Lucy Bernholz, Author, 'Creating Philanthropic Capital Markets'
We live in an increasingly complex and interrelated world where change occurs at an ever-faster rate and our capacity to deal with massively disruptive economic, demographic, and technological developments depends on our ability to know more and learn continually.But if change is destined to be the only constant in the twenty-first century, what must philanthropy, an "industry" with its roots in the social and economic transformations of the late nineteenth and early twentieth centuries, do to remain relevant? Is a business-as-usual approach sufficient in the face of rapidly aging populations in most developed countries, growing inequality between haves and have-nots, and global climate change on a potentially unprecedented scale?
To answer these questions, Philanthropy News Digest spoke with Lucy Bernholz, founder and president of Blueprint Research & Design, Inc. and author of Creating Philanthropic Capital Markets (John Wiley & Sons, 2004), about some of the forces that are roiling the field as well as her vision of what a more effective philanthropy might look like.
A noted analyst of the philanthropic industry, Bernholz has worked as a program officer and consultant to foundations for more than fifteen years and is the author of numerous articles about the field. A visiting scholar at Stanford University's Graduate School of Business, she holds a B.A. from Yale University and an M.A. and Ph.D. from Stanford.
Philanthropy News Digest: How did you become interested in philanthropy?
Lucy Bernholz: Actually, my real interest is the relationship between public and private in society, which I've been thinking about on multiple levels for decades. I stumbled into philanthropy as I began to think about public institutions in American society, particularly public education and the role it plays in our society, and that ultimately led me to questions about funding and decision making.
PND: Do you have a favorite definition of philanthropy?
Bernholz: Not really. The actual definition of the word is "love of mankind," but when I think of philanthropy I think of it in terms of the giving of private resources for a purpose that serves others besides just the giver.
PND: Your first book, Creating Philanthropic Capital Markets, which came out last year, is nothing if not ambitious. How did you come to write it?
Bernholz: I've worked directly with philanthropic institutions and individual donors for more than fifteen years, and over that period I'd done a lot of writing about specific aspects of the industry, from knowledge sharing to changes in the types of giving vehicles that people have at their disposal. As those individual articles and essays started to pile up, I began to re-read some of the things I had written, particularly over the last five years, and soon realized that many of them were about a larger story, which had to do with what a better philanthropic system might look like. Then, as I got comfortable with the idea and did some more research, I began to realize that there really weren't any complete visions out there. So when the opportunity to put it all together in book form presented itself, I jumped at the chance. My real hope, of course, was that the book would spark a larger discussion about what the $240 billion-a-year philanthropic industry in the United States should look like, how it should operate, and so on.
PND: The book's thesis — that American philanthropy can and should be re-imagined to make it more effective — could be seen as a direct challenge to a lot of individuals and institutions. What kind of reception has the book received?
Bernholz: I've had two basic responses. The first has been from professional philanthropists who want to know how to use the framework I lay out in the book to change something within their particular organizations — that's been mostly positive. The more controversial reactions I've received have focused on a couple of things. For starters, people want to know why I call philanthropy an industry. And then there's a second group of people who read the book and come away thinking that I'm not in favor of donors retaining control over their donations. Which is not my argument at all.
PND: Well, let's talk about the first, first: Why did you choose the philanthropy-as-industry metaphor?
Bernholz: When I first started to think about what a better philanthropy would look like, I needed a way to compare philanthropy to something else over time. Calling it a sector or a field wasn't particularly helpful, and I couldn't find anything else that, historically speaking, had the same characteristics I saw in philanthropy.
At about the same time, I stumbled upon [Harvard Business School professor] Michael Porter's theories of competitive strategy, one of which deals with a set of firms selling highly substitutable products. As I began to study Porter more closely, a light bulb went off. That's what I was looking at. I was looking at a set of organizations — I'm talking about American philanthropy — that offered their customers, donors, different ways to do basically the same thing. From there, it just naturally plotted nicely against the rest of Porter's definition of an industry in terms of markets, customers, competition, cooperation, regulation, et cetera. In other words, I could fit what I had identified as the characteristics of philanthropy into the industry framework and then look at other industries — the recording industry, the financial services industry, health care, education, and so on — and see what kinds of things served as catalysts for major change in those industries.
PND: And what did you identify as the core characteristics of the philanthropic industry?
Bernholz: The part of the industry that my book looks at, and which I focus on in my work, has to do with the way people organize the financial resources they've allocated to their philanthropic endeavors. And what I discovered, once I hit upon this framework, was another phenomenon I'd been seeing but couldn't put words to — namely, the advent of commercial firms selling retail products to help people manage their philanthropic dollars. I'm talking about everything from the Fidelity Charitable Gift Fund to the growth of family foundations. Suddenly, I had a way of explaining all that — namely, that philanthropy increasingly is an industry in which firms are selling highly substitutable products, and those products represent choices, both pro and con, for donors. That was really interesting to me. From there, it was relatively easy to see that, over the last twenty years or so, the financial products available to donors had been unbundled from the advisory services that used to be marketed with those products, mostly in the form of private foundations. Today, in contrast, there's a whole menu of ways to put philanthropic dollars together with guidance and advice. And those two observations captured, for me, a lot of the tension and emerging discomfort I was seeing as I pursued my consulting work.
PND: One of the things you try to do in the book is to situate philanthropy in the context of broader forces shaping the field. What are some of those forces, and do you think their impact on the field is temporary or more structural?
Bernholz: The impact is absolutely structural. What's really interesting about many of these forces is that they're having their greatest impact on individual donors. All of a sudden, individuals who find themselves at a stage in their lives where they are ready to think philanthropically have a whole set of new options they need to navigate. Not only that, but the people making those decisions are different. For starters, they're often younger than earlier generations of philanthropists were, for reasons that are readily apparent. People are either making fortunes at an earlier stage of life, or they are inheriting wealth at a point in their lives when they still have a lot of living left to do. In many cases, this new generation of philanthropists will be actively involved in the field for the next thirty, forty, even fifty years. So their choices, philanthropically speaking, are different.
PND: Do you expect the so-called intergenerational transfer of wealth to have an impact on the field over the next few decades?
Bernholz: I think it already has had an impact, in that projections about the size of the intergenerational wealth transfer have played a significant role in bringing for-profit players into the field.
But let me back up a step. What doesn't get addressed carefully enough when people talk about several trillions of dollars changing hands by 2050, or whatever the timeframe is, is that we will have experienced two generational transfers of wealth by then. One of them is already under way — namely, the transfer of wealth from the World War II generation to the baby boom generation. If you look at the growth in giving over the last three or four years — since, say, the stock market crash and 9/11 — one would have expected to see a much bigger drop in giving than what we've actually seen. Yes, institutional and individual giving has declined, on a per annum basis, but those declines have been in the neighborhood of one or two percent, which is pretty modest, and I would argue that the main thing mediating those declines is the ongoing transfer of wealth from the World War II generation to baby boomers.
Now, the next transfer of wealth that will take place within that fifty-year timeframe is from baby boomers to their kids, and that, I think, is a much less certain proposition. For starters, there are several forces at work in our society that are going to profoundly influence how baby boomers live out the last twenty, thirty, forty years of their lives — one of them being that many of them will live thirty or forty years past the traditional age of retirement.
The other thing that is going to change, sooner or later, is how we, as a society, finance the retirement of the largest demographic group in the nation's history. I mean, we've never faced anything like this before, and we have no idea what Social Security reform is going to look like in its final form. But the impact of those changes is going to be enormous, and to expect, against that backdrop, that the rate of wealth transfer will remain unchanged is simply unrealistic.So the short answer to your question is, Yes, the intergenerational transfer of wealth is real, it's under way, and its impact on philanthropy is likely to be profound. But whether those things will be true twenty or thirty years from now is impossible to say.
PND: Isn't it also true that the impact of the wealth transfer from the World War II generation to baby boomers has been diluted by the sheer number of boomers on the receiving end of that transfer?
Bernholz: Absolutely. In fact, that's exactly what has happened as a result of the proliferation of philanthropic products over the last decade or so. How much did Americans give last year — something like $240 billion dollars? A lot, right? But how many pockets was that $240 billion distributed among? Twenty or thirty million? And with that kind of diffusion, what are the chances of that money really making a difference?This is where people start thinking I'm opposed to donor intent. I'm not opposed to donor intent. What I'd like to see, however, is deliberate action on the part of the vendors of philanthropic products, as well as the rest of us who have a stake in the field, to come up with ways to aggregate those dollars while still allowing people to have a say over how they're used. If you really think about it, there aren't that many issues or causes that haven't already attracted the attention of somebody, somewhere. But nobody has enough money to solve the kinds of problems philanthropy likes to tackle on their own, not even Bill Gates. What people who find themselves in that position really need is a way to find other people with money who share their interest or passion. And what the Internet and some of the new products in the field have the ability to do is to connect people with specific interests to other people, all over the world, who share those interests in ways that aggregate and leverage their philanthropic dollars.
PND: That sounds constructive. You write in your book, however, that at this particular moment the forces of fragmentation in the field are stronger than the forces of aggregation. What do you mean?
Bernholz: What I'm talking about is the continued introduction of and competition between different products from vendors. Essentially, market forces are driving the evolution of the field, and there's no financial incentive right now for vendors to work together to get folks to aggregate their charitable dollars. They just want to sell as many of these different products as possible.The other major force acting on the industry — and there's nothing new about this — is regulation and the regulatory structure that shapes the way philanthropy in this country operates. Right now there's nothing impelling regulators to take steps to promote the aggregation of philanthropic resources. I mean, the trial balloon that [then-New York State Attorney General] Eliot Spitzer floated last year with regard to getting rid of foundations with assets of $20 million or less and rolling those assets over into donor-advised funds at community foundations — a proposal that addressed the issue of fragmentation head on — disappeared without a trace.
Ultimately, however, I'm not sure it matters where the dollars end up, whether that's a donor-advised fund or a private foundation or something else; it's not really about where the money sits and how it gets managed. It's about whether it is given in a way that attracts other partners and resources to issues. What the issue is and how the dollars are managed — I don't care. The problem we have is that we don't have a business model for doing philanthropy that's based on anything other than where those dollars sit. And until we come up with a different model, there won't be any real incentives to aggregate charitable assets.
PND: I take it you don't see the regulatory environment changing anytime soon in this regard.
Bernholz: That's right. None of the regulatory changes the folks on Capitol Hill or the people who have their ear are talking about has anything to do with improving the aggregation of assets or the effectiveness of the field. Congress is concerned about excessive compensation and accountability — in part, because no one is presenting them with a different picture or vision. The only regulatory vision that's being moved through state houses and on the Hill is coming from the politically conservative end of the spectrum, and those folks feel very strongly that this is a donor-intent issue, that it's about individual rights. That agenda has some traction, it's got people's attention, but ultimately it's going to increase fragmentation in the field, not reduce it.
PND: So you think the recommendations presented to Congress by the Panel on the Nonprofit Sector are beside the point?Bernholz: Let me put it this way. The panel is responding to an agenda put forward by Congress. The conservative foundations, through the Alliance for Charity Reform and other vehicles, are shaping the actual agenda. The panel is responding to it — what we need are voices in the mainstream and on the left that work to shape the agenda, not just answer questions when they are asked.
PND: What's going to happen with the estate tax?
Bernholz: Based on the results of the last election, I think we can kiss the estate tax good-bye.
PND: Will that be good or bad for philanthropy?
Bernholz: Ultimately, I think repeal of the estate tax will diminish the resources coming into philanthropy. But with six years to go before repeal becomes final, I think the bigger issue involves the Bush administration's interest in reforming the tax code. The way I see it, philanthropy is an industry built on assumptions of growth, especially the growth of charitable assets. But now you have two forces — the repeal of the estate tax and reform of the income tax code — that could change the incentives that drive a lot of charitable giving in this country and dramatically alter those assumptions. If any other industry saw these kinds of threats on the horizon, you can be sure it would be organizing to make sure its voice was heard and its interests considered. But where is institutional philanthropy on those issues? Nowhere. People who have philanthropic products to sell should be figuring out how to get on the tax code train before it leaves the station. But I'm pretty sure the only segment of the industry that has done that is the commercial side — the Fidelities, Schwabs, and Citigroups. They know how to play the regulation game, they know how to work with politicians to advance policy agendas, they know what they want and are ready to shape policy decisions that affect them.
PND: We've talked about some of the external forces shaping the field. What about internal practices? Are there any, in your view, that are ripe for change?
Bernholz: Philanthropy is an industry comprised of mom-and-pop shops. Even the Bill and Melinda Gates Foundation is a mom-and-pop shop. It might be the biggest mom-and-pop shop in the history of the world, but it's still a mom-and-pop shop. That said, the best foundations are focused on accomplishing programmatic missions. However, because they don't have anything forcing them to, they tend not to act with a coherent voice on anything having to do with their mission. There have been a few visionaries who recognized the importance of caring about what the other guys did, but they've been the exception rather than the rule.In terms of individual institutional structures that hamper effective philanthropy, the thing that comes immediately to mind is the lack of metrics and a bottom line. The one metric that exists across the board is the payout rate for private foundations, and that's fairly loosely applied. In contrast, we see very little in the way of credible review systems in foundations designed to organize the work of the organization around accomplishing a stated mission or goal. Nor do many foundations think about assessing themselves in terms of the changes they actually help fund — do their dollars draw in other dollars? Do they see positive change on the issues they care about? There has been a lot of talk about these issues, but, in the current setup, at the end of the day the rules are designed to make sure foundations spend a certain amount of money and are somewhat transparent about reporting that information; there are no requirements that any of these organizations actually accomplish anything.
PND: People who work in the sector will tell you it's difficult to design meaningful metrics for activities that have a significant social benefit component?
Bernholz: It's not easy. But it's not impossible, either. It is very possible to figure out what it is you want to accomplish, who else you need to work with, and how you want to divvy up the work so that there's a minimum of duplication and wasted effort. And then to work over time with those whom you fund to see those changes made. It can take a long time to see change, but it can be done. The problem is, we've created an organizational structure — the private foundation — that isn't really suited to the things we want those organizations to accomplish, and we've replicated it sixty-five thousand times.
PND: Are you saying foundations don't do a good job of talking to each other?
Bernholz: Some of them do a fabulous job of talking to each other. And we're seeing more and more of it. What I tried to do with the book is to put something out there that built on the best of what is already happening and imagine an even better vision, a vision we could move toward. Are a lot of good things already happening? Absolutely. Big foundations spend a lot of time talking to other big foundations. There are big foundations based in New York City that are significant players in the international arena and are influential far beyond their actual financial resources, and that's fabulous. On most issues, there are a handful of foundations that can invest time and money to think through an issue, or identify some aspect of it as a new concern and find ways to engage individual donors in that issue. So yes, there are a lot of good things happening in philanthropy in terms of information sharing and collaboration and trying to break down some of these organizational barriers. But we've got a long way to go.
PND: It's become fairly commonplace in recent years to hear foundations described as the venture capitalists of the nonprofit sector. Do foundations fill that role, and if so, do they do it effectively?
Bernholz: Not really. Venture capitalists have very clear metrics about what they're investing in and what they want to realize from their investment. They also have deliberately organized themselves into an ecology of sorts. By that I mean there are VC firms that focus exclusively on startups, and firms that focus on mezzanine funding, and firms that focus on IPOs. In each case, they know exactly what their job is, and they know there are other firms in the system that are equipped to deal with different stages of the organizational life cycle. Foundations need to think of themselves as part of a comparable ecology. Even if a foundation has figured out which piece of the organizational life cycle it wants to focus on and has developed metrics to measure its effectiveness, it probably doesn't know who is focusing on an earlier or later stage of the cycle. We spend far too much time in philanthropy talking about starting or initiating things, and far too little time making sure there are revenue streams to sustain the work of the thing that has been created. I mean, we're just terrible at it.
PND: You devote a fair amount of space in the book to laying out what an improved philanthropic industry in this country might look like. Can you give us the Cliff Notes version?
Bernholz: First and foremost, an improved philanthropic industry would encourage diversity. Let me return to the ecology metaphor, which I've received a lot of push back on over the years but which is perfectly valid, in my opinion. One of the things I always tell people — and this is critical to the framework I lay out in the book — is that a healthy ecology is only healthy if it has diversity. Now, in the case of philanthropy there are many different ways for people to organize their giving, which would suggest that it's plenty healthy. But what philanthropy in this country is lacking — and I use this phrase advisedly — is a regulatory mechanism that encompasses the whole. When the population of deer begins to exceed the carrying capacity of an ecosystem, for example, nature will try to correct the imbalance and restore itself to a state that allows the ecosystem to thrive. In the case of philanthropy, we've spent the last dozen years or so complaining about, and trying to legislate out of existence, some of the newest players in our ecosystem. My view is that we should be celebrating the diversity that these new products bring to the sector. We need to exploit the diversity of giving styles and traditions out there and find ways to draw attention to them. It doesn't all have to look the same. In fact, the chances of it withering and eventually dying are much greater if it all looks the same. That's what I mean by diversity, and I tie it to other things in the book, including demographic changes in this country and the fact that charitable giving means different things in different cultures. What we think of as philanthropy is just one aspect of it.
Obviously, greater aggregation of resources would be another hallmark of an improved philanthropic industry. A great example of that, and one I think bears watching, is what the Annie E. Casey Foundation has been doing to try to create opportunity in low-income neighborhoods. The folks at Casey are trying to take what they know about investing in low-income neighborhoods and improve on that by engaging faith-based groups and small local foundations and companies and individuals — the actual source of most of the philanthropic dollars in those communities — in the kinds of planning and research and knowledge-gathering activities that Casey can afford but others can't — and not just with the expectation that Casey will fund X for five years and then walk away, leaving it for somebody else to keep going. It's a totally different way of thinking about partnering and collaboration, more of a vertical instead of a horizontal approach.The other change that is really exciting —and it has been unfolding for at least the last four or five years — is the entrance of new technology companies into the sector. Take something like Foundation Source, which provides a common Web-based platform for small foundations to do their giving. Several hundred foundations already are using the service, and who knows what else it could lead to? Maybe it will become a resource for foundations looking for other foundations to partner with. Maybe it will become a repository of certain kinds of practice or knowledge. Who knows? The point is, it's already happening. These kinds of things used to be difficult, if not impossible; now they're very possible.
PND: What about two other things you mention in the book, timing and commitment?
Bernholz: Both of those really go back to what I was saying earlier about organizational life cycles. Philanthropists need to know where in an organization's revenue stream they fit and where they can make a contribution to its success and sustainability. If you're the executive of a foundation, you need know whether your staff is equipped to be involved in a startup or whether it's better suited to work with a more mature organization over a longer period of time. I have several clients who work that way, and it's good philanthropy. They know their grantees well, and they know where they fit in the life cycle of those organizations.In fact, I think funders need to move past the idea that they can make a difference on any issue in a predetermined timeframe, that they can decide, in advance of actually doing something and seeing results, that they will only make a three-year or five-year commitment to a project or organization. Those kinds of decision have more to do with a funder's internal structures and metrics and almost nothing to do with what should be the ultimate objective, which is about creating change. I'm not suggesting that every funder has to fund every project for a decade or more, although I do think ten-year grants are better than three-year grants. But those decisions need to be made based on whatever it is the grantee and funder are trying to accomplish, not something unrelated to the ultimate goal.
PND: The subtitle of your book is "The Deliberate Evolution," which suggests you think it's possible to move toward an improved philanthropy with deliberate intent and forethought. Who or what do you see as the drivers of that process?Bernholz: There needs to be leadership from various parts of the sector in terms of making sense of the changes that are already under way. For example, people in the CEO position at large, staffed foundations have an unbelievable bully pulpit. But too often, in my opinion, they choose to focus on their organization's specific programmatic mission rather than the broader philanthropic environment around them. That needs to change.
There are also a set of new actors in the field. I've already mentioned Foundation Source. There are other technology companies, including nonprofits such as Collaborative Standards and GroundSpring, that grew directly out of their founders' experiences in the sector. There are community foundations working with financial-service partners in interesting ways, and there are companies poised to change the way information and data flow in the industry. I think the role these new actors play in the sector is only going to get bigger, and as it does they'll have more of a say in how the sector evolves. Nonprofits, in turn, need to be thinking about the implications of that. What if the philanthropic resources controlled by commercial firms increase by a factor of ten? How do nonprofit organizations take advantage of that? What are the implications for community foundations? Personally, I think the arrival of the Fidelity Charitable Gift Fund on the scene has forced community foundations to become more responsive and efficient. If Fidelity hadn't come along, community foundations would still be sending out sloppy fund statements to their donors whenever they felt like it. Fortunately, those days are over, and Fidelity is a major part of the reason why. What if, ten years from now, there are a dozen Fidelities which, combined, control a hundred times the assets now held by commercial firms? What kind of effect will that have on the philanthropic industry?
The other thing the commercial firms have done is to shed light on how little the philanthropic industry knows about its customers. I mean, Fidelity has attracted $6 billion worth of philanthropic assets in under a decade, which I don't think anyone would have predicted when they started. But clearly there was, and is, a market there. And that's why nonprofits need to be more innovative and proactive. Otherwise, we're going to be looking at a situation not unlike what has happened in health care. We were told that de-regulation of the healthcare industry would lead to greater competition, which in turn would result in a stronger, more efficient, and less costly system. But that didn't happen; instead, the healthcare system has become more fragile, at least for the uninsured, and is more expensive for everyone. We didn't solve any problems by partially privatizing the healthcare system, and so while we need to take advantage of what the commercial firms bring to the table, we also need to prevent the same thing from happening in philanthropy.
PND: What's your general sense of how the sector is responding to the forces we've been talking about?
Bernholz: The bright spot in philanthropy right now is community foundations. After a decade of real challenge, they've gotten smarter. They've been exposed to a major competitive threat, and they've improved because of it. The rest of the sector needs to look at the way community foundations are dealing with those challenges — everything from technological innovation, to how they, as stewards of philanthropic dollars, share information, to the role they'll be expected, or need, to play ten to fifteen years from now. For private foundations, that conversation is virtually nonexistent. You know, I'll say that to some people, and they'll look at me as if to say, So what? Why should I worry about what the private foundation down the street does? Like I said before, it's not really their fault; there's no structural incentive for private foundations to care about what other philanthropic entities are doing.
PND: Do you see any catalysts on the horizon that would cause private foundations to become more interested in collaboration?
Bernholz: There could be something in the administration's income tax reform proposals when they finally come out. I've written fairly extensively about the promotion of market dynamics at the expense of the public interest. What may happen in the case of philanthropy is that Congress will recognize it as an industry where the various stakeholders have it within their power to strike a constructive balance between the two. This is an industry that could make those changes; there's nothing to stop folks from doing it. But the people who work in philanthropy first have to develop a sense of interdependence, a sense of connectedness with like institutions and others in the industry, before it will happen. I believe that; I believe that, in the years to come, what with ever-greater needs and increased competition for funding dollars, success increasingly will be defined by how many people and resources you can attract to your cause. One exciting change would be to see a philanthropic industry that, twenty years from now, could catalyze financial resources and knowledge quickly and make visible, well understood contributions to the public good. What if American philanthropy in all of its diverse glory put in the money to meet the UN's Millenium Development Goals or took up economist Jeffrey Sachs' challenge for cutting world poverty by half? We have the resources. And the international NGOs, governments, and mulitilateral organizations can do the work. We'd live in a much better world if we could pull off that kind of coordinated, focused philanthropy. And philanthropy itself would benefit, I believe.
MFN spoke with Lucy Bernholz in March 2005.