Why More and More Philanthropies Are Choosing to Put Themselves Out of Business
Resource type: News
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The limited-life foundation–where big donors pledge to spend all their money in a certain short period of time–offers the potential for a bigger immediate impact at the expense of longevity.
By Ben Paynter
The majority of America’s top foundation leaders recently admitted in a Center for Effective Philanthropy report that they don’t think their industry is doing such a great job at making a difference in the world. The list of causes focused largely on controllable hang-ups–everything from not listening to grantees, to not collaborating well with other organizations. What most didn’t complain about was their business model.
The irony is that by making a radical change to their business model that’s being embraced by more and more philanthropic organizations, many groups may give themselves far less to complain about: because they would be out of business, after making a huge impact. That’s the finding of a recent report from the Center for Effective Philanthropy, which interviewed the heads of 11 organizations that are limited life groups, meaning they plan to spend themselves out of existence within a certain timeframe, a model that proponents say gives them both more immediate funds to address the world’s most urgent problems and additional pressure to ensure investments are well spent.
According to the Chronicle of Philanthropy, the vast majority of foundations currently operate an in-perpetuity or 5% model, spending just enough of their endowment annually that it can be recouped through smart investing. But about 10% of the industry is now working in “go broke on purpose” mode, a format largely credited to Julius Rosenwald, the head of Sears, Roebuck and Company, who first pioneered the concept in 1917. In recent years, groups like Atlantic Philanthropies, an $8 billion fund founded by duty-free shop magnate Chuck Feeney, which is committed to improving opportunity, equity, and dignity around the world, have followed suit. Atlantic (which, full disclosure, funds Fast Company‘s philanthropy coverage) will close its doors in 2020.
At the same time, there’s been an ideological shift among private givers like Bill Gates, Warren Buffet, and Michael Bloomberg, all of whom are among the more than 150 billionaires who have signed a public Giving Pledge to donate the majority of their wealth within their lifetimes. The organizations they’ve funded, like the Bill & Melinda Gates Foundation, have approached grant-making in ways that solve systemic problems, rather than just helping the group retain a stable account balance. In December, as the report notes, the $1 billion Edna McConnell Clark Foundation, which works to expand programs for economically disadvantaged young people, announced its own intention to spend down within the next 10 years.
“We’re in a critical moment of ecological crisis, social crisis, and economic crisis. To meter out our expenditures at 5% of assets per year seems foolish.”
For many, it’s not a workable model for giving because it eliminates other philanthropic tactics, like wielding your largess in ways that spur matching grants or impact-driven investments that can, over time, also be a great way infuse more cash toward a cause. There’s also the argument that having a endlessly refillable piggybank to continue funding the next round of scientific and technological advancements over a generation is more responsible than a decades-and-done play precisely because there’s no telling what troubles loom ahead in the future that might need addressing. But perhaps it’s time to reconsider. “What was surprising was the similarity in reason for spending down,” says Ellie Buteau, co-author of “A Date Certain: Lessons From Limited Life Foundations,” the new CEP report. “There was a focus on being able to have greater impact by getting more resources out the door in a shorter period of time.”
As Marnie Thompson, the co-managing director for The Fund for Democratic Communities, which works to fund grassroots solutions for community growth and progress, put it, “We’re in a critical moment of ecological crisis, social crisis, and economic crisis. To meter out our expenditures at 5% of assets per year seems foolish at a moment when greater investments in new solutions feels very critical to us.”
Stephen Bechtel, Jr., the founder of an eponymous foundation, which promotes STEM and character-development educational policies and programs and environmental conservation in California, shared similar thoughts in a letter to his board before that group decided to change models in 2009. “It is more important for the foundation to focus on the contributions that we see as the highest priority near-term charitable needs, and let future generations of charitable contributors determine, in the future, the greatest needs of their time.” If you’re an expert on current problems, Bechtel asked, why not fight them with everything you have? That also avoid any issues with mission drift as years pass and management changes.
The basic finding of the report is that when a group knows the cash will eventually be gone, it can’t afford not to rethink its relationships with those it funds and might work with. “In some of the interviews we heard from these leaders that nothing focuses you like the urgency of knowing that you are going out to be out of business and that you have a limited amount of time to accomplish your goals,” Buteau says.
In some cases, this led to more honest conversations with grantees about how they’d need to grow to continue succeed and how funding could be structured accordingly. In others, it led to mandates that groups begin to seek out additional donors–current foundation that might promise to match that support–so that they’d have new partners on tap when their old ones shut down.
Many of the groups had different sunset periods (the range was between 10 and 25 years) and strategies make that happen, but all will be kaput within the next 10 years. Many of the tough considerations that could also benefit the world in the long run include some ruthless math about what groups really are accomplishing their mission, who to continue funding, and what it will take to get others to a point that they are successful.
There’s also staffing considerations to consider, especially as employee morale might suffer if everyone knows they’re working themselves out of a job. (Hint: Leaders can solve that problem by pushing professional development programs to prepare workers for their next act. Nice severance packages are good, too.)
Of course, there’s some obvious pitfalls: An economic downturn might tank your investment reserves in a way that requires new exit planning. After the 2008 financial crisis, for instance, the AVI CHAI Foundation, which encourages Jewish faith, traditions, and more religious understanding, moved its quit date up five years to 2019.
For groups considering this approach, the report includes a spend-down planning sheet and list of resources of those working in the area. In addition to just plain solving immediate pressing crises, groups like Atlantic, which has already announced its final allocations, are structuring their last act in a way that will ensure their influence lives on by backing fellows and grants that can mature as thought leaders or be distributed, respectively, even after it closes its doors. One less obvious tactic to keep things running smoothly is to keep just a little bit of money in reserve for special projects that pop up. That way, if some wonderful world-changing opportunity does come along while their closing shop, they still have the chance to back it.
Fast Company is an Atlantic grantee.