The high cost of running a foundation

Posted: Apr 19, 2007 12:01 AM
The high cost of running a foundation

Charitable foundations play a large and important role in American life. Beginning well over a century ago with the creation of charitable foundations by several very wealthy men, they have enriched our national life in many ways.

John D. Rockefeller Sr., Andrew Carnegie and Henry Ford were among those leading the way, but they have been followed by literally thousands of others who have seen to it that their wealth served purposes far higher than merely enriching their children.

Almost from the start, however, problems arose when control of these foundations passed from their founders to trustees in the oncoming generations. Henry Ford had pronounced views on all sorts of things, and intended to promote them in suitable charitable ways through his foundation. But the hijacking of the Ford Foundation by its subsequent directors, and the activities it has promoted since his death, have become the textbook case on what can happen when a foundation falls into the hands of people not particularly interested in carrying out the donor's intent.

This problem of the "donor's intent" has quite properly become the central focus of attention in discussions concerning charitable foundations. The donor had at least a vague idea, and often a quite explicit one, concerning the purposes to which he wanted his foundation put. But when he passed on, it often turned out that one of his nephews on the board of trustees had very different thoughts on the subject. And if, as was often the case, the trustees included, or came to include, distinguished professors of one sort or another, these too often had ideas of their own concerning the uses of the late donor's money. You can see the potential for conflict.

But there is another aspect of foundation management which, it turns out, is also susceptible of abuse, and recent developments suggest that this matter, too, deserves looking into. The Foundation Management Institute, which (as its name suggests) keeps an independent eye on how foundations are run, has found some disturbing figures in the tax returns submitted by various big foundations for 2005.

It isn't that foundations are doing badly. On the contrary, all is going exceptionally well. The problem is with how much the management of these institutions is costing.

Thus, Robert Wood Johnson's charitable contributions for 2005 were a majestic $419 million. But the "administrative expenses" required to distribute this largesse totaled $69 million. Kellogg contributed $285 million, but chalked up "administrative expenses" of $65 million. And the Rockefeller Foundation, in the course of giving away $148 million, found it necessary to spend $36 million on -- you guessed it -- "administrative expenses." In other words, as the Foundation Management Institute put it, "the staff gave one dollar to itself for every three dollars it contributed to charity" -- a handling charge of 24 percent.

Now, nobody wants the staffs of important foundations to live in penury, and there is no question that the sound administration of organizations that give away tens or even hundreds of millions of dollars a year requires oversight that can be expensive. But are such enormous "administrative expenses" genuinely justified?

One comparison is certainly suggestive. The Walton Family Foundation managed to give away $232 million in 2005, while charging expenses of only $2 million. As Neal Freeman, Chairman of the Foundation Management Institute, remarked, "Ol' Sam would be proud of that 1.2 percent mark-up."

It would certainly seem to be high time that somebody -- perhaps the IRS? -- told major foundations that their expenses will henceforth be examined more closely, lest the charity that the administrators bestow on themselves threatens to outstrip what they manage to give away.