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The First Grantee

Published on August 5, 2012 by in Philanthropy

$18 million…  You can do a lot with a grantmaking budget of that size.  But with all the important things to do in the world, where should that first grant go?  Which grantee deserves that level of confidence and support?

Answering these questions led me to a surprising result, and a staggering responsibility.

The Joyce Foundation was going through one of its periodic reviews of its grantmaking programs.  We were in the later stages of a significant shift of programming away from grants for direct services to focus more systematically on public policy. Before locking into this focus, though, we decided to do a top-to-bottom review of all of our programs.  We challenged ourselves to consider a range of other possibilities for the use of our grant dollars.  We called this our “$18 million question.”

As Vice President at the time, I was responsible for working through the nitty-gritty of the various options, ten in all.

Among the options, we considered focusing all of our grantmaking on a single issue area, which would have made us one of the largest funders in the country on whichever issue we chose.  Perhaps we could magnify our impact in one area that would, on balance, be more beneficial than spreading our resources across multiple programs.

We considered taking things a step further, and converting ourselves to an operating foundation, running our own policy oriented projects, and not make any grants to external nonprofits.  We had significant institutional memory about where the gaps in public policy thinking could be found, so perhaps we should leverage that accumulated knowledge directly.

We considered taking the full grant budget and giving it a single nonprofit — a university, for example — to build long-term institutional capacity to develop breakthrough approaches to a problem or set of problems.  This would allow a different kind of focus that might increase overall impact.  And it would save a lot of money on staffing costs…

Staffing costs… …We suddenly realized that we didn’t have an $18 million question after all.  We really had a $20 million dollar question

Private foundations are required by the IRS to distribute at least 5% of their asset to charitable activities.  But foundation operating expenses — investment costs and program staff — are counted as part of that distribution requirement.  Joyce’s $400 million corpus translated to a $20 million requirement, but if the foundation put its corpus into passively managed index funds and made grants to a predetermined set of grantees, then it could cut its operating expenses from 10% of distributions (considered very good) to less than 1% of distributions, freeing up the balance for further grants.

The question presented itself, Was the work of staff resulting in greater net impact than giving that same amount of money to one or more established, well-managed nonprofits?

Some people would hasten to answer, “Of course.”  But I’m not so sure it’s as easy as that.

The annual turnover of grantees in the average foundation is relatively small, usually less than 20%.  Joyce’s turnover was slightly higher than that, but a significant percentage of every program’s grant budget went to a small number of grantees who showed up in the grant pool year after year.

We had to consider the possibility that a “passively managed portfolio” of grants — i.e., giving blindly and without restriction to the nonprofits that have established themselves in their fields — might be as effective as actively managing that portfolio, perhaps even more so.  Actively managed investment funds regularly underperform index funds when management fees are considered.  Might not the same be true for foundations?

I don’t know.  But I can no longer ignore the possibility.

In effect, the first grant that a foundation board approves every year is the grant to its staff.

In most years and for most foundations, it is also the largest grant that the board will approve.

Grantees and staff are peers.  They are funded from a common pool of resources.  Yet, foundations rarely assess the work of their staffs with the same scrutiny and on the same scales that they use for their other grantees.  They should.  The illusion of a separation between the two groups of people has led more than one foundation to overstate its own impact and understate the costs it imposes on the fields in which it funds.

Staff should have no special claims on the resources of a foundation.  It should work hard to demonstrate that it deserves its privileged position among grantees.

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