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From the President's Office, March 2007

Dear Friend:

Several recent news events have me thinking this month about the roles and responsibilities of foundations.

Take these separate but related items:

Joel Fleishman's new book, The Foundation: The Great American Secret; How Private Wealth Is Changing the World, both applauds America's foundations and asserts that they are not meeting their potential. Foundations, he maintains, have been driving forces behind civil society here and abroad. Yet they need to "create a climate of transparency, the lack of which both causes foundations to underperform their potential and creates growing public distrust." Currently, these institutions "operate within an insulated culture that tolerates an inappropriate level of secrecy and even arrogance in their treatment of grant-seekers, grant-receivers, the wider civic sector, and the public officials charged with oversight. This needs to change."

A recent Los Angeles Times series on the investment practices of the Gates Foundation has rekindled a debate that has been with us for years: what should be the connection between an organization's activities and its investment policies? This is not just a question for foundations. The corporate and academic worlds face this issue as well with their business and investment practices. We heard it many years ago about investments in South Africa and more recently with products such as tobacco and liquor. Although investment policies are important, an even bigger issue for me is whether foundations are getting sufficient social leverage out of the enormous amount of money they manage.

And finally, according to a recent Chronicle of Philanthropy article, 2006 was a "blockbuster" year for philanthropy, a year in which 60 Americans contributed a total of nearly $7 billion dollars, up from $4.5 billion in 2005. And this figure doesn't even include Warren Buffet's $43.5 billion gift to the Bill and Melinda Gates Foundation. Twenty-one Americans contributed over $100 million. The money continues to grow, so the urgency to do something more continues to grow as well.

There are many interesting issues to explore, but I want to focus on an issue that I think could have a big impact: is there more that foundations could be doing to unlock the power and potential of their endowments?

Foundations manage hundreds of billions of dollars, but most hold very stringently to using no more than 5 percent of their investment returns for philanthropic purposes. Current practice is to build a high wall between a foundation's investment arm and its program activities. More than one program officer has been told that he or she doesn't have a prayer of influencing a foundation's investment practices. But does that have to be the case?

What would happen if every foundation took a tiny percentage of its assets—let's say one-quarter of 1 percent—and invested—not granted—it in nonprofit organizations and required a modest return, one roughly equivalent to investments in other low-yielding investments, such as government bonds? What if foundations invested this money in such activities as Program Related Investments (PRIs), or created something new like "nonprofit investment bonds," or started a lending program for nonprofit organizations with scalable economic models of sustainability?

Many nonprofit organizations have the capability of expanding their scope and impact but are hindered by the systematic lack of investment capital. Foundations have the potential to do more to advance philanthropy and meet the needs of communities today. Small changes in foundation investment practices can unleash new resources that could strengthen nonprofits and provide a return on investment for foundations' investment managers.

It would be a small step, but a step that could have a dramatic impact on—with lasting consequences for—the nonprofit sector.

What if?


Bob Ottenhoff
President and CEO