smart money: general operating grants can be strategic for ... · paul brest is president of the...

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Smart Money

General operating grants can be strategic – for nonprofits and foundations

By Paul Brest

Stanford Social Innovation Review Winter 2003

Copyright 2004 by Leland Stanford Jr. University All Rights Reserved

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Email: [email protected], www.ssireview.com

IN RECENT YEARS, THERE HAS BEENmuch talk within the nonprofit sector about“strategic” or “effective” philanthropy, aimedat maximizing the social impact of foun-dation grants to nonprofit organizations.This talk takes place in the context of non-profit organizations’ perennial and increas-ing concern that the large majority ofphilanthropic dollars are earmarked for par-ticular projects – often designed by foun-dation staff with little or no consultation –rather than for general operating, or core,support. In 2001, less than 16 percent ofthe grants budgets of the thousand largestfoundations provided general operatingsupport.1 Many observers of the nonprofitsector argue that this relatively small pro-portion of core support seriously dimin-ishes the efficacy and vitality of the orga-nizations and the sector as a whole.2

Does the new interest in strategic phil-anthropy provide yet another reason, orrationalization, for not providing generaloperating support? Some foundations appar-ently believe that impact is best achieved andmeasured through grantor-initiated pro-jects. Early in my tenure at the HewlettFoundation, I spoke to an experienced eval-uation officer at a foundation known for itsambitious projects, who flatly asserted thatone cannot evaluate the impact of general

support grants. If she is correct, then gen-eral operating support and strategic phil-anthropy are indeed in conflict – for strate-gic philanthropy depends on evaluation,feedback, and correction.

If only because almost 50 percent ofthe Hewlett Foundation’s grant dollars aredesignated for general operating supportand because we think of ourselves as strate-gic and results-oriented, I was skeptical ofthe evaluation officer’s assertion. My skep-ticism has only grown with experience. Yes,the evaluation of projects is often simpler,and surely there are situations in which pro-ject support yields the greatest impact. Forexample, it is relatively easy to make andevaluate a grant to a museum to purchasea particular Rembrandt. Yet a strategic fun-der can often have the most significant andsustainable impact through general oper-ating support grants – for example, main-taining the overall excellence of themuseum’s collection and its accessibility toa diverse public. Moreover, a nonprofit orga-

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Smart moneyGeneral operating

grants can

be strategic –

for nonprofits

and foundations

by PAUL BREST

44 STANFORD SOCIAL INNOVATION REVIEW ~ FOR PERSONAL USE ONLY ~ DO NOT DISTR IBUTE ~ www.ssireview.com

nization that cannot cover its overheadexpenses, of which project grants seldompay their proportionate share, simply can-not sustain its operations.

This essay identifies the competing inter-ests at stake in the funding of nonprofitorganizations. It begins by categorizing thedifferent kinds of support a funder maygive an organization and by defining theconcept of strategic philanthropy. It thenarticulates the legitimate interests of fundersand grantees implicated by different kindsof support.

The essay concludes by proposing gen-eral principles for reconciling the potentialcompetition between strategic philanthropyand general operating support. Although I do not believe that thereis a single approach, resolution of the tensions often lies in whatI shall call “negotiated general operating support,” based on a clearagreement and ongoing relationship between the funder and thegrantee, and also in the willingness of project funders to bear over-head costs.

General Operating Support and Project SupportOne can array the forms of funding for nonprofit organizationson a continuum, anchored at one end by totally unrestricted gen-eral operating support – for example, an expendable gift to YaleUniversity to be used as its president pleases – and at the otherby funding for projects designed by the funder – for example, agrant for a professor in Yale’s astrophysics department to iden-tify asteroids heading toward the earth. There are many possiblehybrids, but it suffices to describe two basic models of generaloperating support and two of project support.

General operating support

The least constrained form of general operating support is unre-stricted support with “no strings attached” and minimal donorengagement. This is the support typically given by annual donorsto colleges, symphony orchestras, museums, and membership

organizations such as Mothers AgainstDrunk Driving, the National Rifle Associa-tion, and the National Abortion and Repro-ductive Rights Action League. Donors donot seek to influence the recipient’s actionsdirectly, and they rely on general newslettersand annual reports to learn of the organi-zation’s achievements.

By contrast, negotiated general operat-ing support is based on an agreed-uponstrategic plan with outcome objectives.Here, the funder engages in a due diligenceprocess, which culminates in an agreementabout what outcomes the organization plansto achieve, how it plans to achieve them, andhow progress will be assessed and reported.

With these understandings in place, the funder’s support goes tothe organization’s operations as a whole rather than to particu-lar projects, and the organization has considerable autonomy inimplementing the plan.3 For example, the Hewlett Foundationrecently made a substantial general operating support grant toa performing arts organization. We expressed some concernsabout the viability of the organization’s business plan, which ledto changes in the plan before the grant was made. However, ourgoal throughout the discussions was to support the organization’svision rather than impose our own.4

When given by foundations, either sort of general operatingsupport typically consists of multiyear expendable grants, oftenwith a reasonable likelihood of renewal.

Project support

While general operating support is an investment in the grantee’soverall expertise, strategy, management, and judgment, projectsupport is typically based on the organization’s capacity to carryout specific activities. There are two basic models here as well,also with possible hybrids.

First, funders can support projects designed and autonomously implemented by the grantee. The paradigm is amedical, natural science, or social science research project designedby university faculty, who then shop it to foundations or gov-ernment funders. For example, we recently made a grant toPrinceton University for a professor to carry out an empirical studyof the effects of affirmative action in higher education. Andtogether with the Mellon Foundation, we are supporting the Mass-achusetts Institute of Technology’s OpenCourseWare project,which makes course materials available free on the Internet.

Second, funders can initiate projects and seek organizationsto carry them out. The paradigm is a funder initiative designed


Paul Brest is president of the William and Flora Hewlett Foundation inMenlo Park, Calif., which focuses on conflict resolution, education, environ-ment, performing arts, population, and U.S.-Latin American relations. Thefoundation is among the funders of the Center for Social Innovation, whichpublishes the Stanford Social Innovation Review. Before joining the founda-tion in 2000, Brest was a faculty member at Stanford Law School, where heserved as dean from 1987 to 1999. He can be reached [email protected].

A strategic funder

can often have the

most significant and

sustainable impact

through general

operating support

grants – for example,

maintaining the

overall excellence of a

museum’s collection

and its accessibility

to a diverse public.

The Ceiling is Falling

Geoffrey Canada learned the hard way just howdifficult it is to secure general operating support.In 1991, a leak developed in the bathroom ceilingat the office of Harlem Children’s Zone (HCZ), anonprofit that works to enhance quality of life

for kids in New York City’s most devastated neighborhoods.The plaster buckled, and Canada, president and CEO, knewthey didn’t have “an extra hundred dollars” to fix it.

Fortunately, Canada was just then negotiating with theleaders of a foundation for a general operating support grant– unrestricted dollars that could have been used to make vitalrepairs. “They asked me: ‘What worries you? What stops you

from thinking about the poor children?’”Canada recalled recently. “And I said, ‘Youreally want to know? I’m worried about thebathroom ceiling falling in.’”

The “ceiling is falling” was the perfectmetaphor for the organization’s woes, andthe foundation leaders seemed to get it. “Ithought, ‘I have finally convinced folks ofwhy this kind of support is important,’”Canada said.

Only, in the end, the foundation didn’tmake the grant. The ceiling crashed to thefloor. Canada paid for the repairs and fixedthe ceiling himself, in part because he couldnot afford a lawsuit if a worker got hurt.(“The only person who wasn’t going to sueme was me,” he says.)

For years after that, the nonprofit sur-vived on a paper-thin margin, with boardfundraisers helping to cover costs. Generaloperating support was almost impossible tocome by.

“Most folks are very clear, they don’t dogeneral operating support,” says Canada,whose nonprofit, founded in 1970, servessome 7,500 children with a full-time staff of250 and a $16.8 million budget. “They doproject support.”

Canada believes there are several reasonsfor this. For starters, when foundations givegeneral support, they are essentially backinga nonprofit’s mission, and it can be tougherto evaluate impact. Additionally, foundationboard members often want to supportunique, sexy projects that garner publicpraise or media attention. General supportis “not exciting,” Canada laments. “Youdon’t get a charge from it.”

HCZ solved these problems in 1999, whenthe organization, working with manage-ment consultants from the Bridgespan

Group, developed a 65-page business plan, mapping out pro-grammatic and fiscal strategy to reach a goal of serving morethan 23,000 by 2009.

“Now we can say, ‘Fund the plan,’” Canada explains. “Thismakes it easier for donors to understand why they should giveus general operating support.”

Since developing the plan, HCZ has received several majorgeneral operating support grants: $1.2 million from the RobinHood Foundation; $1.2 million from the Edna McConnell ClarkFoundation; and $1 million from the Picower Foundation – allgranted each year for the past three years.

This means that Canada, while not exactly relaxed, canbreathe a bit more easily.

“I think this is one of the critical issues in philanthropytoday,” he says.PH

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to achieve a particular result, such as protecting biological diver-sity in the Amazon. The funder designs a strategy that includesa number of component parts and assembles a portfolio ofgrantees to carry them out – for example, organizations doingscientific field research, indigenous groups trying to changeregional policies and practices, and organizations advocatingsustainable practices by multinational businesses. The fundermay seek out particular grantees or issue a request for propos-als. The funder thus serves as architect and general contractor,and the organizations as subcontractors.5

What Is Strategic Philanthropy?By strategic philanthropy, I simply mean philanthropy that isstructured to be effective in achieving a donor’s charitable goals,whatever they may be. The essence of strategic philanthropy is

that (1) the funder specifies objectives and has a plausible (strate-gic) plan for marshaling its resources to achieve them; (2) the fun-der seeks grantee organizations that share its aims, and engagesin due diligence to ensure that grantees have the capacity toachieve them; (3) the funder and its grantees articulate how theywill ascertain if they are moving toward their shared objectives;and (4) they take reasonable steps to assess progress and evalu-ate outcomes.6

If there is a polar alternative to strategic philanthropy, it is afunder having a vague set of goals or preferences (for example,“protect the environment” or “help disadvantaged children”), wait-ing for organizations with interesting ideas or projects to comeknocking, and making grants with little due diligence or agreed-upon objectives, strategies, and milestones. This is not usually theway to maximize impact. Achieving most social or environ-


Did you hear the oneabout the family founda-tion that granted onlygeneral operating andcapital support – and no

project support?That’s the modus operandi of the

Sobrato Family Foundation, a Cuper-tino, Calif.-based foundation that hasgranted some $13 million to commu-nity organizations since its foundingin 1996, promoting self-reliance andeconomic independence for SiliconValley residents.

As outlined in the foundation’sgrant priority guidelines, the founda-tion board has chosen “to exclusivelymake capacity-building investmentsfor general operating and capitalneeds rather than specific program orproject grants made by most otherfunders.” The foundation grants coveroperating expenses such as rent, utili-ties, salaries and benefits (includingworkers’ compensation), executivesuccession planning, and board devel-opment, as well as capital construc-

tion and facility renovation.When Foundation Director Diane

Ford explains this to nonprofit leaders– many of whom scrimp and claw tocover precisely these costs (sidebar, p.47) – she is often met with stunned dis-belief.

“The greatest investment we canmake is providing nonprofits withsomething that they can’t easilyobtain from corporations, other foun-dations, or individuals,” Ford says.“We are trying to fill holes – reallydoing the unsexy stuff – but we aremeeting their needs, and that’s whywe’re in business.”

So, for instance, when the MorganCenter, a Santa Clara school for autisticchildren, was forced to move to a newbuilding and found itself facing a rentincrease it couldn’t afford, Sobratohelped pay the rent with a $15,000grant, allowing the school to stayopen. When Catholic Charities of SantaClara County needed to hire two newmanagers, Sobrato granted the organi-zation $123,000 to cover salaries.

It wasn’t always this way. WhenFord came on board in 2000, thefoundation was more in line withmost others, giving mainly programsupport, followed by capital support –but no general operating support. In2001, Ford met with 45 grantees, andasked them what their greatest needswere. “I asked, ‘What can’t you getmoney for?’” she recalls, “and over-whelmingly, it came down to salaries,overhead, rent – operating expenses.”These interviews, along with an inter-nal review of grantmaking processes,prompted the board to drasticallyalter giving policies.

Since Jan. 1, 2002, Sobrato hasawarded $2.3 million for 98 generaloperating support grants and $1.3million for 15 capital grants. Projectsupport has been eliminated.

“Our bottom line goal is to buildrobust, healthy local organizations toserve local public needs,” Fordexplained. “You can slice it and dice itall these ways, but the truth is, itmakes sense to give them the moneyand let them put it where they needto put it to fulfill their missions. Theyknow best what that is.”

Did You Say You’ll Pay the Rent?


mental goals requires a coherent strategythat takes into account the scale of theproblem, the ecology of nonprofit organi-zations working in the field, the funder’sresources, and the roles of other funders.7

What Interests Are Served by Dif-ferent Modes of Support?Strategic philanthropy, with its emphasis onplanned and measured progress towardclearly articulated goals, is generally moresuited to project support or negotiated gen-eral operating support than to general oper-ating support with no strings attached.Does strategic philanthropy also favor pro-ject support over negotiated general oper-ating support? Not necessarily, or even usu-ally – though tensions with generaloperating support may arise. To under-stand the tensions and how they might beresolved, one must first ask what interests are served by the dif-ferent modes of support. The following section outlines three clus-ters of interests held, respectively, by funders, grantee organiza-tions,8 and funders and grantees together.

The Funder’s InterestsStrategic focus. A strategically oriented funder endeavors to achieveparticular outcomes. Sometimes, a grantee’s mission will beoptimally aligned with the funders’ goals. To the extent theydiverge, however, general operating support blunts the funder’simpact, and the funder may be more effective by making a seriesof coordinated project grants. For example, a funder focused onprotecting biological diversity in the Amazon would not achievethis aim efficiently by providing general operating support to amultipurpose environmental organization. Even where thegrantee and funder agree on outcomes, there may be sufficientdisagreement about the strategies necessary to achieve themthat the funder would deem general support ineffective.9

Accountability. A funder also has an interest in ensuring thatgrant funds are used effectively and for the agreed-upon purposes.Accountability entails at least that the organization report on itsactivities, outputs, and outcomes in a form satisfactory to the fun-der. Accountability is weakest with respect to general operatingsupport when (1) there are no strings attached, (2) the organiza-tion’s operations are not transparent, (3) outcomes are difficultto discern, and (4) the funder’s only control is the organization’shope that the grant will be renewed. Accountability is greatlyenhanced by the essentially contractual nature of negotiated

general operating support, where the fun-der and organization agree on outcomes,strategies, measures of progress, and report-ing requirements.10

Evaluation. When a project is well-defined in terms of objectives, activities,and indicators of progress, evaluatingprogress seems a fairly straightforward task.Although the evaluation of a general sup-port grant is comparatively more complex,one should not exaggerate its difficulty. Ineffect, the grantor of general operating sup-port assumes the grantee organization’smission as its own, and evaluates progressand the success of the grant essentially as theorganization evaluates itself. This is thenorm when the Hewlett Foundation makesgeneral support grants to organizationsranging from Human Rights Watch toPlanned Parenthood to the San Francisco

Opera.Making a difference. When one is the sole funder of a discrete

project, one can take individual pride, shared only with thegrantee, in its success. By contrast, funders providing general oper-ating support often contribute only a small fraction of an orga-nization’s budget. A funder who contributes 3 percent of the bud-get of a large environmental organization may wonder just whatdifference the grant makes, and is unlikely to get the same egogratification or publicity from the organization’s success.

In this respect, providing general operating support is no dif-ferent from any other activity or enterprise that depends onmany people’s contributions – for example, paying taxes orvoting – where no individual makes a difference, but where theaggregate contributions are critical to the enterprise. The essen-tial argument for such support is Kantian: If every potential fun-der acted on the belief that its contribution were not necessary,the enterprise would fail for want of funding. Most foundationexecutives who question the value of relatively small contri-butions to an organization’s budget probably write personalchecks to educational, cultural, and advocacy groups eventhough their contributions are even smaller drops in a bucket.The underlying principle, and the need for such philanthropy,are not different.

The Organization’s InterestsAutonomy. Grantee organizations value general operating support– the fewer strings attached, the better – because it allows themto operate autonomously, free from the funder’s control. The

If there is a polar

alternative to strategic

philanthropy, it is

a funder having a

vague set of goals or

preferences, waiting

for organizations to

come knocking, and

making grants with

little due diligence

or agreed-upon

objectives. This is

not the way to

maximize impact.

grantee may have more expertise than thefunder and may be able to carry out itsmission most effectively with minimal inter-ference. Advocacy organizations, universi-ties, and think tanks may be particularlyconcerned about political interference fromfunders.

Coherence. A related organizational inter-est in general operating support is ensuringthe coherence of the grantee’s strategiesand programs. A well-run organization willhave developed its own strategic plan forsolving the problems it addresses. A funderwho approaches the organization with aparticular project in mind is likely to havestrategies that differ more or less from theorganization’s, calling for more or less dif-ferent actions and allocations of resources.As the number of project-oriented funders increases, the orga-nization’s own strategic plans can get quite fragmented and dis-torted. An organization that depends heavily on project supportmust engage in fundraising that cobbles together grants of inter-est to particular funders while trying to maintain some sem-blance of a coherent plan.

Project support may thus contort the organization’s fundrais-ing and operations. Even negotiated general operating supportmay burden an organization if a number of different fundersemphasize different strategies or require different sorts of infor-mation in different formats.

Sustainability. An organization’s sustainability is compro-mised to the extent that foundations supporting particular pro-jects do not cover overhead, or “indirect” costs for rent, electric-ity, back-office functions, and the like. Some foundations will notpay overhead at all, while others limit such payments to anamount, say 10 percent, that often comes nowhere close to cov-ering the actual costs. So for $1 of project funding, the organi-zation must obtain additional unrestricted funds – anywherefrom 25 cents to more than $1 (for, a university’s science or med-ical research project, for instance). Thus, a funder’s ability tosupport particular projects depends on other funders providinggeneral support. There is a problem of the commons here: It isin every funder’s long-term interest to have viable organizationsto carry out the projects of its choice, but any particular fundercan usually avoid paying its fair share of what is needed to keepan organization viable.

Interests Shared by Funders and OrganizationsOptimal deployment of expertise. Funders and organizations both

may have considerable expertise in address-ing the issues they tackle. The due diligenceprocess involved in negotiated general oper-ating support is a way for both parties’ exper-tise to contribute to the outcome. This canalso be true of project support if the funderis well-versed in the field and has takenaccount of the organization’s particularcapacities.

Flexible response. To the extent that anorganization relies on project support, itcannot respond quickly or flexibly to chang-ing needs. If the organization lacks discre-tionary funds, the sole responsibility forrapid responses falls on funders.

Advocacy. Although U.S. Internal Rev-enue Service regulations prohibit a foun-dation from earmarking any portion of a

grant for lobbying, they permit nonprofits to do a certain amountof lobbying using funds provided from general operating supportgrants.11 Thus, to the extent that direct or grassroots lobbying isan effective way to achieve the shared objectives of a funder andorganization, general support is in both of their interests.

A robust nonprofit sector. Americans rely on nonprofit organi-zations to perform a wide range of functions in the realms of edu-cation, religion, social and health services, and culture; we alsorely on nonprofit organizations as watchdogs of government andindustry, and to engage in advocacy for every imaginable cause– and some that are nearly unimaginable. These organizationsare woven into the institutional fabric of our society. Though cit-izens and funders may disagree about the relative importance ordesirability of particular organizations, much of society’s well-being depends on the work of the nonprofit sector. Beyond themission of any particular organization, there is value in a strong,vibrant, and pluralist “independent sector” – independent, thatis, from government and business – and this interest demands orga-nizational sustainability.12

A Proposed Approach to Reconciling the InterestsThe real issue is not general operating support versus project sup-port, but how best to accommodate the legitimate interests offunders and nonprofits, achieve the funder’s philanthropic objec-tives and the grantee’s mission, and maintain a vibrant nonprofitsector. I propose three general principles.

The first is simply that in designing strategies, funders shouldactively consult with others in the field, taking into accountfieldwide knowledge and the opinions of nonprofit organizations.A strategy that is well-informed by research, consultation, and


Providing general

operating support is

no different from any

other activity that

depends on many

people’s contributions

– for example, paying

taxes or voting –

where no individual

makes a difference,

but where aggregate

contributions

are critical.


peer-review is far less likely to end up as a concoction of donorwhim and presumption, and therefore less likely to introduce dis-tortions into the work of good nonprofit organizations. Some ofthe potential tensions between general operating support and pro-ject support are reduced when the design of projects reflects theshared expertise of the funder, the organization, and the fieldsin which they operate.

Second, granting that there are many situations where fun-der and organizational interests only coalesce around particularprojects, funders should nonetheless have a presumption in favorof negotiated general operating support. To be sure, the fundermust sometimes tolerate “slippage” between its strategic focusand the organization’s operations, and the organization will bear

some loss of autonomy as well as the additional administrativecosts of due diligence, evaluation, and reporting. But negoti-ated general operating support is not merely a way of splittingthe difference. Agreement on a strategic plan and the evaluationprocess conduces to the organization’s achievement of its owngoals. Therefore, if done with appreciation of the organization’sinterests and capacities, negotiated general operating supportstrengthens the organization at the same time as it ensuresaccountability.13

Negotiated support should be designed to maximize thegrantee’s candor toward the grantor in the reporting phases ofthe grant. This entails, among other things, that the grant includesome leeway for changing circumstances, that assessment crite-

Getting with the ProgramWhen it comes to program support versus general operating support, it’s still no contest.

According to the latest Foundation Center sur-vey, foundations gave about 50 percent oftheir grant dollars, or $8.3 billion, for pro-gram support in 2001, with the single largestchunk, $5.7 billion, going to support the

development of specific projects.Only about 16 percent of grant dollars, about $2.7 bil-

lion, went for general support – defined by the center as“funds for general purpose or work of an organization, andfunds to cover day-to-day personnel, administration, andother expenses for an existing program or project.” That’sup 27 percent from 2000, when foundations gave $2.1 bil-lion in general support. But as a percentage of total grantdollars, it’s still down from its peak in 1994, when founda-tions awarded 18 percent of grant dollars for general oper-ating support.

Foundations granted another 22 percent, about $3.7 bil-lion, in 2001 for capital projects, which includes buildingand renovation, equipment, and computer systems. The restof the grant dollars supported areas including research, stu-dent aid, emergency funds, and program evaluation.

The Foundation Center’s survey, “Foundation GivingTrends: Update on Funding Priorities,” tabulated grants of$10,000 or more awarded by a national sample of 1,007larger U.S. foundations.

According to the survey, the average value of 48,433 pro-gram support grants in 2001 was $171,689, compared with$108,636 for 24,582 general support grants.

The Foundation Center’s report notes that while theabsolute number of general operating support grants wasup nearly one-fifth, to the largest number on record, thegrowth in program support has been “far more dominant”since 1980. The report attributes this in part to “more tar-geted grantmaking” and “increased emphasis on account-ability” that developed as foundation budgets grewthroughout the 1980s and 1990s.

“Yet,” the report concludes, “as federal, state, and localgovernments have reduced funding for the independentsector, nonprofits have turned to foundations to help offsetoperating budget shortfalls. In response, some foundationshave altered their funding policies to provide more generalsupport or to combine general support with project supportfor their grantees.”

Types of foundation support awarded, 2001

SOURCE: The Foundation Center

Program support50%

Other12%

General operating support16%

Capital support22%

ria be reasonable, and that the risks inevitable in almost anygrant be mutually acknowledged.

Third, as mentioned above, project support pays for the directcosts of a project – for example, the salaries and travel expensesof the staff immediately involved in implementing the project –but typically covers only a small portion of indirect costs. Projectsupport thus takes a “free ride” on others’ general support, whichpays for overhead. Especially an organization that does not havea significant membership or alumni base may have to contort itself– and not always with full candor to donors – to accommodate

diverse projects. Therefore, project support should presump-tively include the organization’s indirect costs. A funder shouldget a realistic sense of an organization’s financial situation, andshould stand ready to pay its full way.

This presumption requires funders to compromise at least theirshort-term interests, since funds spent on overhead could bechanneled to other strategic projects. However, the presumptionserves the social interest in sustaining a vibrant nonprofit sector,as well as the interests of the organizations themselves. It also com-pensates to some extent for the institutional costs (for example,


Should foundations favor gen-eral operating support? Dofoundations have an obliga-tion to pay full overhead costsfor the projects they support?

How should foundations treat the non-profits they fund?

These are just a few of the questionsbeing explored this fall by two smallworking groups, composed of founda-tion and nonprofit leaders, that areaiming to establish norms of behaviorfor grantmakers.

The working groups spun out of alarger meeting on general operatingsupport, which included more than 50nonprofit, foundation, and researchleaders, convened by Paul Brest, presi-dent of the William and Flora HewlettFoundation, at the Open Society Insti-tute in New York City this June.1

One working group, chaired byBrest, is looking at the question of gen-eral operating support – specifically,how much is enough?2

According to Brest, when manyfoundations fund projects, they grantup to 10 percent extra to cover over-head costs, such as associated salariesor office expenses; some foundationsdon’t pay these costs at all. Yet for mostnonprofits, overhead runs them at least20 percent above direct project costs.Thus, foundations often don’t “pay

their own way,” Brest explained. Toremedy this, the working group mayrecommend that foundations provideenough to cover all costs associatedwith their grants; it may also recom-mend some formal standards to helpdetermine appropriate levels of gen-eral operating support.

“The ultimate goal is to get fundersto change their behavior voluntarily,”Brest said. “Many funders just don’thave a deep understanding of theproblems nonprofits face.”

The other group, chaired by EdwardSkloot, executive director of the SurdnaFoundation, is looking at establishingworking principles outlining what con-stitutes “pretty good behavior” forfoundations. The group is also dis-cussing the preparation of a “con-sumers guide to foundations – a sort of‘Zagat’s guide’ – which would identifythose institutions that follow prettygood behavior and those that don’t,”according to an e-mail Skloot circulatedamong group members.3

Skloot explained that “bad behav-ior” can take a variety of forms –including foundations punishinggrantees who speak honestly about dif-ficulties, program officers who treatgrantees disrespectfully, and boards ofdirectors who pay little attention totheir foundation’s work.

“We think we can have a set ofworking principles that people will buyinto and have considerable fidelity to,”Skloot explained, “and they will wantto uphold these as the core values oftheir institution.”

Ultimately, the working groups aimto present their recommendations tothe larger group of 50-plus, and pro-duce a set of principles that founda-tions could then voluntarily sign on to.

“One size does not fit all,” Sklootsaid, “but there is a size that everyonecan be comfortable with.” –JR

1 The meeting was co-sponsored by the William andFlora Hewlett Foundation, the Edna McConnell ClarkFoundation, the Open Society Institute, the RockefellerBrothers Fund, and the Surdna Foundation.2 Brest is the author of the article that begins on page44. The other members of the working group are:Gary D. Bass, executive director of OMB Watch; RickCohen, president of the National Committee forResponsive Philanthropy; Geoffrey Canada, presidentand CEO of Harlem Children’s Zone; GaraLaMarche, vice president and director of U.S. pro-grams for the Open Society Institute; Elizabeth Boris,director of the Urban Institute’s Center on Nonprof-its and Philanthropy; and Clara Miller, president andCEO of the Nonprofit Finance Fund.3 The members of the working group are: Bass;Michael Bailin, president of the Edna McConnellClark Foundation; Stephen Heintz, president of theRockefeller Brothers Fund; Miles Rappaport, presi-dent of Demos; and Melinda Tuan, director of strate-gic projects for the Roberts Enterprise DevelopmentFund.

Taking Aim at Foundation Accountability


in autonomy and flexibility) of not providing general operatingsupport.

Is project support inevitably parasitic on general operating sup-port, or can the two live in a symbiotic relationship? Consider aresearch university, where general operating support comeslargely from tuition and alumni contributions (whether in the formof annual giving or endowments) and where research projectsare funded by governments, the private sector, or foundations.On one hand, to hold that the funding of research projectsshould pay all of its indirect costs would imply that alumni con-tributions should support only the university’s teaching missionand no part of its research. On the other hand, the financial real-ity is that universities could not afford to undertake certain pro-jects without funders’ covering a significant proportion of indi-rect costs.14

Effective philanthropy requires a clear strategic direction.But just as surely, effective nonprofit organizations require themeans and flexibility to carry out their own strategies. Earnestconsultation and shared design can minimize the tension betweenthese interests, and result in negotiated general support grantsthat achieve both philanthropic and organizational goals. Focusedwork will sometimes entail project-specific grants, but these tooshould be designed with respect for the grantee’s mission, per-sonnel, and financial needs. In either case, it is essential that thefunder and organization share a clear sense of their mutual goalsand indicators of progress.

1 Foundation Center Data 1996-2003.2 See, for example, Cohen, R. “Cutting to the Core,” Responsive Philanthropy (fall2002), which argues that the paucity of general operating support threatens non-profit organizations; Eisenberg, P. “The Case for General Support,” The NonprofitQuarterly (winter 1999), which maintains that general operating support is essentialfor strong and independent community-based organizations; and David, T. “Reflec-tions on Sustainability,” California Wellness Foundation, which explains the importanceof general operating support to nonprofits’ sustainability.3 General operating support may, without losing its essential character, focus on aparticular unit or department of a large organization rather than the organization asa whole. For example, a funder might provide general operating support to StanfordUniversity’s School of Humanities and Sciences, or to CARE’s population work.Even with respect to a general support grant to the organization as a whole, theagreed-upon outcomes and evaluation may focus on a subset of the organization’sactivities.4 So-called “venture” or “engaged” philanthropy is a more engaged form of negoti-ated general operating support, typically assisting relatively young and small organi-zations in increasing their scale – for example, the number of clients served. Theventure philanthropist is often significantly involved in the organization’s operations,through board membership, frequent consultations with the CEO, or other activi-ties. The rationale for engagement is that the funder possesses business or organiza-tional expertise not otherwise present in the organization. For discussions of venturephilanthropy, see Letts, C. and Ryan, W. “Filling the Performance Gap,” StanfordSocial Innovation Review, (spring 2003); and Letts, C.; Ryan, W.; and Grossman, A.“Virtuous Capital: What Foundations Can Learn from Venture Capitalists,” HarvardBusiness Review 97 (1997). The present essay does not focus on venture philanthropy,but considers the more common form of negotiated general operating support

provided to mature or stable organizations as well as to those poised for growth.5 One might also characterize as “project support” grants aimed at improving anorganization’s capacity in, say, fundraising or database management. While suchgrants are intended to support the organization’s achievement of its own goals,Pablo Eisenberg, founder of the National Committee for Responsive Philanthropyand a senior fellow at the Georgetown University Public Policy Institute, has cau-tioned that they may divert the organization’s time and resources from its coreneeds. See “The Case for General Support.”6 See Brest, P. “The Hewlett Foundation’s Approach to Philanthropy,” 2002 AnnualReport.7 This is not to say that a strategically oriented funder need commit all of itsresources to a set of tightly focused goals. On the contrary, a funder may sensiblyreserve a certain amount of its grants budget for special opportunities. Even then,however, a strategically oriented funder will approach each special opportunity withclear objectives, strategic plans, and criteria for assessing progress and outcomes. Forexample, although it does not fit within guidelines of the Hewlett Foundation’senvironmental program, when we were presented with the opportunity to restorethousands of acres of salt manufacturing ponds in San Francisco Bay to wetlands,we joined with three other foundations to help state and federal agencies purchasethe ponds. The foundations worked together to negotiate a strategic plan for therestoration and are continuing to collaborate to assure that the plan is well-imple-mented. (This is also an example of an appropriate project-related grant, since thefoundation has no reason to provide general support to either the U.S. Fish andWildlife Service or the California Department of Fish and Game.)8 For a comprehensive statement of organizational interests, see “Reflections onSustainability” and “Cutting to the Core.”9 Sometimes, a funder may wish to effect change in ways that existing organizationsare not equipped or motivated to do, necessitating a strategic series of project-ori-ented grants or even the establishment of new organizations. Two historic examplesfrom the postwar era are the Rockefeller and Ford foundations’ establishment of theinternational agricultural research centers that initiated the “Green Revolution,”leading to increased food production in Latin America, India, the Philippines, andother developing nations; and the effort by Ford and others to establish area studiesprograms in American universities. I am indebted to Kenneth Prewitt, professor ofpolitical science at Columbia University, for this point.10 Accountability is a two-way street. In addition to owing the broader societyresults in its chosen area of work, a funder has obligations of respectful and candiddealings with applicants and grantee organizations. See Emerson, J. “MutualAccountability and the Wisdom of Frank Capra,” Foundation News & Commentary42, no. 2 (March/April 2001). Both negotiated general operating support and projectsupport offer the opportunity to build accountability into the agreement betweenthe funder and organization, but neither assures it.11 Troyer, T. “Private Foundations and Influencing Legislation,” Charitable Lobbyingin the Public Interest (http://www.clpi.org/lobbying_and_funding.html). 12 See, for example, O’Connell, B. Civil Society: The Underpinnings of AmericanDemocracy (Boston: Tufts University, 1999), which describes the importance of thenonprofit sector to a democratic polity; and Prewitt, K. “The Importance of Foun-dations in an Open Society,” in The Future of Foundations in an Open Society, ed. D.Feddersen and Bertelsmann Foundation (Gutersloh, Germany: BertelsmannStiftung, 1999), which describes the nonprofit sector’s role in promoting polyarchy.13 Funders providing negotiated general operating support should be aware thatrigid requirements for proposal and reporting formats may subject an organizationto responding to inconsistent demands by multiple funders. Therefore, a fundershould take into account the size of its grant vis-à-vis those of other funders, andshould consider collaborating with others on a common due diligence process, withone funder taking the lead. 14 Granting that cost accounting is more an art than a science, and that indirect costnegotiations between universities and federal government agencies reflect politicsand power as well as rationality and fairness, funders of all types of organizationscould learn from the guidelines resulting from those negotiations. For a criticism ofcertain caps and exclusions imposed by the government, see Bienenstock, A. “A FairDeal for Federal Research at Universities,” Issues in Science and Technology (fall 2002).

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