U.S. Philanthropy’s Shrinking Ambition, Part II: Confusion about Accountability

Posted on 02 April 2009

By Steven Lawry

I am arguing in this four-part series that US foundations working internationally are not making full use of their freedom to support innovation and help people claim new rights—and that progress toward reducing poverty and extending essential rights and liberties may be casualties.  In my post of March 25, I offered three reasons for why foundations may be stepping away from risk and, in turn, innovation.

Today I write about the first factor:  confusion about accountability.

Indeed, foundations have public accountability requirements.  But these are different from those faced by public funders such as the World Bank and USAID.  I believe that the accountability frameworks governing foundations gives them greater rein to fund innovative and risky work.   

It may be useful to think in terms of two forms of accountability faced by donors, including private foundations and public donors such as the World Bank and USAID: operational accountability and programmatic accountability. 

Operational accountability refers to a set of legal obligations that foundations use tax-exempt funds and public agencies use tax revenues (and other publically-guaranteed financial instruments) to pursue bona fide charitable purposes.  Federal law further provides that foundations payout roughly five percent of the value of their endowments annually.  The law imposes restrictions on use of tax exempt funds to benefit personally contributors, trustees and staff.  US private foundations are required to file annually with the IRS a form 990-PF, showing a list of grants made. The great majority of grantees demonstrate their tax-exempt charitable purpose by virtue of qualifying as a tax-exempt organization under section 501(c)(3) of Federal law.

While the law is somewhat unclear with respect to granting and reporting on grants made to foreign organizations, many large foundations working internationally have developed 501(c)(3) equivalency standards.  In other words, if an organization is organized and registered in its own country to serve nonprofit purposes on terms broadly analogous to US nonprofits, then grants can be made fairly freely. These practices have so far passed muster with the IRS. 

Programmatic accountability is a different matter. Qualifying tax-exempt purposes for foundations and nonprofits as set out in section 501(c)(3) are broadly defined as charitable, religious, educational, and scientific.  The IRS provides a broad working definition of charitable.  The framers of the law have had the wisdom not to require foundations to demonstrate that, in addition to serving charitable purposes, the funds expended have resulted in tangible, indeed measurable benefit to society. To do so would introduce imprecise, uncertain, and contested social science analysis, and widely disparate political points of view, into questions of what interventions have been more or less impactful, and thereby worthy of tax exemption.  This would be a costly and unfruitful exercise and one almost certain to diminish the appetite of foundations to fund innovative, and inherently risky, work.

Once again, Congress has not proscribed that foundations be accountable to the public for programmatic outcomes.   Herein lies the freedom of foundations to support programmatically innovative work. They can do so while fully observing their obligations to demonstrate operational accountability—essentially that funds support bona fide tax-exempt charitable purposes. 

Public sector donors face their own sets of operational accountability requirements.  But they are also subject to high levels of public scrutiny and control over their programs. 

The World Bank’s board consists of 22 member governments.  World Bank staff members work to a set of orthodox approaches to development that will get board support and that will reliably generate results.  This pushes decision-making toward tried and tested approaches and discourages risk-taking on behalf of innovation. 

USAID is subject to intense Congressional oversight of its spending.  Project failure, and the presumed waste of taxpayers’ money, is the bane of any USAID administrator. This reduces the appetite of administrators for risky, untested ideas, even when they appear plausible and promising.

By virtue of the programmatic freedom enjoyed by foundations, I believe they are freer, legally and politically, to support new, promising but untested approaches to poverty reduction and social change.  Regrettably, foundations today are not taking advantage of this freedom.  This retreat from freedom is largely self-imposed.