The Spend-Out/Perpetuity Distraction…and the Merger Option

Monday, February 8, 2010

By Charles H. Hamilton
Senior Fellow, Philanthropy New York

There is renewed interest in the issue of lifespan for foundations (spend-out versus perpetuity). Nonetheless, these discussions seem like a distraction to me, for two reasons: 1) the perpetuity versus spend-out debate isn’t relevant by itself and distracts from questions of mission and impact, and 2) it diverts us from looking at other options for foundations.

There are, of course, good reasons to spend out, just as there are good reasons for foundations to continue in existence. These are usually decisions that are properly “private policy” as it were, and not matters for public policy. In August 2009, Anita Nager contributed a blog post on the Beldon Fund’s decision to spend out; more recently, Jane Schwartz discussed the Paul Rapoport Foundation’s decision to do the same. Both decisions were carefully and sensibly made as the best means to accomplish mission and/or meet a donor’s intent. Those foundations that explicitly decide not to spend out do so for similar reasons.

Recently, the Foundation Center and Council on Foundations released Perpetuity or Limited Lifespan: How Do Family Foundations Decide?; and The Aspen Institute published Time is of the Essence: Foundations and the Policies of Limited Life and Endowment Spend-Down. These and other works have valuable things to say. But the Foundation Center survey of family foundations makes it clear that perpetuity versus spend-out simply isn’t a pressing matter. Indeed, most foundation boards and staff and most donors are rightly more concerned about mission, values, effectiveness, and impact; as well as about family issues, control, concerns about “immortality,” etc. Decisions on those issues may then lead to strategies that lead to spending out or continuing into the future. We don’t generally discuss perpetuity versus closing down when discussing settlement houses or commercial equipment manufacturers or community foundations, for instance; why should we with private foundations? Let us stick to the important questions. Let us avoid that first distraction.

The second distraction is more unfortunate. A focus on perpetuity versus spend-out limits and impoverishes our thinking about the future of foundations and the varieties of their “existence.” It is not either/or. What other organizational options can promote mission, values, impact, and effectiveness? What about the possibilities of foundations merging, rather than disappearing or doing the same old, staid thing?

There are great examples of foundation collaborations, donor collaborations, pooled funds, funders’ groups, etc. That literature is vast. I am talking about variations beyond that, and closer to a merger, that may provide new ways to achieve mission, impact, and other values as well. Many of the issues that animate discussions about spend-out and/or staying in business can be seen in a new light by asking about different possibilities, including merging. The question is relevant not only for family foundations and small foundations, but for larger, more established philanthropic institutions.

Some interesting examples exist:

  • In mid-1999, the Charles E. Culpeper Foundation (over $200 million in assets) merged with the Rockefeller Brothers Fund (approximately $460 million in assets).
  • In June 2006, Warren Buffett pledged what was then $31 billion to the Bill and Melinda Gates Foundation over a number of years. One stipulation amounted to a spend-down of that amount over time. Starting in 2009, the Gates Foundation must spend at least the amount that was allocated for 2008, in addition to the amount that the foundation would be required to spend under federal tax law. This process would then continue until the Buffett gift is totally expended. Word has it that other donors made the same offer to the Gates Foundation but were declined. Whatever the nature of the offers, this suggests that there is a “market” for additional competent organizations to steward philanthropic funds.
  • On January 2, 2007, the Silicon Valley Community Foundation opened its doors and became the second largest community foundation in the country. This was the result of a merger of the Community Foundation of Silicon Valley and the Peninsula Community Foundation.
  • There are also the very interesting nonprofit and commercial intermediaries that provide advice and services much deeper than consolidation of grantmaking. This includes community foundations but also organizations like The Philanthropic Initiative and Rockefeller Philanthropy Advisors. While not exactly mergers, these organizations may be the harbingers of organizational structures that do merge mission, endowment, and administration of different foundations in new ways of giving and new ways of combining foundations.

Each of these examples is a variation on the theme of merging. There are many different ways to bring together different donors and foundations. The field as a whole would do well to focus creatively on the pros and cons of mergers and other such organizational forms. What about other examples? And where are the good “inside story”/how-to case studies?

Mergers in any sector are not simple panaceas. They are usually time-consuming, difficult, complex, and messy. They can be inappropriate and inefficient. Each of the above examples had its own difficulties. Mergers certainly have the potential for representing a loss of control or of family involvement. They can become takeovers where the original mission disappears in the bowels of the new entity.

Mergers can also be effective ways to stay true to mission and passion and values. They can substantially increase impact in communities or increase leverage for programs of importance. They can improve efficiency in operations and provide greater programmatic expertise. They can shake up the calcification of settled philanthropic practice while reviving and strengthening civil society (this later point is the topic of my next contribution).

Boardrooms, staff, scholars, and living donors should think about foundation mergers as part of their drive towards impact. We need to experiment with the idea of new foundation forms and combinations. Focusing too narrowly on perpetuity versus spend-out is a distraction from the purposes—and the possibilities—of foundations.

(A forthcoming session at Philanthropy New York, “What Are the Options? New Ways for Foundations to Do Their Work”, will look at mergers and other organizational options for foundations. It will be held on April 16th, from 8:30 to 11:00 AM. Please continue to check Philanthropy New York’s Calendar of Events for more information.)

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