FAMILY GIVING NEWS, January 2004

Board Accountability, Research and

Trends in Family Philanthropy
Volume 4, Issue 1

FOUNDATION AND BOARD ACCOUNTABILITY

WHAT'S NEW AT NCFP

NEW RESEARCH AND TRENDS

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Throughout 2003, accountability within nonprofit organizations, and family foundations in particular, was the focus of a great deal of negative media attention. Reports of excessive trustee compensation, expensive and unjustifiable perks, and suspect business dealings made headlines from coast to coast alongside a spirited debate surrounding proposed changes to foundation payout requirements.

In a special year-end issue, Philanthropy News Digest summarized the myriad reports questioning the level of accountability in the philanthropic community, concluding that, “For a second consecutive year, the philanthropic sector was battered by a series of events — some beyond its control, many self-inflicted — that hampered its effectiveness and undermined public trust.”

The Boston Globe led the charge among national newspapers focusing on foundation misbehavior. It published a six-part investigative series on shady foundation activities, ranging from the unethical to the illegal, and highlighted the lack of oversight by the IRS and state regulators.

The small percentage of foundations engaging in unethical and illegal practices cause significant damage not only to the reputations and accomplishments of those foundations that take their responsibilities seriously and operate with integrity for the public good, but also to the nonprofits they support. Meanwhile, the heightened level of public scrutiny has caused some leading nonprofit associations, such as Independent Sector, to call for increased self-regulation in order to regain public trust. Other national leaders, including Council on Foundations’ Board Member Emmett Carson, have called for increased government oversight to promote better behavior and help standardize regulatory practices.

Whether you are a seasoned donor, an experienced advisor, or still relatively new to the world of philanthropy, we hope that this issue of Family Giving News presents you with new perspectives from around the country on the increasingly important issue of foundation board accountability.

Denis Prager is the author of Organizing Foundations for Maximum Impact - A Guide for Effective Philanthropy (see below).

FAMILY FOUNDATION GOVERNANCE:
THE INTEGRITY IMPERATIVE

by Dennis J. Prager

Family foundation boards have a particular burden of proof concerning the charitable purposes of the funds disbursed by their foundations, the effectiveness and efficiency of their grantmaking programs, and the integrity of their decision-making processes. If family foundations could once fly under the radar, largely invisible to federal and state authorities and the communities in which they exist, those days are long gone.

Today, all foundations – in fact, all non-profit organizations – are under increased scrutiny, with some in positions of influence (most notably, Congress and the IRS) calling for particular attention to family foundations, especially the smaller ones whose operations have heretofore been largely ignored.

This new scrutiny provides all the more reason to reflect on the privileged and protected status conferred on foundations by a society that fosters the private enterprises needed to produce the wealth from which foundations are created. And all the more reason to remind ourselves of the extraordinary opportunity that such status provides for giving back to this society.

Compared with most other institutions, foundations are afforded a high level of independence and freedom from regulation and oversight. As non-governmental public trusts that exist to improve the human condition, they are permitted to earn and accrue assets, are largely protected from taxation, and are not accountable to voters or shareholders.

However, this extraordinary opportunity is more than matched by the important obligations that foundations have to manage their assets prudently and distribute them wisely. In the end, it is the members of foundation boards – of every foundation’s board – who bear that obligation, requiring them to govern with purpose, care, and integrity. This means:

• Remembering that they are stewards of a public trust – recognizing their fiduciary responsibility for assets which represent the means for improving the health and well-being of individuals, families, and communities;

• Keeping their collective eye on the prize – single-mindedly pursuing the foundation’s mission and goals;

• Being committed to making a difference – making every grant dollar count, rather than “gold-dusting,” spreading money around to please friends and appease family members;

• Always doing what is best for the foundation – acting in the best interest of the foundation and its mission at all times, making the foundation the focus of family pride and collective philanthropic action, rather than a source of dissension or a place where dysfunctional family dynamics get played out;

• Governing with accountability – employing a variety of mechanisms, including staff, outside experts, and external evaluators, to separate, to the degree possible, the foundation’s governance and implementation roles, so that the board can retain some level of objectivity as it sets the foundation’s directions, programs, and policies, and holds itself accountable for their effectiveness and impacts; and

• Acting with integrity – making decisions, taking actions, dealing with conflicts of interest, and assessing success as though they were being observed by members of the communities served by the foundation.

Foundation board members bear an obligation to govern with purpose, care, and integrity.

Source:

McKinsey Quarterly,
January 2004

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BUILDING BETTER FOUNDATIONS

This interview with Ralph Smith, senior vice president of the Annie E. Casey Foundation, reflects upon the ongoing debate on payout definitions and foundation accountability, and explores how the Baltimore-based Casey Foundation has addressed these in its own planning and programs.

Smith describes the three sets of questions that the foundation uses to help measure and hold itself accountable in its grantmaking:

• Impact: “What did an investment accomplish for the people whose lives we’re hoping to affect? How are they better off?”

• Influence: “Who is behaving differently as a result of an investment? Are policy makers, decision makers, and opinion leaders saying different things, understanding different things, and making different decisions?

• Leverage: “Did our investment help stimulate other investments from the public sector, the private sector, or other philanthropies?”

Smith notes that philanthropy is just one of many sectors of society being scrutinized and held more accountable by the general public, but that this will have positive implications in the long run. “We live in a time when there is cynicism about all institutions, including corporations, the media, the public officials, higher education, and even the clergy. There’s no good reason to expect that foundations and the rest of the nonprofit sector will get a free pass. Nor should we, because there are several things we can do differently.”

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