Many boards aren’t as risk-taking as they think they are

Foundation funding is often referred to as risk capital for the charity sector. But, as Rockefeller Philanthropy Advisors’ The theory of the foundation points out, while many trusts would describe themselves as ‘risk-taking’, they aren’t always able to articulate exactly what that means at an organisational level.

In my experience, risk is something that trustees are good at thinking about, but only on a grant by grant basis: thinking about the size of the grant relative to the project or organisation, or identifying things that might derail a project. But what about thinking about risk in a more fundamental way?

How much a foundation pays out goes to their heart of its mission

As foundations generally achieve their charitable objectives by making grants to other people, how much money they are giving away as a percentage of their assets—their payout ratio—goes right to the heart of their mission. And this denotes risk, because the more foundations give the more good they can do now, but the less money they will have in the future.

In the US, foundations have to give away 5% of their assets, and there have been calls for the UK to adopt a similar rule. But adopting a fixed rule doesn’t really take into account the very varied things that foundations fund. In my recent blog for Alliance on the subject [paywall], I make the argument that your payout ratio should, in part, be determined by what you want to achieve. Trustees have to weigh up the cost of not helping now, versus the cost of not being able to help in the future. For example, in tackling early intervention or issues where there is an urgent need—such as environmental causes—there is good reason to spend more money up front, even if it means there may be less money later down the line.

Yet it seems to me that many foundations act more cautiously in how much they give away than their risk-taking ambitions would lead you to expect. ACF’s work on payout ratios—For good and for keeps—shows that many foundations are spending amounts that suggest they are preserving capital. This is despite the fact that most of them are not permanently endowed.

We need foundations to be more ambitious with their funding.

So how can trustees guard against being too conservative in their spending?

One step is to think about who is making the decision about how much is available to spend. Is the amount you’re spending done deliberately, thinking about the mission of the organisation, and needs of society? Or has it become simply a function of an investment policy that was decided a long time ago? To combat against the investment policy deciding what can be achieved, some trusts and foundations are making sure that the investment committee isn’t just made up of people with investment management experience. Trustees that are brought in for their experience of charities and society are also critical. They can help decide whether now would be a good time to increase or reduce the money to the sector.

Another step is for foundation boards to regularly ask themselves questions designed to assess whether they are spending the right amount, particularly in relation to what they are trying to achieve, like: Does the need we are looking to address have a point of no return? How is the level of need forecast to change over the next five years? And how does that compare to our investment return projection? Trusts also need to look at the practical considerations of changing a payout ratio, such as: Do we have the staff capacity to deal with a decision to spend more? Most importantly, we think that every five years trustees should have a serious conversation about whether the foundation aims to exist in perpetuity or if its existence should be time limited.

There needs to be a policy change around payouts. We don’t think there needs to be a mandatory minimum payout ratio. But foundations should be required to publish in their accounts how much they have decided to spend and why. This would encourage trustees to have the conversation about whether they are paying out the right amount.

Hear Angela discuss payout ratios with Cathy Pharoah, Co-Director of the Centre for Giving and Philanthropy at Cass Business School, and Jake Hayman, CEO of Ten Years’ Time, on the Alliance podcast.

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