Private foundations: spotlight spurs sharper focus, less secrecy

In the year since Warren Buffett announced his historic $30 billion commitment to the Bill & Melinda Gates Foundation, philanthropists — and especially this country's largest charitable foundations — have found themselves under the spotlight to an unprecedented degree.

With more than $500 billion in charitable assets and annual grants exceeding $40 billion to nonprofit organizations around the world, what are foundations, anyway? What kind of impact have they made — and might they make — on our most pressing social problems? Are they effective?

Unlike businesses, elected leaders and nonprofit charities, endowed private foundations enjoy unrivaled freedom. They face no competitive pressure, are not accountable to voters, and have no fundraising imperative. They undergo little meaningful regulation.

This lack of fetters enables foundations to tackle social problems that other societal actors ignore — whether due to a lack of profit incentive or political will. The results of foundations' efforts can be profoundly positive. Two examples from a single foundation are the creation of the 911 emergency system and the reduction in teen smoking in the U.S., both of which were unlikely to have occurred without the work of the Robert Wood Johnson Foundation.

But, as is often the case, the virtue is also the vice. Their freedom means that ineffective foundations don't go out of business, and inept foundation leaders sometimes enjoy long tenures while accomplishing little. Historically, too many foundations have sought to operate in virtual secrecy, avoiding questions about their goals and eschewing the notion that, by virtue of the tax revenue forgone through their creation, they have an ethical responsibility to maximize their impact.

Fortunately, the numbers of the ineffective and secretive appear to be dwindling. More and more foundation leaders are pushing to increase the effectiveness — and ultimate impact — of their foundations by taking several important steps.

Embracing focused strategies to achieve impact. Increasingly dissatisfied with mere "charity," an increasing number of foundation leaders are embracing focus — defining clearer goals and coherent strategies to achieve them. Some have gone as far as the Edna McConnell Clark Foundation in New York, closing program areas and dramatically reducing the number of grantees they support in order to make large, long-term commitments to fewer organizations as part of a tightly focused strategy.

Assessing their own work and soliciting critiques from outsiders. Foundations are increasingly seeking to assess their performance, defining indicators that relate to the achievement of their goals. In the process, many are also seeking external critiques. And, in a welcome change, more are moving away from a historic reticence by publicizing their failures in order to ensure others don't waste precious charitable dollars by repeating their mistakes. In just the past few months, the William and Flora Hewlett Foundation and James Irvine Foundation have released reports on major funding initiatives that did not meet their objectives.

Exploring new ways to achieve impact. The entrance of new players onto the philanthropic playing field — from Bill Gates and Paul Allen to eBay's founder Pierre Omidyar and its first president Jeff Skoll — has contributed to a new wave of creativity and a questioning of long-standing assumptions about how private foundations operate.

Not all the new ideas are good — and not all are even really new — but the questioning is healthy. For example, some newer foundations have decided to buck the typical approach of managing a foundation to exist in perpetuity. (Most large foundations spend only around the mandated 5 percent of assets annually on grants and related expenses.)

The living donors behind foundations such as Gates and the Atlantic Philanthropies have chosen instead to follow the lead of Sears founder Julius Rosenwald and limit their foundations' life span. By spending themselves out of existence by paying out large amounts of money more quickly, they hope to concentrate their resources in a way that will reduce future need or eliminate social problems altogether.

An increasing number of foundations are also looking at how, beyond grantmaking, they can deploy their endowments to achieve their programmatic goals: Some make mission-related investments; others use their proxy votes to influence corporate practices.

The freedom foundations enjoy allows them to take on crucial issues that others ignore — and that's undoubtedly good for our society and democracy. But, their work should be understood and examined, and the push for greater effectiveness and impact encouraged.

The spotlight, after all, is as healthy for foundations as it is for actors and singers. It brings out the best performances. Given the environmental and societal challenges we face, we can't afford anything less.

Phil Buchanan is president of the Center for Effective Philanthropy, a nonprofit research organization based in Cambridge, Mass. The center has received grant support from some of the foundations cited in this guest column.