Stanford Social Innovation Review

The Poster Child for Failure in Philanthropy

A lot of people pretend that philanthropy is easy—that every grant meets its objectives, and that foundations, despite taking risks, knock the ball out of the park every time.

Wrong. Innovation and constant success are mutually exclusive. It is impossible to do anything noteworthy while consistently avoiding failure. If you never fall and skin your knee, then you’re hanging out in the kiddie section of the playground.

Jim Canales, the CEO of The James Irvine Foundation, has some badly scarred knees. And he’s proud of it; he believes that “failure” is the mark of someone who takes risks and pursues difficult tasks. Last year at the 2007 Council on Foundations conference, Canales was a panelist at the Demonstrating Impact session along with Joel Fleishman, author of The Foundation: A Great American Secret, and James Knickman of the New York State Health Foundation. While the session was nominally about the extent of philanthropy’s impact, at its core it argued that by being transparent and honest about what works and does not work in philanthropy, we will truly demonstrate impact.

Canales was back at this year’s conference, but this time he was accompanied by the brilliant Phil Buchanan of the Center for Effective Philanthropy. In his session, “The Advantage of Sharing Failures,” Buchanan pointed out that while the Council on Foundations conference has long booked sessions about innovations, session about failure have been nonexistent.

Jim went through a list of the pros and cons of sharing failure:

Pros

• You share knowledge. Knowledge and capital are all that foundations have, so we must effectively share both.
• You help others avoid common mistakes.
• You improve your own work by valuing self-reflection and learning.
• You reinforce your commitment to impact and effectiveness.

• You potentially harm your grantees.
• You might damage your reputation.
• You might discourage others from taking on high-risk ventures by highlighting the difficulties you’ve encountered.
• You provide fodder for people who are against foundations.

There is a risk to reputational damage if all of your colleagues refuse to recognize mistakes and foundations pretend to be infallible forces for good. Canales and Paul Brest (from the Hewlett Foundation) both published reports on their mistakes last year. As far as reputational risk, what they got for their trouble was coverage in The New York Times, an op-ed in The Chronicle of Philanthropy, and an enhancement of their already stellar reputations. Their colleagues hung them out to dry, but the lack of other foundations taking similar steps makes Canales, in his own words, “the poster child for failure in philanthropy.” Still, he hasn’t suffered any reputational damage. Instead he is asked to lead sessions at philanthropy conferences.

Confessing difficulties and then having nothing bad happen to you for doing so (as is the case with Brest and Canales, and will likely be the case in 99 percent of future cases), encourages people to take risks. The people who are not joining Canales in sharing failures discourage other people from taking risks.

Does talking about failure provide fodder for people who are anti-foundations? Last year at the Demonstrating Impact session, a member of the audience who identified herself as a professor of marketing stood up to say that people who admit their mistakes publicly are viewed as more trustworthy afterwards. Enough said.

At the Demonstrating Impact session, panelist James Knickman summed it up well:

“We need to frame our release of ‘failures’ as an attempt to learn. No one tells scientists they are a failure when one of their experiments [doesn’t] work!”

And my comment at the time, which I still stand by, was:

“That’s it right there. What philanthropy is engaged in is an experiment; an experiment in how we can all make the world a better place. We don’t know what the right answer is. In fact, the ‘answer’ is probably evolving as quickly as we can design experiments. But by being transparent, by sharing successful ideas and failed ideas, by judging ourselves not on the outcomes of each grant, but on the body of knowledge that we contribute to the field, we will truly transform philanthropy.”

I know this stuff is hard. But during the “Failure” session, moderator Toni Freeman of the Duke Endowment told a wonderful story that highlighted the difficulty. She described her decision to take a firefighter training class as leadership training. She was told, “You are going to climb up to the seventh floor and jump out the window.” She thought, that sounds good! But standing on the ledge, every fiber of her body was telling her not to jump. Yet she did. And then she climbed back up and jumped out of the window two more times.

And each time it was easier.

Sean Stannard-Stockton is a principal and director of Tactical Philanthropy at Ensemble Capital Management. Ensemble Capital provides families both traditional investment management and philanthropic planning. He is the author of the blog Tactical Philanthropy and writes the column On Philanthropy for the Financial Times.

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Vision, Leadership, and Partnership

On Tuesday evening, the famed cartoonist Milt Gross made an appearance at the Council on Foundations annual conference. In a session called Strategic Philanthropy: Theory and Practice, the speaker Paul Brest, president of the William and Flora Hewlett Foundation, flashed on the monitor a cartoon of howling wolves gathered at the edge of a cliff. One of the wolves had taken a break from howling to ask his companions, “My question: Are we making a difference?”

The attendees at this week’s philanthropy summit in Washington D.C. met up to ask themselves the same question. As a blogger, I wasn’t privy to many of the intimate conversations among colleagues and close friends in the foundation world. I didn’t hear the uncertainties that were no doubt expressed in whispered voices between conference sessions and at the gala events. Instead, I heard bold proclamations on what it takes to make a difference: namely, the right combination of vision, leadership, and partnership.

In his presentation about strategic philanthropy, Brest presented an outline of his foundation’s approach to all three points. For vision, Brest said a foundation must first establish a viable theory of change. “If your theories of change are incorrect, your interventions will only be right by accident,” warned Brest.

He had just finished explaining a case study in New York City in which police implemented a program to reduce crime by arresting people for petty offences. Crime went down, which was the desired effect. During the same time, however, crime also dropped in cities that had not implemented a similar program. In this case, the desired impact may not have been linked to the city’s theory of change. 

Brest went on to discuss the importance of maintaining an “expected return attitude,” in which every effort is made to assess an intervention’s cost and likelihood of success. Doing so permits grantmakers to recognize and mitigate risks; justify large expenditures with the prospect of high returns; and be candid if and when failure sets in. He also emphasized the need for complete “logic models” to explain how change happens and evaluation criteria to measure success along the way.

According to Brest, failure to demonstrate leadership in these respects can result in wasted money, or worse, “unanticipated bad consequences.” In seeking partners, the William and Flora Hewlett Foundation looks for grantees and co-funders who share a similar theory of change and demonstrate willingness to candidly assess each program during and following an intervention. Brest’s professionalism commanded respect in the room full of his peers and colleagues. Quiet in his delivery and precise with his words, I was left thinking that calmness is king in vision, leadership, and partnership. 

On the following day, “Teacher of the Year” and bestselling author Ron Clark tore this hypothesis to pieces during his closing plenary of the leadership summit. Clark, who jumps rope “double-dutch” with his middle school students, delivered half of his speech while literally jumping from table to table in the closing plenary ballroom. I have never seen a more hyperactive successful adult.

In an abandoned factory turned state-of-the-art school, Clark has setup a scholastic program that transforms Atlanta’s poorest school children into over achievers. How? By mixing together the same ingredients that Paul Brest documented with Pentagon restraint.

Clark’s school has honed and implemented an accurate theory of change. That is children perform best when their instructors have high expectations, maintain rules, believe in their students’ futures, and serve as living role models of creativity, innovation, and free thinking. Clark has created a partnership with his students, their parents, and school staff by winning them over to this theory. Together, they are reaching unlikely heights of academic achievement and preparing “a new generation for leadership in a globalized world.”

Clark’s description of his school in Atlanta reminded me of a quote I heard earlier in the day. Andrew Gillum, director of the Young Elected Officials Network commented on the electoral success of young people of color, including himself. “We did the impossible, because we didn’t know what was supposed to be impossible.”

At the end of Ron Clark’s Broadway performance renamed a closing plenary, the audience of more than 1,000 grantmakers gave him a standing ovation that extended for minutes. It sounded like wolves howling. They stood up to applaud the fact that at least one among them was making a difference by harnessing the right combination of vision, leadership and partnership.

Peter Deitz is a micro-philanthropy consultant and the founder of Social Actions, a website that helps individuals and organizations use social media to plan, implement, and support peer-to-peer social change campaigns so that grassroots solutions to local and global problems can flourish.  He also writes a blog about micro-philanthropy.

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Bloggers Cover the Council on Foundations Annual Conference

The Council on Foundations deserves two thumbs up for putting together a thought-provoking leadership summit that attracted philanthropists and foundation staff from across the globe. Unfortunately, their effort to communicate what was happening at the event to people who could not attend was less successful.

The homepage of the Council on Foundations does not feature a single headline about the conference. Visitors can click on a text link that redirects them to Philanthropy Today, the Council on Foundations website devoted to covering the event. This website features pictures with captions that read “undefined.” The video section features a screenshot of a media player with the words, “Coming soon.” On the up side, visitors can treat themselves to PDF versions of the conference’s daily print newsletter.

Contrast the coverage described above with an anecdote from Kassie Rohrbach, director of the Energy Action Coalition and a panelist on a session this morning called The Millennials and the Moment: Youth Engagement and Leadership Development. As the organizer of the PowerShift 2007 Conference, her organization provided video training and gave cameras to interested attendees so they could cover the event using social media. The result is this powerful set of videos and this collection of images, created entirely from attendee-generated footage of PowerShift 2007. If I could make one point, it would be that the Council on Foundations can learn from the communications strategies of its youngest members.

So what are non-attendees interested in the summit to do? There are two solutions.

(1) Sean Stannard Stockton of Tactical Philanthropy, a leading philanthropy blog, organized a blogging team to cover the conference. A group of us has posted more than 30 blog entries, with more on the way. Here are links to the most recent posts:

• The Next Generation
• Telling the Story of Philanthropy
• links for 2008-05-07
• Facing Reality in Philanthropy
• Engaging Donors and the “Y & H”
• Tactical Philanthropy Un-Reception
• Don’t Worry, I’ll Save Democracy!
• Foundations & Human Rights
• The Language of Philanthropy

(2) The Chronicle of Philanthropy also sent a blogger delegation to cover the conference. They have published a Council on Foundations notebook for the last three days. 

Here are the most recent blog posts from The Chronicle of Philanthropy:

• Debating Diversity
• Different Approaches Needed for Poorer Communities
• Who Can Name a Foundation?
• How Foundations Can Best Help the Poor
• More Than Money: How Foundations Can Help After a Disaster
• Brace for Tough Times, Grant Makers Warned

The Tactical Philanthropy and Chronicle of Philanthropy blogging teams have done most of the heavy lifting in getting news out about the conference. And yet, not all bottom-up coverage of an event like this one works out 100 percent. Those of us covering the summit have added the COF2008 tag to our blog entries. Technorati, a tag-based aggregator of blog entries, has confused the Council on Foundations 2008 conference with the Czech Open Fighting 2008 competition, which also used the COF2008 tag. 

As a result, all of the blog entries from the Tactical Philanthropy blog team now appear alongside videos of the Czech Open Fighting event. I guess crowd-sourcing has its limits.

Peter Deitz is a micro-philanthropy consultant and the founder of Social Actions, a website that helps individuals and organizations use social media to plan, implement, and support peer-to-peer social change campaigns so that grassroots solutions to local and global problems can flourish.  He also writes a blog about micro-philanthropy.

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Philanthropy 2.0: A Video Q&A

Yesterday at the Council on Foundation’s annual conference, the session entitled Philanthropy 2.0 featured a star-studded panel. The founders of DonorsChoose, Facebook Causes, and The Motley Fool were joined by the East Coast Development Manager of Kiva.org and the Director of Social Investment for The Case Foundation.

Roughly 150 people attended the session, choosing Philanthropy 2.0 over a host of other really awesome sessions.  Session facilitator Sharna Goldseker, vice president of the Andrea and Charles Bronfman Philanthropies, took a quick survey of the audience. The attendees consisted of 30 percent family foundations, 40 percent community foundations, 5 percent corporate foundations, 10 percent private foundations, and 15 percent foundation consultants and advisors.

For the first hour of the session, the presenters showcased what they have been doing with web 2.0 and philanthropy. For those who aren’t familiar with the platforms listed above:

DonorsChoose.org – A donation site that connects teachers who need supplies for classroom projects with citizen philanthropists interested in funding the projects. (67,400 donors, $1.2 million since 2000)

Facebook Causes – A popular application on Facebook that permits anyone to start a fundraiser on behalf of a registered 501c3 organization. (12 million users, $2.5 million raised since 2007)

Kiva.org – A community of advocates of micro-finance that permits individuals to make loans to small-business owners in the developing world. (270,000 lenders, $28 million lent since 2004)

The Motley Fool – A web 2.0 financial investment community that also runs an annual program in which investors make donations to a select list of charities.

The Case Foundation – A family foundation started by AOL founder Steve Case that has invested heavily in the tools that make micro-philanthropy possible and has run several contests that encourage individuals to become citizen philanthropists.

After the presentations, the conversation gave way to a “Q&A” session, in which foundation representatives asked the panel how philanthropy 2.0 could impact their own work.

Here is a video of the Q&A. (From left to right: Michael D. Smith, director of social investment, The Case Foundation; Rupa Modi, East Coast development manager, Kiva.org; Tom Gardner, co-founder, The Motley Fool; Charles Best, founder, DonorsChoose.org; Joe Green, founder, Facebook Causes)

Yesterday morning I also attended a session entitled Social Entrepreneurship: New Approaches to Changing the World. The session featured several notable speakers including: Bill Drayton, CEO and chair of ASHOKA; Brian Trelstad, chief investment officer for Acumen Fund; Erich Broksas, vice president of business development for The Case Foundation; J. Gregory Dees, professor of the Practice of Social Entrepreneurship at the Center for the Advancement of Social Entrepreneurship; and Jed Emerson, project manager of Strategy and Performance for The Edna McConnell Clark Foundation.

By the end of the day, I felt compelled to draw up a list of seven tips I had heard for foundations looking to “push the envelope” of philanthropy. The following ideas come from the two sessions I attended and an interview with Bill Somerville, author of Grassroots Philanthropy: Field Notes of a Maverick Grantmaker.

Here are the suggestions, in no particular order:

1. Put young people on your board, or consider creating a junior board for generating new ideas in grant-making, program evaluation, and technology-assisted philanthropy. (Source: Participant in the “Social Entrepreneurship” session)
2. Create room for “high risk/high reward” grants, and learn from any failures. As a foundation, having philanthropic “scar tissue” could be a good thing. (Source: Presenter in the “Social Entrepreneurship” session)
3. Open source the design of micro-philanthropic solutions, ie, integrate your constituents’ ideas and preferences into the planning and implementation of grant-making programs. (Source: Charles Best, DonorsChoose.org)
4. Use social networks to tell people what organizations your foundation is funding, and why. This will permit you to serve as a scout for citizen philanthropists looking to make informed decisions about where they can direct their philanthropic dollars. (Source: Joe Green, Facebook Causes)
5. Experiment with using social media. Don’t worry if it doesn’t work out. On the Internet, you can always maneuver quickly when something isn’t having the results you expected. (Source: Rupa Modi, Kiva.org)
6. Commit your foundation to funding nonprofits and to creating more change-makers in the world. A society of change-makers will solve the problems your foundation cannot solve on its own. (Source: Bill Drayton, Ashoka)
7. Trust your program staff to make grants. This will speed up the process of moving money to where it’s needed most. Board members can confirm the grants after the fact. (Source: Bill Somerville, Philanthropic Ventures Foundation)

Peter Deitz is a micro-philanthropy consultant and the founder of Social Actions, a website that helps individuals and organizations use social media to plan, implement, and support peer-to-peer social change campaigns so that grassroots solutions to local and global problems can flourish.  He also writes a blog about micro-philanthropy.

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The Davos of Philanthropy: First Impressions

Yesterday, I arrived at the Council on Foundation’s annual conference entitled, “Philanthropy’s Vision: A Leadership Summit.” For the next four days, I will post a round-up of my experiences at the conference for readers of the opinion blog at the Stanford Social Innovation Review. 

As a micro-philanthropy consultant and blogger, I have focused most of my attention on the tools that make small-scale grant-making possible, including DonorsChoose, Kiva, and Facebook Causes. But micro-philanthropy also encompasses new ways of thinking about donor engagement, the grant-making process, and program evaluation. I’m looking forward to using the Council on Foundation’s leadership summit as an opportunity to focus on these other issues.

Here are a few questions I have going into the conference:

• What interest do brick and mortar foundations have in using technology to broaden participation in grant-making?
• How can we overcome the perception that technology-assisted philanthropy is a phenomenon for the next generation to figure out?
• In what ways can micro-philanthropy facilitate co-funding opportunities and unlikely partnerships among activists, foundations, and the corporate sector?
• Is there interest on the part of foundations to use technology to collaborate, or at least create the appearance of collaboration?

I expect to find some clues in the next few days that will help me piece together a few initial answers to these questions. For the duration of the conference, I will be wearing my blogging hat only. I’ve committed myself to asking questions, listening, and learning from the incredible gathering of people.

Of course, I have my own experiences and ideas to bring to the debate. But I’ll be leaving my preconceptions at the door. I’m entering the conference with fresh eyes on an issue that’s very dear to me.

Day 1 Round-up: May 5, 2008

I find myself on the edges of what could easily be called the “Davos of Philanthropy.” Roughly three thousand attendees have flown in from across the globe to discuss the current and future states of global philanthropy.

A few phrases from the opening statements of Steve Gunderson, the Council on Foundations executive director, jumped out as worth noting:

• “Philanthropy must become a movement, more than an institution”
• “Our greatest power is not in the checkbook but in our vision.”
• “Either we frame the conversation about philanthropy, or our detractors will.”
• “Market economies are best when joined with a strong philanthropic movement.”
• “If we do not believe change is possible, we cannot be philanthropists.”

Gunderson’s remarks were followed by a video essay from Roger Rosenblatt, contributor to the MacNeil/Lehrer NewsHour. Rosenblatt’s vision of the future of philanthropy jives 100 percent with the potential I see in micro-philanthropy to transform traditional philanthropy into a vibrant, inclusive and very public force for good.

The big ideas of Rosenblatt’s video testimony:

• Ordinary citizens are left out of contemporary philanthropy
• Non-philanthropists equate philanthropy with charity, as opposed to strategic efforts to solve the world’s most pressing problems.
• Philanthropy can make use of ordinary citizens, who would amplify the work and mission of foundations
• Foundations should reconsider their inclination to “work in the shadows”
• When foundations take a more public role in the media, they will reframe the news from a conversation about problems into a platform for demonstrating that problems have solutions.

That the Council on Foundations chose to feature this video statement from Rosenblatt in the opening session suggests that there’s interest in broadening participation in philanthropy. I’m excited to ask attendees what they thought of the message, and whether it resonated.

Peter Deitz is a micro-philanthropy consultant and the founder of Social Actions, a website that helps individuals and organizations use social media to plan, implement, and support peer-to-peer social change campaigns so that grassroots solutions to local and global problems can flourish.  He also writes a blog about micro-philanthropy.

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Root Causes vs. Facebook Causes

Each day in the philanthropy blogosphere, somebody spills some digital ink covering the emergence of new platforms for social action. Online communities such as Facebook Causes, DonorsChoose, Kiva, Change.org, and SixDegrees are the most frequently cited harbingers of change in the way philanthropy happens. 

The attention lavished on these platforms is a net gain for micro-philanthropy. With each blog post, more people find innovative ways to support grassroots initiatives. Recently, even mainstream media outlets such as MSNBC (Facebook Causes), Oprah (Kiva), Steven Colbert (DonorsChoose), The Wall Street Journal (Change.org), and CNN (SixDegrees) are covering micro-philanthropy. 

It’s easy to get caught up in the excitement that surrounds these initiatives. But maintaining a critical lens is equally important. I am concerned that few, if any, social action platforms are currently leveraging the self-organizing potential of social media to address the root causes that make online social activism necessary in the first place. 

As food for thought, here are two excerpts from Wikipedia’s entry for “root causes”: 

• “Solving a problem by addressing root causes is ultimately more effective than merely addressing symptoms or direct causes.”
• “An issue closely related to solving an existing problem is [how] to foster learning that will embed knowledge (within a person, group, or organization) that may help prevent similar problems from occurring in the future.”

As legions of digital natives start to self-identify as citizen philanthropists, they should be given online tools that permit them to do more than donate to an existing organization or recruit friends to a cause. 
Instead, micro-philanthropists should be as respected as large-scale philanthropists. They should be treated in a way that implies that they can address the root causes of a problem and spread the knowledge required to resolve similar problems. 

The following exemplify deeper level corrective actions that social action platforms could facilitate:

• Creating feedback mechanisms where individuals and beneficiaries of nonprofit programs can immediately inform the program staff whether a service is having the desired effect;
• Pioneering innovative models for philanthropy where individuals can coalesce into collective grant-making bodies that fund community-level social change projects;
• Building a tax-deductable open marketplace for funding outstanding individuals and informal projects;
• Using constituent and donor pressure to bring about new forms of collaboration among nonprofit groups and foundations.

Will platforms like Facebook Causes, DonorsChoose, Kiva, Change.org, and SixDegrees render top-down organizations obsolete? Do they bypass old-school methods of fundraising and grant-making? Have they planted the seeds for a society composed of highly motivated micro-philanthropists? 
When the millions of active users on these platforms are busy addressing root causes instead of symptoms, then my answer to these questions will most certainly be, “yes, yes, and yes.”

Peter Deitz is a micro-philanthropy consultant and the founder of Social Actions, a website that helps individuals and organizations use social media to plan, implement, and support peer-to-peer social change campaigns so that grassroots solutions to local and global problems can flourish.  He also writes a blog about micro-philanthropy.

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Bernholz’s Law of Philanthropic Adaptation

Late on a Friday afternoon (April 8), feeling a little punchy after a long week, I posted Bernholz’s Law of Philanthropic Adaptation 1.0. Then I wound up thinking about it most of the weekend. Here is the first upgrade.

Bernholz’s Law of Philanthropic Adaptation, 1.1:

The rate and cycles of philanthropic adoption of new technology follow a fairly predictable pattern, regardless of technology. This pattern is:

• Phase Zero – ignore new technology.
• Phase One of philanthropic adoption of a new tool is fundraising. (See this application of iPhones)
• Phase Two (in the case of bet2give phase one and two are simultaneous) is using charitable giving as a means of attracting customers to some other business model. (See good2gether or goodsearch)
• Phase Three is using the tool to publicize the philanthropic status quo (see almost every foundation website)
• Phase 3.5 – meanwhile, real change will begin happening on the edges, as innovators recognize the implications of lowered transaction costs and global attention (see globalgiving or networkforgood).
• Phase Four involves trying technology to change the edges of philanthropic practice (see Packard Foundation’s Nitrogen Wiki).
• Phase Five brings us to the conference circuit, where we will learn (perhaps with some bemusement) about technology applications that “came in from the edge” and are now discussed as mainstream. ( globalgiving and networkforgood)
• Phase Six – we watch in envy as a real twist or two in the playing field as we know it happen, and kiva.org reshapes microfinance and donorschoose catches public school foundations off guard. They also get adoring press attention.
• In Phase Seven – big foundations amplify attention on “little” innovations and while attention is directed there…
• …Phase Eight begins, in which the reality of how change happens is setting in and new philanthropic supports for these new ways of being are being created (while we’re looking elsewhere.) In other words, we’ve entered phase one of a new cycle.

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Short-term vs. Long-term Focus in Philanthropy

In the summer 2007 edition of the Stanford Social Innovation Review, Charles Conn, a senior advisor to the Gordon and Betty Moore Foundation and a high tech executive, wrote about the short-term focus of most foundations in an article titled Robbing the Grandchildren:

“If future generations could vote on how foundations invest their money today, would they choose the current allocation? Byron Swift, chair and executive director of the World Land Trust, suggested this thought experiment to me, and I am disturbed to find that my answer is no...U.S. charitable foundations are better positioned than companies, governments, and universities to address these long-term, potentially catastrophic problems. One of the few sources of long-term risk capital, they control more than $500 billion in assets, generating funding that with other charitable giving totals almost 2 percent of GDP. With Warren Buffett’s gift, the Gates Foundation alone will control more than $60 billion in assets and $3 billion to $5 billion in annual spending. Other foundations closely associated with the digital revolution (such as Dell, Ellison, Packard, Hewlett, Moore, Omidyar, Page and Brin, Yang) could account for at least $50 billion to $70 billion more.

Perversely, though, many of these new tech entrepreneurs are worsening foundations’ shortsightedness by implementing businesslike metrics and controls in a way that reinforces short-term thinking and behavior. Other questionable management practices, such as low payout rates and lack of coordination with other organizations, further aggravate foundations’ myopia…A recent movement, sometimes called philanthrocapitalism or venture philanthropy, seeks to avoid complacency and lack of focus in foundation management by introducing rigorous success metrics and accountability practices. Many of these new-style foundations limit their scope to a few problem areas and, like corporations, intensely monitor outcome metrics, often with tight windows for review. To those of us who came to foundation work after a career in business, this sounds eminently sensible; after all, the foundation world is littered with fragmented, unfocused, and failed programs...This short-term, metric-focused approach likewise hampers grantees. Foundations take the passionate and committed people in these institutions and harness them to near-term indices of progress. Grantees, in turn, stop playing the long-term game in order to keep the money flowing. They aim lower, too.”

I agree completely with Conn’s thesis, but I want to elaborate, since Conn fuses “short-term,” “metric-focus,” and “businesslike” as if they automatically go hand in hand.

In the stock market, most people have become more and more short-term oriented. In the 1950s, investors held stocks for an average of 7 years. Today the average is 11 months. Investors have gained access to vast amounts of information they never used to see; and yet in many cases, this information has resulted in investors frequently changing their minds rather than gaining more conviction in their decisions.

However, almost all great investors make financial decisions based on a long-term outlook, not a prediction of what will happen in the next three months. At the investment management firm in which I am a partner, we talk about “arbitraging other investors’ time horizons.” In other words, we try to identify situations where short-term bad news about a company causes other investors to sell the stock so that we can buy it at lower prices. We use short-term good news that causes a stock to move higher to sell stock in companies whose longer-term outlook we think is deteriorating. Warren Buffett, or most any great investor, will tell you that Wall Street’s obsession with quarterly earnings reports is misplaced. Some companies (such as Coca-Cola, a company Buffett has owned a long time) have stopped issuing guidance to investors regarding what their next quarterly earnings might be.

Frequently, a short-term focus goes not with a quantitative metric focus, but with knee-jerk emotional reactions. When an investor buys a stock and then sells it soon after based on “bad news,” it is highly unlikely that the new information justified a reversing of the investors’ position. More likely, the investors threw out the fundamental reasons they chose to buy the stock and decided to sell out of fear.

It is human nature to want results as quickly as possible. But to achieve success, we must match our investment decisions to our time horizon. If we want to fix a local school because our child will be attending starting next year, then it might make sense to focus on short-term solutions. But most donors fund issues because they want to have a sustained impact on a situation. The techniques that might reduce crime in a bad neighborhood the most over the next month are unlikely to be the techniques that will have the largest, permanent impact on reducing crime rates over the next couple of decades.

Financial market participants are often short-term focused. They often focus on metrics that describe short-term conditions, but do little to illuminate long-term trends. But great investors and great philanthropists must focus on the information that matters to the long-term success of their projects. The short-term focus that Conn complains about may well be a problem common to many people in business. But it is a characteristic of meritocracy, not of the best business minds. Metrics and businesslike thinking have a place in philanthropy (but in no way are the best approaches to every problem). But short-term thinking is rarely useful.

Disclosure: Nothing in this post should be considered investment advice.

Sean Stannard-Stockton is a principal and director of Tactical Philanthropy at Ensemble Capital Management. Ensemble Capital provides families both traditional investment management and philanthropic planning. He is the author of the blog Tactical Philanthropy and writes the column On Philanthropy for the Financial Times.

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Is Philanthropy Going Open Source?

Several years ago, I wrote a book chapter about open source philanthropy. It is in The World We Want, edited by Peter Karoff and Jane Maddox and includes an interview with me called, “Open Sesame: Networks of Cooperation and Open Source Solutions.”

It presented seven building blocks for bringing open source principles to philanthropy.

These seven building blocks of open philanthropy are:

1. Facilitate adaptation; don’t hinder it
2. Design for interoperability; local specificity will follow
3. Build for the poorest
4. Assume upward adaptability
5. Creativity and control will happen locally
6. Diversity is essential
7. Complex problems require hybrid solutions

And more recently I’ve been thinking about public ideas, crowdsourcing innovation through Kluster or Social Innovation Camp, and now the folks at Social Edge are onto the idea - read this discussion on open source social entrepreneurship. If nothing else, the basic premises of seeking diverse input, trying some design methodologies such as rapid prototyping, and drawing from multiple disciplines are strategic approaches to solving social problems that are starting to gain some traction.

These concepts are all exciting, and they also raise some questions for philanthropy. Where are the lines between public and private when it comes to ideas for the public good? Can or should someone be able to own a policy innovation? Protect a service delivery process? Are all socially positive ideas public? How will new entities like L3Cs or B corporations re-mix the assumptions about ideas and innovation as proprietary sources of business proposition - or are they public goods?

What are the best ways to encourage creative thinking and bring the ideas to action? Is social entrepreneurship better at this than anything else? Are social entrepreneurs even paying attention to raging intellectual property debates - and, if so, how and why? What should they be asking? What should philanthropy be asking?

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Moral Hazard

Today I was fortunate to enjoy what has become an annual ritual: listening to young people from the LA Conservation Corps talk about where they have been (hell, in too many cases) and their hopes for the future. The Corps’ annual Russell Kantor Scholarship Luncheon, and the annual celebration of an independent living program for emancipated foster youth sponsored by United Friends of the Children, are to my mind the best, and most consistently excellent, events of their kind because of the chance to hear stories of redemption directly from young people. Without fail, it is inspirational and very emotional to hear them.¹

With the economic slide accelerating, expect to see a lot of worry among philanthropy watchers about likely declines in giving by individuals and foundations. Those concerns will be very valid. Programs like the LA Conservation Corps will need to weather some tough times, especially if they receive government funding. But the energy we spend focusing on grant dollars in our corner would be better spent attending to the bigger picture of what investment priorities we set as a nation. 

When the financial crisis first received a lot of attention last August, many commentators invoked the concept of “moral hazard” to argue against protecting homeowners from the expected flood of foreclosures. Now that the Fed has injected $30 billion into a workout of Bear Stearns, and put billions more into circulation to preserve liquidity (and there will surely be much more to come), we don’t hear it so often.

According to Wikipedia, ”moral hazard² is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions.”

So, what is the threat to nonprofits and social entrepreneurs in this financial crunch? A significant, but likely temporary, drop in private philanthropic support? Or is there something more at stake?

The real risk we’re running is the possible dissolution of our hopes to expand opportunity for the young people like those who spoke today. The money that taxpayers (and mostly those not yet born) will foot to work out this mess – and the $2 trillion Iraq fiasco – is money that we could have spent instead to better equip our children for the future. Perhaps even more importantly, the harm posed is yet another cut at our shared belief that the U.S. is committed to at least trying to be a more just. As we have so many times since 1987, what the rest of us may learn from these bailouts is that it is indeed a rigged game – those with more financial and political assets are “more equal” than the rest of us. This increases the pull of cynicism, and that ultimately is very bad for nonprofits who depend on the faith and good will of Americans, much more so than their dollars.

Foolhardy and contradictory as it may sound, though, the main point I want to emphasize here, as I have in previous posts, is that we will still be able to pay these costs AND make investments in our people and infrastructure. It is a question of will; we can do it, if we choose to do it. And for the sake of our children, we can’t afford not to make these investments. It would be immoral not to step up to pay both the cost of those investments, and also the cost of paying the debt we already have shifted to future generations. “Serious” policy people will tell us that we’ll need to live within our means (buckle down, tighten our belts, or other metaphor of your choice) – anything but increase our means. And the temptation to shift the pain to the future, again, is the true moral hazard we need to resist.

1. Bias alert: I am on the board of United Friends of the Children and the Los Angeles Education Corps, a nonprofit that operates the three charter schools sponsored by the LA Conservation Corps.

2. Whatever you think of Wikipedia, its definition was the best of over a dozen dictionary or glossary entries I reviewed. The second paragraph of the definition really was a cut above (see how it works when you plug the finance industry and taxpayers, or the current and future generations, into it): “Moral hazard is related to asymmetric information, a situation in which one party in a transaction has more information than another. The party that is insulated from risk generally has more information about its actions and intentions than the party paying for the negative consequences of the risk. More broadly, moral hazard occurs when the party with more information about its actions or intentions has a tendency or incentive to behave inappropriately from the perspective of the party with less information.”

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