Foundations can be smarter investors

By Todd Cohen

The crisis in the financial marketplace should be sounding alarm bells in the charitable marketplace.

With the failure of the capital markets, the value of the endowments of U.S. foundations fell nearly as much last year as the total grants those foundations paid out over the past four years.

Despite those huge losses, foundation endowments still total roughly $550 billion, yet foundations are blowing a big opportunity to shape social and economic change because they continue to operate as passive investors, says Michael Passoff, associate director of the Corporate Social Responsibility Program at As You Sow.

Foundations typically delegate their proxy-voting responsibilities to investment managers who often vote the foundations’ proxies based on recommendations from management of the companies in which the foundations own stock, say As You Sow and Rockefeller Philanthropy Advisors.

So foundations fail to influence corporate policies on a broad range of governance and business issues and even can support actions directly opposed to their own philanthropic values and goals.

Passive oversight of their investments also can put foundations at serious risk.

As The Wall Street Journal reported last week, that was a key message from New York Attorney General Andrew Cuomo in a fraud charge filed April 6 against J. Ezra Merkin, the former chairman of GMAC Financial Services who Cuomo says was a middleman for the convicted investment manager Bernard Madoff.

Big losses to charities that invested through Merkin underscore how charity boards fell down on the job, the Journal said.

A key step foundations can take to be more responsible investors in the charitable marketplace is to be more responsible investors in the capital markets, say As You Sow and Rockefeller Philanthropy Advisers.

“The surge in shareholder scrutiny of financial matters that cut across the traditional ‘governance’ and ‘social’ divide should signal that foundations now have greater opportunity than ever to exert more influence in how companies conduct business,” says Doug Bauer, a senior vice president at Rockefeller Philanthropy Advisers.

Taking a more active shareholder role is an important step foundations should take to put their assets to more productive use in addressing the charitable purposes for which givers gave those assets to foundations in the first place.

Private foundations, which are required to pay out at least five percent of their assets in grants and overhead, typically do not pay out more than that minimum.

Community foundations, which do not face a mandated minimum payout, often pay out a bigger share of their assets than do private foundations.

But far too few foundations treat their investments as assets they can use to address the social and global problems they care about.

That is a huge waste because, as shareholders, foundations can play an important role in shaping the corporate and business policies of the companies in which they own stock.

Foundation boards have a lot to answer for: Their hoarding of assets, combined with plunge in the capital markets, has cost the charitable world billions of dollars that now will never be used to address urgent problems.

And in providing only passive oversight of the investment of their assets, foundation boards have acted as enablers of corporate boards and executives in setting and carrying out business strategies that have seriously damaged our economy, our environment and our national security.

For the fifth year, As You Sow and Rockefeller Philanthropy Advisers have published a “Proxy Review” that aims to provide the leadership of foundations with guidance on shareholder proposals on social and governance issues directly related to their mission.

Also available on the websites of both organizations is a downloadable copy of their earlier publication, Unlocking the Power of the Proxy, which offers information on how foundations can exercise their fiduciary responsibilities in voting their proxies.

Foundations can do much more to address the economic crisis and the human toll it is taking.

Instead of hoarding their assets so they can perpetuate their wealth and the power, foundation boards should be voting to pay out more in assets and better fulfilling their governance role by taking a more active role as shareholders.

Foundations should be putting all their assets, including those they pay out and those they invest in the capital markets, to more productive use to address the critical and escalating social and global problems we face.