The 1990s were a golden age for foundations, with stock market investments yielding sensational returns and assets reaching record levels. Those days are gone, however, and foundations are now having to contend with sometimes dramatic falls in the value of their assets. How has this affected their operations? Alliance talked to 12 international grantmakers to find out.
One way to cope is to take systematic pre-emptive action. As Barry Gaberman of the Ford Foundation explained, ‘Managing the upside is just as important as managing the downside. When resources are expanding dramatically, you have to recognize that this is not sustainable. In a period of growth, you shouldn’t make commitments that will lead to a budget you can’t sustain.’
At Ford, he said, there is a general reserve fund, into which 10-15 per cent of each year’s budget goes. In good years, it’s possible to commit reserves, preferably on one-off grants (eg an endowment grant), in order to avoid making possibly unsustainable long-term commitments. If asset values fall, a decision can be taken not to spend the reserve and the year’s expenditure can be reduced without having to cut back budgeted funds. It gives what Gaberman describes as a ‘first line of defence’.
This was echoed by Mitchel Wallerstein at the MacArthur Foundation: ‘We have maintained a modest budget reserve … which so far has cushioned us from the loss in value of our assets.’ Maureen Smyth reported that the Mott Foundation, too, made a series of large one-off grants during the good years. ‘This strategy helped the Foundation meet its payout requirement, but did not expand its core grants budget and create ongoing financial commitments that would be difficult to sustain in the current economic climate.’
According to Ann Petersen, Kellogg also has in place ‘a couple of processes that decrease the likelihood that we would need to change our programming dramatically’, one of which is a reserve fund. They also budget on a five-year rolling average, with annual review, ‘permitting us to make adjustments’. (Kellogg is in fact the only foundation in our sample that has not experienced a fall in assets.) The Bernard Van Leer Foundation (BvLF) takes a similar approach, working on a three-year rolling average of investment results, which has so far kept their income level despite a fall in assets. This means their annual budget has not yet declined.
Role of strategic planning
Even so – and even if, like Ford, it has so far meant only being able to spend less of your reserve fund – foundations have felt the draught from the falling market. Have they been engaged in strategic planning to consider how to respond to the situation?
The majority of those we spoke to said that they had recently reviewed their operating strategies as a matter of institutional practice. Robert Herdt at the Rockefeller Foundation referred to strategic planning as ‘a continual exercise’. The Mott Foundation clearly take a similar approach. But most denied that they had rethought their strategy specifically to cope with the fall in asset value. ‘It was never an exercise in “damage limitation”,’ said Mitchel Wallerstein at MacArthur. John Healy of The Atlantic Philanthropies said they had made the decision to enter into new programme areas and to spend down their assets within the next 12-15 years, and needed to plan for these changes.
Four foundations said they had undertaken strategic planning exercises as a direct response to reduced revenues. As Craig Kennedy of the German Marshall Fund (GMF) admitted: ‘While we have used [the review] as an opportunity to sharpen our grantmaking, our primary purpose was to address the simple fact that our resources were going to be more limited in the coming year.’ GMF is the one foundation that explicitly mentioned involving grantees in this process as well as Board and staff members. Two out of the four had suffered huge declines in income: the Packard Foundation’s assets have declined by over 60 per cent since the end of 2000, while the Sasakawa Peace Foundation has seen its income drop by three-quarters – though special circumstances apply here.
The King Baudouin Foundation (KBF) is also something of a special case. As Luc Tayart de Borms explained, KBF is cushioned against stock market fluctuations because nearly half of its income (42-48 per cent) comes from the Belgian state lottery. However, this does not make it completely proof against the vagaries of the market. Its most recent strategic plan, devised in 2002, has turned out to be based on what Tayart called ‘optimistic beliefs’ about the endowment. In the event, KBF will have to cut some 20 per cent of its budget.
The impact on grantmaking
In every case where it was applicable, the foundations we talked to said that changes in their financial circumstances would not affect the balance between their domestic and international grantmaking. Luc Tayart said that in the long term, KBF’s ambition is to increase the proportion of European/international grants.
Most acknowledged, however, that straitened means would oblige them to concentrate their resources on priority areas of grantmaking, the core of their mission. Craig Kennedy of GMF said that they would be ‘tightening their priorities’ and placing an emphasis on those organizations that receive larger, less restricted grants through the Key Institution programme. ‘We have created a good network of institutes over the past five years and do not want to dismantle this system after making a substantial investment in it.’ They are nevertheless reducing grants to these institutions by some 20 per cent.
The Packard Foundation is working to phase out over a period of time support to areas that its Trustees do not see as a priority. The Rockefeller Foundation expects to selectively complete programmes that have the potential to gather support from other sources or which are not as closely connected to strategic goals. Luc Tayart talked of KBF focusing on ‘core competencies’ and looking for greater impact: ‘Where we’re not sure about impact, we won’t do it.’
However, several foundations said that payout levels had increased as a result of pressure on resources. Mott reported a slight increase to 5.8 per cent of its assets. GMF’s payout rate was set at 6 per cent some years ago, and ‘will not change’.
The Packard Foundation paid out over 8 per cent of its assets in 2002 and has budgeted to pay out more than 7 per cent in 2003 in order to help offset the worst effects of the economic downturn on its grantees.
Newcomers or the usual suspects?
An obvious dilemma that foundations face is whether to concentrate their giving on those organizations they know and think will guarantee value for money, or whether to support more vulnerable organizations that are feeling the effects of a cold economic climate. Peter Laugharn at BvLF spoke of programme specialists ‘having to make difficult judgements between extending partnerships and starting new ones’. While most were more guarded about new investment, whether in new programme areas or untried organizations, they were also striving to retain sufficient flexibility to take on new project ideas. KBF’s strategic plan deliberately leaves 20 per cent of its budget unspent so as to leave room for innovation and flexibility.
Craig Kennedy at GMF felt that, while one-off projects or events were less likely to be supported, they would continue to make such grants in areas where they believed there was a special need. He gave the example of GMF’s work in the Balkans where, he said, some new organizations would undoubtedly receive support. The Packard Foundation said that though it was streamlining its programme areas, it might expand grantmaking within those areas and would continue to fund start-ups as well as established grantees.
Mitchel Wallerstein at MacArthur said that they were moving away from funding individual NGOs. Instead they were moving towards making larger grants, making more use of intermediaries, and identifying opportunities to take work to scale on a regional or national level. This change in policy had more to do with the strategic approach taken by the foundation than with the downturn in the market.
Interestingly, and against the general tide, SPF is tending to spend more on start-up funding than on ‘maintenance’. In Akira Iriyama’s words, ‘marginal productivity is of more concern at a time of less affluent resources’. In order to avoid the danger of tending to select safer, more conservative, grantees, SPF is spending more money on feasibility researches. Even more strikingly, The Atlantic Philanthropies, which is in the process of entering new programme areas (like MacArthur, not primarily in response to economic considerations), expects to devote most of its grant funds in 2003 to organizations in the programme areas it is leaving.
The general view, though, was summed up by Robert Herdt at the Rockefeller Foundation: ‘Whether they are ‘vulnerable’ or ‘existing’ grantees, their work will be rigorously reviewed to determine if it is sufficiently directed toward our strategic goals.’
Duration and purpose of grants
Again, most considered that economic circumstances had not caused them significantly to modify the kind of grants they were making as far as duration and purpose were concerned. Packard will continue to make capacity-building grants to its grantees – approximately $3 million worth in 2003. According to Carol Larson, they have also, where possible, supported grantees with multi-year commitments, increased asistance for general operations over specific programmes, and provided transitional organizational support.
Where changes were occurring, these were prompted by other considerations. As we have seen, MacArthur is moving away from making small grants. Changes in the pattern of Atlantic’s grantmaking will be in response to the shifting of their areas of interest.
Had foundations changed or were they changing their investment policy in order to make more programme-related investments? Among the foundations we spoke to, in almost every case the answer was no. The Packard Foundation has what Carol Larson describes as ‘a robust Program Related Investments Program’. At present, it has some $130 million in programme-related loans to organizations aligned with its mission and expects to authorize about $25 million in new ones in 2003. The Rockefeller Foundation, meantime, is adopting a more cautious attitude towards programme-related investments. It has increased such investments ‘somewhat’, but, according to Robert Herdt, is ‘unlikely to make large increases’. Mitchel Wallerstein said the MacArthur Foundation, as a pioneer, together with the Ford Foundation, in the use of programme-related investments, already invests millions of dollars each year in PRIs, both in the US and internationally.
Under circumstances of financial scarcity, you would expect to find some retrenchment in operating costs, and in virtually every case you would be right. The exception is Atlantic Philanthropies: ‘We shall budget prudently but we would have done this anyway.’
Foundations have adopted a variety of means to curtail administrative expenditure: making less use of consultants and contractors in the case of the Mott Foundation; deferring some internal investments and cancelling some annual events in the case of the GMF; keeping a more watchful eye on the travel budget, in the case of BvLF; moving to less costly office premises in the case of SPF.
As Luc Tayart pointed out, for most foundations, salaries are the largest part of the administrative budget. All those questioned had been forced to consider their staffing needs. Measures taken range from not automatically replacing staff when they leave and asking existing staff members to take on additional responsibilities to making more or less drastic cuts in staffing levels. SPF, the worst hit financially of those we talked to, had reduced its workforce by almost 20 per cent over the last few years, while the Packard Foundation had laid off 40 per cent of its workforce. Their operating costs in 2003 will be 50 per cent of what they were in 2000.
Fortunately, so far most have not had to proceed to this sort of extremity. But the message is clear that even the best-placed foundations are having to look very hard at all aspects of their spending in the face of shrinking endowments. So far, they have managed to weather the storm, even if has meant making adjustments. But, as Peter Laugharn of BvLF observed, ‘None of us knows in which direction the economy will evolve.’ If the markets decline further in the coming year, Mitchel Wallerstein at could not categorically rule out some ‘belt-tightening’ at MacArthur, while Luc Tayart felt this would mean a major rethink for KBF.
1 In the fiscal year 2000 (1 October 1999 – 30 September 2000), the last good year, Ford committed around $214 million in general reserves. This figure dropped to $105 million in 2001, the beginning of the decline in the stock market, to $75 million in 2002. In 2003 the figure will be around $10 million.
2 The Japanese government requires foundations to invest only in yen-denominated, fixed-rate bonds and deposits. The low interest rate in Japan and the sluggish stock market – conditions which date back ten years or so – have meant that Japanese foundations fell on much harder times than their counterparts elsewhere.
3 A €1 million for AIDS in Central Africa came from that 20 per cent.
Andrew Milner is a freelance writer and editor who specializes in civil society issues. He can be contacted at email@example.com
Caroline Hartnell is editor of Alliance. She can be contacted at firstname.lastname@example.org
If and when foundations make the decision to withdraw from a particular area of work, how do they do so responsibly? The first thing, says Barry Gaberman, is to let both grantees and funding partners know you are carrying out a review and the scale and timing of it. They need to be made aware that the foundation is not going to be able to go on funding at the same level. Failure to do this can seem like a breach of good faith. Once the decision has been made, the foundation must communicate very clearly what the new lines of work are going to be. ‘You can’t just toss people aside,’ as Gaberman remarked, especially when you have worked with them for a long time. The foundation has to extricate itself as sensitively and responsively as possible
This certainly involves talking openly to grantees, and possibly making a generous tie-off grant. The Atlantic Philanthropies, for instance, is in the process of doing this, while the Packard Foundation, says Carol Larson, is looking carefully at the strands of work it is phasing out and developing a strategy to ease the withdrawal for grantees.
Alliance would like to thank the following for taking part in the survey:
John Healy, President, The Atlantic Philanthropies
Toby Johns, Executive Director, Baring Foundation
Peter Laugharn, Executive Director, Bernard van Leer Foundation (BvLF)
Barry Gaberman, Senior Vice President, Ford Foundation
Craig Kennedy, President, German Marshall Fund of the United States
Anne Petersen, Senior Vice President for Programmes, W K Kellogg Foundation
Luc Tayart de Borms, Managing Director, King Baudouin Foundation (KBF)
Mitchel Wallerstein, Vice President for the Program on Global Security and Sustainability, John D and Catherine T MacArthur Foundation
Maureen H Smyth, Vice President-Programs, Charles Stewart Mott Foundation ¬
Carol S Larson, Vice President and Director of Programs, David and Lucile Packard Foundation
Robert Herdt, Vice President, Program Administration, Rockefeller Foundation
Akira Iriyama, President, Sasakawa Peace Foundation