Dear Ladies and Gentlemen,

You are all aware of the original philanthropic missions of our foundations. None put it better than our great forebear, John D. Rockefeller, when he said:

Instead of giving alms to beggars, if anything can be done to remove the causes which lead to the existence of beggars, then something deeper and boader and more worthwhile will have been accomplished.

We do not labor merely to treat the symptoms of misfortune, but to bring our formidable assets to bear on their sources. And we have much to be proud of. Thousands of American foundations are actively working for the betterment of our society and our world. Behind each one stands a wealthy individual or family that has chosen to use a significant portion of its wealth for the benefit of the wider community rather than hoard it, invest it or spend even more of it on personal pleasures.

As all of us know, America is unique in this regard. The American civic (or non-profit) sector, of which our foundations are an integral and leading part, is a wonder of the world, an unprecedented social phenomenon not unlike America itself—imperfect, to be sure, but the most dynamic, inclusive and democratic in history. Created by Americans acting freely to meet their own needs and those of their fellow citizens, our civic sector is supported by nearly 70 percent of Americans, of all colors, creeds and socioeconomic conditions, to the tune of more than $260 billion annually. That sum constitutes almost a tenth of the nation’s gross domestic product; non-profit sector employment represents more than a tenth of the labor force; American volunteers constitute between 30 and 50 percent of the citizenry. Nowhere else has there ever been so huge and broad-based a voluntary sector, or one so multifaceted, dynamic and free. Nowhere else has there ever been so powerful a third social force, distinct from government and business, that balances and mediates social pressures through voluntary action. It is just as Alexis de Tocqueville observed more than a century and a half ago, after his American tour: “The wealth of a democratic society may well be measured by the quality of functions performed by private citizens.”

Yes, our work has been and remains remarkable, a testament to human generosity and creativity. The achievements and triumphs of America’s foundations will live long in history. But for how long? Today, several very hopeful, positive trends may be discerned in American philanthropy, but also some daunting challenges. Let us take them in turn.

The first trend to note is that America’s charitable giving will likely increase greatly in this century. There are widely varying estimates of the so-called intergenerational wealth transfer to come, but clearly a huge wealth transfer will occur over the 55 years between 1998 and 2052. The most frequently cited figure of $41 trillion is that of Boston College’s Center on Wealth and Philanthropy. That figure is based on a 2 percent annual growth rate in the economy—certainly a low-end estimate by historical measure. If existing bequest and lifetime-giving patterns hold for the future, the charitable share of the transfer should range from $4 trillion to $6 trillion in total. Even if the lowest of the estimates of the overall wealth transfer—$10 trillion—prove correct, the charitable share of that total would be between $1 and $1.5 trillion. In any scenario, then, sums being spent by philanthropic foundations will at least equal and probably exceed current levels.

American philanthropy will also continue to evolve and diversify, as it has over the past century. Innovation in charitable giving has often followed innovation in business practices. Just as businesses have radically evolved over the last century in their methods of creating and selling goods and services, as well as in their ways of organizing for-profit endeavor, new forms and strategies for philanthropy have also evolved. In the 21st century we are bound, therefore, to move strongly toward what we have come to call “venture philanthropy” and social entrepreneurship.

These new forms of giving, modeled after successful capitalism itself, will increasingly shape not only the way philanthropy is organized in the United States and other wealthy countries, but also the ways foundations carry out their grantmaking. It is not only the newly wealthy, recent creators of foundations who think of themselves as venture philanthropists. Long-established foundations are increasingly moving in that direction, too, not only because today’s wealth creators have begun to join their boards in greater numbers, but also because it is becoming obvious that venture philanthropy and social entrepreneurship have significantly greater impact than dollars spent the old-fashioned way.

It is not just better results that are pushing philanthropy this way. A powerful new social conscience is also emerging among many of the suddenly rich young (and no-longer-so-young) business founders of today. They are determined to make a difference with today’s problems while they are still alive and kicking, and they tend to bring the same results-oriented focus that earned them the wealth on which all foundations, not only the new ones, were created. So the powerful passion to do good for others is increasingly being joined by a relentless determination to do it well. With that determination comes a keen sense of responsibility to make oneself continually accountable for achieving one’s goals.

Notwithstanding these positive trends, American philanthropy today faces unprecedented challenges having to do with philosophy, management style and focus. The bottom line is that America’s foundations, along with the organizations they support—the great secret of the dynamism of America’s civic sector—are at risk. If the very infrastructure of American philanthropy is undermined, the positive trends I have noted may be diminished or destroyed, to the detriment of all.

The most significant cause of the various past sins of some American foundations has been their lack of accountability. Most other institutions in America, whether in the civic sector, the for-profit sector or government, benefit from continuing challenges, criticism and oversight. Officeholders must go before voters. CEOs of for-profit organizations must respond to the wishes of their board members and company shareholders. Operating nonprofit organizations, as distinguished from foundations, also have stakeholders to whom they are responsible—faculty and students in the case of a college or university, for example, or physicians and patients in the case of a hospital.

By contrast, foundations have no external stakeholders with effective influence on them, which means that the virtually unhampered freedom that foundations enjoy deprives them of such external feedback and constraints. Foundation staffs are accountable to their trustees, but the trustees are usually self-perpetuating and fundamentally unaccountable to anyone else. Having been funded by an individual or family at a particular point in time, most foundations need not solicit funds and therefore are not accountable to current or potential donors.

Operating without accountability, free from the competitive constraints of the marketplace, may sound highly desirable, and it surely is—for those who run the foundations. But it creates an unhealthy cocoon-like insulation for foundations, one in which arrogance, arbitrariness, failure to communicate and the rest of the besetting sins are all the more likely to flourish.

A lack of accountability leads directly to a second source of trouble for foundations—their relative invisibility. Being unaccountable, foundations are not obliged to provide meaningful information about their decisions or their consequences. As a result, few Americans know much about foundations—how they work, the roles they play, the goals they pursue, or the strategies they employ.

Public attitudes toward foundations have varied over time. In recent years a tide of criticism has been rising again, focused on many alleged shortcomings, from excessive staff compensation and benefit packages, inordinate honoraria for foundation trustees, and loans by foundations to executives and trustees. Foundations have been excoriated for overly modest annual payout requirements, and for involvement in social issue advocacy on or beyond the border of legality, as well.

Are there real problems in the way some foundations are managed? Absolutely. Is this malfeasance pervasive? Absolutely not! Of the 68,000 foundations listed by the IRS in 2005, only a few hundred have been implicated in any documented instance of malfeasance. But the lack of general public understanding of foundations—and the fact that critics among the press and politicians focus more on their shortcomings than on their achievements—makes foundations especially vulnerable to political attack.

Notwithstanding often unfair criticism, most American foundations continue to do an excellent job of creating effective programs that benefit the general public and help to improve society. What they have not done is create a climate of transparency, the lack of which causes foundations to underperform and creates growing public distrust. It would hardly be surprising if members of the public, whose attention to foundations has recently been dramatically drawn by Warren Buffett’s $31 billion gift to the Gates Foundation, find it increasingly incongruous for foundations to operate on such a grand scale while doing so in a secretive manner. The foundation practices that concern critics the most include:

• unwillingness to provide sufficiently detailed documentation about all their initiatives to permit unbiased outside appraisal
• refusal to disclose, analyze and call attention to failed initiatives
• failure to communicate openly with grant-seekers and the public about how foundation decisions are made
• infrequent and insufficiently rigorous evaluation of their own grant making initiatives, and an unwillingness to make such evaluations available to the public
• the general “fuzziness” and “mushiness” of many foundation initiatives resulting from a failure to assess them during and after implementation

Imperfections such as these inevitably lead the public to regard foundations as non-responsive at best and as willfully arrogant at worst.

The only solution before us is to introduce a greater degree of transparency and accountability into the foundation world. But how can this be done without unduly limiting the freedom of foundation managers to pursue their objectives as they see fit? Let’s consider some possibilities, first with respect to willful wrongdoing and then with respect to facilitating greater transparency.

Of all the oversight possibilities that have been suggested for dealing with willful misconduct by nonprofits, including foundations, the one proposed by Marcus Owens, former director of the IRS Exempt Organization Division, is the only one that promises to be both effective and unlikely to infringe on the indispensable freedom of nonprofits. Owens has concluded that the IRS as currently structured is not the best home for charities’ supervision, and has called for the creation of a new congressionally chartered, private, not-for-profit organization that would be related to but independent of the IRS to discharge that function.

Owens’ suggested new agency would be modeled on the National Association of Securities Dealers (NASD), which regulates brokers and brokerage firms. Like its two sister organizations (the Municipal Securities Rulemaking Board and the Public Company Accounting Oversight Board), the NASD assists the Securities and Exchange Commission (SEC) in carrying out its responsibilities. As Owens notes, “All three entities share the common characteristics that they are not structurally part of the federal government, yet all exercise oversight authority by virtue of their relationship with the SEC, including the ability to sanction those who transgress their rules, including the levying of fines.”

So much for accountability; how best can foundations create a climate of transparency? The answer to that question seems obvious—by taking action themselves. That would be a far better solution than having transparency forced on them by government action. But few foundations, so far, have manifested much enthusiasm for any collective, energetic effort to that end. Perhaps the greater public attention to the existence of foundations and the rapid growth in their assets brought to light by the Buffett gift, coupled with the recent increased level of criticism by public officials and the press, will build up momentum for doing so. Foundations themselves should create a transparency-enforcing mechanism that could be implemented in short order by a foundation-sector infrastructure organization.

For example, a group of foundations could develop and promulgate a “transparency and accountability code” on their own or under the auspices of the Council on Foundations. Some foundations have already broken ranks on transparency—especially the Robert Wood Johnson Foundation, the Wallace Foundation, and the David and Lucile Packard Foundation—and could constitute a core group of initiators. Individual foundations could sign on to the code and agree to be bound by its provisions.

The next step might be the creation of a foundation-supported transparency-enforcement board to which persons denied information could appeal for redress. This board would work with the signatory foundations in developing standard criteria for disclosure and agreed-upon procedures for appeal.

The third piece in this self-regulatory system would be a requirement that every foundation above a stipulated size employ an ombudsman charged with fairly and independently receiving, evaluating and acting on complaints about a foundation’s failure to disclose requested documents. If the existence of the ombudsman’s office were widely publicized, it could go a long way toward remedying the general perception that foundations are arrogant and indifferent to outsider complaints.

A fourth and final element would be a foundation sector-initiated and financed system that would publicly rate foundations on the extent to which they fulfill obligations of transparency. We would call this the Foundation Transparency Rating Board. If enough foundations become sufficiently concerned about the risk of doing nothing, they will provide the financial and moral support for such an effort.

Of all institutions in our democratic society that have no excuses for non-transparency, foundations are second only to government itself because of the quasi-public nature created by the tax benefits that they enjoy. That fact notwithstanding, after nearly a century of complaints about the lack of foundation transparency, anyone would be justified in being skeptical about the likelihood that the problem will be solved by foundations’ voluntary action alone. But we have now reached a point where, if foundations do not grasp the nettle themselves, others may impose legal requirements to create a culture of transparency. That’s the choice we face: Police ourselves better, or invite government to do it for us—with consequences unknown (but not wildly promising) for all.

Sincerely,