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March 2011 (4 posts)

Modernizing the 990-PF to Advance the Accountability and Performance of Foundations: Part 2
March 21, 2011

(John Craig is executive vice-president and COO of The Commonwealth Fund. Craig is chair of the Nonprofit Coordinating Committee of New York, and a former chair of The Investment Fund for Foundations (TIFF). He serves on the boards of the TIFF Education Fund, the Greenwall Foundation, the International Women's Health Coalition, and the National Center for Law and Philanthropy, and on the investment committee of the Social Science Research Council.)

The full essay on which this post is based appears in The Commonwealth Fund's 2010 Annual Report.

John E. CraigIn my previous post I discussed some concerning flaws of the Form 990-PF, the tax return filed annually by private foundations. To address these flaws, I present some guidelines to consider for modernizing the 990-PF – a modest proposal, if you will:

The return should prod foundations to use web sites to report information on their programs and performance that cannot be readily conveyed on a tax return. The Foundation Center reports that only 26 percent of foundations have web sites. Surely in the Internet age, maintenance of a site that discloses basic information on the foundation's activities, governance, and management should be a fundamental test of accountability. Foundations should be allowed to detail their charitable activities by linking to their web site. Such sites enable far more comprehensive, timely, and accessible reporting of this information than a tax return can ever achieve.

Craig_pull_quote_3One of the biggest obstacles to e-filing is the return's Part XV requirement to list detailed information on all grants. Foundations should be able to meet the requirement by providing a link and by participating in the Foundation Center's web-based Grantsfire and eGrant Reporting program, which allows foundations to post information on grants nearly in real time or submit such data to the Center on a regular basis. This step would allow raw data on grants by individual foundations to be available on their web sites, while cleaned and structured data would be available through the Foundation Center's electronic databases.

 The reporting of expenses should be disaggregated functionally. Doing so would enable users to readily identify what part of the foundation's expenses is devoted to grants and direct charitable activities, grants administration, endowment management costs, unrelated business costs, and general administration.

The major missing gap of endowment investment performance should be filled. Requiring all foundations with assets of $10 million or more to report the net investment returns on their endowments for each of the last four calendar quarters would quickly produce a comprehensive time series on endowment returns that could be parsed by foundation size, intended life expectancy, and other variables to enable reliable peer benchmarking.

The basic return should be as short and uncomplicated as possible, and written in plain English. Essential tax code terminology should be provided parenthetically. The calculations of the required payout, payout shortfall, and excise tax on investment income should be concise and presented in a format easily followed by lay users. Secondary information should be requested in supplemental schedules. The requirement to list individual securities in the endowment portfolio should be replaced with one aimed at revealing any worrisome concentration of the endowment in a few securities—say, amounting to more than 5 percent.

Craig_pull_quote_4The Commonwealth Fund estimates that with these and other revisions, the annual cost of filing its 990-PF would fall from $18,000 currently to around $10,000—and its return would be more informative.

A revised 990-PF would also improve the principal databases for monitoring foundation activities. Nevertheless, the size and diversity of the foundation sector, the perils of the IRS using limited data to promulgate performance benchmarks, and serious IRS resource constraints lead to the conclusion that the foundation community itself should take primary responsibility for ensuring transparency, accountability, and best-practice adoption. Among the most promising approaches for helping institutions meet these goals is the Foundation Center's web-based Glasspockets project, which is increasing understanding of best practices in foundation transparency and accountability by drawing on information that foundations make available online.

As Foundation Center President Brad Smith argues, greater transparency is the best means to protect the freedom that philanthropies need to pursue their missions. Modernization would make the 990-PF an even more valuable instrument for promoting transparency and accountability and would strengthen the sector's own self-regulatory efforts to ensure effective use of the nation's philanthropic resources.

— John Craig

Modernizing the 990-PF to Advance the Accountability and Performance of Foundations: Part 1
March 14, 2011

(John Craig is executive vice-president and COO of The Commonwealth Fund. Craig is chair of the Nonprofit Coordinating Committee of New York, and a former chair of The Investment Fund for Foundations (TIFF). He serves on the boards of the TIFF Education Fund, the Greenwall Foundation, the International Women's Health Coalition, and the National Center for Law and Philanthropy, and on the investment committee of the Social Science Research Council.)

The full essay on which this post is based appears in The Commonwealth Fund's 2010 Annual Report.

John E. CraigTo obtain the information needed to exercise its regulatory responsibilities, the IRS relies principally on an annual filing by private foundations—the Form 990-PF tax return. If the 990-PF is a necessary requirement of private foundations, it is also a costly one: estimated total filing costs in 2008 for all foundations was $675 million—more than the average annual $552 million in excise taxes generated by the return over the 1999-2008 period.

To their enormous credit, the 1969 regulations on foundations and the 990-PF that resulted in 1974, along with strong self-regulatory activities by the foundation community, have eliminated most of the abuses targeted by those actions. But the 990-PF has failed to keep up with the evolution of the foundation sector over the last four decades. As both an instrument of basic regulation and tax collection and a tool for promoting strong performance among private foundations, the return is seriously flawed.

It misstates foundations' administrative expenses. The information requested in Part I, "Operating and Administrative Expenses," is particularly problematic for foundations that make grants, conduct their own research programs and communications activities, and are extensively involved in developing, monitoring, and disseminating the results of grant-funded work. Most of the intramural expenses of such foundations are mislabeled as "administrative."

It misses opportunities to shed light on endowment performance. Information on investment performance is not solicited in the 990-PF. Since their endowments are the only source of income for most foundations and effective endowment management is a challenge for many foundations, this is an egregious omission—equivalent to not requiring for-profit corporations to report their earnings on tax returns and financial statements.

The format is unwieldy and its content poorly targeted. The 990-PF is unnecessarily long, complicated, and poorly organized; little attention is paid to users' needs and priorities. For example, the determination of the all-important required annual payout, comparison with actual payout, and calculation of any necessary catch-up payout that must be made in the following year are spread over four sections and two pages. Additionally, the Part II requirement that foundations attach schedules showing individual securities in their endowment portfolios at fiscal year-end serves little purpose, as most portfolios are actively traded.

E-filing is cumbersome and costly. Because of the potential efficiencies in submitting data and creating researchable databases on foundations' tax returns, electronic filing of the 990-PF is desirable. But realizing this goal is greatly hampered by the complexity of the existing form. Foundations currently e-filing report substantial extra costs, as special software must be used to provide non-financial information like that requested on grants.

As a database, it has poor functionality. Efforts to use the information collected by the 990-PF for research purposes reveal its deep flaws: too often, the information requested is of little current relevance; major gaps limit its utility; and the return's complexity make it a researcher's nightmare.

It has misleading or indecipherable terms. Because of its reliance on tax code terminology, much of the language in the form is unintelligible to the many lay readers, including trustees and journalists, who use it—leading to harmful misinterpretations.

It is time to consider modernizing the 990-PF. In Part 2 of this post, I'll present some guidelines to consider for doing so.

— John Craig

For Performance Assessments, How Public Should Foundations Be?
March 7, 2011

(Kevin Bolduc is the Vice President of Assessment Tools at the Center for Effective Philanthropy (CEP). In this role, he oversees both the design of new tools and the refinement of CEP's suite of assessment offerings, and has presented CEP's data to the boards, management, and staff of dozens of funders.)

Kevin Bolduc

We at the Center for Effective Philanthropy (CEP) are often asked, just how public should foundations be with the results of the assessments tools we provide them?  It's a simple question, but I am not sure there's an easy answer.

The question arises most frequently in the context of our Grantee Perception Report (GPR), which we have provided to some 200 foundations of various types and sizes. CEP's motivation for creating the GPR was simple: in order to be truly effective, foundations need to hear from those they are supporting. Relative to other one-off grantee surveys, the GPR is powerful because grantees can be candid, knowing their identity will be protected, and because the results are comparative.  Through the GPR, funders learn about how they are doing relative to others, helping highlight real strengths and weaknesses.

Since we began delivering these reports eight years ago, about 40 funders of all stripes and sizes, from the William and Flora Hewlett Foundation (the first to do so and unusual enough that it was written about in the New York Times) to The John R. Oishei Foundation (one of the most recent), have elected to post some or all of their CEP Grantee Perception Reports on their websites. (You can also find links to public GPRs listed on Glasspockets.) But many funders have chosen not to post their GPRs. Here and there I've been asked why not all funders make their GPRs public and whether I think they should.

There are a few intertwined reasons I see (and hear) about why funders posting their GPRs can be good for philanthropy and can even help to mitigate some of the sector's inherently asymmetric power dynamics.

  • Clarity: Public GPRs can provide one more resource for grantees and other prospective partners to understand how a particular foundation does its work—strengthening potential future proposals or helping to identify areas of mutual alignment.
  • Transparency about successes and failures: Funders can lead the way in demonstrating that by sharing successes and failures openly, we can best learn and improve.
  • Accountability: Self-imposed accountability can often serve as a first step in a funder making change. While posting the GPR alone might not do this, funders often use the opportunity to tell grantees (and others) what they're going to change and why. They can prime grantees to start reconsidering any preconceived notions and approach the foundation with a fresh perspective. And in so doing, they might begin to alter the dynamics of the relationship for the better, fostering a greater sense of comfort among grantees in providing feedback, including about whether change is happening—or not.
  • Motivation of internal change effort: When leadership makes the GPR itself public, it's a powerful statement to staff colleagues about the importance of the GPR feedback and, more importantly, about the importance of always seeking to learn and improve the way the foundation works with its grantees.

These are strong arguments. But here's the thing: I've seen funders that don't make their GPRs public go on to make real and important changes in their work based on GPR results. And I've seen a few funders go ahead, make results public, and then follow-up with half-hearted change efforts.

Posting results is easy. Creating change based on those results is the hard work.

Furthermore, we know that many foundations communicate about their results in some way, even if they don't go as far as publicly sharing their GPR. Some send a detailed letter or e-mail to grantees. Some have hosted a gathering or discussion with grantees and potential applicants. The Bill & Melinda Gates Foundation, for example, didn't post its GPR, but it held open conference calls in which foundation leaders candidly described GPR results and invited questions; the Foundation then posted audio recordings of the calls on its web site.

So, here's a thought: maybe Glasspockets should accept and link to all these types of sharing as "evidence" of transparency and accountability. It's not just the public GPRs that are real signals of commitment to effectiveness.

CEP's third-party evaluations indicate that funders are making major changes in their work, whether they're posting results or not.

And that's what it's all about for me. 

— Kevin Bolduc

Integrating a Network Mindset into Grantmaking: Part 2
March 1, 2011

Beth Kanter is the author of Beth's Blog, one of the longest running and most popular blogs for nonprofits, and co-author of the highly acclaimed book, The Networked Nonprofit, published by J. Wiley in 2010.

This is the second of a two-part blog post that explores "network weaving" skills. In Part 1, we looked at how grantmakers can incorporate these activities into daily practice. This second post explores how to use social networking tools to visualize your network, examines why changing our practice is so hard, and looks at how grantmakers can overcome the challenge.

Beth Kanter

Visualize your network. An important technique is to visualize your network. Steve Waddell, in talking about the value of mapping networks for systemic change, asserts that maps are most useful as tools to generate discussion about "what is," "what can be," and "what needs to change." Looking at your network map while thinking of gaps can be an insightful step.

Mapping Your LinkedIn Network

Recently LinkedIn created this free social network analysis mapping tool that lets you see your LinkedIn network and better understand relationships between you and your network. The most powerful feature of the map is that allows you to peer into your network, notice connections, and to remind yourself of people you know but may not have thought about in years.

As an exercise, we used the mapping to visualize our networks and ask these questions:

  • What patterns do you see?
  • What surprises you?
  • What might you do differently with your network?

I learned a lot by browsing through the visual network. My network is dense because I'm connected to a lot of well-connected people. What surprised me most about my map was how densely connected the nonprofit technology field was. Viewing my whole network in this visual format helped me remember people who I haven't been in touch with and their knowledge.

Using the map with a specific question about a gap is far more valuable exercise. I make a lot of referrals and I tend to get in ruts, but using the LinkedIn map as a spark to think of new people was useful.

Why Is It So Hard?

During the discussion, we all agreed that incorporating network weaving tasks into daily work requires conscious effort, especially if these activities are not called out specifically in a staff performance plan. One grantmaker shared that they have indicators around growing their professional network and have begun to celebrate staff members using social networking tools to do so. For example, a staff person recently received special recognition for reaching over 1,000 followers on Twitter.

There are a few personal and organizational challenges:

Information Overload: The issue is about being able to shift between connectedness and solitude. Once we are able to do this in discrete ways, we can avoid the feeling of anxiety that might come from being confronted with a lot of unstructured information.

Time Consuming: Learning new skills does take time to develop a habit, and then it becomes less time consuming because you don't have to think about the skill so much. Stephen Covey says it takes 23 days to make habit. One way to start is to focus on a new network weaving skill each month. Write it down on a sticky note, put it on your computer, and try to use that skill once a day.

Steep Learning Curve: Learning curves become steep when we try to take on too much at once. Try to break down the task. Also, having a peer group or a colleague who is learning the skill with you helps with motivation.

Few Incentives: How many of you have "network weaving" as a formal part of our jobs? Network weaving tasks are not typically linked to KPI, or even the informal on the job learning techniques that are such an important part of network weaving.

Internal Systems: Several grantmakers mentioned that their systems for sharing information internally—information that isn't necessarily confidential—cause them to do "double duty" if they want to share with the field.

How have you put a network mindset into practice? What online tools have you used? What are the barriers and how have you overcome them?

— Beth Kanter

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  • Transparency Talk, the Glasspockets blog, is a platform for candid and constructive conversation about foundation transparency and accountability. In this space, Foundation Center highlights strategies, findings, and best practices on the web and in foundations–illuminating the importance of having "glass pockets."

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