forfeiting an element of conventional financial return as the price for social experiment and progress, then there should in my view be no legal constraint or fiscal disincentive to prevent or discourage them from doing that. If they want to dip into capital to make a real difference quickly, or, within reason, to save it up for a big initiative in, say, five years’ time, then I think they should be free to do that as well, provided that eventually we can check whether this was for real. Judgements on foundation performance should not be made slaves to the tyranny of the accounting year; those judgements should be made over the longer term.

A hands-off approach
A hands-off approach means just that: foundations that are doing their job well should be able to operate free from government interference. What institutional arrangements are most conducive to this? One size will not fit all. Different societies will need different mechanisms. The UK Charity Commission is seen as too much the regulator on behalf of the State. It doesn’t distinguish foundations from any other beneficiaries of tax-exempt monies, and is understandably preoccupied with abuse by charities that raise money directly from the public. What is needed is an arms-length body that is created so as to be independent of government and foundations, and therefore where necessary able to be critical of either or both.

Taking foundation initiatives seriously
The third element of what we expect from the State – the commitment to take foundation initiatives seriously, to be willing to learn from them and to take on board proven experiments – will require government to engage with foundations. On their side, engaging with government will be easy for the big foundations, but the smaller ones may have to look to their associations to act as brokers and communicate with government on their behalf. And that means associations being staffed adequately to do the job, which in turn means realistic membership subscriptions, with larger foundations accepting their responsibility to pay more.

In this context, it is important to emphasize that whatever institution is devised to monitor this new contract between foundations and the State, it is empowered to monitor both sides of the contract – not just whether the foundations deserve their tax privileges. If there is evidence that foundation-backed initiatives have been drawn to government’s attention and dismissed out of hand without a fair hearing, then we all need to know about that.

Advantages of a new contract

I like to think that a clear new contract with the State along the lines I have set out could, in the longer run, be packaged in such a way as to make giving more attractive to new donors. Greater public understanding of what foundations do will also help the foundations. If foundations are fulfilling a distinctive and defensible role in a transparent and accountable manner, then society should feel it is well worth ensuring that they operate in a supportive fiscal environment. Foundations in the UK have in recent years suffered some serious fiscal setbacks as a result of government action. There has been no great outcry from the public about this, because most people know nothing of their work and are thus hardly likely to rush to the barricades to defend them. If their role was more widely understood, people might be more likely to care about what they do.

Foundations for whose benefit?

I don’t expect these proposals to be initially popular with anyone. Governments may not react kindly to the idea that they should really be encouraging foundations to do things that they won’t do because they know that they might be unpopular with voters.

On the foundation side, there will be those who see the glorious freedom of foundations to do what they will in the way that they choose to do it as something precious and worth preserving, especially as it saves them from what they will see as interference by the State. Many people associated with foundations like to ‘do good’ in a short-term ‘go home and sleep peacefully in your bed’ kind of a way. In my view, such sentimentality is misplaced. It is relevant only if we decide that foundations exist principally for the benefit of the trustees and staff who run them rather than to change the circumstances of people who are excluded or marginalized, because of poverty, minority ethnic status, disability or whatever.

Joseph Rowntree’s message, quoted at the beginning of this article, is still relevant today. Foundations have a vital job to do and I don’t see why they should be playthings for society’s ‘haves’. That does not mean that working for them or running them shouldn’t be fun. But neither does it mean that their decisions should be whimsical, opaque or unaccountable.

This is a field in which there is a natural inclination to think uncritically and accept the status quo. Who could possibly be critical of organizations that are so generous? We need at all costs to avoid believing our own publicity and succumbing to what those who receive foundation grants tell us about ourselves (how wonderful we are, how our grant has pushed back the boundaries of human endeavour, helped to save the world, saved lives, and so on).

We badly need a vision, a dream, of how it might be better done. In the immortal words of Oscar Hammerstein II, ‘You got to have a dream – if you don’t have a dream, how you gonna have a dream come true?’  

1 James Luther Adams, University of Chicago.
2 Mark Porter & Michael Kramer, ‘Philanthropy's New Agenda: Creating value’, Harvard Business Review, Nov/Dec 1999.
3 G Freund (1966) Narcissism and Philanthropy: Ideas and talent denied New York: Viking.
4 Bridge House Estates, whose origins can be traced back to 1097. See M Dean, ‘Trust open for business’, Guardian, 17 July 2002, available on the web at www.guardian.co.uk/Archive/Article/0,4273,4462434,00.html
5 J A Scott, ‘New economy, new philanthropy’ in The State of Philanthropy 2002 National Committee for Responsive Philanthropy, Washington DC, 2002

Steven Burkeman worked for almost 20 years as the Trust Secretary to the Joseph Rowntree Charitable Trust, a large UK foundation founded in 1904. He is now a consultant working with foundations and others interested in philanthropy. He can be contacted by email at burkeman@gn.apc.org or visit www.stevenburkeman.co.uk

This paper was delivered as the keynote address at the annual conference of Philanthropy New Zealand in Wellington on 21 October 2002.