Perpetuity or Spend-Down: Does the Notion of Lifespan Matter in Organized Philanthropy?

This article was originally published by NPQ online, on March 31, 2016 (https://nonprofitquarterly.org/2016/03/31/perpetuity-or-spend-down-does-the-notion-of-lifespan-matter-in-organized-philanthropy). Used with permission.

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Are foundations with set periods for spending down their assets more effective as grantmakers than their peers who are established to exist in perpetuity? This is a longstanding discussion among philanthropists, with an article on the topic by Ray Madoff and Rob Reich published just yesterday in the Chronicle of Philanthropy. But Francie Ostrower, who has done extensive and in-depth research into this aspect of foundations, has some answers that may surprise readers and spark dialogue among advocates either of limited life or philanthropic immortality—so weigh in!

By Francie Ostrower

The Debate over Perpetuity

Most private foundations are perpetual endowments, and perpetuity has been called a “key feature” of foundations, so pervasive that “it is hard to imagine any other type of charitable giving.”(1) Nonetheless, perpetuity has also been subject to criticism and controversy for hundreds of years. In the 1830s, philosopher John Stuart Mill criticized the irrationality that makes “a dead man’s intentions for a single day, a rule for subsequent centuries.”(2) Over 175 years later, Ray Madoff decried the assumption that “people can make intelligent decisions about the use of resources in the distant future.”(3) Although these critics believe perpetuity gives donors too much power, others object that over time perpetual foundations drift away from donor intent. Critics object that perpetuity leads foundations to focus on organizational survival and asset preservation at the expense of mission, and that foundations could more effectively address pressing problems by spending those assets.

The assumption made by critics and supporters alike is that lifespan is an organizational characteristic with considerable consequences for foundation practice. Even those that take no official position in the debate contend that the very act of thinking about lifespan enhances foundation strategy and effectiveness. But are these assumptions true? To answer this question, we need to go beyond the abstract character and frequent reliance on anecdotal illustrations that characterizes much of the debate and examine systematic research on foundation practice. We do that here by taking together findings from three studies for which the author served as principal investigator.(4)

Based on the results, we question assumptions about the impact of perpetuity as an organizational characteristic per se and call for refining and reframing the debate. Lifespan generally appears to be less a predictor of foundation practice than a reflection of the values and norms of the trustees and donors making decisions about lifespan. Likewise, the impact of a decision to forego perpetuity is not direct or automatic, but is deeply shaped by why and how foundation leaders approach the decision to sunset and its implementation.

The Significance of Lifespan: What the Data Tell Us

If perpetuity has a significant impact on foundation functioning, there should be considerable differences between perpetual and limited life foundations. Yet, comparisons of the attitudes and practices of 850 private foundations (including 70 planning limited life) in a 2003 Urban Institute survey reveal few such differences. If one sought an organizational characteristic to predict foundation practice, one would be far better off knowing a foundation’s asset size than its longevity plans. Perpetuity generally was not correlated with what foundations viewed as important to being effective, or to their practices when it came to grantmaking goals, criteria, or style. Perpetuity was not correlated with self-perceptions of effectiveness with respect to grant quality, impact, and staffing or grantee relations (although limited life foundations were less often satisfied with their asset management performance.)

Sunsetting foundations were more donor-centric in certain respects. Among those with a deceased donor, limited life foundations were more likely to say that adhering to the donor’s wishes is very important to foundation effectiveness (there was no statistical difference among foundations with a living donor), and these attitudinal differences endured even when foundation size and age were taken into account. When we turn to practices, the picture is somewhat different. Sunsetting foundations did say somewhat more often that the donor’s interest in a cause was a very important grantmaking criterion, but these differences disappeared once the presence of a living donor and foundation age were taken into account. Put otherwise, over time, having a sunset clause per se apparently offered no greater likelihood of using the donor’s interest in a cause as a grantmaking criterion. Interviews conducted for the next study revealed that the significance of issues of donor intent in relation to choices about perpetuity and sunset is indeed more complex than initially meets the eye.

A subsequent interview-based study conducted between 2007 and 2008 with CEOs and/or trustees of 22 sunsetting foundations revealed that sunsetting was not typically selected for philanthropic strategy or experienced as having a substantial impact. The most commonly cited consequence of sunsetting was that the foundation gave in excess of the five percent legal minimum. Yet even that was not necessarily the case, and a significant minority (one-third) felt sunsetting had no influence at all. Many of the foundations did little planning for their ultimate closure, and some had no set termination date, suggesting that “perpetual” and “limited life” are not rigidly distinct categories. An interviewee who had been involved with two sunsetting foundations observed, “You wouldn’t see [them] any differently than other foundations on a day-to-day basis because of the fact that they are spending down.”

The decision to sunset was, however, deeply reflective of donor and trustee values. Interviewees repeatedly characterized preservation of donor intent as their motivation for sunsetting. For instance, one explained, “The key here is not sunset. We were concerned about staying faithful to donor intent…that becomes difficult over time.” Some trustees even gave this as their motivation when the donor had left no guidelines concerning intent. Interviewees also expressed an aversion to the perceived institutionalization resulting from perpetuity, such as one who believes “some foundations are perpetual and [take on] a life of their own, and may lose sight of what they were founded for.”

Taken together, I believe that the survey and interview findings indicate that debates and criticisms regarding donor control and intent can become too narrowly or literally focused on perpetuation of donor directives. Instead, our findings underscore the importance of a broader normative orientation toward the role of the donor and of foundations as organizational vehicles. Those in limited life foundations regard philanthropy in a more personalistic way, view foundations as an expression of the donor, and have an antipathy toward institutionalized philanthropy, which they believe represents an organization taking on a life of its own detached from the donor.

In sum, the findings take us away from our initial organizational focus on lifespan as an organizational attribute and back to the attitudes and values of those who make and execute decisions about foundation longevity. Does that mean then that the decision about longevity has no impact on how a foundation operates? No—but that impact is not automatic or pre-determined. Instead, it depends on how and why foundation leaders approach and implement a sunset plan. While most foundation leaders did not look to sunsetting as a philanthropic strategy, some did, and in those cases it provided a distinctive philanthropic option. The third study, conducted between 2008 and 2010, examined cases of four such atypical sunsetting foundations.

Sunsetting as a Philanthropic Strategy: A Case Study

In 1998, John Hunting, the creator of the Beldon Fund, increased the Fund’s assets from $10 million to over $100 million—and announced the foundation would pay it all out over the next ten years. His reasons involved personal, philosophical, and strategic considerations: He wanted to see the results of his philanthropy, felt today’s donors should solve today’s problems, and believed perpetual foundations too often do not follow the original donor’s intent. In characterizing his most important reason, he linked his timeframe to his philanthropic focus on the environment, asking, “Given all the environmental problems besieging our planet today, how can I not give away all of the foundation’s assets in the very near future?”(5)

Following the original decision, trustees and staff saw an additional rationale emerge. Specifically, they felt that because they were able to spend so much more, sunsetting permitted the foundation to have the visibility and impact of a foundation many times its size. Said one, “We were spending at the rate of a much larger organization, and thus had the influence of a larger foundation. So you can play with the big boys.” Grantees agreed, including one that explained, “They weren’t that big…so being able to give larger amounts with that kind of focus, it probably had more of an impact than if they had been slowing giving out $25,000 grants.” To achieve the goal of coming as close to “zeroing out” as possible, great attention was given to financial planning, which interviewees said required different investment models than those required by a perpetual foundation.

Beldon’s strategy was not simply to give a lot, but to do so in a highly focused manner, and to link decisions about grantmaking to their timeline. The Fund narrowed its scope to two major programs oriented toward building support for environmental advocacy. Trustees and staff felt the federal policy climate was not conducive to the reforms it hoped to achieve, and could not assume that climate would change during its 10-year lifetime. They therefore focused on the state level. Likewise, they pulled back from initial grantmaking concerned with global warming because, given the timing, “it would be problematic for us to do anything impactful.” Interviewees said that their ten-year termination date kept them focused. Said one, “The advantages [of sunsetting] were staying committed and true to a strategic approach.”

While the foundation did not seek its own organizational survival, it tried to create structures with sustainability to continue after its closure. Trustees and staff believed the way to do this was to provide large, ongoing funding to strengthen grantees’ capacity and the environmental movement more broadly to help them be more effective advocates for policy change. Said one trustee, “There were a set of enhancement grants…that were made, because we understood that we were going out of business and needed these organizations to be able to thrive after we were gone.”

Beldon and the other three foundations differed in many ways, but all made four similar decisions: They adopted highly focused philanthropic purposes, gave long-term funding to grantees, tried to strengthen grantees to carry on the foundation’s work, and gave a high level of attention to donor intent. The four foundations’ approaches and trajectories were not determined by the decision to sunset, but by the values and norms trustees and donors brought to their decisions about why and how they would sunset. It was not lifespan per se, but how foundation leaders approached and used that lifespan that, in the end, that led sunsetting to impact not only the way their foundations ended, but how they lived.

Notes

(1) The former is from Kenneth Prewitt, “Foundations.” In W.W. Powell & R. Steinberg (Eds.), Page 355. The nonprofit sector: A research handbook, second edition. New Haven, Yale 2006. Page 365. The latter quote is from Ray Madoff, Immortality and the law: The rising power of the American dead. New Haven, Yale, 2010, Page 102.

(2) John Stuart Mill, “The right and wrong of state interference with corporation and church property. Dissertations and Discussions. Boston, W.V. Spencer, 1868 [1833], Page 6.

(3) Ray Madoff, op. cit., Page 106.

(4) For information on the three studies and the cases, interviews, and survey data referenced in this discussion, see Francie Ostrower, Attitudes and practices concerning effective philanthropy, Washington DC, Urban Institute, 2004; Limited Life Foundations: Motivations, experiences and strategies, Washington DC, Urban Institute, 2009; Sunsetting: A framework for foundation life as well as death, Washington DC, Aspen Institute.

(5) Hunting, John. (1997). Beldon Fund President’s Report. New York, NY: Beldon Fund.

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About the Author

Francie Ostrower, PhD, is Professor in the LBJ School of Public Affairs and College of Fine Arts at the University of Texas at Austin, where she is also Senior Fellow at the RGK Center for Philanthropy and Community Service, and Director of the Portfolio Program in Arts and Cultural Management and Entrepreneurship. She is a past president of ARNOVA.