Why Aren’t We Talking About a Critical Philanthropic Trend?

So, it’s been awhile…  I am working on a little book about philanthropy and found myself in dire need of a break from writing over the summer.  But, hey, Who GIves? is back!

Even though I took a couple of months off Among the summer’s philanthropic happenings, one development sticks out. In June, GivingUSA released their much anticipated annual report.

Every year for as along as I can remember, the focus by academics and media on this report is on the “ups and downs” of charitable giving.  Much like groundhog day, we see the report and either celebrate more giving or freak out about less giving. This year we are supposed to be concerned because giving dipped by 2.1% (when adjusted for inflation). See you next year!

But, folks, you are readers of Who Gives? and you expect much more from this blog. And, I suggest that we focus on what I view as the most problematic trend in the data - the continuing rise in the percentage of philanthropic giving going to private foundations (and other intermediaries). 

Take a look at the chart below, pulled from the report.

What the data show is that of all the money contributed to causes in 2023, a full fourteen percent of it was dumped into a foundation. Meaning, last year alone, a major chunk of available philanthropic resources stopped, and took a detour from the nonprofit sector. Sure, 5% of it will go out each year as a legal obligation, but the rest of it will be invested in hedge funds, venture capital, mutual funds, and other equities. Compounded over the past few decades, these foundations (and donor advised fund assets) are astounding. According to the Federal Reserve and the National Philanthropic Trust, the US has an estimated $1.5T piled up in these intermediaries.

The argument that the proponents, such as Joel Fleishman, make for our current foundation system is that wealthy individuals are making so much money now that they simply cannot move it directly to nonprofit organizations. They need a storage facility so that they can take the time to think through their giving, plot out their strategies, and identify the most effective organizations.

But why?

The answer requires us to dig deeper. According to a recent National Center for Family Philanthropy report documenting the psychological barriers that donors face when making philanthropic decisions, donors are getting stuck. These barriers are paralyzing for people that suddenly steward public assets in the private foundations they govern. For many, it seems, they need significant training and counseling to move past these barriers. In the meantime, dollars sit and grow in foundations.

This growing and consistent trend of warehousing philanthropic capital in the midst of existential crises of climate and democracy brings up three key points of inquiry.

1. Harm - Warehousing philanthropic assets in foundations comes with a significant cost to communities under stress. Trust me, go through any foundation tax return and you will see the harm that 95% of the assets do through their investments. I recently looked back at the tax return of one of the foundations my family governs. The goal of the foundation is to promote animal welfare. Guess where the endowment was invested a couple of decades ago? Proctor and Gamble and Johnson and Johnson. Do you know how these companies used to test their products? That’s right - on animals. So, the foundation had 5% of its assets going to protect animals each year, and the other 95% was invested in harming them. There are myriad examples of this across the foundation sector for every community of concern out there.

2. Cost - I work at a private foundation, and I can tell you that staffing and operating one of these intermediaries is expensive. Staff take a cut of the endowment in salaries, benefits, retreats, convenings, travel, gatherings, and more. We have to have expensive consultants like lawyers, strategists, and investment advisors. We need a place to work, and we usually require beautiful spaces. Assets that could simply go straight to the frontline organizations addressing critical challenges get sucked up in operations.

3. Delays - And, of course, in a world where everything is about growth, intermediaries struggle to move money. The world is about “assets under management,” so it makes little sense to think about “assets out of management.” 

These are all implications of the trend reported by Giving USA - assets to foundations and intermediaries continue to grow. The bottom line for me is that this comes back to stewardship. Is this the right way to steward charitable assets? And, relatedly, are these the right people to steward these assets? 

I wonder often if we shouldn’t add a new box to the checklist of possible ways to steward assets. Along with thoughtful, equitable, and responsive.  I wonder if we include qualified. If someone struggles to move philanthropic assets due to psychological and structural barriers with which they uniquely struggle, then perhaps they aren’t qualified to steward these assets. 

Maybe good stewardship is about stepping away or aside, and handing over the decision-making to people who know what to do, where to give, and are ready to move money immediately.  Otherwise, I fear that someday the GivingUSA annual report will have one big category titled foundations, and a much smaller one for all the rest.

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Stop whatever you are doing! You really need to watch this outstanding episode of #BreakFakeRules.

Jennifer Risher, a dynamic fake rule breaker from the donor world, takes uncovers the warehousing of money in donor advised funds (DAFs).

Learn how to break the fake rules of DAFs in this exciting episode!

Watch the abbreviated version of our discussion on YouTube or listen to our full exchange wherever you get your podcasts.

And, if you have a moment, share what you learned from Jen and/or any thoughts that are coming up for you. We would love to hear what you are thinking about Break Fake Rules!