Charity needs a better foundation

Despite best efforts by “corporate social responsibility” activists, business is not philanthropic by nature. By contrast, philanthropic bodies, charities and non-governmental organisations are, indeed, businesses in the eyes of the law. Yet, perversely, today’s FTSE or Nasdaq companies are far more transparent, accountable and responsibly governed than the typical wealthy foundation or charity. More damning, corporate results are measured in the marketplace while philanthropic results are not. That invites mischief and mismanagement.

As grant-making institutions seek greater influence on public perception, policies and practices worldwide, their need for greater openness and technical assessment has intensified. Good intentions should not excuse poor ac­countability. Philanthropic reform – not just new philanthropy – is essential. The trustees and directors should be every bit as accountable and liable as – if not more so than – their for-profit counterparts. UK shareholders, for ex­ample, have the right to vote on executive pay and perks; charitable donors to “good causes” typically do not.

What role, then, should “donor democracy” play in philanthropy’s future? Environmental trusts demand governments slash carbon budgets even as they profess ignorance of their members’ carbon profligacy. US and European charitable foundations are notorious for bloated boards of fund-raising directors that – not unlike their 1990s corporate forebears – have become captive to their staffs. Indeed, how does a bad philanthropic board get the sack?

Britain has begun addressing these concerns in a way that America has not. Parliament last November approved the Charities Act even as US congressional efforts to mandate greater philanthropic accountability failed. While the British reforms take crucial first steps – for example, not granting charities the presumption they act for the “public benefit” – a disconcerting vagueness shrouds how regulators will assure effective transparency and transparent effectiveness.

“Of every $1,000 spent in so-called charity today,” observed a philanthropist both Warren Buffett and Bill Gates have described as an inspiration, “It is probable that $950 is unwisely spent – so spent, indeed, as to produce the very evils it hopes to mitigate or cure.” The entrepreneurial billionaire who penned those words was Andrew Carnegie, the diminutive Scot and philanthropic giant, in his 1889 Gospel of Wealth manifesto. By today’s standards, Carnegie’s unusually transparent grant-making style puts contemporary foundation trustees to shame.

US corporate governance gurus such as Ira Millstein insist top foundations grasp what the Enron debacle and the Sarbanes-Oxley Act imply for their own institutional accountability. They have begun re-engineering their boards and flirting with transparency. Yet most philanthropic bodies appear operationally opaque while providing no reliable assessment of their “public benefit”. They seem to measure success more by how much is given to whom than by how much social or economic value they create. Any harm their initiatives may cause – inadvertent or otherwise – is rarely discussed. This behaviour is no longer tolerated in the “for profit” sector. Why should charity be exempt?

Funders with the cash and conviction to proffer solutions for societal shortcomings should have a duty, if not the integrity, to disclose their own shortcomings. Global philanthropy would be more credible and productive if, say, the Ford, Rockefeller and Soros foundations and Wellcome Trust would publicly debate their greatest programmatic failures.

Freedom and fairness demand individuals and institutions have a right financially to support lawful ideals and causes. That right does not entitle philanthropists to policies subsidising inefficiency and opacity. In reality, well-intentioned tax subsidies have spawned foundations and charities that are more like misshapen creatures of tax advantage than healthy embodiments of public interest.

For any organisation, preferential tax treatment should be contingent on performance measures that go beyond grant giving and wealth redistribution. Institutions unable or unwilling to proffer auditable results should lose their subsidy.

The urgency for innovative oversight reflects accelerating growth in non-profit assets and aspirations. Much as hedge funds and private equity have transformed global financial markets, entrepreneurial and institutional philanthropists are collectively investing billions to transform public policy. The Gates Foundation – by far the world’s largest – is the colossus but there are now literally tens of thousands of foundations with tax-supported ambitions to change the world. The global surge in mass affluence assures this trend will accelerate. The next great philanthropic action in the west may be Chinese, Indian and Russian.

Globalisation and extraterritoriality – not just new wealth – have qualitatively complicated the altruism business. Philanthropic bodies increasingly serve as rivals and goads – rather than complements – to government. There is indeed a thin line between noblesse oblige and philanthropic imperialism. Crossing it is dangerous but inevitably the insulated and unaccountable board and trustee will cross it. That is the regulatory story of 20th century philanthropy. Charitably put, in this emerging era, quality philanthropic governance is crucial to quality philanthropic leadership.