Nicole Richards | August 2017
Stanford Professor Rob Reich explains why he believes small philanthropic foundations shouldn’t exist, why perpetuity is problematic, and why philanthropy is asking the wrong questions.
Professor Rob Reich, Faculty Director at Stanford Center on Philanthropy and Civil Society (PACS), has been touring Australia this last fortnight, sparking debate and perhaps more importantly, reflection, about philanthropy’s role in democratic societies.
Reich contends that philanthropy, as the benevolent expression of the well-to-do, has more influence in modern democracies than it probably deserves. Philanthropy’s lack of public accountability, Reich has stated, means “we should view philanthropy, especially big philanthropy in the form of private foundations, as an exercise of power and plutocratic voice that warrants democratic scrutiny”.
“Without constituents, consumers, or competitors, wealthy persons are free to set up foundations for whatever purpose they please, with whatever money they wish, and to continue to hew to this purpose, regardless of the outcome of the foundation’s grant-making.”
Reich’s not suggesting that philanthropy has no place in democratic societies, but rather, the way we structure, disburse and account for philanthropy needs re-thinking as he explains in this conversation with Philanthropy Australia’s Chief Storyteller, Nicole Richards.
NR - You’ve been writing about philanthropy and its role in democracies for several years now. What’s changed, if anything, during that time?
RR – The first thing I’d say is the role philanthropy is playing—especially in the United States, and I’m led to believe in other countries such as Australia—now that wealth inequality has grown and the number of people who are extraordinarily wealthy has become concentrated at the top.
When people are very wealthy, the usual diminishing utility of a dollar to a very wealthy person means they have extra reason to be philanthropic. So, there are a larger number of big philanthropists than there were five years ago.
Gates was the first wave of what I would call the second gilded age in the US and that’s further populated by the Zuckerbergs and the 30-something billionaires who will become significant philanthropists.
So in that respect, to the extent that philanthropy is a help to democracy, the presence of people who’ve made a lot of money and feel some obligation, or at least some reason to give some amount of it back to society in the form of philanthropy, is a good thing.
Of course, on the other hand, if philanthropy turns out to undermine democracy, the presence of especially large philanthropists in greater number is perhaps not so good.
Though you’re often critical of foundations, you’ve said that at their best, foundations can play important roles advancing pluralism and discovery. Given the current political landscape in the US, are these roles increasingly important?
Yes, as a counterpoint to the diminishing appetite of government to play a role in what you could call R&D for democratic purposes or democratic experimentalism.
However, the orientation the Gates Foundation and other tech philanthropists have what I call a technocratic approach to philanthropy. It’s kind of engineering solutions to problems which often enough has a hint of: “Democratic institutions are inefficient and broken. Let the smart, technocratically-wise people work here and we’ll do better.”
I don’t think bypassing democratic institutions by philanthropists is a healthy thing. I think serving democratic institutions by playing this R&D role and then looking for a stamp of democratic approval or legitimacy is the orientation to take.
Would I wish the Gates Foundation away? Not in a heartbeat. Here’s a more concrete way to put it: even the wealthiest foundation in the world, the Gates Foundation, knows that with respect to education, it can’t bankroll the policy it prefers across every school in perpetuity.
When Carnegie came up with the idea of public libraries, he didn’t say that every town that wanted one would get one paid for by his foundation forever. No foundation has the money that could steward that, so it has to present the innovation to citizens, or in some cases to the market place, and say, “Look, if you think this works, give it a stamp of approval and either publicly fund it or send it off to the market which will bring investment capital and see it scale.”
So it’s a sense of serving democratic purposes rather than supplanting or subverting them.
Who confers the “stamp of democratic approval”?
Functionally, it would be a town council, a state legislature, the democratically representative body authorised with the spending of tax payer dollars.
How would you suggest philanthropy can best foster pluralism and discovery?
With respect to pluralism, if philanthropists turn out to be birds of a feather and they chase the latest fad causes, then there’s group think. People often say this these days of education policy philanthropy in the United States. It’s the Gates Foundation, the Walton Foundation and a whole bunch of other foundations which all more or less are in the same policy mode. I think it’s a healthier thing, democratically speaking, to have lots of different philanthropic voices with lots of different experiments at work.
If you have a concentration of the same experimental ideas philanthropically funded amongst lots of foundations, then you’re not fostering the pluralism that the sector should in fact represent.
I don’t think any particular foundation itself has to be pluralistic internally, you can have a very strategic orientation on a particular goal, but if lots of foundations, whether because of collaboration or happenstance, more or less end up in the same policy boat, that’s not good for pluralism.
Then, with respect to experimentalism, here I think—and I can’t speak for how it is that Australian citizens or philanthropists view it—but I heard your CEO at an event use the phrase “Philanthropy is risk capital”, and that captures some of the argument I have.
The thing is, if you have $100,000 and you create a small foundation with a modest payout each year, how much risk taking over a long time horizon can you take with a $15,000 a year grant making budget? My thinking is not so much.
If you’re a small foundation, you’re better off just making ordinary charitable donations. The policy implication is that I think there should be a floor on the size of foundations, not a ceiling.
Doesn’t that strengthen the level of influence the larger foundations have? And, to your earlier point, wouldn’t that limit the diversity of philanthropic voices?
It does strengthen the power of the larger foundations because it would, in my view, eliminate or make redundant the need for the smaller ones.
I don’t think there should be a policy that allows people under a particular figure to set up foundations, so yes, that by definition, would concentrate some power in the hands of a fewer number of people.
But, so long as that power is being exercised for the experimental discovery purpose, that’s an exercise in power that I think is healthy for democracy, so that’s good.
As to the pluralism, it’s not that I think people with $100,000 who might create a foundation shouldn’t make donations at all, I just don’t think the foundation form is the vehicle for it.
I think they should make charitable contributions however they wish, to whomever they wish, which keeps the pluralism or diversity of voices.
There are administrative and overhead costs that go along with a foundation and if you don’t have the capacity because of the size of your assets to do the R&D work but you’re spending all this money to hire grant officers or an accountant, if you were just making charitable donations out of your back pocket you’d get both more money out doing social good and the same pluralism or diversity of voices would be there.
Given the democratisation of philanthropy that’s been underway for many years and we’ve seen the rise of engaged giving rather than cheque book philanthropy, do you think the suggestion of reverting to passive donations is going to fly?
Fly in the sense of meeting social approval?
Fly as in persuading smaller or fledgling philanthropists not to go the foundation route?
I guess whether my policy proposal is feasible or not, the honest answer is I have no idea and if I were trying to assess it, my guess is probably not.
The kind of strategic impact orientation that is indeed a much larger part of philanthropy, whether it’s big philanthropy or ordinary charitable donations, has both a good side and a bad side.
The good side is the obvious point which is that people who are strategic and seek to measure the impact they have is far better than idiosyncratic, driven-only-from-the-heart philanthropy where you’re not even sure you’re having an impact and making a difference in the world.
On the other hand, the reason I have some concern about it is that a good part of what goes on these days in some philanthropic quarters is that the knowledge of how to make the change in the world resides in the heads of the people who are in the foundation or in the heads of the donors. And instead of say, having an application process where people can apply for funding, there’s no application process. Instead, the foundation staff goes out and looks for people to subcontract their part of the strategic operation—this is the technocrat orientation.
Often foundation people are quite intelligent, there’s no doubting that, but do non-profits or grantees want to be treated as subcontractors for the broad vision in the heads of the foundation only? There has to be some wisdom that resides in the heads of the grantees and a certain amount of strategic giving can often deny that that’s relevant.
You’re not a fan of foundations existing in perpetuity.
That’s true, but I’m a fan of long time horizons, so the life of the donor or 50 years after the death of the donor, that sounds fine. But perpetuity is problematic.
Do you see the sunset foundations, such as Atlantic Philanthropies which has just wrapped up its activity, as a more promising way forward?
Seeing as it’s more common these days but hardly prevalent I think we should study them and learn more and if I had to convert my view on this into a policy proposal, at least in the US, the default legal arrangement when you create a foundation is that it exists in perpetuity and you can choose to spend out in your lifetime. I’d rather have the default arrangement be a sunset clause and that you could opt in to perpetuity, but you’d have to provide some justification for it.
You’ve mentioned in the past that foundations generally aren’t great risk takers. Do you think that’s changing?
The simple answer is that I don’t know. The things that I’ve written that suggest that foundations aren’t great risk takers are taken entirely from the words of other people in the foundation sector. I’ve tried to set out a kind of standard by which to evaluate whether foundations serve a democratic purpose and then pilfer the views of other people whether they’re risk-taking and that would be further research for me or other people to do.
But, I can give you a really concrete example of what I have in mind. If you have a multi-million dollar foundation which is making donations to the local food bank, that’s not an R&D undertaking, that’s ordinary charitable giving which you could accomplish just as successfully by writing a cheque. You do not need a program staff and the foundation form to carry that out.
Foundations ought not to be doing small ball, low risk, short time horizon service delivery. They ought to be experimenting with novel things.
You’ve also suggested that philanthropy is asking the wrong questions when it focuses on how to achieve more impact or greater effectiveness. What’s the right question?
How to serve democratic institutions and purposes.
 Repugnant to the Whole Idea of Democracy? On the Role of Foundations in Democratic Societies https://www.law.berkeley.edu/wp-content/uploads/2016/01/Repugnant-to-the-Whole-Idea-of-Democracy_On-the-Role-of-Foundations-in-Democratic-Societies..pdf p 9.
 ibid, p 11.
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