Increasing the integrity and Effectiveness of Institutional and High-Net-Worth Philanthropy

One of the biggest problems with large-scale philanthropy - billionaires & family offices, community foundations, and DAFs, etc. - is that the incentives for grants and major gifts are often misaligned with the needs of the impact-generating organizations they’re supposed to support. All of these entities can reap financial and reputational rewards long before their funds are actually deployed to nonprofit organizations, let alone put to work in the field.

Foundations are legally obligated to distribute at least 5% of their holdings to nonprofit beneficiaries, and Donor Advised Funds (DAFs) have no distribution mandate at all. Even where distributions are legally required, there’s very little enforcement, and many organizations strive to hit this figure exactly, rather than treat it as a minimum.

In a sector that’s notoriously adverse to change, this issue is especially thorny, with some custodians of foundation funding spending millions to prevent oversight and enforcement around these policies. According to a recent article by The Chronicle of Philanthropy, opponents of reform spent $11 million to block legislation that would force DAFs to distribute funds with greater velocity.

While the lobbying effort was mostly funded by for-profit organizations like Vanguard and Schwab, they’re far from the only supporters. The Council on Foundations, which represents 900+ grantmakers, spent more than $200,000 to block this legislation as well.

Why would custodians of funds earmarked for charity actively combat efforts to get that money out where it can be put to good use? Because they benefit from holding onto it, of course!

The fact is, custodians of DAF, family office, and foundation funding, will never act completely in the best interest of the social impact sector, as long as they’re disincentivized to do so. Until the incentive structures are aligned properly, the methods for funding high impact programs are improved, we’re unlikely to see any meaningful change.

That said, we can all be part of the solution. Here are 5 things we can do as individuals, organizations, and as a sector, to increase the integrity of our philanthropy, and accelerate funding for programs making the greatest impact.

1: Stop Treating the Floor like the Ceiling

The legal mandate for distribution of foundation funds from 5%. That means that legally, these organizations get to hold onto 95% of the funds they have under management. According to a recent Candid report, more than 50% of independent foundations surveyed do exactly that. DAFs, having no mandate at all, should at least face moral pressure to distribute the funds for which their benefactors have already reaped the rewards.

To pretend they’re holding that high a percentage of  funds for any reason other than self-interest, is absurd. We should each do whatever is in our power, and encourage the entities we have influence over to stop treating the 5% minimum like the maximum. Nobody is saying they need to clear out their holdings completely, but finding a way to maximize distribution while also following responsible business practices should become the new standard.

Between Donor Advised Funds and Foundations, there’s currently more than $1 trillion that can be deployed to fund high-impact social good programs right now.

2: Streamline Grant & Accountability Practices

Grant writing costs nonprofit organizations valuable time and resources, with no guarantee that they’ll secure the funding they need. Complicating grants and follow-on reporting with unique requirements determined by the funder creates an onerous process that demands efforts that might be better spent on other things. As funders, we should be working to find high-performing teams that operate transparently, and trust them to do their jobs well.

We should adapt our own reporting requirements to match the Key Performance Indicators (KPIs) beneficiary organizations set for themselves, rather than the other way around. In doing so, we can increase efficiency across the impact space.

3: Invest in Overhead

Despite loud and persistent cries for innovation, fixation on overhead persists. Ask the average philanthropist how they evaluate nonprofits, and they still point to Charity Navigator as the definitive resource. Newer arbiters of impact pushing a cost-per-outcome approach are hardly better. As we’ve spoken about in previous articles, the “race to the bottom” to maximize outcomes per dollar spent, is little more than overhead dressed up in fancier terms - and equally harmful.

The fact is, organizations can’t create high-quality, and long-lasting impact without great employees. This may seem obvious, but what most people don’t realize is that the consequences of doing impact work poorly can be dire. By definition, most nonprofit organizations deal with vulnerable populations. As a result, ill-conceived programs or programs that fail to provide long-term support for their constituents can cause incredible harm.

Safeguarding against this - ensuring nonprofit programs create lasting positive impact while guarding against unintended consequences requires sustainability. It requires investment in hiring, retaining, and developing team members. It requires building strong cultures, strong marketing and fundraising strategies, and sound measurement and evaluation practices, all of which require significant investments in overhead. We need to stop asking for our donations to directly support “the cause,” as if investment in salaries, infrastructure, and other reasonable overhead items are somehow unrelated.

4: Invest in High-Impact Programs

Some nonprofit organizations are just more effective than others. They may be rooted in better ideas, more thorough research, and more aligned with the needs of their clients.

Impact organizations of all types have to take high-quality measurement and evaluation practices seriously, contextualize the impact data that’s available, and use it to drive decision making. With so much qualitative and quantitative information available today, gone are the days when social good organizations can ignore the need for rigorous measurement and evaluation practices.

As funders, we need to insist on a high-standard of rigor, and make investment, gifts, and grants to organizations that are making significant, measurable impact.

5: Invest in High-Potential Programs

Some ideas are just better than others, and as a sector, we need to make sure new, innovative, high-potential ideas have the resources they need to prove their theories. Having a long and established track record is important. However, if we don’t also fund new initiatives, with the most promising ideas and great people, even without the long track records, the impact sector will cease to innovate, and fail to provide the solutions we’ll need in the future.

6: Invest in both Services and Systems Change

Service-based organizations are so much easier to relate to than those focused on policy and systems change. It’s easy to envision kids learning to read, low-wage workers preparing themselves for more lucrative professions, and the homeless and food-insecure being fed. Those initiatives remain incredibly important to fund.

However, we must also fund solutions to the underlying problems that create food-insecurity, poverty, lack of education, and climate change. While often harder to understand and relate to, those organizations looking to solve the root causes behind these issues need funding as well. Without treating the root causes, we won’t see any meaningful change, and the same intractable problems will continue to plague us long into the future. We need to fund the solutions of today, and solve for the challenges of tomorrow as well.

7: Seek Expert Guidance

Defining and delivering high-impact solutions, sustainably is not for the faint of heart. It takes deep, domain-specific expertise to achieve significant impact, and prevent inadvertent harm. Sure, enterprise foundations like Ford, Gates, and MacArthur all have teams of researchers and analysts. But for smaller foundations, for individual philanthropists and DAF holders, the expertise tends to be more general, or lacking altogether.

Without deep and detailed understanding of cause areas, regions, and the specific needs of the populations they’re trying to serve, organizations are apt to do just as much harm as good. Without careful scrutiny of organizations working on important causes, it’s impossible to understand which organizations are maximizing their positive impact, and which aren’t.

Make sure your internal teams, advisors, and role models have the expertise, up-to-date information, and nuanced understanding of the cause areas you’re looking to affect change before making philanthropic decisions. Scrutinize their data, challenge their assumptions, and keep asking questions until you’re satisfied you have all the information you need to guide your investments decisions.

How Altruous is Transforming Philanthropy

If all this seems a little daunting, we’ve got your back! Altruous does the heavy-lifting for you. We conduct rigorous measurement and evaluation of hundreds of impact programs around the world. We gain a deep understanding of the specific context in which they work, and present them in a compelling, easy-to-understand way, and provide you the tools to manage every aspect of your philanthropy.

Altruous helps philanthropists of all kinds reach new levels of effectiveness and efficiency in managing their impact portfolio. At Altruous, we’re reinventing what philanthropy can be through what we call High Integrity Philanthropy, and we’re driving unprecedented efficiencies through our groundbreaking platform, currently in closed Alpha.

Interested in taking your philanthropy to the next level? Contact us today!

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