Foundation Responsibility Goes Beyond GrantMaking

As a past community foundation CEO, I am a passionate advocate of the power of foundations.  However, I find myself disappointed in the narrow-minded focus of many of these organizations who hold so much potential power in terms of making and inspiring positive social change.  Currently most foundations (especially in Florida) are trying to solve the major social problems of our day – such as poverty, homelessness, global warming, and lack of healthcare – by making grants to nonprofits.  However, grant-making is not why foundations hold so much potential power, because that is not where major change is made.  Large scale social change is made in the capital market, and foundations are in a unique position to create change because they alone control large pools of investment capital that CAN BE dedicated to broad social purposes. They have the power, through their collective financial assets, to craft market-based solutions to social problems.  Market-driven solutions cannot cure all social ills, but they can create positive social change in many areas that nonprofits previously could not influence.

What we are talking about here is not the bland "social investment strategy" most foundations define with a paragraph in their investment policy stating "no investments will be made in companies involved in the production of tobacco, weapons or alcoholic beverages".  Instead, we are talking about a proactive approach to using a foundation's large investment pool to help shape social change.  A practice most often called mission investing, or impact investing.

Mission investing refers to investments in revenue-generating nonprofit and for-profit organizations whose work is consistent with an investor’s charitable purpose and goals.The emphasis is on investments, as opposed to grants.  To be successful, foundations must reach out beyond the nonprofit universe to work with a new set of partners in the commercial sector.  Board members and foundation staff must recognize that for-profit enterprises also contribute to social solutions. They must thoroughly understand not only the nonprofit options for intervention, but also the impact of commercial enterprise on the social issue to be addressed.

Foundations must also realign their organizational structures to bring program expertise to the investment side and investment expertise to the program side. This may require recruiting new staff or hiring consultants who bring this unusual combination of perspectives. Foundations must also coordinate impact evaluation and financial reporting processes to enable tracking of progress toward both program and investment objectives.

At the same time, the spread of strategic mission investing will also require changes external to foundations. A robust and efficient marketplace of investment options for mission investing does not yet exist. The sector needs new investment intermediaries that offer foundations easy participation with low transaction costs in a wide range of investment vehicles targeted toward specific programmatic objectives. People with financial and business expertise must be recruited into the sector. Nonprofits must develop the financial discipline and appetite for investments as well as grants. And better ways of measuring social performance and benchmarking financial returns must be found.

Neither the internal nor the external changes will happen all at once. Instead, they will evolve. The more foundations create demand for strategic mission investments, the more others will develop a robust roster of investment offerings. This will make mission investing easier, leading more foundations (as well as social-concious individual investors) into the practice. And as mission investing becomes more mainstream, foundations will attract staff and develop the internal processes necessary to support them, as well to benchmark each other.

1 Mark R. Kramer and Sarah Cooch. “Strategic Mission Investing.” Stanford Social Innovation Review, Fall 2010. 2 Based on Foundation Center data for 50 largest U.S. foundations, March 2007.

 

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