Who sets the agenda – funder or grantee? That’s the question posed by this edition of Alliance. To put the matter in the business vocabulary more familiar to philanthrocapitalists: how should (financial) resources be allocated to citizen sector organizations?

From developed countries, Luis Ubiñas and Wolfgang Hafenmayer make the case for strategic philanthropy – allocation decisions primarily driven by philanthropists, who focus resources, assemble professional teams, set measurable targets (though my former McKinsey partner Luis fully recognizes the danger of driving organizations through sets of purely quantitative measures) and develop clear plans to achieve them.

From developing countries, Sheela Patel, Bhekinkosi Moyo, Sheila Richards, Oscar Rojas and Santosh Samal make the case for a bottom-up process where funding priorities are set in collaboration with local citizen sector organizations and even involve the participation of local ‘beneficiaries’. They stress the need for local knowledge and, most importantly, empowerment of ‘beneficiaries’ to achieve social transformation.

Two insightful papers, by Barry Knight and Caroline Hartnell (for private philanthropy) and David Hulme (for official aid), remind us of the constant tension between these two forces – strategic/reactive, top down/bottom up – in the donor community.

Clearly, something is wrong when both sides of the deal are unhappy. Citizen sector organizations complain about the high costs of raising funds, donors’ arbitrary reporting demands, the impossibility of raising funds for core costs. Donors complain about the difficulty of identifying good projects, weak management teams, lack of business plans and measurable targets. New thinking is needed to ensure financial resources are allocated to citizen sector organizations more effectively?

What can we learn from capital markets?

We should recognize, first of all, that achieving social change is not only about allocating financial resources, as Michael Edwards has eloquently pointed out in his new book. My five years with Ashoka have convinced me that social capital is more important than financial capital in effecting social change.

It is nevertheless worth considering whether the way markets work can inform our thinking about how social change should be funded. In business, capital allocation is achieved through capital markets, which regulate ownership of companies and manage the relationship between financial investors and entrepreneurs who need capital to fund their ventures. Three major developments have interesting implications for the social sector.

• Over the last 30 years, the increased dynamism of the market for corporate control has dramatically changed the structure of capitalism, dismantling conglomerates and shifting the focus to the quality of investors/owners rather than of the entrepreneurs/businesses invested in. Foundations, too, need to ask themselves whether they are good or bad investors, and which social entrepreneurs they can add value to. Matthew Bishop says that ‘the rich need to be accountable for the results of their philanthropy’. But if they don’t have to raise funds, how can they be accountable? Donors are the sole judges of their own performance. Philanthropy is an industry with low barriers to entry, low competition intensity and high barriers to exit. This is not a good prognosis for performance.
• At the root of the wealth of philanthrocapitalists are the very favourable terms they have managed to obtain from their financial investors. Shouldn’t they be the first to recognize that (social) entrepreneurs are the scarcest resource in the social change equation?
• Very few individual investors directly own shares. A fast-growing and diverse industry of intermediaries has developed – venture capital and private equity firms, fund managers, hedge funds, etc. All are led by small teams of highly skilled professionals with clear strategies who raise money from investors based on their track record and strategies. Aren’t social investments sufficiently complex to warrant the involvement of sophisticated intermediaries? Despite the rapid growth of organizations like Acumen, Ashoka and New Profits and the emergence of new players like BonVenture, Impetus and Wise, the intermediary industry remains small. A primary reason is that most foundations, due to lack of competition, remain vertically integrated: one donor channels all his or her giving through one professional team, which in turn gets all its funding from this donor.

Towards a new architecture
 
Based on the above, here are some personal thoughts about the architecture our sector needs to develop to ensure a better allocation of financial resources to social change.

Sustainable citizen sector organizations

First of all, to achieve sustainability, citizen sector organizations need to recognize that not all donors are alike. Some donors will behave as ‘customers’, happy to continue to give money as long as they see change they care about taking place, while others will want to behave as ‘investors’ – ready to take risks to fund a new venture based on the quality of a team and strategy but setting clear time limits for their involvement. Alex Pryor’s Guayaki is a good example of an earned income model but sustainability can also be achieved by creative fundraising that targets donors willing to behave as ‘customers’, as Médecins Sans Frontières has successfully done with the general public. Achieving some level of sustainability is indispensable if citizen sector organizations are to have an adult relationship with ‘investor’ donors.

Large foundations kept accountable by competition

There will always be a role for very large foundations with the resources needed to develop and implement aggressive, top-down strategies. The accountability of these large foundations is critical to our democracies. Accountability demands consequence. I believe that competition between foundations is a prerequisite for such accountability. Donor collaboration can be immensely useful if it is focused on building common infrastructure for the industry (reporting standards, for instance), but it should not lead to the creation of informal ‘cartels’. Diversity of donors is key to ensuring a fair functioning of the donor-grantee market and competition among foundations for additional funds is probably the best way to achieve this. For example, if foundations wanting to benefit from tax incentives had to spend 10 per cent of their assets each year so they were forced to raise further funds if they wanted to maintain asset and spending levels, they would have to compete for funds with other foundations on a regular basis. David Hulme makes a strong case for competition among donors when he describes how, despite immense resources and skills and best intentions, the international development ‘community’ has failed to turn ‘recipient’ countries into ‘partners’. He points out that, with the emergence of China, and to a lesser extent India, on the ODA stage, the resultant competition ‘could mean that developing countries get more control over determining how aid will be used’.

Networks of engaged philanthropists

An attractive feature of ‘new philanthropy’ is the growth in numbers of individual donors who want to get personally engaged. Many of these ‘hands on’ investors recognize that joining a network of peers enables them to be more effective in identifying the best organizations to engage with and allows them access to state-of-the-art thinking and like-minded investors. In Europe, the European Venture Philanthropy Association is playing a lead role in building these networks, inspired by some US-based precursors such as Social Venture Partners. Ashoka has created its own rapidly growing support network, now consisting of 160 business people who support Ashoka Fellows financially and with their skills and networks.

A diverse industry of professional intermediaries
 
Finally, the sector needs intermediaries to channel financial resources from donors who do not have the wealth to set up an effective foundation or the time or skills to become personally engaged. The challenge is to get these donors to recognize that, while creating their own foundation might provide short-term satisfaction, the best way to effect social change is to trust professional teams to do so. Thus, Warren Buffet’s decision to trust his wealth to the man he considers ‘the best in the business’ is to be applauded. Efforts to provide transparent information to donors will never suffice and can be counterproductive if they reinforce donors’ belief that they can judge an organization’s performance from an analyst’s report. Who would advise the average retiree to invest his or her pension directly in the stock market? LGT’s model (‘once everything is up and running we will offer the foundation’s services to our clients and to interested third parties’) is also promising, providing an interesting variant on the model developed by intermediary organizations such as Acumen, Ashoka or Impetus. The three southern foundations contributing to this issue also stress their role as key intermediaries.

Sustainable citizen sector organizations, large foundations kept accountable by competition, networks of engaged philanthropists and a diverse industry of professional intermediaries. Here are the pillars of what could be the new architecture for our field.

Olivier Kayser is a guest editor for this issue of Alliance. He started his career creating a consulting firm serving French public sector clients. He then joined McKinsey; based in France, the US and China for 18 years, he was eventually elected a Senior Partner. He joined Ashoka in 2003 as a Senior Adviser. Email Olivier@olivierkayser.com