Proposed: Foundations, Public Goods, Elites and the Formation of Civic Obligation

In late July 2013, the New York Times ran what would end up being a controversial op-ed piece written by Peter Buffett, the son of billionaire and noted philanthropist Warren Buffett. He wrote:

“Inside any important philanthropy meeting, you witness heads of state meeting with investment managers and corporate leaders. All are searching for answers with their right hand to problems that others in the room have created with their left. There are plenty of statistics that tell us that inequality is continually rising. At the same time, according to the Urban Institute, the nonprofit sector has been steadily growing. Between 2001 and 2011, the number of nonprofits increased 25 percent.”

What Buffett calls attention to is a profoundly troubling feature of society—inequality and philanthropy are growing together. There are, of course, a few ways to read this point. One, philanthropy is growing in response to the need created by poverty and inequality, two, philanthropy is ineffective at addressing need, or three, more cynically, philanthropy is growing without regard to need and is driven by some other factor. Buffett suggests this other factor in his op-ed saying that those who accumulate massive wealth justify their wealth by “sprinkling a little around as an act of charity.”

The various reads on Buffett’s point give rise to an important sociological question—to what does philanthropy respond that causes it to grow? Is it in response to growing economic inequality and the needs of the disadvantaged or does it arise from conceptions noblesse oblige? If the latter, how does a sense of civic obligation become part of an elite group identity? These questions are momentously important for our time.

Bolstering Buffett’s account of philanthropic growth, the US is currently experiencing a second golden age in American philanthropic regimes. Analogous to Andrew Carnegie and John D. Rockefeller are Warren Buffet and Bill Gates along with a host of others with immense net-worth and philanthropic foundations to their names. As shown in the figures, from 2001 to 2011, the number of family foundations in the US increased almost 1300%, from 3,219 to 40,456, the total assets held by these foundations increased nearly 240% from $124 billion to $294 billion, and the total amount given by these foundations increased around 300% from $7 billion to $21 billion (an average giving-to-assets ratio of 6.8%, or just over the legally mandated disbursement rate of 5% for maintenance of foundation tax status).

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Further underscoring the importance of studying the formation of philanthropic interests in family foundations is the fact that trust in the nonprofit sector is increasing while trust in government is at an all-time low (Pew). Though the nonprofit sector and public sector may both provide public goods, the nonprofit sector is distinct from the public sector in that it is noncoercive—it cannot force collectives toward common ends—and thus it relies on goodwill. The effective use of state power fades in tandem with trust in the state (Frumkin 2002) and the nonprofit sector rises to fill the gap. This can be described by the three-failures theory suggesting that non-profits step in where for-profit markets and government actions fall short (Steinberg 2006). This is due to consumers’ lack of faith that profit-maximizing institutions have consumers’ best interests in mind (Hansmann 1987) and the government’s failure to provide for the minority interests of the electorate (Weisbrod 1975). Voluntary organizations can fail too. They are prone to amateurism, paternalism and particularism (Salamon 1987), and some, such as the private foundations that I am studying, may be criticized as bastions of plutocracy (Reich 2013). Placing nonprofits in the role of providing for the public good raises questions about their accountability. But if foundations are stepping into the role of providing public goods—we must understand what drives these decisions. It has been suggested that there are competing hypotheses for how nonprofit allocations are made: it could be in response to the desires of those making decisions or it could be in response to societal need (Frumkin 2002). With the current growing trend of vast financial resources being set aside in long-term, donor-directed and tax-incentivized private foundations, it is imperative to scrutinize the decisions of these foundations in distributing their money for the public good. I propose such scrutiny be conducted through empirical research.

First, based on data provided by the Foundation Center (foundationcenter.org), I will conduct a basic exploration of the grant-making habits of independent family foundations. Where are they giving their money—which locations and which causes? Which sectors receive the most attention and which sectors are neglected? The Foundation Center’s data can be cross-checked and verified with additional data collected through the Urban Institute’s National Center on Charitable Statistics (NCCS; nccs.urban.org) which relies on a IRS-990 forms and shows revenues, expenses, and basic organizational activities for non-profits. Together, this data can show trends, both historically and currently, of growth, revenues and expenditures, including information on the sectors toward which expenditures are going.

The Bill & Melinda Gates Foundation, for example, with assets of  $34,640,122,664 at the end of 2011 and an additional $37 billion pledge from Warren Buffett can be examined through these data. Foundation Center data provide deep understanding of this and other organizations’ grantmaking activities and allows for the study of trends in foundational giving across sectors and time periods. Mapping the diffusion of grant-making trends through family foundations may reveal the underlying drivers of foundation grantmaking processes. A network analysis may show that particular organizations such as the Gates Foundation are trendsetters, directly or indirectly influencing the giving behavior of other foundations. This means understanding the decision making behind foundation grantmaking is all the more important, possibly contributing to a theory of why some societal needs are met while others are not. Likewise, this may help to answer Peter Buffett’s criticism of elite philanthropy. I hypothesize that there are gaps in philanthropic focus due to the way in philanthropic trends diffuse. This would suggest that philanthropic interests do not grow in lockstep with social need and may require greater regulatory oversight than they currently receive.

These data alone however will not sufficiently answer my set of research questions. To do that, it is necessary to conduct open-ended interviews within foundations to better understand how decisions are made. To accomplish this task, I propose the use of ethnographic methods in the tradition of organizational ethnography in which I both assess the formal organizational structures within foundations as well as the informal means by which decisions are made. Through ethnography and interview, my focus will be on understanding how decisions are made about where to invest, to what degree decision makers are assessing need in making these decisions, and to what degree money is being invested toward assessed needs. Are they following the lead of other, more prominent foundations, or are they charting new territory? I will be interested to find how philanthropic ideas and practices emerge and diffuse through organizations and individuals. At Stanford, I am in a prime location to conduct this ethnographic work—there are 2,498 foundations in the Bay Area, 108 of which have assets over $50 million dollars. There is ample opportunity to conduct research within foundations from my current location.

Together, the mix of quantitative and ethnographic methods will provide solid empirical ground on which to assess questions of how philanthropy responds and grows in interaction with society at large, and how the elites within foundations develop a collective sense of noblesse oblige—potentially seeing philanthropy as an outgrowth of a collective identity that involves civic obligation. Understanding how philanthropists and their foundations see themselves and their work will provide the basis of knowledge from which philanthropy can be better enacted, regulated, and more efficiently meet its stated goals of improving society.

To this end, I seek to disseminate my findings widely, both through philanthropic foundations, policy think-tanks, and the PACS Center at Stanford of which I am a member. Philanthropy is of growing interest in the social sciences and, as I have shown, of growing relevance in our society. I seek to contribute to the conversation about how it can be understood and harnessed for social good. The NSF GRFP would better equip me to play a role in this emerging academic focus.

Frumkin, Peter. 2002. On Being Nonprofit. Cambridge, MA: Harvard University Press.

Hansmann Henry. 1987. “Economic Theories of the Nonprofit Organizations,” In The Nonprofit Sector: A Research Handbook, ed. WW Powell. Yale University Press.

Reich, Rob. “What are foundations for?” Boston Review, March/April 2013.

Salamon, Lester M. 1987. “Of Market Failure, Voluntary Failure, and Third-Party Government: Towards a Theory of Government-Nonprofit Relations in the Modern Welfare State.” Journal of Voluntary Action Research 16:29-49.

Steinberg, Richard. 2006. “Economic Theories of Nonprofit Organization.” In The Nonprofit Sector: A Research Handbook, ed. WW Powell and Richard Steinberg. Yale University Press.

Weisbrod, Burton A. 1975. “Toward aTheory of the Voluntary Nonprofit Sector in a Three-Sector Economiy.” In Altruism, Morality and Economic Theory, ed. Edmund S. Phelps. New York, Russell Sage Foundation.

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