Towards a Golden Age for Foundations

04/07/2015 08:32 pm ET | Updated Jun 07, 2015

U.S. foundations and endowments may not yet fully appreciate it, but not only are the winds of change beginning to blow across their bows, but they will soon face the veritable "gales of creative destruction". The world in which they operate is changing exponentially. The good news, however, is that these changes, if embraced, should provide a once-in-a-generation opportunity for foundations and endowments to improve both their programmatic and financial outcomes.

There are at least three factors disrupting foundations. The first factor is the role of social media, and the "radical transparency" which comes with it. Social media has already been acknowledged as transforming societies; viz the Arab Spring Revolution and even President Xi's crackdown on corruption in China. What is less commonly understood is that social media is also playing a critical role transforming institutions in western democracies.

The smartphone has transformed the way individuals access the internet. Whilst it is difficult to predict how 24/7 internet access will impact global economies over coming decades, the one certainty is that it is not possible to put the genie back in the bottle. Transparency that is enhanced by the universal access to the internet that the smart phone brings is here to stay. This will impact charitable foundations at both an individual and collective level. Some activists are already exploiting social media very effectively on questions such as fossil fuel divestment, but this is merely the very thin edge of a much, much larger wedge. Both the operating and investment sides of foundation and endowment activity will be under unprecedented scrutiny, and from an increasingly demanding set of stakeholders at that.

The second factor is fiscal austerity, which will be us for the next 20 to 30 years. All western democracies that experienced a baby boom following the end of World War 2 face the same fiscal pressures. As baby boomers retire -- and the first are already over the age of 65 -- government budgets will face unrelenting pressure paying for health care and social security. The impact of fiscal austerity is that governments ultimately have to look at every expenditure, or taxation concession, to determine whether it is sustainable in the long run.

Charitable foundations cost governments in two ways. Firstly donations made by individuals are tax deductible. Secondly foundations themselves receive taxation exemptions. There are very good reasons to suggest that the taxation concessions are of benefit to society. But the lack of transparency amongst the foundation sector means that there are no clear indicators to demonstrate the relative value of money from government providing taxation concessions, as opposed to government simply undertaking the activities itself. The Obama administration has already attempted on a number of occasions to shrink the "tax loopholes" which foundations and their donors currently enjoy.

The third factor is demographics. Over the next 10-30 years, somewhere over $30 trillion worth of wealth will be passed down into the hands of a generation which is infinitely more concerned about social and environmental issues and outcomes than were their parents. It hardly needs noting that these newly wealthy individuals and families also happen to be major donors to both foundations and endowments. Also, unlike their parents, the so-called Millennials recognize the potential for foundations and endowments to reinforce and strengthen their program impact by aligning their investment strategies with their missions more closely. This is a huge, and largely unexplored opportunity for endowments and foundations to maximize their impact, their appeal to a new generation of donors, and even their risk-adjusted financial returns.

Today, the top 100 U.S. foundations alone control investable assets of nearly $300 billion. At present, under U.S. law, five percent of this may be deployed for program activities in any given year. I believe that any fair-minded assessment of their work would agree that, on the whole, it has generated significant positive impact. However the fiscal position of governments, which will make it difficult to fund many activities that have traditionally been undertaken by governments, means that in the coming decades there will significant focus on the foundation sector to lift its performance to another level.

Matthew Bishop and Michael Green in their book Philanthrocapitalism: How Giving Can Save the World, argued that we are entering a golden age of philanthropy. The examples of the way the Gates Foundation has tackled disease in Africa provide a spotlight on the opportunity that charitable foundations have to make fundamental changes for the social good.

But to deliver on this golden age, charitable foundations will need to understand that the world we are living in is substantially different from the one in which the charity assets were accumulated in the first place. With local, state and Federal budgets facing contraction, we are already seeing evidence that there is an increased focus on the role that institutional investors can play meeting economic, environment and social objectives. Why would foundations and endowments not want to join them, and utilize and leverage 100 percent of their assets to produce improved social and environmental outcomes? The old shibboleths which posited a conflict between such objectives and strong financial performance and fiduciary responsibilities have now been discredited literally hundreds of times, most recently in studies by both Harvard and Oxford Universities.

We believe that there are a number of areas where we are likely to see reform of the foundation sector. The key issue for the foundations is to embrace, rather than resist change. The opportunities beckon...