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Leadership

Philanthropy's Shift Toward Entrepreneurism

As the discussion heats up about how to rescue our battered economy, the spotlight will undoubtedly fall on philanthropists and private foundations. Indeed, with talk of more taxes on the rich and proposals to levy surcharges on private foundations, it has already begun.

Regardless of the degree of government spending, as a nation we are compelled to find the means to pay for our way of life—including health care, home ownership, education, and all the rest—if we want to maintain our standard of living and extend it to as many Americans as possible. That means that one way or another, taxes are going to increase. And one way or another, philanthropists will carry part of the burden.

How to pay for "running the country" is not a new discussion, nor is philanthropy a new part of it. In fact, it has been a seamless policy debate since the modern federal income tax was established in 1913. No matter the year, the question remains the same: What is the best way to distribute the nation's wealth to buy all the things a decent society requires? Is it government programs funded by taxes, the creation of jobs through private enterprise, or the funding of charitable programs and activities through private grants?

Undoubtedly the answer is that we need all three. The question is in what proportion should these be balanced? For the better part of the 20th century, philanthropists were not inclined to think too much about it. If you were a wealthy American, you paid your taxes and you wrote checks to charities. You let others figure out how best to spend your money.

That has changed dramatically. The shift is toward more direct involvement in philanthropic work. In a word, philanthropy has become entrepreneurial. As tax burdens likely increase on America's wealthy, that trend will continue to grow.

If I am a philanthropist, particularly one of the growing number with an entrepreneurial perspective on life, I want to have as much personal control as possible over how my assets are put to work in the community. Therefore, even when taxes on charitable assets increase, I'm going to be inclined to continue to fund charitable activities so that I can maintain control over how my money is used. This goes a long way to explaining why charitable giving actually has gone up among small and midsize foundations since 2008. In fact, grant making by small and mid-size foundations last year rose 8.7% over 2009, while the value of these grants increased by 17.8%.

The point of decision where a wealth holder chooses to take direct control of his or her charitable assets is also the point where philanthropy, wealth management, and government policy converge. Not making a decision about how one's money is invested and distributed is to default to the government—I pay my taxes and let Washington run with the ball. 

Or I can choose personal investments and charitable gifts that are value-driven and support goals and missions in which I believe. On the personal investment side, I can engage in mission-related investing that puts my assets into companies and financial instruments that support specific social goals, like green energy or promoting women executives.

I can do the same thing, of course, with my charitable assets. I don't have to simply write a check; I can direct my charity toward grants, loans, and investments that support all manner of works I personally favor—from hurricane relief to rebuilding rural churches, from building a mathematics museum to financing experimental bio-medical therapies, or underwriting documentary films that raise the visibility of entrenched social problems. If I choose to do my grant making through a private foundation that I control, my influence over how my money is spent is all the greater.

Smart wealth builders and their financial advisers recognize that when philanthropy and wealth management are harmonized and directed by value-based strategies, a tremendous advantage is accorded the individual who wants to (a) control his or her assets and (b) have an impact on the nation's public policy.

It may seem obvious that wealth builders are so self-directed that they naturally want to see their assets devoted to accomplishing their own charitable goals and not somebody else's, especially when that somebody is a bureaucrat. But in fact, that's a new attitude and it represents a seismic shift from the way we historically talked about philanthropy.

The 20th century style of philanthropy was to provide funding to the nonprofit community and let them deliver services. The new 21st century model is DIY. The old way depended on passive grant making and large administrative costs. The new way features targeted mission-directed grants and as little overhead as possible.

The conversation about where philanthropic decisions are made has changed its venue. That conversation is no longer being driven by the nonprofit community. It's being driven by and occurring at the wealth management advisor's office or at the lawyer's, accountant's, or financial planner's office—everywhere but at the nonprofits. It has migrated to where wealth is being created, accumulated, and managed. The discussion now revolves around realizing the donor's vision. Philanthropy has shifted. The new reality is that if assets are going to be transferred, that's how the donors—particularly entrepreneurial donors—want wealth distribution to play out.

Foundation Source Philanthropic Services Inc.  •  Fairfield, Conn.  •  foundationsource.com

[Image: Flickr user calpsychik]