Giving sector needs to adapt to economic crisis

By Todd Cohen

Business as usual should be history for the giving sector.

The recession should be spurring nonprofits, giving organizations and individual givers to regroup and find innovative ways to address urgent social and global needs that only are getting worse because of the growing economic crisis.

Three new studies underscore the need for givers and nonprofits alike to change the way they operate.

On study looks at steps U.S. foundations are taking to cope with the crisis, another looks at the need for U.S. nonprofits to fill key jobs, and a third says U.S. corporations and nonprofits could do more with pro-bono and skilled volunteers to offset a decline in corporate giving.

Foundations already are retooling their work, with nearly two-thirds expecting to reduce the number or size of their grants, or both, according to a new survey by the Foundation Center.

Over half the more than 1,200 foundations responding to the survey say they are responding to the crisis by taking on more work other than grantmaking, with two-thirds aiming to collaborate more, one-third planning to act as convenors, and one-fifth planning more staff-led work such as technical assistance, bridge and emergency financing, or advocacy.

Foundations also say they will tap a range of resources to fund their giving this year, with nearly 40 percent expecting to dip into their endowments.

Fourteen percent of foundations have made or launched, or plan to make or launch, special grants or initiatives to address the economic crisis, mainly by shifting existing grants budgets.

And in response to the economic downturn in 2000-02, nearly one-third of foundations say, they made operational changes, such as adjustments in their investment strategies or reductions in their operating expenses, that they believe better prepared them for the current crisis.

“Foundations are not rolling over in the face of adversity,” says Steven Lawrence, senior director of research at the Foundation Center. “The new survey shows foundations being creative, strategic and willing to dig deep to ensure that their agendas move forward while this crisis persists.”

In a separate survey of nonprofit executive directors, Bridgespan Group finds a leadership deficit projected in 2006 may have widened in 2009 and that, despite tighter budgets, nonprofits already see a need to fill 24,000 vacant or new jobs, in areas such as finance and fundraising, in the face of growing management complexity and retirements by Baby Boomers.

Developing nonprofit leaders remains critical, Bridgespan says, with nearly three-fourths of 433 executive directors responding to the survey saying they value skills from the for-profit sector.

But despite big layoffs of corporate managers, 60 percent of those nonprofit executives believe they will not get enough qualified candidates.

“It’s a wake-up call that even as the rolls of unemployed executives swells, nonprofits are struggling to fill key positions,” says David Simms, a Bridgespan partner. “There is an overwhelming perception that these roles will be difficult to fill due to the need for specialized skills, compensation and funding challenges, competition for the best candidates, and lack of career development opportunities.”

The third survey, by Deloitte, finds that while nearly 40 percent of nonprofit executives say they will spend $50,000 to $250,000 of “hard-won” cash on outside contractors and consultants this year, 24 percent say they have no plans this year to use skilled volunteers or pro-bono support.

“The current economic crisis and the new [Obama] Administration’s national call for service underscores the need for corporations and nonprofits alike to broaden their definition of corporate giving,” says Barry Salzberg, Deloitte’s CEO.

“Nonprofits and corporations are encouraged to think of pro-bono and skill-based volunteerism as a valuable form of currency,” he says. “It is an opportunity to more fully maximize corporate assets, especially when demand for nonprofit services are on the rise and corporate giving is on the decline.”

The ruins of the U.S. economy and capital markets can be the seedbed for innovation in the charitable marketplace.

Instead of bemoaning the obvious, which is that times are tough, nonprofits and givers alike can look for ways to work smarter and make a greater impact.

Giving sector should invest in social media

By Todd Cohen

The giving sector, especially in the face of the continuing economic crisis, needs to retool its model for charitable giving and fundraising.

Nonprofits, for example, should start looking at building social media into their overall fundraising and communication strategies.

Often reluctant to move beyond traditional strategies, whether or not those actually produce positive results, nonprofits should look at social-media tools that are changing the way people communicate, connect and spur one another to action.

“If you don’t get started now, you’re going to be playing catch-up,” says Beth Kanter, a social-media strategist who is serving as scholar in residence for nonprofits and social media at the David and Lucile Packard Foundation in Los Altos, Calif.

Consider Facebook, the wildly-popular online meeting place for young people that has been attracting a growing number of Baby Boomers.

Membership on the site hit 200 million active users in April, double the total just last August.

Or consider the unprecedented use of social media that Barack Obama made in raising money and recruiting supporters in his successful 2008 presidential campaign.

Kanter says nonprofits should be strategic about their use of social media, starting with small experiments linked to their marketing or fundraising plans.

At 3:01 p.m. on Dec. 13, 2007, one minute after the Case Foundation launched a social-media contest, promising to contribute $50,000 each to the four social-media campaigns that raised the most money, Kanter entered the contest, using several tests of social-media tools and strategies.

And while conducting those tests, she also was blogging to her network of readers about the progress she was making.

Through GlobalGiving, using an application on its site, along with email and blogging, she raised $43,000.

Altogether, including seven different campaigns she launched, plus the Case Foundation match, she now has raised over $215,000 for The Sharing Foundation, a charity that works to address the needs of children in Cambodia living in poverty.

The key was “starting small, figuring out what worked and what didn’t,” she says. “And by doing it over and over, I built up a community of donors who donate through social media.”

In addition to starting small, Kanter says, nonprofits should pay close attention to what people are saying about their cause or organization in the blogosphere.

“You listen and you learn and you adapt,” says Kanter, who with Allison Fine is co-writing a book, to be published by Wiley, about how social media are reshaping the way nonprofits operate, creating a more networked nonprofit.

It also is important to remember that social media do not represent an “either-or” strategy, Kanter says. “It’s both-and.”

And nonprofits cannot afford to ignore new social media, she says.

“Nonprofits putter along and, yes, they tend to keep doing what works,” she says, “but they also need to understand that the old way of fundraising is not going to work forever.”

While nonprofits should “not throw out the baby with the bathwater,” she says, they cannot stand still and simply expect old fundraising tools are all they will need in world increasingly driven by social media.

Nonprofits also should not use the failing economy as an excuse to avoid social media.

“Look at everything you’re doing in fundraising and marketing,” she says. “If you’ve been going on automatic pilot, look at the effectiveness of everything, and make room for a small amount of experimentation. Stop doing stuff that doesn’t work.”

As they regroup and rethink how they do business to survive the economic crisis, nonprofits of course need to get back to basics.

But innovation always has been basic to the giving sector, and nonprofits need to begin testing social media and building those strategies into the way they operate.

Foundations can be smarter investors

By Todd Cohen

The crisis in the financial marketplace should be sounding alarm bells in the charitable marketplace.

With the failure of the capital markets, the value of the endowments of U.S. foundations fell nearly as much last year as the total grants those foundations paid out over the past four years.

Despite those huge losses, foundation endowments still total roughly $550 billion, yet foundations are blowing a big opportunity to shape social and economic change because they continue to operate as passive investors, says Michael Passoff, associate director of the Corporate Social Responsibility Program at As You Sow.

Foundations typically delegate their proxy-voting responsibilities to investment managers who often vote the foundations’ proxies based on recommendations from management of the companies in which the foundations own stock, say As You Sow and Rockefeller Philanthropy Advisors.

So foundations fail to influence corporate policies on a broad range of governance and business issues and even can support actions directly opposed to their own philanthropic values and goals.

Passive oversight of their investments also can put foundations at serious risk.

As The Wall Street Journal reported last week, that was a key message from New York Attorney General Andrew Cuomo in a fraud charge filed April 6 against J. Ezra Merkin, the former chairman of GMAC Financial Services who Cuomo says was a middleman for the convicted investment manager Bernard Madoff.

Big losses to charities that invested through Merkin underscore how charity boards fell down on the job, the Journal said.

A key step foundations can take to be more responsible investors in the charitable marketplace is to be more responsible investors in the capital markets, say As You Sow and Rockefeller Philanthropy Advisers.

“The surge in shareholder scrutiny of financial matters that cut across the traditional ‘governance’ and ‘social’ divide should signal that foundations now have greater opportunity than ever to exert more influence in how companies conduct business,” says Doug Bauer, a senior vice president at Rockefeller Philanthropy Advisers.

Taking a more active shareholder role is an important step foundations should take to put their assets to more productive use in addressing the charitable purposes for which givers gave those assets to foundations in the first place.

Private foundations, which are required to pay out at least five percent of their assets in grants and overhead, typically do not pay out more than that minimum.

Community foundations, which do not face a mandated minimum payout, often pay out a bigger share of their assets than do private foundations.

But far too few foundations treat their investments as assets they can use to address the social and global problems they care about.

That is a huge waste because, as shareholders, foundations can play an important role in shaping the corporate and business policies of the companies in which they own stock.

Foundation boards have a lot to answer for: Their hoarding of assets, combined with plunge in the capital markets, has cost the charitable world billions of dollars that now will never be used to address urgent problems.

And in providing only passive oversight of the investment of their assets, foundation boards have acted as enablers of corporate boards and executives in setting and carrying out business strategies that have seriously damaged our economy, our environment and our national security.

For the fifth year, As You Sow and Rockefeller Philanthropy Advisers have published a “Proxy Review” that aims to provide the leadership of foundations with guidance on shareholder proposals on social and governance issues directly related to their mission.

Also available on the websites of both organizations is a downloadable copy of their earlier publication, Unlocking the Power of the Proxy, which offers information on how foundations can exercise their fiduciary responsibilities in voting their proxies.

Foundations can do much more to address the economic crisis and the human toll it is taking.

Instead of hoarding their assets so they can perpetuate their wealth and the power, foundation boards should be voting to pay out more in assets and better fulfilling their governance role by taking a more active role as shareholders.

Foundations should be putting all their assets, including those they pay out and those they invest in the capital markets, to more productive use to address the critical and escalating social and global problems we face.

Should nonprofits ‘strike’ against foundations?

[A reader named Neal, responding to my March 23, 2009, Inside Philanthropy blog about foundation hoarding, offered a thoughtful and provocative comment in the Stanford Social Innovation Review, which also publishes the blog. The comment follows. – Todd Cohen]

I work for a large foundation and agree with many of your points but also want to acknowledge that it can be complicated.

Our endowment must last into perpetuity and other foundations are not allowed to dip below corpus.

That means all of us have to manage spending to meet the obligations we have to the founders; meet our obligations to non-profits; and create a cushion so we can weather market downturns.

We, for example, make on average about 10 percent on our investments each year.

We spend 5 percent to meet federal tax regulations.

Inflation averages 3 percent so we really only make on average 2 percent a year.

That percent annual growth allows us to build up a cushion so we can maintain spending in down years.

We obviously make a lot more during the up years and lose a lot more during the down years but on average it works out to be fairly reasonable.

I do agree, though, that foundations can and should do more when the opportunity is there.

I also agree that nonprofits need to kick the habit.

The rate of return on grants can be appalling because the time invested in writing the grant can be disproportionate to the size of the grant.

I know this sounds crazy, but nonprofits could band together and refuse to take foundation money until the rules changed.

Foundations would get desperate to find places to spend their required 5 percent and would potentially come to the table to talk about real systemic change.

Nothing will change, though, as long as nonprofits are willing to spend four days applying for a $1,000 foundation grant.

It is clear that foundations need to be pushed to change and that we could and should do more.

We have no outside influencers to force us to change so please keep pushing.

Someone has to.

Giving sector needs to reengineer itself

By Todd Cohen

In the same way the breakdown of the economy is forcing businesses and policymakers to change the way they operate, it should be prompting the giving sector to remake the way it does business.

And because the economy’s collapse shows no sign of hitting bottom any time soon, the giving sector needs to get started on its makeover immediately.

Nonprofits and foundations typically find it tough to move outside their comfort zone and take a hard look at how they operate, but that is precisely what they must do.

Many of these groups have strayed beyond their mission, and many have become more preoccupied with perpetuating themselves than with truly serving their constituents.

To retool, nonprofits and foundations must get back to basics and find innovative ways to streamline their costs and improve their impact.

They need to move quickly because challenges for the giving sector are rising quickly.

Fewer than half of nonprofits raised more money in 2008 than the previous year, for example, and increases in fundraising lost a lot of ground, according to new data from the Association of Fundraising Executives.

And fundraising fell across the board, regardless of cause, organizational size, or geography, the data show.

Equally troubling, if not more so, is a new report from the Foundation Center that says assets of the more than 75,000 U.S. grantmaking foundations fell $149.4 billion in 2008, or nearly 22 percent.

That loss is nearly as much as the $165.4 billion in grants those foundations made over four years, from 2005 through 2008.

And the combined value of gifts to foundations will drop sharply this year from a record high in 2007, with foundation giving likely to decline even more, the Foundation Center says.

Instead of continuing to treat givers as automated teller machines, nonprofits must treat them as partners, involving them in their organizations, understanding their values and needs, and keeping them informed about the impact of their giving.

And instead of continuing to hoard their assets and treat nonprofits as supplicants, foundations must pay out more and treat nonprofits as partners, better understanding and addressing their operating and programmatic needs.

Lawmakers have given the giving sector tax-exempt privileges because it serves the indispensable role of taking on the symptoms and causes of critical social and global problems.

The giving sector, in short, can be a leading force for progress.

But it cannot make progress if it continues to act like it is entitled to special treatment.

What it must do, now more than ever, is justify the privileges it enjoys by adapting itself to an economy and a charitable marketplace that will never again be the same.

Indeed, the giving sector must help shape the new economy by redesigning the charitable marketplace to operate more fairly, efficiently, creatively and collaboratively.

Instead of fighting to protect their own turf, for example, nonprofits should think hard about consolidating back-office services, or even merging, with other nonprofits.

And instead of focusing on perpetuating their own wealth and power, foundations should think about pooling their assets with those of other funders, or finding innovative ways to put their assets to more productive use, such as making loans to nonprofits that help them equip themselves to stand on their own feet.

Before they can fix the world, nonprofits and foundations must fix themselves.