Foundations and the Changing Landscape of Philanthropy
As disruption becomes the norm in nearly every business sector, there are many trends that also disrupt the way charities operate, and foundations are no exception.
Foundations face a unique set of challenges, including:
- Generating a return on investments sufficient to maintain consistent levels of giving to the communities they serve
- Accurately capturing financial and nonfinancial data
- Communicating outcomes
And adding to the list of challenges, for community foundations, is the recruitment of new support and donors.
But these challenges can also provide new opportunities. Here are three examples of current trends in which foundations can embrace disruptors and leverage them to help lead philanthropic giving.
- Government funding and tax changes
- Changing attitudes in donor giving
- Emerging digital vehicles for philanthropy
Charities are increasingly at risk for decreases in funding from government agencies. Changes in tax laws have reduced tax incentives, which may impact charitable giving in the private sector. At the same time, charities are challenged with addressing growing needs while also facing decreased administrative support.
Reduced government funding does not reduce the need to provide services to the communities foundations serve. In fact, government agencies are looking to charities to continue their current programs and do even more. Charities are constantly competing for the same government funds and private contributions, and they are increasingly looking to foundations for financial support.
Foundations have unique access to information regarding financial and programmatic data of various organizations. Using data analytic tools, foundations can use this data to evaluate the needs of the communities they serve as well as the effectiveness of current programs. Identifying innovative and cost-effective programs can also assist foundations in identifying the charity or collaborative group of charities that can best deliver a solution. Foundation support can then focus on these areas.
Foundations can also lead the way with facilitating cooperative agreements, partnerships, or mergers by allocating funds for programs, capital, and operational support to those charities that are willing to work together toward a common outcome.
Donors’ attitudes toward giving have been changing due to evolving demographics and technological advances. The new donor is trending more towards women – as women now control more than half of the private wealth in the U.S. – and to tech-savvy individuals who use digital platforms to support their philanthropic goals. These donors often contribute their time and money toward big and ambitious goals. Technology gives them access to data and broader access to organizations beyond their local charities.
Tech-savvy donors, who can access data directly, may rely heavily on quantifiable metrics, which often fail to capture the full impact of giving. The information gained from this data, along with published accounts of alleged not-for-profit improprieties, has led to a lack of trust in traditional organizations and not-for-profit effectiveness. These donors have turned to other options for their philanthropic goals.
One example resulting from this trend is crowdfunding. Crowdfunding has grown as an impactful alternative to traditional charities. Crowdfunding is a digital tool designed to allow large numbers of individuals to invest or contribute money in support of new businesses, people in need, interesting ideas, or important causes. Crowdfunding focuses on generating small donations and making connections with a mass number of donors with a shared passion for the same cause, rather than traditional fundraising of large donations from a few mega-donors.
Another digital trend is contactless payments, where donors make monthly payments by credit card, online contribution, or by text message. Research indicates that donors who make contactless payments tend to give more than the average cash donor.
Foundations and charities can both benefit by effectively using technology to reach these donors. However, harnessing the power of digital platforms requires significant resources and technical expertise that many charities lack. Foundations can lead the way by identifying collaborative uses of technology. A single team of specialists with expertise in social media and new technology solutions could develop a platform for foundations that also can be shared with the charities supported by the foundations. This platform could provide outreach to potential donors of the foundation and charities. At the same time, the platform can be used as a tool for collecting valuable donor data.
Foundations can also lead the way in improving outreach to new donors. Education and networking programs for charities, women, and younger donors can nurture new relationships and shared ideas.
New donor attitudes have led to new vehicles for philanthropic activities. One of the most well-known vehicles is the donor-advised fund (DAF). DAFs are a type of giving vehicle created to manage charitable donations for organizations, families, or individuals. A donor creates a fund by making an irrevocable, tax-deductible contribution to a fund and gives up all rights to the assets. Although the DAF sponsor is responsible for investing the funds and making gifts to charities, donors may advise on how their account is invested and provide suggestions for distributions to specific charities.
DAFs are popular because they allow individuals and families to make charitable gifts over time and reduce administrative burdens.
According to the National Philanthropic Trust 2018 Donor-Advised Fund Report, DAFs grew significantly between 2016 and 2017:
2017 2016 Increase
Number of DAFs 463,622 289,478 60.1%
Contributions to DAFs* $29.23 $25.09 16.5%
Charitable assets held in DAFs* $110.01 $86.45 27.3%
Impact Giving and Socially Responsible Investing
In the U.S., nearly $1 trillion is committed to philanthropy through foundations, DAFs, and other funds. Yet, only a fraction of these funds is expended directly on charitable donations for the public good. The bulk of philanthropically committed capital is invested and put to work to create income to support charitable efforts, but does not directly support those efforts. Socially responsible investing, on the other hand, is a philanthropic approach that blends profit-motivated and market-connected activity to philanthropic goals by using both generated income and the invested funds toward charitable events.
Program-related investments (PRIs) are a method of socially responsible investing that makes capital available to both not-for-profits and for-profits that are addressing social concerns. With a PRI, a foundation lends or invests its endowment in a way that furthers its mission. At the same time, the investment has the potential of providing a positive financial return to the foundation’s endowment. This method essentially uses and recycles the endowment.
Socially responsible investing is also supported by other business structures such as a benefit corporation or a taxable limited liability company (LLC). A benefit corporation may pursue socially minded purposes as a corporate objective, where traditional corporations are required to maximize shareholder profits. LLCs can be created to support the social good. This type of entity receives no tax benefit but gains flexibility to execute its mission more effectively. The most notable of these recent endeavors is the Chan Zuckerberg Initiative. This LLC received a gift of shares in Facebook with the expectation that the shares would be sold and the proceeds used to donate to charities, invest in other for-profit entities with like-minded missions, or contribute to political efforts to advocate for its mission.
Foundations have already taken the lead in this area by sponsoring DAFs and making PRIs. Some foundations have also expanded into other types of socially responsible investing. As foundations proceed in this direction, they can provide valuable assistance to existing charities. Education is an important first step. Foundations can educate themselves and charities on:
- Identifying socially responsible investing sources to support current or future programs
- Evaluating the use of benefit corporations or other socially responsible investing organizational structures
- Developing business plans and outcome measurement tools
Foundations will continue to be looked upon to provide support to charities. In providing financial support through grants and non-traditional investments and leadership through technology, data, and outcome measures, foundations can bring together members of the not-for-profit sector to help create stronger, more efficient charitable organizations. Although there are many disruptors in today’s philanthropic landscape that at first appear daunting; they may, in fact, create opportunities and a new journey toward collaboration and positive outcomes.
For more information about philanthropic trends and foundations, please look for our forthcoming Not-for-Profit & Education Industry Perspectives Report, featuring insights from foundation executives and industry trends.
This has been prepared for informational purposes, is general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without first obtaining professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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