Editor’s note: This month’s feature story is an excerpt from the new edition of our Passages issue paper series. A full copy of this issue paper, complete with specific tips, tools and interviews, is now available for members of our Friends of the Family Program and subscribers to the Family Philanthropy Online Knowledge Center.

If you asked at a gathering of family foundation folks whether using discretionary grants is a good idea, you’d never reach consensus. Many family foundations don’t use them. Those that do have widely varied policies governing how much money is available, who is eligible to make the grants, and whether the grants must be within the foundation’s mission and guidelines.

A decade ago, the National Center for Family Philanthropy wrote a Passages issue paper to examine family foundation practices around discretionary grants. In this issue of Family Giving News, we feature an excerpt from our new edition of Passages which revisits this interesting subject to see if trends in the use of these grants are changing. Anecdotally, we know that some foundations cut back on their discretionary grantmaking budgets when the economy weakened. Others have begun using them as a way to engage a new generation of board members.

WHAT’S THE ISSUE?

Typically, a discretionary grant program allows designated individuals to direct a gift from the foundation to a chosen nonprofit organization with the full board approving the grant by consent. These grants differ from core program grants in that they typically do not go through the same level of review and may not even have to meet the foundation’s mission or guidelines. Usually the individuals are board members and sometimes the CEO, but some foundations extend the privilege to others.

Proponents say that discretionary grants are useful tools to:

  • Keep family members engaged in the foundation’s work when they no longer live in the community it serves
  • Keep board members’ personal passions from taking up time on the board’s grantmaking agenda
  • Help trustees with wide ideological differences get along better and keep their focus on the core grantmaking on which they can agree
  • Train future trustees in the grantmaking process
  • Allow a quick turnaround to respond in times of natural disasters or other emergencies

Critics say that allowing individuals to designate grants:

  • Turns the foundation’s assets into several personal piggybanks instead of encouraging collective and strategic grantmaking
  • Prevents the board from focusing on shared goals
  • Leads to less scrutiny for effectiveness and impact than other grants receive
  • Confuses grantees if the grants are outside of the foundation’s mission
  • Can open the foundation to legal difficulties around self-dealing if not handled carefully
  • May reduce the amount available for mission-related grantmaking over time as families expand and more people want to participate

This is just a partial list of the pros and cons. As with any things related to family foundations, whether discretionary grants add to or subtract from the foundation’s work depends on the individuals, the family, and the situation. What’s right for some isn’t right for others.

Alice Buhl, senior consultant to Lansberg, Gersick and Associates and senior fellow at the National Center, has worked with countless family foundations. She recommends discretionary grants for some family foundations and not others. “Discretionary grants can be a really good safety valve. They can help families stick to their focus,” by allowing individual board members’ interests to be handled another way. “But they should be modest,” stresses Buhl. “If they take up a big piece of the budget, then you are not focusing your resources on what you said you wanted to be doing—grantmaking together as a family.”

For National Center President Ginny Esposito, the question goes back to good governance and a clear understanding of the family’s shared goals and values. “Don’t start the conversation with whether you want to have discretionary grants or not. Instead, ask ‘what are we trying to accomplish together? What are the tools that will help us do that?’ It might be discretionary grants or it might be something else.”

For example, Esposito thinks discretionary grants can work well when “they keep the family’s eye on the shared grantmaking” by providing an outlet for various individual interests of board members who disagree on certain shared funding areas. They can also be used creatively “by families trying to stay on the cutting edge. There could be a percentage of the grantmaking allocated to innovative issues,” with individual family members bringing ideas to the table through their own knowledge of their communities.

But sometimes discretionary grants designed for one purpose are used inappropriately, says Esposito. “Discretionary grant policies can lead to a sense of entitlement. I hate it when I hear ‘my share’ because it means that the notion of stewardship of a public trust has shifted to one of ownership.”

One place where Esposito thinks a lot of families go wrong is when they strive for family fairness. “Fairness is an elusive if not unachievable goal,” she advises. For example, foundations that apportion discretionary grants by branch can inadvertently find themselves in serious disagreements about having spouses as board members, because it means a married couple would then have twice as much discretionary grant money available as an unmarried member. “The question of whether to let spouses on the board is a governance question. What do discretionary grants have to do with it?” Esposito says. “They should be asking ‘What does the foundation need?’”

Why One Family Switched from “Con” to “Pro” on Discretionary Grants

Over time, the Russell Family Foundation in Gig Harbor, Washington, has reversed its views on discretionary grants. When the foundation was endowed in 1999, the board decided not to use discretionary grants “because the foundation was created so the family could work together in consensus around their common causes,” explains Chief Executive Officer Richard Woo. “They didn’t want to be an organization that just divvies up the money according to individual interests.” When the family brought on their first non-family board member in 2002, however, they decided to allocate $25,000 annually for discretionary grants to recognize the independent director’s time and devotion to the family’s philanthropic work. “The most outside board members we’ve had at any one time is three, so it was $75,000 all together,” Woo says, representing a small percentage of their annual philanthropic budget of $6 to $8 million.

The reversal came in 2010 when the board decided family trustees should have the same opportunity to make discretionary grants as the non-family board members. The board now totals eight: five family members and three non-family.

“The change was very successful and educational,” Woo says. “It engages the board members as they share their grants with each other and their rationale for choosing them. It also offers hands-on grantmaking experience for the board, since it isn’t staff driven.” As CEO, Woo retains the ultimate authority to approve each grant.

Why the change? “One reason the family was reluctant to expand the use of discretionary grants in the early years was a concern that people might disagree over which grants furthered the foundation’s goals,” Woo explains. “Now they have a greater ability to hold the harder conversations and are also comfortable surrendering these to an independent authority—me. While there’s the potential for conflict, there’s also greater understanding of each other as they explore their passions and differences. I take it as a sign of maturity in board governance for both family and non-family directors.” Woo does not have discretionary grants himself, but like the rest of the staff, does have access to up to $5,000 a year in matching grants for his personal charitable donations. In addition, each employee can direct up to $1,000 in grants from the foundation to community nonprofits where they serve as volunteers or on the board.

Why One Foundation Eliminated Discretionary Grants in Favor of Matching Grants

At the time Carrie Avery, president of the Durfee Foundation in Los Angeles, and her brother joined the foundation’s board, they were in their 20s. Family board members had been allocated $20,000 per member annually in discretionary grants money. After seeing the process in action, Avery convinced the family to eliminate the grants.

“I was 26 years old and new to the board. I disagreed with my grandfather [the founder] over a $3,000 discretionary grant to an organization whose mission I disagreed with fundamentally. We had very divergent political views, and this grant brought them to the surface.” The discussion went on for so long without resolution that the board decided not to make the grant. “And we eventually decided that discretionary grants weren’t a good use of our board’s time or our foundation resources,” Avery recalls. “There was so much that our board agreed about; that’s why we developed a mission statement. Why spend our time talking about off-mission organizations that we could not agree on?”

At the time, Avery and her brother “were both in grad school and didn’t have any personal philanthropic resources,” she says, so the elimination of the grants affected them the most. “But what’s the purpose of the foundation? It’s not to execute the trustees’ personal giving.” Instead of discretionary grants, the foundation now encourages personal philanthropy through a matching gifts program providing up to $1,000 a year for trustees and staff. The match can also be earned for volunteer hours to a nonprofit.

Now, years later, she says her opposition to discretionary grants has grown stronger.

“They create confusion in the nonprofit world about the foundation’s mission and grantmaking. Nonprofits have difficulty distinguishing between mission-driven and discretionary grants when they look at a foundation’s grantmaking history to determine if they are a good fit. Also, it troubles me if there is a tacit deal between trustees to ‘vote for my discretionary grant and I’ll vote for yours,’ and the grants aren’t examined with the same rigor as the mission-driven grants,” Avery says. “If that happens, trustees aren’t acting as the fiduciaries they should be.”

WHAT TO PUT IN A DISCRETIONARY GRANTS POLICY

Any discretionary grant program should be covered by a written policy that is understood by all participating individuals.

At a minimum, it should specify:

  • How much money individuals may designate annually (either a dollar figure or a percentage of the total grantmaking budget)
  • Who is eligible for the program (options include the family board members, non-family board members, board chair only, executive director, staff, etc.)
  • Types of organizations that are eligible and whether the grant must fit the foundation’s mission and/or guidelines
  • Any requirements of the individual designating the grant, e.g. submitting a written proposal
  • Requirements of the grantee, including submission of a 501(c)3 determination letter and whether a final report is required
  • Grant approval process, e.g. the executive director reviews the grant for compliance with policy and the full board approves retroactively at their next board meeting.

See below for an example of a discretionary grants policy provided by the Knott Foundation.

CONCLUSION

Roughly half of family foundations use discretionary grants. Among other things, supporters suggest that discretionary grants help with geographic diversity, next generation training, and keeping the board’s agendas free of personal passions. Critics counter that discretionary grants take them off mission, don’t get the same scrutiny as core grants and confuse grantees, to name a few.

Whether discretionary grants are a useful tool for an individual foundation depends on the considerations highlighted in our new edition of Passages, which features the results of new research from the National Center and a variety of additional stories of creative techniques used by family foundations in the area of discretionary grants.

CALLING ALL FRIENDS AND FAMILY PHILANTHROPY ONLINE SUBSCRIBERS: PLEASE SHARE THE NEW EDITION OF PASSAGES WITH YOUR COLLEAGUES!

A full copy of this issue paper, complete with specific tips, tools and interviews, is now available for members of our Friends of the Family Program and subscribers to the Family Philanthropy Online Knowledge Center.