Real Change

[This post was co-published in Inside Philanthropy on September 10, 2015.]

A friend of mine rolls her eyes whenever I speak skeptically about the value of charitable endowments. “You’re neglecting the future!” she tells me. She thinks that I’m being profligate and short-sighted by advocating for distributing charitable funds rather than letting them build up.

Actually, my skepticism about endowments arises precisely because I care about the future. And I’d like to illustrate my argument by describing the life of Congressman John Lewis – and the philanthropist who helped make Lewis’s achievements possible.

Born in 1940, Lewis grew up in Pike County, Alabama, one of ten children to sharecropper parents. Lewis was a black child in the Jim Crow South, so to say his opportunities were limited is a gross understatement. He was born into a world of legally sanctioned segregation, utter power imbalances, zero due process, and racial terror.

But thanks to the vision and generosity of one philanthropist, the young John Lewis had a fighting chance. That philanthropist was Julius Rosenwald, the president and chairman of Sears, Roebuck.

I’ve written about Rosenwald before. In the first part of the twentieth century Rosenwald was one of the three best-known philanthropists in the country, along with John D. Rockefeller and Andrew Carnegie. Though Rosenwald had broad charitable interests, he was best known for providing educational opportunities for African American students in the segregated South. At the time, many communities had no schools whatsoever for black students. Many of the schools that did exist were crumbling, poorly staffed, and open for only a few months a year.

Rosenwald changed that. He proposed a formula to Southern communities: if the state or local government would provide one-third of the money for constructing a school, and if local donors, black and white, would provide the second third, he would provide the final third – along with architectural plans. Additionally, Rosenwald required that the schools be open for a full nine-month school year. Rosenwald’s efforts bore remarkable fruit: he was responsible for the construction of over 5,300 schools around the South, eventually serving hundreds of thousands of African American children.

One of those children who benefitted from Rosenwald’s philanthropy was John Lewis. As he describes it in the excellent new documentary, “Rosenwald,” the local Rosenwald school was a lifeline – “It was the only school we had!” It was also, of course, where Lewis learned to read and write and think about the world outside of Alabama.

John Lewis went on to graduate from Fisk University, and as chair of the Student Nonviolent Coordinating Committee he became one of the leaders of the civil rights movement. Lewis’s road to prominence was not an easy one. Most notably, he was viciously beaten by Alabama State Troopers while marching across the Edmund Pettus Bridge in Selma with Dr. Martin Luther King in 1965. But Lewis subsequently built a career as a 15-term congressman from Georgia – a position he holds to this day. That the same man could nearly be killed for demanding voting rights, and later be elected multiple times to Congress, is surely one of the heroic political stories of our times.

John Lewis is a man of extraordinary talents and character, but by his own testimony he wouldn’t have gotten very far without the start provided by his local Rosenwald School.

Why isn’t Julius Rosenwald better known today? In large part because he chose not to create a permanent foundation named after himself. Rosenwald specifically ordered that his fortune be given away for charitable purposes – most in his lifetime, and the remainder in the years after his death. Rosenwald thought that a permanent foundation was an utterly inefficient way of changing the world. Rosenwald wanted to see his good works in action right away.

Instead of creating a permanent foundation that would have invested its funds in Wall Street, Rosenwald invested in people like John Lewis, who in turn touched the lives of those around them for the better. And, while not every beneficiary of Rosenwald’s philanthropy became a civil rights leader and congressman, Rosenwald helped hundreds of thousands of boys and girls to build the skills and confidence to become doctors, nurses, letter carriers, teachers, accountants, bookkeepers, clergy, businesspeople, secretaries, bus drivers and, yes, politically engaged citizens. It can be argued that the civil rights movement in the 1950s and 1960s was that much more successful because of Julius Rosenwald’s philanthropy in the 1910s and 1920s and 1930s.

And what if Rosenwald had instead created a permanent foundation, an entity that would have grown over time and distributed five percent of its assets every year in grants? Well, he would have built only a small fraction of the 5,300 schools that were actually constructed. Would he have built the school in Pike County, Alabama, that John Lewis attended? Possibly, but probably not. The Rosenwald Foundation today would no doubt have a large and impressive office in Chicago with a well-paid staff, and we would all know the name of Julius Rosenwald because of the foundation’s ongoing grants. But hundreds of thousands of African American children would have attended vastly inferior schools, if they attended school at all. And the nation would have had a far more difficult time leaving behind the Jim Crow laws and moving into an era of greater civil liberties.

Maximizing an endowment’s capital growth is not the same as maximizing impact. Investing in people today helps many more people tomorrow: the beneficiaries’ families, employees, students, patients, clients, colleagues, readers, and constituents. The same can be said for environmental philanthropy. If you’re trying to save a species or habitat from destruction, you need to do it now, or it’s too late; if you’re trying to slow down climate change, well, you’d better do it now, or else.

Julius Rosenwald could have created a permanent mega-foundation. He didn’t. Instead, Rosenwald provided enormous opportunity for hundreds of thousands of people, and he helped change the nation. It’s hard to argue with that approach – though, surprisingly, the majority of people involved in philanthropy tend to do just that. They’re taken by the notion that the best use of a charitable dollar is to invest it for future use. I respectfully, and strongly, disagree.

Copyright Alan Cantor 2015. All rights reserved.

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15 Comments. Leave new

  • Paul VanDeCarr
    September 9, 2015 1:33 pm

    Thumbs up! I wish more foundations would do this.

    Reply
  • Al,

    I completely agree with you, that there is too much money invested in funds that benefit the donor and the investment company more than the intended recipients. The need is too great for all that money to be essentially locked up. Your friend makes a good point, though. There is a need for future sustainability. What does that look like for you? Where’s the balance between investing for immediate impact vs. investing for future impact? I know I don’t have any answers. Seems like we probably need a big shift in our assumptions and our thinking.

    Reply
    • Thanks for your thoughtful comment, Marty. I want to assure you that I think there is a place for endowed funds. I simply don’t think endowing a charitable gift, whether at an institution or by setting up a foundation, should be the default choice. I encourage people to think about it, trying to understand the need, and act in a way that has real impact.

      Obviously, I think Julius Rosenwald made the right choice in spending down his foundation and building those 5,300 schools. But, in the interest of candor, Rosenwald actually set up many endowments at places like the University of Chicago — so even my exemplar of spending his money down chose to create some endowments.

      There are some cases where endowments are totally appropriate. The clearest examples for me are endowing a maintenance and capital improvement fund for a historic building or museum. In that case, the very building is central to the mission, and neglecting the building damages the mission. So by all means, endow the maintenance of old buildings! I also think endowments make a lot of sense for managing conservation easements. The parcels of land need to be overseen in perpetuity. You might as well ensure that with money up front.

      Other cases are trickier. With social services organizations, I have a hard time presuming that creating an endowed fund is a better use of the money than putting it to direct mission work — or creating an “impact fund” that will spend the money down over a few years. And we’ve all been reading about the tens of billions of dollars piling up at Harvard and Yale and Stanford. There the issue, to my mind, is the low spending rate. The universities should be putting out closer to the 7% maximum allowed in most states, rather than hoarding the money and spilling out only 4% or so a year.

      As for foundations, there are other examples like Rosenwald’s. The Aaron Diamond Foundation spent down its full corpus in ten years — and in the process funded the most significant advances in AIDS research at the time, work that led to the creation of the HIV drug cocktail. That literally saved millions of lives. Or Chuck Feeney’s Atlantic Philanthropies will have given away $8 billion by the end of next year. Atlantic has built entire universities and hospitals in places like Vietnam and South Africa and Ireland. All examples of foundations having far greater impact than if they were perpetual.

      Of course, the tricky part is that many donors love the idea of creating an endowed fund. After all, it’s the traditional approach, and people like to do what others have also done. If that’s absolutely what donors want to do, well, in most cases the nonprofit should cave and agree to set up an endowment. But at the very least the nonprofit should analyze the gift and see if it’s truly in their best interest. It’s only right to challenge the donor (gently) to think of alternatives to a traditional endowment fund. Have a dialogue. Don’t be passive!

      Reply
      • Benjamin Soskis
        September 12, 2015 2:27 am

        Alan,

        Rosenwald was actually pretty consistent–he was a critic of university endowments as well. In several of his major gifts to the U of Chicago, he insisted that the University spend the principal in a designated period of time (and he tried to convince other donors to do the same). And in his famous 1929 Atlantic article piece, “Principles of Public Giving,” in which he outlined his rejection of perpetuity for foundations, he also complained about endowments more generally. He complained that the U of Chicago had a $43 million endowment, but students couldn’t afford books. Sound familiar?

        Benjamin SOS’s

        Reply
        • You’re right, Benjamin. I misspoke about Rosenwald and the University of Chicago. I’d read Peter Ascoli’s biography of JR a couple of years ago, and I’d conflated Rosenwald’s approach with that of some other philanthropists I’ve been reading about. Your comment sent me scurrying back to the book. When he was giving to the University of Chicago, Rosenwald created the notion of “suspense accounts,” where he’d make a gift into a fund and the principal and interest would be spent down over a few years. It’s what I in other places have called “aspirational impact funds.”

          Yes, Rosenwald wanted to get the money out the door, even when giving to universities. I stand happily corrected — thank you for pointing this out!

          Reply
  • Al: Julius Rosenwald: Convincing testimony to what you have been preaching for quite some time now. I am not yet a Cantor convert but can feel myself edging a bit closer to your philosophy of giving. As I recently shared with you, a friend sent me this little ditty about giving: “Giving while you’re living means knowing where it’s going”.

    Reply
  • susan rappaport
    September 9, 2015 3:12 pm

    Thanks Al!! A fascinating chapter of history few people know about! And an excellent testimony to your theory!

    Reply
  • Al:

    Thanks for citing a real world example of what you have been advocating! Money alone can’t solve all our problems but let’s give humanity the best chance now by putting it all to good uses.

    Reply
  • Well chosen example of how much more effective immediate charitable giving can be used to also beneficially impact the future on a larger scale. Bravo Al.

    Reply
  • Rose Marie Lanier
    September 14, 2015 9:21 pm

    Recently heard a report saying that most of the money in charitable gift funds isn’t spent down every year. We’ve had a Fidelity CGF for a number of years. I spend it down each year and don’t really understand why others don’t. I figure you use the gift fund for convenience not for hoarding. So, your article about Rosenwald if very interesting and fits in with my philosophy. In looking through the comments I see that is your philosophy. Nice.

    Reply

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