Philanthropy’s Red Herring: The Misconstrued Idea of Risk

Inside Philanthropy recently ran an interesting analysis of the evergreen debate and concern around low payout rates by private foundations in the US. Mike Scutari makes good points around the failure of many foundations to meet their legal obligation to disburse at least 5% of assets each year, citing a new analysis of the giving of some of the country’s largest private philanthropies:

“John Seitz is the founder and president of FoundationMark, which tracks the investment performance of private foundations. He recently crunched Form 990 data from the 40 largest U.S. foundations by total assets and determined that 17 of the 36 for which information was available for the last five years failed to hit an average 5% payout during that timeframe.”

Scutari and other experts cited in the piece make similar points in trying to explain the low payout rates:

1. The assets and endowments of these large foundations continue to explode thanks to market gains (essentially, the denominator gets larger as income inequality increases and the rich get richer) so even if they’re giving away plenty, the percentage struggles to reach the 5% mark; and
2. It’s hard to give away lots of money thanks to due diligence requirements and a desire to avoid making poor short-term decisions: “Better to sock away the money into a donor-advised fund, the thinking goes, than disburse it irresponsibly.”

There’s little to be done about point number one absent structural and regulatory reforms. But point two strikes me as a bit misguided and risks being characterized as gaslighting.

One of the greatest red herrings in philanthropy is the misconstrued idea of “risk.” Many professional grantmakers and boards worry, implicitly or explicitly, about the “risk” of their charitable funds being poorly spent or mismanaged. On the face of it, this seems like a reasonable concern! Thus, the generations worth of burdensome application processes, due diligence, and overly onerous grantee reporting requirements.

But more savvy grant makers embrace the reality that the true risk they face is failing to achieve impact with their charitable dollars, not that their dollars are being used to fund booze-fueled junkets to Las Vegas. Once dollars are sitting in a foundation, they’re already “gone” to the original donor…they aren’t coming back to be spent on one’s lifestyle or to be bequeathed to heirs. At that stage, the “risk” to the donor isn’t that the funds will be “wasted” or poorly spent – in reality, there are very few true horror stories of organizations running away with a donor’s funds and misspending the money on irresponsible expenses. The real risk is that the funds are spent on mediocre or poorly imagined interventions or programs that fail to advance positive social change. 

Yet many private foundations continue to focus on the wrong kinds of risks, and those habits indeed become part of the problem when it comes to achieving the minimum 5% payout rate. Newer donors have, of course, demonstrated the fallacy of these misguided notions of risk, MacKenzie Scott most notable among them. If she can move tens of billions of dollars in charitable dollars in just a handful of years (risky, right?!), it’s entirely possible for other donors and foundations to recalibrate notions of risk to enable more efficient and generous giving.

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