The International Journal
of Not-for-Profit Law

Volume 6, Issue 3, June 2004

By H. Peter Karoff*

Philanthropy is private action in public space. In an increasingly political and media-intensive world, what governance, what accountability, what transparency, and what attitude are appropriate and right for charitable organizations and private foundations?

Preface

This essay is based on the premise that trust in society as a whole is in decline, and philanthropic organizations, among many others, are facing a crisis of trust. The erosion of trust within American society has been well documented long before today’s corporate and investment scandals, but public outrage and loss of confidence has reached an all-time high. While there are many implications of this dilemma, one pervasive result is that no person, no organization, no institution, no established leadership, no community of interest—no matter how distinguished or revered—is beyond examination. Perhaps this examination has always been valid in a society where pluralism and a cacophony of voices are the norm. Nonetheless, I wonder if we have managed to arrange, among the legacies we are passing on to our children, the death of trust.

When a leader, organization, company, product, or political party falls from grace, trust is very hard to regain. A hospital on whose board I sit had two tragic and highly publicized maternity deaths in the mid-1990s. The experience shook the institution to its roots. It took an enormous effort, a great deal of expense, and years to repair the damage, which fortunately it was able to do. Fred Miller, an experienced consultant to non-profit organizations for 25 years, believes “when trust is lost, what is at risk is the potential loss of an organization’s franchise to operate.” That is not an acceptable risk for philanthropy to run, especially when the critical needs of society demand escalating resources. Perhaps even more important, philanthropy’s potential for moral leadership is one of the few antidotes to an increasingly materialistic and cynical society. At this moment, we badly need that leadership.

The authors of a book I recently edited, Just Money: A Critique on Contem­porary American Philanthropy,[1] take a hard look at the issues of governance, account­ability, transparency, and attitude as they relate to private foundations. The authors, all former CEOs of major foundations, have a more-than-casual working knowledge of these themes. And they are not alone in their interest; the field is abuzz. This is no fad, but rather an inquiry into troubling questions embedded in the way philanthropy has operated for a long time, and the implications go far beyond the realm of large, private foundations. The field of philanthropy is overdue for a serious reassessment of its mission and an examination of many of its operating assumptions. A good defense is not the answer. While this essay expresses the palpable frustration that exists within the field, it also reflects a yearning to turn powerful visions of good works into practical strategies for transformation.

This state of affairs reminds me of the large sign that one of my business partners long ago kept on his office door: Assume Nothing. I think that is an apt perspective as we join the question and take a serious look at what we in the field of philanthropy do and how we do it. And make no mistake about it—the question is joined.

The Rise of Public Scrutiny

One of the contributors to Just Money, Peter Goldmark, the former President of the Rockefeller Foundation, makes this observation: “Philanthropy enjoys relative immunity from the three chastising disciplines of American life—the bottom line, the ballot box, and having the press walk up and down your back every day.” While true in the past, that immunity is fast disappearing. Philanthropy is increasingly being judged in the harsh court of media-driven public opinion. That forum in the broadest sense is essentially political, and it increases the potential for additional legislation and regulation.

It was an event when Time did a cover story on philanthropy in 2000. But Time was not alone; the fascination with wealth and the wealthy quickly beat a hot trail to philanthropy. While initially positive—an infatuation with the givers and their giving and what might be possible—this press soon turned critical, much of it focused on actual or presumed fraud and abuse within the philanthropic and non-profit sector.[2]

In tandem with the media attention, and certainly influenced by it, regulators in many states have begun investigations, cases are before the courts, and legisla­tion is proposed to monitor the not-for-profit sector and in some cases to “reform” large foundations.[3] These efforts are being viewed by the major philanthropic trade associations as attacks on the system. The Charitable Giving Act of 2003, which was not enacted, would have excluded certain salary and administrative expenses from the foundation 5 percent pay-out requirement. That proposed change became a lightning rod for a lobbying effort to limit the provision.

Some foundation executives couldn’t understand why there was not more support for their position from non-profit organizations. Many non-profit executives, however, were angered by what seemed to be an example of large foundations throwing their weight around for their own self-interest. Those who remember the debate over the conclusions of the Filer Commission[4] in 1973 will think that history is repeating itself. At that time, public charities and private foundations did not always see their interests as the same, and they do not today.

While raising issues of trust internal to the field of philanthropy, this is only the beginning of a period when philanthropy will be operating in a highly politicized environment. Thus, it isn’t a matter of when the battle will end. The bigger issues are what the battle is and what its stakes are. If it is merely to protect the status quo, I predict that not only will we lose, but we will miss an opportunity to engage both the field of philanthropy and the broader public in a critically needed review of the way we go about our work.

A Higher Calling

Philanthropy occupies a special place in the heart and the soul of the society. It truly is about faith, hope, and charity. At its root, philanthropy is an expression of love, which when harnessed is perhaps the most powerful force in the human experi­ence. Out of those roots, charitable organizations have always answered to a higher calling, one that befits the doing of good works through remedy, cure, conservation, social change, and service. If we can’t trust charity, the very embodiment of human goodness, the world is in a sorry state indeed.

The problem, of course, is that these noble sentiments do not necessarily transfer to organizations and institutions and the individuals who run them. Organ­izational self-interest is an extension of human behavior, and people intuitively understand that. So while we may love and trust charity, when it comes to what is called the “third sector”—which includes non-profit insurance companies, credit unions, and large corporate institutions as well as more traditional charities—there is a lot of confusion and a lack of confidence.[5] Nevertheless, we expect a great deal from those who do this work on all levels, and we are rightfully angry when that expectation is not met.

The Gray Areas

At a minimum, all philanthropic organizations must adhere to codes of ethics that include prohibitions against self-dealing and conflicts of interest. Despite a few highly publicized examples, I believe it is rare that those minimum standards are not met. The question is, how acceptable are merely minimal standards for an endeavor such as philanthropy? For charitable organizations, the notion of a higher calling can turn what may be standard operating procedure in a business or political context into a gray area. One need not look far to find examples:

The Yawkey Charitable Trust in Boston was established by the former owners of the Boston Red Sox. With the recent sale of the team, it is now one of the region’s largest philanthropies. The Trust was questioned by the Massachu­setts Attorney General in connection with a large grant it made to Boston College.[6] At issue was whether there was a conflict of interest, since both the former President of BC and a current BC board member are trustees of the Yawkey Trust. There has not been any legal action, nor is it clear whether the Attorney General had any basis for the inquiry. Yet the truth is that many foundation grants are based on direct and indirect interlocking personal rela­tionships. Many trustees and grantees are part of an old-boy/old-girl network. In fact, fundraising and development efforts are often reliant on such net­works. A cynic can easily assume that things like this are wired, that some­how the fix is in. What does such an appearance say about serving the public interest?

• Many professionally run foundations make grants based on research and merit, but once again, personal relationships between program officers and prospective recipients frequently influence who is even considered. It would be interesting to analyze the number of major national foundation grants that had two-way connections between those who attended elite secondary schools or Ivy League colleges. The reality is that if you are part of certain networks, then you have access; otherwise you may not. What does that say about a level playing field?
• Many private foundations by policy do not accept applications for grants. Many others prefer to operate anonymously. What does that say about access?
• The CEO of a corporation is recruited to join the board of a national non-profit organization, an event that is considered a coup for the non-profit. His com­pany develops a cause-related marketing campaign that benefits the non-profit—and increases sales, profits, and public image of the corporation, as well as, indirectly, the compensation of the CEO. Is that a conflict of interest?

If we believe that things like fairness, access, and a level playing field are core values for philanthropy, what are the implications of such questions? Ethical and fairness implications aside, these are not legal issues today, but they could become so. If one needs an example, the Sarbanes-Oxley Act of 2002 provides it.[7]

Sarbanes-Oxley

While Sarbanes-Oxley is directed at public corporations, today’s corporate regulation could become tomorrow’s non-profit regulation. The principal areas covered by the act are as follows:

• Establishment of a Public Company Accounting Oversight Board to oversee the audits of public companies in order to protect investors and further the public interest
• Auditor independence, including limitations on scope of practice and prohib­ited activities, specific protocols for investigations and disciplinary procedures, and corporate and criminal fraud accountability
• Corporate responsibility, including the role, duties, and oversight and censure responsibilities of the Board; prohibitions on insider trading; fair treatment of investors; and attorney responsibilities
• Extensive rules concerning financial disclosures, investment analysts, conflicts of interest, and the disclosure of transactions involving management and principal stockholders
• Increase of authority and responsibility of the Securities and Exchange Commis­sion and the courts
• Rules addressing corporate fraud and accountability, including personal loans to executives, white-collar crime, the signing of tax returns, and protection for whistleblowers.

What is remarkable is that all of this has happened in a domain that does not lack regulation. The Securities & Exchange Commission, state regulatory authorities, the New York Stock Exchange, the National Association of Securities Dealers, and numerous business organizations promote self-regulation and standards of conduct, many of which cover the same ground. One prominent lawyer told me that Sar­banes-Oxley has hit corporations like a “death star.” A board member of a public company that is being investigated for fraudulent revenue recognition, who in the process has run up huge legal bills, called it the “Forensic Accountants and Lawyers Relief Act.” You do not have to be a lawyer to read Sarbanes-Oxley and readily follow the Congressional train of thought, since it follows the trail of publicity and media coverage of the various stories about outrageous corporate abuse that have appeared and continue to appear.

The bottom line of Sarbanes-Oxley is less autonomy for corporations to con­duct their own affairs along with a huge increase in the cost and complexity of doing business. One spin-off effect will be greater difficulty in recruiting qualified board members.

Yet there is justifiable skepticism that legislation and regulation of any kind can change a culture of greed and corruption. Some observers think the act was a cop-out, as it did not deal directly with excess compensation and how executives play financial information for their own gain. The act also did not substantially increase the culpability or liability of directors. None of this has had much effect to date on the public’s anger and lack of trust in corporations to protect the interests of investors.

Sarbanes-Oxley was written to affect only very large public corporations, but it does not take a great leap of imagination to conceive what a Sarbanes-Oxley for foundations and non-profit organizations might look like. While they are different animals from the perspective of the public interest, charitable organizations are quite similar to public companies. Certainly the fiduciary obligations of corporations to their public investors are analogous to those between non-profits and donors. The responsibility of manufacturers in regard to the safety and quality of products they produce for their customers is analogous to that of a Boys and Girls Club to the young people it serves.

In his book Board Room Excellence,[8] Paul Brountas, one of the nation’s lead­ing corporate lawyers, writes that non-profit institutions will increasingly be judged by the same standards that apply to public corporations. While especially true for non-profits that receive government funding, Brountas believes that codes of con­duct, more intensive review of compensation packages, and the increased role of truly independent audit committees should become the norm for all charitable organizations. BoardSource and the Independent Sector have issued a brief on the direct implications of Sarbanes-Oxley for non-profit organizations.[9] In fact, as this essay is being written, boards of many charitable and non-profit organizations are deep into the review of these very questions.

Beyond the Similarities

Regulation of charitable organizations has been increasing for some time. Especially relevant are the “intermediate sanctions”[10] that govern matters of compen­sation and conflicts of interest in 501(c)(3) organizations, first promulgated by the IRS in 1998, long before Sarbanes-Oxley. Based on tax rules passed by Congress in 1996, these IRS regulations lay out, in considerable interpretive detail, instructions relating to excessive compensation and penalty excise taxes that can be levied on both executives and board members. Private foundations are exempt from these tax rules because they are presumed to be subject to even more stringent rules and tax penalties on self-dealing. A close reading of the “intermediate sanc­tions,” however, could lead one to conclude that some of the gray areas referenced above would no longer be gray if the sanctions applied.

Despite the similarities, charitable organizations have a very different rela­tionship to the public space from that of publicly held corporations. The field of philanthropy operates under a certain set of assumptions, but in the current climate, many of the assumptions will be, and in my view should be, seriously challenged. Under the “assume nothing” theory, here is a sampling of the questions we can expect:

• Who says it is better for society that private foundations preserve their assets for future generations as opposed to investing them in the issues of today? How do we know that to be true? What have foundations actually done that adds sufficiently to society in order to justify immortality? If so many new donors are establishing sunset clauses for foundations, does it even matter?
• What qualifies trustees of charitable organizations to act in the public inter­est? How does the public know they are fulfilling their fiduciary responsibility? Before appointment, should they be screened for suitability based upon established criteria by an independent entity or even a government body?
• Why shouldn’t there be a public representative, ethicist, or both on philan­thropic boards, at least for organizations over a certain size? Why isn’t the consumer—the recipient—represented?
• Who is really minding the store? Should the oversight capacity of the IRS, which is very limited, be expanded? Should the role of the attorneys general, the official advocates for the public interest, be expanded? Should a new SEC-type organization be created for foundations and non-profits? Should the field itself create new self-regulatory organizations with enforceable codes of con­duct? Should membership in the Council on Foundations and the Independent Sector require detailed annual reporting on meeting certain standards?
• Why shouldn’t private foundations be required to issue annual reports to the public that disclose, among other things, how they have fulfilled their public purpose? Should charitable organizations be required to issue a form of public notice similar to those required of government agencies before they make major decisions? Why shouldn’t they share their knowledge with others as a matter of course?
• Is there not a hierarchy of public needs? Why should those who give money to non-profit organizations that cater primarily to the quality of life of the wealthy receive the same tax breaks as those who give to benefit the poor?

Some of these questions may sound over the top to some ears—an outra­geous invasion of the prerogatives that underlie the historical independence of private philanthropic action. But I see them as reflecting the growing groundswell of democratization, empowered by the information explosion in which blogs and click-of-the-mouse listserves instantly cover the globe. The public’s right to be informed, along with the need for leadership of all kinds to be open and accessible, represents a fundamental change in the rules of the game—in ways that have yet to be defined.

Autonomy Conflicted

With all this talk about regulation, it would be regrettable were we to take away from the sector the very autonomy that gives the field its strength. In his essay in Just Money, Joel Fleishman, the former President of Atlantic Philanthropic Services, refers to what he calls the “American Polyarchy” as the bedrock of the nation’s vitality. Fleishman argues that autonomy of private charitable foundations, and by inference that of the third sector as a whole, is a major contributor to that vitality.

Certainly, the freedom to act is part of what attracts participants. Not having to wait or ask permission, but the option to respond, to initiate, to be original and creative, and then to act on your convictions and beliefs—all these make philan­thropy one of the few realms where pure individualism is at work. It is in part why the work can be so exciting and why the process continues to engage so many people. Limit that freedom and we will quickly lose a lot of players and a lot of resources.

Even more important, the whole concept of a third sector is based on inde­pendence from government. The idea that neither government nor the market economy can fully represent the needs of society, and that another voice is needed, is at least as important today as 100 years ago. The Independent Sector is far more than the name of an organization. The restriction of that independence through increased regulation carries the risk of limiting one of the sector’s most important roles—an issue far more significant than foundation pay-out regulations or artificial salary limitations.

Private Action in Public Space

Philanthropy starts with what is personal and private, and then moves to a transaction, of money or time or both, that is enacted in public.[11] Most charitable organizations invest a lot of effort defining their missions and goals. Most are very clear about what they want to do. We are not as clear, however, in defining our responsibility to the “public good.” It simply is assumed that what we want to do is good for society.

When successfully bridged, the process creates an action that is neither pri­vate nor public but transcends both. The problem is that the bridging process is frequently unsuccessful and, to borrow and adapt a phrase, fails to render unto the public what is due to the public. Absent fraud and abuse, for which there are legal remedies, there are few standards or measurements for what organizations actually owe society for the favor of tax exemption. While pressure is growing for greater accountability, the definition and the terms of the deal remain a matter of invention.

Self-interest too often works against the public interest, as when a non-profit organization resists collaborating with a competitor even though it would benefit the community served. Ongoing momentum keeps too many non-profits in existence when they really should close up shop; it is one of the inefficiencies that drives down confidence in the field. Too often donors push their own agenda and strategy, and in the process sap the very creativity and risk-taking that are the objectives of great philanthropy.

Perhaps nowhere is the dilemma around private persona and public responsi­bility more complicated than with private foundations and individual donors. Creation of the original private foundations, beginning with the Rockefeller Foundation in 1913, met with considerable skepticism in the press and in Congress as to what motivated these acts by some of the country’s wealthiest and most controversial citizens. It is part of America’s love-hate relationship with wealth: on the one hand, the wealthy are admired; on the other hand, they are viewed with suspicion. Witness the original widespread view that the motivation for Bill Gates’s philanthropy was to buy a kinder public image that would offset the public relations effect of Microsoft’s litigation problems. Since then, suspicion has much diminished based on the sub­stance of the Gates Foundation’s work.

The legal responsibility of a private foundation rests with the board of direc­tors or trustees. But do they “own” it? In practical terms, if you control something you ordinarily own it. The vast majority of the 65,000 private foundations practice “checkbook philanthropy” rather than what might be called “citizenship philan­thropy”—philanthropy that reflects a broader, more public agenda. The legal nicety of establishing a tax-exempt fund aside, most living donors believe that it is still their money, and interpretation of donor intent often perpetuates that belief. The bottom line within the universe of private foundations is an appalling lack of public con­science and awareness. While not surprising, it is one the major failures of the field.

Over the last 15 years, my colleagues at The Philanthropic Initiative have worked with several hundred individual, family, and corporate donors and learned that the values, passions, and personal interests of the donor drive everything. Until that is sorted out, not much progress can be made. And as a private philanthropy, how could it be otherwise? Whether a public voice also emerges, however, is much influenced by the original motivation behind establishment of the foundation or giving program.

Some people are motivated by religious convictions and a strong sense of stewardship. Some feel a responsibility to their community, where many times the wealth originated. Some individuals are motivated by very personal experiences, like the illness of a loved one. Some have a passion for an issue, like children or the arts. Some are outraged over what they perceive as injustice. These kinds of motivations mean there are identified stakeholders and communities of interest, and the assumption of public accountability flows more easily.

Other donors, by contrast, are responding to an unexpected level of wealth and do not want to leave overwhelming amounts of money to their children. For them, a foundation is a default mechanism. Some are responding to social pressures, to celebrity, and to the hungers of ego. A few people, far fewer than one might expect, are motivated primarily by tax savings. Such motivations make philanthropic goals more of an afterthought, and the only accountability that matters is personal. In those situations, a meaningful public persona, however defined, is much less likely.

Another major factor involves one of the first and most fundamental policy decisions a family foundation—and most private foundations are family enterprises—has to make. Is it to be a collective endeavor built around a common mission, or individuals doing their own unconnected things through the legal mechanism of a foundation? If it is the latter, then the checkbook metaphor is apt.

The major national foundations are the “names” of the field. Many of the largest foundations continue to operate behind a veil of secrecy. To the general public these large accumulations of capital and the movement of the capital are incomprehensible. Some have learned the value of communication. For example, both the Robert Wood Johnson Foundation and the W.K. Kellogg Foundation publish their research and other work, including program evaluations, in papers and on their Web sites. Others stonewall public information and, as a matter of policy, do not disclose or communicate beyond the bare bones of the legal requirements. For them, it is still viewed as their money. In this environment, they are vulnerable. Transparency, being open and accessible, and communicating have become new and unfamiliar imperatives for all philanthropic organizations—even for those that do not wish to do so.

Communication goes a long way toward integrating the affairs of large foun­dations into public space, but it is by no means the only important element. I think there are two tests of whether a donor, irrespective of size, satisfies his or her public responsibility. The first test is what the donor does with the money and how those resources add value to society. The second test is how the philanthropic process operates. I would suggest the results of both tests are much determined by attitude.

On Attitude

Many of the issues around trust can be resolved with what Anna Faith Jones, in her chapter in Just Money, calls attitude. Past President of The Boston Foundation, Jones developed her own attitude out of a deep conviction that the source of mean­ingful philanthropy lies in listening to the intelligence, wisdom, and experience of the community. Jones makes the case for a more democratic inclusion of expanded communities of interest and a foundation that becomes a listening post.

In her essay in Just Money, Adele Simmons, immediate past President of the John D. & Catherine T. MacArthur Foundation, extends this reasoning and makes a strong case that context matters. Without understanding the lay of the land, the local customs, and what people in the community consider appropriate behavior, a foundation or donor will get it wrong almost every time. Simmons expresses amazement that such an obvious truth is so often ignored.

In many ways attitude and integrity are linked. Attitude determines whether one is a listener or a talker, whether one is open or closed, whether evaluation and measurement represent a policing effort or an integral part of the process, and whether one is an advocate or a collaborator. And attitude is key in determining whether an organization is thoughtfully governed.

On Governance

Even the large, elite philanthropic institutions often do not get it right. Con­sultant Fred Miller thinks that some boards confuse being independent with being private. He observes that the language one hears—”my organization,” or “we will do this”—is often more typical of a private enterprise than of one with public ties. This has long been reflected in the resistance to disclosure, even when the law requires it. Miller remembers, in the days before Guidestar made Form 990s available electron­ically, how difficult it was to obtain copies of that supposedly public document, even from 501(c)(3) public charities, including the larger ones. These traditions of secrecy, of playing it close to the vest, die hard and play into the broader issues of governance.

William Pounds—former Dean of the Sloan School at MIT, and a board mem­ber of Fortune 500 companies as well as of large non-profit organizations—believes corporate governance will not improve until we are willing to deal “with what CEOs and Boards actually do,” as opposed to what they cannot control, like the price of stock or, in the case of a non-profit, a recession that reduces contributions. Pounds advocates much more sharply defined job descriptions for CEOs, board members, and the chair of the board. Job descriptions would remind all players of their respon­sibilities, provide a framework for evaluating their performance, and help recruit new board members. In Pounds’s view, “Governing a corporation [organization] is serious business requiring the best effort of serious people. Until we are clear about what the work is—and what it is not—we will neither attract the talent we need nor use the talent we have effectively. And corporations [organizations] will continue to be governed poorly.”

This lack of clarity often leads non-profit boards to perform either too little or too much oversight. When the CEO recruits board members, loyalty to that individual is often confused with fiduciary responsibility to the organization. This is especially true in a founder-led organization. If boards do not routinely question assumptions, they fall into complacency, a situation ripe for manipulation. It is dangerous to assume “someone else is looking so I do not have to.” By the same token, too much oversight can occur when a board gets confused, crosses the line into management, and ends up running things. A similar problem arises when a donor is too intrusive and tries to run the show. Sometimes a board will step into the breach and try to compensate for the deficiencies of management. This behavior makes for a leader­less and unfocused organization, signifying that the board has not fulfilled one of its most important responsibilities.

Non-profit boards are unique in some respects. Corporate CEOs and board members have extensive resources for advice and counsel inside and outside the company. That is not the case with many non-profit boards, where members are often recruited for their ability to give as opposed to their skill or wisdom. There is also a training gap, despite the resources available from organizations like Board Source, the Association of Governing Boards, the American Hospital Association, and many local United Ways. Too often, there is a casual relationship to responsibility and to taking this job seriously, along with timidity on the part of organizations to ask for more.

Beyond Rhetoric

We do not need more rhetoric, at least not at 30,000 feet. The Independent Sector Statement of Values begins with the statements “Commitment beyond self” and “Commitment beyond the law to the public good.” The Guiding Principles of the Council on Foundations states, as its first enduring value, “The field of philanthropy must uphold the public trust.” But rhetoric and reality do not always meet. For example, how many private foundations have done more than glance at the Council’s good principles, or even know they exist? I am afraid of the answer.

Where Does This Lead?

What is missing? What would increase trust in philanthropy? What proactive, not reactive, steps can be taken to deal with criticism, to change what should be changed, and at the same time to reinforce the vitality and centrality of the work of this field? On some levels, it is relatively straightforward to think about what philan­thropy might do differently. For example:

• Customer feedback and surveys, standard in the corporate world, are rare in the non-profit world. They should not be. In fact, the common relationship of dependency between non-profits and clients, along with that between donors and recipients, makes critical feedback almost impossible. It would be a sign of maturity in the field if that were to change.
• Peer review in science and accreditation in academia help maintain agreed-upon levels of excellence. There is no analogue in philanthropy. If there were, it would go a long way toward making best practices more universally under­stood and pursued.
• Take Dean Pounds’s advice to develop good job descriptions for CEOs, board members, and board chairs. Here is Pounds’s description, with some small adaptation, of the job of board members:
  1. Do whatever is necessary to be able to confidently assess the CEO’s per­formance of her job.
  2. Do nothing to hinder the CEO in the performance of her job.
  3. Offer the CEO wise counsel and advice.
  4. Do nothing contrary to the best interests of the organization’s stake­holders.
  5. Be an active participant in succession planning.
  6. Be prepared to terminate the CEO in the event she fails to do her job well despite the best efforts of all concerned.
  7. Be an active participant in the selection of a new CEO as required.
  8. Be an active participant in the performance-based renomination of existing directors and in the selection of new directors as required.
  9. Be an active participant in the reconsideration and redefinition of the job descriptions of the CEO and board members.
  10. Understand and be an active participant in setting the total compensation arrangement for the CEO and the organization.
  11. Understand and be an active participant in the ongoing review of the organization’s mission, and help insure that the organization stays true to that mission

In addition to these kinds of better practice ideas, here are some broader suggestions.

Create and Enforce Standards

The promotion of a stronger culture of self-examination within the field is at the heart of any meaningful change. There are standard-setting roles here that only the Independent Sector and the Council on Foundations can play, but others closer to the ground may be the more important players overall. Community foundations, because of the unique local space they occupy, are at the axis of public need and public good; they are the natural champions of that integration. The increasingly important organizations and networks like the Association of Small Foundations, Social Venture Partners, National Center for Family Philanthropy, and the commercial gift funds, as well as the growing field of philanthropic consultants and advisors, are a potential distribution and education system. Some regional associations of grant­makers are ahead of the curve. At its 2003 annual meeting, the Council of Michigan Foundations (CMF) approved a set of guiding principles that are now a condition of membership and issued guidelines for their implementation. The seven guiding principles address the question most asked by the public, “What do foundations stand for?”

1. Adhere to the highest standards of ethical behavior in all foundation actions.
2. Honor donor intent.
3. Have an identifiable active governing board, a decision-making body that sets up and regularly reviews policies on: governance, including conflicts of interest; grantmaking; and finance and administration, including audit and communications.
4. Be accessible by having basic grantmaking information readily available regarding funding priorities and application requirements.
5. Build constructive relationships based on mutual respect, candor, confiden­tiality, and understanding with the public, applicants, grantees, and donors.
6. Strive to include the perspectives, opinions, and experiences of the broad­est possible cross-section of people to inform the foundation through its grantmaking; through the composition of its board, committees, staff and advisor/consultants; and through its business practices.
7. Support learning by trustees, staff, and grantees.

The promotion and enforcement of these principles would go a long way toward addressing the issues this essay has raised. The challenge to CMF and to others will be to develop, first, the strong peer leadership to make these kinds of operating principles normative within the culture of charitable organizations, and then, second, the courage to enforce these principles within their membership. And with that, we come back to the earlier discussion of attitude.

The 360° Mission—Reinventing Mission

The mission of a philanthropic organization lays out the relationship between the manifest destiny of the organization and the public space it inhabits. Mission in a non-profit or philanthropic organization drives everything, and I think we have to reinvent it from what might be called a 360º perspective.

A 360º mission would disaggregate organizational self-interest from the public interest. A 360º mission would have less emphasis on what “I”—the foundation, donor, or non-profit organization—want to do, and more emphasis on the broadest possible interpretation of the issue from the perspective of the people being served: what works for the individual, for the community, for society. A 360º review of mission and operating procedures would reach beyond the traditional, especially into the gray areas of self-interest and conflicts of interest. Some of the questions one might ask are the following:

• Have we carefully thought through the implications of our actions on others, including possible unintended consequences?
• Do we avoid simplistic solutions to complex problems, issues, and social systems?
• If there is resistance to what we want to do, is there merit in that resistance?
• Are we respectful and sensitive to cultures and beliefs different from our own?
• Are we sufficiently on guard against hubris and excessive personal and organizational ambition?
• Are we absolutely committed to integrity and to avoiding conflicts of interest, including between the personal and family relationships of both board and staff?
• And perhaps overarching all—is our mission the right one, and do our actions at all times live up to that mission?

The Leadership Connection[12]

Trust is based on faith and confidence in the loyalty and veracity and integrity of someone or something. And so is leadership. Jim Kouzes and Barry Posner, who have been researching leadership for 27 years,[13] have concluded that people look for leaders who are honest, forward-looking, competent, and inspiring, qualities that when combined add up to one word: credibility. “Credibility is the foundation of leadership,” they say. “Above all else, we must be able to believe in our leaders. We must believe that their word can be trusted, that they’ll do what they say, that they’re personally excited and enthusiastic about the direction in which we’re headed, and that they have the knowledge and skill to lead.”[14]

Motivation is another key element in establishing credibility. We want leaders who are motivated less by self-interest than by a desire to serve others (i.e., the public interest). This is true for all leaders, irrespective of the domain.

We know that donors are significantly influenced by confidence in a non-profit organization’s leadership and “trust that the money will be used wisely.”[15] Trust is a two-way street, however, and even those who come bearing gifts have to earn trust. For example, NGOs are challenged to earn the trust of the leaders of indigenous communities in which they work. The Trojan Horse may be the oldest and best-known story of how a gift can be a two-edged sword. And gift giving carries many risks, the most important of which is the danger of violating the first rule of life and philanthropy, “do no harm.” Breaking that rule may be the most serious lapse imaginable in the responsibility of leadership.

Trust and leadership go hand in hand, be it in philanthropy or commerce or politics. Certainly the connection is integral to the practice of all charitable organizations. On one level, trust in philanthropic leadership is earned through the doing and managing of “good works.” But there is also a higher calling here. The bigger issue is whether philanthropy can realize its potential to be a true moral leader in the affairs of the world.

Trust Redux

In most instances, trust is built on a foundation of examined experience. It is earned when appearance and substance are joined and then communicated. Trust can develop organically, by word of mouth, as when a farm stand has been selling the best-tasting corn in town for years. Today’s communication networks can influence credibility with astounding speed—witness the way in which Vermont’s Governor Howard Dean’s presidential campaign came out of nowhere based on the success of a sophisticated Web- and email-based strategy, and, just as suddenly, collapsed.

Leaders and organizations are judged trustworthy or not trustworthy when they are held accountable. Accountability is concrete, not abstract. It fortifies trust. Accountability determines whether one’s actions live up to the expectations of stakeholders. Communities of interest, which include both direct and indirect stakeholders, expect accountability, require it, and even demand it. They demand “the piper has been paid.” But defining who the piper is, and what responsibility is owed to which constituencies, is often complicated. Fulfilling expectations is difficult because beliefs and points of view of the constituencies vary enormously and sometimes conflict. A Community Development Corporation proposal to build a supportive housing project for mentally ill homeless people will engender a wide range of responses from direct abutters to the site, donors and state agencies and lenders financing the project, investors purchasing tax credits, the city councilor representing that neighborhood, the mayor of the city, the advocates for the homeless, and those citizens who want to occupy the housing. Each party at interest will have a definition of accountability. That is always the case.

While accountability and other aspects like transparency are critical, trust at a deeper level revolves around love, will, and power.[16] I do not think we understand the effect of power on the philanthropic process, and especially the power imbalance inherent in funding relationships. I also have observed that the elusive element called “will” is more central to impact and result than almost anything else. While we may neither love nor need to love those whom we trust, a relationship that comes close to love results when we commit into another’s hands ourselves and our affairs, our problems, our health and well-being, or our security. In this relationship of what might be called kinship, we yield control over something or someone, and in the process a transfer of money or time or influence occurs. In doing so, we take a risk. Risk-taking is part of what makes us vulnerable to being hurt, but it is the only thing that can lead to success.

Trusting Ourselves

Would a combination of more rigorous practice, clearer job definitions, commonly agreed-upon standards, and an attitude that better respects those with whom we work and the public space help answer the questions raised in this essay? Would they help build and maintain trust? I think so. Do you

Some questions are the stick; they force us to think. I think we need the answers much more for ourselves than for others. There are, however, other questions in philanthropy that are closer to the carrot, such as the following:

• What really makes philanthropy special? What draws us in, and what could draw others in?
• What does this incredibly rich and idiosyncratic field, this pluralistic philanthropic universe, this third sector mean in today’s world?
• We mess around and think creatively, but so what? Are we working around the edges of issues? Why are we not outraged more often?
• How do we turn powerful visions into practical strategies for leadership and even transformation?
• How do we learn to think beyond money, services, and programs, and instead think about convening and organizing communities of interest?
• How do we keep from falling in love with the rhetoric of our own importance? Or, put another way, how do we transcend personal ego?
• How do we believe more in ourselves? How do we resurrect the values of maturity and wisdom?

This essay began with a look at the forces outside the world of philanthropy, like the media and the potential for increased governmental regulation. But what has become apparent is that the more important point is the force within us. From that perspective, trust begins at home with confidence not only in ourselves but in the communities of interest that make up our world. What we seek is a deepened relationship between philanthropy and society. With that, everything else will fall in place.

End Note

Philanthropy, at its intelligent and passionate best, is a critical element in achieving the manifest destiny of a world more in balance. John Gardner once observed that at best, we only use 50 percent of our personal potential for doing meaningful work and for becoming truly engaged in love and life. I believe that is true, both personally and organizationally. We need not only be trusted; we also need to work a lot harder, perhaps in the way the following story suggests:

The poet William Everson wrote about an incident that occurred when he was interned as a conscientious objector during World War II. The artist Morris Graves was visiting the camp, which that day was clearing a new trail up a mountain. Graves suggested that everyone pause and “consider where the mountain might prefer the trail to be.”

“Please,” he said, “before we begin we had best consult the spirit of this place…. Let us regard the underlying purpose…. Let us discover why things are as they are…. Observe the inclination of the slope, and above it the drift of the foliage. Do you sense the slight depression there where the leaves have drifted? It is the clue to the stress-line in the rock below. It is the flaw that enables us to enter into the presences here, and understand their disposition.” Then with supreme deliberation, the tact that comes only from an achieved authority, he reached in and extracted a dead branch. “The trail begins here,” he said simply.[17]

In some ways it is that simple. If we act accordingly, I think trust will live.

Notes

* Founder and Chairman, The Philanthropic Initiative, Inc., www.tpi.org. Copyright 2004 by H. Peter Karoff and The Philanthropic Initiative, Inc.

[1] Just Money: A Critique on Contemporary American Philanthropy, copyright 2004 by H. Peter Karoff and The Philanthropic Initiative, Inc.

[2] Boston Globe Spotlight articles published October 9 and 10, 2003, have several examples of apparently outrageous compensation and behavior of private foundation trustees. More than 70 such articles appeared during 2002 and 2003.

[3] Attorney Generals in New York, Massachusetts, and several other states intend to file new legislation.

[4] The Commission on Private Philanthropy and Public Needs, known as the Filer Commission after chairman John Filer, was founded in 1973 through the efforts of John D. Rockefeller and others. The final report was entitled Giving in America: Toward a Stronger Voluntary Sector.

[5] See the research of Paul Light of New York University and Lester Salomon of John Hopkins University.

[6] Frank Phillips, “Yawkey Trust Acknowledges Conflict,” Boston Globe, September 6, 2003.

[7] The American Competitiveness and Corporate Accountability Act of 2002, commonly known as the Sarbanes-Oxley Act.

[8] Boardroom Excellence: A Common Sense Perspective on Corporate Governance, by Paul Brountas ( Boston: Hale and Dorr LLP, 2003).

[9] “The Sarbanes-Oxley Act and Implications for Nonprofit Organizations,” by BoardSource and Independent Sector (2003), available at https://www.independentsector.org/PDFs/sarbanesoxley.pdf.

[10] Section 4958 of the Tax Code. They are called “intermediate sanctions” because they fall short of revocation of exempt status.

[11] See “The Public and Private Persona of Philanthropy: The Donor Challenge,” by H. Peter Karoff, in Understanding the Needs of Donors, issue no. 29 of New Directions for Philanthropic Fundraising, fall 2000.

[12] The relationship between trust and leadership came as an insight from Douglas T. Hall, who read an earlier draft of this essay. Hall, who has studied and written about leadership for many years, teaches at the Boston University School of Management.

[13] The Leadership Challenge, by James M. Kouzes and Barry Z. Posner (3rd ed.) ( San Francisco: Jossey-Bass, 2002).

[14] Id., pp. 32, 33.

[15] From a 1996 TPI survey of high net-worth individuals for Bankers Trust Company (now Deutsche Bank), which found “trust that an organization would use the money wisely” was the biggest influence on the level of giving.

[16] An observation from Theodore Mallon, author of the book Masterful Philanthropy.

[17] William Everson, Earth Poetry: Selected Essays and Interviews (Berkeley: Oyez, 1980), pp. 177ff., from “Sane as the Mind that Makes a Nest,” by David Axelrod, The Kenyon Review (New Series), vol. XXV, no. 3-4, summer-fall 2003.