A hybrid foundation

According to Steve Case, the hottest topic for discussion at the second annual meeting of The Giving Pledgers was impact investing. This puts some emphasis on an idea that was raised at our recent ReCoding Good charrette on Impact Investing, Philanthropy and the New Social Economy.

That idea, quite simply, is this - do we need a new form of philanthropic enterprise designed to work across the continuum from grants to impact investing?

 The last few years have given us both B Corporations and L3Cs - hybrid forms that provides entrepreneurs with a corporate structure committed to both profitability and social good. Is it time for a similar innovation in the way we structure the capital for social good?

Will the next ten years see the creation of hybrid foundations - a capital investing form structured specifically to allow greater flexibility in how funds are used for social good?

New examples of program related investments from the IRS are designed to make these types of investments easier and more common. Private foundations and public grantmaking charities are permitted to make program related investments, so a new form may not be necessary. Many believe that the barriers to more impact investing by foundations is not the institutional form but the professional skill sets of employees and board members' tolerance low tolerance for risk.

Of course, both those barriers - professional skill sets and risk tolerance - may actually be part of the institutional form, or at least the norms that have been created around it. The philanthropic foundation in its current form is marking its centennial this year and next. Since the creation of the Carnegie Corporation of New York and The Rockefeller Foundation, the first private foundations, there has been remarkably little innovation in the institutional form itself.

Shortly after these private foundations were created Cleveland gave birth to the first community foundation, an innovation in its time that took federated giving (until then a largely religious or ethnic community activity) and applied it to place-based communities. Some eighty years later, in 1991, national mutual fund firms started offering donor advised funds. In this decade, Omidyar Network - which is an LLC with an associated philanthropy - and Google.org, the company's philanthropic arm - have both experimented with alternative structures to allow them greater flexibility in how they make funds available. Jeff Skoll has a "suite of organizations" - including a media production company and two grantmaking foundations - that focus on his social change interests. On the :other side" of the ledger, perhaps, we can also point to entities such as Legacy Ventures, which exists to invest donors' assets for maximum return on the premise of a promise to grant those earnings philanthropically. Social investment companies may be said to be pulling investment institutions into the business of social capital. But there are few examples to be found, out of the thousands of foundations formed each year, of institutional redesign. Few other of today's institutions - businesses, schools, universities, libraries, hospitals - look as much like their forebears as do philanthropic foundations.

It's illogical that this century's wealth creators are going to be content with last century's philanthropic forms. While it is still tough to distinguish hype from reality where impact investing is concerned, there are already several states in the nation with new enterprise forms for social businesses, documented new impact capital being made available from governments and private investors, and an emerging body of experience-based reflections on the capital continuum from philanthropy to impact investing.

Impact investing is not the only pressure point on the institutional form. Digital public goods, real-time payment systems, informal networks, globally-viable small organizations, remote care and education, crowdfunding, tax incentives, attitudes about perpetuity, late-in-life philanthropic focus - changes in all these realities also challenge core assumptions that under gird the foundation structure and institutional form.

With the centennial of the modern foundation upon us, as well as an era of wealth creation and inequality that matches that of last century's gilded age, it's time to think about the institutional forms that fit our current needs. This century's great philanthropists should aim not just to match history's great givers in their largess, but also in the creation of mechanisms and institutions that serve the future as well as their predecessors served the past.


Kate Barr said...

Thanks for the excellent kickoff of a discussion that is much needed. I am really struck by this sentence: "Few other of today's institutions - businesses, schools, universities, libraries, hospitals - look as much like their forebears as do philanthropic foundations." Could it be that these institutions have all changed in response to market forces, since all have external customers/payers/funders, while private foundations are insulated for any real "market" that would compel adaptation? The tax code is not substitute for external demands. What you describe is a new type of market force - internal dissatisfaction with slow or inadequate results. New forms may be essential to change that.

Bradford Smith said...

Good to have you back Lucy! Great post and it will be interesting to see how far the Giving Pledgers really go on the grants-to-impact investing continuum. Current foundation disclosure requirements make it possible for us to track their grants and program-related investments. So, for the sake of transparency, we will know more about what the Giving Pledgers actually do to fulfill their pledge to the extent that they create foundations. However, foundations are not required to disclose their mission-related investments...so reliable data on those will have to be created so we can track them the way we track other foundation expenditures. Foundation Center has done some survey research on Mission-related investment and found that, while still not very prevalent in the foundation world, it is growing http://tinyurl.com/bqrvu5k And as you point out there are good examples of this kind of hybrid, or "blended capital" approach like Omidyar Network of the F.B. Heron Foundation.

But I am less convinced about the need to innovate the form of foundations. We know all the downsides to the lack of external market signals, voter pressure, the need to raise funds, etc, that can insulate foundations but the very essence of philanthropy, its freedom and potential also derives from this independence. I think it is much more a question of leadership, vision, culture and management than institutional form. Some foundations work wonders with all the independence and freedom they have.

In the end I think transparency is more critical than institutional form since the true measure of institutions whose mission is to serve the public good is how much good they really do in the world. Google.org is a fascinating example. It came on the scene with a lot of hype about a new organizational form and style of working but how much has it really achieved? How would anyone interested in answering that question find out?

Back to impact investing. America's foundations hold more than 600 billion in assets and make some 46 billion in grants per year. That is real money and its potential for good is enormous.

Lucy Bernholz said...

Thanks for this. Actually - you hit on one of the key norms of a new institutional structure - transparency. Possibly even more important than how a capital firm for social good structures its payments (grants - impact investing), I think there is an argument to be made that the "data products" of their work are key public goods, that impose additional costs that should be incentivized, and that might ultimately prove as valuable as the dollars. I'm working up to a follow on blog post to carry this forward - would love your thoughts on what a 21C foundation of public goods data might look like....

Something else on my mind a lot these days - we've embodied "public good" in organizational form for over almost a century. By this I mean that nonprofit is synonymous with public good. As we consider other organizational forms as potential private resource creators of public good (informal networks, social businesses) - isn't it true that the good should be "embodied" in the outcomes/activities not just in the organizational form? What does that mean, practically?

I'm swimming right now in this debates on morality and markets - http://bostonreview.net/BR37.3/contents.php

I highly recommend it #Bostonreview #BR


Adin said...

I love you post Lucy. You have provided a great summary of many sidebar and under the radar conversations taking place on how to reposition philanthropic institutions to better align resources (broadly defined) to address community issues. I don’t know where the hybrid philanthropic institutions might emerge from, although I would argue that community foundations and federated systems (where I now work) are best positioned to engage individual donors in establishing these new types of organizations. We are truly in that moment of disruption; the ride itself should be fascinating.

Heather Peeler said...

Interesting post and discussion! The interest in mission investing and questions about organizational structure are helpful in sparking innovation and I am excited about the debates in the field. In light of the scale of needs in communities in the US and around the world, more innovation is clearly necessary. That said, I do think some caution is needed as we explore new frontiers. Too often our sector can become enamored with ideas, displacing attention away from purpose and results. My hope is that as philanthropists experiment with new forms of enterprise sparked by the new realities, they will also seize the opportunity to experiment with new ways to strengthen nonprofits and social change organizations (and networks!), facilitate learning (can transparency be embraced as a learning tool?), collaborate with government and “last-century” organizations, and engage the community in their work – and as a result, enable both old and new to be more effective.

Robin Hacke said...

Great post. I am struck by your comment about the barriers posed by professional skill sets and risk tolerance. In our work at Living Cities, we see that the need for cross-training: for finance-oriented PRI makers to understand program priorities and for program officers to understand the strengths and limitations of investing, as opposed to grant-making, is acute. We notice that some individuals are hungry for this kind of cross-training while others find it threatening. We also are struck by the cultural and behavioral differences between grant-makers and PRI/MRI makers: they seek and value different characteristics, their timelines often differ, and they are rewarded in different ways. Even within our current institutions, we have an opportunity to reduce the barriers between grant-making and impact investing. The work that Clara Miller is doing at the Heron Foundation points the way to a "new normal."

Tristan said...

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You can find my social ventures here: http://www.indiegogo.com/HouseInc , but just in case this comment gets moderated, I'd love to hear from you so I can get your advice. :)