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Apr 8, 2015

The tension in some foundations between the purpose of grant-making and the purpose of endowment management

Steve Godeke and William Burckart wrote a piece recently in the Chronicle of Philanthropy that describes well the cultural challenges which impact investing presents to the traditional mode of operating a foundation.  What I like about their article is their empathy with the internal challenges and functional realities of foundations.  Their article was prompted by the Rockefeller Brothers Fund’s decision to divest itself of investments in fossil-fuel companies, a decision that aligned their grant-making priorities with their investment priorities.

Historically, foundations organize themselves into specialties just like any company would do.  The program experts are in charge of the grant-making and the financial/investment experts are in charge of investment of the foundation’s assets.  This division was encouraged by the old foundation laws (Uniform management of funds act UMIFA) which emphasized the obligation to preserve the principal (corpus) of the foundation and led to investment approaches that added the fiduciary duty to preserve future inflation-adjusted buying power over current grant-making potential.

This focus really changed with the universal adoption of the new foundation law (Uniform prudent management of funds act UPMIFA) which spread across the states beginning in 2008 (June 2009 in Ohio).  This eliminated the concept of corpus and noted that support of the mission was equal in importance to preservation of capital and indeed permitted grant support to be sustained even when the value of the investment portfolio plummeted, as it did in 2008.  By the way, this same phenomenon has led to the increasing interest in impact investment, using the investment portfolio to support social causes as the grant budget has always done.

Some keen observations by the authors:

  • Foundation investments are often in direct conflict with the mission of the Foundation.
  • Charities have greater demand for their services in economic recessions but investment losses during recessions often led to reduced foundation grant-making.
  • Grant-makers and investment managers work in separate units (and investment managers are often not foundation employees) and report to different managers.  (A communication challenge I have regularly encountered when I talk to corporate foundations about instituting a social impact investing program.  A good conversation requires the community relations staff, the investment staff, and the legal staff to be in the same room at the same time, not always a routine practice.)
  • There is a perception the social investment leads to lower returns. (As I have repeatedly written in this blog, this is not necessary but could occur AS A RESULT OF A POLICY CHOICE.)
  • There is limited expertise in social impact investing at the banks and financial advisors that are hired to manage many endowment portfolios.
  • Measurement of financial performance is standardized but measurement of social impact is in its infancy, making it difficult to fairly balance one against the other.
  • Fiduciary responsibility has been historically defined as a financial responsibility while the social responsibility (social impact) is a relative newcomer to the discussion.

They conclude that the limited amount of impact investing by foundations demonstrates “how strong the tension is in the world of philanthropy between financial investments and social ones.”

I believe that the more we talk about social enterprises and celebrate the social enterprises in our community, the gulf between financial and social decision-making will diminish.  That is one reason the Center for Social Enterprise Development is working hard to identify, profile, and showcase the social enterprises currently operating in the Central Ohio community.

As of March 2015, our list is up to 54 social enterprises!  Some will fail, some will stay small, and some will grow, but they all will be producing social impact that leverages the social good currently produced by the nonprofit sector alone.  Watch our list expand and follow as we start to produce profiles of our emerging social enterprise sector.

If you want to learn more about social enterprise and social impact investment, search our blog archive,  come to our introductory workshop Generating New Revenue for Mission-Related Ventures (next one is May 19, 2015), or invite us to speak about both at your next board meeting, civic group, or whatever brings you together (info@cincohio.com).

In any case, learn more about social enterprise, and help your foundation to expand its reach beyond grant-making by engaging in social impact investing.

Allen Proctor