The New Age of Philanthropy - By Daniel Schley , Page Snow - 12/1/2007
Daniel Schley is chairman at Foundation Source, which provides its services to more than 600 family, corporate and professionally staffed foundations representing over $2.5 billion assets. More information is available at: www.foundationsource.com.View all articles by Daniel Schley
As we enter the 21st century, many believe we have entered the second golden age of philanthropy. A confluence of trends certainly point in this direction:
unprecedented wealth creation over the past 25 years, and the projected
$44 billion intergenerational transfer of wealth over the next 25
years. The result: more people with more capital than at any other time
in U.S. history.
The propensity of wealthy Americans to commit an ever-increasing percentage of their net worth to philanthropy. As evidence: a 77% increase in the number of newly formed private foundations over the past ten years as reported by in the most recent edition of Foundation Giving Trends (2007 edition).
The technology revolution-and particularly ubiquitous presence of the Web-which has provided instant access to information on issues of interest to philanthropic families, the ability to quickly research charities for due diligence purposes, and the structure for the efficient distribution of philanthropic capital.
Globalization, motivated or enabled in part by the media and the Internet. As a result, people are more aware of challenges, such as AIDs, terrorism, the environment, widespread pandemics, poverty, hunger and religious strife. People also have become all-too aware of the limitations (or unwillingness) of the governments to solve these problems.
Major public figures such as Bono and Warren Buffett are leading philanthropy efforts, but one doesn't need to be famous or richer then Oprah to be philanthropic. For every mega-wealthy donor of media acclaim, there are literally tens of thousands of families of more modest means (millionaires, not billionaires!) who form the foundations of modern wealth and will determine whether the prediction of a new golden age of philanthropy becomes a reality.
The question one might ask is this: Will the new generation of wealth holders cross the chasm from wealth creation to wealth distribution as did their predecessors? Will they have the resolve to invest the time and energy, in addition to their capital, to pioneer groundbreaking solutions to society's most intractable problems? Will they be inclined to push the frontiers of philanthropy?
Today's Philanthropists: Cut From A Different Cloth
If the actions of today's young philanthropists are any indication, the answer to these questions is a resounding yes. The groundswell of philanthropic innovation is very much underway as today's crop of donors seeks to transform modern philanthropy through a major injection of philanthropic capital coupled with a well-articulated mission, clear strategy and willingness to become actively involved alongside their capital to affect social change.
In a profound change from the past, the mandate for today's philanthropists comes so from the wishes of dearly departed benefactors and more from their own capital and their own inspiration. The entrepreneurs of the '80s and '90s have become the philanthropists of the new millennium, leveraging their time, energy and capital toward the social good. Today's donors are younger, more energetic and more adept at leveraging technology, investing their capital and driving results. Frequently referred to as "venture philanthropists" or "social entrepreneurs," they are accustomed to achieving success and not the least bit inclined to back down in the face of resistance. Comfortable with their achievements and confident in their abilities, they are transitioning their passion and talent for creating wealth to its logical corollary: the distribution of wealth-"giving back," as some would say-with the very same intensity and sense of direction as was required to create their wealth.
Leading the pack and grabbing the headlines are some of the more notable entrepreneurs of the past quarter century. Bill and Melinda Gates have now committed their lives and their capital to tackling many of the world's most pressing issues. Add to this list Pierre Omidyar, founder and chairman of eBay, who put $400 million into the Omidyar Network to fund nonprofit and for-profit ventures aimed at the social good; Gordon Moore, who contributed half his interests in Intel to the Gordon and Betty Moore Foundation to support environmental causes; Richard Branson of Virgin Atlantic fame, who committed part of his profits over the next ten years to developing alternative and renewable fuels and technologies; and Jeffrey Skoll, first president of eBay who put $250 million of eBay stock into the Skoll Foundation to support social entrepreneurship.
Beyond the marquee names of business, civic and social philanthropists (a euphemism for Hollywood), myriad local and regional affinity groups have spawned in the past dozen years. Among the more notable examples: Social Venture Partners, founded by Aldus Corporation President Paul Brainerd, which has rapidly evolved into a highly respected nationwide network of technology entrepreneurs turned active philanthropists who are pooling their professional experience and financial resources to drive innovation and affect social change. Finally, as a confirmation one need look no further than the 30,000 families who have established new private foundations in the past decade, and tens of thousands more who have contributed to the explosion in donor-advised funds and the efficient distribution of philanthropic capital across the globe.
Blessed with an ever-increasing pool of capital and the propensity to use it for social good, this new wave of philanthropists is trending away from the traditions of passive or year-end grant making and edging in the direction of more active engagement in the distribution and direction of their capital. They are becoming ever more strategic in the distribution of their wealth, preferring to develop a mission or purpose behind their giving with the intent of affecting a specific outcome. Rather than pulling out the checkbook at a fund-raising dinner or in response to a direct-mail solicitation, they are proactively targeting their capital like a proverbial laser beam on the key social issues of the day.
Not content with mere demonstrations of good will, they aim to get at root causes of problems rather than addressing mere symptoms. Indeed, the term, "strategic philanthropy" has become a buzzword, and its underlying concepts reflect a profound and, we think, a permanent shift in the way philanthropic families think about their wealth and giving.
With sufficient funds for their own needs and their children's inheritance, they're setting aside the surplus to make their mark on solving social problems. Having available funds at the ready enables them to advance their own vision of the social good. Indeed, they often champion issues that affect them personally: preventing the demolition of a cherished historical landmark, fast-tracking research for a rare disease that's ravaged a beloved family member, cleaning up a river in their own hometown. Critics might view this as self-indulgent, but in practice the personal is often political. More often than not, the process of selecting causes nearest and dearest to their hearts leads them to address "orphaned" issues that may have been unnoticed by government or business. Case in point, Megan's Law, Amber Alert and the Brady Bill were initiated by ordinary people whose lives were personally affected and wanted to do something. In short, they are enlarging the menu of pressing public needs requiring attention and providing the innovation capital (plus their own sweat equity) toward their resolution.
In drawing upon the panoply of resources available to them, new donors often come to the realization that their dollars are not necessarily their greatest strategic asset in creating change. Sometimes their ability to make traction on social issues rests on their corporate know-how and experience in business strategy: their knack for successfully identifying and exploiting niche markets, maintaining a competitive edge, ensuring high-level performance and relentlessly pursuing a set of narrow objectives. Other times, the driver is their ability to bring to the table key players who can make things happen: corporate chieftains, influential leaders in other countries, helpful political contacts and key social connections. Last but not least, their status and standing as business leaders, enabling them to catch the attention of the media, attract others to their cause and hire the "best of the best" top talent. If the next golden age becomes reality, as we believe it will, these strong suits could give the individual donor a competitive edge over professional staff in major philanthropic institutions.
Strategic Philanthropy And The Power Of The Family Foundation
While the media feeds on eye-catching images of Oprah Winfrey at her school for disadvantaged girls in South Africa and Angelina Jolie at a refugee camp in the Sudan, the real drivers of this new age of philanthropy will not be the "star power" philanthropists or even the major foundations of public note. Rather, it will likely be the small family foundations led by their entrepreneurial founders that will raise the bar slowly, imperceptibly, much as a rising tide.
The statistics on the number and size of America's private foundations are surprising, indeed. The prevailing assumption within traditional philanthropic circles is that "You have to be a Ford to have a foundation"-that is, exceptionally wealthy with tens of millions to spare for charitable purposes. Ask a financial, tax or legal advisor what the minimum funding should be to "afford" a private foundation, and you will often hear "a minimum of $3 million to $5 million." Like the prevailing wind, these basic assumptions about private foundations have been seemingly cast in stone for as long as we can remember. Thus, it should come as quite a surprise that these assumptions are, for the most part, pure myth. Thanks to the IRS (we'll say that only once!), we now know that the number of large foundations is, in fact, very small. And further, we now know that the majority of all private foundations-67% to be precise-have assets under $1 million.
Certainly, the 44 largest foundations with their marquee list of grantees and multi-million dollar grants gain the spotlight. And deservedly so. However, the majority of the philanthropic dollars and the distribution of funds come not from the few largest and most visible foundations, but rather from the silent majority in the philanthropic world-the remaining 71,980 foundations that represent the majority of all foundation assets and grant-making. It is the collective power of these thousands of smaller foundations that hold the promise of adding up to truly significant outcomes.
As noted previously, half of all private foundations have been formed in the past decade or so with the founding donors still actively engaged in the mission and direction of their family philanthropy. Many are young entrepreneurs, still in mid-career, who have made significant wealth and are looking for ways to constructively spend the surplus. Others are baby boomers, with their children through college, homes paid for, who refuse to accept traditional notions of retirement and are looking for ways to add to their legacy by creating a better world for their grandchildren. It is these donors and these families who are at the helm, steering philanthropy into the 21st century, and driving its future in a very different direction.
For the most part, these smaller foundations operate as solo players outside of the status quo of "organized philanthropy." As they are doing things their own way and are not influenced by "how things are done," without trying, they are changing the field. How are they rewriting the rules of engagement?
Unlike their predecessors, 21st century philanthropists don't rely on middlemen and instead see themselves as the principal agents of their philanthropy. Highly self-directed, they don't allow others to present highly screened, giftwrapped grants or advocate for pet projects. They prefer to have a high level of personal involvement, not only making their own decisions about what to fund and when, but also contributing their own time and talents to providing consulting and technical advice to their grantees in areas such as strategy, communications, leadership development and finance.
They ensure they have the time to devote to their philanthropic strategy by leveraging online resources to find, research and confirm their philanthropic decisions. In the foundation world, many families are now choosing an alternative model to operating their foundation. Rather than establish the foundation, hire staff and build the physical infrastructure to support their philanthropic initiatives, these families are choosing a far more expeditious and less costly route by outsourcing their back office, technology and support requirements to professional firms such as Foundation Source. By outsourcing the overhead of the foundation, these families can focus on what matters most-their philanthropy-without having to bear the corresponding burden associated with the traditional foundation.
But perhaps their most important contribution to date is their willingness to employ all the tools at their disposal toward the accomplishment of their goals. As a result, they are breaking the traditional boundaries between philanthropy and "the rest of their lives."
Eschewing conventional notions that one shouldn't make a profit while advancing one's philanthropic interests, many family foundations are thinking about how to harness all their investment assets on the causes they support, beyond the 5% minimum distribution they are required to give away. They invest the foundation's endowment in for-profit ventures that produce both financial and philanthropic returns (alternative fuels and technologies, hospitals, educational programs, drug research and development companies) thereby ensuring that both their grant funds (5%) and endowment assets (95%) are aimed toward the same mission.
As an example, the Acumen Fund, launched by the Rockefeller Foundation, invests in for-profit enterprises that manufacture goods and services urgently needed in the developing world and sells them for affordable prices: reading glasses, hearing aids and insecticide-treated mosquito nets to protect against malaria. San Francisco-based Good Capital operates like a venture capital fund, investing money from wealthy individuals into social enterprises and distributing the earnings back to investors. The difference is that Good Capital invests in both for-profit and nonprofit ventures that perform functions associated with nonprofit charities by investing in health-care delivery systems that provide medical benefits for at-risk populations, fair trade coffee companies that give farmers in poor countries access to U.S. markets; and job training for disadvantaged youth.
These new players are also using innovative new financial tools that cross the boundaries between nonprofits and for-profits: program-related investments, recoverable loans, equity investments, guaranteed lines of credit. These tools allow them to recycle the assets they have set aside for philanthropic endeavors, making them available over and over again.
Micro credit is also gaining traction-the practice of lending small amounts of money to entrepreneurs, mostly in the developing world, to help them start small businesses that will raise them out of poverty: purchases of livestock, sewing machines and other small-scale equipment and paraphernalia for petty trade. Just last year the Nobel Peace Prize was awarded to Muhammad Yunus and the Grameen Bank for their use of micro credit to create economic and social development.
Role Of The Family Wealth Advisor
As the nation's more prominent families bring philanthropy into the forefront of their wealth agenda, leading financial advisors are revising their business strategies and evolving their service offerings to respond to the demand from their clients.
Sounds logical, of course, but ironically for many wealth managers, the notion of helping their clients "lose" money is anathema to their very being. The very pillars of traditional wealth management were long ago etched in stone: grow the family assets, protect them in difficult times, and distribute them to the next generation. But give them away? That has always been the province of others.
Not any more. Philanthropy is driven off of philanthropic assets, and as wealthy families carve out an ever-increasing share of their current asset portfolio for charitable purposes, the attitude and approach of the wealth manager must necessarily adapt. More to the point, families today expect their wealth managers to manage all their assets-including philanthropic assets. But not all wealth advisors understand this to be the case. In a report published in Financial Advisor magazine in November 2005, the chasm between the desires of the wealthy and the expectations of their advisors was fully exposed in one simple sentence:
"... 67.7% of the affluent are interested in learning about private foundations, while only 14.5% of their financial advisors believe they are interested in learning about private foundations."
To the extent that wealth managers commit the talent and resources to build the core competency in the management of philanthropic assets, they are in a far better position to attract new clients and perpetuate existing relationships. To the extent that they leave this responsibility to others, they leave themselves exposed and vulnerable.
Today, leading wealth management firms recognize that strategic philanthropy is a central component of the successful wealth offering. And for those firms targeting the top of the food chain-ultra-high net-worth families-any successful strategy must necessarily include two components: competency in the management of philanthropic assets and the related services to support the family foundation. They are aggressively marketing strategic philanthropy as a core competency, and quickly learning that the marketing of philanthropic services can be an effective way to differentiate the value of their service offering in an increasingly competitive marketplace.
Catching Up Or Keeping Pace
Given the powerful trends in family philanthropy and the concurrent investment in philanthropic services by the nation's leading wealth management firms to keep pace with this demand, many smaller practitioners are asking the obvious question: "What can I do to compete?" The answer is as simple as 1-2-3:
1. Go to school. Well, not literally. But it is important to recognize that one cannot speak the language of philanthropy, nor understand the interests and motivations of philanthropically inclined clients without a basic understanding of the latest charitable giving techniques and the pros and cons of various options. To learn about philanthropy, advisors are turning to organizations such as the American College, which offers a professional designation to those completing their Chartered Advisor in Philanthropy (CAP) program, and the International Association of Advisers in Philanthropy, which is holding their annual Advisors in Philanthropy conference in Chicago in April 2008.
2. Leverage the skills of others. Within wealth management circles, the concept of "open architecture"-e.g., choosing the very best third-party managers to complement one's in-house capabilities-is now standard fare. In the same vein, there are exceptional third party providers of philanthropic services who have the skills and experience to deliver a full range of support services to any wealth manager with little or no investment required.
3. Make the commitment. Yes, it sounds simple enough: You make a decision, articulate your strategy and off you go. In truth, it's harder than it seems. Building a core competency in philanthropy that becomes ingrained in your company culture and becomes credible to your clients requires a well defined strategic plan, investment in collateral and support materials, redesign of your Web site, training of your staff ... and more training of your staff.
As we enter what historians will reflect upon as the second great era of philanthropy, it is essential that the private wealth community embrace strategic philanthropy as a core component of the successful wealth offering and fully appreciate philanthropy's offensive and defensive merits. Armed with an appreciation of the value of charitable planning, leading advisory firms led by visionary executives will continue to expand their philanthropic offerings and truly differentiate their firms from their competition. Much as a market correction tends to weed out those on the marginal edge, the firms with the complete portfolio of support services-including philanthropic services-will be in an exceptional position to attract and retain clients and assets... at the expense of those for whom philanthropy remains the province of "someone else."
Daniel Schley is chairman and Page Snow is senior vice president at Foundation Source, which provides its services to more than 600 family, corporate and professionally staffed foundations representing over $2.5 billion assets. More information is available at: www.foundationsource.com and www.pw-mag.com.
A structured approach to philanthropy allows wealthy families to reap additional benefits.
A generation of affluent boomers has structured their lives around three sequential stages-earn, learn and return-a cycle that, if adhered to, will feed itself for years to come. And as the average age of wealth declines, a more strategic approach to charitable giving has emerged-one built on the foundation of thoughtful planning, informed decision-making and the pursuit of long term goals. "Individuals that have had success in business want philanthropy to be part of a well-researched plan with its own specific set of objectives," says Domenic DiPiero III, president of Newport Capital Group, a boutique wealth management firm in Red Bank, N.J., that provides family office services to its clients. "It's a process they're familiar with and makes it much easier to measure the success of their efforts."
Perhaps more important, this segment of givers feels passionately about including several generations, especially younger ones, in the planning efforts. To do so takes the time and commitment of the donor and, more often than not, some assistance from a specialist who can guide them through a process requiring research, facilitation and execution. As a result, the incidence of dedicated philanthropy specialists at multifamily offices and other private wealth organizations has increased.
DiPiero says the goals of multigenerational philanthropy are two-fold. "Charitable giving is appealing because it benefits both the donor and the donee. Younger donors are increasingly interested in managing both parts of that equation making sure their gifts deliver maximum value to the cause they support and using the process of giving as away to educate their children."
There are, of course, numerous lessons to be learned from philanthropy, and each family's educational goals will vary based on their personal values and their experience with giving. "Older generations often want to work with their kids and grandkids to create a legacy of giving for the family," explains DiPiero. "Whether it's being a board member, donating money or volunteering time, the real focus is on getting everyone involved because you can't affect change as an observer."
In DiPiero's experience, instilling a true sense of ownership happens when younger family members are involved in, and have oversight for a portion of, the family's overall philanthropic agenda. "The learn-by-doing philosophy can be very effective. Charitable activities can be structured within the context of the family's mission and it helps children feel connected to the process. Responsibility and accountability can have a lasting influence on a child's philanthropic mindset and priorities."
It may be hard to picture charitable giving as the subject capable of bridging the communication gap between parents and their children, especially if the younger crowd is apathetic or unsophisticated. But DiPiero says there is proof otherwise: "I have seen very young children warm to these concepts." After all, the earlier philanthropy is an established presence, the longer a child has to assimilate the associated actions and philosophies into their lifestyle. "Giving back is a learned practice and it can start by teaching the simple value of sharing things like toys and food."
DiPiero feels there is a greater awareness among today's affluent families of