|Leverage for the Environment - A Guide to the Private Financial Services Industry (WRI, 1998, 108 pages)|
A foundation is a nonprofit organization established to manage a pool of capital and distribute grants for purposes consistent with the mission or philosophy of the organization. Foundations thus have two distinct operations, a grant-making side and an investment side, and it is the earnings from the investment side that enable the foundation to continue to give grants over the long run. However, in practice the two sides usually operate independently of each other. Exceptions to this general rule take the form of so-called Program-Related Investments (PRIs), which are low-interest loans allocated by foundation staff in a similar manner to grants, and mission-related venture capital investments. Figure 9.1 summarizes four key characteristics of foundations of particular importance to the public interest community.
Size and Leaders
Worldwide, there are nearly 40,000 foundations. However, 20 percent of these foundations control 96 percent of all foundation assets. The Council on Foundations in the United States estimates the collective assets of U.S.-based foundations to total some US$ 189.2 billion. These foundations disbursed more than US$ 10 billion in grants in 1996. That same year, more than US$ 100 million in PRIs were made by ten foundations. Some of the largest foundations include the Lilly Endowment, with US$ 13 billion in assets, the Ford Foundation, the Robert Wood Johnson Foundation, and the David and Lucile Packard Foundation in the United States; the Foundation de France; and the Sasakawa Peace Foundation in Japan.
Traditionally more conservative in their investment strategies, foundations have become more aggressive, investing in various higher growth (and higher risk) foreign stocks and "emerging market" funds. Large foundations are more likely to invest some assets in foreign investments, ranging up to 25 percent of total holdings. According to a survey by the Council on Foundations, 69 percent of U.S. grantmakers utilize external investment managers (1).
In the United States, the principal regulatory framework for foundations is provided by tax legislation, which requires a foundation to pay out a rolling average of 5 percent annually of its total assets and administrative expenses in grants in order to maintain its tax-exempt status. A current U.S. Internal Revenue Service (IRS) proposal seeks to enforce greater disclosure on grantmaking activities by making the Form 990 tax returns filed by foundations more easily available to the public (2). The investment operations within foundations face virtually no regulation.
Attention to Environmental Issues
Frequently, a foundation's portfolio of investments appears to be in conflict with its mission. For example, a foundation making grants to an environmental nongovernmental organization (NGO) for research on climate change and alternative energy might also be investing in carbon-intensive industry stocks (3). Until the 1990s, no mainstream foundation appeared to be integrating its grantmaking philosophy into its investment management strategy. Traditionally, the investment side was delegated to external asset managers solely to maximize profit. Although some foundations are now considering how to integrate social and environmental goals into their investment strategies, foundation financial managers and board members have resisted adopting "socially responsible" investment guidelines because they consider this step financially imprudent. It is often argued that the foundation's mission is best served by maximizing capital available for disbursement as grants.
The New York-based Jessie Smith Noyes Foundation has attempted to "reduce the dissonance" between asset management and grantmaking values through a three-pronged strategy of screening its portfolio to exclude companies with particularly troublesome environmental impacts, engaging in shareholder activities to support the work of grantees (see Box 9.1), and including mission-related venture capital investments in its investment portfolio (4).
Relevance to Developing and Transition Economies
Although several foundations based in industrialized countries have significant international grantmaking programs, an indigenous, Western-style foundation sector is not well established in most developing and transition countries. The limited size of the foundation sector in some countries is attributed to a variety of factors, including the lack of tax incentives for charitable contributions, or the absence of a philanthropic tradition. In other cases, foundation-like activities take different forms from the ones familiar in the United States and Asia.
Figure 9.2 illustrates the operation of a foundation. A foundation is established in order to direct funds from an aggregate asset pool towards grants that advance the organization's mission or philosophy. The original and subsequent assets may come from donations, endowments, and bequests. This asset pool is utilized by the foundation's program staff and mission-related consultants to provide grants and PRIs. Organizations such as the Foundation Center and the Council on Foundations serve as information resources to the foundations as well as to organizations seeking funding. In regards to tax laws, foundations do not pay any federal income tax, but they do pay an excise tax on investments.
Grantees, such as NGOs, may have an ongoing relationship with the grantmaking staff and may communicate with foundation staff about grantmaking and investing priorities. Although it is the grants side of the foundation that interacts with grantees, the finance side of the foundation manages the foundation's portfolio of investments. Many of the individuals managing the finances of foundations are likely to be external to the organization. The treasurer and finance committee are the link between the board and the asset managers/financial advisors. The Board of Directors is the fiduciary of the foundation and, along with the Executive Director, can determine the strategy of the portfolio's investment. Usually, however, this responsibility is left to the Chief Financial Officer (CFO) and external financial advisors, while the assets managers work to diversify the foundation's investments. The income generated from the return on investments replenishes the aggregate asset pool for another cycle of grants.
Many foundations do not exercise their proxy power, via shareholder resolutions or other shareholder activities, to influence corporations in which they hold stock, abdicating their rights and responsibilities on proxy issues to the external asset managers who vote proxies as they deem appropriate. A few foundations have begun to make mission-related venture capital investments in high-risk, high-return commercial ventures related to their grantmaking portfolios.
Executive Director/Board Members - Values-based/Reputational leverage. Foundation board members are obligated to direct the organization's investment strategy. An individual or group of board members with sufficient knowledge and commitment can lead an initiative to internalize the foundation's mission into its investment strategy, for example, by applying social or environmental screens, or by engaging asset managers with an expertise in socially responsible investing.
Treasurer/Finance Committee - Bottom-line/Values-based leverage. Unless the treasurer or members of the finance committee are receptive to internalizing the foundation's mission into its investment strategy, an initiative for change within the foundation is unlikely to be successful. Demonstrating the correlation between environmental issues and financial performance is critical.
Proxy Power - Values-based/Reputational leverage. Because many foundation boards fail to exercise proxy power over stock held in the organization's portfolio or otherwise engage in shareholder activities, it often falls upon a single board member who has sufficient knowledge and commitment and is willing to take the initiative to begin to ensure that the foundation's shareholder resolution record and corporations in which it owns stock are consistent with its mission or grantmaking philosophy.
Box 9.1 A Foundation Speaks with Its Endowments as well as Its Grants
Background: In 1994, the Intel Corporation came under scrutiny for its environmental and hiring practices at a US$ 1.7 billion manufacturing plant in New Mexico, based on a report prepared by the Southwest Organizing Project (SWOP), an organization that promotes economic and environmental justice in that state. Intel did not acknowledge or respond to SWOP's report. One of SWOP'S funders, the Jessie Smith Noyes Foundation, realized that it held 100 shares - then worth about $6,000 - of Intel stock and asked, in the words of Noyes' President Stephen Viederman, "What we could do, in our capacity as a shareholder, to help."
Action: After consulting with SWOP, Viederman appeared at an Intel stockholder meeting in 1994 to ask Intel to respond to SWOP's report He was told that Intel does not deal with "vocal minorities." Next, working with SWOP, Noyes filed a shareholder resolution asking Intel to improve its environmental, health, and safety (EHS) policy and to commit to sharing nonproprietary information with local communities. It noted that Intel "jeopardizes stockholder investments by picking environmentally risky sites" for its plants. The 1995 resolution, with nine co-filers, was supported by 5 percent of the vote (8 percent abstaining). Shortly thereafter, Intel and SWOP began meeting to discuss SWOP'S concerns. With little tangible progress toward policy change, Noyes re-filed the resolution with several co-filers, this time including four other philanthropic foundations with whom it had shared its concerns.
Outcome: Before the resolution could come to a vote at the 1996 stockholders' meeting, Intel drafted a new and improved EHS policy. After consulting with SWOP and the other co-filers, Noyes agreed to withdraw the resolution.
Analysis: The Noyes Foundation supported its grantee, SWOP, not only with grant funds but with the leverage of to endowment holdings. The combination of SWOP'S community organizing and shareholder activism facilitated by Noyes, brought Intel to the bargaining table. The shareholder resolution raised bottom-line concerns about the plant but also carried with it the possibility of costs to Intel's reputation. Although Intel claims the new EHS policy simply codified existing procedures, local organizations that monitor high-tech companies suggest that the shareholder resolution accelerated change at Intel. At Noyes and the four supporting foundations, the decision to link the investment and grantmaking sides of their work sparked internal discussion and, in some cases, internal guidelines for such actions. Thus, action resulted not only in a policy change at Intel, but has also provoked the broader philanthropic community to explore links between grantmaking and investment.
Sources: Stephen G. Greene. "Foundations' Shareholder
Activism." The Chronicle of Philanthropy. January 25, 1996. p. 25; and
Stephen Viederman. "Adding Value to Your Grants." Foundation News and
Commentary. January/February 1997.
Program Related-Investments (PRIs) - Values-based leverage. PRIs are often an underutilized part of a foundation's financing capability. PRIs can be used to support progressive entrepreneurial activities by for-profit or nonprofit organizations and still count toward the foundation's 5 percent annual payout requirement.
Venture Capital - Bottom-line leverage. Some foundations have begun to utilize their investment portfolios to finance high-risk, high-return commercial ventures related to their missions.
1. Investment Performance and Practices of Community Foundations. Washington, DC: Council on Foundations. 1995.
2. Garance Franke-Ruta. "Show Me the Nonprofits' Numbers." National Journal. February 14, 1998.
3. "Foundation Grants and Investments on Opposite Side of Global Warming Debates." The Climate Change Report. Vol. 1 No. 2. April 29, 1998.
4. Viederman, Stephen. Mission Related Investing at the Jessie Smith Noyes Foundation.
Council on Foundations, Washington DC: http://www.cof.org
Foundation Center, New York: http://www.fdncenter.org
Foundation Partnership on Corporate Responsibility, at the Interfaith Center on Corporate Responsibility (ICCR), New York, (212) 870-2295
Foundations News and
The Chronicle of Philanthropy
Foundation Giving Watch
"Adding Value to Your Grants." Foundation News and Commentary. January/February 1997. 68ff.
Directory of Finance and Investment Terms. Hauppauge, NY: Barron's. 1997.
"Dissonance, Responsibility, and Corporate Culture, Or How Two Camps Struggle For Our Hearts and Minds and What We Can Do About It." In Jessie Smith Noyes Foundation 1994 Annual Report. pp. 5-10.
The Foundation Directory. 1997 Edition. M. Feczko and E. Rich, eds. New York: The Foundation Center.
"Foundations Must Invest With a Social Conscience." Chronicle of Philanthropy. October 5, 1995.
"Foundations' Shareholder Activism." Chronicle of Philanthropy. January 25, 1996.
Foundation Management Report. Eighth edition. Washington, DC: Council on Foundations. 1996.
Freeman, David F. The Handbook on Private Foundations. Washington, DC: Seven Locks Press. 1981.
Investment Performance and Practices of Community Foundations. Washington, DC: Council on Foundations. 1995.
Kinder, Peter. Mission-Based Investing: Extending the Reach of Foundations, Endowments, and NGOs. Cambridge: Kinder, Lydenberg, Domini & Co. July 1998.
Mekeon and Solomon. Journal of Investing. Winter 1997.
Olasky, Marvin. Philanthropically Correct: The Story of the Council on Foundations. 1993.