I am more grateful than these few words can properly express to the nine commentators who took the time to read and respond to my essay. Their thoughtful feedback raises more than a few points that have already prompted additional reflection on my part, with constructive criticisms, elaborations, and considerations I failed fully to consider or explain. Space constraints make it impossible to address every worthwhile point, much less to give them the full attention they deserve—an apology I make knowing the authors were constrained by a tight word limit. But I hope our exchange will prompt further debate and discussion among us and in the sector more broadly.
Let me begin by flagging some important points with which I agree. I agree with Rob Reich that payout rates are a tool that should depend on goals and strategy, not a matter of first principles, and that the spending calculus may be different for living donors who are still earning wealth and funders who (for whatever reason) have chosen to spend down. I agree with Dan Cardinali that “new national momentum and will” to address systemic racism warrants additional spending now, as reflected in the Hewlett Foundation’s own new commitments described here, here, and here—initial efforts we expect will grow and evolve as we learn. I also agree with Helmut Anheier that grantmaking foundations are not the only or even especially important instruments for dealing with a crisis and that government in particular must play the key role. I said as much about government, but Anheier is correct that my essay is addressed to the foundation world: it is about the role foundations can play during and after a crisis, not about the best or complete way to deal with one.
These points of agreement help clarify why Darren Walker is misreading me when he says I assume “that society is, somehow, better served, when foundations value their own preservation over the survival of the civil society and nonprofit organizations that work on the frontlines;” that I believe in “the superiority of endowment-led giving;” or that I favor “preservation forever over innovation for good.” I believe none of those things and didn’t intend my essay to suggest otherwise. What I tried to say, and what I believe, is that the question of how to spend over time—how best to help civil society do its work, and how best to innovate for good in ways that have lasting impact—is instrumental and pragmatic and depends on circumstances, strategies, and goals. Walker presumably agrees with this, since he leads an endowed foundation. Our disagreement, such as it is, is about what such instrumental thinking calls for in the present moment—though even that disagreement may be a product of our foundations’ different priorities and our different understandings of the likely impacts of different decisions, more than disagreement about values or core principles.
Given this, it should not be surprising to hear that I also agree with Diana Leat that we should not “equate the capacity to do good with the amount of money one has to spend.” My essay focuses on payout, but the underlying objective is the amount of good one can accomplish. Spending is an instrument for that end, but I do not believe and did not mean to suggest it is the only such device, and I happily embrace Leat’s qualification that more is encompassed in doing good—while noting that this fact in no way changes the essential problem I identified of balancing present and future needs. John Palfrey presents a credible example of present opportunities that may warrant a change in spending policy that I think is wholly compatible with my position. And I enthusiastically second Kathleen Enright on the importance of flexible funding as a means of making nonprofits more resilient and capable—a practice that should be followed whether the economy is stable or turbulent, and one I emphasized in my essay.
I do need to refute Phil Buchanan’s assertion that endowment returns are consistently strong enough for foundations to spend more without any tradeoff in relative future spending power. For proof, Buchanan points to the S&P 500 stock market index, which, adjusted for inflation, has produced annual returns of 7.6 percent since 1950 and 8.5 percent since 1980. But no responsible chief investment officer invests only in public equities, because they have to manage an annual budget and must worry about volatility as well as returns. Indeed, for a CIO to invest everything in the stock market would likely violate the prudent investor rule and be a breach of fiduciary duty (which is why no one does it).
Instead, as I showed in my essay, between the obligation to diversify among uncorrelated asset classes and the need to meet payout commitments even in years where returns are low or negative, foundations have struggled to meet the hurdle rate of 5 percent plus inflation. Most fail, and this is true whether one looks at returns over a long period or an intermediate one. (I used 90 years, 12 years, and 15 years—the latter two to show more recent results with different weights given to the Great Recession).
This conclusion finds further support in the most recent comprehensive study of nationwide endowment returns. Conducted by the Council of Michigan Foundations, it found—consistent with four prior studies CMF had commissioned from Cambridge Associates—that “historical and projected investment returns struggle to consistently deliver more than 5 percent annual real returns—regardless of investment model portfolio” and that, as a result, “a mandated payout rate above 5 percent would be difficult to sustain on an inflation adjusted (that is, real) basis.” Interestingly, and contrary to Rob Reich’s assertion, the study also found a widespread in payout rates among endowed private foundations.
Which brings us back to one of the main points in my original essay, which most of the commentators appear to accept, that we cannot have our cake and eat it too: a tradeoff between resources to help people in the present and resources to help people in the future is unavoidable.
Reframing the Problem
With that, let me reframe the problem in a way I hope clarifies the choice that must be made. Imagine a foundation that is deeply concerned about problems confronting people in two different places—call them Rohan and Gondor. The needs and challenges of people in Rohan may be the same as those faced by people in Gondor, or they may be different; the foundation may be concerned with particular communities in Rohan and Gondor, such as racial minorities or other historically disadvantaged groups, or it may be concerned with the two communities generally. All that matters for present purposes is that the funder cares about and is trying to do the best and most it can for some group or groups of people in both places.
There are, as we know, different ways to go about doing this. A funder might study challenges facing people in Rohan and Gondor and make its own judgment about how it can best help them, or it might let nonprofits working on the ground in Rohan and Gondor guide the decision, or it might find ways to learn from the people of Rohan and Gondor themselves what they most need and want and have that guide its decisions. In practice, the decision will likely comprise elements of all three approaches. But pick whichever way of doing philanthropy you think best and assume this is how my hypothetical funder wants to support people in Rohan and Gondor.
It’s important to understand that the funder cares equally about the people of both places. The needs of people in Rohan are not more important to it than those in Gondor, or vice versa. Unfortunately, what’s needed in both places is beyond what the funder can fully address, even if it expends all of its financial and non-financial resources. If the funder put everything it has into Rohan, there would still be unmet needs in Rohan; likewise if the funder put everything into Gondor. The funder has, as a result, made a judgment about how to divide its funding and efforts between Rohan and Gondor so as to maximize the overall amount of good it can do.
As with the decision about which problem or problems to focus on, the decision about how to allocate resources among different groups—whether by consulting experts, letting nonprofits decide, finding participatory roles for intended beneficiaries, or blending these—is something about which people can (and do) disagree. But, again, whatever method you think best, assume the funder has used it to divide its resources between Rohan and Gondor, with an eye on doing the most overall good.
Now suppose conditions in Rohan change, and the needs of Rohan’s people grow deeper or more widespread. The funder has a choice to make: whether to decrease the resources it puts into Gondor in order to help people in Rohan more. Doing so will help address Rohan’s greater needs but only at the cost of leaving greater needs in Gondor. What should the funder do?
That needs in Rohan have become greater does not point automatically toward shifting funds from Gondor to Rohan. The goal remains to do the most overall good, and there were already more Rohanians in need than the funder could help, just as there were in Gondor. Helping more people in Rohan means leaving more people in Gondor without help or providing them less help. That much is inescapable, which means so is the funder’s dilemma: will it do more overall good by shifting funding from Gondor to Rohan or not?
The answer could be yes, either for reasons suggested in my essay or for reasons suggested in some of the comments. The changed conditions in Rohan may create opportunities to do good in Rohan that are more lasting than was true before, or that will stave off future harms in ways that were not true before. Or the new harms in Rohan may be different in ways that make the overall good accomplished by addressing them more compelling than continuing to help people in Gondor. These are the kinds of empirical questions a funder in this situation needs to ask and answer—and they are the same questions however one views the role and purpose of a foundation (as described by Anheier) or however one understands “healing” (as Edgar Villanueva puts it). Frame your approach to philanthropy however you like, you still must choose between helping people in Rohan and helping people in Gondor, recognizing that more for Rohan inevitably and unavoidably means less for Gondor, and vice versa.
The Funder’s Dilemma
It’s not hard to see where I am going: the funder’s dilemma is just the same whether the choice between Rohan and Gondor is a choice between helping people in two different places or helping people at two different times—if, that is, rather than being two different locations at the same time, “Rohan” is the present and “Gondor” is the future.
Actually, there is a difference that makes the funder’s problem qualitatively different and more difficult when choosing among people at different times—a difference that complicates the relevance in this context of Villanueva’s argument that funders should let communities decide for themselves how to utilize philanthropic resources. On this view, a funder should let the people of Rohan decide how to use the funder’s resources in Rohan and the people in Gondor decide how to use the funder’s resources in Gondor.
There is a great deal of force to that idea, which Hewlett has been working for several years to incorporate into its grantmaking approach. (There are also challenges that qualify its scope and delimit its execution, though these would require a second long essay to discuss fully.) However one constructs it, though, the process of letting communities decide is more complicated when it comes to allocating resources among communities. It would obviously be unwise and unfair to let the people of either community alone decide how much should go to each. But while a funder might devise a method whereby the people of Rohan and Gondor can decide together—maybe some kind of deliberative polling process—even that option isn’t available when Rohan and Gondor represent different people or communities at different times.
The bottom line is that whether a funder is choosing among different communities in space or in time, but particularly in the latter case, it must make hard choices: choices that appropriately turn on differences in what funders are trying to accomplish and how they assess the consequences of different changes they might make in their grantmaking.
It does not follow that spending decisions are therefore wholly subjective and there is no room to criticize a funder’s choices. But disagreement and criticism should be framed with an appreciation for legitimate differences that can reasonably and appropriately lead to divergent conclusions, whether due to dissimilarities in strategies and goals, epistemic uncertainty, ordinary cognitive differences, or some mix of these.
The task of making such choices is not, to borrow Walker’s framing, a matter of putting logos ahead of pathos, or the reverse. It is, rather, having the same pathos for people in the future that one has for people in the present, and using logos to guide and shape the best way to help both given their inherently conflicting needs.
I wish there were no conflict and that we could do it all: address the challenges of the moment, even when these grow, without affecting our ability to respond to future challenges. But Villanueva is right that I am operating with “a scarcity mindset.” It’s why I assumed that, even if my hypothetical funder expended all its resources in one place, it would not be enough to fully address the needs even of that place. Would that it were otherwise, but philanthropy’s resources were inadequate for existing needs even before the current crisis, and I don’t see that changing in any foreseeable future. Which is only to say that, much as we might want it to be different, a scarcity premise is not hypothetical. Hence, the problem.
Walker believes that the disruption underway now is different in kind from any we have encountered in the past or will encounter in the future—that “we are facing a set of profound challenges on a scale we’ve never before confronted.” Pathos then leads him to put larger efforts into the present, even knowing this will limit future capacities, and the only counterbalance he sees is a misplaced logos that assumes “some rosy version of economic perpetuity” in which “markets will continue to rise and progress.”
If I were as sure as Walker that this is “the big one,” the mother of all crises, so to speak—and many people do believe that, including several who commented here—I too might favor steps like those he has taken at the Ford Foundation. And I do see the suffering. I’m not oblivious or heartless or blind. I’ve experienced poverty and violence and loss in my own life, and I am acutely conscious of the accidents of fate and good fortune that afforded me opportunities to prosper nevertheless. What’s happening to so many in the world today affects me no less and is no less heart wrenching to me than it is to those who urge a different course.
Today’s Crises Are Not the Last
Why, then, am I holding back?
The answer comes partly from this: In studying and writing about American history, which was my life before becoming president of the Hewlett Foundation, I came across people in every major crisis of the past saying similar things—authentically and with complete sincerity. One finds the same anxiety—that no earlier crisis was equal to this one and no future crisis will be more dire—expressed during the economic crunch of the 1780s, the Panics of 1837 and 1893, the Spanish Flu crisis, the Great Depression, the social upheaval of the late 1960s, and, most recently, during the Great Recession.
Which is not to argue about whether the people who make such claims are right or wrong. It is, rather, to emphasize that we must deal with each crisis knowing it won’t be the last. Much about the future is uncertain, but we can be absolutely sure that more and similar crises are in store: crises that will be, to the people living through them, every bit as awful as ours. Walker is wrong to say I assume a rosy future. I assume exactly the opposite: that there will be future catastrophes and market crashes and times of immense need. That’s the whole reason for needing to worry about how to deploy philanthropy’s limited resources, financial and otherwise, between present and future.
Where would philanthropy be today if every philanthropic leader had responded to these earlier crises—even just the ones that arose in and after the 20th century—as we are all urged to respond now? How much less capacity would there be to deal with this crisis today, not to mention the important work done in “normal” times?
Questions like these are why I hesitate to take resources away from future grantees and beneficiaries to address even a crisis as compelling as this latest one. Future hardships always seem hazy and abstract and less pressing when compared to the clarity and certainty of present adversity. But as I enter my seventh decade, a vexing lesson I’ve learned is that, however remote the future seems now, it comes. Inevitably. Inexorably. Quick as a snap of your fingers, what seemed far off and indistinct has arrived—bringing its own terrible clarity—and we need to keep that in perspective too.
Which is why I brought up the moral hazard necessarily embedded in all these difficult payout decisions. But the hazard is not just that the people making the decision today get the benefits, while the costs must be borne by unknown others in the future. It’s that the needs of those unknown others, by their very nature, will always seem less urgent and compelling to present day decision makers. To which we can also add, as shown by an extensive body of research in psychology and behavioral economics, we humans are biologically programmed with a “present bias” that systematically overvalues present costs relative to future ones. With the deck thus stacked, a rebuttable presumption not to overspend makes sense as a self-disciplining device for boards and CEOs to check themselves and ensure they are fairly balancing the needs of future grantees and beneficiaries.
I want to emphasize that I am not making a case for other foundations to take (or not take) any particular action. Certainly I am not, as Villanueva suggests, urging others “to give less money to those in need.” That’s not what Hewlett has done or is doing, as I’ll explain in a moment. I wrote my essay because the public debate has not recognized or adequately grappled with the complexity and contingency entailed in payout decisions, and I wanted to put forward a more complete picture of the relevant factors. How they apply in this or any other situation is a decision each funder must make for itself.
I mention this because of a final consideration, particular to the Hewlett Foundation, that has played an important role in our decision. It comes up indirectly in the final section of my essay—the one entitled “Anticipating the Problem,” which only Enright addressed, and even she only in part. There I explored the question of what funders could do to better prepare for unexpected disasters and exigencies. Enright endorsed one such option, namely, helping grantees build resilience by providing flexible funding in good times. But another measure we adopted after our experience in the Great Recession is to build and maintain a meaningful “grantmaking reserve” of unallocated funds that can be called upon to address unanticipated needs or opportunities, including in crises.
We used those reserved funds this past year, as I mentioned at the outset, to make a substantial set of immediate grants and new commitments to address systemic racism. But we were able with the same funds also to make the region’s largest grant to a coordinated Bay Area COVID relief effort; to help pivotal grantees remain open and adapt to the economic shutdown; to enable frontline organizations in women’s reproductive health protect their work and capitalize on a unique opportunity created by the pandemic to expand the use of telemedicine; and to aid state officials in safeguarding the election and redoing their election systems so people could vote by mail or safely in person.
The availability of these resources, in short, made it possible for us to maintain full support for existing grantees and beneficiaries while still meaningfully addressing additional needs created by 2020’s successive crises—and to do so without reducing our capacity to do the same for their successors and descendants. Moreover, because of the anomalous and unexpected way markets held up in 2020, we have equivalent funds available for similar needs and purposes in 2021. All things considered, this has seemed to us the best way to manage the difficult choices we had to make.
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