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Foundations’ 21st-century obligation: Align your endowments with mission

Philadelphia. May 23, 2019 Category: FeaturedFundingLongMethod


This is a guest post by Laura Kind McKenna, a trustee and board treasurer of the Patricia Kind Family Foundation. She was the managing trustee of that foundation from 1998 through 2016.
In the United States, eighty-seven thousand foundations collectively own approximately $800 billion in assets.

Each year, these foundations — financial institutions established for the public good — have a federal obligation to give just 5% of those assets toward achieving their mission. The remaining 95% of assets are traditionally invested in Wall Street, to preserve and grow the foundation’s endowment and, consequently, ensure their capacity for philanthropic giving in perpetuity. In other words: foundations generally invest 5% for mission-first outcomes and 95% for finance-first outcomes. It is my resolute belief that challenging and changing this status-quo is not only philanthropy’s greatest 21st-century opportunity but our most critical obligation.

In the face of today’s intractable challenges — from Philadelphia’s 26% poverty rate to our nation’s rampant wealth inequality — many philanthropic leaders are awakening to philanthropy’s moment of reckoning. As it’s increasingly clear that the sector’s risk of collective inaction far outweighs the risk of any individual foundation’s action, leaders across the country are stepping up to model a new path forward. That path is commonly referred to as mission-aligned investing, investments that align with mission while also providing the opportunity to return assets or generate a positive financial return (ranging anywhere from a 0% interest loan to an above-market-rate return on investment). Mission-aligned investing is philanthropy’s extended toolkit, an opportunity to leverage previously untapped capital — to the tune of ~$760 billion — to create the world we need today and envision for our future.

Early movers such as The Heron Foundation ($275 million in assets) and Nathan Cummings Foundation ($443 million in assets) are often noted for their 100% commitment to mission alignment. Additional leaders have made significant allocations of their endowment, such as the Ford Foundation’s $1 billion commitment in 2017. Organizations like Mission Investors Exchange continue to advance the field by aggregating knowledge, building capacity, and convening practitioners. The growing leadership and practice is undoubtedly a step in the right direction, but the field needs more foundation leaders to step forward. This is how I started my own mission-aligned investing journey nearly 20 years ago.

From our Partners

Moving from personal inspiration to 100% mission-alignment

In 2001, I heard Luther Ragin, then VP of Investments for the Heron Foundation, speak at a Delaware Valley Grantmakers (now Philanthropy Network of Greater Philadelphia) event. Luther posed the question, “Why should a foundation use only 5% of its assets to work for the greater good, while the rest is working like an investment bank?” It was an “aha” moment for me. At the time, I had recently assumed the managing trustee role of my family’s foundation, The Patricia Kind Family Foundation, and was in a unique position to take action toward a radical practice: 100% mission-alignment.

The Patricia Kind Family Foundation — established in 1996 with a gift from my grandparent’s estate — had defined its mission to support the health and well-being of Philadelphia and surrounding counties, particularly children, adults and seniors who experience the effects of poverty. As a family nurse practitioner, I welcomed the challenge and opportunity to impact community health and well-being in a new way — through the power of capital. Alongside my mother, siblings (fellow trustees), and our financial advisors at Glenmede, we got to work in understanding how we could look beyond the foundation’s grantmaking activities to use “all the tools in the toolbox” in alignment with our mission.

It wasn’t without trial and a degree of tribulation, but we steadily learned through action. Our first step came in the form of investing 10% of our assets into two Community Development Finance Institutions (CDFIs), The Reinvestment Fund and Community Capital Management, who were set up to make Community Reinvestment Act (CRA) qualified investments for the revitalization of communities. The next step came in the form of program-related investments, then negative ESG screens of our public equities, and eventually positive ESG screens. Through Glenmede, we began practicing shareholder advocacy. Asset by asset, deal by deal — we moved everything into alignment.

One tool in the toolkit: Program-related investments

While there are many stories and learnings to share, I often tell fellow foundations the story of our first program-related investment — a poignant example of how foundations might make a small shift that can generate positive additionality for all.

In 2012, Tina Wahl of The Barra Foundation told me about Depaul USA, a local transitional housing provider that was interested in establishing a commercial cleaning franchise. Instead of giving a grant, The Patricia Kind Family Foundation structured an interest-free, five to seven-year, $37,000 loan that allowed Depaul USA to purchase a commercial cleaning franchise. Immaculate Cleaning Services, set up as a for-profit limited liability corporation, would generate unrestricted income for Depaul’s programs and employ residents of Depaul’s transitional housing program.

The program-related investment, fully repaid by Depaul USA, was a win-win for both parties. By structuring our support as a loan, Depaul USA’s management team gained valuable experience in financial tracking and reporting. Our foundation was able to trial and learn from its first loan, while also being returned capital that we could recycle into new grants and loans for other worthy ventures. Additionally, it’s important to note that the foundation assumed minimal risk in this transaction. If Depaul USA had defaulted on the loan, it would have been the equivalent of an unsuccessful grant — which is not uncommon in the traditional foundation world.

My call to action for peers: Get started

Laura Kind McKenna.

Today, I’m proud that my family accomplished what we set out to do two decades ago. The Patricia Kind Family Foundation’s $35 million corpus is 100% mission-aligned. Our money is no longer sitting in mission-agnostic accounts or blindly invested in Wall Street, creating unknown or counterproductive consequences as we sleep. It’s in our local Philadelphia community, it’s revitalizing neighborhoods, it’s keeping people off the streets, warm, and employed with reliable income. Also, it’s strategically invested in a way we believe will enable us to continue our philanthropic work for years to come. Now, a continued goal — of the foundation and myself personally — is to leverage our story to inspire other foundations to action. It’s too important and there’s far too much work to be done.

My call to fellow foundation leaders is simple: get started. Beyond your grantmaking, make a mission-first direct investment or exercise shareholder advocacy within your endowment investments. The journey to 100% mission-alignment is undoubtedly a marathon, but it’s one that you’ll never finish by repeating trial runs or sitting on the sidelines. If you focus on the why it’s so important — to achieve our foundations’ fullest potential in doing the most good possible — then the what, how, or fear of failure become secondary. Just imagine if we doubled or tripled the cumulative amount of capital we have flowing to advance our missions. The positive impact could be transformational, but we won’t know unless we start.

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