Creating Philanthropic Capital Markets: The Deliberate Evolution / Edition 1

by Lucy Bernholz

Overview

Through a coherent framework for pursuing such far-ranging changes, this easy-to-understand book addresses new ways for individuals and organizations to invest grant funds, approach regulatory structures that guide giving, and define their goals, activities, outcomes, and achievements. The author applies basic principles of industrial theory and evolution to examine, with a trained scholar’s eye, how individual organizations, associations, and the philanthropic infrastructure can work more effectively.

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Product Details

ISBN-13:	9780471448525
Publisher:	Wiley
Publication date:	02/04/2004
Pages:	264
Product dimensions:	6.22(w) x 9.55(h) x 1.05(d)

About the Author

LUCY BERNHOLZ, PhD, is the founder and President of Blueprint Research & Design, a strategy consulting firm specializing in program research and design for philanthropic foundations. As a noted analyst of the philanthropic industry, she has published numerous articles in the trade and general press, and edited many collections and scholarly journals. A portion of the income from the sales of this book will be dedicated to the Blueprint Research & Design corporate giving program. www.blueprintrd.com

Read an Excerpt

Creating Philanthropic Capital Markets

The Deliberate Evolution

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By Lucy Bernholz

John Wiley & Sons

ISBN: 0-471-44852-4

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Chapter One

The Industry of Philanthropy

The sweat of industry would dry and die But for the end it works to. -William Shakespeare, Cymbeline

Philanthropy-at its most basic-is the process of sharing private resources for public benefit. The activities it encompasses range from volunteering time to strategically investing endowed resources in socially responsible index funds to giving time and money together. All of these activities involve "putting something in" to make something better "come out." This can be expressed as an incredibly simple equation:

philanthropic inputs + existing conditions = better outcomes for others

This deliberate oversimplification is important in helping us locate the industrial elements of philanthropy. The equation in its entirety, including the final sum-"better outcomes"-captures both the public purpose of the industry and the extent to which philanthropy is part of its surroundings ("existing conditions"). Philanthropic actions are not about profit or outcomes for the giver, but are actions taken in pursuit of something for others. This public purpose distinguishes philanthropy from other industries and greatly influences the manner in which key components of the industry interact.

The industrial framework applies most specifically to the equation's"philanthropic inputs" variable. While the two most basic forms of input are time and money, applying the industrial lens allows us to see the magnitude of the changing forms, functions, participants, activities, and scope of these inputs. Industries are defined as a set of companies that produce highly substitutable products or services. All financial vehicles for making tax-deductible contributions fall into the philanthropic industry, from charitable gift funds to independent foundations, private banks, corporate giving programs, and social donor networks. Each of these vehicles has a unique set of characteristics from the perspective of tax and estate planning, yet they are all firms or products for the purpose of giving away money. Understanding philanthropy as an industry is an effective aid in better seeing what it is uniquely capable of and what it stands no chance of accomplishing.

Applying an industrial framework to philanthropy is not a futuristic definitional trick, it simply recognizes the changes that have already occurred. The components of an industry, which are detailed as follows, now permeate philanthropy. The market and regulatory forces that shape this industry (and are discussed in Chapters 3 and 4) are profound. They will not disappear simply because many in the industry are uncomfortable with the language I use to describe them or because of some idealistic image of what the nonprofit sector should be.

Pointing out the industrial nature of philanthropy is both an act of accepting the real pressures of markets and regulation and positioning the industry to reclaim control of its future. There has long been a robust debate within nonprofits and philanthropy about what to call the work, some prefer "nonprofit," others like "public benefit," and the 1960s brought us the "independent sector," by which to distinguish the work from government or business enterprises. In contrast, this analysis shows philanthropy and nonprofits as dependent on the public and commercial spheres, especially when the guiding questions are about future directions.

This chapter outlines both the ways in which the industrial framework is useful and the limits of that framework. It also rounds out the conceptual work of the book by presenting components of evolutionary and systems theory that inform the argument.

Defining the Industry

The literature on business is rife with analyses, exhortations, and primers on industry characteristics, growth, and decline. Industries define themselves through trade associations, the government draws some defining lines while investors determine others, and individual businesses are often active in more than one industry. The work of Michael Porter at Harvard University is particularly noteworthy in defining industries and helping us to see how the standard characteristics and pressures are relevant to philanthropy. The six core elements of an industry are listed as follows and described in more detail in the following section:

Capital for investment

Firms, markets, and customers

Products and services

Competition and alliances

Regulation and public policy

Media attention and public awareness

Viewing philanthropy as an industry provides us with a conceptual framework to hold together these disparate pieces. By thinking of philanthropy as an industry, we can track the influence of capital growth, regulation, product differentiation, and markets. We need to push our imaginations beyond the commonly held vision of a purely commercial industry in order to understand the role that the human and social elements of philanthropy play on the overall shape and size of the endeavor. Lacking a common bottom line, philanthropic action is not as linear, predictable, or quantifiable as changes in the oil, biotechnology, or telecommunications industries.

The various elements of philanthropy are neatly defined by these six industry characteristics.

Capital for Investment

Philanthropy is experiencing an explosion of available capital. The financial resources dedicated to philanthropic action have increased multifold in the last decades, topping out at more than $240 billion in gifts and $476 billion in assets in 2001. This growth is the primary reason that there is so much change in philanthropy. The opportunity to manage and/or advise these financial resources has attracted new types of firms to the market, caught the eye of regulators, excited the media, and created an entry-level for market participation that requires much less wealth than was previously feasible.

As more and more people attain a level of wealth at which managing their philanthropy is an option, they are seeking out a wide variety of giving products. They may choose to establish a donor-advised fund at either a commercial or nonprofit organization. They might partner with peers in creating a giving circle. They may simply increase their charitable giving as part of their overall budget and choose not to invest in a specific philanthropic product. They may simultaneously create a family foundation and become more active in their company's giving program. And, as we will see, many people will choose to use several of these giving products all at once. The growth in giving options-some of which look like products (donor-advised funds) and some of which look like firms (private foundations)-allows broader participation in the industry and encourages a new level of competition between products or firms.

While this growth in philanthropic participation is interesting, it is important to note that more people are purchasing philanthropic products and the actual value of their giving is increasing, but the percentage of individual wealth allocated to philanthropy has remained rather steady (ranging between 1.7 and 2.1 percent of personal income) over the last 30 years. This narrow band of giving is surprising if viewed solely through the lens of the market. There has been no lack of effort to grow the market, as evidenced by the dramatic shifts in the types of firms actively involved in philanthropy and the customers and markets they seek to reach and expand.

The involvement of commercial firms offering charity-related products has drastically affected the role that competitive markets play in philanthropic decision making. As in most competitive markets, there are many players in philanthropy: individuals; financial service firms; private, community, and corporate foundations; giving circles; professional advisors (accountants, attorneys, and investment professionals); and estate planning and fundraising professionals. The various firms and products are simultaneously struggling to differentiate themselves and working together in alliances. They all offer a host of similar products, and several layers of regulation govern them as a single industry.

Firms, Markets, and Customers

Firms in the philanthropic industry include all those who provide or advise charitable giving opportunities. Twenty years ago this would have included foundations, community foundations, community endowments, nonprofit organizations with established donor services and planned giving opportunities, fundraising professionals, banks, and trusts. In 2002, the landscape of firms in the industry included the aforementioned list plus financial services firms, mutual fund companies, independent donor-advised funds, independent consulting firms, professional advisory services, and e-commerce companies that provide Internet technology to manage or assist in fundraising.

The marketplace has become increasingly crowded and diversified. The traditional customers for most of these firms have been individuals with high net worth. One result of the increased activity in the market is that customers with lower net worth are increasingly sought after as target customers, expanding the reach of the market. As the types of firms in the industry continue to diversify and new partnerships and alliances emerge, the old categories of foundation, commercial firm, and donor-advised fund decrease in their utility. As we look to the future, a new matrix for thinking about the firms presents itself, designed more around the services and products being offered than by the host institution selling them (see Exhibit 1.1).

All purveyors of philanthropic services can be categorized on the continuum in Exhibit 1.1. A key trend to track in the industry is where the majority of firms fit along the continuum at any given time. Fifty years ago, it is safe to say that most institutional philanthropy was managed through exclusively not-for-profit organizations (e.g., foundations, community foundations). Commercial banks were involved in the work to a small degree through their trust departments. These institutions provided a mix of advisory services and asset management services, and pricing was based on asset management fees.

Today, the mix has shifted dramatically. Commercial relationships are far more common, either through direct product sales from commercial banks (donor-advised funds) or partnerships between banks and foundations. Many firms that sell advisory services, absent any asset management component, are also visible on the landscape. As we think along these broad stripes of philanthropic firms, it becomes easier to focus on the mix of products and services available to the market, and we are less bound by traditional categorical breakdowns.

Products and Services

The two major products sold in the philanthropic industry are (1) tax-exempt structures for giving funds and (2) advice and research. The available asset management structures include direct gifts of cash or equities to a nonprofit organization, charitable trusts, private foundations, donor-advised funds, supporting organizations, and semi-restricted or unrestricted gifts to community foundations or endowments. Also available are several different annuities, trusts, and estate management tools.

On the advice and research side, the services offered include investment management advice, educational opportunities, reporting to regulatory bodies, grants management, advisory services regarding the structuring of philanthropic gifts, independent research and analysis on issues of concern, family wealth management, board training, peer learning opportunities, and management consulting. Sometimes these services are coupled with asset management products, and often they are sold independently.

Competition and Alliances

One of the most persistent mischaracterizations of this industry is that because it is largely not-for-profit it is also free of competition. As commercial firms have entered the market for charitable giving options, the role of competition has become more obvious. Individual philanthropists have several options for managing their giving. From the standpoint of these donors, the options are in competition with each other. Donors are doing more comparison shopping across products and services. More and more frequently, donors are choosing several options and expecting to derive different benefits from each.

Although community foundations and financial services firms are in competition for managing the assets of charitable individuals, there is also an increasing willingness to form alliances between foundations and other giving vehicles. Several financial services firms work with large numbers of community foundations. Private foundations often work with community endowments. Alliances of private, corporate, and community foundations are nurturing several giving circles around the country. In some situations, private foundations are even turning to the commercial firms' donor-advised funds (and to community foundations) to help them meet payout requirements.

These alliances have several drivers. Most important is the industry-wide recognition that asset management and advice are separate services, available from independent vendors, and that command different pricing structures. This encourages mixing and matching by both consumers and purveyors. Also at work is the recognition that no single philanthropic entity has the assets to achieve its goals alone. This awareness increases opportunities for partnership as philanthropic individuals find themselves choosing several vehicles at once and then seeking ways to make them work together.

Regulation and Public Policy

Philanthropy is a regulated industry. Federal, state, and municipal tax codes govern tax exemptions and regulate charitable giving. Secretaries of state, attorneys general, the Internal Revenue Service, and state departments of corporations oversee foundations and nonprofit organizations. Individual giving is subject to regulations regarding tax deductibility. For institutional giving, additional regulations require public reporting and influence the roles that tax-exempt organizations can play regarding political advocacy and lobbying.

The different firms competing in the philanthropic product market do not share the same interests vis-à-vis tax policy and regulation. This results in conflicting activity on public policy regarding the oversight of the industry. For example, community foundations and private foundations have different opinions on the levying of an excise tax levy on private foundations. Community foundations and commercial financial service firms also have taken different stances on the regulation and oversight of donor-advised funds.

Continues...

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Excerpted from Creating Philanthropic Capital Markets by Lucy Bernholz Excerpted by permission.
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Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

List of Exhibits.

Acknowledgments.

Introduction.

Designing the Future.

Change Comes Slowly.

The Trillion-Dollar Opportunity.

What Does Better Look Like?

Chapter 1. The Industry of Philanthropy.

Defining the Industry.

Mapping the Landscape of Philanthropic Capital.

Evolutionary Adaptations and the Limits of the Industrial Framework.

Evolutionary Aspects of Philanthropy.

Systems Theory.

The Exceptions Prove the Rule.

The Age of Commercial Charity.

Chapter 2. What the Future Could Look Like.

Why Bother?

Getting There.

Assembly Required.

Not Just Newer, But Better.

Chapter 3. The Forces of Change.

Change Drivers on Society as a Whole.

Demographic Trends.

New Structures for Working.

Globalization and Its Backlash.

Environmental and Community Sustainability.

Change Drivers on the Industry.

Pushing on the Pieces.

Collectively Isolated.

Drivers of Change at the Organizational Level.

Community Foundations Innovate First.

Private Foundations and Changes in the Industry.

The Ties that Bind Foundations Together.

Implications of These Changes.

Imagine the Industry Anew.

Can Philanthropy Change Itself?

Chapter 4. Philanthropic Marketplaces.

Philanthropy and Financial Services: Parallels and Divergences.

Competition in the Philanthropic Marketplace.

Products in the Market.

Philanthropic Alliances.

The Power of Joint Action.

Tied Together at the Top.

Emerging Connections.

Divergent Tensions.

Chapter 5. Public Support for Philanthropy.

Regulated from the Start.

Industry Growth and Public Oversight.

Operating in the Public Eye: Growing Public Attention.

The Potential for Industry Action.

Pressure Points in the Regulatory Framework.

What the Regulatory Framework Should Do.

New Markets, New Approaches to Regulation.

Meaningful Metrics.

Chapter 6. Evolving the Industry.

Aligning Products and Services to Aggregate Resources.

Using Knowledge as an Industry Resource.

Promoting Hybrid Organizations and Strategies.

Redesigning the Industry Infrastructure.

Potential Leverage Points.

The Direction of Evolution.

Chapter 7. New Nodes on the Network.

Organizational Implications.

Partnership Building.

The Role of Money.

Charting Philanthropic Cycles.

Mixing Up the Menu.

New Assessment Strategies.

Buy or Rent?

Results.

The Sum of the Parts.

Independent Foundations.

Changing One to Change Many.

Chapter 8. Building New Systems for Social Good.

The Futures We Choose.

New Revenue Systems.

Industry Leadership.

Deliberate Diversity.

Looking Back from the Future.

Copyright Information.

Bibliography.

Notes.

Index.

What People are Saying About This

From the Publisher

Lucy Bernholz is one of the leading thinkers on the present and future course of philanthropy. Her writings are always a step ahead of the rest and this book is no exception. Her thoughts and analysis on the philanthropic sector, where it is headed and what is required from leaders like us, are both timely and visionary. She urges us to reimagine ourselves as an industry and identifies the practical steps we can take as donors and foundations to build philanthropic capital markets that will help us achieve our social missions.
Alexa Cortes Culwell, CEO
Charles and Helen Schwab Foundation

"Now that all the philanthropic hype of the late 90’s has died down, what are the true, key trends for the future? What really matters? Bernholz articulately identifies the vital issues we all must focus on if we are going to capitalize on those trends and optimize philanthropy’s future."
Paul Shoemaker, Director
Social Venture Partners Seattle

Lucy Bernholz combines the rigor of a trained scholar with the street smarts of an experienced practitioner. This combination ma kes her an indispensable guide to the philanthropic marketplace. Creating Philanthropic Capital Markets provides her most provocative theories and visions, and therefore is a must read for anyone who wants to understand, influence or participate effectively in what she calls the new era of commercial charity.
Katherine Fulton, Partner
Global Business Network and the Monitor Group

"Lucy Bernholz's critical analysis and clear language has captured the key issues in today's philanthropy and made it accessible to the non-technical reader. Our foundation's Board was able to make several significant operational decisions by beginning with Bernholz's analysis of the future of foundations."
Marvin Shotland, President
The Jewish Community Foundation of Los Angeles

"Lucy Bernholz's newest book is a lively and engaging exploration of the dynamic new philanthropy industry in America. It functions as a kind of ‘charitable GPS’ guiding the reader across the fascinating, varied, and shifting terrain of 21st Century charitable giving. But more importantly, it offers a well-conceived blueprint of new ways that private charitable resources can-and should-be better leveraged for greater effectiveness and impact in the public benefit sector."
Peter Hero, President
Community Foundation Silicon Valley

"Business success relies on networks—why would philanthropy be any different? Lucy Bernholz has charted how families and individuals are building "giving portfolios" by using multiple products and services within the philanthropic sector. She also challenges the philanthropic service sector to evolve to best serve these donors and communities. For people just getting started in giving—and for those already involved—this analysis provides practical insights into how to get the greatest results from their philanthropy."
Jeff Shields
Vice President
U.S. Trust Company