Philanthropy is sometimes said to be “society’s risk capital.” But without market accountability, without consumers or competitors, we can’t properly speak of philanthropic grantmaking as “risk taking.”
Philanthropy, it is sometimes said, is “society’s risk capital.” The phrase casts philanthropists as venture capitalists for the common good—able to direct resources to the kinds of projects that are too unproven or outré to receive public funding.
Prominent philanthropists and the directors of large foundations sometimes even worry that they and their peers aren’t taking enough risks. These proponents of philanthropic risk-taking point out that our society faces many complex problems that require, in Stanford professor Rob Reich’s description, “a potent discovery mechanism for experimentation in social policy with uncertain results over a long time horizon.”
In other words, complex problems will sometimes call for unorthodox (or “risky”) solutions, and those solutions may take the form of unorthodox programs that the public won’t be willing to pay for.
In his important new book, Reich points out how foundations are in a prime position to take risks precisely because they are so insulated from the consequences of risk taking:
Foundations have no market accountability; they have neither goods for sale nor marketplace competitors […] Foundations have no consumers or competitors, only supplicants for their money in the form of grants. If citizens do not like the grantmaking decisions of a foundation, there is no recourse because there is nothing to buy and no investors to hold the foundation accountable.
This is an important point. But properly understood, it undermines the very notion that foundations can rightly be said to “take risks.”
Apart from the legal requirement that they give away a small portion of their net assets every year, foundations aren’t really accountable to anyone. If the Highly Regarded Foundation funds a program that fails to achieve its stated goals, the foundation’s board of directors might experience regret, the foundation’s program officer might have to file a penitent report, critical articles might be written…but the foundation will not suffer any meaningful harm. (In fact, some of those critical articles would probably also note that we learned a valuable lesson from the Highly Regard Foundation’s failure, and that we might even be better off for it.) The state will not revoke its charter. The board members will not be ousted by shareholders. Its endowment will continue to grow, and it will go on to make more grants the following year.
In a likewise manner, foundations do not meaningfully benefit when they fund successful programs. If the Highly Regarded Foundation funds a nonprofit that eradicates malaria, the board of trustees would pop champagne corks, the program officer would file an ebullient report, adulatory articles would be written . . . and its endowment will continue to grow, and it will go on to make more grants the following year. When a history of the foundation is commissioned by the board, the eradication of malaria will get its own chapter.
Unless the board has plans to spend down all of the foundation’s assets—which would place them in a small minority—the foundation will survive to grant another day. And another. And another, in perpetuity. It’s not quite as certain as death and taxes, but it’s up there.
Don’t get me wrong: Eradicating malaria would be a very good thing. Unmeasurably good, in fact. Because, how much, exactly, is eradicating malaria worth? $100 million? $1 billion? How much would a foundation have to “invest” in eradicating malaria for the investment to constitute a “big risk?” Do we have to take into account current NIH funding, or the size of the foundation’s endowment? What if the foundation doesn’t succeed in eradicating malaria, but somehow stumbles upon a discovery for Zika virus in the process—would its risk have “paid off?”
There are two primary flaws inherent in applying notions of “risk capital” and “risk taking” to foundations.
First, foundations are so insulated from the results (good or bad) of their grants that it seems inappropriate to even use the word “risk.” They are, on this pendant world, unmoved movers. It is others who bear the risks resulting from their decisions: the people carrying out the program or, more likely, those being served by it. Teachers, students, children, caregivers, citizens—it is the public that will be exposed to either the benefits or harms of a foundation’s actions.
The second flaw involves the fundamental immeasurability of the “big risks” that so many foundations seem intent on taking. The investor who passed on the chance to purchase Apple stock in 1985 knows the precise cost of his mistake. The venture capitalist who poured his money into Uber rather than these companies can say with confidence that his financial risk paid off.
Such precise evaluations are inherently impossible in the world of philanthropy. (Really, they’re impossible anywhere outside the realms of finance and business . . . the very places that many philanthropists and foundation executives hail from). If a foundation gives $1 million to a program seeking to eradicate homelessness, we cannot compare the resulting outcomes to those from a world in which the foundation instead funded a program seeking to eradicate obesity. Nor can we compare it to a world in which the foundation chose to do neither. It is also unclear how far we should extend the timeline of our evaluation period. Many advancements have seemed like great ideas right up until the day they didn’t.
I don’t say this to cast doubt on the obvious benefits that many foundations provide. I say it merely to note that it’s almost impossible to know when philanthropic “risks” were “worth it.” If such is the case, why even use the vocabulary of risk in the first place?
Our society has tremendous admiration for risk takers. Entrepreneurs, astronauts, firefighters—we celebrate those who exhibit bravery and bravado, who live and die, and who help others live and die, because they risk everything. Given the chance, most of us would cast our own actions as bold, as iconoclastic and daring. Those who control the firehose of foundation funding are no different. Many imagine themselves to be risk takers (or, in some cases, prudent avoiders of risk) even though the risk is not their own; they talk in terms of costs and benefits that are tethered to reality only by hypotheticals and their own best judgement.
I’m grateful for the countless foundations where conscientious directors and program officers exercise wisdom, curiosity, and humility in making grants. Foundations, I think, will do more good by recognizing the un-risky perch on which they sit, and on which they will continue to sit, everlasting to everlasting.