It is board meeting season in philanthropy, and on many board agendas is the important decision of how much to pay out in the coming year. In recent years, foundations have been evolving their practice of determining how much to spend. When I published “A Balancing Test for Foundation Spending,” in the Stanford Social Innovation Review in early 2020, many foundations still employed a simple mathematical formula to decide their overall annual spending. In response to the events of 2020, however, many foundations shifted to a more mission- and values-driven approach to spending, and in many cases, increased their payouts.
While the increased payouts of recent years took place at a time of increased endowment returns, this season’s spending conversations are taking place against the backdrop of high inflation and a volatile stock market that has (at least temporarily) wiped out many of the record gains of recent years. The current economic moment has grantees bracing themselves for possible declines in foundation giving. Grantees fear that foundations will mistake the legally required minimum payout of 5% as a ceiling and not the floor. While some funders are contemplating cuts, others are boldly staying the course — with some even increasing grants to take inflation into account.
Taking inspiration from a well-loved icebreaker, I offer two truths and a lie about foundation spending to help inform these critical discussions.
Truth: The decision of how much to spend is one of the most important decisions a board makes, and therefore, should reflect deep consideration and strategic governance.
Traditionally, foundation boards have made their spending decisions wholly or largely based on the advice of investment and/or financial advisors. While investment and financial advisors do bring expertise about investments and finances, the question of how much to spend is not simply a financial question. Rather, the spending question is a part of broader strategic questions about how to advance our mission in the coming year. Therefore, boards should consider a broader set of factors when making spending decisions and incorporate mission-related expertise into the process. A mission-aligned spending decision looks at financial considerations, grantee needs, and what is at stake in this moment for the organization’s mission and values.
Truth: The crises that inspired increased payout in 2020 and 2021 have only intensified and still deserve philanthropy’s undivided attention and investment.
In 2020 and 2021, many foundations stepped up their spending in a moment of crisis. Today, we are forging a post-pandemic “new normal,” but challenges persist, and in some cases, have only intensified. Almost two years after the insurrection at the U.S. Capitol, our democracy is even more fragile and vulnerable, with 43% of Americans believing we are on the verge of a civil war. In the absence of meaningful action, climate change poses an existential threat. The systemic racial, gender and economic inequities in our country have only deepened over the last few years. The pandemic showed us that these inequities are literally a matter of life and death. These challenges won’t be solved in a year, and we can’t press pause and return to this work when markets are up again.
Lie: In volatile economic times, trustees/directors have a fiduciary duty to protect the endowment by spending less.
Foundation trustees/directors have important fiduciary duties including duties of loyalty, obedience and care. While the financial health of the foundation falls under their responsibilities, the fiduciary duties are not simply to the endowment, but rather to the organization as whole and its charitable mission. The fiduciary role requires trustees/directors to make decisions with care for the overall organization and its purpose. The truth is that whether markets are up or down, trustees/directors must approach the decision to spend with care for the organization’s mission. The Heron Foundation beautifully captures this understanding of fiduciary duties in their investment policy: “We believe the fiduciary responsibilities of all philanthropic institutions mean that we have both a duty of obedience to our specific mission, and a duty of obedience to a larger public purpose.”
There is one more truth that should be present in boardrooms this fall: A philanthropic divestment at this moment will have terrible consequences. The incredible leaders who make up the nonprofit sector and serve on the front lines, the people we charge with realizing our missions — they are exhausted. After years of working through crises and having to do more with less, nonprofit staff are transitioning and turning over at record rates. A pull-back in funding will not only slow down grantees in their attempts to challenge climate change, secure our democracy, and do the long-term work of building a more equitable and just society, but it will also confirm the worst suspicion that our grantees hold about the philanthropic sector: that we are really financial institutions first, and mission organizations second.
Let’s prove this suspicion wrong and fund in a way that shows that we understand how high the stakes are in this “new normal.” After all, money locked in our endowments goes up and down, appears and disappears, based on the market. But money that we invest in the field, in organizations and communities — that money is almost never a loss. Rather, we see a return on mission that is needed now more than ever.
Dimple Abichandani is a National Center for Family Philanthropy Fellow and serves on the Board of Solidaire Network, and the Steering Committee of the Trust-Based Philanthropy Project.
