October 16th, 2019
Over the last few years, the underlying ethical challenges that all of us, on both sides of the philanthropy table, face have surfaced because of far too many abuses and embarrassments in our sector. Sad, indeed. In its most recent issue, the Chronicle of Philanthropy focuses our attention on those ethical dilemmas faced by fundraisers. As most readers know, my own work on philanthro-ethics focuses on the other side, on the ethical responsibilities on the funder side of the table but the issue that stimulated this post goes back a few professional incarnations ago.
As many of you know, before I was on the funder side full time, I had a long run of executive roles on the nonprofit side. Those roles well positioned me for what I have done for the last quarter century as a funder: executives in the nonprofit sector are faced with choices between breadth and depth, the recruitment and support for professionals with great responsibilities with all too few resources, the need to understand competing stakeholders, and balancing the measures of short term successes with long term impact are all the daily work of non-profit CEO’s. Sounds a lot like the issues we funders have as well.
In the early 80’s to mid-90’s, I had CEO responsibilities for many programs with their own facilities. None of them had deferred maintenance funds, most were inadequately designed or too small for their current and projected utilization, or simply needed to be replaced, and the expansion of our system called for several new facilities. This challenge was not unique to the Hillel Foundation – it characterized a huge swath of nonprofit facilities from universities to churches and everything in between. All too many were built in the 40’s, 50’s, and 60’s by institutions so happy to get capital gifts, any capital gifts, that they never planned for or insisted upon the long-term needs of those facilities. But just because it was not a unique problem didn’t make it any less urgent. [Much of this has changed as many more funders are willing to provide much larger capital gifts to all sorts of institutions with greater sophisticated understanding of what longer term needs are.]
In another context, I would be happy to write more extensively about how we, largely successfully, managed this and set up the conditions that would preempt these capital challenges from continuing into the future. Below I mention one. But for this post I would like to tell only about one approach that I found easy to dismiss at the time but wonder how one might respond today.
One day, someone scheduled an appointment to discuss a proposal. This fellow, whose name I have long forgotten, had developed a particular expertise. He facilitated getting bond funding for non-profit organizations, especially those whose size put them below the normal bond radar. While our needs were in the $m’s, he would fold “our” bond request into a much larger public bond offering of a much greater amount. These publicly issued bonds had low interest rates and would provide all of the capital we needed for re-hab and construction projects in one easy step. Universities and hospitals and other large institutions do this all the time; no reason, he argued, why relatively smaller non-profits shouldn’t benefit as well.
But here was the kicker that turned me off immediately: when I pointed out that I couldn’t see how we would be able to repay the bond amounts in a timely manner, he tried to seal the deal by assuring me that the bonds would never really have to be re-paid. If memory serves, he said that bond holders understood the risks when buying the bonds and they would be very unlikely to come after a non-profit like ours for non-payment.
It struck me at the time as more than a bit sleazy and I politely thanked him and let the proposal finds its way to a circular file. Eventually, we did get the capital for most of our projects, and by then the board and I had developed a policy that no capital project would be accepted without an accompanying endowment. [Whatever one thinks about endowments in general, it is clear that facilities have new, predictable, and substantial costs over time that should be accounted for from the very beginning. It was a gutsy but persuasive policy that worked.]
It is now well over 3 decades since that episode. In my current roles which are now restricted to the funder side, I teach about using PRI’s to accomplish philanthropic goals. To remind those who may not be familiar with the term, a Program Related Investment is money taken from the grants side of a foundation’s ledger that can be given with the desire for or expectation of a financial return. That might be an investment in a for-profit firm aligned with the grantmaking mission of a foundation or it can be a loan to a grantee. A straightforward example of a PRI: a non-profit has a short-term cash flow crisis for any number of legitimate reasons. A foundation chooses to lend the non-profit sufficient capital to tide it over at very favorable terms. If the anticipated money comes in to the non-profit, the loan is repaid. A foundation then must re-grant that money within a certain time frame. But should the non-profit not repay the loan, the foundation must reclassify that loan as a “grant” to that non-profit. [There are more technical issues, but for our purposes this example should suffice.]
In thinking about PRI’s, I began wondering if there might be a similarity between a foundation PRI loan and a public bond. Both are for public good, both provide funds that a nonprofit desperately needs, and both carry the risk of non-repayment. [Bonds are rated according to that risk.]
To be sure, there are very different decision-making processes, different stakeholders, and different legal requirements. But in many ways there are more similarities.
Now let it be said that in the example I gave, the sleaze factor was quite relevant. It seemed ethically problematic that the sales pitch so quickly affirmed that one could take these funds and not feel any repayment responsibility. From my perspective at the time, that was an ethical non-starter.
But given what I now know about PRI’s, I wonder: was I so blinded by the sales affect that I ignored the potential effect? Had I underestimated that the bond raters and the bond buyers would do their own due diligence to determine if we would have been worthy? Had I not overlooked the pattern of philanthropic giving that rewards success – had we demonstrated success in our massive [for us] facility projects might that have changed the giving level of current and potential donors, perhaps making those repayment obligations less elusive? Had I applied a sincere but irrelevant ethics screen that delayed much needed upgrades to our facilities and service systems?
Of course, PRI’s were not very evident in those days, and hindsight is… well, you know. During my time in those executive roles, there was a long litany of ethical, moral, and even legal issues that required a clear ethics grounding if I were to do my job responsibly; if my antennae were too sensitive in this area, it was because I required them in many others.
However, ethics, unlike morality, is often choosing between two credible and often legitimate options. I now wonder if I was too quick to see only one.