Friday, December 24, 2010

2011: The Year Philanthropy Starts to Become a “Long-Term Solution”

An apparent disagreement between two of the sharpest minds in philanthropy is just too tempting to resist.  Herewith, an unsolicited response to Matthew Bishop (co-author of Philanthrocapitalism and The Road From Ruin, and NY Bureau Chief of The Economist) and Lucy Bernholz (founding President of Blueprint Research & Design and blogger extraordinaire at Philanthropy 2173) on the subjects of predicting trends in philanthropy and the relationship of private giving to public policy.

Here’s the set up:  Lucy recently blogged about a video of Matthew offering some predictions for 2011, which include (as Lucy summarized) a “rise in impact investing, ... boom year for education giving, down turn in government aid, and increased awareness of social capital markets.”  While I would venture to say that he’s hardly going out on a limb here, still, it’s good to hear someone as perspicacious as Matthew validate what many of us are expecting and planning on for the year ahead.  

But what’s noteworthy to me is Lucy’s response (with my emphases added), which, as I read it, seems to suggest that Matthew is all wet:  
Most interesting, in my opinion, is Bishop’s sense there will be more attention on policy issues, not just from big givers but also from the rest of us.

  I'd like to point out that the very fact that Bishop highlights education and maternal health as two "hot areas" for giving in 2011 is indicative of the limits of philanthropy as a solution. Global solutions don't lend themselves to "annual hot lists" - as I noted here. This blog received a comment from a reader that said: “Planned giving and philanthropic leadership are the need of the hour as many countries are crisis-ridden."
My response "... I think it is a fallacy to equate anything you would describe as “crisis ridden” with “philanthropy” as a solution. Philanthropy is – by design – episodic, donor directed, temporal, fragmented, decentralized and disaggregated. Not what any people, society, institution, community should expect to be responsible in “crisis ridden” situations."
Those same characteristics shape the kind of impact philanthropy can possibly have on ongoing issues such as education and maternal health or whatever the 2012 issues of the year will be. We don't help anyone by pretending otherwise. It's not to say that philanthropy can't make a difference. It is to say that we need to develop philanthropic strategies that draw from the strengths of philanthropy and don't burden it with being a long term, equitable, prioritized source of funding or attention.

The only word that captures my reaction to Lucy’s reaction is one that Matthew might use:  gobsmacked.  I’m utterly astounded not merely because I so strongly believe that transforming at least part of philanthropy to become “a long term, equitable, prioritized source of funding [and] attention” is precisely what we should try to do next year, but because I would have thought that Lucy Esmerelda* Bernholz would be the last person on Earth to suggest otherwise.  [*I have no idea what Lucy’s middle name is ...]

Let’s put this in context. A recent installment of the New York Time’s “Neediest Cases” series, entitled “When Children Are Caught in the Cycle of Poverty,” illustrates what I’ve called “$100 million problems,” social problems that are so pervasive, incapacitating and intractable that much larger sums than usual must be marshaled to develop and pilot scalable responses:
The economic collapse has taken a toll on vast segments of society, but it has affected some groups disproportionately. Among those are children. The Institute for Children, Poverty and Homelessness reports that nationwide, 1.35 million children are homeless. Most of them are black or Latino. Children make up a quarter of the nation’s population, but account for 36 percent of all people in poverty, according to a report from the National Center for Children in Poverty, at Columbia University. In New York City, 30 percent of children are living in poverty. One out of every five children relies on local food banks or pantries for sustenance, and of these children, 79 percent rely on the National School Lunch Program. Poverty stymies performance in school and negatively affects mental and physical health, experts say. Poor children have higher rates of asthma, are more likely to suffer a higher rate of cognitive delays and developmental disorders. Absent intervention, these children will face great difficulty in transcending the disadvantages of their early lives and, as adults, are likely to perpetuate a cycle of poverty that has consumed generations in areas like East New York, Brooklyn; Jamaica, Queens; Morrisania in the Bronx; East Harlem; and Port Richmond on Staten Island. Such an outcome is not acceptable to advocates like Richard R. Buery Jr., president and chief executive of the Children’s Aid Society, who said, “Those who love our country, and believe in its ideals, cannot be satisfied until the promise of equal opportunity is made true for all of our children.”
Now, we have any number of outstanding charitable organizations that have developed innovative solutions to just these kinds of problems, many of which have achieved significant levels of incremental growth over the course of two decades or longer.  But we simply cannot make meaningful headway against the massive scope of these problems -- 1.35 million homeless children, 36% in poverty, one-fifth experiencing food insecurity, with all the attendant impairments of health and educational and economic opportunity -- because we don’t know how to make those innovations much, much, MUCH more widely available.  

In my book, I argue that, as it stands today, philanthropy can’t increase the availability of proven social innovations by orders of magnitude.  Much of my thinking about this was informed by none other than Lucy Cleopatra Bernholz.  Lucy wrote the very first and extremely insightful book on this critical subject way back in 2004, called Creating Philanthropic Capital Markets:  The Deliberate Evolution (Wiley), which, by the way, hasn’t become outdated in the least.

Early on in her book, Lucy argues that “the goal of a new philanthropic system should be to demonstrably accelerate the effective application of private resources to achieve public good.”  So she asks, “How do we maximize the impact of hundreds of thousands of individual charitable acts and experience the full potential that private giving can bring to our shared society?”  Good question, to which she provides an equally good answer:

  • “The greatest professional challenge in philanthropy and the mark of success is the ability to attract other people’s money to an issue and apply the joint resources of many to make change happens.”  

  • “The book argues for the potential -- and the necessity -- for philanthropy to reorganize into a more rational system for social good.”  

I like where this is going.  So what will it take?

  • “If elements of the industry were deliberately designed, streamlined, creatively conjoined, and aggregated we could indeed build new philanthropic capital markets that could significantly improve the quality of community life.”  

Any difficulties expected?

  • “The strength of American philanthropy is its diversity and personal nature.  Its weakness is its dispersed size and diminishing value in the face of ever-widening wealth gaps and public revenue shortfalls.”  

  • “If we intend to make philanthropy a stronger, more vital participant in social health and problem solving, the most efficient places to focus are on those elements of the industry that broadly affect many individual players.  Simply put, the industry is too dispersed and deliberately isolated to effect much influence on it by moving from organization to organization.”

So philanthropy needs to be “redesigned” and “aggregated” to accomplish “greater social good”; as it stands now, it’s too “dispersed” and “isolated” to accomplish its potential.  I couldn’t agree more.  

But then who’s this other person arguing that philanthropy was “designed” to be “fragmented, decentralized and disaggregated,” so we shouldn’t “pretend” that philanthropy can be a “long term, equitable, prioritized source of funding or attention?”  Is there an “old Lucy” and a “new Lucy”?

I think my confusion began when Caroline Hartnell, editor of Alliance magazine (on whose Editorial Advisory Board Lucy sits), offered this on Lucy’s behalf:
No one should have to rely for their long-term basic needs on something that is by its very nature ‘episodic, donor directed, temporal, fragmented, decentralized and disaggregated’. No one can force foundations or philanthropists to act in a particular way over the long term. If we want to do that, we can tax the wealthy more. Social justice philanthropy doesn’t aim to meet people’s basic needs but to support marginalized groups to change the conditions that make them marginalized and to ensure that their long-term needs are met by the state as a matter of right.
I respectfully disagree.  The charitable sector has long seen government -- naively, in my view -- as an “exit” or “take-out” strategy in which nonprofits develop an important social innovation, which the public sector then adopts and scales with tax dollars.  What’s missing, I believe is an appreciation of just how profoundly the public sector has been recast and its role permanently diminished.  

Not only has the legislative process become almost completely dysfunctional, but almost everyone agrees that our national and state budget and debt structure have become unsustainable, with severe cutbacks in governmental expenditures as far as the eye can see.  There are no realistic prospects for significant expansions of government programs to address $100 million problems in education, healthcare, workforce development, housing, food, or any of the many other areas of significant decline.  Lucy seems to agree in both her book and her Blueprint 2011:

  • “Public funds for nonprofits at both federal and state levels will be down in 2011; many of the public sources of funds for nonprofits in 2009 [including the American Recovery and Reinvestment Act and the Department of Education’s Investing In Education fund] were one-time shots and state budgets have been decimated.”

  • “We are in the midst of a public revenue crisis at every level of governance that will not allow philanthropic assets to remain unaccountable or disconnected.”  

  • “Changes in public funding practices, primarily the devolution of funding and decision making from the federal government to state and local jurisdictions, constitute the fourth driver of the [philanthropy] industry.”

I see decades of governmental retrenchment ahead that cannot possibly cope with the array of debilitating social problems we already face.  If government remains the primary institutional response to those problems, we will not make sustained progress in overcoming them.  Other sectors, including business and nonprofits, have to take up the slack.  

A more plausible approach, presaged by the Social Innovation Fund and NYC Deputy Mayor Stephen Goldsmith’s Governing by Network model, is forming new public-private partnerships (such as Promise Neighborhoods based on the Harlem Children’s Zone) to share ongoing responsibility and funding for the development of new initiatives that straddle boundaries between sectors by combining the strengths of both.  Old Lucy seemed to agree:  

  • “A stronger philanthropic system will integrate private funds with public strategies....”

  • “There is no universal equation for the best relationship between the marketplace, government, and nonprofit providers -- the challenge is making the mix work.  As the balance of players -- commercial, nonprofit, and public -- shifts, the public benefit sector presents a shocking new environment for philanthropic action.”  

  • “Philanthropy is also changing as a result of new public-private partnerships.  There are many catalysts for those partnerships but the devolution of public budgets and decision making from the federal to the local level is a major reason for their growing popularity.”  

  • “Co-production of social services may become the norm, as municipal governments scale back and individual residents and philanthropic entities band together to provide core community services such as recycling, safety, and recreational services.” 

This evolution is happening right before our eyes.  Consider some of the more significant developments of 2010 in nonprofit growth capital markets and scaling social impact:

  • Three grantees of the Social Innovation Fund recently awarded the first round of subgrants to support 61 community-based nonprofit organizations working to provide workforce training, job placement, financial literacy services, and other resources to help over 32,000 individuals and families find jobs, reduce their debt, gain financial literacy and build assets.

  • In June, the Social Impact Exchange held its 2010 Inaugural Conference on Scaling, where more than 450 funders, investors, high net-worth individuals, philanthropy advisors, academics and nonprofit leaders focused entirely on planning, evaluating, and financing the scaling of high impact, nonprofit organizations.  In December, the Exchange announced several follow-up capital projects to be developed in time for the next annual event, including the formation of collaborative working groups focusing on Social Impact Bonds, donor-advised funds, private banks and financial institutions, and multi-family offices.

  • Social Finance in London has launched the first Social Impact Bond to raise private investments for early intervention programs to reduce downstream governmental expenditures resulting from  prison recidivism.  The Centre for Social Impact in New South Wales, Australia has announced plans to develop a similar initiative in areas such as juvenile justice, mental health or services assisting young families at risk.

  • Nine NFF Capital Partners’ “philanthropic equity” campaigns -- “the type of capital needed to explore better business models, scale impact, and create lasting change” -- have grown average annual program delivery by a factor of 3.1x, with a compound annual growth rate of 57%; annual business model revenue for these nine organizations has doubled, with a compound annual growth of 36%.

  • SeaChange Capital Partners launched “transformational fundings” totaling more than $11 million   for outstanding nonprofits that have “the opportunity, capacity, and ambition to increase their impact significantly on behalf of low-income young people in the United States.”

  • The third annual Social Capital Markets (SOCAP) conference added a “Tactical Philanthropy” track curated by Sean Stannard-Stockton to “examine the way in which philanthropy is an integrated part of the social capital markets, not a separate activity.”

  • Charity Navigator, Philanthropedia, Root Cause, GiveWell, New Philanthropy Capital, Keystone Accountability, Great Nonprofits, Guidestar, Independent Sector, BBB Wise Giving Alliance, and the Alliance for Effective Social Investing are developing and collaborating on various initiatives to advance performance-based philanthropy and measuring social impact.

  • Social Venture Partners International launched its first “mezzanine fund” to “take investees to national scale.”

I could go on, but it appears to me that we’re on the verge of something seismic.  In fact, over the last few weeks, I’ve asked quite a few people who’s views I respect whether they think (as I do) that a significant shift is taking place in the nonprofit capital marketplace and that major funders and intermediaries are ready to support growth capital investments and scaling initiatives.  While no one thinks that we’ve arrived at the promised land just yet, they all agreed that a lot more people seem to believe that such a place exists and that a consensus is emerging about the most likely ways to get there.  Having talked the talk for several years now, the possibility of walking the walk feels imminent.

Philanthropy is experiencing the kind of periodic “paradigm” changes that Thomas Kuhn described in which radically new approaches to social and scientific problems finally displace long-accepted explanations (such as belief that the sun revolved around the Earth) that clearly no longer work.  The idea that philanthropy is supposed to be “episodic, donor directed, temporal, fragmented, decentralized and disaggregated” has been eroding for some time, and the realization has taken hold that “new philanthropic capital markets ... could significantly improve the quality of community life,” if, but only if “elements of the industry were deliberately designed, streamlined, creatively conjoined, and aggregated.”  When we finally acknowledge (as the old Lucy urged us to do) that declining social mobility cannot be corrected by diminishing public revenues, and that the nonprofit sector has become impressively good at spawning effective social innovation, we must accept Lucy’s conclusion that the time has surely come “to demonstrably accelerate the effective application of private resources to achieve public good.”  

Philanthropy as “long term, equitable, prioritized source of funding [and] attention,” here we come.  But who knows?  As Yogi Berra said, “It's tough to make predictions, especially about the future.”


  1. Steve

    Wow - I, too, am gobsmacked. But gobsmacked that my writing was so cursory or your reading it such that you read this much into a quick blast blog post.

    No, there is no old and new Lucy. All the things you point to about where we might going are good, and most are meaningful, and I hope there are more of them.

    My description of philanthropy as it is designed "fragmented, etc" is not a wish, it is a statement of fact. That is what we're working with and from. Are some things in place to change it, sure - and you mention many of them (as do I and as does Matthew).

    But here's the rub - the innovations you, Matthew and I are so impressed with and spend much time promoting, are primarily financial innovations. Business model innovations. These are important. Yes. But they are new players in the game.

    But philanthropy as an industry is "designed" by policies. It is a regulated industry. It is shaped by the rules. And the rules, currently, favor "donor centric, fragmented, etc" as I describe it above. The game itself doesn't change because there are new players - it needs new rules.

    The "design" part is about the rules. The rules currently not only allow, but favor, "cause de annum" philanthropy as Bishop noted in his video. All I was doing was pointing out that the very fact that we can make such "cause of the year" predictions is indicative of the donor-centric, fragmented design of philanthropy. As it is now, and as it will be until the rules change. Not just the players (social enterprise, SeaChange partners, etc. etc) but the rules themselves.

    I just today picked up HBR which features a solid article from Porter and Kramer on "Reinventing Capitalism" It has a compelling argument and great examples of businesses creating shared value and how this is reinventing capitalism. Where does the article fall short (in my opinion) - in thinking that these new behaviors, new players, are by themselves enough to change the rules of the game. To their credit, they include two short sidebars on new regulations. I know its HBR and no one in business wants to talk about regulation (Except behind closed doors to manipulate them to their advantage). But that's the issue - new players are great - they incite and promote and innovate new futures. But the design element is in the rules.

    To clarify, I did not mean to comment, positively or negatively, on any of Bishop's predictions OTHER than the "causes of the year" comment. Nor was I taking issue with the causes he picks, who knows, he may well be right. But as long as philanthropy functions in such a way that "this year is Blue and next year is Pink" then its not designed to solve long term problems.

    Should it be? Now, that's a different question.

    BTW - I don't have a middle name.

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