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]

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4 Comments

  • DougSnyderCPA

    Good article that is on-point with today's nonprofit financial support challenges.  In today's data driven society, it would be insightful to determine how the entrepreneurial donors segment their contributions.  A portion of their annual contributions probably still goes to nonprofits withour any direction limitation. But I agree that a more significant percentage of the weathy donors' contributions are being decided outside of the nonprofit arena.

  • Mark Stewart

    McGlaughon's statement that higher taxes on the wealthy is
    unavoidable is news to me, although I hope he's right.  He also says that
    "grant making by small and mid-size foundations last year rose 8.7%
    over 2009," which seems to track with this article from HuffPo: http://www.huffingtonpost.com/... although that can't make up for all the loses in federal and state non-profit funding, it's nice to know that people are stepping up to help those who need more help than ever.  I didn't understand why he felt that philanthropists HAVE to get more
    involved in directly supporting the KIND of programs that support the
    kind of changes/improvements they want to see, but I hope he's correct in thinking they will become more involved. 


    I've been assuming
    that things are just going to get worse, that there will be more and
    more cuts to services and fewer and fewer jobs, and that what jobs
    remain will offer less and less in the way of benefits.  Because of that, I've been working on Circle of Collaborative Communities (http://www.circleofcollaborati... 
    ), building a link library of sites that offer practical advice on entering the subsistence economy, and more recently,
    trying to figure out how to get that information to the people who I
    think need it most: the urban and rural poor (except where these people
    are money poor but have what they need because they're already
    comfortable living and working within the subsistence economy).

    It's starting to look like part of the problem is that
    grants are often used to train people in job skills for jobs that
    aren't there. Non-profit organizations aren't generally in a position
    to tell foundations what they want money for. Perhaps the way to create change is to go directly to the
    foundations and to individual philanthropists and ask for more funding
    in helping people to enter the subsistence economy.  Because the
    people trained to do this would be able to train family members and
    friends directly, funding for this kind of training could create the
    best kind of non-profit: the kind that does its work so successfully it
    puts itself out of business. 

    What kind of skills allow people to enter the subsistence economy?  In
    many cases, the same skills that our ancestors learned and taught for
    the last thousand years: farming (specifically small farms), carpentry,
    blacksmithing, cobbling, etc.  Today we would also want auto mechanics,
    acetylene torch experts, electricians and the Geek Squad (divorced, of
    course, from BestBuy), and possibly others.  The more skills a person
    (of either gender) has, the more useful s/he is to her community and the
    less s/he suffers from not having a job in a cubicle or behind a fast
    food counter.

    Of course, it will not be immediately obvious to everyone who could use such training were it provided that these skills are
    an end in themselves.  Anyone, especially in the inner city,  who's
    grown up in a world that constantly bombards us with messages that tie
    our self-worth to our consumption is not going to be comfortable with
    the idea that s/he should learn to live without most commercially
    marketed products.  Therefore more funding will be necessary for an
    education campaign, ideally with the kind of market-testing used by
    those who sell everything advertised.

    But before such an idea can be sold to those who need training to
    survive in a subsistence economy, perhaps it needs to be sold to the
    philanthropic community.  And that could be its own education campaign.
     

  • Mark Stewart

    The
    author makes it sound like higher taxes on the wealthy is unavoidable
    which, though attractive, is news to me. S/he also says that "grant
    making by small and mid-size foundations last year rose 8.7% over 2009,"
    which seems to track with this article from HuffPo: http://www.huffingtonpost.com/.... For reasons that weren't completely clear
    to me, his/her conclusion is that philanthropists HAVE to get more
    involved in directly supporting the KIND of programs that support the
    kind of changes/improvements/whatever they want to see.

    I've
    been working on the assumption that things are just going to get worse,
    that there will be more and more cuts to services and fewer and fewer
    jobs, and that what jobs remain will offer less and less in the way of
    benefits.  Because of that, I've been working on Circle of Collaborative Communities (http://www.circleofcollaborati... ),
    building a link library of sites that offer practical advice on
    entering the subsistence economy, and more recently, trying to figure
    out how to get that information to the people who I think need it most:
    the urban and rural poor (except where these people are money poor but
    have what they need because they're already comfortable living and
    working within the subsistence economy.The subsistence economy is that part of the economy that depends less on cash and more on trade and barter, along with fending for oneself (as in homesteading or urban gardening) and making do. It's starting to look
    like part of the problem is that grants are often used to train people
    in job skills for jobs that aren't there, and non-profit organizations
    aren't generally in a position to tell foundations what they want money
    for, having to make the best of whatever options they're offered. Perhaps the way to create change is to go directly to the
    foundations and to individual philanthropists and ask for more funding
    in helping people to enter the subsistence economy.

     

  • Ray Bohlin

    As the president of a religious non-profit, I see the shift you describe as a disaster in the making. Non-profits know their work and how to use the dollars they receive. The entrepreneurial donor knows his/her business. They're not the same. All I see is donor interference into practices they don't understand. This highlights further the "me first" attitude our nation has adopted. I will "give" my dollars in a way that benefits me, not necessarily others because they matter.