14 min read

The Syracuse University professor and former Kauffman Foundation president talks about entrepreneurship, education, and philanthropy with Michael E. Hartmann.

Carl Schramm is a leading international authority on innovation, entrepreneurship, and economic growth. He has been a University Professor at Syracuse University in Syracuse, N.Y., since leaving Kansas City’s Ewing Marion Kauffman Foundation as its president in 2012. The $2 billion Kauffman Foundation, which he joined in 2002, is the world’s largest philanthropy dedicated to promoting entrepreneurship.

After earning his Ph.D. in economics from the University of Wisconsin in 1968, Schramm began teaching at Johns Hopkins University, where he started the nation’s first research center on health-care finance. He later earned a law degree from Georgetown.

Dubbed by The Economist and widely considered by others an “evangelist for entrepreneurship,” Schramm has founded or co-founded five companies. He has also served in executive-level positions at several major corporations.

A prolific author of books and articles, in both the academic and popular press, Schramm’s most-recent of many books is Burn the Business Plan: What Great Entrepreneurs Really Do. In 2010, he introduced the concept of “expeditionary economics,” an emerging field of study focusing on the rebuilding and reconstruction of economies in post-conflict and disaster-struck nations. He is a trustee of the Templeton World Charity Foundation, as well.

Below is the second of two parts of an edited transcript of a discussion that Schramm was kind enough to have with me in July. The first part, in which he talks about business plans and entrepreneurship, including philanthropic efforts to support it, is here.

 

Hartmann: You said the circumstances by which you came to the Ewing Marion Kauffman Foundation in 2002 were an accident. What was that accident?

Schramm: After leaving Fortis, I set up my own investment office in Baltimore. Besides starting and seed-funding several new companies, I was retained by several venture funds in Silicon Valley, Johnson & Johnson’s venture-fund arm, and Ford to find startups that fit with their investment priorities. Along the way, I accepted the post of Entrepreneur in Residence at American University, where the business dean was a friend from graduate school. That’s when I began to confront students who were asking me to read business plans.

While I was not unfamiliar with business plans, I had always seen them for companies that were several years from startups. It never really occurred to me that people wrote them at the outset. I had never written one for the five companies that I started. The formalistic plans students were showing me described a precise path to an exit, in some cases naming the potential acquiring company. After reading a few, I came to a view that professors were wasting students’ time using plans as a means of teaching students how to start companies. The plans were a hybrid of fantasy sports combined with false advertising, always producing a happy ending.

After a while, I told my friend the dean that I couldn’t imagine why he was teaching entrepreneurship this way. I told him from experience that starting a business is really a practical skill. He couldn’t teach in in the classrooms using what I came to see as misleading textbooks and forcing students to write plans.

For my trouble, the dean called me one day and he said he knew of a foundation that seemed to be interested in entrepreneurship. It was looking for a new leader and, without my permission, he had advanced my name to the search firm. I remember him joking, saying that if I got to be president, he expected America’s business school to get a grant. Seriously, he suggested the foundation had resources to spend on research about more-effective ways to teach entrepreneurship.

Like the dean, I had never heard of the Kauffman Foundation. I remember thinking that the headhunter would never call me. I was the longest of long shots. Retired college presidents get to run foundations. Besides, I was not at all looking to going to Kansas City. My kids were in Baltimore. I was in a very happy circumstance.

After a six-month back and forth, I accepted the position. Years later, a trustee friend told me why they hired me. I had a Ph.D., which was window dressing they liked. More importantly, unlike the other candidates, I had started real businesses. None of the other applicants or people that they were looking at had ever owned or started a business. And, there was another reason. Someone on the search committee also told me I was the only candidate who had read Mr. Kauffman’s biography [Prescription for Success: The Life and Values of Ewing Marion Kauffman], by Anne Morgan.

When they interviewed me, they noted that I kept referring to Mr. Kauffman’s ideas, his beliefs, his intentions. What better source than Morgan’s book? It described his aspirations when he started the foundation. To this day, I wonder what else a rational person would do except read the book? If the information was available, you want to read about this place, figure out whether or not you want to be a part of it, don’t you?

Hartmann: What did you learn from your time at the Kauffman Foundation? Are you glad you did it?

Schramm: Oh, it was the greatest experience. First of all, having been a CEO a few times before, I was ready and knew what needed to be done. I knew from my days at Hopkins, working closely with foundations, and having been a trustee of Milbank, what the potential was to influence the national debate on subjects like health-care policy. This experience came in very handy when taking over Kauffman.

When I got there, we didn’t have a research program. We basically outsourced our research to a small college, Babson, in Boston. One of its former presidents had behaved like a real entrepreneur. He had rebranded the place as America’s entrepreneurship college. It did not really have a research-based curriculum. Nevertheless, it was exerting influence on other institutions of higher learning. Babson had saved itself by sensing a demand among college-aged students to follow in the tracks of Jobs and Gates.

After visiting Babson and a few top-tier business schools, I knew we had a huge opening in the area of rigorous research on entrepreneurship. I was very fortunate to get Bob Litan, the senior-most economist at the Brookings institution, to come lead our research department. He convinced leading economists around the country, some of whom subsequently won Nobel Prizes, to write books and papers on the role of new businesses and economic growth and to do histories of how businesses get started. Of great importance, Bob and his team designed the first surveys of startups, which eventually won the support of the federal government. Because of Bob and Kauffman, there are accurate measures of just how many new companies get started every year.

When I look back, I think about the now over 60 books and a thousand academic articles that have done a lot to flesh out the nexus between new firms starting, and expansion of GDP, and social welfare—not only in the U.S., but across the globe. As part of our outreach, we worked with U.K. Prime Minister Gordon Brown to initiative Global Entrepreneurship Week, now celebrated in 170 countries. That’s something that I take some pleasure in, looking back at my decade at Kauffman. We changed the dialogue. Aspiring entrepreneurs in far-away countries had their lives changed because of Kauffman.

Hartmann: So if people should burn their business plans, should philanthropies plan? Can I accuse you of having a philanthropic plan, which one might have thought you were just describing a little bit? I mean, does the concept transfer to the philanthropic sphere?

Schramm: Yes, it does. It does, and you could say, “Boy, it sounds like you had a plan.”

Much of our best and most-influential programs were opportunistic. As we made grants and learned, our staff saw new ways to leverage our grantmaking. I constantly encouraged the staff to think experimentally. What could we do that would expand the obviously positive impact of what we had tried in the past?

I think foundations now all want to have plans, and they all want to have milestones and benchmarks. Business consultants have identified foundations as a lucrative client base. Many foundation executives and many trustees are not fluent in business thinking. The idea of measuring the impact of their grantmaking seems like such a good idea. They have been sold on the idea, from business, that they can follow “best practices.”

I find this kind of thinking fundamentally opposed to the innovative thinking that should characterize foundation leadership. In fact, the noting of using “best practices” in business is questionable—it implicitly suggests looking for the common denominator. It has no place in philanthropy. It is akin to the foundations that hire consultants to help them devise a strategy. Just as in business, if the CEO and his or her team can’t determine the organization’s future path, they should be fired.

I’ve thought about this quite a lot. You know, foundations are non-market institutions. I’ve written about this, in the Harvard Journal of Law & Public Policy. The social utility of the foundation as an institution in American organizational life is linked to its unparalleled freedom. It has no customers. It has an endowment. What else does this mean but freedom to operate outside of conventional boxes?

In the eyes of the first big philanthropists, the likes of Rockefeller, Carnegie, and Henry Ford, they exist as a catalyst to do all kinds of innovative things. Like entrepreneurs, I think they should be self-referencing, ignoring what other foundations do. Each one should be as their founders expected them to be—a generator of good ideas that are “risky,” disturbing social and institutional equilibrium, and that can’t be measured in the lifetime of foundation staffers.

I think that’s sort of much of what we did at Kauffman, in one program after another. We put stakes in the ground. It looked like these were good bets, but we knew we couldn’t tell in the long term what their long-term implications would be.

 

The foundation’s charter school

 

Hartmann: How did Kauffman’s charter school fit within the program, and how’s it been doing?

Schramm: Well, the charter school might be the perfect example of planning as you go along. Let’s call it that.

Mr. Kauffman wanted his money spent in two areas. One was entrepreneurship, and the other was improving education. Kauffman was and is a Kansas City institution. There was, naturally in a city with a small and insular elite, a lot of consternation when somebody not from Kansas City, particularly somebody from the East Coast, was appointed president. It sounds silly, but the local newspaper records will confirm the skepticism that I faced.

I never planned to ignore Kansas City; I had lived and led communities in other cities. I was highly conscious of and sympathetic regarding local sensitivities. Besides, with Mr. Kauffman’s passion in local schools, it was a no-brainer that we should develop the best way to spend money to support the city’s educational efforts, especially its public schools.

Mind you, Mr. Kauffman loved schools, but by the time he had died, the city schools had deteriorated in many ways for many reasons. K.C. had a federal judge who thought that new buildings were the way to make up for past racial disparities. While the city built structures, it ignored the takeover of the schools by an aggressive public-union culture. The stories I heard were hard to believe, but anyone who works in the area of school reform knows all too well how much the culture of educators has come to put the interests of teachers over the learning of students.

We tried our best to give the city school system resources. It was hard to make any lasting difference—every two years, there was a new superintendent. The school board, under the influence of the unions, had developed a revolving door at the superintendent’s office. We decided eventually that we had to take a more-active role than just helping the system with grants to fund special programs or running our own very good after-school and summer programs, and a program called Kauffman Scholars that helped kids supplement their classroom exposure sufficiently that they could get into college, where the incentive was that we paid their tuition.

At a systemwide level, we decided we would invite the Teach for America [TFA] program to K.C. I think at one point, Kauffman underwrote more Teach for America fellows than any other city. Trouble was that I and many foundation staff came to a view that many of these TFA fellows were not as passionate about education as advertised. I don’t mean to be particularly critical of Teach for America. I love the program in theory, but I didn’t think the program was going to produce big change in the city’s schools.

Eventually, again with no plan­, just looking for more opportunity, the foundation decided to open its own charter school. The view was that Kauffman could model good schooling for the community. (Along the way, we explored many other potential ideas, including whether we might adopt the New York State Regents’ exams, once the nation’s most-rigorous curriculum model for high schools. No surprise; we found it had been watered down in the face of worries about self-esteem. The test generally separated students in the state who were really ready for college from all other graduates.)

When it came time to start the Kauffman School, we recruited fantastic people from around the country to run the school and to teach. We had a particular method of admitting kids who appeared to be in most need of a break. We had a wonderful head, whom I believe is still in place.

Ewing Marion Kauffman School, Kansas City

We opened with a fifth-grade class and added one class a year to become a full 5-to-12 school. The day we first took applications, a couple thousand families applied for spots for their children. This was the first indication that the community approved. I knew Mr. Kauffman, our founder, would have been very happy.

The school just had  its first high-school graduation this last June. I think about 90 students graduated. Every single kid was accepted early-admission to college and the valedictorian is going to Yale.

Looking back, as a labor economist, and a former union member, I understand the need for unions—and also how public-sector unions are not disciplined by market realities. Taxpayers, represented by school-board members, city councils, and state legislators, usually get the short end of the bargain because the unions spend so much campaign money getting these politicians elected. The result, certainly in public teachers’ unions, is to resist change at all costs. We can’t sacrifice kids this way.

Hopefully, the Kauffman model is going to make a long-term difference in Kansas City.

 

What happens in, and is happening to, philanthropy—and what can be done about it

 

Hartmann: Is philanthropy in America too politicized?

Schramm: Oh, much too politicized. I think many foundations break these IRS rules that prohibit political involvement every day. Many of the people who manage philanthropies, who are on the board of philanthropies have very strong ideological positions. In many cases, that’s why they’re recruited to the board in the first place. The vast preponderance hold liberal views and see nothing wrong with trying to enlighten government, legislative and agency staff, to do what the foundations believe is the best course of action.

Hartmann: Is it the letter of the law being broken or the spirit?

Schramm: I think it’s probably both. We were awfully careful at Kauffman not to get into politics because, well, I’m a lawyer and I never wanted to break our forward momentum by having to deal with government examining whether we were too political to hold our special IRS status. Additionally, I had a mixed board, including a few conservatives, so we had a built-in safeguard.

I really believe the spirit of the law, as I’ve written, has been that foundations should be an independent institutional force in the American civic order and this does not mean being a political force. Foundation staff’s job is not to believe that the ideas they think would improve the world are so great that the institution’s resources should be spent convincing government to spend public money to make those ideas shape the way society works.

The Head Start program, for example, likely doesn’t work. There is an enormous body of evidence that suggests this might be the case. It was the brainchild of one foundation. Likewise, the early support of eugenics, really intent on shrinking the African-American population, was the work of Rockefeller and other foundations. They inserted the idea into the zeitgeist of the nation and, tragically, the world. Ford was an accomplice with the CIA in thwarting emergent democracy in much of South America. These are examples that should cause anyone, a foundation executive or board member, to contemplate what should be a kind of philanthropic humility.

Hartmann: What could perhaps be done about this politicization? The menu of options might include more scrutiny, some might say more regulation, or there could perhaps be other, bolder ideas.

Schramm: My instinctive first blush is to say I wish I could rev up Sen. [Charles] Grassley, because he pays attention to this kind of abusive private power. Foundation abuse of political power, however, is not all that compelling when America is beset with so many larger problems. But our public policy should not be made by an elite cadre of self-certain philanthropists and their successor staffs.

That’s one thing. I think it’d be great to have some congressional oversight in this regard, though I’ve got low expectations there. It could be a rewriting of the IRS rules. I think a more-fundamental thing, which is an idea I’m working on right now, is basically challenging the notion that we should have perpetual foundations.

Eventually, I think they all drift away from their founder’s intent, and it should be the founder’s intent that guides them. Without the founder’s intent really expressed in a foundation’s daily business, the government will eventually be tempted to expropriate the money or steer the money in a very, very nondemocratic way.

I think I’ve given you a three-part answer. One is some oversight. Second, rewrite the law. Third, basically consider whether or not these institutions outlive their productive lives.

Hartmann: And if they have, what could be done? I don’t want to use a term that you would not use, but “forced sunsetting”?

Schramm: I would use that term. I’m not sure I’d say “forced,” but you could basically say, fine, foundations have terms of, like, 20 years. Period. End of story.

Hartmann: So that’s pretty bold.

Schramm: Or something even more to the point: your foundation is closed five years after the settlor has died, because there’s not going to be any direction after that at all.

Hartmann: Are you being provocative there to lay out a marker, or is that something you think that would have a realistic chance of being seriously considered?

Schramm: Well, you know the way intellectuals behave. We’ve bought into a lot of ideas that when they were first announced, it looked totally outside the orbit of reasonable ideas. I actually have come to a view that foundations are mostly mischievous. They eventually become antidemocratic institutions. They don’t help us with great new ideas. They basically reaffirm pretty conventional ideas.

If you would go to a foundation executives’ meeting this or any recent year, there would be session after session promising to teach how to manage to achieve the most “bang for the buck.” Inevitably, they would devolve to meditations on “best practices.” Even at the highest levels of wealth, there is a certain unspoken search for consensus on how to apply money most effectively.

There is a rich irony here, if that’s not a double play on words. Guys who have made their money as entrepreneurs, many of whom appreciate how accidental their becoming billionaires actually was, want to plan to change the world by strategically applying their gifts. Any of the folks who don’t inherit their money, a certain other kind of accident, might be described as accidental billionaires. They don’t have a background in policy, not that people with Ph.D.’s in policy know much more. I’m quietly amused by all the folks who’ve made their billions in software and think of themselves as the absolute last word on alternative farming, or global warming, or whether space aliens will be among us soon.

Hartmann: On that point, Anand Giridharadas’ and some of the other progressive critiques of philanthropy would say it’s anti-democratic, too. Do you acknowledge agreement on at least that point in principle, before getting to what’s to be done about it?

Schramm: Absolutely. Yes. I think he’s 100% correct.

I think it comes down to a question of who gets to decide the prescriptions for society’s ills and who gets to identify them in the first place. His book [Winners Take All: The Elite Charade of Changing the World] is very uneven, almost schizophrenic. Whatever certain people, provided they come from a certain intersectional perspective, have the privilege of having their ideas, however, wrong-minded, treated as worthy of action and spending by foundations and government. This seems undemocratic on its face and Giridharadas really knows this, and knows it to be anti-democratic.

Hartmann: Your third prescription, to sunset foundations, sort of outflanks Giridharadas’ and the others’ in boldness, doesn’t it? There’s a little bit of “I'll see your anti-democratic concern and raise you.”

Schramm: I think that’s a fair way of saying it, yes. I don't mean to outflank him or them, but yes, I think my perspective actually is more radical.

I don’t want you deciding who’s a good foundation or who’s a good foundation manager. Let’s decide it on whether or not, over time, they are truly pro-democratic or anti-democratic, and operate from that metric. I don’t think, in the end, any of them are pro-democratic in the long run. I don’t think the nature of the beast permits it. The minute you sit on a pile of money, you are immediately vested in an elite. Giridharadas argues this very point! It’s not your money, but the elite will treat you as if it is because they want some of it. It’s very corrosive to the people who have these roles in society.

I remember when I came to the Kauffman Foundation, I discovered that any number of our staff people were on the boards of entities that were supported by the foundation. My very first management act was to disturb this custom. It can’t but be corrosive to the identity and self-worth of the individuals involved. The people serving on these boards effectively were being treated as if they were the children of Ewing Kauffman. Foundation leaders must remember the corpus they husband is not their money. Foundation staffs don’t like to hear it, but we all work for a dead man or woman, a boss like any other, who expects money to be used efficiently and effectively.


Leave a Reply

Your email address will not be published. Required fields are marked *