Après moi, la deluges? Succession questions in family foundations

In my work with family foundations, there are few matters which arise as frequently as the questions of succession. “Who”, “when”, and “if” come up all the time. Sometimes raised by the founder, more often raised by next generations, the all too frequent absence of clarity can be an open or barely hidden source of contention, resentment, and puzzlement which often gets in the way of good and open decision making, and as often taints the well-deserved family legacy of giving.

In the current philanthropy environment, it is crucial to return to core matters such as this. All too often, in the face of books and press which challenge the larger conceptual issues of philanthropy, especially given the economic and political crunch of these times, people are reluctant to raise questions like this. They may feel that their energies should be spent making sure that their philanthropy is effective, or high impact, or transformative, or cutting edge. All of that is valid, but if there is internal disarray or disappointment, it will be hard to get to those other issues in a way that is reinforcing to the family.

No single article can address all of this in depth but from my experience there are a number of issues and bits of advice which can prove helpful.

1. Trust and Estate planning, I have learned, is an inexact science especially as it relates to philanthropy. Often tension arises because the trust attorney simply didn’t ask or didn’t want to force a discussion on succession planning with the founder. It may have been hard enough to determine who would sit on the foundation board among the heirs; to recommend or mandate what rules should define who follows them was not easily on the table. Thus I have often seen trust and foundation documents which simply obfuscate, and implicitly push the question down one generation. If the foundation is created as part of an estate, the most one can do is participate in a question of “donor intent”. If the funder is alive, one would often do well to engage him or her in understanding what his or her expectation may be. [Sometimes this is best done by an independent outsider who can engage the question without the emotional overlay a family member inevitably has.]

2. Some few funders seem to leave matters of succession vague on purpose. It is their way of empowering heirs to take ownership of management of the family legacy – to make it work. These founders seem to recognize that not only can one not rule from the grave, but also it isn’t fair or wise to try to do so. In some cases, the founder knows that there is sibling rivalry and hopes that giving them the responsibility to work together will bring them together. In a healthy family environment, this empowerment can be refreshing and engaging. In a family with unresolved issues, this can often serve to be even more divisive. Any of us in this field quickly learns that one cannot solve unresolved family issues through philanthropy.

3. Address succession early. In whatever way the question of succession is resolved, it will never anticipate every possible permutation. However, the later the discussion takes place, the more likely it will be to become personal and not simply “policy.” For example, the question of spouses of family members’ eligibility for the board is more easily dealt with before there are spouses. Eligibility for 3rd and 4th generations is best addressed before any of them is at an age when that might be an issue. Is eligibility to be based on family units or numbers in each generation? I have known and worked with families that have adapted quite different answers to these questions and have done so quite effectively. In most cases, it is when they are making policy decisions of succession which will enfranchise or disenfranchise people already in the room that bad feelings can arise.

4. For how many generations is it intended that this fund or foundation exist? We have addressed the question of perpetuity elsewhere. Suffice it to say that the question of succession is very different if all eligible people are alive and known than if planning is for future un-born heirs. I know of several families that define the anticipated length of their foundation to the time when anyone who knew the founder is no longer living, or some other objective point in the future. This may not define when the heirs may participate but it surely defines who is eligible. Other families, which assume a permanent endowment, structured to last for many generations, have a highly systematized rotation and selection system.

5. Be aware that there are different dynamics which define the 2nd generation from subsequent ones. The 2nd generation may have been patronized by a domineering father, ultimately having no real say in decision making until the founder’s passing. They may acquire decision-making authority late in the day. Intellectually, they may know that they want their children to be spared this waiting game, but emotionally they may be protective of their own long awaited role. The reasons for subsequent generations’ involvement may be quite different from that of the 2nd generation, and the emotional connection will be very different.

Let me be clear: Much has been written and spoken about intergenerational issues of the 21st Century. We live in a time when younger people really do think and act differently, and that manifests itself in giving strategies and priorities. That is an important topic about which I have written and spoken extensively. However, for our purposes here, the question is not giving strategies but succession strategies. And these are perennial and universal.

6. In setting up policies, it is constructive to have each generation meet without the others. Each of these may bring a different set of concerns, preferences, and recommendations which may never arise in a single joint meeting. In my own experience, at least two foundations changed their name based on recommendations which would never have surfaced had everyone met together. Older generations may have very distorted assumptions about what the foundation does or doesn’t mean to their own children, who in turn may have some very crisp and poignant observations about their parents. If a constructive succession system is to be put in place, it needs to incorporate as honest and complete an understanding of what different branches and generations bring to the discussion.

7. Succession is meaningless unless there is real decision making. If the by-laws or practices of a family foundation predetermine where the majority of grants are given, it is hardly interesting for subsequent generations to participate. Whatever formal succession is in place matters little if what happens at the table is pre-determined. Similarly, if, as happens, the founder essentially divided the spending equally among siblings or branches of the family, done more than one may imagine to avoid in-fighting, why bother to be at the table at all with others who have full autonomy over substantial parts of the grants process? Why not simply stay home and call in your allocation instructions? Therefore, as important as it is to address the principals and policies regarding who sits at the table, it is equally important to assure that the table is a worthwhile place to be.

All of us who work with families are fully aware of the dynamics of families. When a family embraces a legacy in a healthy and robust way, it not only honors those who established the foundation, it ennobles those who follow. Yet as all of us know, achieving that sometimes requires diplomatic skills and Solomonic wisdom. Fortunately, the majority of families really do want to do it well.
Read more!

How one organization blew it - the view from this side

This is not an unprecedented story but is a worthwhile morality tale for non-profit fundraisers. To ruffle as few feathers as possible, I won’t name names.

I was recently honored by being elected Chair of an organization that has a very distinctive mission. There are a few other organizations with compatible but not identical missions and in a collegial manner, I extended a hand to the heads of several.

The President of one of those organizations – one that does a fine job in its sphere – sent an email congratulating me and suggested that the member of their staff responsible for the areas of overlapping interest would soon be in touch to discuss mutual opportunities. The organization I now chair is neither a fundraising nor fund distributing organization, so the possible avenues for collaboration could only be built on mutuality of interest.

Sure enough, a personally addressed envelope arrived from that organization within a couple of days. That wasn’t unusual – a number of congratulatory letters were arriving around that time. However, upon opening this one, I found neither a personal letter nor any reference to the previous communication. Rather, it was a fund raising request.

One might be inclined to say that it was coincidence but, in fact, I had not received personal fund raising appeals from this organization previously. Perhaps they thought that this was the opening they were waiting for since I am known as an advisor to funders and foundations. Interestingly, I have yet to hear from the person who was to have been in touch. I have waited a month to write this on the chance that there would be appropriate follow up on their end.

Now, of course, no one can begrudge any non-profit from doing its best to stimulate support at this time – or any time. But the message came across that one must pay to play, even on an organization-to-organization level. Whatever their intention, it left me with a double bad taste: I am surely not inclined to ever send any financial support whatever and, moreover, if and when I ever do hear from their designated contact, I suspect I would not be inclined to be very open to explore mutual efforts between our two entities.

A pity, I think, since it probably represented a mindless, and needlessly thoughtless act on someone’s part. But organizations do have some responsibility to know how they come across and to exhibit appropriate judgment. In the scheme of things, my discarding of their appeal will have no impact on the functioning of this unnamed organization, but I hope that readers who have development responsibilities take to heart how one organization blew it.
Read more!

The Roubini Effect on Philanthropy

This posting was erroneously placed on a different blog. It was written on 4 June 09

Earlier this week, I had the intellectual pleasure [but the emotional let down] of hearing a far-reaching economic assessment by Nouriel Roubini. Professor Roubini is well known for his dour assessment and he didn’t surprise the assemblage of well-healed and largely high net-worth attendees. While Prof Roubini and I both teach at NYU, this was the first time we had met. His reputation for breadth of knowledge is well deserved, although his pessimism hardly left anyone very cheery – even on a magnificent spring day high above Manhattan.

I am not a trained economist, so I am hardly equipped to rebut any of Roubini’s points. However, as I heard him, it seemed that even he does not predict a repeat of the perfect storm of economic catastrophe that caused the worldwide implosion of the last 18 months. While he emphasizes the negatives, he allows for the possibility that some of the initiatives which have been taken are not fully off base and may even work. As one in the philanthropy field, I am always on the side of the improvable, not the inevitable, so I will grasp at the few positive straws which Roubini waves around.

Which brings me to the main point of this posting. At this luncheon I was seated next to a person whose family last name is known by all. Over lunch, this individual, who has at his disposal some of the most well-known and prestigious philanthropy advice around, peppered me with questions about the trends and probabilities in this world. I honestly don’t think that he was looking for new information as much as reflecting, through his questions, the continuing unsettled feeling that all philanthropists feel these days.

For example, it is clear that 2009 will be a much harder year for philanthropic giving than the last. As I have written previously, foundation giving and large individual gifts are almost always prospective pledges based on retrospective assets. If a pledge was based on assets in January 2008, by the time that was paid the asset base was probably quite a bit smaller – but the pledge will still be paid based on assets at the time of the pledge. Similarly, a pledge made in Spring 2009 will probably be based on assets in hand now. So even should there be a remarkable recovery by December, the pledge will be based on current assets, not potential ones. I cannot imagine a scenario in which the non-profit world will see improvements for at least another year, except, perhaps, for those which may qualify for new government funding.

Similarly, by now all major funders have addressed what to do with a smaller asset base. They have made the hard decisions and are implementing them. The range of responses has been addressed in previous posts, but by this time, we have seen virtually any of the possibilities play out – from increasing payout to more focus to continuing the course to non-financial support to new partnerships….. Why then did this boldface name ask so many questions about these policy and practice questions? It is my sense that no one sits comfortably with whatever decisions we have made because they all have implications and connotations. A serious funder doesn’t belittle the impact of one’s giving, nor the impact of not giving. Even if one is convinced of the legitimacy of a decision on how to do a cutback in spending, it doesn’t diminish the unhappiness.

Thus the Roubini effect in philanthropy. One doesn’t need another perfect storm to know how elusive our abilities to accomplish what we did even a year or two ago. One doesn’t need to assume only the most dire economic projections to know that people will be un or underemployed for a long time; that expectations for individual careers, retirements, families are being lowered for the foreseeable future; that claims on social services will continue to skyrocket and quality of life arts organizations will suffer even more. Professor Roubini’s projections may be off – but he does provide a sober reminder to those of us in this field that we will have several years before we can again rest comfortably that our giving is able to address so many of the needs and causes we believe in.
Read more!

Partnerships and Mergers: The Hype and the Promise

Readers of this blog are aware of a piece I wrote some time ago giving organizations a useful tool for the ifs and hows of partnerships and mergers. It is one of the most requested pieces I have ever written. It was based on fairly extensive experience in the area: both as the ceo of a foundation which invested heavily in such partnerships and as a periodic consultant to organizations which were exploring mergers and partnerships.

Any observer of the independent sector is well aware that this topic continues to be at the top of the agenda of many organizations and funders. The reasons are obvious and persuasive: are there duplications of services or back-office support that can be eliminated for immediate financial savings? Can one larger better-funded organization reach the scale to truly have an impact? Can a merged organization inspire influential volunteers/board members who might be less interested in smaller or more local initiatives? Is there a leveraging of influence which might impact public policy or encourage greater voluntary support if funders joined forces?

Over the last 2 or 3 years, the answers for many non-profits and for many funders to these questions has been “yes.” Barely a week goes by without the announcement of another merger or partnership. It is time to take a glance to see if we are going the right direction.

Observation 1. Takeover or merger?

Upon close examination, most of the mergers are not true mergers except in name. In the vast majority of cases they are really take-overs by a stronger organization which identified a common interest or missing competence. The new organization may have a revised name and board, but it is rarely a merger of equals.

This probably represents one of the more successful models of organizational marriage. Success means that there are efficiencies and scale. Often there is a loser as well. The absorbed organization may find that its staff is soon considered expendable, its signature programs revised or replaced, and constituencies or locations once served by the absorbed organization don’t make it past the new strategic plan.

This is not to say that there never is a value in such a takeover. The weaker organization may be truly vulnerable or fragile and may well have had to close; their prize programs may have outlived their value; funders may simply have lost interest in the unique constituencies. Such a takeover may serve to preserve and add value to programs and projects that would have been lost without them.

What makes these successful is when there is clarity ahead of time about what is really at stake, what the trade offs will be, and who really will be in control. If there isn’t a good self-awareness by both sides, resentment and resistance is likely to surface pretty quickly.

Observation 2. Cultural compatibility

The greatest challenge to successful partnerships and mergers is cultural incompatibility. While a shared mission, agreed funding, negotiated governance and staffing are necessary preconditions, they are insufficient. What is harder to determine but ultimately the most crucial component is if the 2 or more organizations have compatible cultures. These cultures don’t have to be identical – they have to be compatible.

Most organizations would do well to avoid shotgun weddings and most funders would be wise to not force them. They would be better to try some joint projects, a shared planning effort, a mutual board retreat, a safe space for staff to converse openly with each other about their own organizations and visions for the future.

Some might argue that in these crisis times this kind of planning takes time, money, and risks the benefits of the merger. And they are correct that there is an investment which hard pressed organizations may feel they don’t have. But these investments are not luxuries – they are essential. We have learned all too well that financial investments made with due diligence can be risky; investments made without them are downright dangerous. The same can be said with proposed mergers. Done too quickly or with too much naïveté can bring disaster and bring down 2 organizations quite quickly.

What is culture? The affective issues that say something about the style and character of any organizations. How are decisions made? How much empowerment or micromanagement is there? Do aesthetics matter? Is the workplace competitive or collegial? Is risk rewarded or penalized? And this is just the beginning.

Integration of programs may take time. Integration of cultures takes much longer.

The message for funders is that they/we need to be quite cautious in our trying to be directive and helpful to our grantees. What may seem obvious from a slight remove may be less so from the inside. The funder may be right, but only if the funder allows for the merger process to work its way carefully and thoughtfully.

Observation 3. Efficiency is not always the same as Effectiveness

Efficiency and scale may not always be the most effective way to achieve an end. As we saw in “observation 1”, a merger may well lead to some external efficiencies. But if an entire constituency is abandoned because of it, is it always the most effective way to do things?

The pressure for scale and replicablity seems enticing. But only if the problem being solved is one that lends itself to scale and replicability. Food stamps work well because it is a large and easily applied solution; food pantries are much more dependent on local realities.

Funders much be careful to make sure that they are clear what problem they want to solve when they urge their grantees to scale up or to follow developed models. All too often programs and projects are viewed as cookie cutter solutions without adaption to local, regional, ethnic or cultural circumstances. Fortunately, among sophisticated funders this tendency has begun to ebb. But as the perception grows that good funding is to use leverage to encourage efficiency, there has been a surge among funders who haven’t had the depth of experience to know how and when to use this leverage.

Observation 4. Innovation matters

Innovation matters. But innovation only occasionally comes from large bureaucratic organizations [and is particularly true during these times of stress when organizations are doing all they can to stay afloat]. It is vital that there be as much commitment to continued innovation as there is to enhanced efficiency. Innovation and start-ups have a high failure rate, but the best innovation eventually becomes mainstream and predominant.

Let me be clear: I am not saying that funders should insist that they will only fund new projects even when it may be clear that the best grant is for operations or technical assistance. However, more than ever there are pockets of creativity that need start up or mezzanine funding. And while it may seem to be good practice to encourage these small free standing organizations to be adopted or absorbed or merged, funders who choose to encourage mergers and partnerships would do well to keep some of their funding dry to support start-ups on their own terms.

Certainly as every early investor knows, good exit strategy planning is key. There will be a time when the start up needs to sink, swim, swallow or be swallowed. Hopefully at the right time and not because of an externally motivated push for efficiency.

Observation 5. Courage to Explore

The first 4 observations might well be read as cautionary. I wouldn’t want a reader to assume that these cautions suggest a resistance to partnerships and mergers. In fact, quite the contrary. It is probably true that never before has there been a better time. Survival challenges focus the mind. It is time for many organizations and projects to drop their isolation and self-importance. It is time for many organizations to look more closely at whether their business model is really sustainable looking forward. It is time for many organizations, which claim a transcendent mission, to confront whether they really believe it – and accept that fulfilling their mission may require surrendering their own autonomy. It is time for many organizations which have done many more things than they could possibly do well to drop the mediocre parts of their portfolios – for their own and for greater good. It is a time for courage, reinvention, and honest self-examination.

The caution is to do these things right – or at least as well as humanly possible. But avoidance is not the same as thoughtful and courageous exploration. It is time for nothing less.
Read more!

MBA Ethics Oaths

Today’s Times reported that both Harvard and Columbia had instituted variations on a theme: an ethics oath for newly minted MBA graduates. It appears that Harvard’s is more voluntary but also requires a pro-active step; Columbia’s is built into the honors code and is assumed to apply for the entire career yet to be for all in the Columbia B-School orbit.

The article seemed to suggest that ethically driven financial wizards will restrain their greed for the greater good – because of the power of an oath. It is a well meaning and timely initiative. Who can criticize the welcome introduction of an ethics mandate in a curriculum committed to learning all the effective, efficient, innovative, and emerging ways to make money? Surely….

Teaching ethics is a necessary but insufficient way to imbue good behavior. Over 30 years ago, I taught some seminars in medical ethics at a medical school. They were well received and the discussions were lively and sincere. I am told that such courses and seminars are even more prevalent today. Yet, I regret to say, that over the years, I have come across a number of doctors, for whom that thinking was left at the academy gates. When challenged, they had plenty of exculpatory explanations, but it was clear that, when it might have mattered most, ethics was the furthest thing from their mind. Were it not for professional expectations and even laws which help mandate that ethics, however defined, are part of the system, one wonders how internalized these issues would be.

To return to our issue, I am one who believes that greed was not the driving force which led to the dismantling of the world financial order over the last 18 months. Greed isn’t new; it is not that many steps removed from attributes we respect such as ambition and drive. I am not at all persuaded that the Wall Street and hedge fund hotshots of the last era were greedier than their predecessors, or of most others not in the industry.

I do believe though that there has been a more perverse dilemma characteristic of the era we are concluding: and that is arrogance. Greed is having personal interest beyond reasonable expectation, even at the expense of others. Arrogance is that the rules don’t even apply, that one is above or beyond them.

How else to explain the push to dismantle regulation? How else to explain financial advisors who sit on non profit boards and push investments to their own firms, feeling that conflict of interest or prudent investor rules can be by-passed? How else to explain a sense of entitlement regardless of impact on others or even proven results?

We still have rules and used to have even more to limit greed; but arrogance defies easy legislative fixes. One hopes that the corrective of lost pride, wealth, and credibility will do what best practices and rules didn’t – bring a sense of propriety, humility, and balance to the next era. But to do so will require more than ethics oaths. If one doesn’t believe rules apply, what does an honor code mean? It will require a social expectation that judges such behavior, and boards which insist that they indeed do have a higher calling.

Some years ago, I had lunch at a famous restaurant with the scion of the wealthy family which had part ownership of this destination dining spot. There was a dress code for men – sport jackets or suits required. The scion chose to come in a dress t-shirt. The maître d quietly offered a jacket kept for such occasions. My young luncheon companion politely declined the offer – and then commented to me after the maître d was out of earshot. He confided, “Ownership should have its privileges.” Sitting there, I could imagine his father responding more emphatically, and with not a little bit of pique, “No, ownership should have its responsibilities!”

Ethics knows that there are rules; responsibility is knowing the difference.
Read more!

Courses for Funders and Philanthropists

It is a good time to reveiw the course offerings in Philanthropy for June and July. I am proud to be associated with courses at 2 universties offering these courses:

The NYU Academy for Grantmaking and Funder Education is the oldest and most comprehensive training program for funders, families, and philanthropists anywhere and the only University with a full certificate in Grantmaking. Summer courses include the Mini-Intensive for new Grantmakers, the introductory course, the course on how grantmakers can understand and utilize evaluations, a day long workshop exclusively for families, and Level II of the workshop on grantmaking strategies in this economic environment.

Penn is now offering a new week-long course on effective philanthropy. In cooperation with its Center for High Impact Philanthropy and a number of other organizations, this seminar will be Penn's first offering of what we hope will be many teaching funders.

I hope to see many of you at these educational offerings. Please see the websites on the left to register. Or be in touch off line for more information.
Read more!

Donor Intent - ask the hard questions early

Yesterday’s NY Times featured a helpful review of the thinking in our field about the relationship of funders and recipient organizations in honoring donor intent. It is always good to see colleagues Melissa Berman and Lisa Philips quoted, with their typical good judgment. The article summarized the current status of the legal issues and best practices regarding the right of the non-profit to interpret the intention of a funder, and the rights of the funder to make a subsequent claim on the organization. Well worth a read.

The article understated two very key components of this question which require further discussion:

Often, the dilemma of donor intent is that the funder has not adequately thought through what will be adequately gratifying about the gift. After all, just getting to a decision to fund a project is hard enough. A long-term gift often has no shortage of technical matters to work through – how much to give, when, etc. The recipient organization will try to anticipate what kind of recognition to give, an occasional source of tension, but surely of attention. A long term or endowment gift will inevitably yield an enthusiastic response built on the most optimistic read of what can be accomplished with the new funds. In this context, it is often hard to ask the funder to take a breath to ask a very straightforward question: what will make you pleased in 10 years or 20 years? What will make you displeased?

To my mind, it is the responsibility of the funder to think these things through prior to making a gift. The recipient organization can surely challenge these preferences, say no, or ask to renegotiate. That organization should assuredly affirm its values, priorities, practices and ethics – and clarify which of these are non-negotiable. [In an executive position I held some years ago, our policy was not to accept any capital/facility gift without an endowment component. It was hairy when we risked losing very large commitments but in the long run, it was the right policy and got better gifts because of it.] But to put the recipient organization in the position to have to second-guess what might be satisfying to the funder is wrong. It has been my experience that, when these questions are asked, they often make the funder uncomfortable, but yield a better and more satisfying grant.

The second issue that was not fully addressed by this article was donor intent for multi-generational giving vehicles such as foundations or donor advised funds. There is such a wide swath between “controlling from the grave” and providing no direction that the 2nd, 3rd and 4th generations often find themselves reacting to too strict guidelines or those that simply don’t exist. In my experience, so much time is spent addressing these questions when the control of philanthropic vehicles shifts to these generations that it is clear that opportunities have been lost. The issue here is not the tension between recipient organizations and funders but rather the ambiguous relationship and expectations between generations. If the guidelines are too strict, it functionally disenfranchises the future – why bother if there is no choice? And if the guidelines are non-existent, so much time is spent competing for who most authentically represents the family legacy.

Just as in the first case, the time spent clarifying these expectations early in the process obviates tensions later on, so the same should be true here. It is here where those of us on the philanthropy advisor side earn our fees. I am sure that Melissa Berman and Lisa Philips would concur that when we do our work well, we are not only helping funders give well, wisely, and strategically, we are also helping them help their families, heirs, and trustees be able to do equally effective philanthropy for years to come.
Read more!