Cross-posted at Education Week
I’ve just read the new announcement from the Ford Foundation describing the direction the foundation will take under its new President, Darren Walker. It is a deeply thoughtful and quite radical statement of priorities. It tells us not only what the foundation will do, but what it will no longer do and why. Most important from my point of view, it reverses trends in foundation management that are decades old, trends that have been very damaging to the not-for-profit community on which the foundations depend to reach their own goals.
The heart of the matter is a dry-as-dust topic: institutional overhead. For those who need a brush-up on this arcane subject, overhead is what not-for-profits charge for the costs they bear that are not associated with particular foundation-supported projects, but are associated instead with the cost of things that all or many projects share and which, if not paid for, will make it impossible for the organization to function. A few examples will suffice. Typically, the foundation will pay directly for the cost of the space the project itself occupies, but the cost of the hallways, lobby, general management offices and so on are shared among all the projects on some reasonable basis. The same thing might be true for the costs associated with copying, IT support and office supplies. What can reasonably be assigned directly to the project is so assigned; the rest is put in the pool of overhead or indirect costs and shared out. There are many different ways to determine what should be in the overhead pool and what should be assigned directly to the project that are regarded as legitimate by the accounting profession.
When I was just starting out in the not-for-profit world, foundations typically assumed that it was their obligation to pay their fair share of indirect or overhead costs. But that changed over time. First, they chafed at the idea of paying the full overhead costs of universities that applied for research project grants, often charged at rates of 70 percent of the direct costs or even more. They could see why they should pay for their share of the common space for a research facility, but they could not see why they needed to pay for a share of the costs of the gymnasiums or the general libraries, for example.
Many foundations then rethought the nature of their obligation. When I was in government, our grant and contract officers distinguished sharply between the purpose of a grant and the purpose of a contract. They told those of us in charge of research operations that we should use contracts when our goal was to carry out a government purpose. Interestingly, at that time, the government took the position that it should pay its share of all the indirect or overhead costs associated with the proportion of direct costs that we were providing.
That was in an era in which most private foundations, just like government grant makers, saw themselves as providing grants to highly capable people who had their own agendas and their own plans. Even though they were providing aid to people and institutions to support the implementation of their grantees’ plans, and not their own plans, they were still prepared to pay their fair share of overhead costs.
But then it all fell apart. A new wave of private foundations were established by living entrepreneurs who tasked their staffs with coming up with tightly focused agendas, plans for achieving those agendas and timelines and metrics for accomplishing those plans. The locus for agenda-making shifted from the grantees to the foundation. Grantees became agents of the foundations and their agendas. As the transformation I just described took place, the foundations—both old and new—began to look for the best deal they could get from not-for-profits that had become, in effect, private contractors. They no longer took responsibility for the institutional health of the not-for-profits they funded.
The foundations began to put caps on the amount of overhead they would pay, conscious when they did so that the caps were so low that they would not pay for shared costs that had to be incurred if the project they were funding had any chance of succeeding. In effect, every grant they made to a not-for-profit that received all of its income from grants would produce a deficit for the organization receiving the grants. This led to what I can only call a corrupt relationship between the not-for-profit staffs and the foundation staffs in which both worked together to get around the trustee-imposed ceiling by re-categorizing what should have been overhead expenses as direct expenses. But there were limits to the degree to which this was possible, and so many not-for-profits were forced into a hand-to-mouth existence, worrying from month to month whether they would make payroll. Whether they did or not, many were forced by this regime to abandon their own agendas to become contractors to many foundations to pursue the foundations’ increasingly narrow agendas on the foundations’ terms.
Enter the Ford Foundation. To my utter delight, Darren Walker, Ford’s new president, acknowledges in his open letter that the polices of his own foundation—and by implication all other foundations with similar policies—made a big mistake when they decided, in effect, that they would henceforth refuse to pay the full overhead costs associated with the grants they made to not-for-profits. And then he goes much further. He goes on to announce that Ford will henceforth take a direct interest in the health of the not-for-profits they support, as institutions. There are no details, but I must say I was thrilled at this news. Not because I expect that we will be one of those institutions—I imagine the chances of that happening are small—but because this is enlightened policy at its best.
No foundation should feel itself obligated to support any institution that is not a strong contributor. Opportunities abound for cozy relationships between foundation program officers and not-for-profit staff based on close personal relationships or past performance not reflected in current capacity. Foundation boards and CEOs need to be sensitive to that possibility. But foundations will be hard pressed to get the kinds of wins they want if the only institutions out there are job shops interested only in doing what it takes to keep their staff employed. Just as the best not-for-profits cannot survive without foundations willing to take responsibility for their health, the foundations cannot do good work without a supply of not-for-profits with imagination, great leadership and the capacity to chart new waters and implement ambitious plans.
It is really wonderful to see the Ford Foundation taking this kind of leadership in addressing the key issues of institutional capacity in the not-for-profit community that some of us have worried about for so long. I can only hope that others will follow their lead.