Alliance@PND

Through an agreement with UK-based Alliance magazine, PND is pleased to be able to offer a series of articles about global philanthropy.

Why We Need to Talk About Payouts

Why We Need to Talk About Payouts

In the December 2016 issue of Alliance, Cathy Pharoah noted that, despite calls for a mandatory payout ratio, little evidence has been produced that mandatory payouts would lead to greater effectiveness. In fact, there is plenty of anecdotal evidence from the U.S. that imposing a mandatory rate leads to foundations pushing money out the door without much regard to whether it's put to good use.

It's also possible that a mandatory ratio ends up a sort of de facto ceiling rather than a floor. Given this, and coupled with the need to respect foundations' independence, we at New Philanthropy Capital do not believe the UK should impose a mandatory payout ratio.

But we do need more discussion of how much foundations are giving away and more transparency around their reasoning and actions. While the data in this area can be problematic and needs to be treated with care, our analysis found that among the top fifty UK foundations by assets, the range is huge. Plenty are spending more than 10 percent, but more than half of the top fifty have given away less than 5 percent over the past three years. And three of the top fifty gave away less than 1 percent.

Perhaps there are good reasons for that: a foundation may have overspent in previous years — on a major capital project, for example — or perhaps it's in the midst of a strategy review and has put its grantmaking on hold. Still, the data certainly raises questions.

There is no magic number for the "right" payout ratio, and inevitably it will vary. Indeed, settling on a ratio is a complicated and multifaceted decision involving difficult calculations such as how much good can the money do today compared to what it might do if spent in the future.

The recent success in developing an Ebola vaccine shows what can happen when funders are galvanized to put money behind a big bet in the short term. And in early intervention areas such as child care, a higher payout ratio makes sense due to the obvious benefits. But if you fund social infrastructure such as education, green spaces, or the arts, you may want to ensure your resources will be around to provide for these things decades from now.

Payout ratios are also about confidence in the future: Do you think society is likely to generate additional wealth in the decades to come to address problems that have yet to emerge? Or should we put money aside to help future generations' address those problems? People are of two minds about this, but hiding behind a pessimistic vision to justify a low payout ratio surely is something that should be questioned. Trustees are not just fiduciaries of a foundation's assets, they are also guardians of its mission. Unless a foundation or trust is permanently endowed, its payout shouldn't simply be a function of the return it earns on its investments.

Over half of respondents to a survey of UK foundations said that less than half of their assets were permanently endowed, suggesting that there is more scope for foundation trustees in the UK to think about how much of the assets they are stewards of can be put to work.

Because charitable foundations receive tax breaks in return for providing a public benefit, it seems entirely reasonable that they should explain in their annual reports the basis for the decisions they make about how much they give each year. In the UK, we urge the Charity Commission to take steps to encourage this kind of transparency as it revises its reporting guidelines in 2017. To do otherwise will only make it easier for critics to assume that foundations are warehousing assets that could be better used to help people in need.

Angela Kail is head of funding at New Philanthropy Capital.