The Magazine

Money Ill Spent

What foundations do wrong and, occasionally, right.

May 14, 2007, Vol. 12, No. 33 • By MARTIN MORSE WOOSTER
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The Foundation

A Great American Secret; How Private Wealth Is Changing the World

by Joel L. Fleishman

PublicAffairs, 384 pp., $27.95

Spend enough time in the world of nonprofits and you discover that foundations, for all their wealth and power, are organizations with very thin skins. The pages of the professional philanthropic journals are brimming with agonized articles by program officers and foundation presidents that, stripped of pseudo-scientific jargon, list the endless reasons their employers just don't get any respect.

Having read far too many of these articles, I can boil all of them down to a single paragraph: "Why don't people like foundations? We're doing good. We're helping people. Our grantees love us. Sure, our president may make $700,000 a year, but being a foundation president is tough. Don't people know that? And that guy from the Senate Finance Committee who keeps bugging us about first-class tickets and four-star hotels. Doesn't he know how exhausting it is to fly these days?"

As part of their defensive strategy, about once a decade a book emerges from the nonprofit world that tries to explain to a general audience how wonderful foundations are. With the notable exception of Waldemar Nielsen's valuable The Golden Donors (1985), most of these books gather dust in university libraries.

Joel L. Fleishman's The Foundation is yet another defense of philanthropy by a seasoned insider. Fleishman, who teaches at Duke Law School, has some virtues as a writer. He does recognize that the nonprofit world has flaws that businesses don't have. Corporations, after all, have to please the public if they are to survive, and CEOs who cause the company's stock price to fall get sacked. Foundations, by contrast, face no market test. They can do whatever they want with their wealth. As a result, the law of motion in foundations is that programs, once created, continue endlessly unless stopped by an outside force (a congressional committee, or a riot).

This unchecked power, Fleishman notes, "creates an unhealthy cocoon-like insulation for foundations, one in which arrogance, arbitrariness, failure to communicate, and all the other besetting sins are all the more likely to flourish."

"The arrogance foundations are accused of," Fleishman adds, "is, ironically, a disguised form of insecurity. Despite their immense wealth and power, many foundations seem afraid of their own shadows."

Fleishman is also right in some of the solutions he calls for to make foundations more accountable to the public. Part of the reason foundations seem so secretive is that the press wrongly ignores them. Most newspapers, including such large ones as the Washington Post, don't have anyone regularly reporting about philanthropy. Foundations ought to get as much coverage in the press as colleges and universities do.

Finally, Fleishman is right that more extensive regulation of nonprofits would not address the problem of foundation accountability. Congress has, in recent years, flirted with draconian proposals for regulating foundations, such as creating a regulatory structure comparable to the Sarbanes-Oxley Act. These new regulations would force foundations to spend more money on lawyers and accountants and less on charity.

Fleishman argues that the current overseers of charities-the Internal Revenue Service and state attorneys general-do a poor job of making sure that foundations obey the law. He endorses an idea proposed by the former IRS charity regulator Marc Owens to create a quasigovernmental organization to police foundations that would have the same power over nonprofits that the National Association of Securities Dealers has over stock brokers. Owens's idea is certainly worth debating.

Yet while Fleishman is correct in some of his diagnosis of philanthropic problems, he is fundamentally wrong in his analysis of the history of foundations. He also asks foundations to continue bad practices that waste money and ensure philanthropic mediocrity.

Fleishman lists 100 case studies of good things that foundations have done to make our country better. When the foundations funded science, they tended to do a good job. For example, the Rockefeller Foundation used its wealth to eradicate hookworm, a disease that ravaged the South a century ago. Rockefeller money also created the Rockefeller Institute for Medical Research (now Rockefeller University), whose scientists have made many important medical discoveries.