Alumni

Philanthropy’s Road Less Travelled – and How it Makes All the Difference

Page 2 of 3 -- Philanthropic Observation No. 3: Excellence is self-imposed.

There are no marketplaces in philanthropy. No profit discipline. When was the last time a philanthropic organization went out of business because it didn't generate the right level of social impact? In philanthropy, the absence of market forces can detract from the decision making and behavior that actually advances the cause. Microfinance, of course, is an exception. But, by and large, in pure philanthropy, there are no competitors, no customers, and no consequences of mediocre performance. The field can be seen as kind of a cross between the Galapagos Islands and Lake Wobegone. On one hand, you have this blissful absence of predators. On the other, everybody is above average.

An anecdote illustrates this point: I was in a foundation board meeting once with a group of very accomplished individuals, including the donor. It was at the end of a long day. We started discussing the topic of failure. I said, “Let’s discuss your bottom quartile of grants.” And somebody responded, “Well, we don’t actually have a bottom quartile.” Obviously, it’s impossible for every grant to be above average, but the attitude is not unusual in any way. In fact, it is regularly magnified by grossly distorted positive feedback. Indeed, recipients don’t normally tell you that money you gave away was wasted, especially if their organization is dependant on those funds. Instead, they tell you what you want to hear. They tell you that things are not only great, they would be even better if they just had more funds.

What is the inescapable conclusion? It’s simply this: When there are no marketplaces, when excellence is self-imposed, philanthropists have to be incredibly disciplined. Most philanthropists know that. They are acutely aware that in those areas where they want impact, discipline matters enormously; discipline in whom you fund, discipline in whom you don’t fund, discipline in where you double down. Yet for a lot of reasons, it’s hard to maintain relentless rigor in philanthropy. It’s so much easier just to write checks and feel good.

A related trend over time is something like entropy – the law of physics that everything tends toward the random. A donor’s funding starts to get spread out over greater and greater numbers of recipients. They feel good because they're giving a little money here, a little money there. But they're actually not focusing sharply enough on the actual results that money is buying. No marketplace feedback helps them self correct on a timely basis.

So given that philanthropic excellence is self-imposed, the associated question for philanthropists is: What will you hold yourself accountable for? And that brings me to my last philanthropic observation.

Observation No. 4: Philanthropy is only as effective as the organizations and the people you give money to.

The corollary is that as a philanthropist, you don't literally own that nonprofit you fund. It's not like taking a board seat and having 10 percent of the company, as one might do in private equity. That nonprofit has its own stakeholders, its own board. It has staff. It has other donors. It’s an independent organization. All of this means a philanthropist can exercise influence, but not control. It's more like being a limited partner than a general partner—you don’t get to be the decision maker.

The reality that you’re only as good as the organizations that you fund has another powerful implication around strategic alignment between donor and grantee: Together you have to agree on a well-defined direction. The essential question is: What is the line of sight from your philanthropic strategy – in tandem with grantees – out to the ultimate beneficiary or problem you are trying to address? That’s a basic test of strategic clarity. You can think about it as the path of an arrow to a tightly defined bull’s eye. In other words, you also are only as good as the strategies you fund.

More than that, philanthropic organizations need to be clear about strategic implications for every participant; themselves, the grantees and other constituents. Exactly how are we going to hit that mark? Too often, philanthropists shoot the arrow and expect results. The result is that, on average, philanthropic impact is just that: average. There is a bottom quartile and a top quartile and everything in between. From what I’ve seen over the past decade, our philanthropic average is probably not very high.

To restate my Observations 1 through 4: Giving money away to improve our society—to change lives—is really hard. Philanthropy is personal and messy. Excellence must be self-imposed. There are no marketplaces to guide and motivate you. You’re continually working through others. And you’re only as good as your partners.

To state this as an axiom: The challenges confronting a philanthropist are like gravity—they exert a force that relentlessly pulls performance downward—reducing impact over time. Donors have to fight tenaciously against this tendency. Otherwise they can easily end up with mediocrity in perpetuity.

We all know, however, that gravity can be broken, in both flight and in overcoming institutional inertia. In fact, data and experience led me to the optimistic belief that philanthropy is taking off. Indeed, if you examine the trends, the state of American philanthropy is truly extraordinary, despite the recent financial downturn. And that takes me from observations about philanthropy to a well-grounded conclusion about its future:

American philanthropy is entering an era of unprecedented size and impact.

How so? For my own experience I can unequivocally state there is more growth, there is more innovation, there are more highly engaged philanthropists driving toward higher impact than any time in history. There’s some interesting data to buttress this assertion:

If you tally all of the money that's gone into foundations in the 20th century and compare it to all of the money that is likely to go into foundations in the first half of the 21st century – 50 years versus 100 years, in constant dollars – the ratio is an incredible 10 to one.

That prediction is derived from a base case that is not at all aggressive and incorporates the current market situation and various financial scenarios. The number is stunning; 10 times more money is expected to flow into foundations in half the time. Could it turn out to be eight to one? Yes. Could it be 15 to one? Yes again. But the underlying trend lines are unmistakable. The implications for philanthropy and for America are truly astounding.

Continue to page three