In this third installment of Sunsetting a Foundation we explore the effect on grantees. Hint… It is more than a financial change.
If you haven’t already done so, we recommend reading the first post on Sunsetting a Foundation. This post lays the underlying questions for sunsetting.
Wealth Transition and Grantee Relationships
A standard foundation sunsetting plan timeline is two decades out from the intended closure. This time period allows for a number of changes to happen within the foundation.
- Next Generation develop the skills required to take on a leadership role at the board level of the foundation,
- Provides a way for the foundation to develop a Big Bet with current and potential grantees,
- Change the grantmaking process (deadlines and disbursements) and grantee communication, and
- Adjust the asset management strategy. All of this helps grantees transition to new sources of funding, pivot the program design or wind-down those funded services.
Grantmaking decisions should include a mix of short, medium and long-term funding to the organizations in your funding portfolio. The flexibility of having a mix of term lengths allows for managing investment changes and also the changing needs of the community(ies) that the foundation supports.
For a grantee, nothing is more frustrating than having a funder restrict the donation to an issue or program that no longer serves the needs of their clients. These limitations become especially difficult when the relationship between the foundation and the grantee is merely transactional. This type of passive relationship limits the communication between the grantee and the foundation leadership around changing the funding allocation. One way to mitigate a “stale donation” is to draft unrestricted Donor Agreements at the outset. An unrestricted Donor Agreement entrusts your grantees to make the operating decisions to achieve their mandate.
A second way to manage unproductive or too restrictive funds is to provide a means for changing the scope of the funding allocation within the Donor Agreement. Changing the agreement should be as simple as possible so as to not pull resources away from the project itself. The process should also provide enough clarity to support the board’s fiduciary obligations.
Documentation: Grant Decisions & Context, Grantee Communication and Administrative Documents
The wealth transition plan should include a list of archival documents. Documentation to consider keeping (digital or physical):
- Past funding requests and decisions: This is especially important for those foundations where the Founder can no longer share the decision-making history. Example – the decisions around why a project or organization was not supported, or why a multi-year grant was not renewed. Documenting this history, and more importantly, having the conversation, transfers the knowledge and values of the Founder to the leadership responsible for sunsetting.
- Funding agreements and Grantee correspondence: This provides future leadership and the operations team with examples of the foundation’s communication tone and style.
- Grant application forms: These forms may have evolved with your Foundation. Having a sense of what was asked of Grantees in the past and what was deemed important to the Foundation leadership can support future direction of leadership.
A list of all the documents a foundation needs to review in advance of sunsetting is in the previous post. Additionally, we have created a Digital Footprint Checklist. Not all of these items pertain to the foundation, but it is a useful tool for all inheritors to have as they navigate through any familial loss.
Should I Stay or Should I go?
Societal Benefit and Legacy
There are three arguments some frontline organizations make for advocating for foundations to spend down:
- The notion that frontline organizations are better equipped and have tacit knowledge of the issues, whereas funders are too far removed from the problem.
- If grantees have access to all available philanthropic capital in the marketplace, and not just sporadic or project-based support, they are better equipped to solve their mandate.
- Instead of dedicating grantee managers attention to program design, delivery and evaluation, they are constantly pulled to fundraise.
There is some merit to these arguments.
One of the age-old comments about Canada’s charitable sector is that it is the “graveyard for pilot projects.” This is in large part, because funders tend to support new ideas and offer limited follow-along or scaling capital. The thought therefore, is that access to working or scaling capital would increase if multi-generational foundations were prohibited. The “unlocking of trapped capital.”
This may be the case for some foundations. But for most, the foundation is set up to preserve family legacy. This viewpoint requires a multi-generational perspective on charitable wealth.
The Influence of the Structure of the Charitable Sector on Multi-Generational Giving
It may be hard to think of the charitable sector as a market. However, consider this: there are 90,000+ charities in Canada and 1.5Million+ in the United States. A marketplace is where there is an exchange of goods between a buyer and a seller. In the context of the “business of philanthropy,” there are three entities participating in the transaction: the donor, the implementing organization and the client or end-user of the service. In some cases, the donor and the end-user may be the same person, but it is more common that the end-user has no connection to the donor. The federal government registers charities with a specific mandate and set of activities. While this allows for a level of accountability of donor proceeds, this begs the question of an organization’s ability to scale, its incentive to solve the problem (i.e. work itself out of the market), and its commitment to donor stewardship and partnership.
A funder who retains the assets within their foundation may be more inclined to understand the financing needs of their community/funding area and, consequently, pivot their funding regime based on shifts in the market. A funder who completely disburses their assets removes the safety net for grantees. The removal of secure funding curtails the ability for the grantee to pivot to meet the new market demands.
Foundations that take the time to build deep relationships with their grantees are able to design spend-down plans that empower an agency to make critical decisions without the constraints of donor wishes.
The Business of Philanthropy – Operating Costs of a Foundation
Like any corporate entity, there are operating costs associated with keeping a foundation running in perpetuity. Having a clear sense of the overall wealth plan helps with the long-term thinking about how a multi-generational foundation operates once the founder(s) are no longer leading the board.
As time passes, the Founder will no longer be responsible for the implementation of the charitable activities of the foundation. Eventually, it may end up that the inheriting generations, be they one, two or three generations removed, will not be at the decision-making table. At this point in time, there is typically a paid Trustee who takes on the board responsibilities of the foundation. Trustee compensation directly correlates to retaining assets under management and not necessarily on impactful philanthropic decision-making.
The business of philanthropy goes beyond the operating costs of the foundation. It also includes the impact on the overall charitable sector. The donation’s effects (positive and negative) correspond to the size of the foundation (longevity in the community and asset value), the dollar contribution at a single time to a single grantee or multiple agencies, and the size of the grantee operations.
Just as the foundation has operating expenses to manage money, so too does the receiving organization. Grantees need time to ramp up operations when they face a large infusion of capital. Conversely, the organization may need to restructure if the capital is not replaced by another donor. They may also need to coordinate with other donors to better leverage the donation they are receiving from the sunsetting foundation. And of course, recipient organizations also have the expenses associated with portfolio management.