Several years ago, the New Yorker ran a cartoon showing a man in a suit throwing money out a window. An older colleague is running up behind him, arms waving wildly, screaming, “Just a minute, young man. That’s not the way we do things at the Ford Foundation!” As the caption slyly suggests, foundation operations are often poorly understood. Efforts to poll citizens on the street for their impressions of foundations tend to produce hilarious results, while Dwight Macdonald famously reduced these institutions to “a large body of money completely surrounded by people who want some.”

In his new book, The Foundation, Duke University’s Joel
Fleishman pulls aside the veil of mystery to educate general readers,
potential donors, and the “philanthropoids” who run these institutions
about what foundations were, are, and should be. He has chosen a
uniquely opportune time to do so. Richard Branson’s $3 billion pledge
to combat global warming, Warren Buffett’s $31 billion gift to the
Gates Foundation, and that foundation’s continuing growth are just a
few of the avalanche of stories about philanthropy that have filled the
news this past year. This generosity marks the culmination of the
“second Gilded Age,” a rough-and-tumble period of corporate expansion,
corruption, and king-making akin to the first Gilded Age a century ago,
which consolidated the fortunes of men like John D. Rockefeller and
Andrew Carnegie.

However, the extraordinary generosity of the Buffett and Gates
families is only part of the story. The other is the unprecedented
growth in the number of foundations over the past three decades, the
majority of which have been nothing like the headline-grabbing giants.
Rather, they are small organizations operating at the community level,
but also playing an increasingly significant role in the American
public sphere by virtue of their numbers. Only a few foundations were
in operation during Rockefeller’s lifetime; today, there are more than
70,000, up from 22,000 in 1980. Together, they control over $500
billion in assets, a figure that some observers predict may reach $2
trillion in the coming decades.

Clearly, foundation philanthropy has become big business. And it has
done so in an era of government downsizing, devolution, and soaring
deficits, trends that will shape the role of the nonprofit sector for
decades to come. At the same time, there has been a growing emphasis on
accountability. Senator Charles Grassley recently led an investigation
of foundation and nonprofit activities, which some believe may be an
opening salvo in a string of queries akin to those that occurred in the
wake of the last significant spurt in foundation growth, in the 1950s
and 1960s. These hearings, in turn, were sparked by a series of exposés
that ran in the San Jose Mercury and the Boston Globe about abuses at the Irvine Foundation and an array of smaller organizations.

There is no doubt that this sort of scrutiny will continue, and
perhaps rightly so. Not only journalists, but all those in the public
sphere, will doubtless take notice as this increasingly wealthy and
entrepreneurial sector plays a more influential and direct role in
public policy–from education for inner-city children to battling
HIV/AIDS and promoting maternal and child health in Third World
villages. Indeed, recognizing the shape and influence of the foundation
community may be critical to understanding the future of American
policy-making.

What impact do foundations have? That is, what value do they add,
and how do they optimize the efficacy of their grants? This question
surfaced at the Grassley hearings, but it unfortunately elicited little
more than isolated anecdotes. Indeed, the question is key to
understanding the rationale for creating foundations from their
beginning. Men like Rockefeller and Carnegie had strong ideas about the
obligations of wealth and the importance of systematizing their giving.
“The man who dies rich dies disgraced,” thundered Carnegie, who
siphoned much of his fortune into the Carnegie Corporation and the
Carnegie Foundation for the Advancement of Teaching (CFAT). Rockefeller
viewed foundations as a means of transposing the corporate model that
he developed at Standard Oil onto “the business of benevolence.” Run by
the “best men,” heavily capitalized and funded in perpetuity, these
institutions broke with earlier philanthropic models by building their
own professional staffs, investing in research, and demanding
measurable results. Rockefeller drew a sharp distinction between
charity, which deals with symptoms, and philanthropy, which aims at the
root causes of social ills. Unlike charities, foundations were designed
to identify social problems, test solutions, and provide replicable
models for national and international reform.

Fleishman taps into this definition, arguing that foundations
conferred “significant social benefit on the people of the United
States over the past century.” This can be overstated, however, since
grant-makers historically underwrite the development of new social
initiatives but rarely have the resources to develop them
comprehensively, leaving that work to the government. To illustrate his
point, Fleishman provides a series of case studies of influential
grant-making programs in medical and minority education, public policy
research, public television programming, and agricultural and social
reform. Although he skips lightly over some of the critical commentary
surrounding these activities, his point is well-taken. At their best,
foundations can indeed provide resources for innovation and reform
within specific fields.

Although Fleishman’s list is longer, grant-makers have historically
shaped their most influential initiatives around four objectives.
First, they have served as venture capitalists for new ideas. The big
grant-making foundations like Carnegie, Rockefeller, and Ford spend
significant amounts of money on research. In the early twentieth
century, they invested their funds in medical studies, education, and
the social sciences, helping to develop policy briefs for a variety of
reforms. Their efforts were rooted in the Progressive faith in
“disinterested expertise”: the belief that impartial research will
yield unbiased prescriptions for reform and positive social change.
Although this notion has come under fire from both the left and the
right in recent years, it still infuses the work of many of the largest
so-called “liberal” foundations. Many of the resulting projects
directly influenced government initiatives. For example, the
Rockefeller Foundation supported the research of Robert Oppenheimer,
Enrico Fermi, and Edward Teller and invested more than $1.5 million to
develop a cyclotron for processing uranium, paving the way for the
Manhattan Project. Gunnar Myrdal’s study of race relations, An American Dilemma, which was commissioned by the Carnegie Corporation, afforded vital background information for the Supreme Court’s 1954 Brown v. Board of Education decision. A decade later, the Ford Foundation’s Gray Areas grants provided the template for Lyndon Johnson’s Great Society community action programs, while Rockefeller underwrote the planning for New York City’s Lincoln Center, one of the largest public-private cultural initiatives in American history.

A second way in which grantmakers have made an impact is by building
and nurturing communities of experts. Professional development has been
one of the hallmarks of leading foundation initiatives since these
institutions first appeared. Perhaps the most famous
professionalization campaign was sparked by Abraham Flexner’s 1910
report to CFAT on Medical Education in the United States and Canada,
which Fleishman cites for its role in modernizing medical training. The
Rockefeller Foundation helped to build a variety of international
scientific networks, and it figured prominently in the development of
fields such as public health. Similarly, the Ford Foundation has spent
three decades fostering the careers of nongovernmental leaders in
developing nations, and the Skoll Foundation is now doing the same with
social entrepreneurs.

Foundations can also develop new institutions. For example, CFAT
addressed Andrew Carnegie’s concern that college professors lacked
adequate retirement funds by creating the Teachers Insurance and
Annuity Association (now TIAA-CREF), backed by a $1 million endowment
grant from the Carnegie Corporation. More recently, George Soros built
a network of foundations across Eastern Europe and the former Soviet
Union as a means of aiding civil society organizations and promoting
his vision of open societies, while Ford and Mott have invested in the
development of community foundations around the world to stimulate the
globalization of philanthropy.

Finally, donors often enhance the impact of their grants through
partnerships. Despite the remarkable upsurge in the number of
foundations over the past three decades, they still account for only a
thin slice of the total philanthropic pie. Most of the money (at
roughly 83 percent) comes from individuals, with foundations
contributing a scant 11.5 percent. As a result, they have historically
sought partnerships with governments and other donors to replicate
their work, maintain it over the long term, and bring it to scale. The
earliest initiatives, such as the Peabody Fund’s Southern schools and
Rockefeller’s efforts to eradicate hookworm and malaria in the American
South and overseas, were demonstration projects designed to be adopted
and amplified by government agencies.

Collaboration became more necessary–and more alluring–with the
growth of government programs and corporate giving. In the first half
of the century, foundation resources exceeded those of governments in
many fields, such as medical and policy research. When the Ford
Foundation emerged as a national and international grant-maker in the
1950s, its assets eclipsed the budget of the entire United Nations
system by a considerable margin. By the 1970s, the situation was
reversed. While federal expenditures skyrocketed, foundations’
purchasing power withered with inflation. By the 1980s, the emphasis on
collaboration was becoming more widespread, including efforts to reach
out to corporate donors, as well as government agencies.

The most effective grant-making programs often combined all four
types of activity, cobbling together ideas, professional networks, new
institutions, and partnerships with government. The success of a small
number of conservative donors in creating a constituency for their
ideas is a case in point. For decades, grant-makers like the John M.
Olin Foundation targeted their funding to institutions that promoted
public policy-making and trained emerging conservative scholars. In the
process, they generated ideas that often directly influenced federal
initiatives; developed an institutional presence on many campuses; and
nurtured think tanks that worked hand-in-glove with government
policy-makers.

Of course, not every grant has had an indisputably positive effect,
even among those cited in Fleishman’s case studies. For example, many
might question the legacy of the conservative revolution that
grant-makers helped to bankroll, particularly in light of the events of
the past six years. The Rosenwald Fund’s initiatives came under fire
for their “separate but equal” mentality in funding segregated
institutions for African Americans, and the Rockefeller Foundation’s
efforts to increase crop yields in developing nations through the
“Green Revolution” have been criticized for their environmental side
effects.

Yet because work on this scale requires significant funding, it is
almost exclusively the preserve of large foundations, a fact that
Fleishman underplays, focusing on the country’s largest grant-makers,
those capitalized at over $50 million, which control over 70 percent of
all foundation assets. The bulk of the nation’s grantmakers are
considerably smaller. Roughly 90 percent are capitalized at less than
$10 million, and almost two-thirds have assets of less than $1 million,
which means that they tend to be small, locally oriented, and
unstaffed. Developing new ideas, professional networks, new
institutions, and funding alliances requires professional staffs to do
the research, convene the meetings, visit grantees, attend conferences,
and build the necessary knowledge base for informed grant-making. This
is the model that undergirded Rockefeller’s “scientific” philanthropy,
and this is the model that is still used by the giants like the Gates
Foundation. But smaller donors lack the resources–and often the
inclination–to pursue this pattern.

Nonetheless, the smaller institutions do play a distinctive role in
their communities, underwriting nonprofit service delivery and
providing continuing cash reserves after the donor’s death. They can
afford a cushion during economic fluctuations and shifts in government
funding, and additional resources to help nonprofits weather
emergencies like September 11 or Hurricane Katrina. At their best, they
can make a noticeable impact by concentrating on a single field rather
than scattering their grants in all directions, which is the more
common pattern. And because of their numbers, they will play an
increasingly important role at the local level, particularly if
government funding diminishes. Unlike the grant-makers that Fleishman
discusses, these are pillars of continuity, rather than catalysts for
social change.

However, one trait that small foundations do share with larger
donors is an aversion to public scrutiny. Foundations are, in
Fleishman’s words, “the least accountable major institutions in
America,” a fact that may have profound implications for their future
dealings with Congress. Surprisingly, this wasn’t always the case.
Rockefeller’s key adviser, Frederick Gates, was keenly aware of the
need for public accountability, arguing that foundation activities
should be “a matter of public concern, public inquiry, and public
criticism.” Toward that end, the Rockefeller Foundation initially
sought a federal charter that would have given the president and the
chief justice of the Supreme Court veto power over its board
appointments. When that effort failed, it was incorporated in the
hospitable legal environment of New York with a self-perpetuating
board, which became the standard model of foundation governance. But,
while grant-makers are required to file annual reports with the IRS,
pay out a minimum of 5 percent of their assets (primarily in grants),
and avoid self-dealing, Rockefeller’s initial belief in the value of
strong government oversight has faded over time. Rather, the evaluation
of foundation programs, performance, and ethical standards resides with
their donors, staff, boards–and the press, when it can crack open a
door to assess the operations of grant-makers who shield themselves
from public view.

Which is not to say that Congress doesn’t occasionally force open
the door as well. The lesson that secrecy does not serve foundations
well was brought home with full force during the congressional
investigations of the 1950s and the ’60s, when they were attacked in
Congress first from the right, then from the populist left. During the
McCarthyite investigations of the 1950s, the Rockefeller Foundation was
accused of contributing to the fall of China into communist hands
through its funding of the Peking Union Medical College, and Ford was
tarred for ostensibly seeking to foster the same results in
“pro-Communist India” through its grantmaking activities. Although the
charges were frivolous, the lesson was clear: If you fail to tell
people what you are doing, and why it is important, they will believe
anything. Afterwards, the big foundations took the lead in encouraging
grantmakers of all sizes to publish annual reports, but this came with
mixed results.

Today, although the largest foundations tend to publicize their
programs, only a fraction of the rest have followed suit. A 2006 survey
by the Foundation Center reported that only 1,645 (7.8 percent) of the
nearly 21,000 large grant-makers surveyed issued annual reports, and
only 2,599 (12.4 percent) had websites. This presents a jarring double
standard. Even the smallest nonprofit organization generally has an
online report listing its programs, history, and mission. Very few
grant-makers do, despite the fact that they enjoy substantial tax
benefits: Fleishman estimates the public revenues ceded through the tax
benefits to foundations at roughly $20 billion in 2003 alone. He
suggests the need for increased state and federal oversight and the
creation of a private Foundation Transparency Rating Board to foster
self-regulation and enhanced accountability. Given the growing
percentage of the nation’s wealth that they control, and the
significant tax concessions that they enjoy, at minimum grant-makers
should be required to describe their activities online, if not in print.

There are also varying levels of openness to public scrutiny. The
historical records of the Rockefeller Foundation and several other
grant-makers, such as the Russell Sage Foundation and the Rockefeller
Brothers Fund, are open to scholars at the Rockefeller Archive Center,
which is why Rockefeller’s history is well-known. The largest
grant-makers issue a variety of reports on their work, and a few, like
Ford and Robert Wood Johnson, have a professional communications staff.
Major donors like Gates, Mott, and Soros have highly detailed websites,
while others post bare-bones accounts of their operations on the Web.
However, as the statistics indicate, the majority issue nothing at all,
preferring anonymity. The IRS currently collects data on the
availability of online reports, information that could be used to
require all foundations to educate the public more aggressively about
their activities.

But the argument for more openness goes beyond a taxpayer’s right to
know and includes the very role of nonprofit institutions in American
society. Foundations may be at a critical juncture in their history.
Fundamental questions may be raised over the next decade about their
function in a democratic society. Critics from the center-left, such as
former Knight Foundation President Hodding Carter III, have already
taken them to task for remaining silent amid growing human rights
abuses and the muzzling of the press after September 11. Conversely,
those on the right want foundations to shed their historic roles in
spinning off new government programs to assume caretaker
responsibilities, maintaining nonprofit organizations amid shrinking
public outlays in lieu of contributing to the growth of the state.

As the full impact of the federal deficit begins to be felt,
questions concerning the appropriate role of philanthropy will become
increasingly important. If the Bush tax cuts and alternative minimum
tax relief are extended or if the war in Iraq continues, some very hard
choices will have to be made about what can be funded at the federal
level. States will feel the pinch as well as they inherit
responsibility for the remaining services, which will increase pressure
on local legislators to find additional funds–possibly including
foundation assets. Sunset laws–legislation requiring foundations to
spend down their assets within a specified amount of time–were a
recurring theme in earlier congressional inquiries into grant-makers’
activities, and there is reason to believe that such a proposal may
surface again.

We are entering a period of extraordinary policy challenges, as the
volatile brew of deficits and demographics–including the needs and
prerogatives of aging baby boomers–begins to reach a boil. Finding a
way to bridge the current ideological divide and to build viable
programs to deal with these issues in an era of limited government may
be the greatest challenge of all. Foundations have the resources to
underwrite the development of new approaches for dealing with these
issues. But if they persist in remaining “a great American secret,” as
Fleishman terms it, they may not have the opportunity to play that
role. Unless the entire foundation community begins to work more
consciously to convince legislators and the citizens who elect them of
their legitimate value in a democracy this teeming, diverse sector may
jeopardize its independence and its ability to sustain itself over
another century.