Limited life or perpetuity? Achieving greater impact through philanthropy

Caroline Hartnell

Though the first ever limited-life foundation, the Julius Rosenwald Fund,was established as long ago as 1917, the idea that a foundation might have only a limited life still seems to subvert many traditional notions about foundations. But in 2002, Paul Jenson and David Katz wrote an article suggesting that ‘giving while living’ is far more cost-effective than building a perpetual endowment. While endowed foundations look well beyond the lives of their founders and take for granted the idea that they will exist in perpetuity, Jenson and Katz and a small but growing number of others challenge this model and claim that it results in a significant loss of value to society. Instead, they propose a model whereby foundations literally spend themselves out of existence. Not surprisingly, then, a session on limited-life philanthropy at the recent European Foundation Centre in Madrid in June gave rise to a lively and stimulating debate.

At this session, John Healy, former President of The Atlantic Philanthropies, and Stephen Pittam, Secretary of the Joseph Rowntree Charitable Trust (JRCT), represented these seemingly diametrically opposed positions. Atlantic is spending down. At the end of December 2006, the value of the endowment was €3 billion, and the plan is to have spent all of this by 2020. This will mean awarding over €250 million a year until 2016, the year it plans to complete its active grantmaking.

JRCT has a much smaller endowment of around €300 million and makes grants of around €7.5 million a year. Joseph Rowntree established the trust in 1904 with a 35-year lifespan, but gave his trustees unfettered discretion to set up new trusts or keep going if they felt this was the right thing to do. At meetings in 1939 and 1974, the trustees concluded that their work fighting for peace and social justice was not yet finished. They now meet every ten years to consider the question: should JRCT keep going or spend down?

Both foundations are thus to an extent structured around the possibility of limited life, yet for the time being they have opted for very different courses. Their debate at the EFC, on which this article is based, represents years of a friendly yet passionate disagreement on this subject.

Achieving the greatest impact

John Healy
Perpetuity is an awfully long time. I can’t get my head around the concept. Does it mean 1,000 years, 5,000 years, 10,000 years? Will the world really be the same in a thousand years’ time? Will we really need all these foundations doing what they were set up to do today or a hundred years ago?

In contrast, a foundation that has decided to adopt a policy of limited life can focus on the really pressing issues of our time – poverty, climate change, health. Why wait to deal with these issues over a long period? Why not spend as much money as possible as quickly as possible to address them?

There can often be a mismatch between a foundation’s mission and its payout rate if it is wedded to perpetuity and insists on paying out only 5 per cent per annum. Take the fictional example of a foundation that was set up by some wealthy person with an endowment of €1 billion to deal with the pressing global issue of climate change. As perpetuity is the ‘default’ position, the foundation is set up on a perpetual basis. It can thus only spend €50 million a year. Well, I tell you, if we don’t solve this climate change problem in the next 25 years the game is up, and perpetuity won’t mean much to anybody, let alone a foundation. It just doesn’t make sense.

Stephen Pittam
JRCT trustees have on occasion discussed whether spending capital now could avert a global catastrophe. This arose in the 1970s and 1980s when there was a real threat of nuclear war. At this point the trustees asked the question, would it be better to spend all our resources now if we could avert nuclear war? JRCT is much smaller than Atlantic, we have an endowment of about €300 million. But the trustees have never been convinced that JRCT could make the difference that would be necessary to justify spending down; they have always been conscious of the unknown but pressing needs that the future might hold. So I suppose the question is, could you make that significant difference on a new issue like climate change? I think we need to be cautious in our claims about the kind of impact we’re capable of having.

Many of the historic examples in the social justice field that we work in suggest that the kind of length of time that you need to change things is much longer than say 20 years or 50 years. The abolition of the slave trade in British territories, the extension of the franchise to women, the abolition of capital punishment, and more recently the implementation of human rights and freedom of information legislation in the UK – all these have required sustained commitment over decades. It has been our experience at JRCT that support for the change makers over the long term offers the best social return.

John Healy
I’d like to talk about precedents. There are relatively few precedents for limited life because it is such an eccentric way of operating. Limited-life foundations are mostly in the US, although there are some foundations in the UK that have adopted this model. One example that comes to mind is the Aaron Diamond Foundation, a relatively small US foundation that spent down during the 1980s and early 1990s and in doing so achieved some very good results. The foundation’s heavy investment in an AIDS laboratory in New York resulted in the development of the anti-retroviral drugs that have made such an impact on the death rate from AIDS around the world.

Atlantic Philanthropies will, I think, be the example that either makes or breaks the case, because it intends to spend €3 billion over a relatively short period of time. Grantmaking will end by 2016, and it won’t be long before people can form judgements as to whether this has really worked.

The importance of focus

John Healy
It is well documented that foundations have a worrying characteristic of straying from their missions. They don’t have the discipline of the marketplace to keep them focused on what they were originally set up to do. If a foundation has a limited life, its chances of creeping away from its mission are significantly reduced.

In the case of Atlantic, taking the decision to limit our life was very liberating, and it brought an enormous sense of urgency. Unlike those working in a perpetual foundation, an organization that has decided to limit its life is faced with the prospect of judgement in the immediate future. This encourages you to get on with the job with a renewed sense of urgency. It also demands a much greater sense of focus than is normally to be found in foundations. And let me declare a bias here, I think lack of focus is the besetting sin of the foundation world.

Stephen Pittam
Of course focus is generally a good thing, but equally too much strategy and focus can be a bad thing. What we as foundations are good at is opportunism, flexibility, and an entrepreneurial spirit. I think if you get too far entrenched in strategic thinking with a very limited focus then you can quickly become bureaucratic and ossified.

I am concerned that foundations that decide to spend down put themselves under so much pressure to achieve that they lose something really precious to the foundation world. Inevitably ‘legacy’ becomes all important. This is accompanied by an obsession with evaluation and measuring effectiveness. I am really concerned that in trying to achieve over-optimistic short-term targets we lose sight of a longer-term vision.

And what about organizations that fall outside the remit of a limited-life foundation? What about new and emerging organizations that don’t fit within the strategic direction of a foundation that is already imagining its legacy? Organizations that emerge to meet new needs in a changing context are likely to feel excluded by the limited-life model.

Ossification or maturity?

John Healy
You mention the danger of becoming ossified, but we found in Atlantic that taking the decision to limit our life meant a much greater possibility of introducing really profound change within the foundation. Foundations in general do not find it easy to change direction and take tough decisions. It is much easier to do this if you are a limited-life organization.

Ossification is something that is likely to develop over time – most organizations tend over time to become bureaucratic and ossified. Corporations of course have to renew themselves, but foundations have no such discipline or stimulus to encourage them. I do not wish to argue that a limited-life foundation is not bureaucratic, but I would wish to argue that the chances of a limited-life foundation becoming seriously bureaucratic are minimalized because there simply isn’t enough time to do so.

There are very few foundations in existence for a long period of time of which it can be truly said that they are as effective in the latter years of their existence as they were in the early years. According to Stephen, JRCT was probably more effective in its second 50 years than it was in its first 50 years. I’m sure he’s right, but equally I’m sure that it’s such an exception to the rule that it proves my case.

Stephen Pittam
Certainly in my personal view, JRCT has been far more influential and more effective in the second half of its 100-year existence than it was in its first 50 years. I think it takes organizations time to develop and mature and to build their own reputation. It is a tall order to think you can build a unique niche, develop programmes and make a real difference in a timeframe of 20 years. A mature organization can take risks that others might not.

The question of values

John Healy
How can a foundation which is in existence for 975 years remain true to the values with which it was imbued when initially founded? I have some real concerns about this.

A limited-life foundation, particularly if it was established by an individual donor who is still alive, offers that donor the possibility of a very meaningful involvement in the foundation. There are some founding donors, of course, who like the idea of their name being repeated year after year, century after century, so the attractions of limited life are not for them. We have found in Atlantic, however, that the limited-life approach encouraged our founder to become very engaged, and that was very much to the benefit of the foundation.

Stephen Pittam

The issue of values is absolutely crucial for any foundation, and I think you really do need to think about how you maintain them. Now that’s very easy for me to talk about because JRCT is a Quaker foundation based on Quaker values. This gives us a very firm value base, including concerns for peace, social justice and equality. It also gives us a touchstone to measure ourselves against, because the Society of Friends, the Quakers, is changing all the time. So at JRCT we have a mechanism for being able to maintain our value base and change as well.

Sustainability

Stephen Pittam

An issue that worries me with the limited-life model is sustainability. This primarily relates to the scale of grantmaking when a foundation has decided to spend down – especially when a very large foundation like Atlantic decides to spend €3 billion over 20 years – and has selected a small number of organizations in which to invest heavily. It inevitably has to invest very large grants in organizations that fit with its narrow programme focus. This has implications for the sustainability of the organizations receiving these very large grants.

Is it really effective to take €1 million now when you’ve been operating at a level of maybe only €50,000? What does this do to the organizations? How do organizations cope with large-scale growth knowing that the extra funding is short term? This is a real dilemma.

And what does it do to other funders? JRCT has been funding a number of important organizations in Ireland (recently in partnership with Atlantic Philanthropies) for nearly 30 years. These are organizations that cannot take government money because of the nature of the human rights work they are undertaking. As a result of Atlantic’s decision to spend down, JRCT is no longer funding several of these groups. The JRCT trustees have said, ‘What is the point in funding an organization at the level of €50,000 if it is in receipt of €1 million?’ Our resources might be better spent elsewhere. Several of these organizations anticipate a life beyond 2016. They are asking if JRCT will be around then!

John Healy
I would be concerned if Atlantic’s ability to invest heavily in an organization were to cause JRCT to withdraw from funding that organization. JRCT brings so much in addition to money to its grantees.

In relation to sustainability, it is often argued by those in favour of perpetual foundations that their money is so important to such a vital group of grantees that without them these grantees will wither and important issues will not be dealt with. I have to say, in the gentlest possible way, that there is a touch of unintentional arrogance about this point of view. And of course it completely ignores the possibility that if our economic system works as we expect it to work, new foundations will be created all the time, to carry on the important work that is done by the limited-life foundations.

Stephen Pittam
Context is important here. Atlantic Philanthropies has developed some of its thinking in the US, where I am always amazed at the number of new foundations that emerge every year. My concern is that I don’t see who in Ireland is going to be coming in with the kind of money that Atlantic has been putting into really progressive and important causes. And that makes me slightly nervous, because Atlantic has had such a huge input. There is no sign in Ireland that new funders are coming into the field in sufficient numbers to make up for the large investments that are currently being made. In the States it may well be that there’s such a renewal of the foundation world that you are in a different situation.

The need for diversity

John Healy
What I am calling for is not a choice between limited life and perpetuity, because diversity is the hallmark of our sector and limited life is clearly not for all. My argument is that limited life is an option worth considering, both when a foundation is set up and at other stages during its life. We should not have perpetuity as the automatic default position as is the case at the moment. In particular, I think a foundation would find it helpful to consider this issue of payout and length of life by asking itself some very hard questions about its mission and objectives. Remember the example of climate change. It doesn’t make sense to be a perpetual foundation if climate change is your mission. It doesn’t make sense to be a perpetual foundation if population control is your mission. These problems demand rapid responses.

Some have suggested that ‘hybrid’ models would combine the advantages of perpetual and limited-life foundations. In fact, I think that in some ways JRCT is a hybrid foundation. The one thing that foundations need to do, and most don’t do, and which you’re required to do if you decide to spend yourself out of existence, is to ask yourself some very hard questions about what it is you’re trying to achieve. Now, it’s easier to do that within the discipline provided by the spend-down decision. It’s very difficult if you are a perpetual foundation. But JRCT seems to have achieved it with their ten-year fundamental review. Foundations carry out lots of reviews but most of them are not too fundamental, and very few really put out the question of should we exist or should we not.

I suspect that with the Quaker background that JRCT has, which makes it quite different from most foundations, that ten-year review really is a fundamental questioning of the future of the organization. If other foundations that have a longer-term plan can find ways of asking themselves those questions at appropriate intervals, I think you have your hybrid.

Stephen Pittam
How fundamental our reviews are is a question. Do we really carry them out in the kind of depth that we might think we do?

But we could be a hybrid very easily because we can spend capital, and on occasions we have done, and we have spent large amounts of money on particular issues where we felt we could make an impact. I think that’s a possibility for many foundations, but others are restricted from spending capital. But for us that’s not an issue. The question has to be how you can be most effective.

John Healy recently retired as President of The Atlantic Philanthropies. Email jrhealy007@eircom.net

Stephen Pittam is Secretary of the Joseph Rowntree Charitable Trust. Email sep@jrct.org.uk


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