These kinds of subsidiaries, of course, are not without risks. A cautionary tale comes from the Milwaukee YWCA, where the director, Julia Taylor, had distinguished herself as a model entrepreneur. Between 1986, when she began her tenure, and 2002 she had developed a variety of for-profit businesses, including a computer software company and a plastics factory, to expand the organization's budget nearly 100-fold. The collapse of these subsidiaries in 2003 left the YWCA saddled with millions of dollars of debt. Taylor herself was one of only two board members overseeing the computer software company, and she paid herself stock options (ultimately worthless).

Minnesota Public Radio's sale of its mail-order catalogue business to Dayton Hudson Corporation for $120 million was also controversial. The deal was executed by the Greenspring Company, a for-profit subsidiary whose executives--including William Kling, who is also president of the nonprofit MPR--are expected to pocket $7.3 million personally.

What made Taylor's and Kling's actions ethically problematic was not that they acted entrepreneurially but that each kept one hand in the nonprofit while putting the other in the pocket of the for-profit. Nonprofits must operate at arm's length from related revenue generators, with different management, staff, activities and cultures. And personal enrichment of any person within the nonprofit must remain strictly prohibited. But the examples above also suggest how nonprofits, if they are careful about how they structure the relationship, can use sister companies to become more financially independent without drifting from their mission.

Foundations that really believe the mantra that grantees become more self-reliant should support these efforts, but to do so they must overhaul the way they do business. Today the typical foundation usually spends 5 percent of its assets annually on do-good nonprofits--the legal minimum--derived from investing the other 95 percent in do-bad for-profits. In a recent interview, Mark Dowie, author of American Foundations: An Investigative History, said the Pew Charitable Trusts, "the largest environmental grant maker of all the foundations, was earning more money in dividends from the nation's largest polluters than they were giving to the environmental movement."

The Hewlett Foundation's in-house scholar on entrepreneurial philanthropy, Jed Emerson, finds the skewed use of foundation resources indefensible: "Imagine a baseball team manager choosing to send just two of her three dozen players through the rigors of spring training, regular practices and coaching. The rest of the team members would be enrolled in 'anti-training,' in which they'd be encouraged to park on the clubhouse couch all day watching Dukes of Hazzard re-runs."

Foundations need to start investing a greater percentage of their asset base in businesses aligned with their missions. The good news is that IRS law allows "program-related investment" (PRI) losses to count toward the minimum 5-percent-per-year payout. Consistent with its mission, the F.B. Heron Foundation now uses PRIs to invest $42 million of its $226 million asset base in housing, real estate and other community-development enterprises in low-income neighborhoods. These investments thus far have performed as well as the foundation's remaining assets, and, in Emerson's view, illustrate how a foundation has put "more than four times the annual grant assets...at work." [Emphasis in original.]

The total percentage of foundation asset bases being invested in PRIs right now? An embarrassing one-tenth of 1 percent.

• « Previous
• 1
• 2
• 3
• 4
• 5
• 6
• 7
• Next »

• Get The Nation at home (and online!) for 75 cents a week!
• If you like this article, consider making a donation to The Nation.