Investing in Local Business to Get an Even Break

The other level is tactical — by systematically analyzing where their investments are held and how they are giving away money, leaders learn how to get ruthlessly honest about where their foundations are failing to live up to their values. Sarah Kinser, the chief program officer of the Arkansas Community Foundation, was surprised by the process: “I expected to find a step-by-step recipe for transitioning our portfolio, but the Foundation Circle helped me realize that there’s no one-size-fits-all approach.”

But that doesn’t mean the Circle’s members can’t be helpful to one another; to the contrary, they create a support group as they go back to their home institutions and try to change them. This, not the accounting, is often the hardest work. It often involves a lot of pushback from boards, attorneys and others who are accustomed to the old ways. Ms. Kinser explains: “The members of my cohort are supporting one another in discovering ways forward that are specific to the needs of the communities we serve and the organizations we represent. It’s more difficult, but it’s more authentic and, I believe, will be more effective in the long run.”

Many of the leaders go back to their institutions and do an audit of where their endowments are invested, then disinvest from companies that don’t align with their values and invest instead in local efforts like affordable housing developments, work force development programs and small businesses. To date, foundations involved in the program have committed to reallocating over $100 million into their communities and mission-aligned investing.

In some ways, that’s a drop in the bucket when compared with the larger philanthropic sector. In 2014, nearly 90,000 foundations operating in the United States reported giving away about $60 billion; they are legally required to give away just 5 percent of their assets each year. Much ink has been spilled analyzing the failures of various grand philanthropic gestures, like Mark Zuckerberg’s $100 million investment in the Newark public schools. But rarely do we hear about another, even more significant number: in 2014, those same foundations reported holding $865 billion in assets. In other words, we hear a lot about the 5 percent of foundation dollars actively at work, but almost nothing about the 95 percent that could be working.

Typically, foundations have operated with a sort of church-and-state mentality about their money and how it is handled — one set of people (finance guys) manages the money according to one set of values (creating profit), while a different set of people (do-gooders) donates the money according to another set of values (an equal start for everyone). Foundation leaders are evaluated, in large part, on the growth of their assets. But members of the Local Economy Foundation Circle are questioning whether growing, or even maintaining, wealth is even ethical.

The Heron Foundation, which is dedicated to helping people get out of poverty, is one of the leaders in this regard. In 2012, its then-president, Clara Miller, wrote: “Business as usual — with respect to both strategy and the way we operate as a foundation — is no longer an option.” She and her staff audited their entire $270 million endowment. They found that only 44 percent of the companies they were invested in actually aligned with their values. Today, after withdrawing funds from companies like CoreCivic, the largest operator of private prisons in the United States, formerly known as the Corrections Corporation of America, that number is an impressive 100 percent.

It wasn’t easy. In a reflection on the lessons learned for Stanford Social Innovation Review, Ms. Miller explains: “We looked underneath the traditional ‘asset allocation’ view — equities (stock), debt (bonds), real assets, alternatives and so on — to get visibility into the enterprises and projects that give these assets value. This practice has been labor intensive, but has sharply improved the integrity of the underwriting and monitoring of our holdings.”

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