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The International Journal
of Not-for-Profit Law

Volume 13, Issue 3, June 2011

A publication of the International Center for Not-for-Profit Law

Table of Contents

Letter from the Editor

Democracy and Civil Society

Civil Society and the Duty to Dissent
Helen James

The Abandonment of Democracy Promotion
Tara McKelvey

"When We Raise the Issue of the Corruption of Local Authorities, It's the Rebels Who Descend on Us"
Frank van Lierde

Interview: Civil Society Organizations Respond to Government Regulations in Ecuador
Susan Appe

Articles

The Financial Crisis and the Nonprofit Sector: Can Philanthropic Foundations Support the Creation of a Civic Watchdog of International Finance
Lorenzo Fioramonti and Ekkehard Thumler

The NGO Law: Azerbaijan Loses Another Case in the European Court
Mahammad Guluzade and Natalia Bourjaily

A Reflection on the Legal Framework for Civil Society in Nepal
Uttam Uprety

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Editorial Board

The Financial Crisis and the Nonprofit Sector: Can Philanthropic Foundations Support the Creation of a Civic Watchdog of International Finance?

By Lorenzo Fioramonti[1]
Ekkehard Thümler[2]

Introduction

The global financial crisis has been ravaging economies in Europe and North America, but it has also severely affected many other regions of the world, including some developing and emerging countries. The long-term consequences of this crisis are hard to predict, but governmental responses point to a general downsizing of the public sector that will inevitably result in layoffs and cuts in the social sector and welfare systems. Moreover, the events have revealed how fragile the whole European monetary system actually might be: within the European Union, Greece is the most recent example of a country brought down to its knees by a mixture of budget overspending and financial speculation (with Ireland, Spain, Portugal, and some other EU members facing similar risks). The drastic reforms announced by major economies such as the UK attest to the gravity of the situation. At least in some countries the economic crisis is likely to turn into a widespread social crisis, affecting citizens and civil society, even though in some cases it might give rise to new social patterns at the local level and stimulate cooperation between progressive actors in the public, private, and third sectors.

Over two years after the fall of Lehman Brothers, the world economy is still struggling with the largest recession since the Great Depression of the 1930s and fears of a “double dip” crisis. In spite of the turmoil, there is little evidence that we have learned the lesson. Surprisingly few reforms have been introduced to more effectively monitor and govern financial markets. Banks have resumed their old habit of paying obscene bonuses to their CEOs and top management (even when they sink clients’ investments and retirement savings), hedge funds keep operating mostly beyond control, speculation is back on track as it was before 2008, and all actors know that in case of a new downturn, taxpayers will pay the bill again.

The nonprofit sector has also suffered the consequences of the financial downturn. Public as well as private funding has shrunk, while social tensions are on the rise, thereby placing an additional strain on NGOs, voluntary organizations, and other nonprofit entities already running on tight budgets. As funding has started plummeting, proposals for a “bailout” for the nonprofit sector have been voiced in a number of nongovernmental forums across the Atlantic. The Foundation Center, a U.S.-based service provider to philanthropic foundations, has set up a specific program to focus on the economic crisis in order to support nonprofits through the recession and help them strengthen their fundraising skills. A few other foundations have launched programs to help nonprofits adapt to the new financial climate and reorganize their business model in an age of austerity.

Yet, a survey focusing on how U.S. philanthropic foundations have been supporting nonprofits during the recession paints a rather bleak picture: poor communication, ad-hoc initiatives, and little systemic help in responding to the real challenges of the downturn. Most foundations seem to act poorly and, often, in a piecemeal fashion, with little coordination across sectors. As regards overall financial support, the giving forecast 2010 put together by the Foundation Center confirms the downtrend among the biggest American foundations: a significant number of big philanthropies have been cutting down their budgets due to reduced endowment income and sharp decline in asset value.

Whether or not foundations are effectively helping nonprofits muddle through the dire straits of the financial crisis, their mainstream approach appears to be reactive at best. What we find lacking is a proactive attitude by nonprofits and, especially, endowed grant-making foundations to see the crisis as an opportunity to critically review global economic mechanisms and respond to the call for an overall reform of the financial sector.

This brings us to the next level of analysis, which concerns the root causes of the current global crisis. The financial downturn was caused by reckless behavior on the part of a multitude of investment and commercial banks and financial service providers – private and public alike – exacerbated by the liberalization of financial markets, lack of effective public monitoring, and a generalized bandwagon mentality paving the way for mass investment in rather obscure financial products. Just like many investors and businesses, even some foundations were lured into high-risk investments and faced fraudulent deals. Notorious is the case of the JEHT Foundation, which lost the bulk of its endowment through Bernard Madoff’s “Ponzi scheme” and was forced to close down in 2009.

Against this backdrop, it seems fair to argue that tackling the root causes of the financial crisis (rather than focusing exclusively on some of the symptoms) would be an important and meaningful goal for civil society as such, and philanthropic foundations in particular. In the German weekly newspaper Die Zeit, nonprofit specialist Helmut Anheier has argued that the financial crisis should be seen as a window of opportunity for foundations and called on them to “jumpstart” the creation of a watchdog organization to rein in financial speculation and provide civil society’s oversight of markets. Indeed, unlike other areas within society, the financial sector is virtually unchecked: not only does it take advantage of poor governmental oversight mechanisms, but it also thrives due to a strikingly limited presence of civil society actors. According to Anheier, philanthropic foundations possess all necessary qualities to support the development of a civil society infrastructure that might lead to the establishment of the “Greenpeace” of financial markets—that is, a transnational network supported by national chapters and significant grassroots participation, which would be a point of reference for citizens and other public advocates in order to become the public eye on global finance and counter the speculative tendencies of financial actors. Foundations have not only the financial resources, the political clout, and the communication tools, but also the autonomy and freedom to do the job. Building on Anheier’s appeal, we then asked: have foundations made any moves in this direction? What did they look like? Are there any organizational, economic, or political reasons why some foundations might find it difficult to play such a proactive role? And are there options to overcome these difficulties?

Addressing the root causes of the financial crisis

What can foundations do to address the root causes of the crisis (that is, the unaccountable and unchecked behavior of financial actors) rather than simply focusing on treating the symptoms (that is, the social impact of the crisis)? After all, so much social work, day-to-day community involvement, and other interventions in the social sectors have been wiped out by the economic downturn. Does it make sense to continue investing single-mindedly in social welfare initiatives, when the bursting of a financial bubble can easily plunge our countries into an economic recession threatening the very basic foundations of our societies? Shouldn’t civil society become active in this field and learn from this experience so that it will not happen again? Can we expect at least some foundations (along with other public-good oriented institutions) to be the driving force behind such a civil society watchdog, in line with their proclaimed interest in serving the public good and being agents of change? For instance, can they provide the much-needed resources to build the necessary infrastructure so that civil society can bridge the information asymmetry and effectively monitor the behavior of financial actors? What foundations are more willing to take the lead? And what activities are they already supporting in this field?

With a view to answering these questions, we conducted an international survey of foundations based primarily in Europe (where the economic crisis is challenging the traditional welfare state) without excluding other regions of the world, from North America to Asia. We sent our questionnaire to more than 400 directors and other key staff of private foundations between November 2010 and January 2011, and received 85 responses. In what follows, we present some of our findings and a first tentative analysis, which is at the same time critical and encouraging.

The overall result of our survey is that most foundations are not active in this field. We draw this conclusion not only from the number of negative responses, but also from the feedback of those that did not complete the survey, arguing that the topic did not at all fit their areas of work. When the respondents are asked if their organizations provide funding, sponsor, or directly operate any activities/campaigns that may help “address the root causes of the financial crisis,” a majority of respondents (over 76 percent) answers “no” (Figure 1). The number of negative answers grows even further when respondents are asked if they know other foundations that may be involved in this type of work: 84 percent provide a negative answer. The same trend holds true if we look at future developments: almost eight foundations out of ten admit not having any plans to fund (or continue funding) projects/campaigns that aim at addressing the root causes of the financial crisis.

Figure 1

Notwithstanding a large majority of respondents that appears to be insecure, indifferent, or uncommitted with respect to the role that civil society should play as a financial watchdog, some foundations (roughly a quarter of our sample) are involved in the field and have been promoting some type of initiatives and projects. The various examples they provided can be roughly grouped into three categories: 1) research initiatives aimed at rethinking our financial and economic framework; 2) advocacy campaigns aimed at promoting transparency; and 3) projects to support ethical investment.

Within the first group, we find – among others – references to initiatives such as:

In the second category, we find references to campaigns such as:

Finally, in the third group, we find campaigns such as:

These are important areas of work and some of these projects are leading the way for more and more organizations to come aboard. Although often focusing on specific issues and only marginally on financial transparency and accountability, some of these initiatives may become interesting "incubators" to test the feasibility of an international watchdog movement of financial markets. Of course, a "Greenpeace moment" would require more support, more popular participation, and more outreach capacity. It would also need to play a more "political" role as well as adopt innovative advocacy strategies in order to stand out in public consciousness and influence citizens' opinions and behaviors.

Problems of autonomy and willingness

In the public discourse, foundations are often described as flexible and innovative public-good oriented organizations. In particular, the idea is that when it comes to the reaction to new societal challenges, foundations can be early movers, and that under certain circumstances they can more easily "get the job done," while public institutions are often burdened by over-bureaucratic processes and political pressures. Our survey reveals that, with respect to the idea of promoting a civil society watchdog of financial markets, the opinions of the CEOs and key staff we interviewed can be divided into three camps. Fifty percent believe that "foundations possess the autonomy, innovative character, and resources to support civil society's monitoring of financial institutions" (Figure 2, in green). Only 21 percent (strongly) disagrees (Figure 2, in red), while 29 percent neither agrees nor disagrees (Figure 2, in yellow).

Figure 2

Let’s go step by step. First of all, it is interesting to note that about one respondent out of five either disagrees or strongly disagrees with the idea that foundations are autonomous and innovative enough to support a civil society watchdog of financial markets. When looking at the explanations provided by respondents, we see a general acknowledgment that many foundations are actually risk adverse and “refrain from getting involved in new sectors.” Some of them have been working almost exclusively on social welfare projects and their constitutions forbid them from entering new terrains. There are also issues with the boards of directors and “legal requirements that need to be fulfilled.” Some argue that “the thematic focus of a foundation is hard to change.”

Nonetheless, albeit a significant portion of respondents are not enthusiastic about the “autonomy, innovative character, and resources” of private foundations, at least half of them believe that foundations would be well equipped to take on the task. Then again, why have they not done so yet? In Figure 3, we report the responses to a question concerning the “willingness” of foundations to support a civil society watchdog of financial markets: over 60 percent of respondents provide a negative answer (Figure 3). Therefore it must be concluded that even some of the respondents that support the “autonomy and innovation” argument recognize that there might be some “willingness issues” at play. So, can we explain this lack of commitment?

Figure 3

Explaining why certain foundations might not want to get involved

A first set of answers focuses on the demand side of the problem—that is, the lack of an already existing and credible interlocutor in civil society: “civil society is not sufficiently organized nor knowledgeable to undertake effective monitoring of financial institutions,” “if there is a civil society group with a great proposal, we will fund it. But so far we haven’t heard anything,” “it is questionable whether civil society can truly fulfill a monitoring role as outsiders.” Another group points at the supply side of the problem—that is, the lack of a proactive role of foundations, highlighting that foundations have other missions, interests and goals than working towards the change of financial markets. There are also qualification issues at play. For instance, some respondents call into question the very idea that foundations are the right addressees for such a call. In their view “monitoring is the role of the state.”

Others underline the lack of resources: “this is not what foundations have been established for. Therefore they lack the instruments and knowledge,” “given the amount of specialization required to monitor financial operations and the absence of control by public authorities, it would be presumptuous to think that foundations can help,” so that, in effect, “the lack of willingness to get involved may be the result of a rational choice.”

Another group stresses the limited power and capacities of foundations: “we are too small and too flighty to offer a true balance against the size, scope and power of financial institutions,” “I feel we are not confident than we can make a difference.” Some respondents point to a lack of interest: “while some change is under way, most foundations still aim to maximize investment income from their portfolios without giving attention to these important issues,” “the fact is that very few foundations pay much attention to how they get their own money, nor show a great interest in examining the financial and corporate sectors.”

And finally, there is the general tendency to prefer welfare issues and shying away from more “political” advocacy: “Foundations could play a key role here, but my experience is that few are interested. Welfare issues are much more attractive.” According to one respondent, most foundations have become reluctant to support controversial campaigns and any social movement that might challenge the status quo:

They have become afraid of controversy. It’s very sad. Recall the 1960s when it was Ford and other USA foundations to fund the civil rights struggle? Today Martin Luther King Jr. would never be able to get a grant, as he did then. I think it’s lack of will and interest, and perhaps a sense that government should do it.

It is interesting to note that most of our respondents acknowledge the limited commitment or active disengagement of their foundations. As illustrated in Figure 4, over 54 percent admit that their foundations should do more to address the root causes of the financial crisis (rather than its symptoms) and support civil society with expertise and resources to hold financial markets accountable to citizens (Figure 4).

Figure 4

Conclusion: what to do?

Obviously our survey does not offer a statistically significant representation allowing for easy generalizations. The foundation sector is a composite universe of hundreds of thousands of organizations, with different and at times competing agendas. However, we hope that this survey and the questions it raises will steer a more general debate about what civil society can do to monitor financial markets and act as a watchdog against its speculative tendencies. The task at hand is definitely complex and will require significant resources and knowledge. But the same can be said about a number of areas where civil society advocacy has covered significant ground in the past decades. Advocating for human rights requires a lot of technical information, field research, access to secret documents, and also personal risks. Yet, this has not prevented civil society (and the foundations providing resources) from building a strong information basis, data, and global advocacy campaigns. Advocating for the environment necessitates significant research, expensive tools, and an excellent knowledge of biological and physical processes. Notwithstanding the challenges, the influence of environmental organizations and their capacity to affect political decisions is nowadays recognized by everybody. So, why shouldn't it be possible to do the same with the financial markets? Of course, there are a lot of politics and conflicting interests that need to be overcome, but the dramatic impact of the financial crisis undoubtedly calls for a new and dynamic role for civil society in this field.

Foundations can support this process in three ways that are not necessarily mutually dependent but certainly reinforcing. First of all, they should recognize the fundamental value of ethical investment, both in the way in which they accumulate resources ("where does the money come from?" "was it generated ethically?") as well as in the way in which they administer their own endowment and capital. It is no longer acceptable that foundations claiming to be concerned with the public good invest their resources in conventional (often high-risk) schemes. They should exclusively interact with ethical banks, use their pension funds to promote social welfare investments, and demand full transparency and accountability on the part of their banking counterparts. It might even make sense for foundations to scrutinize their salary scales – and, let's say, expenditures for housing and representation – according to principles of proportionality and appropriateness. By rethinking their internal functioning and their investment policies (and making all of this public), private foundations can already make first steps to reshape the financial system. These reforms are within reach of any foundation, big or small, international or local. Whether concerned exclusively with social welfare issues or some other area, these changes should be part and parcel of any public-benefit organization.

The second option concerns the pioneering if often rather small-scale initiatives identified by our survey, whose full potential may be brought to bear if foundations will make use of their convening capacity to connect such "disparate experiences" and provide a neutral locus for interaction, networking, and cooperation (at the national and the international but possibly even at the regional level).

Of course, the most innovative and courageous foundations can do even more, thus moving to the third level of action. By getting involved, directly or indirectly, to support civil society's action as a watchdog of the financial sector and sustain a full-fledged social movement, they may help citizens keep international finance in check, thereby strengthening our social welfare and, ultimately, our democratic societies. As underlined by the CEO of a foundation,

foundations are themselves crucially important actors of civil society and depend on the legislative framework and also the financial institutions which allow for their activities to continue. A critical civil society is a guarantor of transparency and good governance, and these are the two core values needed for the development of responsible financial institutions on which foundations depend to carry out their work.

In our view now, time has come for progressive foundations to take a bold stance, even if this implies abandoning the safe ground of uncontroversial gift-giving to move towards an unknown and potentially contested territory. The global economic crisis might provide a unique once-in-a-lifetime window of opportunity for real change.

Although we have treated all foundations as a single, uniform entity, we are aware of how diverse the sector is in practice. However, we believe that the constraints discussed above might prevent only some foundations from getting actively involved in this "hot" field, while others – we hope – will find it easier to grasp the importance and timeliness of the task. Alliances have to be forged across various fields and actors within civil society in order to pull the best energies and resources together. This would also imply a stronger support for cutting-edge advocacy initiatives and a closer relationship with other social actors, such as grassroots movements, trade unions, and active citizenship organizations. Whatever civil society initiative might be born out of the ashes of the current financial crisis, it will need to grow organically, possibly from the bottom up, certainly fed by different springs and with participation from different sectors. Foundations should nurture this spontaneous process and help it get off the ground.

Needless to say, supporting such an alliance would require many foundations to rethink their role in society and become not only more "political" but also more critical of the problems caused by our economic systems. In this regard, this might also be viewed as a test bed of the scope as well as the limitations of foundations' role in society. But if improving the quality of life of our fellow citizens and redressing social injustices are at the heart of the philanthropic impulse, then, given the abysmal impact economic misbehavior and aberration are exerting on the wellbeing of our societies, this is definitely a cause worth fighting for.

Notes

[1] Lorenzo Fioramonti is Senior Visiting Fellow at the Centre for Social Investment of the University of Heidelberg (Germany). A preliminary version of this article was published on www.opendemocracy.net in the openEconomy section.

[2] Ekkehard Thümler is Project Director at the Centre for Social Investment of the University of Heidelberg (Germany).

 
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ISSN: 1556-5157