Effectiveness, Efficiency and Accountability in Philanthropy: What Lessons can be Learned from the Corporate World?

Preface

The Philanthropy and Foundations division of the Bertelsmann Stiftung aims at an effective and efficient foundation sector. Our projects have focused on donor information, donor learning and innovative philanthropic vehicles such as community foundations as well as issues of foundation governance and management.

The Bertelsmann Stiftung invited an international group of participants from both academia and innovative social-investment organizations to its Foundation Management Symposium 2005. The debate was organized around the issues of effectiveness, efficiency and accountability and was held in a thoroughly interactive conference format. Foundations are not unique in many of the challenges they face, but they operate in an environment in which leverage and risk taking under conditions of market uncertainty remain key. They are usually small players compared to the problems they address, and their smallness requires particular care in their strategic thinking. At the symposium, brief impulse statements initiated round-table discussions on the philanthropic market as part of the third sector, strategic leverage, efficient resource allocation, and public expectations toward the accountability of charitable foundations. In particular, we raised the question whether foundations could learn from the corporate world in addressing these issues (and vice versa).

This volume documents the proceedings of the conference. The first contribution is an editorial overview of the debate, for the following contributions authors have elaborated their short impulse statements to the symposium. The contributions are more like essayistic reflections than academic papers, and their character has not been changed.

The transfer of knowledge from a corporate to a philanthropic background is difficult but still has its merits. Even participants from business schools agreed that the market could be seen only as a metaphor in philanthropic contexts because the actual functioning of resource allocations lacks the efficiency and smoothness of a market. Nonprofit organizations in general and foundations in particular have to bear comparatively high transaction costs when they try to establish information on their field and transparency in their spheres of interest. When deciding on their allocations, foundation leaders cannot rely only on simple mechanisms of return on investment. They have to bear in mind more complex frameworks for their decision making that are defined by a multiplicity of variables which in addition are characterized by normative interpretations. However, this very complexity of decision-making under conditions of uncertainty may be of interest to the corporate world. In addition, the legitimacy advantages of foundations in society may be of interest to corporations.

I would like to thank all the speakers and contributors to our debate for their input. I wish you a stimulating reading experience and hope that you will share our interest in improving professional thinking within our sector.

Dr. Brigitte Mohn

Member of the Board of Management

Bertelsmann Stiftung

Gütersloh, February 2006

1. Key Issues in Foundation Management

Heribert Meffert, Volker Then, Nina Fritsch

1.1 The Role of Foundations in Society-What Market Are We in?

In recent years, the controversy over the relationship between the state, the economy and civil society has achieved a new dynamic. It is clear that, increasingly, the state is unable to assume responsibility for all spheres of life, and the limitations of the market are becoming obvious. Consequently, the significance of civil society will increase within this power triangle. Both politically and economically, as a highly independent part of the nonprofit sector, foundations are vitally important in an era of smaller government, social diversity and greater reliance on private action for the public benefit.

The question arises as to how foundations can justify their privileged position in society, and not only with respect to taxation. Resentment and criticism can be perceived to an increasing degree among certain groups. They argue that foundations are antidemocratic institutions serving public purposes, but oriented toward the motives and goals of individual private founders. Furthermore, they are suspected of plutocracy, and without a doubt, their founding requires substantial capital.

Initially, it might be argued that foundations correct the errors of society, because they respond to the needs of minorities and therefore strengthen rather than compromise democracy. However, overall, the privileges accruing to foundations arise from their ability to maximize their potential and therefore their impact. Achieving maximum impact is tied to two conditions.

The first is the ability of a foundation to fill an appropriate role in society that corresponds with its targets and complements the functions of other players in the foundation’s relevant markets. This is because the complexity of social problems that foundations face is such that their resolution is never in the hands of a single actor. This is particularly so if the actors, just like foundations, do not have the resources commensurate with the problem at hand. Second, the implementation of effective and efficient processes (that is, good management) is also essential.

As regards the role of foundations in society, conventional philanthropy over the decades has changed. As the first approach and original model of philanthropy, charity in many ways was well-suited to the social and political context of the nineteenth century. Foundations provided services to those in need, acting as a complement to the government. Until the beginning of the twentieth century, this approach was probably effective, yet it still had its defects. Its major shortcoming was that it makes a difference to those lucky enough to benefit directly from the service but, taken alone, has no impact beyond that if there are not many of the lucky few. The approach addresses symptoms rather than causes.

As a new approach to foundation management in the early to mid-twentieth century, philanthropy emphasized dealing with causes rather than symptoms. There was a strong belief in the power of a scientific approach as a concept of social engineering. Regardless of its achievements, this approach suffers from weaknesses when viewed from a present-day perspective. First, it completely fails to exploit the unique potential of endowed foundations. Second, it rests on assumptions that hold true for physical science, but not necessarily in the context of social issues. Even if the causes of poverty, for example, were identifiable, they would not necessarily be susceptible to scientific solutions. Finally, while the philanthropic approach has a much wider potential impact, if often fails to appreciate the complex and extensive nature of effective problem solving.

As a response to the shortcomings of the charitable and philanthropic approaches, new modes have emerged that are in many ways descendants of scientific philanthropy. These new modes of foundational work can be summed up as strategic philanthropy. Although they have stimulated a healthy debate, they still focus on foundation processes rather than roles and do not address the question of the unique value that foundations can deliver in a democracy.

Foundations are currently experiencing increasing competition in their various fields of activity. They need to accept that, even though their operations are not motivated by a bottom line, they are competing for legitimacy, public attention, knowledge and expert resources, access to key decision makers, and, in the case of fund-raising foundations, for financial resources. It becomes immediately clear that they are agents in markets, both in the metaphorical and real senses of the term.

Looking at the role foundations can play in society, one should make a distinction between a sectoral and an institutional approach. Foundations are part of the larger nonprofit sector and, as such, they participate in the way boundaries are drawn between the corporate, public and nonprofit sectors of society. At an institutional level, a foundation must define its division of labor in comparison to other nonprofit organizations. Finally, as an individual player in the foundation sector, a foundation must identify its distinct strategic niche.

In positioning themselves with regard to all three levels, foundations define their market. They identify those whom they regard as their competitors, those whom they expect to provide services or activities complementary to their own, and those from whom they differentiate their approaches. This contribution of foundations looks primarily at the sectoral and institutional levels of the market and its boundaries.

The relationship between sectors is increasingly characterized by a blurring of boundaries between the market, public and nonprofit sectors. The public sector has come under pressure from the corporate world to perform more efficiently. This issue is known as new public management. In turn, the public sector