First published on the Center for Effective Philanthropy's blog.
Twenty years ago, before I worked in philanthropy, if you had asked me to explain the fundamental purpose of a foundation, I would have given a simple answer: to give money to nonprofits.
That was naive. After joining the Eugene and Agnes E. Meyer Foundation in 2003, I quickly came to understand that the foundation had a mission beyond giving away money — and a vision for impact that encompassed more than simply supporting good organizations. I also learned that strategy entailed more than just figuring out which issue areas and organizations to fund.
During my nearly 14 years at Meyer, we went through two strategic-planning processes — emerging from each with a somewhat narrowed focus, more concrete ideas about our goals, and an increased commitment to measuring our impact.
That evolution was part of a broader shift by many foundations over the past few decades toward an approach often referred to as “strategic philanthropy.” In a 2009 report, the Center for Effective Philanthropy defined “strategy” as an approach to giving focused on the external context (rather than the foundation itself or its grantees) and the logical connections between use of foundation resources and achievement of goals, with a commitment to measuring progress.
This field-wide shift, though not without detractors, has been positive in many ways. Institutions entrusted with significant philanthropic capital have an obligation to be thoughtful and intentional about how that capital is being deployed. And any effective organization should want to know whether it is making progress toward its goals.
But as our field has embraced strategic philanthropy, “checkbook philanthropy” — the term frequently invoked to describe giving that is the opposite of strategic — has gotten a bad name. Just look at the websites of leading philanthropic advisors, who describe checkbook philanthropy as “ad hoc with little further communication or follow up,” or even “giving without thinking.”
“Checkbook philanthropist” has become a pejorative, and that’s a shame. Simply writing checks to effective organizations doing important work can be an honorable approach to philanthropy and doesn’t have to be mindless, haphazard, or ineffectual. Checkbook philanthropy isn’t necessarily the opposite of strategic philanthropy. And more checkbook philanthropy could go a long way toward solving some of the chronic problems with how nonprofit organizations are capitalized.
There’s considerable evidence that the current system of capitalization isn’t creating the kind of strong, resilient, and effective organizations that strategic philanthropy aims to support. More than a third of the 5,400 respondents to the Nonprofit Finance Fund’s most recent State of the Nonprofit Sector Survey, for example, reported that their organizations had less than three months of cash on hand, and cited achieving long-term financial sustainability as their most pressing challenge.
A more recent national analysis of more than 200,000 IRS forms 990 found that about half of nonprofits had less than a month of operating reserves. Nearly eight percent had liabilities that exceeded their assets, making them technically insolvent. Thirteen percent of health and human services organizations were insolvent.
Both reports pointed to government funding and contracting policies as part of the problem. Many contracts don’t pay the full cost of services, regulations and contracting procedures can be onerous, and payments often come late.
Those things are generally true, but philanthropy is far from blameless. Philanthropy is also often reluctant to pay the full cost of programs, and many foundations are skeptical of general operating support and ambivalent about overhead.
Strategic philanthropy has been instrumental in calling attention to this problem and has also offered new frameworks and systems that help organizations measure their outcomes and impact, which is critical to ensuring financial sustainability and programmatic success.
But for all the good it’s done, strategic philanthropy can also be part of the problem. As more foundations develop their own strategies — complete with goal statements, theories of change, and outcome measures — nonprofits are under increasing pressure to align their work with the strategies of their funders. Ideally, funders would give general operating support to organizations that are already aligned with their goals. But in the less-than-ideal world many of us inhabit, things are messier. Here’s an example of how it plays out:
Imagine yourself as the executive director of an organization providing after-school and summer programs to middle school students in a large city. Your organization serves 600 students each year across eight sites, with an annual operating budget of $1.2 million. You have no endowment and unrestricted net assets of $200,000 — less than two months of operating expenses.
Two of your largest foundation funders, each providing about $50,000 per year, have just completed strategic-planning processes. Both funders admire your organization’s work and would like to continue support. But one foundation is shifting to a systems-change approach, and so suggests that you could continue to get funding if you expanded your parent engagement program and mobilized parents and students as advocates for school reform.
The second foundation now wants to fund programs “at scale,” and would like to see you expand to the eight other middle schools in the city. They don’t have the resources to fully fund that expansion, but would be willing to provide seed funding to help you get started. This foundation is also concerned that you aren’t able to track college completion rates for students, which is now the key metric they’re focused on tracking.
And so it goes. Oh, and I should have mentioned that your largest funder is a quasi-governmental agency that requires detailed monthly reporting on program participation, and contract payments often don’t arrive until 90 days after reports are submitted. You also have 18 other institutional funders and can’t seem to keep a director of development on staff for more than a year.
This scenario is fictional, but not so far-fetched — organizations like this one comprise a large proportion of the nonprofit sector. To capitalize its operations in a sustainable way, this hypothetical organization — like so many others — needs some funders who believe in the work and are willing to just write checks.
One could argue that the primary concern of foundations should be impact on people and communities, rather than the financial health and stability of grantees. But when organizations are financially unstable, the people and communities being served experience the adverse effects, such as disruptions to or lowered quality of services. And chronically underfunded organizations are less likely to be reliable partners in delivering on the impact strategic philanthropy aims to achieve.
While the shift of many foundations toward strategic philanthropy has been a positive trend for the field, there’s no one-size-fits-all, silver bullet approach for maximizing impact. Like for-profit enterprises, healthy and sustainable nonprofit organizations need a variety of investors — some who support innovation and push the envelope on strategy, and some who are willing to “buy shares” in the good work already being done.
Yes, foundations serve a broader purpose than simply giving money to nonprofits and should be clear about strategy and intended impact. But in a sector in which organizations are chronically starved for capital to support their core operations, there’s also a need for funders who just write checks.
Rick Moyers is an independent consultant to philanthropy and chair of the board of directors of BoardSource. Follow him on Twitter at @Rick_Moyers.