What will the financial crisis mean for philanthropy?

Who's giving, who's getting.
Nov. 13 2008 6:42 AM

The Rise and (Potential) Fall of Philanthrocapitalism

Billionaires brought their business sense and ambition to charitable giving. Now what?

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Although they mention this controversy, Bishop and Green fail to explore it fully. The debate in philanthropy between "old" and "new" is not simply a case of the ancient regime resisting change. Rather, some of the field's veterans are asking more fundamental questions about the nature of philanthrocapitalism—just how revolutionary is it? How valuable are all its business prescriptions? And might philanthropy in fact hold some lessons for the private sector?

In his Gospel of Wealth, Carnegie championed systemic change for social ills and helping "those who will help themselves," a mantra consciously echoed today by his philanthrocapitalist successors. Rodin characterizes her own revolution as a return to the "scientific philanthropy" of John D. Rockefeller, who created his foundation to "go to the root ofindividual or social ill-being and misery." In 2006, Rodin teamed up with the Gates Foundation in support of a "green revolution" in Africa to enhance agricultural productivity and reduce hunger. The model for this initiative was the first Green Revolution, which was launched with funds and direction from the Rockefeller Foundation between the 1940s and 1960 and which dramatically improved farming and food production in Latin America and Asia.

Susan Berresford, who spent 37 years at the Ford Foundation, including the last 10 at its head, oversaw similar visionary and risk-taking initiatives. She has cautioned against a false and "dangerous" dichotomy between "old and new philanthropy." In 2007 Berresford told the Financial Times, "I don't think there is anything more ambitious about new philanthropy than old philanthropy. … Hundreds of foundations for decades worked to address apartheid, hundreds of foundations worked to support the civil rights movement in this country, there is nothing more ambitious than those noble aims. They were extremely results-oriented—they wanted the end of apartheid, they wanted fairness for minorities—and the use of business principles has been in the foundation world for a long time."

In Just Another Emperor: The Myths and Realities of Philanthrocapitalism, Michael Edwards makes a critical distinction between the tools of business—many of which can and have helped improve the effectiveness of nonprofit organizations—and a wholesale adoption of free-market ideology. Some private sector principles, he contends, simply do not translate. Long-term "social transformation," for example, is neither easy to measure nor always cost-effective in profit-maximizing terms.

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Bishop and Green dismiss Edwards in one page in their epilogue. Both his dissent and their hasty dispatch reveal a clash of cultures between the philanthrocapitalists and the charitable-world lifers that is the subtext of the philanthrocapitalism debate. Many of the early philanthrocapitalists—successful in one sphere and new to another—saw inefficiencies and opportunities in philanthropy but overlooked the knowledge and experience residing there. According to Omidyar: "[E]very business person who first engages in the nonprofit sector goes through a lot of growing pains, disappointments. It is a very different kind of sector, a different cultural environment."

Some of the more vexing assaults came not from philanthropists themselves but from members of the business management establishment. Writing in the Harvard Business Review in 1999, Michael Porter and Mark Kramer claimed "billions are wasted on ineffective philanthropy. … [T]he real scandal is how much money is pissed away on activities that have no real impact." Three years later, McKinsey consultants Les Silverman, Paul Jansen, and former Sen. Bill Bradley wrote in HBR of a "$100 billion dollar opportunity" if nonprofits could only fundraise more efficiently, streamline how they provided services, and distribute money more quickly. "Perhaps," they admonished in the New York Times, "non-profit executives can learn some lessons from their counterparts in the private sector."

While there are merits to many of these claims, they were also a product of a heady economic era. Some (including Jansen, et al.) have advocated for foundations to spend down, or "pay out," their endowments faster than the 5 percent per year required by law. The choice of pace (which, in economic terms, is a discount rate) effectively represents a choice between spending on the needs of present vs. future generations. Many in the philanthropic world counter that capital preservation in certain instances may be vital to the health of the social sector. Reiterating this case in the Sept. 5 Chronicle of Philanthropy, Susan Berresford and Lorie Slutsky, the president of the New York Community Trust, argued, "[D]onors who set up endowments in perpetuity understand the value of a constant resource, available in good times and bad, for causes popular and unpopular. … Many have bold ambitions and seek solutions to problems such as poverty and injustice that they know will take many lifetimes of effort. Others want to ensure that future generations can deal with the inevitable—and now unimaginable—challenges that will arise."

The unimaginable just might be a meltdown of the financial system. Since that op-ed ran, the S&P 500 has lost more than 25 percent (50 percent over the year), destroying billions of dollars at the most diversified endowed philanthropies, eviscerating Wall Street corporate and family foundations, and making charitable donations difficult for all Americans. Giving for 2009 will plummet across the country and the world. This comes at a time when enormous government bailouts leave fewer public resources for greater public need. Perhaps experience in the philanthropic sector will be better-heeded. Writes Michael Edwards, "It's time for more humility."

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