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#349 The ICYMI Series – from June 2012 – 10 Rules for Funder Ethics

August 28th, 2019

Richard Marker

This post is another that is worth revisiting several years since its first publication. I have made some very modest revisions to account for changes in what I am doing where, but otherwise it is intact. Your thoughts are welcome.
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A few weeks ago, a philanthropist friend forwarded an op-ed regarding ethics for funders. [I like to give credit where credit is due, but the source of the op-ed wasn’t included.]

In reading it, I found myself amused – not because the author was off base, but because it was so clearly written by a fundraising expert who was expressing some exasperation with the overreach of some funders. It is quite true that there are ethical limits to what a funder and grantmaker can request and require from a grantee, and it is useful for funders to hear how they are perceived by the other side of the table. But in many ways, the author’s points are too easy and in other other ways do not go deep enough into the ethical and best practice issues between funders and grantees.

I have been teaching funders since 2000, for many years at NYU’s Academy for Funder Education, now at UPenn’s Center for High Impact Philanthropy, and through our own Institute for Wise Philanthropy. In those courses, we spend a great deal of time unpacking this very complex area. This has also been a key topic of interest in several recent conferences of foundations and grantmakers. Here are 10 key points to help funders stay on the right side of right:

1. Power Imbalance Most funders do not willfully or purposely abuse the role of funder although, to be sure, some do and some do egregiously. Most however are simply unaware of the appropriate boundaries and cross them innocently. Most of these transgressions occur because of an insufficient awareness of the implicit power imbalance and the concomitant and enthusiastic willingness of a potential grantee to do whatever possible to encourage a gift or grant.

2. Philanthropy Law Most funders know the basics of philanthropy law but are less clear on their ramifications in their daily application. For but one example, “self dealing”, always illegal, is not the same as “conflict of interest” which is more nuanced and subject to board-determined policy.

3. Law vs Ethics What is legal is not always the most ethical. For example, the law permits a foundation to pay an attorney or investment manager who sits on its board. Many of us in the field feel that this creates ethical dilemmas for a board’s decision-making autonomy. I for one feel strongly that best practice should be to separate those roles – either one sits on the board or is a compensated professional but not both at the same time. This matter has little to do with funder-grantee relations but a great deal about internal foundation decision-making.

4. Interlocking Boards One area about which there is conflicting consensus is the propriety of a foundation staff or board member sitting on the board of a grantee or vice-versa. We have developed some guidelines to help foundations figure out what makes sense for them. Suffice it to say that there should be a clear alignment between grantmaking process and the policy regarding interlocking boards.
5. Honoring Commitments.. Sad to say, too many funders don’t fully grasp that public benefit organizations rely on receiving their grants on the dates promised. They pay staff, rent space, run programs anticipating that income. A grant letter should be viewed as binding on both the grantee and funder. This problem is more typically evident among unstaffed or outsourced foundations, but it should never be. It is a commitment and it is an ethical lapse not to pay on time.

6. Transparency of Procedure. Many of us have written about what transparency might mean in the contemporary grantmaking world; it has become the subject of much debate. One thing which should not be subject to debate is the expectation that a funding organization makes its procedures known and clear. That process can range from stating that no unsolicited proposals will be accepted, or that there are very specific conditions for consideration or anything in between. An organization searching for funding should be able to ascertain in a clear way who is eligible, what information will be required and when, when they can expect to be notified of decisions, etc. There are no ethical mandates that any one way of doing these things is superior to another, but there are very clear ones that processes should be consistent and evident.

There are numerous other important ethics and best practice issues which every funder should address, and in many cases establish foundation policies. But since the issue of funder – grantee relations is the one which precipitated this post and garners the most attention, let’s turn to some of the sticky issues:

7. Funding for Success. The challenge for a funder is to give the most effective amount toward a project or organization to provide the greatest likelihood that the project will succeed – or at least come close to their expectations. One way NOT to do that is to automatically discount any request. Doing so may save a funder money in the short run but may well guarantee mediocrity in the long run. Now, to be fair to funders, non-profits have been known to pad budgets and a funder often has to work hard to figure out what is really necessary or appropriate. But the key to setting the right amount is to be comfortable that the amount given will make the likelihood of success greater. It is also true that inexperienced organizations may ask for too little – or in their naivete don’t realize what will really be necessary. Such miscalculation from a large university or museum is inexcusable; from a small neighborhood center or start-up may be understandable. This organization may well be understaffed and each of the staff has multiple responsibilities. If one thinks their idea or project is worthy, no reason to punish their insufficient training. Help them know what they understated or omitted. While on the surface this may not appear to be an ethical issue, it veers into it if a funder’s funding pattern makes failure or mediocrity likely. It also underscores the need for those who solicit funds to not play games with exaggerated claims and padded budgeting.

8 Staff and Benefits. Another area where funders, mostly innocently, tend to compound a the challenges for non profit success is to have conflicting expectations. How often do we hear funders bemoan the inability of the sector to retain the best and brightest while at the same time putting pressure on hard pressed groups to cut their budgets? If, say, 80% of a budget is staff, what ends up being cut is salary, fringes, or f.t.e.’s. Funders should hold their grantees to standards of personnel practices which they would expect of a quality run organization, and fund accordingly. [While much has been written about overpayment of a few executives in this sector, in fact the issue of underpayment is far more common.]

9.Leading Them On -or, the Walking $ Sign. Site visits are wonderful ways for a funder to learn about an organization. Yet nothing raises the anticipation level higher than the word that “a funder is coming: a funder is coming”. Organizational execs send memos to their staff to the effect: “clean up your room and dress up”. A site visit makes all the sense in the world if there are really open questions about a grant request or as a way to monitor one already given which can be answered best by seeing for oneself. By all means. But funders need to be aware that when they walk into a room they are not simply flies on the wall, but rather the center of attention. People stop what they are doing, or adjust their activities for your benefit. [I could tell so many stories here, but I imagine that any experienced funder has his or her own litany.] If there is no real decision-making or monitoring, or, especially, if you have no real interest in funding a particular place or project, look for less intrusive ways to satisfy your philanthropic curiosity. Your very presence will lead a non-profit into the assumption that you are open to a proposal or have made a decision to fund them.

10. Expectations and Relationship After the Grant is Given. In my experience, this is the area most fraught with potential frustration. Funders should clarify, when a grant is given, what they expect. Whether this has to do with monitoring or evaluation or recognition or any of a long list of other relationship areas, funders have an obligation to not leave a grantee guessing. This will allow a recipient to give you what you want to know – or to determine if you are overreaching. [To take an extreme example, a $10,000 gift to a major university is not going to get a named chair; the same gift to a food pantry may be the largest gift in its history. The responses and expectations should be quite different. Similarly, it is important for funders to set expectations which are proportional to the size of the gift and the abilities of an organization to respond. A hospital or university or major museum should have no problem producing reports in a timely manner; there should be more reduced expectations from a small 2 or 3 person start-up.

This list in no way defines all of the ethical and best practice issues for funders. It is not even the full list of what we cover in working with and teaching funders, and, indeed, in the years since this was first written, the complex issue of equity and inclusion have moved to the center of our discourse. In a subsequent postings, I have explored the charged area of intervention by a funder into the work, mission, or priorities of a grantee. Until then, I invite you to add your topics to this list and to make this a robust discussion so that we can enhance the quality and standards of those who are entrusted with funds to make the world better.

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