Impact Philanthropy

Nov 01, 2012

Exciting new forms of giving are enabling donors to match their desire to do good with a drive for measurable, businesslike results.

Two years ago, a mental health nonprofit looking for funds to renovate its headquarters building called on a family foundation based in the Midwest. It appeared to be a natural fit. The nonprofit was engaged in important work that aided poor, infirm residents in an area of the country that the family's late patriarch, the founder of the foundation, had specifically wanted to help. Initially, the foundation was concerned about the lack of business expertise reflected in the charity's proposal, even though the organization clearly meant well. After a bit of further due diligence, the picture grew worse. "We analyzed the proposals and numbers, and things were not adding up — literally," says Miki Akimoto, a market philanthropic director for U.S. Trust's Philanthropic Solutions Group, which helps administer the foundation. Indeed, it turned out there was some question as to how many more years the charity could survive.

What to do? An entrepreneurial culture had long permeated the family as well as its foundation. So rather than reject the charity's application out of hand, the foundation offered to provide something it felt the charity needed more urgently than simply a lump cash sum, no strings attached — a thorough business analysis by outside experts, and then the careful construction of a long-term fiscal plan. The process helped the nonprofit not only to resurrect itself financially but also to create a new, more focused and more practical approach to its work. Full-scale renovations to the organization's headquarters were put on hold in favor of dedicating funds to a new program — providing in-home health services for needy patients across the region — that is actually beginning to generate income for the charity.

The tack taken by this particular foundation is emblematic of a growing trend in philanthropic circles. While some donors may prefer the ease of simply writing checks to organizations they know and trust, an increasing number of givers are behaving more like financial backers in the private sector than traditional benefactors. Like venture capitalists or angel investors, these donors take a vested interest in where the money goes and how successfully the recipients pursue their stated mission. A term has even been coined to describe the best practices of this entrepreneurial breed of giver: "impact philanthropy."

One of the prime motivators of this movement is the simple utilitarian desire to understand where one's charitable dollars might do the most good. Headlines about irregularities at a few charitable groups, among other factors, have spurred high-net-worth donors to become even more diligent and strategic about their philanthropy. It's noteworthy that in the recently-released 2012 Bank of America Study of High Net Worth Philanthropy, conducted in partnership with the Center on Philanthropy at the Indiana University, 71% of high-net-worth benefactors reported having a strategy for their giving in 2011, and 61% said they are operating within a budget. Meanwhile, the same advances in technology that have enabled people to leverage their talents and money in so many other fields have given philanthropists a new sense of possibility. Sitting at home while on their computers, givers now have the ability to go beyond traditional acts of generosity, such as contributing to their college or building a hospital wing, to effect real global and social breakthroughs — combining their generosity with the entrepreneurial spirit they've long cultivated.

Not surprisingly, many young entrepreneurs have gravitated to impact philanthropy, particularly those from the tech sector. Eager to use their energy, creativity and newfound wealth to move the needle in any number of areas, they are in many ways helping to define the movement. "They're full of innovative ideas about how business and philanthropy can work together," says Danielle York, a director at 21/64, an advisory firm that works with young givers on their "strategic philanthropy." But it's not just youthful entrepreneurs. The movement encompasses a whole spectrum of givers that are applying business-world wisdom to their charitable endeavors, from large benefactors and old-line family foundations, like the one in the Midwest that helped the mental health charity, all the way down to individuals donating in increments of a hundred dollars or less, pooling their funds via innovative Internet-based crowdsourcing platforms like The overall trend has entered the zeitgeist, influencing even donors who give in more traditional ways. Almost as a matter of course, charitable acts of all varieties are now preceded by at least some level of due diligence and performance analysis of the nonprofit receiving one's hard-earned dollars, says Claire Costello, National Practice Executive, Philanthropic Solutions group, U.S. Trust. "In recent years," she adds, "donors have grown markedly more sophisticated."

Finding Focus

Plenty of resources are available for those interested in entering the world of impact philanthropy. The University of Pennsylvania's Center for High Impact Philanthropy, for example, is a clearinghouse for best practices and research on causes ranging from education to the global fight against infectious disease. "There are just so many more resources available today to help donors get up to speed," Costello says.

Part of Bank of America, U.S. Trust's Philanthropic Solutions Group works with clients across Merrill Lynch and U.S. Trust to help build and sustain their charitable missions. A large part of the job is helping potential donors take advantage of resources like Penn's Center for High Impact Philanthropy in developing their strategic philanthropic plan. But even before that important step, Costello and the Philanthropic Solutions team can help clients discern their own values and sharpen their goals to figure out what causes interest them, and how best to get involved.

"You've got to be passionate about the organizations you're giving to," Costello says. "If you're not fully engaged, the impact will not follow, at least not readily." Adds Mark Kramer, a founder of the nonprofit consultancy FSG Social Impact Advisors and a senior fellow at Harvard's Kennedy School of Government: "You have to pick a problem that really matters to you, because it's one you're going to need to stick with for years. Change doesn't always happen quickly."

The process of defining your personal high-impact philanthropic mission includes finding a cause where your donations and efforts can be most efficiently used to generate the greatest eleemosynary yield — what some call a "social return on investment," or SROI. Take diseases in Africa. As worthy as AIDS vaccine research undeniably is, a philanthropist looking to make a measurable impact in disease relief in the developing world might choose to focus instead on lesser-known health problems in Africa that still do enormous harm. Neglected Tropical Diseases (NTDs), the term for a class of mostly parasitic diseases all but eliminated in the first world, cause immense suffering and economic loss despite the existence of several inexpensive and highly effective treatments. Deworming a single school-aged child in Africa, using a drug called albendazole, costs less than $1. A multi-drug combination, costing less than $2 a year, treats multiple debilitating infections. With drug companies largely donating the needed medications, a philanthropist might consider financing health education and the delivery and administration of the drugs, says Donald Hopkins, vice president for health programs of the Carter Center, a leading coordinator of such efforts that was founded 30 years ago by former President Jimmy Carter and his wife, Rosalynn. In other words, dollars donated to fighting NTDs "go a very, very long way." says Hopkins. A child protected from these easily treatable diseases is a child that has a far better chance of becoming a healthy and productive adult. And if $100,000 can treat as many as 500,000 children a year, it could mean an improved quality of life, and greater hope, across entire communities.

Measuring Impact

According to the National Center for Charitable Statistics, there were 102,146 arts and culture nonprofits based in the U.S. in 2010, 157,334 dedicated to education, 88,605 focused on human services — and more than 1 million in all. Which is to say, no matter how narrowly potential donors focus their search, they will confront a significant problem: how to choose among multiple organizations, each one staffed with dedicated people working hours upon hours to do great things. It's one of the reasons donors are increasingly relying on metrics and analytics to help quantify the results achieved by nonprofits. The trend has become entrenched enough that nonprofits have come to expect it. To attract donors, they realize that they need to show, with data, the extent of the direct impact each dollar would have on a given social goal.

Michael Weinstein is the chief program officer of the The Robin Hood Foundation, an organization founded in 1988 by Paul Tudor Jones, then a 30-year-old hedge fund manager, to focus on providing financial support to antipoverty groups in New York City. Weinstein says the organization began using metrics in its early days. Though well funded, Robin Hood didn't have unlimited resources; it had to make tough decisions about which nonprofits to support. And so, Weinstein says, the organization needed to formulate a rigorous method to assess which programs delivered the most impact. For example, for charities that train chronically unemployed individuals to find and keep work, Robin Hood's metric focuses on how much the program helps boost the worker's future income. Using that information, Robin Hood estimates which job-training programs impact incomes the most for each dollar that it spends.

It's a difficult estimate to make, to be sure. Perhaps the reason that graduates of Program X earned less than Program Y is because the latter taught fewer students with learning disabilities. In their decision making, Robin Hood looks at factors like these and tries to determine how much the program has improved the lives of the participants, compared with if they had never enrolled. Even then, Weinstein stresses that hard numbers are only one input for complex decisions that also take into account many other factors about each charity. He likens metrics to a standardized test that might help a college admissions staff assess an applicant, even as the student's essay, grades, extracurricular activities and other factors also play a big role. "We never, ever make a decision based just on arithmetic," he says.

Gaining Leverage

Once a donor has found a cause and the best organizations involved in tackling it, the real entrepreneurship begins. Many impact philanthropists, no matter the size of their giving, face an issue that's also common in the for-profit sector: the need to scale up. This is especially true if you're somewhere below the size of the Gates Foundation. With limited monies, how can you juice your philanthropic returns?

There are ways. One of the best is through donor collaboration, in which funds from a variety of smaller givers are pooled together. As crowdsourcing on the Internet has shown, getting together with like-minded souls can leverage the talents and resources of a group in order to have a much broader reach than any individual could alone. "A pooled fund of $1 million is going to have a bigger impact than separate checks of $100,000 from 10 different donors," says U.S. Trust's Akimoto. The seven-figure gift can make a major impression, energizing a nonprofit and generating publicity that can, in turn, pull in other large contributors. It also gives the donors greater leverage when it comes to influencing how the money is spent.

Miki Akimoto and Christine O'Donnell, a fellow market philanthropic director in the Philanthropic Solutions Group, have recently helped a number of clients find and join such pools. They point to one that funds a new preschool program in Brooklyn, and another that supports summer camps for underserved youth in the Boston area.

Less formal than foundations, collaboratives don't need to be registered nonprofits. Members often simply write their checks individually so they can claim their charitable deductions on their tax returns. In other cases, where the groups want to make their contributions in a lump sum, they'll usually get an IRS-recognized charity to act as its sponsor so members can still claim their deductions. The clients supporting the Summer Fund Boston summer camp program, for example, established their fund under the auspices of Associated Grant Makers, a Massachusetts-based association of foundations and corporate giving programs.

Scale and leverage can also come from how you structure a gift — a concept similar to the ways in which deals are structured in the private sector. Donors can use challenge grants, a time-tested philanthropic model, to make their contributions contingent upon other people's donations. Akimoto, for example, once set up a $75,000 grant to benefit a successful program at a college to help first-generation students from low-income families. Concerned that the gift, if funneled directly into the program, would be of only temporary benefit, the foundation stipulated that the gift, plus a required matching contribution from other sources, be used to launch a permanent fund for generations of students to come.

Another way to structure a donation — and leverage its power — is to limit the duration of support. If a recipient has the clear understanding that your donations will continue for just two or three years, the group may be moved to show rapid results and to cast a wider net for other donors. You might also stipulate that continued support depends on achieving certain performance benchmarks, such as a reduced level of early infant health problems, training for mothers or higher academic test scores for participants in an after-school program.

At the same time, being too hard-nosed in demanding quick results may backfire, Christine O'Donnell warns. In attempting to leverage a gift so that it does the most good, strings are invariably attached. But there are good strings and there are bad strings. If donors have unrealistic expectations, they may inadvertently disrupt the operations at a charity that is forced to scramble to meet those excessive demands, undercutting the core mission. Furthermore, says Costello, donors need to recognize the importance of the gift with no strings attached. Not every dollar given to a charity can go toward the food that feeds the hungry child. Traditional no-strings donations help pay the electricity bills and the salaries of workers who have often sacrificed the opportunity to pursue careers in far more remunerative professions. "You can't always be so strategic and proactive about giving," Costello says.

Indeed, the best kinds of strings are often those that allow you to gain an intimate enough understanding of an organization's operations to figure out just how much to demand, and how much not to. Bill Eaton is a Merrill Lynch Financial Advisor who participates in the Boston chapter of a group called Social Venture Partners. A national organization started by a group of Seattle philanthropists, Social Venture Partners matches financial gifts with a commitment by group members to donate their expertise and time. In that sense, they are similar to the angel investing networks in the private sector that frequently insist on an active two-way dialogue with the startup ventures they nurture through their earliest stages. "We might give an organization $30,000," Eaton says. "But the monetary value of what we bring to the table, in terms of professional expertise and time, could be more like $300,000. We're saying, 'In return for our money, you're getting us too. We're going to take the time to get to know you and get involved with you.' "

Where Philanthropy Meets Business

If the basic goal of impact philanthropy is to find a way to make each donated dollar do the most good — to leverage one's giving — then the ultimate method for achieving that goal sometimes involves the profit motive itself. It is both controversial and, in some cases, experimental, but an increasing number of philanthropists have come to believe that certain elements of the private sector — the mechanisms of the free market, the ability to mobilize large sums of money — can boost the impact of charitable works by an order of magnitude.

This might be especially the case when it comes to some of the world's biggest and most intractable problems. In part, that's the idea behind research-and-development prizes. Probably the best-known recent effort along these lines was the X PRIZE Foundation, in which founder and entrepreneur Dr. Peter H. Diamandis, frustrated with the lack of attention at the federal level to furthering commercial space travel, offered $10 million to the first private company or group to develop and launch a reusable space vehicle that could withstand two trips to space within two weeks. The Ansari X PRIZE, which was won by Mojave Aerospace Ventures in 2004, ignited a wave of aerospace startups and technological breakthroughs. The foundation, which looks to private funding for its competitions, has since ventured into other areas in need of technology advances, such as the life sciences, education and global development.

There can be problems with this model, however. No matter how large it might be, a prize cannot guarantee a breakthrough if there isn't the infrastructure in place or the seed capital available to get the initiative off the ground. In such cases, the prize money can just sit there, doing little work. But that's where a new bleeding-edge form of impact philanthropy known as social impact bonds may be able to help. Instead of simply trusting the private sector to figure out how to get from A to Z, social impact bonds actively engage the same capital market structures relied upon by startups and more mature companies to raise their funds. The concept began as a way for cash-strapped governments in Great Britain, Australia and elsewhere to accelerate the scaled development of proven, innovative social programs. Recently, for example, in the first social impact bond offering in the U.S., Wall Street investors put $10 million toward combating recidivism among convicts at the New York City's Rikers Island prison complex. If the programs the investors funded succeed in cutting recidivism rates by more than 10% over the next four years, the city has agreed to pay back the investors' investment, plus a rate of return of about 20%. If the programs fail to meet the goal, the investors lose about a quarter of the principal, with a private foundation agreeing to step in to guarantee the remaining losses. In the end, these instruments potentially allow governments to scale successful social programs more quickly, without having to put their own money at risk.

Now, Guillermo MacLean, a director with Merrill Lynch Wealth Management, is among those looking to use social impact bonds not just to help governments fund worthy programs but also to underwrite causes wherever they exist. Having spent years working to set up similar financial structures to improve housing and sanitation in various parts of Asia, Africa and South America, including his native Peru, MacLean is preparing to put out the word to major donors — and smaller givers whose pooled money would amount to large sums — to enter into commitments to put up sums of money that will be awarded upon the realization of similarly elusive and compelling social goals. The idea is for Merrill Lynch then to take those commitments out to the capital markets and put the proposition to the private investor community: How much might they be willing to put at risk now in an attempt to eradicate deaths from hospital-borne infections in the U.S., or to raise math and science scores in Cleveland by 50%, if there is an opportunity to earn $100 million in 10 years' time if the dream is achieved? "These types of social impact bonds involve the transfer of risk, just like any investment," MacLean says. "We're transferring risk from the philanthropist who is willing to give away a large sum of money, but who wants some guarantee that the money will achieve the stated goal, to the socially minded investor who is willing to take on more of the risk upfront as long as he has an opportunity for a sufficient rate of return."

If the vision of MacLean and others comes to fruition, he says, a liquid market could be developed — an exchange — where philanthropic commitments could be traded and social initiatives could be floated and securitized like newly issued shares in an IPO, presumably rising in value the closer they get to achieving their goal.

As exciting and auspicious as these hybrid models are, for-profit systems can never fully replace philanthropy. For securitized social commitments to work, the people on the philanthropic side of the ledger have to be willing to give their money away; even though such instruments directly tap the profit motive as a means to an end, they will always require that basic human quality — generosity. But there's something more to it. After all, it can be said that the act of striving to produce the greatest good for each gift is in in itself an act of generosity. When givers use social impact bonds to make their dollars go as far as they can toward curing a problem, they are acting on the core promise of all impact philanthropy: to see that the altruistic spirit is maximized.

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