Legitimacy of Philanthropic Foundations: United States and European Perspectives

Chapter 2 American Foundations: What Justifies Their Unique Privileges and Powers

Chapter 2 American Foundations: What Justifies Their Unique Privileges and Powers Kenneth Prewitt Should nations that do not have a modern philanthropic foundation sector bother to establish one? If so, on what grounds? What is it they do or represent that cannot be provided by the government, the market , or the nonprofit sector more generally? To address the principles of legitimacy and accountability that underlie these questions I draw on the U.S. case. This is not to suggest that American practices should be adopted elsewhere, but simply to pose a theoretical question: what is the source of foundation legitimacy, of the widespread acceptance and public endorsement of the privileged status of foundations as appropriate institutions for fulfilling basic societal functions? A Question Posed Much confusion in the discussion of legitimacy derives from the failure to distinguish the comparatively small foundation sector from the larger charitable and philanthropic giving and that, in turn, from the much more substantial nonprofit sector. Although these three levels interact and are lumped together under that loose term civil society, their dissimilarities matter in any discussion of legitimacy. The nonprofit sector meets an obvious performance test. Colleges, hospitals, relief agencies, art institutions, advocacy organizations, and think tanks provide what others are willing to pay for—80 percent of the nonprofit sector’s revenues derive from membership dues, tuition payments, fees for services, and government contracts. Nonprofits survive only if what they provide is wanted. The remaining one-fifth of the sector’s revenues are charitable in origin—tax-deductible gifts by individuals, in small as well as large amounts, to hospitals, universities, museums, and relief agencies. These tax-deductible gifts meet a simple legal test. Is the donation directed to what, in the tax code, is defined as a charitable purpose? Although foundations also meet this test, and provide about 2 percent of the funds that sustain the nonprofit sector, the private foundation differs from charitable giving along a key dimension. The prototypical foundation is uniquely privileged. Once established , it never again needs to raise funds. Its in-perpetuity endowment allows it to design grant-making programs that reach to hundreds, even thousands, of other nonprofit institutions. It has an extraordinary license to spend tax-protected wealth on projects and purposes of its choosing, with only minimal accountability. Trustees and officers change guidelines, start new program lines, and otherwise reallocate grant dollars on their own authority—as long as grant making serves the public interest. And there is wide latitude in how the public interest is defined—from housing the homeless to space exploration, from policy briefs to art collections. Approximately 65,000 private grant-making foundations are licensed to operate in the United States, though as many as a quarter of these are in name only (that is, make no grants) and many thousands more give less than a million dollars a year in grants. These small-scale operations do not raise the legitimacy question in the same way that the foundations with assets large enough to have a professional staff engaged in systematic grant making do. It is these larger foundations that aspire to eliminate diseases, reform education, advance civil rights, alter public policy, change public opinion, and otherwise operate at the scale of the market and the government. Restricting attention to these staffed, larger-asset organizations leaves us with fewer than 200, and only half that number have enough of an asset base to give more than $12 million a year in grants. One could narrow the subset even more. The twenty-five largest foundations (.00004 percent of the foundation universe) account for more than 25 percent of the sector’s asset base (Foundation Center, 2004). The names are familiar: Gates, Pew, Ford, Rockefeller, MacArthur, Lilly, Carnegie, Hewlett. The agendas pursued by the large, independent grant-making foundations self-consciously differ from charity or service delivery. They are about social change, in the spirit of what John D. Rockefeller, Sr. 28 The Legitimacy of Philanthropic Foundations argued a century ago. In establishing his philanthropies, Rockefeller remarked: “I do not believe in giving money to street beggars, but this is not reason why one should be exempt from doing something to help the situation represented by the street beggar” (1984, 110). “Scientific giving,” in Rockefeller’s term, is changing the conditions that give rise to begging. Charity can...