At lunch recently, a director of development of a large nonprofit organization and I got to talking about the perils of accepting large (multi-million dollar) “named” gifts from major donors. We recently had seen a number of well-publicized examples of such gifts to health care institutions and universities, and were also aware of the economic problems that these institutions were experiencing. We wondered if some of these gifts, while welcome in many respects, might have caused more difficulties than they were worth.
Leaders of smaller and intermediate-sized nonprofits might say, “Well, that’s the kind of problem I’d like to have!” Yet the problems are generic and apply to nonprofits of almost any size that have potential donors willing to consider gifts that are large relative to an institution’s budget. What are these problems and how can they be addressed? Some of the issues are well known. First, major donors like to put their names on structures or programs that have visibility and the appearance of permanence. Call it the immortality syndrome.
One problem is that such gifts, no matter how large, usually do not cover the costs of construction, which obligates the organization to raise the rest of the money from other sources. Major donors often like to feel that they are leveraging other resources and are not alone in their support of a given project, even if they crave the credit. There are often large opportunity costs to the obligations to raise additional capital funds. What else could such raised matching funds have been used for? What other kinds of mission-related efforts could the staff of the nonprofit have undertaken were they not intensively engaged in seeking those additional funds?
A second problem is that such projects usually generate additional operating costs. Buildings need maintenance and the new programs that they house must operate from day to day. Often, new facilities cost more to operate than the facilities they replace or augment. If the gift does not apply to these operating costs, two issues arise: how are the additional operating costs to be paid for, and how will that money be raised if the program has already been named for the donor? Other potential donors will assume that the gift covers those costs, and they will balk at giving additional money to a cause for which someone else has received the credit.
A related, third problem concerns the period of time over which the donor is identified with the particular facility. Is such identification necessarily perpetual and does that obligate the nonprofit institution to maintain it indefinitely? Suppose, after some time, a new facility is needed for the same purpose and a new donor desires recognition? This situation can lead to additional costs such as maintaining outdated facilities, or forgoing additional contributions of new donors. There are ways of dealing with such situations, such as clear contracts with donors, covering such contingencies, and other ways of honoring past donors once the facilities named for them are phased out. But none of these options are costless or easy to negotiate.
The fourth problem is a little subtler. Major gifts are restricted to certain purposes – a building or wing for a new program, a fund for a particular type of scholarship or course of study, etc. Such restrictions mirror the donor’s preference, not necessarily the highest mission-related priority of the organization. Opportunity cost raises its ugly head again. Suppose the gift were unrestricted. Would not the institution be in a position to spend that money more effectively? The situation is analogous to receiving a meal ticket and being told by the donor that it must be spent on a fancy dessert. A hungry person wants and needs a balanced meal, perhaps with dessert as a component. But the money must be spent unwisely on dessert rather than a nutritious appetizer and entree; on a fancy building rather than faculty or support staff; on an advanced piece of medical technology rather than nurse, physician or student training; or even on a peripheral program rather than one of higher priority.
Finally, if the gift is large enough, and the donor sufficiently self-centered, the tail may begin to wag the dog. The donor rather than the trustees and staff leadership may begin to call the shots. In one well-publicized case, the donor decided to boycott all local charities until the university to which he had given “got its act together”. In other cases, donors are idolized and their musings or philosophies cast in stone (even literally), sometimes in ways that raise doubts about the institution’s integrity. Extreme examples are relatively rare, but there have been many instances when major nonprofit institutions have been offered problematic gifts and are often not strong enough to mold them to their best uses, or avoid significant tension with their basic values and mission. Universities, for example, have been known to return gifts to donors who insisted on funding a particular course of study that was deemed inappropriate; but in other cases, universities can be too eager to honor the educational philosophies or preferences of their donors and skew their programs in ways that do not reflect their best understandings of what is needed in research and education.
Nonprofits themselves are as much to blame for these problems as the relatively few troublesome major donors. Most donors appreciate the guidance and education that a nonprofit organization can give them, in order to make sensible philanthropic choices. However, the competition for gifts is intense, and chief executives and development officers of nonprofits are more often chastised for losing gift opportunities than they are for accepting problematic gifts. If Mr. and Mrs. Rich are misguided and can’t get their way with institution X they will more than likely be warmly welcomed at institution Y down the street or across the nation. If all nonprofits were to discipline themselves to calculate the opportunity costs of prospective gifts, and then to bargain more effectively with donors to shape those gifts in sensible ways, and if nonprofits were to reward their development people for wise economic decision making instead of merely counting the dollars raised, then nonprofit resources would be deployed more effectively across the board. The major gifts would not disappear; they would be transformed into more useful instruments, because donors would not find ready markets for errant indulgences. Unfortunately, it takes only a few hungry and shortsighted nonprofit institutions to compete away the funds of vain donors, even if the uses of those funds are ultimately disappointing.
Perhaps ironically, my own belief is that this kind of problem is likely to be ameliorated over time, if not remedied, with the help of leaders in the business sector, from which most major donors emanate. For example, a new generation of philanthropists grew up in the hot economy of the 1990s, focused on results and close engagement with the nonprofits with which they were involved. While it remains an open question as to whether such “venture philanthropy” will become the norm, the idea that philanthropy should be focused on mission-related results and not the indulgence of donor preferences or prejudices, will persist. Moreover, business leaders engaged as trustees or in partnerships with nonprofits will learn the issues from the inside and be more appreciative of where resources are really needed and how they can be best deployed. Even more fundamentally, business leaders, who make up the bulk of major donors, understand what it means to run an organization. Too often, such individuals have failed to translate that knowledge and perspective into their personal giving but perhaps with some coaching and cultivation, I believe that this situation can change.