Money Ill Spent

Spend enough time in the world of nonprofits and you discover that foundations, for all their wealth and power, are organizations with very thin skins. The pages of the professional philanthropic journals are brimming with agonized articles by program officers and foundation presidents that, stripped of pseudo-scientific jargon, list the endless reasons their employers just don’t get any respect.

Having read far too many of these articles, I can boil all of them down to a single paragraph: “Why don’t people like foundations? We’re doing good. We’re helping people. Our grantees love us. Sure, our president may make $700,000 a year, but being a foundation president is tough. Don’t people know that? And that guy from the Senate Finance Committee who keeps bugging us about first-class tickets and four-star hotels. Doesn’t he know how exhausting it is to fly these days?”

As part of their defensive strategy, about once a decade a book emerges from the nonprofit world that tries to explain to a general audience how wonderful foundations are. With the notable exception of Waldemar Nielsen’s valuable The Golden Donors (1985), most of these books gather dust in university libraries.

Joel L. Fleishman’s The Foundation is yet another defense of philanthropy by a seasoned insider. Fleishman, who teaches at Duke Law School, has some virtues as a writer. He does recognize that the nonprofit world has flaws that businesses don’t have. Corporations, after all, have to please the public if they are to survive, and CEOs who cause the company’s stock price to fall get sacked. Foundations, by contrast, face no market test. They can do whatever they want with their wealth. As a result, the law of motion in foundations is that programs, once created, continue endlessly unless stopped by an outside force (a congressional committee, or a riot).

This unchecked power, Fleishman notes, “creates an unhealthy cocoon-like insulation for foundations, one in which arrogance, arbitrariness, failure to communicate, and all the other besetting sins are all the more likely to flourish.”

“The arrogance foundations are accused of,” Fleishman adds, “is, ironically, a disguised form of insecurity. Despite their immense wealth and power, many foundations seem afraid of their own shadows.”

Fleishman is also right in some of the solutions he calls for to make foundations more accountable to the public. Part of the reason foundations seem so secretive is that the press wrongly ignores them. Most newspapers, including such large ones as the Washington Post, don’t have anyone regularly reporting about philanthropy. Foundations ought to get as much coverage in the press as colleges and universities do.

Finally, Fleishman is right that more extensive regulation of nonprofits would not address the problem of foundation accountability. Congress has, in recent years, flirted with draconian proposals for regulating foundations, such as creating a regulatory structure comparable to the Sarbanes-Oxley Act. These new regulations would force foundations to spend more money on lawyers and accountants and less on charity.

Fleishman argues that the current overseers of charities-the Internal Revenue Service and state attorneys general-do a poor job of making sure that foundations obey the law. He endorses an idea proposed by the former IRS charity regulator Marc Owens to create a quasigovernmental organization to police foundations that would have the same power over nonprofits that the National Association of Securities Dealers has over stock brokers. Owens’s idea is certainly worth debating.

Yet while Fleishman is correct in some of his diagnosis of philanthropic problems, he is fundamentally wrong in his analysis of the history of foundations. He also asks foundations to continue bad practices that waste money and ensure philanthropic mediocrity.

Fleishman lists 100 case studies of good things that foundations have done to make our country better. When the foundations funded science, they tended to do a good job. For example, the Rockefeller Foundation used its wealth to eradicate hookworm, a disease that ravaged the South a century ago. Rockefeller money also created the Rockefeller Institute for Medical Research (now Rockefeller University), whose scientists have made many important medical discoveries.

But when foundations use their wealth to change human behavior, they often fall flat on their faces. Consider one of Fleishman’s heroes, Abraham Flexner. In 1908 Flexner published a small book on education in which he quoted the president of the Carnegie Foundation for the Advancement of Teaching, Henry S. Pritchett, three times in the first 12 pages. The flattered Pritchett then hired Flexner to write a report on the problems of American medical schools. Flexner’s report, which appeared in 1910, exposed many problems in these institutions and ensured that many of the shoddier ones closed their doors.

Flexner then went to the Rockefeller Foundation, where in 1919 he convinced John D. Rockefeller Jr. to let him oversee a $50 million fund to finance medical schools. But the grants came with a substantial string attached: These schools had to ensure that their doctors had no outside incomes from private practices.

Fleishman says that Flexner’s idea “helped to elevate medical education as well as medical research in America to a position of international leadership.” It did nothing of the sort. Flexner failed to consider reasonable alternatives, such as allowing medical school professors to have private practices as long as these practices were in a teaching hospital. His tenure as Rockefeller’s medical education czar was marked by protracted, savage battles between grantees and the foundation over Flexner’s inflexible conditions. These battles only ended with Flexner’s ouster from Rockefeller in 1928. Once he was gone and the Depression began, the cash-starved hospitals that had received Rockefeller money abandoned Flexner’s rigid rules and allowed their doctors to make money any way they could.

Flexner’s story is worth retelling as an example of foundations behaving badly. Foundations often fail because they assume their experts have the one right way to solve a particular problem. They fail to consider reasonable alternatives. For example, in 1979, the Carnegie Corporation funded a commission that argued that public television was necessary because “original American drama, documentaries, [and] programming in science and the arts . . . have already proven unappealing for commercial network distribution.” The commissioners could not foresee how such thriving cable networks as the Discovery Channel, the History Channel, and HBO would ensure most lovers of documentaries would watch them on a commercial network rather than PBS.

Foundations also often fail to realize that small-scale grants are often better than large ones. In 1993 Walter Annenberg announced that he would give $500 million for school reform. “I wanted to give an amount big enough to startle private and public leaders,” Annenberg told the Philadelphia Inquirer at the time.

But Annenberg’s money was eagerly consumed by big-city bureaucracies, and resulted in little or no lasting change. Had Annenberg given this huge sum to the private school voucher movement, the money would have helped tens of thousands of worthy students get a good education in an inner-city private school.

Foundations would do a better job if they spent less on theory and more on programs that directly help people. Instead of yet more research on the causes of poverty, foundations ought to find the five best faith-based poverty-fighting organizations in their cities and see what help they need. Conservation-minded donors should spend more money preserving land and less money on environmental activists.

Another useful reform would be for donors to place strict term limits on the foundations they create. History shows that, with very rare exceptions, the longer a foundation survives, the less likely it is to perpetuate a donor’s ideas. Henry Ford, Andrew Carnegie, and J. Howard Pew strongly supported individual liberty and traditional virtues. But the Ford Foundation, the Carnegie Corporation, and the Pew Charitable Trusts are reflexively liberal philanthropies.

Fleishman notes that lots of donors today have placed strict term limits on their charity. Warren Buffett, for example, has given his money to the Gates Foundation with a term limit. Fleishman argues that perpetual foundations are necessary because they are better able to provide long-term funding rather than short-term grantmaking. But more often than not, perpetual foundations become calcified, rigid, and predictable organizations that spend as little as they can get away with because most of their wealth is tied up in an endowment.

If more foundations were term-limited, they could spend more money for the needs of our time. As John J. Miller notes in A Gift of Freedom, because the Olin Foundation was term-limited, it spent about three times as much each year on grants as it would have if the foundation hadn’t had a term limit.

The Foundation has some merits. But by overstating the strengths and underestimating the weaknesses of foundations, Fleishman’s survey is inaccurate and seriously misleading.

Martin Morse Wooster, a senior fellow at the Capital Research Center, is the author, most recently, of Great Philanthropic Mistakes.