Trust, Unrestricted Grants, and the Golden Rule for Funders

A version of this post was originally published by Oxford HR. It is posted here with permission of the author.

The best thing about becoming a funder is that people have started laughing at my jokes…

The relationship between funders and grantees is asymmetrical. One person needs money; the other has money. I should know. I’ve been on both sides of the divide.

After 12 years as a fundraising CEO, I know how it feels to be the one asking for the money. I remember the hours running up to a potentially significant funder meeting. The anxiety that flows. I remember how tempting it was to laugh at jokes I didn’t find funny. I will always remember how patronized and belittled I sometimes felt.

I remember feeling disempowered and demotivated by funders. I felt defensive and I would sometimes act suspiciously, like a child falsely accused of stealing the chocolates hanging from the Christmas Tree (this also happened, but is another story). I know a few noble fundraisers who enjoy the relationship and who battle on with undiminished enthusiasm, but I also get the sense I’m not alone in my frustration.

Then again, sometimes special funders came along. Funders with exceptional humility and empathy. Funders who placed impact above control or attribution, and who understood that their role was both easier and more powerful than mine. Funders who listened and who I could trust as I shared our work — warts and all. Funders, most importantly, who trusted me and provided unrestricted grants — which are critical for an organization to successfully grow.

And so, when I became a funder, I had some great models to emulate. And guess what? Nearly all the best funders have one thing in common: they employ staff with experience working at nonprofit organizations.

By understanding how the funding relationship feels and how nonprofits work, funders with experience “at the coalface” bring a perspective so often lacking in foundations. It’s a perspective that might help balance the relationship a little. But more importantly, it’s a perspective that can make money go further; that can create more bang for each philanthropic buck.

One area foundations often get it wrong is in the choice between restricted and unrestricted grants.

In 2019, I carried out an unscientific but hopefully illustrative Twitter poll amongst fundraisers. I asked them whether they’d prefer a $100,000 project grant or a $50,000 unrestricted grant. The smaller, unrestricted grant won by two to one!

This makes sense because those fundraisers know just how inefficient restricted grants are and how much more impact they can have with unrestricted support. What makes less sense is why so many grantmakers continue to restrict their grants. If nonprofits value unrestricted funds so highly, you’d think funders must have some pretty good reasons for making restricted grants.

In my view, here are some of the drivers that lead funders to prefer restricted grants:

• We will know where our money is going.
• We want to avoid funding reserves.
• We want to make sure more money goes to the frontlines.
• We don’t want our funds to be a “drop in the ocean.”
• We want to support a particular thing a grantee organization isn’t doing, but we feel it really should be doing.
• The grantee asked us to fund a specific project.
• We want to keep grantees on their toes and stop them from just sitting back knowing their core operating budget and reserves are covered.
• We can enjoy more tangible recognition through a named project.

These conscious drivers are driven by subconscious drivers:

• We don’t trust the organization to make good decisions.
• We don’t trust the organization to work hard to maximize its impact.
• Attribution for “our” impact is more important to us than maximizing “total” impact.
• We want more control.
• We don’t know the organization well enough.

My golden rule for funders is this: if you don’t trust the organization, don’t trust the project! And conversely, if you do trust them, give them unrestricted funds. If attribution matters, there are plenty of ways in which to achieve that without restricting grants.

A grant agreement, like any contract, aligns the interests of the counterparties. If an organization is well governed and well led, its interest in maximizing its long-run impact is in line with its mission.

In my opinion, there should only be two instances in which a funder might want to restrict a grant. The first is if your mission isn’t aligned with your grantee’s mission. In this case, the funder shouldn’t provide funding — or at least they should be clear that they are effectively agreeing a contract for services delivered and not a grant. The second instance is where the funder needs reports and assurance to retain trust in the grantee. By only funding organizations whose missions are aligned with their own, funders can create grant agreements that include only the minimum requirements for reporting and assurance.

At the Peter Cundill Foundation, where I serve as director of grants, we spend a lot of time really getting to know each organization we’re interested in supporting. After we begin funding, grantees share their key milestones and then send biannual updates against them, along with audited accounts and any generic impact reports that they publish. These reports are enough for us to retain trust in the partner while keeping an eye out for other ways we might help.

There are heaps of reasons why unrestricted grants make so much more sense. Here are my top dozen.

Unrestricted grants:

1. Allow repeatable reporting (would a commercial company provide individual reports on different aspects of their work to each investor?);
2. Simplify accounting and avoid the need for complex grant “tessellation” (fitting each grant into the cost structure of the organization like a puzzle);
3. Reduce the complexity and the cost of audit for the grantee;
4. Reduce the overall cost of fundraising and the fundraising/expenditure ratio, since unrestricted funds are both essential and, given most funders’ inclination to restrict grants, more expensive to raise;
5. Are flexible (if the organization is well run, money is allocated to where it’s needed and that may change within a grant cycle);
6. Reduce grantees’ incentive to “mission creep” as they follow the money;
7. Encourage long termism by reducing the short-term focus on keeping the lights on;
8. Allow the grantmaker to focus on the 10,000-feet and one-foot views and to leave the bit in the middle to the organization, saving time on both sides;
9. Empower and motivate entrepreneurial leaders (given all of the above);
10. Potentially strengthen a grantee’s governance by increasing the CEO’s accountability to their Board of Trustees, as opposed to their funders;
11. Potentially improve transparency, which helps build trust (restricted grants can create a vicious circle leading to distrust; unrestricted grants create a virtuous circle);
12. Encourage organizations to compete for funds on strategy, leadership, governance, and impact per dollar received, rather than on their ability to dream up the most fundable projects in an inefficient race to the bottom.

One bright spot amongst the COVID-19-induced chaos of the past year is that many foundations have increased their unrestricted giving. The big questions are whether and why they might flip back to restricted funding as we get through this particularly difficult period.

Unless a funder isn’t interested in impact, why would they go back to making only restricted grants? Recent evidence from CEP indicates very few real barriers for foundations to increase the amount of general operating support they provide. Whether it’s inertia, a lack of understanding, or a lack of leadership, it’s time for funders either to make the shift to unrestricted grants, or to provide a clearer rationale for why they cannot.

John Rendel is director of grants at the Peter Cundill Foundation. Follow him on Twitter at @john_rendel.