Big Philanthropy

Big Philanthropy

Leslie Lenkowsky

The surge of new wealth in America is creating a bumper crop of large foundations. History suggests that they can accomplish a great deal. But it’s not always easy to do good.

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15m 14sec

With Warren Buffett’s decision to give it most of his fortune, the Bill and Melinda Gates Foundation has established itself as the largest private philanthropy in the world. Added to the nearly equal amount the Microsoft founder had already contributed, Buffett’s commitment of $31 billion means the foundation will spend at least $3 billion ­annually.

Extraordinary as that amount is, big philanthropy is no longer rare. For many years, the Ford Foundation was by far the largest ­grant ­maker in the United States and often the only one with more than a billion dollars in wealth (“the fat boy in the canoe,” Dean Rusk used to call it when he was president of the Rockefeller Foundation in the 1950s). But today, a foundation with a billion dollars in assets would not even be among the top 50 ­grant ­makers. Ford alone is now worth more than $10 billion, with several others within a good year’s investment returns of equaling ­it.

Along with his donation to the Gates Foundation, Buffett gave each of his children ­billion-­dollar gifts for their own foundations. The press generally characterized these as “small,” which they were in relation to what Gates was promised. But less than a generation earlier, such a sum would have made a foundation one of the largest and most important in the United ­States.

Though not on Buffett’s scale, more people are starting or contributing to foundations. Between 1975 and 2004, the number of ­grant-­making organizations in the United States rose from 22,000 to nearly 68,000. According to Giving USA, an annual guide to American philanthropy, 11.5 percent of the ­quarter-­trillion dollars Americans gave to charitable organizations in 2005 came from foundations, almost equaling the record share reached in ­2001.

Not only has the number of foundations been increasing, but so too has the frequency of ­extra-­large gifts to other kinds of nonprofit organizations. During 2006 alone, at least a dozen groups (besides the Gates and Buffett foundations) received pledges of $100 million or more, including $175 million from George Lucas to the University of Southern California’s film school, $150 million from Stanley W. Anderson to the Presbyterian Church (USA), and $100 million from Mortimer B. Zuckerman to the Memorial ­Sloan-­Kettering Cancer Center. Before the mid-1990s, it was unusual to see more than a handful of such gifts each year.

Much of American philanthropy now rests on the generosity of the very wealthy. Nine out of 10 families in the top fifth of the income distribution contribute to charity each year, writes Arthur Brooks in Who Really Cares (2006), compared to six in 10 from the bottom fifth. While less ­well-­off donors give a larger share of their income to charity, approximately ­two-­thirds of all giving comes today from the most affluent three percent of American ­households.

Why this is the case is no mystery. The ­high-­tech boom of the 1990s not only created sizable new fortunes but helped established ones grow rapidly. (Despite the prominence of names such as Gates, Dell, and Packard on the list, most of the 50 largest foundations in the United States are products of the industrial era.) The 1990s also produced lots of givers who were apt to be more generous than the typical wealthy donor. According to a recent survey of high net worth households done by Indiana University’s Center on Philanthropy for the Bank of America, “entrepreneurs,” who earned at least half their fortune by starting businesses, give twice as much, on average, as rich people who inherited at least half of theirs. Those who became wealthy from increased savings, higher returns on investments, or rising real estate values lag further behind in their giving. Since high net worth households give about 50 times more than the typical American household, to the extent economic inequality grew during the 1990s, philanthropy was the ­beneficiary.

Nor has the “giving boom” by the wealthy run its course. According to calculations by Boston College’s Paul G. Schervish and John J. Haven, the aging baby boom generation has accumulated trillions of dollars in assets. A large share of this bounty is likely to wind up going to ­charities.

Many Americans of modest means still contribute significantly to charities of all sorts. ­Heart ­warming stories abound of cleaning women or factory workers who lived their lives frugally, saved their money, and made large gifts for scholarships to enable others to have the opportunities they missed, proving that one does not have to be rich to be philanthropic. People with more time than money at their disposal, such as teenagers and retirees, have also been volunteering more than in the ­past.

But this should not obscure the fact that charitable giving in the United States increasingly depends upon donations by the rich. And that has not always been regarded as a good thing.

Throughout American history, charitable donations by the wealthy have inspired more than a few misgivings. Henry David Thoreau and some of his contemporaries regarded philanthropy as ­“over-­rated,” seeing in the generosity of wealthy merchants an attempt to put doing good ahead of being good in their business pursuits. “If I knew for a certainty that a man was coming to my house with the conscious design of doing me good,” Thoreau wrote in Walden, “I should run for my life.” Nineteenth-century schoolchildren learned from McGuffey’s Readers to be wary of the kind of ambitious philanthropy that aimed to tackle big and distant problems (such as those the Gates Foundation is planning to address), and instead to prefer more modest efforts to do “a thousand little, snug, kind, good actions.”

Even the very rich had doubts about their giving. In one of his writings on philanthropy, which were collected under the title The Gospel of Wealth and Other Timely Essays, Andrew Carnegie maintained that “the problem of our age is the proper administration of wealth.” Not only were too many of his ­Gilded Age peers devoting their wealth to luxuries, but those who were making gifts to charity were largely wasting them. “Of every thousand dollars spent in ­so-­called charity today,” he wrote, “it is probable that nine hundred and fifty dollars is unwisely ­spent—­so spent, indeed, as to produce the very evils it hopes to mitigate or cure.” By this, Carnegie meant that the money was helping to perpetuate poverty and fuel social unrest instead of assisting the less affluent to get ­ahead.

Carnegie famously urged his counterparts to donate their “surplus” during their lifetimes and provided a list of causes he thought were best, including libraries, universities, parks, and concert halls. But today, Carnegie is more likely to be remembered as an industrialist who treated his workers badly than as a ­far­sighted philanthropist. His ideas about giving are often criticized as paternalistic at best or a scheme to preserve the advantages of the rich while only mildly ameliorating poverty at worst. Recent Carnegie biographer David Nasaw sides with one of Carnegie’s early critics who saw danger in the expectation that charity can do the work of social ­justice.

Far harsher criticism greeted John D. Rockefeller’s idea, developed at the beginning of the 20th century, to use the bulk of his assets to create the Rockefeller Foundation. Though his plan was undoubtedly aimed partly at improving his public image, Rockefeller had been a devoted philanthropist throughout his lifetime, tithing regularly and putting his money behind a variety of worthwhile projects, including the creation of the University of Chicago. Still, his proposal to establish what has become the prototype for today’s foundations was greeted with criticism, chiefly reflecting the concern that it would enable him to wield more power than he was already thought to have. When he sought a federal charter for his new ­grant-­making body, the executive branch and ­Congress—­both led by midwestern ­Republicans—­refused to grant it. Rockefeller even offered to cede control of his foundation to a group of public officials and university presidents, to no ­avail.

After receiving the necessary legal approval from the New York State legislature, the Rockefeller Foundation began operating in 1913. Not long afterward, it was entangled in the first of several congressional investigations aimed at examining whether ­grant-­making organizations were really philanthropic or were serving the business and political interests of their ­donors.

The criticism climaxed in 1969 with the enactment of a federal law that singled out foundations underwritten by wealthy individuals or families for special scrutiny and regulation. By that time, the Ford Foundation had replaced Rockefeller as the most prominent philanthropy in the United States; moreover, Ford’s vast size and interest in fostering ­large-­scale social change made it an inviting target. A number of its grants had stirred controversy, including a pilot project on community control of schools that led to a ­racially ­charged confrontation between teachers and parents in New York City and a voter registration drive in Cleveland that seemed to favor one ­candidate—­Carl Stokes, who would become the city’s first black ­mayor. And the Ford Foundation’s leader at the time, McGeorge Bundy, was the former national security adviser to Presidents John F. Kennedy and Lyndon B. Johnson and had his share of detractors in ­Washington.

Following nearly a decade of hearings, the law passed by Congress came close to requiring foundations to give away their assets and go out of business. (Advocating that position was none other than ­then-­Tennessee senator Albert Gore Sr., who warned his congressional colleagues about the dangers, in a society that valued equality, of allowing private fortunes to remain intact and grow for generations, even if they were intended to be used for charity.) Instead, the law required them to spend a minimum ­amount—­the ­“pay­out requirement”—every year, and prohibited them from owning more than a minority share of businesses. It also placed a variety of restrictions on the kinds of grants foundations could make and imposed a special tax on them, supposedly to pay for increased supervision of their activities by the Internal Revenue Service. Charities that received support from the general public, rather than from a wealthy individual or family, as foundations typically do, were exempted from these ­rules.

If not as damaging as some had feared, the 1969 law suggested to most of big philanthropy’s leaders that their undertaking was in big trouble. In a widely read 1978 article, John D. Rockefeller III warned that the nonprofit sector was “eroding before our eyes” and that philanthropic giving “has steadily lost ground in recent years.” He was not far from the truth. The poor economy of the 1970s, combined with the new rules placed upon philanthropic institutions and their wealthy donors, meant that the number of foundations and the ­inflation-­adjusted value of foundation assets hardly grew at all during the ­decade.

Aquarter-century later, the outlook for big philanthropy is much healthier. Indeed, nothing like the outcry accompanying the creation of the Rockefeller Foundation followed the announcement, in 1999, that Bill Gates was planning to set up a similar organization, let alone last summer’s news about Warren Buffett’s gift to it. Critics of giving by the wealthy are still plentiful and have achieved a degree of institutionalization in universities, ­think ­tanks, newspapers, interest groups, and even the philanthropic world itself. But they usually concentrate their fire on questions of how much money is being spent and where it is going rather than on where it comes from or who is in charge of giving it ­away.

Congress recently launched a series of hearings on philanthropy, asking whether, in view of the sizable growth in their assets, foundations should be paying out more in grants and putting a greater number of independent directors on their boards, as businesses were required to do in the wake of corporate scandals at Enron and WorldCom. However, these issues were quickly put aside, and legislators turned to clarifying laws affecting charitable giving that may have been exploited by people seeking to reduce their taxes, such as methods for valuing the donation of used cars and other kinds of property. The populist fervor that drove earlier investigations of foundations was nowhere to be ­seen.

Will this fervor return? The growing influence of the very wealthy in ­philanthropy—­and the size of the grant-making organizations they are ­building—­creates the kind of environment in which it might. But whether that will happen depends considerably on how the new leaders of philanthropy conduct ­themselves.

Today’s foundations and big donors reap the benefit of being able to cloak themselves in a record of accomplishment by their predecessors. Starting with the Rockefeller Foundation’s support of medical research and ­scientifically ­based treatment, and continuing through its backing (with the Ford Foundation) of the green revolution, which developed new strains of crops for ­famine-­prone countries, ­grant-­making organizations have demonstrated that they can put large sums of money to good use. Likewise, big gifts such as Andrew Mellon’s donation to launch the National Gallery of Art, Alfred P. Sloan and Charles F. Kettering’s to create a cancer research center, and Julius Rosenwald’s to build schools for southern blacks, not to mention countless endowment gifts to hospitals and universities, have made enduring contributions. Whatever one thinks of more recent giving (and a case can be made that it has fallen short of earlier achievements), the effectiveness of ­grant-­making organizations has quieted some of the doubts that were expressed upon their ­establishment.

The challenge for big philanthropy now is to build on this record. That will be difficult. Many of the largest foundations are seeking to address extraordinarily complex problems, that generate significant differences over what to do. The Gates Foundation has already encountered such challenges in its efforts to improve urban school systems, with results that have been judged ­middling—­at best. As it works to find  cures for the world’s most deadly diseases, it is likely to come up against even greater ­problems.

Moreover, the unprecedented size of the resources at the disposal of today’s wealthy donors creates its own obstacles. Philanthropists (and their advisers) are as susceptible to embracing intellectual or political fashions as anyone else, and maybe more so, in an age in which ­fund­raising has become extremely sophisticated. What seems deserving of their support today may look less promising tomorrow, but honest feedback is often in short supply in the philanthropic world. (As an old adage puts it, three things never happen again to people who work for a foundation: They never sleep in anything but a ­first-­class hotel, eat in anything but a ­first-­class restaurant, or have anyone tell them the truth about their work to their face.) And as organizations become larger and more dominant in their fields, change becomes more difficult, as commitments to programs grow stronger and interest in preserving them more ­entrenched.

Their sheer number and scope give today’s philanthropic institutions an advantage their predecessors lacked. Although there may not be one in every neighborhood, foundations are no longer located chiefly in the Northeast, as they used to be. Nearly 68,000 are scattered throughout the United States, with the most rapid growth occurring recently in the South and ­West.

Almost every conceivable cause now has its philanthropic patron, as do some that most people could hardly imagine, such as creating upscale shelters for stray dogs, a preoccupation of one ­high-­tech billionaire. There are even ­grant ­makers promoting conservative intellectual and public-policy ideas, partly dispelling the impression—if not the ­reality—­of a liberal bias in the foundation ­world.

With charitable giving having become so diversified, stirring up populist resentment toward it will be more difficult. But demanding a portion of it is not. At a 2006 meeting organized by the Council on Foundations, the association that represents the largest ­grant ­makers, Senator Max Baucus, a Democrat from Montana, complained that his state was not receiving enough money from foundations and pointedly invited his audience to make amends. Since he is the new chair of the Senate Finance Committee, which is responsible for legislation affecting philanthropy, it is unlikely Senator Baucus’s suggestion will go ­unheeded.

The real danger philanthropists face today is not that their greatly increased wealth will provoke political attacks, but rather that they will be smothered by the public sector’s embrace. In contrast to Carnegie, Rockefeller, and other early philanthropists who came on stage when the ambitions of American government were small and its resources limited, Gates, Buffett, and other big donors are stepping up their giving just as the American government’s aspirations have risen considerably but its willingness to provide the necessary financing has diminished. Hence the efforts of Senator ­Baucus—­and many other public officials (including retired ones, such as former president Bill Clinton)—to get foundations and other givers to “pick up the slack,” as Reagan administration aide Michael K. Deaver once put it. Instead of seeking to restrain big philanthropy, they hope to enlist it in the service of their priorities. Furthermore, even with tighter budgets, government remains an important force in education, health care, and virtually every other area of concern to philanthropy, providing givers with a strong incentive to ­cooperate.

If they fail to do so, political recriminations are likely to ensue. But if they oblige, the consequences may be even worse. At the heart of the American tradition of philanthropy is the belief that public life is enriched if there are many ways of promoting social improvements, not just those that can pass the test of political acceptability. With the growth of big philanthropy, the potential for such innovations may be greater than ever before. But if their wealth leads foundations and other donors to become overly sensitive to public pressures and work too closely with ­problem-­ridden government agencies, their ability to accomplish much at ­all will be impaired.

The rise of big ­philanthropy—­in the United States as well as other parts of the ­world—­offers an unprecedented opportunity to creatively address many ­long-­standing problems. But if a new “golden age” of giving is in the offing, as its enthusiasts have already proclaimed, those whose ­hard-­earned wealth is making it possible need to realize that more than vast amounts of money are needed to succeed in truly doing good.

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