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Big Issue 2: Questioning the “Traditional” Approach to Endowment Management

Date: May 10, 2016

Phil Buchanan

President, CEP

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This post is the third in a series of seven excerpting CEP President Phil Buchanan’s new essay, Big Issues, Many Questionswhich explores five pressing issues facing U.S. foundation leaders and boards at this moment in time.

For the past century, foundations have tended to default to the same endowment management approach: one that sees the endowment and programmatic sides as separate, with endowments invested to maximize returns to support the foundation’s existence in perpetuity.

That may be changing. Put another way, it’s not your grandpa’s endowment anymore. inline

True, there is nothing new about limited life foundations (see Sears founder Julius Rosenwald’s philanthropy in the 1920s and early 1930s), impact investing (see the Ford Foundation in the 1960s), or negative screening of investments seen to conflict with values or goals (see the South Africa divestment movement of the 1980s or tobacco in the 1990s). But there is more and more discussion about each of these approaches.

And it is true that in all three cases, activity still lags the rhetoric.

  • CEP’s data suggest that perpetuity remains the overwhelming time horizon for large foundations. (Of 49 large foundations that answered this question in a survey we conducted last year, just six are committed to a limited life.)
  • We also see that impact investing is being done by more than 40 percent of large foundations but with (very) small dollars (two percent of endowment and 0.5 percent of program budget at the median).
  • Negative screening is rare. (Just 17 percent of large foundations we surveyed do any negative screening at all!)

But the rhetoric and discussion, and a few prominent exceptions, suggest this may change.

Major foundations like the Atlantic Philanthropies are in the final years of spending themselves out of existence and are actively attempting to influence other foundations to make the same choice they have made.

There’s action on the impact investing front, too. The McKnight Foundation, for example, has committed to investing $200 million, or 10 percent of its $2 billion endowment, “in strategies that align more closely with McKnight’s mission.” New IRS guidelines have reduced the risk for foundations worried that accepting a lower return would result in penalties, removing a potential barrier that some foundations have cited as a reason for not doing more.

Earlier this year, the F.B. Heron Foundation, which seeks to use “every dollar” at its disposal for impact, took the unusual step of issuing a press release urging its peer foundations “to jettison outdated operating models that leave resources untapped in the face of systemic social ills.” Heron President Clara Miller argues in her essay, “Building a Foundation for the 21st Century,” that “money and mission were never meant to be apart.”

Implementation is tough, however, in part because it can be so difficult to gauge who is a “good guy” and who isn’t among the major corporations in which foundation endowments are often invested. Together with the consulting firm (FSG) with which he is affiliated, Michael Porter of Harvard Business School, for example, has promoted companies such as Nestlé, Coca-Cola, and General Electric (GE) as exemplars of what they call “shared value” — doing social good and making a profit (arguing there is no tension between the two).

But are they really doing good? In her book, No Such Thing As a Free Gift, Linsey McGoey raises questions about the concept of shared value and its purported exemplars — and about what she sees as a dangerous blending of profit and philanthropy. “dmiration for Nestlé is not universally held,” she writes, adding that the company “has faced considerable criticism for allegedly encouraging intimidating and lethal union-busting tactics in Colombia, and for aggressively patenting tactics that restrict access to affordable medical procedures and food substances.” She makes similar critiques of Coca-Cola and GE, the latter of which has been called “one of the top ten ‘greenwashers.’”

The point is this: It isn’t always easy to determine which companies are doing good work that might be aligned with a foundation’s mission, which ones are having a negative impact that runs counter to mission, and which are doing what is probably most common — a mix of both. This is a significant practical challenge to the kind of “all-in for impact” model Heron has been championing.

Excluding entire industries from an endowment is a somewhat simpler call to make, however. Although negative screening does remain rare among large foundations, the past several years have seen a number of significant examples of major foundations pledging to divest from entire industries. There was, for example, the much-publicized decision of Rockefeller Brothers Fund to divest from fossil fuels. Others, such as The California Endowment, have recently divested from for-profit prisons.

Foundations need to ask themselves:

  • What is the role of the endowment?
  • How do we define our fiduciary responsibility — and are we acting consistently with that definition?
  • Are there certain industries or businesses in which we won’t invest because doing so is counter to the foundation’s programmatic goals or its values?
  • Will we seek to actively pursue our programmatic goals through investments of the endowment? What are the costs and benefits and potential challenges? (It should be noted that answers to these questions will likely be very different depending on endowment size.)
  • Given our programmatic goals and strategies, should the foundation exist in perpetuity?

On Thursday, I’ll turn to another big issue — the evolution of what good strategy and measurement look like.

Download Big Issues, Many Questions here.

Phil Buchanan is president of CEP. He can be reached at Follow him on Twitter at @philCEP.

Editor’s Note: CEP publishes a range of perspectives. The views expressed here are those of the authors, not necessarily those of CEP.

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