Madoff and Memory ...

So far one good friend has lost virtually her entire net worth. Two active clients have been hit: one by the collapse of a billion dollar foundation that had been giving this charity a million dollars a year in unrestricted money. A second has likely sustained significant losses in donor gifts of as yet undetermined severity.

Flash back to Philadelphia,1995: I was representing three charities at the same time: the public library foundation and two museums when something too good to be true (and it was) came to the attention of first one board and then the other two. It was my first direct professional exposure to a Ponzi scheme. It was called the Foundation for New Era Philanthropy and was started by an area businessman with an interest in Christian causes. His name was John G. (Jack) Bennett Jr. The Wikipedia entry details his activities but on a smaller scale it worked the same way as the Madoff scam.

Bennett first created an aura of mystery by inviting ten "anonymous" business leaders to invest initially and of course the next round of investors paid off the first, and the third, the second and so on until much more money was going out than coming in and the whole thing imploded. When I heard about this "unbelievable man with a genius for investing" for the first time - from the VP for development and a trustee of one of the three institutions my bullshit detector immediately went off. By then I was an investor of sorts and I actually had some money. I was careful. I managed half my portfolio myself, had a financial advisor for the other half, invested only in mutual funds and then far and wide, and I kept about 75-80% in equity funds the rest in bonds. I was a moderate risk-taker.

I mention this only to say that I had some sense of investing; I certainly sensed that the "fabulous" returns Jack Bennett was delivering to the first round of business leaders "allowed in" would and could not last. I those I could that this guy came out of nowhere and had no track record with which anyone was familiar. Where was the due diligence and who had done it? In a nice way I was more or less told to stick to the consulting I was hired for and so I did.

When New Era sank the institutions involved lost some money from their reserves. The sophisticated early investors on the boards who pushed the institutions into investing with Bennett and New Era lost tons more. The idea that nobody knows anything - especially about the stock market and actually much else - has stayed with me ever since.

I think you will find Michael Lewis's (Liar's Poker) essay called "The End" brilliant. Check out Conde-Nast's portfolio.com, December 08. Enjoy.

A NEW AGENDA

A NEW AGENDA

How does President-elect Barack Obama view the role of private philanthropy in the civic life of the nation, especially now?

There is not much of a record and little is known of his giving proclivities. We know the plight of the economy is his first order of business as it must be and with government funds and energies diverted to bailouts and massive public spending there is and will be far less for all kinds of private charities. The prognosis for private giving in the near term - at least a year and maybe longer - is uniformly gloomy. We can expect President Obama to urge on private giving and we can expect him to encouurage all of us to donate to the charities of our choice. But is that enough?

Like FDR Obama understands the presidency is a bully pulpit and I hope he might use it to convene a “White House Summit Conference on Philanthropy” next year or the following at the latest. (The last one was held in 1975). I would bring the best and the brightest together. Here are just a few examples to get the dialog moving …

• The gross product of American philanthropy has been stuck at around 2% of GDP for as long as giving trends have been measured. Why hasn’t the needle moved in a country of such wealth? Why aren’t more people giving more money to US and international charity? What can the government do through tax policy or otherwise to encourage greater public involvement?

• Private foundations are sitting on almost a trillion dollars worth of assets. They claim the income that collective corpus generates makes possible their annual grant making. First, where is it written that private foundations should exist in perpetuity (aside from their charters)? Second, after a generation or two why shouldn’t they be required to transfer their assets to a community foundation or to spend them down and liquidate? Third, why isn’t there a sliding payout scale with the wealthiest having to spend far more than 5% a year on grant making (when most of them earn in the double digits on their portfolios) and maybe the smaller, newer ones be given say ten years of lower payouts maybe 3.5-4% of assets?

• If the SEC’s oversight of Wall Street (which is let’s face it famously de minimus) was as lax as the IRS’ oversight of charities, anyone of the presidential candidates would likely be pounding a shoe (or a pump) on the table. Is there a reasonable regulatory standard possible at the federal level? And could it to some degree supersede the crazy quilt of state regulation that ranges from the ridiculous to the outmoded?

• So-called “faith based” philanthropy – an extension of President Bush’s view of the cosmos – has been directed mostly at human service agencies. Yet this grouping has shown the greatest decline in private support of any category of charity (according to Giving USA Foundation data). And they have also suffered the deepest cuts in federal aid. Why?

The Giving Institute of which the Oram firm is a member is going to associate with others to develop the convening power necessary to bring this off. Our new chairman Nancy Raybin has asked me to take this on;I will do all I can to move the idea along. There is already considerable interest among charity leaders in helping the President create an agenda for phianthropy as the November 13th Special Report in the Chronicle of Philanthropy makes clear.

If you have ideas for the “Summit” let us know!

WAIT ! IT GETS WORSE.

This morning's Wall Street Journal page one story on the decline in charitable gifts caught everyone's attention and generally depressed the holiday mood. Charitable gifts - especially from sinking corporations - are way down. But this is not exactly news. Most charities in New York, where the stock market exerts an inordinate and irrational influence over behavior, have felt the pinch some more than others as is always the case. Human service organizations have suffered more than any other category. Most of us have been living this downturn-turned-recession-now-depression for a year or more. But seeing the cold type is jarring, no question.

By the way it is interesting to note that the New York Times has stopped reporting the dollars raised at the charity events ("gala" may not be the word these days) they cover in the one-page photo spread in each Sunday Styles section.

So let's review:

• Bonuses are being paid on Wall Street this year. Yes. They may be less and they may not show at the very top. But there is a large pool of upper management people who will see year-end rewards. Are they your donors? Why not?
  
• Those of us who have been through this before are well aware that gifts go down in hard times. But giving always bounces back and usually faster than the rest of the economy. This would not be the time to give up no matter how discouraged you may be feeling.
• Money is being made. Those who are making it may not be your usual donors. The job is to find out who they are and then to ask them. Bankruptcy lawyers for example or the shakeout experts who are feeding on the corporate meltdowns.
  
• As a whole charities are not very well managed. There is unnecessary duplication. Of course this doesn't apply to you but to the other guy. Nevertheless there will be a shakeout. But here again nonprofits tend to be a lot more resilient than other economic sectors. Many of them run lean because they must. Lack of resources - usually a bad thing - may not be so terrible in a situation like this.
• If our government can come up with a trillion dollars of our (your) money in just six weeks we are obviously a very rich nation. Lots of people are hurting and they deserve our help through the organizations we serve. But far more of us are feeling it just around the edges; their losses are on paper and unrealized. I myself am down 30-40% for the year - on paper. Just as you are. But I have not stopped giving. Either have you. And either will your donors - if you ask them!

Happy Holidays.

National Philanthropy Day

"Economists say the downturn may
develop into the worst recession since 1981-82."

-- New York Times November 13th,page one.


Today is National Philanthropy Day. A "celebration" marked the occasion here in New York which generates an estimated 25-30% of the country's annual giving "handle." How 2008 will turn out philanthropically won't be known for a few months. But many believe a sharp drop is possible if not likely.

We are hearing that the rich "feel" poor. The Sunday Times styles page that photographs the wealthy and the wannabes at charity events around town have for the most part stopped reporting the amounts of money raised at them.

Unlike many who work as consultants or development officers today I was around for that recession plus two or three before it, and of course for the bubble that burst in 1990. I have little recollection of the 1981-82 recession. So I went back and took a look. Adjusting for inflation in 1982 Giving USA reported about $127 billion contributed to US charities; there was good growth through 1987 ($150 billion). Then came the dot.com collapse and in 1992 - following two flat years at around $150 billion- there was a leap to $165 billion. And there has been strong growth since - up to $306 billion plus in 2007.

What I like about history is the arc of perspective it provides. Long term philanthropic trends - from 1967 forward have always been growth oriented with a few flat years now and then, and modest growth other years. But steady growth. It also seems to me that the swings are less for nonprofits than for the economy overall. That may be because charities over-all are more risk averse than the economy in general. Perhaps because of that and because they are mission and service driven most charities attract people who are less motivated by greed and self interest.

Whatever the environment and whatever 2008 brings by way of total giving in the US charities have no choice but to press on. Shoulder top the wheel, nose to the grindstone, the usual. The bad news is this is rough. The good news is that the story history tells is a hopeful one.

So happy philanthropy day! Hoist one for me.

TOUGH TIMES

Tough times?

Sure. Getting hit the hardest – even before this current mess - are human service agencies. As treasurer and president-designate of Women’s Prison Association, I really see how perilous the situation is in New York – regardless of how the election turns out.

I’d like to invite you and one guest* to be with us December 4th at the Yale Club in New York – to meet our exciting panel and to participate fully in our program:

Are Charitable Dollars Really Getting Where they’re Needed Most?

Details are in the attached invitation. Sorry for the technology but if you’d like to come, please paste the link below into your browser and then RSVP directly to the e-mail address shown there (and please copy me if you would). If you have any questions please feel free to call me at 212 889 2244.

I hope to see you there. All good wishes and thanks.

*We will wait list any additional people you might wish to bring. Please let us have their name(s) as well.

file:///C:/Documents%20and%20Settings/Henry%20Goldstein/My%20Documents/MyFiles1/Giving%20USA%20Fdn/Gurin%20Forum/Invitation%20to%20Gurin%20Forum.doc

Dollars to Dollops, Din to Discipline

Through the din of recent events comes a bright note worth cheering about and telling donors about. Who among us isn’t a little bit guilty of looking for our benefits however they may come? On page 303 of the 451-page bailout bill signed last Friday by President Bush was a two-year extension of the IRA Rollover provision. See “(3) TREATMENT OF CONTRIBUTIONS TO ELIGIBLE RETIREMENT PLANS.” The full text of the Senate bill can be found here.

And speaking of the din, by all measures we are now indeed striding forward into a recession. Take heart. In such times, best practices become our future foundation for survival and success.

We encourage everyone to stick to a discipline of connecting well with donors and prospects to see you through. In forty years of giving data collected by Giving USA through multiple recessions and economic slowdowns, giving has always trended up. Hard to believe? According to the latest issue of Spotlight, the Giving USA newsletter, during the years from 1967 to 2007 -- which saw some big challenges -- “Total giving has increased in current dollars in every year but one....” (A tax law change in 1986 prompted people to “give early,” and skewed the pattern for 1987.) “In current dollars, before adjusting for inflation, giving has increased an average of 8.4 percent in years without a recession. In years with a recession, giving has increased 6.2 percent (also in current dollars). The average rate of change [emphasis is mine] in giving during a recession is a drop of 1 percent...without a recession, [the average rate of change is an increase of] 4.3 percent.”

The moral: Focus on stewardship -- recognition, information about how the donor’s gift made a difference, site visits. Focus on authentic relationship development. Focus on strategic positioning. No matter what is going on in the markets, people still want to find ways to make a difference, to help their communities, to keep beauty, ideas and wonder in the world, to save our beleaguered planet so that we may continue to live here.

Look at this: Today’s San Francisco Chronicle, announced an upgrade of a gift from Lorry I. Lokey, the founder of Business Wire, to $75 million from $33 million to help build a stem-cell institute at Stanford. Mr. Lokey got interested in response to a clear need -- just as the tech bubble was bursting in 2001.
-- Marilyn Bancel

Update ...

As reported in today's New York Times it turns out Starr Foundation had divested much of its AIG stock but in May still had 15.5 million shares of its corpus parked there. So instead of losing 90% of its 3.3 billion value (in 2006) it lost only two-thirds! All commitments will be honored according to foundation president Florence Davis. A tough break for many charities around the country but especially in New York which was particularly favored in Starr's grantmaking.

The piece goes on to note that many other foundations funded with Wall Street excess wealth are now having to downsize but because of its size Starr really sticks out.

The market continues to gyrate and charities are understandably nervous. This morning the letter below came across my desk:

"Dear Colleagues:

When I was growing up on Long Island, we would go on school trips to the United Nations. I can still recall the awe with which I entered the building as a young child. Looking down from the balcony of the General Assembly Hall, I considered myself in the "inner sanctum," where major international events — most vividly, the vote on the creation of Israel — took place. So you can imagine in a week that began with a rally to protest the appearance of Iran’s president at the General Assembly, I was deeply moved to sit on the assembly floor as President Shimon Peres spoke. It felt like he was returning something good to this inner sanctum.

President Peres approached the podium shortly after Hamid Karzai, president of the Islamic Republic of Afghanistan. President Karzai spoke of the huge challenges facing the international community and explicitly recognized the need for Israel to live in peace and security. President Peres followed, communicating the readiness of the people and government of Israel to reach peace with its neighbors. He concluded with wishes for the Jewish New Year, placing a yarmulke on his head, and invoking a prayer in Hebrew from our tradition. As the hall broke into loud applause, several people shared the same sentiment: What a privilege to witness this moment — the president of Israel, a Nobel Laureate, speaking in Hebrew on the 60th anniversary of Israel before the very body that created the Jewish state.

It was a similar feeling of privilege that infused Alan "Ace" and Kathryn Greenberg’s home on Thursday evening when our major donors came together to launch our 2009 Annual Campaign, as they have for the last 22 years. Guest-speaker, Governor David Paterson, surveyed the challenges facing New Yorkers and was eloquent in extolling the leadership role of UJA-Federation.

We are framing this year’s campaign as one "for those who can," recognizing that while virtually everyone has been impacted by the tumultuous economic events that continue to unfold — and some will not be able to make gifts or will have to reduce them — most of our major donors still can. Anticipating the difficult campaign ahead, campaign chairs Howard Milstein and Linda Mirels proposed, and the Executive Committee authorized, that increases leading up to the Greenberg event will be placed in a matching challenge fund to encourage new and increased giving.

While every dollar has not yet been counted, I am pleased to report that the philanthropic leadership of the New York Jewish community pledged $43 million to UJA-Federation’s 2009 Annual Campaign, surpassing last year’s record-setting level by $2 million! The challenge fund raised close to $3 million. In one evening, 110 people came together and proclaimed, "Despite this economic environment, we are among the most privileged men and women on the planet, and we are certainly the most privileged generation of Jews." The recognition of blessings filled the room, together with appreciation of the indispensable role of UJA-Federation and its network of agencies, particularly during these times.

Colleagues, this will be a challenging year. My hope is that each of us, and those close to us, will enjoy a year of health and will be able to stay connected to the blessings of life, which are, at the end of the day, the most important assets we have.

Shanah Tovah to you and your families. May this be a year of peace for Israel, our people, and for all men and women throughout the world.

Shabbat Shalom

John"

I have no sermon to preach - except that your passion for a cause will show you the way!

Star(r)light ...

In my view The Starr Foundation has been one of the best in New York. Its management is highly competent, it is open to new ideas and people coming in; it is one of the few major foundations who will make operating grants rather than limiting itself to capital (makes those grants as well) or specific projects. It is no-nonsense. A program officer there once told me "we are here to give away money and I am always on the lookout for good things to give money to." That you don't hear much. What you get is "you don't fit our priorities," i.e. foundation-speak.

Starr is the giving arm of AIG.

Oh oh.

The foundation got its start-up money from the estate of Cornelius V. Starr, an insurance magnate who developed the Asia market before WW II - and thereafter was funded with AIG stock. NPR and Bloomberg news reported on Monday that AIG stock was once 90% of its portfolio. Starr's president Florence Davis noted that Starr had sold two-thirds of its AIG holdings between 2006-2008. But exactly what the foundation's corpus is right now is unclear because the sale of price of AIG stock fluctuated and we don't know what investments replaced it, or what they may have earned and she didn't say. But she did promise that present commitments would be honored.

Starr's tax return for 2006 (Form 990) is the latest posted on Guidestar and showed the fair market value of assets at over $3.3 billion. Assuming a yearly 5% payout, the norm, yields grants over $150 million. Close enough. In 2005 they granted out $162 million.

If Starr was 90%invested in AIG stock in 2006 - the year of their last tax filing - that would have reduced the corpus to $330 million and cut grants to about $15 million - about the size of many of the family foundations I work with. How much did they actually lose? AIG stock traded at $3.93 at noon EDT today. Ouch.

In the past Maurice (Hank) Greenberg the former CEO of AIG essentially controlled the foundation. For example he had to sign off personally on an eight-figure gift to an Oram client a few years ago and also gave the nod each time on several seven-figure grants to another one. He may have stepped away but we really don't know. He is certainly otherwise occupied.

Everything here you could have pieced together elsewhere. With one difference: Starr has been a real leader in philanthropy, and a great example for how - on the good side - foundations should behave.

It's easy to stay angry at AIG. But join me in hoisting one for Starr and for hoping they'll come back - bigger and stronger than ever - with the most diversified portfolio we've ever seen!

Tear Down That Wall (Street)!

As of 2:40pm Eastern the Dow Jones is tanking yet again, down 204 points - on the heels of the worst week on Wall Street since the Great Depression. It's a great time to announce a multibillion dollar campaign! And last week, the day the Dow dropped over 400 points, or the day after when it put 400 points back - whatever - U. C. Berkeley did just that - kicking off a $5 billion campaign - with almost $2 billion already committed.

Do they know something we don't? Actually not. Even affluent people can lose out in a tough economy because they spend or invest right up to, and over, their affluence. But those with accreted wealth spread their investments around. They are the people who are Berkeley's best prospects as they would be and are in any serious philanthropic venture.

Is the collapse of Wall Street as we knew it, or discerning Governor Palin's view of the Laffer curve relevant to anything? British painter Damien Hirst sold $200 million worth of art at auction last week, no problem. The Sunday New York Times events page pictured folks all gussied up- preening at openings here, galas there, business as usual, with serious money raised.

I've had two meetings today with charities. We talked about meeting budgets by raising money - and not about the economy which, like the weather, we can do nothing about.

Goldman, Sachs has survived. Treasury secretary Henry Paulson was their CEO. Separate, unrelated facts. Profit remains privatized. Congress is about to socialize Wall Street's losses but not health care. President Bush - well what about him?

Up your meds and take a look at the new Giving USA Foundation's "Spotlight" publication by copying and pasting this into your browser. file:///C:/Documents%20and%20Settings/Henry%20Goldstein/My%20Documents/MyFiles1/Giving%20Institute/SPOTLIGHT/Spotlight%20%233%202008_Final.pdf

(United) Way To Go!

Is United Way (finally) getting it right?

The old formula was distribution driven: collect money on behalf of a number of UW accredited human service agencies and then distribute it across the board according to a formula, saving employers and employees(who were enrolled through payroll deductions at work) from selecting and vetting the beneficiaries directly.

Over time a number of things happened:

- Big manufacturing had the largest employee groups. Most of those jobs went away.

- Charities like Planned Parenthood, groups serving the abject poor and the hardest to reach; grass roots organizations and others whose missions were broader than or combined more than human services alone (education, arts in the community, immigration, HIV-AIDS etc.) were generally left out of United Way and as the government's combined federal campaign grew in importance (state and federal employees being another large work force component - jobs that couldn't be outsourced for the most part)successfully challenged the UW throttle hold on work place solicitation.

- Like the Red Cross the UW brand was compromised by multiple scandals at national and local levels. It didn't help that the Red Cross - a major UW beneficiary - was decomposing before our very eyes.

- UW developed a major gifts competency over time through establishing the popular De Tocqueville societies at United Way around the country for donors at $10,000 and up. Traditionally UW eschewed major gifts from individuals asserting that such solicitations should better be left to their member agencies who were in fact least capable of generating them. The unintended consequence of this really good idea has been that many major donors wanted to designate their gifts, a proposition long resisted by UW because it wanted to have the distribution power.

No doubt other societal influences played in. But the welcome result is that UW around the country has recognized that it had to do its business a new way if charitable dollars were going to get where they are needed most. Three weeks ago a big story in the Chronicle of Philanthropy headlined the new approach: prioritizing giving to "focus on helping young people, increasing financial stability for poor families and preventing domestic abuse."

The story goes on to underscore that "such scenarios are playing out across the country as United Ways make changes that are altering the fund raising landscape." New York City and the San Francisco Bay Area are two places where big changes are on the drawing boards.

These new initiatives are not without serious challenges. Cherry-picking among programs within nonprofit agencies, United Ways deciding on their own what the priorities should be, and most of all faced with raising new money over the old - because the basic UW safety net must still be kept in good repair in a struggling economy - make for a tough script.

But I believe this is absolutely the right thing for United Way to do because for a long time now I have been wondering if charitable dollars are really getting where they're needed most. I have prevailed on Giving USA Foundation to sponsor a discussion on this and in the next blog I'll tell you about the Gurin Forum we're doing in New York in December.

Their (Red) Cross To Bear

"The Red Cross is struggling with how to pay
for aid to storm victims."

-- Wall Street Journal, 5 September

I'm sure they are.

Having squandered the brand, having lost the confidence of many philanthropically inclined folks, having demonstrated incompetence at the highest levels (board and top management) having run with neither transparency nor accountability - why should they expect the public to pony up?

The Red Cross logo is probably the best known icon in the world; for years all they had to do was flash the cross if they needed money -or even if they didn't and through United Way participation* or direct chapter based solicitation the American public responded - with money and blood, literally.

Many US and international charities see their contribution revenues spike during crises like floods, earthquakes, war, forest fires, etc. only to see their fund raising bottom out in between. So the Red Cross's strategy was to raise as much money as possible at the peak, salt away as much as possible in reserve for later catastrophes, and pay out for the current appeal as moderately as possible. That actually is not a bad plan. The problem is that they failed - consistently - to tell their donors this. They now tell the truth. At least in the small print. Some of the time.

The red Cross's lack of candor brought more scrutiny and surfaced serious management problems at both the national and chapter levels. At the national CEOs turned over rapidly. A made-for-the-tabloids sex scandal knocked off the former head of the IRS who had just been hired; and his predecessor, an accomplished naval executive, couldn't hack it with the board. Questions kept coming up about the security of the blood supply, the Red Cross's ability to turn fast in a crisis, and ongoing misunderstanding about where the money went.

The Red Cross is now in make-over mode and the jury's out. But in my view the best they will do is paper over their problems. The Red Cross began as one of just a few federally chartered organizations, a good idea at the time. But federalism brought with it the right of the president to appoint a number of board members who, like other presidential appointments of either party, did not necessarily rise to a level of much quality. Like many ambassadorships or other federal sinecures an appointment was often a thank you for services rendered elsewhere.

The poor attendance of these so-called public members at board meetings also helped to concentrate power in management - for better or worse - and also magnifies the accountability problem.

The Red Cross business model is antiquated. I can see two possible solutions to their dilemma. First the federal government could take over completely - funding all existing Red Cross functions. Given FEMA this option may fail to excite some readers. But as a federal agency a board of trustees is not required and all the present incumbents can become an "advisory committee."

The second - and highly preferred - option is for the Red Cross to privatize, a very appealing idea for the last eight years, and who knows what portends? I would recommend to either President Obama, or President McCain (it hurts to type that, yes!) this course. It would enable the Red Cross to begin anew by privatizing the board: all presidential appointees kaput; start over. Legislation would be required to change the existing chartering provisions for board appointments.

As I am fond of repeating "fish rots from the head down." In my experience with thousands of nonprofits, 95% of the time, until the board is fixed and fully understands and enforces its responsibility for oversight, management will still not be accountable, actions will still lack transparency, fund raising will still suffer - and most of all public confidence will continue to wane.

(For an earlier Red Cross blog see the January 23rd post).

*Next blog: Is United Way Finally Getting It Right?

Staff Up

Because most charities are service organizations much of their expense is personnel and one of their critical challenges is attracting, employing and retaining staff - at all levels but especially at the top. And because they are more than anything else mission driven, nonprofits tend to have the most bench strength in program. Other key institutional functions like board development, organizational management, fiscal management,communications and development, i.e., fund raising are in my experience often found wanting.

Because nonprofit organizations have so wildly proliferated since World War II - there are now an estimated 1.4 million non-religious charities in the US alone - it is more difficult than ever to find people. On the scale of difficulty recruiting top management- CEOs,CFOs, marketing and fund raising executives remains a dicey business with high failure rates, low retention and a lot of burned out people (stress is combustible).

As the private nonprofit economy has grown (to more than 10% of the work force) a concomitant parallel development has been the rise of professional associations covering most areas of nonprofit activity. Much of the work of these groups is dedicated to offering in-service education, "credentialing," continuing education credit and a visible labor market. Also graduate degree programs in nonprofit management are now in place at about 50 US colleges and universities and a few have undergraduate majors as well.

Over the years I have had the privilege of working for scores of effective and efficient organizations. On the other hand I have seen some where people are pushed out - or push themselves out of - organizations that are poorly governed, badly managed or worse. Most interesting to me - counterintuitive though it may seem - the efficacy of nonprofit organizations has less to do with money than I used to believe. I recently came across a survey of for-profit businesses that found the number one motivator for most people was not money but working conditions.

In the business world there is usually a management hierarchy that enables a company to vet executives over time trying to push the best to the top And we all understand that doesn't always work). In the nonprofit world there is a search committee; inevitably the size of the search committee is inversely proportional to the caliber of the person ultimately employed. Just as in the nonprofit world there are founder dominated or nepotistic enterprises and in those cultures trouble sidles up. In the nonprofit world the founder hangs on and goes out toes up. In the business world major share owners force the founder out and install professional management. In the nonprofit world it takes a lot for a board to expel a CEO let alone one of their own.

In my view nonprofits have paid less attention to better and best management practices than they might have. That includes management holding the board accountable for oversight,the board holding management responsible for implementing policy and programs, and both parties working together on issues of long term strategic planning, governance, stewardship, asset and revenue growth - as well as transparency, marketing and financial management - including fund raising. Happily these problems make for billable time. Sadly it shouldn't be this way.

Board Beyond Belief

A board is a flat slab of wood or other material used for some specific purpose. Second it is an organized body set up for a specific purpose: to advise, oversee, govern and exact accountability from a business, a charity, or other type of organization. In some of the boards I've served I can't really tell that there's much difference from the first definition to the second.

But I also think some people who run nonprofits, my area of specialty, have about the board they want or deserve - despite their protestations. In their cups more than one of this type has confided to me that they view their board as an expensive nuisance that contributes less than it should in time, money or smarts and demands more than it should through micro-governance, bird-brained schemes and high maintenance. These executives usually have a poor to awful relationship with their chairperson and other trustees.

The very best boards I've seen are well led at the top and respectful of management. They understand governance, pay attention, show up and are clear in their expectations of management; if not generous to a fault the board members are strong contributors.

The not so good boards are most often founder dominated."Fish rots from the head down," says the ancient proverb. Board members and management go along; no one wants to cross the founder. New ideas and new ways disappear into committees that never meet. Sometimes it is hard to feel the stiletto or even know where it went in.

The best nonprofit CEOs I've worked for have figured out a modus for dealing respectfully and candidly with the board chairperson; they make sure the board's membership rotates and that there is reasonable enforcement of term limits. They are transparent in their dealings with the board, they are accountable, they consult and both offer and seek advice. They are tough-minded and most of all they have humor.

Then there is a vast middle: In the board room tarries people who should have left - toes up or otherwise; often the board is observably passive/aggressive. Meetings are stunningly soporific because of the baffle-them-with-bullshit style of deliberate information overload, incomprehensible financial reports, suffocating detail about the golf event and no time left to discuss "program."

This is the question I ask myself: if this organization's board did not exist what difference would it make? If I'm not sure I have a board beyond belief!

Mind The Gap ...

It's sometimes said that trustees of nonprofits check their brains at the boardroom door. Otherwise sophisticated men and women - people who are successful in business, or who can manage money or who bring critical skills to an organization don't apply the same rigor to nonprofit governance as they do to their own business affairs.

There may be occasional good reason to place that charge on board members. I have seen dereliction from both the perspective of the consultant advising boards as well as from the vantage point of a person with long experience serving on nonprofit boards. One reason board members may act casually is because they trust management to do the real work and they rely heavily on the information management gives them - or doesn't.

This brings me to ACORN, the national association of community organizers. On its web site - but only after national press attention apparently forced it - Maud Hurd ACORN's president issued this statement:

“ACORN now begins a new chapter as its founder and chief organizer, Wade Rathke, is moving on from the organization he founded in 1970. The ACORN Board recently learned that Wade’s brother, Dale, misappropriated organization funds eight years ago, and as a result, the Board decided it was in the best interests of ACORN for Wade Rathke to step down as Chief Organizer. Eight years ago an enforceable restitution plan was obtained. Regular payments have been made over the intervening years, and arrangements are now in place to return the rest of the misappropriated funds."

The operative phrase here is of course "recently heard." How could it be that the board members just learned of an eight-year old crime? One answer is management did not tell them. A second answer is that in relying on management's good faith nobody asked any questions. But even when questions are asked there is no guarantee that the truth will out.

Having recently gone through a financial crisis as treasurer of a nonprofit I know first hand how hard it can be for a trustee to really know what's going on. Each month the finance committee of this organization received detailed financial information and each month I would ask management the same question: "any surprises?" And each month I was assured there were none. Until in the dog days of last summer a million dollar short fall turned up. Luckily - after a thorough and costly forensic investigation - incompetent accounting and not crime turned out to be the root cause.

If I had known what questions to ask, I'd have asked them. I suspect that would have been true of ACORN's board as well. Boards don't always know what questions to ask and managements are sometimes not forthcoming. Mind the gap .

STEWART R. MOTT

On Thursday June 12th Stewart R. Mott died.

I first met him in the late 1960s. The Oram Group served several clients in or on the periphery of peace and disarmament, family planning and civil rights - the prime motivators of Stewart's philanthropy. In those heady days the firm also did political work. I got to know Stewart over time and especially during Eugene McCarthy's presidential campaign when we spent time together. In 1968 or 1969 Harold L. Oram tried - for the first time - to sell the business - to Stewart and another peace activist Robert Wallace Gilmore. That bid failed for various reasons, the asking price foremost.

Our relationship continued through the clients we served - the McGovern campaign, other political campaigns that caught Stewart's eye and wallet, and of course the ongoing interests of Spectemer Agendo - Stewart's foundation now known as the Stewart R. Mott Charitable Trust.

In 1976 Harold Oram was a sick man. For the second time (that I knew about) he decided to put the company on the block. I owned 18% of Oram's stock and by refusing to surrender it was able to control to whom the company might be flogged. Harold was not pleased to say the least but it enabled me to block a buyer of whom I did not approve and for whom I would not work. Finally Harold said out of frustration "all right go to Mott and Gilmore" which I had wanted to do right along but only if a reasonable price could be struck with him.

I went to Stewart and Robert and asked them to back me in purchasing the firm. Both of them knew the firm well, they knew me, and they were interested because we were one of the very few firms in this niche industry serving the progressive causes and politicians to which they were committed. Without a lot of fuss they agreed and for the next year we negotiated with Harold. His need to sell was at war with his love for the outstanding firm he had created and like virtually all founders he doubted in his heart that anyone else could carry on.

Stewart was one of the smartest people I have ever met; he was a polymath and especially his ability to crunch lots of numbers in his head at bullet speed was scary. Having had his own difficulties with a parent Stewart dutifully analyzed Harold and figured out that what he really wanted wasn't money but the security he thought the money would bring; Harold wanted an income for life that did not rest solely on the company's ability to generate it. It was Stewart who came up with the creative financing that finally brought Harold around and my lawyer figured out the rest of it. In 1978 we closed on the sale and Stewart and Robert joined the board (along with their respective financial advisors) and there they remained until a company reorganization in 1992.

Stewart rode around New York in all weather on a motorized scooter and one raw rainy day he showed up for an initial board meeting. The receptionist buzzed me in the conference room to announce that "the messenger is here." There indeed was the "messenger" - Stewart in oilskins, messenger bag slung over his shoulder, absolutely dripping,late as usual but ready to work.

We had become friends before we became business colleagues. Friendship mattered to him. For many years my wife and I tossed a New Year's day party that Stewart faithfully attended always in his kilts, with several ounces of his top notch pot in the spoorn.

As I wrote in 2001 for a speech about my career at Oram:

"Stewart Mott, whose fortune came from General Motors, was brilliant, erratic, always true to his principles, and the family outcast. He was a libertarian marijuana grower -- in his Park Avenue penthouse -- devotee of Renaissance music, unpretentious but definitely odd. For example, he generally received any and all in his skivvies. When he wasn’t doing pot, he smoked an exotic brand of Egyptian tobacco that smelled like burning rubber and swamp gas, combined. Despite considerable wealth in the coinage of the time, and of course everybody was after it, Stewart was for a long time the Most Eligible Man in New York Never to Get A Second Date With the Same Woman. His courting style was truly pathetic. But no matter. The ladies came in hope, and left in tears. Feminine raiment accessorized his bachelor lodgings."

Harold Oram is gone.
Robert Gilmore is gone.
Stewart Mott is gone.

Holiday Reading

New York Times reporter Stephanie Strom published a page one piece on May 26th once again raising the issue of charities' tax-exempt status, leading with "Authorities from the local tax assessor to members of Congress are increasingly challenging the tax-exempt status of nonprofit institutions — ranging from small group homes to wealthy universities — questioning whether they deserve special treatment." Her story cites a Minnesota Supreme Court decision requiring a child care center to pay property taxes because they charge one price for all regardless of any subsidies they may receive from government.

The article underscores that with the economy in recession, state and local governments are trying to replace shrinking tax revenues any way they can. Making tax-exempt groups prove they are actually charities - i.e, they give away their services - may be as much as the Times could come up with on a lazy, sunny, long Memorial Day weekend. Not to be disrespectful to Ms. Strom but this dog barks in every recession. As she mentions private hospitals as well have cut way down on charity care yet remain tax exempt. What she doesn't write is that the grumbling has been going on for decades with no legislative result. (See Oram Matters April 4th blog below).

Her piece also gets to the Congress's interest in going after wealthy universities, who pound for pound are much wealthier than hospitals. They have alumni. Hospitals have those who left vertically or their sometimes grateful families when they go out toes up. But Congress going after wealth through legislation is markedly different from local tax authorities squeezing local nonprofits. Legislation to force reform is going nowhere in an election year and if history is a guide not any time else either.

Immense wealth is ever more concentrated in fewer and fewer hands. For example the worth of the 20 richest Americans, reported by Forbes was $436 billion last year. Efforts to redistribute that wealth is really not an agenda item for any breathing politician or government official. Nor will it ever be. No matter how they may game the system and there's some pretty inventive stuff out there - including complex gifts to charity - the taxes these folks paid in are enormous, assuming an effective 15% tax rate that's $65.4 billion.

The aggregate worth of the universities is much less. MSNBC reported that the 20 largest endowments were sitting on 134.4 billion dollars. If these schools' spend rate was 5% - which it isn't - $6.7 billion would be going into operations and the cost of sending your kid to one of these schools could go way down. In fact a few have made big cuts in their tuition to respond to the pressure but most are sailing merrily on.

Loathing the tax collector is an American pastime and an attack on wealth concentration is not in the cards.

Cooper Union Tops Out!

An Oram client,The Cooper Union for the Advancement of Science and Art (www.cooper.edu) today celebrated the topping out of its new East Village academic building. Designed by West Coast architect Thom Mann this "green" and very innovative addition to New York's civic spaces has been made possible by generous private philanthropy, borrowing and modest government encouragement.

One of the most striking attributes of the building is - despite its cutting edge look - how easily it complements the original (and still functioning) Foundation building completed in the late 19th century. For a tour of the new building visit the Cooper Union web site.

Congratulations Class of 2008!

For 20 plus years I have been adjunct professor of philanthropic management at the Milano School for Management and Urban Policy at The New School University in New York. Next week my current group of 15 graduate students - having to my satisfaction completed case studies on existing or start up nonprofits - will graduate. We all began working together at the end of January this year and this required seminar is the only thing that stood between them and graduation.

Of course each year's class is unique and so was this one: 13 women, 2 men, one Thai one Canadian, 2 ex-Peace Corps women, one recovering lawyer, one Latino, one African American woman, one Floridian by way of Colombia and one Vietnamese-American and one Korean-American. The age range is from right out of college to early 40s. These people worked hard and with no little anxiety. They have been at this for three years in most cases and by now they just want to be done with it. Some are full time students, the others hold down jobs.

The subjects they explored included the Dominican Diaspora, the creation of an environmental social venture for profit/nonprofit, strategic and financial planning for under-resourced organizations, arts education in the schools, performance metrics and organizational structure and management. We learned from each other of course. But I learned more from them than they did from me.

As we know commencement exercises and blather go together. So I'll just limit myself to congratulations to each of you. Well done!

Silicon Valley Psychosis

You don't have be in Silicon Valley to contract Silicon Valley Psychosis (SVP).

A self-anointed group of mostly young technocrats calling themselves "social entrepreneurs" want to use the tools of venture capital to restructure private charity. They use the term "metrics" geek code for upsetting bloated nonprofits, sluggish bureaucracies, impenetrable opacity, lack of accountability and too much distance between social need and demonstrable outcome. They put up money to start nonprofits of their own cut to their own notions of social responsibility and charitable purpose.

The symptoms of SVP are ego driven myopia, arrogance, duplication of charitable services on a small scale, insufferable self absorption and the exact same problem of measuring results. Venture capital is but another form of "sea gull" behavior: fly in, fly out, leave a mess behind and not incidentally control the enterprise. SVP is driven by the notion that bringing a start up to market, spinning it off for a bunch of money, and going on to the next (ad)venture is a workable imitable and desirable model in the nonprofit world.

Responding publicly to a recent speech by Emmett Carson head of the Silicon Valley Foundation and a scarred veteran of the traditional foundation world - I observed to him and the audience that virtually none of these (mostly) guys is giving evidence of thinking strategically about the vast problems of the world's richest nation tolerating a poverty rate of 15%, the decampment of government responsibility for basic human services and a nonprofit culture that is indeed out of touch. Why can't they bring their creativity, innovation and get-it-done attitude to mainstream organizations? They could bring a profound difference and a new perspective but only if they stop to listen, respect the achievements of the charitable sector and enter the dialog.

The traditional private nonprofit culture they resist - despite its considerable inefficiencies - has made an exponentially greater difference in the lives of people everywhere than this small group of entrepreneurs thinking they can save the system only by throwing it over. The idea that private charities are too far gone to be made efficient, effective, accountable and transparent is plain out ridiculous. It's time to drop the pose. Social entrepreneurship is not going to replace the existing structure any time soon if ever.

With the economy circling the drain investment capital - venture or otherwise - is becoming scarce. In this environment is the social entrepreneur-venture capitalist really a new exemplar for charity or just the second lemming over the cliff?

"Nonprofit Hospitals Strike It Rich" - Wall Street Journal April 4th

This morning's top-of-the-fold story tells how a relative handful of big nonprofit hospitals net huge profits, pay out multi-million dollars bonuses to CEOs and spend virtually nothing on true charity care - the reason for their tax exemption in the first place.

Is there a connection between this story and the wealthiest universities hitting their endowment returns harder to give students a break on soaring tuition costs? Is there a connection between egregious nonprofit behavior and a recent Chronicle of Philanthropy piece reporting that only 68% of Americans think charities are making good use of their money? Is the public waking up? Maybe so. Are the serfs hoisting their pitchforks and storming the castles? Are the big plaques that hold up the buildings about to be peeled off the walls? Not quite yet.

Twenty-five or 30 years ago I made a speech on this very topic to an audience of hospital fund raisers at a conference in San Diego. My take was on the charity exemption because back then even the largest among them did not make the money some do now. But then as now many offered as little free care as they could. I asked these nice folks why anyone should donate money to their institutions.

I also poked pins in their eyes by suggesting that in most cases their earnest fund raising efforts produced only incremental returns (one or two per-cent of total revenues) (still true for most) and if you backed out fund raising costs most of these places could cut their budgets by half a point and eliminate their jobs. For some reason much of my audience was not pleased. Feathers flew. But a few actually agreed with me.

My point then was that the charitable exemption was and is widely abused by hospitals of all sizes, everyone in the industry knew it and I warned then that government would ultimately be prodded into doing something. As we know the feds move slowly and it took nearly three decades (though a few legislators made half hearted efforts over time). For the last few years Senator Charles Grassley (R) has been going after charity's abuse of the tax break. There is not yet legislation to show for it and in the Cave of the Winds all bets for anything meaningful are always off. The charities' lobbying has been intense; nothing will happen before the elections.

But I can just imagine the meetings, the gnashing of teeth, the wringing of hands going on this morning in the conference rooms of hospitals named in the Journal story and many others unnamed as well. I could write (and have) the-sky-is-not-falling snail mail messages and e-blasts that will be going out to the muk-muk donors - along with the contribution reply envelope or "click-here-to-donate-now."

Philanthropy is venture capital. R&D can bring real benefit and better health care to all of us. Government grants are flat or declining. But like the drug companies' justifying high prices citing R&D cost - when it's really marketing - the facts are in the small print. Not that a hospital financial statement is either comprehensible or comparable to that of another hospital.

Charities need to have funds in reserve - whether they're called endowment, or as in business retained earnings (cash). But it is the responsibility of a governing board to strike a balance between hoarding funds and spending to fulfill charitable purpose. Top tier universities realized the big donors want to see mission fulfilled. Others pointed out that earning 15-20 % and spending only 3-4% was piggy.

The big hospitals have been and are still in denial. But once the crisis management firms are called in you can expect to see the largest of the largest wiping away the large tears as they suddenly see the poor at the door sill.

It Makes Me See Red

Good day.

A month ago Chronicle of Philanthropy ran a story about rock star Bono's "Product (Red)" which as the report says "takes a cut of sales from popular consumer goods and funnels the money to to the Global Fund to Fight AIDS, malaria and tuberculosis in Africa." Around $60 million - says the Chronicle - has been contributed to GF.

The problem is lack of transparency. Nobody really knows how much is actually raised. There is no public accountability, no public stewardship and very likely, little true charity. "Red" is just the latest manifestation of so-called "cause related marketing," (CRM) an idea that has been around in full force for about 35 years. It began in earnest with the campaign to raise funds for the restoration of the Statue of Liberty. Lee Iacocca, the campaign chairman enlisted American Express in the effort and all kinds of claims were made as to the amount Amex actually came up with. It might have been a million dollars as I recall - a lot of new money - or a lot less. As I wrote at the time in Nonprofit Times Lady Liberty was being sold and there's a name for that.

Nonprofits look for an easy, cheap alternative to the slogging in the mud real fund raising requires. I can't really blame them. The naive ones may expect too much from CRM. The savvy ones know it is incremental money at best. Companies like the exposure as do the (often) fading celebrities who tie the can on.

A tolerable argument might be made that CRM brands charities. But I can't make it. I have yet to purchase a good or service because a minuscule portion of the sale might - but I will never know - hit the bottom line of my charity de jour. Have you?

A SLIDING TAX DEDUCTION? CONTINUED ...

Assuming a sliding tax deduction is an idea whose time may have come (I first published on this 20 years ago) the real problem is who qualifies and who decides? Though far from perfect, the nearest tool may be the revised form 990 - the tax return most non-religious charities are obliged to prepare if their receipts exceed $100,000 or their assets are over $250,000.

This tax return - open to the public - unlike yours (presumably) offers basic information about charitable purpose, sources of funds, other financial information and a list of the board. These are primitive measures of efficiency. What the 990 does not tell us is whether the charity is effective. And the 990 won't tell us how aggressive the charity has been in seeking private funds.
Though it's not p.c. to mention it, there is a dependency culture in many social/human service agencies. They have come to depend on government grants and contracts so they expend few resources and little effort on raising money - until crunch time (cuts in funding) which by then is usually too late.

Why then should a sliding tax deduction for donors be used to bail them out? The only possible answer is that these charities are serving people who benefit from their help and in the normal course of philanthropic behavior charitable donors don't give much to human service agencies.

There are three core questions on which the sliding deduction allowance might rest:

1. What do the charity's numbers look like going back five years?
2. What are their sources of funds?
3. How much of that total comes in contributions - i.e., private philanthropy?

I'm sure there are other considerations as well. What about animal shelters, the environment, religiously sponsored health and welfare agencies (e.g. the Salvation Army is the largest charity in the US but files no tax return because it is classified as a religious body)? Should overseas charities or struggling arts groups be included? Who's in? Who's not?

And who is going to decide? In our society the marketplace ultimately decides who is in and who is out. There is not too much subjectivity. But there the idea that the federal government should be in the business of regulating charities far more than they are now (through the overburdened under-resourced IRS) is not appealing. The states have made a mess of charity registration and regulation so there is an understandable reluctance to bring in the feds. But I don't see any other way.

In addition to toughening up reporting and not leaving behavior entirely up to important but essentially unenforceable codes of ethics to which the industry subscribes, federal oversight might be the best way to sort this out. As you may have read in an earlier post, I hope a new president will convene a White House Conference on Philanthropy early in his/her term, and I hope the concept of a sliding tax deduction will be an essential agenda item! What do you think?

A Sliding Tax Deduction for Charitable Gifts?

Do charitable donations really reach those in greatest need? Human service agencies have seen a decline in support in the last several years reports Giving USA Foundation an organization that charts philanthropic trends each year.

Most such charities rely on a mix of (predominantly) public money - restricted grants and contracts - and modest private support. Many are little more than de facto pass-throughs for government money and as a rule they have a tough time raising private funds.

• They can't build wealthy and powerful boards because there is little to no cachet in board membership. The movers and shakers gravitate to bling, high prestige and major visibility and without leadership by example money doesn't flow.
• Poverty is not attractive; even Mother Teresa wondered if she could really make any difference in the slums of Calcutta. Can we?
  
• Donors identify more strongly with causes they feel they benefit directly from - like local hospitals, arts organizations, "alma mater" the green movement and so on.
  
• It is often (wrongly) assumed that government money reaches the poorest of the poor. It may but only if one believes that a melting icicle is the same thing as a mighty stream.
  
• These charities have not invested adequately in building structure for generating private support, many because they don't have the funds. Others rely on the public funding spigot and put their effort into getting those contracts because public money brings the greatest return. But that money is almost always restricted and what is needed most are unrestricted funds. Most major donors who are not directly involved (like board members) resist providing it because they feel (often rightfully) that there's no real accountability.
  

Is there a way to incentivize private support for human service agencies?

Every charitable tax deduction confers the same benefit to the donor. But what if that were not so? What if donations to the neediest human service charities carried a bigger tax deduction and a greater benefit to the donor?

The next post will try to make the case for a sliding tax deduction. Meanwhile if you have a thought you'd like to share, please post a comment.

Recession: Here We Go Again

At noon today, the Dow Jones had fallen another 172 points and is now below 11,800. Washington won't use the "R" word -- but we're in one, for sure. Over a long career I've been through fire, flood, plague, high hem lines, low hem lines, depression, recession, prosperity, etc. Of course most of our clients are edgy. What to do?

• Cover the basics. Forget about "new" vs. "old" philanthropy. You get money by asking for it!
• Your donors are not going broke. They may not feel so good but the smart ones are covered. If you don't ask because you're waiting for better times, other causes will be picking at your flesh.
• The market indicators are off from their top postings - but still way above recent lows, viz. the days right after 9-11.

-- HG

THE RED (FOR EMBARASSED) CROSS

Last week the Red Cross - still reeling from the latest CEO kerfuffle) announced it was riffing its staff by 1000 people but that the cut wouldn't affect services. Hm. The staff bloat was a thousand people. Who is advising these people? The real issue is that fish rots from the head down - meaning the board structure, even though streamlined somewhat, still does not permit of effective governance. Until that changes, if it ever does, it will be difficult if not impossible to attract a CEO who can make a difference. Many have been called but none has survived.

Actually Mark Everson, the ex-IRS head, who had been in the CEO job for less than a year, was showing promise in getting his arms around this monster. Unfortunately, he allegedly had his arms around some of the help.

-- HG