Democracy and the Donor Class

Foundations and philanthropists do much good, but these unelected actors have acquired enormous power to shape policy. Should they be reined in?

By Gara LaMarche

Tagged Philanthropy

Though this is not the way I would usually describe my career, one way of looking at it is that I spent my first 20 working years trying to raise money, and the next 15 trying to give it away. The transition, which took place when I left Human Rights Watch in 1996 to found the United States Programs of George Soros’s Open Society Institute, was a challenging one.

On the one hand, having dealt with foundations over the years as a supplicant, I felt I knew their ways—and in particular, ways of behaving that I was eager to avoid. On the other hand, suddenly becoming the gatekeeper to many millions of philanthropic dollars altered most of my collegial relationships, and many of my personal ones, infecting all but a few of them with a new power dynamic. I found myself—as various wags have observed about philanthropy staff over the years—a great deal smarter, wiser, funnier, and probably handsomer than I had been only months before.

I managed that personal transition as well as I could. I vowed not to internalize the importance others now ascribed to me. What power I held was derivative and temporary, and I tried not to forget that. I think I was mostly successful in remembering, so my recent transition out of philanthropy, with the accompanying loss of certain kinds of power and capital, has been that much easier as a result.

For the better part of those 15 years, I oversaw grants made by two of the world’s largest foundations, both with engaged and active donors, probably to the tune of about $3 billion in all. So I’ve had more experience helping to direct the largesse of the living rich than almost anyone, aside from Patty Stonesifer, Jeff Raikes, and Sue Desmond-Hellmann, the former and current CEOs of the Bill and Melinda Gates Foundation. Through that experience, I’ve been a vocal and persistent advocate for a certain kind of philanthropy, one that eschews simple charity—worthy but palliative measures like supporting a soup kitchen or personal gestures like providing a scholarship—for attention to policy, to the root causes and structural conditions that result in hunger or lack of access to education in the first place. I’ve preached to my philanthropic brethren the virtues of support for advocacy on the leading social-justice issues of the day, and tried in the positions I’ve held to model that in the hopes that others would follow, or in any case find it safer territory to explore. The grant made by Atlantic Philanthropies during my tenure to Health Care for America Now, the grassroots organizing campaign for universal health coverage—at $27 million, the largest advocacy grant ever made by a foundation—was perhaps the most prominent of many such examples.

And yet it was during that campaign, ironically, that I began to have my first real doubts about the legitimacy of philanthropy in its engagement with the democratic process. You’ll recall that one of the many attacks on President Obama’s health-care bill was that it would bust the budget, and the President was careful to state from the outset that this major social-welfare advance would be revenue-neutral, not adding to the deficit, and indeed saving money over time.

That meant finding a combination of savings and new revenue to finance the bill. One proposal from the Administration would have capped the income tax deduction for charitable contributions at the level it was during the Reagan Administration, 28 percent. Almost without exception, the organizations that purport to speak for foundations and the nonprofits they fund rose up in opposition to the proposal.

There are credible arguments on both sides about how much effect a change in the deduction would have on charitable giving in the United States. I tend to believe the studies—such as those by the Center on Philanthropy at Indiana University—that assert that there would be a modest effect, if any. But let’s assume for the sake of discussion that the effect would be more than modest—that wealthy Americans in particular would open their checkbooks for causes dear to them a bit less often without the incentive of a tax break. Is that a price worth paying?

I think so. We had a once-in-a-generation opportunity to advance universal health care, benefitting many millions of uninsured Americans, saving lives, staving off bankruptcies, and indeed saving public dollars that would otherwise be devoted to emergency-room care. We had a means of helping to pay for it by a slight alteration in a tax break used by the most well-off—and, undoubtedly, the most generously insured—members of society. Yet the collective leadership of American philanthropy—a leadership, by the way, that had been with few exceptions silent about the redistribution of wealth upward through the Bush tax cuts, silent about cuts in social programs, silent about the billions of dollars spent on the wars of the last decade—found its voice only when its tax exemption was threatened, and preferred to let the government go begging for revenue elsewhere, jeopardizing the prospects for health-care reform, in order to let rich, well-insured people go on shielding as much of their money as possible from taxation.

As you can tell, this steamed me up a lot, and it did again later when the same script played out during the fiscal cliff crisis. What that situation made plain to me was not just that philanthropy is quite capable of acting like agribusiness, oil, banks, or any other special-interest pleader when it thinks its interests are jeopardized. It helped me to see that however many well-intentioned and high-minded impulses animate philanthropy, the favorable tax treatment that supports it is a form of privatization. Money that would otherwise be available for tax revenue that could be democratically directed is shielded from public control for private use.

As Rob Reich, co-director of the Stanford University Center on Philanthropy and Civil Society, wrote in a 2013 cover article in Boston Review, “What Are Foundations For?”:

Philanthropy in the United States is not just the voluntary activity of a donor. Philanthropy in general, including the work of foundations, is generously tax-subsidized. The assets transferred to a foundation by a donor are left untaxed in two respects: the donor makes the donation more or less tax-free, diminishing the tax burden she would face in the absence of the donation; and the assets that constitute a foundation’s endowment, invested in the marketplace, are also mostly tax-free.
…[F]oundations are partly the product of public subsidies. They are created voluntarily, but they result in a loss of funds that would otherwise be tax revenue. In 2011 tax subsidies for charitable giving cost the U.S. Treasury an estimated $53.7 billion. So foundations do not simply express the individual liberty of wealthy people. We all pay, in lost tax revenue, for foundations, and, by extension, for giving public expression to the preferences of rich people.

I can already hear the arguments that will be made against this view on the political right. They don’t believe in a strong government role in the economy and social welfare, and certainly not the taxes that support it. They prefer to let the private market deal with health and income security. They don’t view wealth as presumptively subject to taxation, and they think the idea that favorable tax treatment constitutes a subsidy turns the world on its head. I don’t agree with them, but I understand their worldview, and they have credible arguments that flow from it.

I do wonder, though, about my progressive friends. They believe in a strong government, in a fair tax system, in a robust social-welfare system, and in a vibrant democracy where all voices count equally. Why are they are not more concerned about the undemocratic and largely unaccountable nature of philanthropy? Why are we—since I too have failed, for years, to ask these big questions—hypersensitive to the dangers of big money in politics, and the way it perpetuates advantage and inequality, but blind, it seems, to the dangers of big philanthropy in the public sphere?

It wasn’t always so in our history. When the titans of their day, Andrew Carnegie and John D. Rockefeller, sought to set up trusts to spend some of their vast wealth for charitable purposes, Frank P. Walsh, a progressive lawyer who chaired a congressional inquiry into industrial relations, called the new Rockefeller Foundation and Carnegie Corporation “a menace to the future political and economic welfare of the nation.” In that period, 100 years ago, the foundations’ endowments surpassed what the federal government, in the pre-New Deal era, spent on education and public health. Walsh called for the “democratization of private benevolence” through more progressive taxation.

In testimony before the Walsh Commission, Morris Hillquit, the labor lawyer and Socialist Party leader, said that large foundations like Rockefeller, Carnegie, and Russell Sage “represent in the domain of philanthropy just what trusts represent in the industrial field.” Edward P. Costigan, who would later represent Colorado in the Senate, called the Rockefeller Foundation “a supreme example of the philanthropy which deadens, by its large benefactions, a public criticism which otherwise would be as formidable as inevitable.” Even feudalism and slavery, Costigan went on, “boasted of their occasional generosity.” The Reverend John Haynes Holmes of the New York Church of the Messiah, who would serve for two decades as chair of the board of the American Civil Liberties Union, called foundations “essentially repugnant to the whole idea of a democratic society.”

In 2013 you’d be hard-pressed to find anyone close to the mainstream of American civic life and political thought raising those kinds of fundamental concerns. Is it because 100 years of practice has erased them? Or because philanthropy has deadened criticism, as Costigan warned, with its “large benefactions”?

The closest we come today is the emerging critique of the Gates Foundation, with its $3 billion-a-year spend rate that is at least four times as big as the next largest philanthropy. Gates is in a class by itself when it comes to size, but its influence in the few areas it has identified for strategic investment is even greater than it might be precisely because it is not scattered, but quite focused on particular approaches to education reform in the United States and public health abroad. When Dean Rusk was running the Rockefeller Foundation, he reportedly said he kept an eye on the Ford Foundation because what the “fat boy in the canoe does makes a difference to everybody else.” If Ford, then the largest foundation, was the fat boy in the canoe, then Gates is the blue whale in the toy sailboat. Not only does what it does make a difference to others in the fields it engages in—it can virtually define the fields and set the policy agenda for government as well as philanthropy.

Laurie Garrett of the Council on Foreign Relations has argued that in focusing on a few big diseases in the developing world, Gates has drawn dollars away from more basic and vital investments in health systems and primary care. A 2007 Los Angeles Times article raised similar concerns, asserting that “the focus on a few diseases has shortchanged basic needs such as nutrition and transportation” and that “Gates-funded vaccination programs have instructed caregivers to ignore—even discourage patients from discussing—ailments that the vaccinations cannot prevent.”

Ed Skloot, the president of the Surdna Foundation until 2007, tells the story in his Alliance magazine article, “The Gated Community,” of Gates’s six-year, $2 billion initiative to break up large public high schools into smaller ones:

Despite the paucity of hard evidence to support this assertion, with foundation support the small-schools programme became a cornerstone of thinking in the minds of many educational reformers, planners and administrators. The foundation became a market-maker. In six years, it funded the establishment of more than 2,600 schools in 45 states and the District of Columbia, reaching well over 750,000 students. However, despite some success in New York City, where the program was more complex and robust than in other places, in 2008 the small schools program was all but dropped.

While Skloot claims the foundation never gave much of an explanation, Bill Gates in his 2009 annual letter acknowledged, “Many of the small schools we invested in did not improve students’ achievement in any significant way.”
After a while, Skloot writes, “The new silver bullets of choice appeared to be…charter schools, standardized testing, national curricula, merit pay for teachers, reorganizing or closing underperforming schools, developing accurate data in and across funding sites, and improved management.” In these areas, Gates worked closely with the Broad and Walton family foundations. Skloot concludes:

It can certainly be argued that education reform is so complex that only consortia of large, well-positioned change agents can make significant systems change in the public policy and schooling environment, but it is also legitimate to point out that when “irresistible forces meet immovable objects” in the educational and political arena, more students may be hurt than helped. Nor did students and their families ask to be subjects in philanthropically driven educational experiments.

I don’t single out Gates—though it’s hard to avoid doing so in this context—because I think the foundation is ill-intentioned or reckless about its engagements. I know the people who run the place; they are trying to make a better world and, of late, they’ve listened more to their critics and tried to adjust. I don’t personally know Gates, who forthrightly defended the advantages of size to Matthew Bishop and Michael Green, authors of the 2008 book Philanthrocapitalism, by asking: “When it comes down to me sitting down with a pharma company and saying, ‘Hey, here is the thing that would be great to do,’ do you think that our size hurts us? Do you think a bunch of tiny foundations could do that?” But of late, Gates has shown some capacity to change—softening, for instance, the demonization of teachers’ unions that the foundation’s allies have made a central theme of their reform efforts.

So the rise of very large philanthropies that are not shy about playing for big stakes in the public sphere raises crucial questions about philanthropic power and to whom it is accountable. You might suggest, after reading for the last few minutes, that I raise these issues because I am not a fan of the particular policies being espoused. Indeed, in these cases, I’m not. The dominant wave of education reform is much too top-down for me, generally heedless of the voices and perspectives of teachers, parents, and students and the communities in which they live. But in fairness, I should say that the same big questions apply to large foundation interventions for policies that I favor, like George Soros’s on drug-policy reform, or Atlantic Philanthropies’ on health care, to name two in which I had a personal role. If we are to raise questions about the role of foundations in a democracy, these have to be on the table, too.

You might then argue—indeed, I often have—that it makes a very big difference what the money is being used for: whether it promotes a privatization agenda; whether it disempowers communities or stands in support of them. And I certainly that agree those issues must come into play. The way I justified to myself the work I was doing at Open Society and Atlantic, despite my growing discomfort over these questions of accountability, was that we were using our funds to ameliorate inequality, not to perpetuate it.

Here, though, I think it is important to broaden the frame beyond the arguably good works of a few foundations. In their Kentucky Law Journal article, “Beyond Public/Private: Understanding Excessive Corporate Prerogative,” john a. powell and Stephen Menendian, speaking about corporations, write:

Some will argue that on the issue of civil rights and racial equality the modern corporation has been a force for good. This is questionable, but the record is probably mixed. Our point is not that corporations will always use their excessive prerogative for harmful ends, but that excessive prerogative itself is a structural distortion…. [Claims of] civil rights, claims of workers, women’s rights, and environmental concerns all limit corporate prerogative. As Rawls and Franklin D. Roosevelt suggest, a healthy democracy and a fair economy require this limitation. We cannot achieve racial justice, economic justice, protect our environment, or enjoy a strong democracy unless we have a realignment of corporations. The structure of corporate prerogative has been undergoing realignment, but one in which their power is becoming ever greater. It is an alignment in the wrong direction.

What I am trying to do here is to substitute the word “foundation” for corporation and prompt us to ask ourselves the same questions.

In 2011, I was asked—such is my reputation as one who is prone to bite the hand that feeds me—by the Council on Foundations, philanthropy’s trade association, to play the role of prosecutor in a mock trial of philanthropy at the council’s annual meeting in Philadelphia, before a gathering of about 2,000 foundation staff and trustees. It seemed at the time like a fool’s errand, but I accepted the challenge, and in my case for the prosecution, I made four arguments that seem even more relevant today.

First, I said that the favored tax status that philanthropy enjoys in the United States makes sense only when it serves an unalloyed public good and only when it does so with integrity, transparency, fairness, inclusion, and effectiveness. Philanthropy has accomplished many good things for society in the last 100 years, and its favored tax treatment might be justified by an argument that it encourages foundations to take risks that corporations and the public sector, for different reasons, don’t usually take. Foundations don’t have to run for office, or satisfy shareholders, or attract customers, or win popularity contests. They can take the long view, and undertake bold initiatives that make it safer for government and other private capital to come in later on.

That’s a plausible argument, and certainly one foundations and their advocates make for themselves all the time, citing, for instance, Carnegie’s role in laying the groundwork for public television, or the Rockefeller Foundation’s support for the Green Revolution.

But few bother to examine these claims about the agency of foundations with much rigor, and the same list of philanthropy’s “greatest hits” appears again and again. Courageous risk-taking is not what most people associate with foundations, whose boards and senior leadership are often dominated by establishment types. If tax preference is meant primarily to encourage boldness, it doesn’t seem to be working. The question is not whether many good things are accomplished with the money excluded from taxation for philanthropy. The standard is whether the record of philanthropy justifies the foregone tax revenue that in our current dire fiscal state could be used to keep senior centers and libraries and after-school programs open, hold tuition within reach at public colleges and universities, expand Internet access in rural communities, and on and on.

The precise level of the charitable deduction (like the fact of the deduction itself) did not come down on tablets from Mount Sinai. It is a choice that a democratic society makes, weighing competing interests and values. One of these is donor independence and philanthropic pluralism. These are not fleeting values. But neither is the responsibility of citizens in a democracy, acting together through government, to strengthen social protections.

Second, I argued that the philanthropic sector has eroded its moral authority by an excessive focus on self-interest. I started out by talking about the battle over the charitable deduction, and have little more to say about it here, except to lament that when the Obama Administration went looking for revenue from wasteful Pentagon spending, unnecessary agricultural subsidies, or monopolies enjoyed by firms that offer student loans, there were loud wails and armies of lobbyists mobilized. We expect such a predictable outcry from special interests. But we expect more from philanthropy.

You may think, and I sometimes worry myself, that the equation of foundations with these unsavory interests is not playing fair, is a bit over the top, because, of course, they are serving their notion of the public interest, not trying to fatten their profit margins. But it’s useful to take a look at the response of leading foundations in California and nationally to AB 624, the effort a few years ago by some state legislators to prompt philanthropic organizations to be more responsive to communities of color by requiring them to report on the demographics of their staffs, boards, and grant recipients. The Foundation Coalition, speaking for the California philanthropic community, expressed concern that “AB 624 serves to divide people and organizations who historically have worked well together. We recognize the value in collaborative problem-solving among the public, nonprofit, and philanthropic sectors. By working together, we can do more to help these nonprofit organizations that will ultimately help our diverse communities.”

There were threats to take organizations out of state, charges of burdensome paperwork diverting resources from the main business, and of dividing, not uniting. If that doesn’t sound like Chamber of Commerce talking points on a tax bill or bit of environmental regulation, I don’t know what does.

AB 624, I hasten to say, was probably poorly crafted. There may have been good reasons to resist its specific form. But the foundation community in California treated it as Armageddon. In the end, all the while railing about the bill and fiercely resisting the notion that California foundations were not doing enough for communities of color, the “big ten” foundations in effect settled out of court, announcing a multimillion-dollar initiative over several years to provide capacity-building support and technical assistance to grassroots and community-based groups serving minority and low-income people, as well as a variety of diversity, leadership, and program initiatives.
Third, I noted that philanthropy remains too focused on charity and lacks a strategy for systemic change. As in so many areas, the Reverend Martin Luther King Jr. set the moral standard: “Philanthropy,” he said, “is commendable, but it must not cause the philanthropist to overlook the circumstances of economic injustice that make philanthropy necessary.”

Too much of what philanthropy does is a sideshow to the most pressing issues of our time. Global warming threatens the planet, and pseudo-scientific denialism of it threatens democracy, yet the handful of foundations engaged on the issue of climate change are vastly outgunned, and even they hoard their foundation assets as if there was no tomorrow—which in fact, there won’t be, before long, if we don’t reverse the warming of the planet. The National Committee for Responsive Philanthropy, of which I am a board member, has determined that only 7 percent of foundations spend as much as 25 percent on social-justice grant-making. The Foundation Center, taking a broad and generous view, estimates it at 15 percent. That leaves the vast bulk of American philanthropy focused on safer things that do little to affect the titanic issues of inequality, poverty, human rights, and environmental degradation. Few of the large, ostensibly progressive foundations in America make any significant grants for lesbian and gay people, 40 years after Stonewall and in a country where now more than half the populace, numerous Republican leaders, and much of corporate America favors same-sex marriage; for native peoples, still reeling from the ravages of American expansionism, the percentage is even lower. When will this change? How long is too long?

Fourth and last, to continue in this vein, I lamented the fact that the sector is not sufficiently reflective of the rich diversity of this country and globe, and in particular does not reflect the voices of the most marginalized. Fully 85 percent of foundation board members are white, while just 7 percent are African American and only 4 percent are Hispanic, in a country where 92 percent of the population growth in the last decade, according to The Economist, came from people of color. Nearly three-quarters of foundations have no written policy on board diversity, and fewer than 10 percent of board members are under 40.

I’ve spent a lot of time in the last 15 years moving the foundations I’ve led to invest in social movements, from immigration to LGBT issues to economic justice, and I’ve also exhorted the larger field to do more. In the previous decade, there was a noticeable increase in foundation investments along those lines. But with a few significant exceptions—the Ford Foundation’s early support for women’s rights (former Ms. Foundation for Women President Marie Wilson used to joke that the women’s movement was one foundation—the Ford Foundation—away from welfare); the relatively small amounts of money from progressive foundations like Field, Taconic, and New World for civil rights in the 1950s and ’60s—foundations have always been lagging indicators where social movements are concerned, on the whole preferring to support other worthy things like scholarships, research, and demonstration projects. As members of INCITE! Women of Color Against Violence wrote in the group’s 2007 examination of the “non-profit/industrial complex,” the revolution will not be funded.

And to the extent that in more recent years a few larger foundations have become stronger supporters of community organizing efforts, that’s also had its price, since it’s made those organizations increasingly as accountable to rich donors as to their own historically broad base. And while foundations talk about sustainability all the time—and the more liberal ones often treat their grantees like the right wing would treat single mothers on welfare, imposing strict time limits and cutoffs—the fact is that most sustainability strategies are aimed at helping grantees move from dependency on one foundation to another. Very few foundations use their funding to help grantees build a more democratic base of support of the kind that has helped the great organizations formed in the Progressive Era—the ACLU, the Sierra Club, the NAACP, Planned Parenthood—survive and thrive over many decades.

That observation, I suppose, is a good segue into a few final thoughts that might be put under the heading, “What is to be done?” I have no ten-point plan for foundation reform. I think criticism of foundations is rare enough, and raising questions about the role of foundations in a democracy rarer still, that the very fact of asking the questions, of stimulating more reflection, is enough for the moment. If others with my vantage point on philanthropy think we have some self-examination to do, and respond and pick up the thread, I’ll be quite happy.

A few thoughts. First, the tax incentives for philanthropy are not going away, in the near term or probably ever. As we have seen, even tinkering with the levels of the deduction is unlikely.

Some have argued there is too much clutter in the proliferation of small foundations, and wonder if there ought to be a minimum asset size. This suggestion is usually offered in the spirit of encouraging innovation and risk-taking with greater possible impact, but it seems misplaced to me. True, a lot of smaller foundations are not very bold, and often are somewhat self-serving and idiosyncratic. But they do promote a kind of pluralism. I’d be more interested in policy ideas aimed at the maximum size of foundations, which would boost pluralism while ensuring that no foundation has disproportionate power. Limiting the lifespan of foundations, or perhaps mandating governance measures such as community representation or even AB 624-style data reporting requirements, might also enhance public accountability and responsibility.

When foundation critics explore the ways philanthropy might be held accountable, they often forget to think about the press. It’s an easy oversight to make, since so little media scrutiny is applied to foundations. I wonder, for example, how many California newspapers have bothered to follow up on what happened to the pledges that the state’s big foundations made several years ago to settle the AB 624 controversy. But as it happens, the period of tremendous growth in the philanthropic sector—particularly the rise of a mega-foundation like Gates, which can by itself steer policy on education reform or global health—has coincided with a significant decline in the resources devoted to investigative journalism. When I started at Atlantic Philanthropies seven years ago, The New York Times, The Wall Street Journal, and the Financial Times had journalists covering the beat of philanthropy and the nonprofit sector. No more. As philanthropy’s power has grown, independent scrutiny of it has waned. Ford, Knight, and other foundations, alarmed at the decline in investigative reporting, have provided support for nonprofit news organizations like Pro Publica (full disclosure: I was on its board, too), or even for-profit ones like the Los Angeles Times and The Washington Post, but for obvious reasons, these foundation-supported initiatives are not likely to cast their gaze upon their own benefactors.

I have left one very loose thread hanging out here, and it is what happened in the mock trial in which I prosecuted philanthropy in a room of a few thousand philanthropists. You could be forgiven for assuming, as I did, that I would have been wiped out, lucky to emerge in one piece—for, as Upton Sinclair famously said, “It is difficult to get a man to understand something when his salary depends on his not understanding it.” But you would be wrong. The Council on Foundations randomly picked a 12-person jury from the audience, and after hearing the arguments from me and from my opposing counsel, Ralph Smith of the Annie E. Casey Foundation, they retired for deliberations. When they came back a short while later, the presiding judge polled them. Ten voted to convict their own profession, two held out, and the trial ended in a hung jury.

So maybe there’s some hope for reform after all.

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Gara LaMarche is the president of the Democracy Alliance. This essay is adapted from a speech he delivered at the Haas Institute for a Fair and Inclusive Society at the University of California, Berkeley on March 7, 2013.

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