The following article is cross-posted with permission from Alliance magazine blog. Based out of the UK, Alliance magazine is the leading global magazine on philanthropy and social investment.
Foundation payouts—how much a foundation spends as a proportion of their assets each year—might sound obscure and esoteric but the reality is anything but that. In the United States and Australia, a minimum payout of 5 percent is required by law, in Canada it’s 3.5 percent, but in the United Kingdom and elsewhere foundations are free, within reason, to spend how much (or little) as they like.
Over the last few months, the debate on payouts has resurfaced. As austerity bites and attention is focused on wealthy foundations and philanthropists, more people are asking the question: should the U.K. and other countries follow the U.S. example and impose a mandatory payout? Will it make a difference to the level of foundation spending and, indeed, accountability?
A trio of pieces and a new podcast on Alliance, have sought to answer this question. In so doing, they have highlighted sharp divisions amongst philanthropy experts and practitioners.
Payouts for one and all—Alliance Audio participants (right-left) Angela Kail, Cathy Pharoah, and Jake Hayman with Alliance editor Charles Keidan.
Cathy Pharoah, an academic who conducts research on, and on behalf of, foundations, argues that payouts would lead to the worst of both worlds: no discernible increase in foundation spending and an encroachment on their freedom. Her view is endorsed by the U.K.’s Association of Charitable Foundations (ACF) who argue that only trustees can decide how they make their investments and how they use their resources. In other words, independence must be preserved at all costs.
Others take a different view. Think-tank and consultancy New Philanthropy Capital argue that, while they remain opposed to payouts, foundations must do much more to explain their investment decisions especially where investment returns exceed grant-making. NPC’s Angela Kail points to the UK’s philanthropic giant, The Wellcome Trust, as a case in point. Speaking on Alliance Audio, Kail said:
“They’ve had an annualized return since 1995 of 13.8 percent on their endowment. ... When you’re getting 13 percent, I need a better explanation of why you’re only spending 4.7 percent. ... I think Wellcome is a brilliant example of why we need more information about how trustees are making these decisions.”
Jake Hayman, a philanthropy advisor and reformer, goes even further condemning “a complete absence of ambition in the sector.” As he puts it:
“... if we’re talking about issues of poverty and we really don’t believe we can make any difference to them, what are we doing hanging around throwing some coins at poor people year after year, after year, or even worse hanging around throwing some coins at rich people year after year, after year.”
While not a panacea, Hayman argues that a 5 percent payout could yield up to £1 billion in resources to a cash-strapped charity sector and, more importantly, increase accountability at a time when foundations “are totally disconnected from the communities they wish to serve.”
Despite the sharp differences (and these are just a few views), highlighted in this exchange, are there signs that, when it comes to payouts, the times might just be changing. As Angela Kail puts it, “I actually think that there is a bit of a movement for change ... and that we might get some sort of ruling about a payout ratio.”
Alliance will be staying tuned.
Charles Keidan is editor of Alliance magazine.