The Social Innovation Fund Kerfuffle

This is a response to an article published in the August 19, 2010 New York Times, "Nonprofit Fund Faces Questions About Conflicts and Selection Procedures," which is available here.

The social sector has long been a recipient of federal, state and local government funding, but it has little experience working with government as an equal partner. Breaking with a past in which nonprofits acted almost exclusively as supplicants for federal largesse, either as contractors-for-hire or grantees, the Social Innovation Fund (SIF) vests shared responsibilities in a broad spectrum of leading social sector players, including foundations, intermediaries, and nonprofits with track records of success, not only for funding, but also for the development and administration of the program itself.

Contrary to isolated pot shots being leveled at SIF, the program is a real-world model of transparency that marks the advent of a new era in cross-sector collaboration -- unless, that is, we continue to indulge in an orgy of recrimination and second-guessing that amounts to much ado about nothing. In two previous posts (here and here), I’ve explained why CNCS has neither an actual conflict of interest nor the appearance of one, and why CNCS should not release the first-round reviews of grant applications by outside experts. In this post, I’ll offer some thoughts about the singular importance of SIF and the risks that unfounded and disproportionate criticisms will end up throwing out the baby with the bathwater.

[Author's note: Although I was involved in the SIF review process, I’m writing on my own behalf and I don’t speak for the Corporation for National & Community Service (CNCS) or any of the organizations that participated in SIF. I have not discussed this memo with or shown it to anyone else (including CNCS) prior to publication.]

SIF Purpose and History

In a speech to a joint session of Congress on May 25, 1961, President Kennedy made the paradigmatic statement of what Jim Collins later dubbed a “big hairy audacious goal,” or BHAG:

“I believe that this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to the Earth. No single space project in this period will be more impressive to mankind, or more important for the long-range exploration of space; and none will be so difficult or expensive to accomplish.”

In 1962, he added for the benefit of those who didn’t understand him the first time, “We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard.”

If the nonprofit sector as a sector has ever had a BHAG, the SIF is it. Indeed, it was not just what SIF aspired to accomplish that was audacious, but also how it proposed to go about it, by actually engaging in two enlightened practices about which there has been much talk and little action for many years: collaborating across sectors and leveraging institutional co-investment.

We can’t appreciate the significance of SIF without understanding the extent to which it departs from accepted ways of doing things. In 2006, Harvard Business School Professor Michael E. Porter told The Economist’s Matthew Bishop that “Philanthropy is decades behind business in applying rigorous thinking to the use of money.” Even further back in the stone age of performance-based philanthropy -- 1999 -- Professor Porter and Mark R. Kramer, his co-founder of FSG Social Impact Advisors, wrote a seminal article in the Harvard Business Review, “Philanthropy’s New Agenda: Creating Value.” They argued that “foundations create value when their activities generate social value that go beyond the mere purchasing power of their grants,” and identified four ways of doing so: (1) selecting the best grantees; (2) signaling other funders; (3) improving the performance of grant recipients; and (4) advancing the state of knowledge and practice.

SIF does all four.

Porter and Kramer have not been alone in calling for a fundamental restructuring of the nonprofit capital market:

“The core problem is that our education and training systems were built for another era, an era in which most workers needed only a rudimentary education. It is not possible to get where we have to go by patching that system. There is not enough money available at any level of our intergovernmental system to fix this problem by spending more on the system we have. We can get where we must go only by changing the system itself.”

“Tough Choices or Tough Times,” The New

Commission on the Skills of the American Workforce

“The financial system [for nonprofit enterprises] we have put in place and support is the worst enemy, not only of the improvements everyone is trying to make, but of the socially critical programs and services this system is meant to sustain. All efforts to improve the sector will be merely palliative without essential, systemic reform of the way the rules of finance work.”

Clara Miller, President and CEO, Nonprofit Finance Fund

“Many organizations with the potential to grow are unable to do so because they cannot tap into an easy-to-access capital market... There are not enough organizations able to systemically expand and strengthen their work in order to really resolve social issues.”

Arthur Wood and Maximilian Martin,

“Market-Based Solutions for Financing Philanthropy”

“The forecast is for hundreds of billions, if not trillions, of philanthropic dollars to be dropped into our industry, but given the current scattered nature of our efforts, the chances of effectively channeling these resources to substantial public good is like trying to direct the floods of the Nile River by building sand castles along its banks.”

Lucy Bernholz, Creating Philanthropic Capital Markets: The Deliberate Evolution

“Any serious discussion of nonprofit capital market deficiencies has to start with an acknowledgement that there is no obvious way out of this maze. Expanding social needs are being addressed by nonprofits with very limited funding options. Grant seekers put extensive resources into navigating unclear and unpredictable restrictions. This fragmented funding landscape weakens the sector and ultimately limits impact, detracting from the very community efforts that the funds are meant to support.”

Cynthia Gair, REDF

I collected these voices in my book and added my own two cents:

“Just as experienced financial investors find the most lucrative investment opportunities before everyone else, we need to help ‘smart money’ find the most capable nonprofits that are ready to take on $100 million problems. If we really want to help ‘all children’ but we don’t want to wait forever for ‘one day’ to arrive, we need to turn the fundraising paradigm on its head: We need a financing system that helps highly engaged social impact investors to direct third-stage growth capital to the best mid-cap nonprofits, instead of one that forces those nonprofits to spend all their time looking for more drops to fill more buckets.”

The origin of SIF traces back to the formation in 2007 of the non-partisan America Forward coalition, led by New Profit, Inc. (NPI). At the time, NPI had virtually no interaction with the public sector, but it assembled “more than 90 results-driven, entrepreneurial nonprofit organizations, grant-making intermediaries, and their partners” around a shared vision that

“one day, our nation’s leaders and citizens will work together to foster innovation and high-impact results in the social sector, identify what works, and grow the most effective solutions to wherever they are needed.”

In a 2007 briefing book, America Forward proposed what it then called the “Social Investment Funds,” which would “make it easier for policymakers, and private-sector funders, to seed innovation, extract what works, identify why it is successful, and take solutions to scale.” In May, 2009, First Lady Michelle Obama announced the $50 million SIF:

“The idea of the fund is simple: find the most effective programs out there and then provide the capital needed to replicate their success in communities around the country. By focusing on high-impact, results-oriented nonprofits, we will ensure that government dollars are spent in a way that is effective, accountable and worthy of the public trust.”

Just one year later, on May 27, 2010, SIF and some of its partners made three big announcements:

• Five of the country’s most forward-thinking foundations -- Eli and Edythe Broad, John and Ann Doerr, Omidyar Network, Open Society Institute, and Skoll -- pledged $45 million over two years to help provide matching funds for SIF grantees.

  
• 140 community foundations signed a letter to President Obama from the Council on Foundations that endorsed SIF “as a tool to find and invest in more community-based solutions.”

  
• 22 grantmakers committed nearly $5 million for three years to an independent coalition called “Scaling What Works” to “extend the reach, learning and impact of the Social Innovation Fund and other philanthropic efforts to bring effective nonprofit programs to scale.” Members include Annie E. Casey, Atlantic, Gates, Carnegie, Mott, Packard, Edna McConnell Clark, Knight, Kresge, Lumina, Robert Wood Johnson, and Kellogg. Its objectives are: (1) Serve as ongoing convener and conduit between the field of philanthropy and the public agencies involved with the Social Innovation Fund with the hope of building effective partnerships between philanthropy and the public sector that can speed the pace at which community solution scale; (2) Expand the number of grantmakers nationally who are prepared to support the evidence base, capacity and growth of promising nonprofits; and (3) Support collaborative learning and action among the network of grantmaking intermediaries funded by the SIF so they can most effectively invest public and private resources, and so the lessons they learn are translated for the larger field.

SIF Purpose and Structure

Grantmakers for Effective Organizations (GEO), which is leading Scaling What Works as part of its “GEO Action Network,” summarized the objectives of SIF:

• Promote public and private investment in effective and potentially transformative nonprofits to help them strengthen their evidence base and replicate and expand to serve more low-income communities;

  
• Identify more effective approaches to addressing critical social challenges and broadly share this knowledge; and

  
• Develop the grantmaking infrastructure necessary to support social innovation in communities across the country.

This “grantmaking infrastructure” is so important for the future of social change. As Porter and Kramer pointed out, it’s not just the direct grant dollars that matter; value comes from producing “social impact disproportionate to their spending.” As summarized in today’s otherwise depressing New York Times story, “Nonprofit Fund Faces Questions About Conflicts and Selection Procedures,” the SIF is specifically organized to produce that kind of value:

“The 11 winners effectively serve as conduits to channel the grant money to other nonprofit organizations that operate successful programs that can be expanded to serve more people in more areas. The winners must match the government’s money, which also must be matched by the final recipients, potentially trebling the fund’s financial effect. The broader goal ... is to develop a network of intermediaries like the grant winners that can identify promising programs and connect them to donors and other sources of financing to allow them to expand.”

Folks who’ve never worked in or with government don’t realize how rare and precious the SIF is. Before we snatch defeat from the jaws of victory, consider what’s at stake.

1. The economy is still in serious trouble and the deficit is blocking far more important programs than SIF. As a result, there isn’t going to be any more government funding for the social sector, period.
   
2. It is orders of magnitude more difficult to prevent or stymie a new federal program than to successfully navigate one through the thickets of competing stakeholders. For every SIF grantee, there are nearly four disappointed applicants who know reviewers, reporters, bloggers, and friends on Capitol Hill. There’s no downside for an unsuccessful applicant to whisper any rumor that might disqualify a grantee and free up a slot; even if they take down the whole program, they’re no worse off. The media thrives on gossip, second-guessing and finger-pointing, no matter how thinly supported.
   
3. To mangle a phrase from Finley Peter Dunne, transparency, like politics, ain’t beanbag. Sausage-making is always ugly. Without exception, every large project with real money at stake that involves scores of people has an embarrassing paper or email trail. When the media and (former) congressional staff gather in the cause of “controversy,” everything is eagerly taken out of context and cooler heads almost never prevail. After all, “questions have been raised.” If I had access to the kinds of documents that critics are calling on CNCS to release, I could make any public, private, charitable, or religious endeavor look bad.
   
4. Public scrutiny is a blunt instrument. You can’t calibrate how much a process is “sullied” by unsubstantiated rumors or when the failure to satisfy a small handful of “surprised” participants becomes “stonewalling.” That’s why CNCS tried to overcompensate with duplicate panels to review every application. Transparency means providing sufficient information and inviting sufficient participation to insure fundamental fairness. It does not require unanimous agreement about each application at each and every step and every final decision. Neither perfection nor the absence of “questions” or “controversy” is the standard. Sorry, folks, but when it comes to government transparency, this is about as good as it gets.

Keep in mind that the President and First Lady of the United States invested their personal political capital in SIF. Why in the world would they do that for a tiny federal program that doesn’t come close to their top ten priorities? Why would SIF staff risk their careers on anything that challenges the status quo, no matter how valuable, if they can be pilloried even after they’ve recused themselves from any conflicting entanglements? Why would any government agency ever try another partnership-of-equals with the nonprofit sector? If SIF goes down, neither it nor anything remotely like it is coming back any time soon. For anyone who wants to strangle SIF in the crib, this is how to do it.

And the really sad thing is, we have even gotten to the hard part of SIF yet. Writing all those procedures, enlisting all those volunteers, shepherding them through weeks of reviews, and then reviewing the reviews for errors and inconsistencies is just mechanical stuff. Even the final round of grantmaking by the selected intermediaries will be a walk in the park compared to the real challenge looming ahead: showing that the SIF model can actually scale what works to an extent that isn’t otherwise possible. We’ve talked a good game about social transformation and the time will come soon -- assuming SIF doesn’t blow up first -- when we have to deliver.

And we’re being held hostage to typos and grammatical errors.

Just last week, new data showed that flawed 2008 research had vastly overstated the gains that New York City public schools had made in reducing the achievement gap between black and white students. What had been thought to be reductions in test-score differentials of about 50% turned out to be modest at best. By happy coincidence, a recent graduate of the Harris School of Public Policy at the University of Chicago, sent me an October 2009 research paper from the Federal Reserve Bank of Chicago on the Rosenwald Fund which showed how an innovative and highly risky public-philanthropic partnership not unlike SIF could scale what works to bring proven innovations to exponentially more people in need. Here’s the abstract:

“The Black-White gap in completed schooling among Southern born men narrowed sharply between the World Wars after being stagnant from 1880 to 1910. We examine a large scale school construction project, the Rosenwald Rural Schools Initiative, which was designed to dramatically improve the educational opportunities for Southern rural Blacks. From 1914 to 1931, nearly 5,000 school buildings were constructed, serving approximately 36 percent of the Black rural school-aged Southern population. We use historical Census data and World War II enlistment records to analyze the effects of the program on school attendance, literacy, high school completion, years of schooling, earnings, hourly wages, and migration. We find that the Rosenwald program accounts for at least 30 percent of the sizable educational gains of Blacks during the 1910s and 1920s. We also use data from the Army General Classification Test (AGCT), a precursor to the AFQT, and find that access to Rosenwald schools increased average Black scores by about 0.25 standard deviations adding to the existing literature showing that interventions can reduce the racial gap in cognitive skill. In the longer run, exposure to the schools raised the wages of blacks that remained in the South relative to Southern whites by about 35 percent."

At a time when our very best social enterprises reach fewer than 3% of the people who need their help, we can’t afford to treat minor misdemeanors as major felonies. But as Professor Porter once said, “Foundation scandals tend to be about pay and perks, but the real scandal is how much money is pissed away on activities that have no impact. Billions are wasted on ineffective philanthropy.”

SIF is working in a conscientious and open way to change that, and it needs our support.