Politics & Policy

Foundation Payouts

Looking at the future.

EDITOR’S NOTE: This is the text of a speech delivered by Neal B. Freeman, chairman of the Foundation Management Institute in San Diego, California in November.

Where you stand on the payout issue–as with so many other issues–depends on where you sit. At the Foundation Management Institute we sit with donors–new donors and prospective donors–those by-now-legendary creatures, the

intergenerational transfer donors.

These donors are so recently arrived at philanthropy, so naïve, that they think a

five-percent-payout requirement means a five-percent-payout requirement. They find the payout requirement not only acceptable but fully understandable. As business people–most of them–they understand the construct of tax preference: Foundations have been given a tax preference to accomplish what all tax preferences are designed to accomplish–namely, to induce taxpayer behavior deemed desirable by society as a whole. And they have no doubts at all as to what that societal goal is. It is to increase the level of charitable contributions. I can report to you on the basis of hundreds of consultations that we have never encountered a donor who has declared: My mission in setting up my foundation is to build a large, costly, self-perpetuating bureaucracy. Not once. Rather, it is

precisely their intention to make charitable contributions that prompts donors to establish new foundations.

Now, in this regard at least, donor intent happens to coincide exactly with legislative intent. I do not pretend to the scholarly attainments of Professor Frumkin, but I have read the legislative record of the pertinent tax bills and it is nowhere stated that Congress sought to encourage an ever-larger, ever-better-paid foundation-management class. Quite the contrary. Our elected representatives have provided the stimulus of tax incentive and we are expected, in return, to increase charitable giving. Instead–by allowing overhead expenses to be counted against the payout–Congress presented foundation managers with this choice at the

margin of expense: they can either increase donations to charity or they can increase their own pay and perks. Students of human nature have not been shocked by the choices made.

And thus our political problem. Over the years, Congress got little of its intended consequence–robust, regular growth in foundation contributions. And a great deal of unintended consequence–the explosive growth of the big-foundation management class funded, in effect, by the payout requirement. Not surprisingly, Congress is unhappy–and is now looking for ways to make those who seem to have duped it unhappy, too.

What can be done? How can we deflect the unhappiness that may soon be visited upon us?

Let me share with you a few lessons born of the Blunt-Ford battle of last spring and summer–and then leave you with a recommendation for specific action.

Lesson # 1–Let’s not confuse the battle with the war. Yes, the Blunt-Ford initiative has been turned aside for now, but the currents of reform run strong–indeed, they run as strongly through the foundation world today as they have run through the corporate world since the market collapse of March 2000. Note that we have somehow managed to attract the attention of all branches of government. The courts have taken up the issue of donor intent–you are familiar with the cases against Harvard, Princeton, USC, St. Luke’s Hospital, the Metropolitan Opera, and others. There are more–and larger–complaints moving through the legal pipeline. The state attorneys general, for their part, have taken on the executive compensation issues–for both managers and

trustees. AG’s in Minnesota, New York, California, and Massachusetts have been leading the charge. Just as they have done in the Wall Street scandals, the AG’s are looking for the big, mediagenic fish. And Congress has reserved for itself the big enchilada–the explosive growth of the big-foundation management class. To many in Congress this cohort appears to be politically cohesive, ideologically tendentious, taxpayer subsidized, and completely unregulated. That is to say, an inviting target of congressional opportunity. My counsel here is that we should not celebrate prematurely the apparent victory in the battle of Blunt-Ford. Remember the response of the ancient warrior Pyrrhus to those congratulating him on his victory over the Romans–”One more such victory and Pyrrhus is undone.”

Lesson #2–Let’s not confuse our self-image with our public image. We think of ourselves as the good guys–and in many ways we are. But that’s not how the man in the street–or the man in Washington–is beginning to think of us. In terms of public relations, we are having a truly historic year–by my count, there have been more than 75 national stories of philanthropic lootings and liftings, gross violations of fiduciary duty. But even more damaging perhaps is the attitude struck by the leaders in our field. Let me cite just two stories from the New York Times. On June 18, the Times ran a long piece under the classic headline–”Foundations Resist Measure to Increase Charity Money.” The story detailed the campaign by Big Philanthropy to hold down charitable contributions. Can you imagine how that story played on Capitol Hill? Or in Peoria? Or this one on July 8–”Foundation to Keep Leader Accused of Fraud at Xerox” If anything, that headline underplayed the story.

The Times reported that the Ford Foundation had reaffirmed Paul Allaire as its board chairman just two weeks after the SEC had banned him from serving on corporate boards because of his role in a billion-dollar

accounting fraud. Deep in the story, the Times also noted that Mr. Allaire had been reaffirmed as a member of the foundation’s audit committee. That’s not the attitude, some would say, of a responsible public institution.

And finally, Lesson #3–Beware the Council on Foundations. When the foundation world speaks to power–be it congressional power or media power or IRS power–it is the Council on Foundations that does most of the

speaking. And it speaks loudly. Its performance in the Blunt-Ford battle was undeniably impressive–a powerhouse lobbying effort worthy of the National Association of Broadcasters or the AFL-CIO. By mid-summer, the Council

reported to its members that it had already made more than one thousand legislative contacts. But when it speaks to power, the Council does not speak for most of us in this room, nor indeed for most of its own membership. It

speaks primarily for a handful of multi-billion-dollar foundations, the same foundations that are earning the rest of us a reputation for arrogance and imperial self-aggrandizement. To that list of life’s most dangerous and

meretricious statements, add this one: “I’m from the Council on Foundations and I’m here to help you.”

Which leads me to my recommendation. Manifestly, the foundation world needs new leadership. We need new voices to speak to power. We need new voices to admit and correct our mistakes. We need new voices to tell our story to the public–our very good story that has for too long gone untold. We need new leadership, as well, to meet the proximate political challenge–we must fix our problems or some political authority will fix them for us in a broad-brush, crude-cut way. Let me respectfully suggest that you begin to speak for yourselves–through the

Roundtable where appropriate, through FMI and likeminded groups, but most powerfully as individual foundations committed to high standards. Working together we can fashion a legislative resolution that accommodates the legitimate interests of the parties involved–the donors, the grantees, and the general public. The alternative is the status quo, in which decisions about your future will be taken in your name at meetings to which you haven’t been invited by people you’ve never met whose values you would not recognize as your own.

Thank you.

Neal B. Freeman is chairman of the Foundation Management Institute.

Neal B. FreemanMr. Freeman is a former editor of and columnist for National Review and the founding producer of Firing Line. This article has been adapted from his new book, Walk with Me: An Invitation to Faith.


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