Seeking a return on investment in nonprofit work – how institutional philanthropy’s risk aversion undermines its potential

Philanthropy feels like it will always be necessary – foundations in the United States manage over $1 trillion in tax-exempt funding. These funds support the more than 1.5 million US-based nonprofit entities that exist to fill the gaps left by inadequate, inequitable, and inaccessible government provisions of educational, health, and social services.

Tax-exempt, unaccountable to politics and “the disciplines of the market,” and continuously growing their endowments, foundations exist in a league of their own. The trajectory of wealth accumulation and preservation across the country has created a growing niche for socially conscious wealthy individuals to make bigger, bolder philanthropic bets – think of the Rockefellers and Bill Gates’ of the world. Their decades of charitable contributions are ostensibly altruistic; investing in the public good rather than the stock market is morally good. On the contrary, the narrative of philanthropy as an altruistic social good is a carefully crafted narrative that allows wealthy individuals to “sprinkl[le] some fairy dust and hop[e] that we will forget the injustice that paid for it.” I would argue that the unscrutinized frameworks and behaviors that foundations uphold actively undermine the lofty missions and visions they purport to pursue. 

Foundations view their grants as investments, not charitable giving. They increasingly hold grant recipients to their quantitative definitions of success, thereby exacerbating an  inequitable power dynamic. Society’s “risk capital” shies away from what makes it unique: Risk. 

On paper, foundations are a risk-tolerant capital provider that can take big bets, accept and learn from “failures,” and work towards a long-term vision for a better future. In practice, foundations provide conditional, risk-averse capital to familiar and safe organizations with a limited time horizon and several reporting and impact data collection requirements. Their desire and ability to make the “impact” they tout in their mission and vision statements is diluted by risk-management practices that prioritizes shielding their endowments and reputation. 

Rather than taking big disruptive bets, foundations seek to measuredly understand and forecast their return on investment (ROI) for nonprofit work by running the nonprofit organizations through a risk mitigation “gauntlet.” 

A foundation’s first line of defence against risk is its Board of Directors or Trustees, the top-level decision-makers. In most cases, a Board of Directors – that usually does not racially, ethnically, or socio-economically represent the communities they seek to serve – leverages their position of power and utilizes philanthropic dollars to push their individual interests and political agendas in the form of a Board-approved strategy. While these agendas can be well-intentioned, a misinformed and out-of-touch Board worsens the “relational inequality” or “paternalistic” relationship between the funder and the grantee. They mitigate risk by solidifying their control over deciding what is worthy of their support and what isn't. This paternalistic structure does not respect or acknowledge that grantees have a better sense of how and where funds will be most beneficial. Instead, funders and Board members work under the assumption that the money would be spent more wisely on grantees, not by them, and leave grantees with no choice but to accept conditional funding. 

A foundation’s second line of defence is impact measurement, which is the process of developing metrics, tracking and collecting data, and evaluating their success. Adopted from private and public sector results-based, performance-measurement practices, foundations have embraced mandating accountability and reporting requirements for their nonprofit partners. At its core, impact measurement is well-intentioned, and quantitative measures make it easier to understand progress and present promising results to Board members. However, an overreliance on data-driven grantmaking has created a double-edged sword for philanthropy. On the one hand, foundations have a concrete way to keep nonprofit partners accountable and on track with previously agreed-upon programmatic goals. On the other hand, the burden of stringent reporting requirements gets placed on nonprofit partners, often without additional technical assistance or financial support. This shift from measurement and evaluation as a means to learn and inform future grantmaking to an avenue for control and risk management puts pressure on nonprofits to only report on positive results, “it sets a floor, not an aspirational ceiling.” 

A lot of nonprofit work focuses on long-term outcomes rather than outputs, and it can involve results that are difficult to quantify. In an attempt to measure and track every aspect, foundations pigeonhole nonprofit entities to focus on short-term interventions that measure cause-and-effect relationships but fail to capture the nuances of long-term partnerships and social progress. Additionally, metrics are often not co-created with the nonprofit partner but developed by foundations based on what will prove their strategic priorities. 

Whether procedural or requiring rigorous data collection, the stipulations that foundations ask of nonprofit organizations create an atmosphere of presumed mistrust. Onerous stipulations often lead to nonprofits directing time, resources, and energy into proving that “investing” grant funds in their organization would yield the best “return” on the foundation’s investment. To gain a foundation’s trust, a nonprofit organization must first establish how low of a risk they are to the foundation's finances and reputation. They demonstrate their knowledge of the community they seek to serve, proving long-term organizational and financial viability and a quantitative track record of success. The time and energy spent proving their “worth” would be better spent listening to community members to develop new innovative and responsive solutions for their unique needs - thereby diminishing the very purpose of their partnership.

Institutional philanthropy has managed to miss the mark for a long time, but it doesn’t have to. While this risk-averse approach is the prevailing methodology, some promising new approaches to philanthropy exist. Trust-based and participatory grantmaking requires the foundation to relinquish control and trust leaders on the ground to make informed decisions. In this collaborative, listening-first process, grantees develop metrics of success that accurately support their mission and decenter the foundation’s interests and ego. Another encouraging aspect of a trust-based approach is recognizing that long-term learning is critical for sustainable growth. Both practices increase a community’s ability to reclaim its power, choice, and ownership.