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New directions, venerable traditions: A case study of change at The Kresge Foundation

UNIVERSITY OF RICHMOND, Va. – What a pleasure it is to talk with you. The institutions in this room have been front-line innovators in so many dimensions. By creating bridges between higher education and the broader community through efforts such as Campus Compact, Alternative Spring Break or any number of other service learning prototypes. By addressing issues of race, equity and access, particularly through the expansion of your endowments to support special recruitment and retention.

I almost feel as if I’m at a disadvantage presenting to you – collectively, probably individually, you almost certainly know more about The Kresge Foundation’s tradition of support for capital projects than I do. But we are changing. It is an exciting time at the foundation. And there are some things I can tell you that you don’t already know. So I’d like to talk about those changes and some of their possible implications.

I’ll divide my remarks into four sections:

  • First, some reflections about how critical challenges in the nonprofit environment have caused us to think differently about our role;
  • Second, a description of some of the reasons we believe merit an adjustment in our course;
  • Third, an overview of the framework that is emerging; and
  • Fourth, a concluding set of observations about how this might play out for your institutions.

I. The Environment in Which We Find Ourselves

You don’t need me to remind you that these are complicated, confusing and dangerous times that require a proportionately serious response from large, privately endowed foundations like Kresge. Simple enough. But let me offer three examples.

The Need for a More Assertive Philanthropic Sector

As the pace of change in the world accelerates – as the interlocking effects of globalism, immigration, economic restructuring, terrorism and climate change ricochet throughout our society – the need for new organizational linkages, particularly among the public, private and nonprofit sectors, becomes increasingly acute. The challenges are simply too complex and multifaceted for one sector or another to take on by itself.

And yet, rather than consciously and proactively calculating how to play off the strengths of one another to take on these problems, each of the sectors instead inclines toward its own splendid isolation.[1] And philanthropy may be the worst violator of all.

That is simply not acceptable. Philanthropy is uniquely suited to explore how best to draw the sectors together.

We have the privilege accorded relatively few in society to take the long view – searching out the connections among ostensibly unrelated activities, chipping away patiently and intelligently at seemingly intractable problems.

We have the luxury of being able to deploy multiple tools. First and foremost, we make grants. But we can also convene as a way of forging relationships, promoting joint inquiry and fostering concerted action. We can invest in research to create a solid empirical base for change. We can communicate to deepen public understanding of, and engagement in, the work of grantees. We can support networks to harness and amplify the collective intelligence of organizations working in common purpose.

Secured by our assets and free from re-election cycles, quarterly profit reports and appropriations from others, we have the independence to take bets – both the small bets required in the daily routines of nonprofit life and the larger bets that promise to catapult a community beyond its fixed and safe positions to more profound and enduring social change. Philanthropy is society’s social venture capital.

We can, in a word, use our flexible resources and multiple tools to explore the kind of interdisciplinary, multisector solutions demanded by the scale and seriousness of contemporary problems.

The Increasingly Dire Need for Nonprofit Investment Capital

A second challenge is the increasingly dire need for nonprofit investment capital.

Lester Salamon of Johns Hopkins University has documented through his Listening Post Project that nonprofits are proving remarkably resilient to the unyielding financial pressures they work under, adapting in often unexpectedly creative ways. But Salamon points out that they will ultimately be limited in their response if they cannot broaden their access to the capital investment they need to expand facilities, upgrade technology, support programmatic innovation and generally weather the vicissitudes of governmental cutbacks and philanthropic capriciousness.

In the for-profit world, corporations have several capital alternatives, the cost of which can be known and considered as an integral part of the entity’s decision-making process. In a startup phase, they can raise it from early investors. In periods of growth, they can generate it from revenues, equity investments or traditional debt-financing sources.

The nonprofit world is a study in contrast – nonprofits are generally poorly equipped to identify strategically their capital needs and inadequately positioned to gain access to the right kind of capital to meet those needs. As a result, nonprofits chronically underfund program needs, overextend their personnel and spend significant time and resources searching in a relatively disorganized way for capital.

Kresge understands capital. And we want the foundation to be an even more effective resource than it has been.

A Two-Tier Economy

A final challenge I want to mention is the economic bifurcation of America.

Again, you don’t need me to tell you that the schism between the haves and the have-nots is increasing by the day. Let me mention just one manifestation.

Every metropolitan region in this country is seeking to build out a high-road, knowledge-based economy as the key to global competitiveness. Sensible.

The problem emerges when these approaches are pursued without an attendant attention to those who populate the rest of the economy, particularly communities of color – the nickel-and-dimed crowd who cut my lawn, make my hotel bed, teach my fourth-grader or take my 911 call. These folks are lagging badly in virtually every important measure of civic life – educational attainment levels, median income, household wealth formation and countless others.

It’s hard to explain at some level. Our deepest communal values – based on solid American concepts of public responsibility for the common good – seem to have been eroded, leaving us with a dominant social and political ethic that too frequently enshrines personal gain as the ultimate public virtue.

The effects are corrosive. Devaluing the importance of long-term investments in the building blocks of future health and prosperity in favor of an obsession with minimizing tax payments. Dismantling structures of mutual assistance compassionately and systematically built up over generations in favor of ideological commitments to “right sizing” government and glorifying private-sector value systems.

This isn’t temporary, or minor or limited. It’s real, it promises to endure and it’s becoming embedded in virtually every dimension of modern American life.

These are trends that the market will not correct if left to its own devices. It is not clear whether philanthropy can spur a different result. But it has an obligation to try. Although Kresge has funded many organizations working to level the playing field, there is an opportunity for us to stand in a different, more deliberate, relationship to these organizations by elevating within our values structure the importance of enhancing broad-based economic opportunity.

II. The Case for Change at Kresge

The realization that Kresge’s extraordinarily precious foundation dollars could more effectively be called into battle against these trends led our board and staff to step back and take a long look at how we work and assess the kinds of adjustments we needed to make to get into the thick of things.

Let me use this second section to describe what we found.

Emergence of the Capital-Challenge Program

From its earliest days, Kresge has sought to strengthen nonprofit organizations by supporting their physical expansion. Over time, and in recognition that facility projects required significant capital, the idea of issuing capital-challenge grants emerged as the foundation’s central grantmaking tool – this provided organizations with deadline-driven incentives to complete their project by enlisting a broad base of individual donors.

As the challenge-grant program grew in size, its rationale shifted slightly – imperceptibly to the outside – from “building buildings” to “enhancing the capacity” of nonprofits to harness what Kresge viewed as the transformational opportunity created by a large campaign to raise private funds from individuals.

Positive Aspects of This Approach

There are a number of attractive qualities about this approach.

First, our brand is clear.

As the only major national foundation that focuses on underwriting building projects, people knew what we did. For many organizations, surviving Kresge’s demanding and rigorous application and approval process imparted a Good Housekeeping Seal of Approval, a credential stamping an organization’s approach as a model of effective fundraising.

Second, we have seen ourselves as neutral.

Kresge did not make judgments about the project’s value, an organization’s mission, its impact on the local community or its role within a particular field of work. We instead left that to others, preferring to interpret an organization’s ability to mount a well-supported capital campaign as evidence that the community valued its work.

Third, although we remained consistent in our goals and methods, we were able to adapt our model to special circumstances.

Kresge has transported its core work to a handful of particular fields of interest: building the development functions of historically black colleges, supporting planning for green buildings and a number of others.

The cumulative impact of the Kresge capital-challenge grant model has been unquestionably beneficial. It is a system that has helped countless campaigns reach the finish line. It has repeatedly generated new gifts, larger gifts and more engaged trustees and executives. It has prompted organizations to set new benchmarks against which to measure their development.

Limitations to the Approach

This is a distinguished tradition. But it carries with it some serious limitations.

First, Kresge’s model overstates our importance to an organization’s long-term stability.

There are certainly a great number of cases in which our support for a highly disciplined machinery of capital fundraising has translated into a more robust, sustainable organization. But there are also many cases in which it is not at all clear we have made a significant difference.

Is it really plausible, for example, that a Kresge challenge grant materially strengthens the institutional capacity of a well-resourced private university engaged in a billion-dollar endowment campaign driven by scores of development staff and a high-powered board? You know better than I, but the honest answer is pretty clear.

A second critique of our approach is that Kresge relies on far too narrow a view of organizational capacity.

Kresge has tended to equate long-term organizational capacity with an expanded individual-donor base generated during a building campaign. There is, again, a certain sensibleness to that proposition. But although a building campaign is unquestionably a teachable moment in an organization’s history, it teaches us largely about one dimension of a nonprofit’s resilience and precious little about other aspects of its organizational capacity – the relevance of its mission, the efficacy of its strategies, the adaptability of its staff to changes in the external environment, the efficiency of its operations, the quality of its governance and the like.

A third criticism of our approach is that we’ve relied almost exclusively on a single tool, even as the business of raising money has turned into a major industry.

Kresge’s challenge-grant program was developed at a time when nonprofit organizations faced huge obstacles to securing funding from all sources and when there was very little professionalization of the development function. The environment has changed profoundly. Nonprofits have become increasingly more sophisticated in their approach to fundraising. An entire professional field of institutional advancement has emerged. Donors are better informed. The variety of capital available to support facility and equipment has expanded exponentially to include a range of public funding, debt financing and charitable giving options.

And yet, Kresge continued to work the same way it had for a quarter century. This reliance on a single tool is a little like choosing a screwdriver for every construction project – it works some of the time, but limits what you can ultimately build. An alternative might be to decide what you want to build and then chose the tools most appropriate to the task. Hammers and saws can be a good thing.

A fourth limitation on our work is that, in the spirit of staying neutral, we have marginalized value judgments.

Everybody would agree that Kresge’s process is exacting – some might say finicky and exasperating. We don’t compromise on what we believe to be the essential formula for a successful capital campaign. The approach is almost like an algorithm – an impartial mechanism that generates predictable results.

This highly disciplined approach pushes nonfundraising elements of an application to the sidelines. It is often difficult for an applicant to believe, but an organization’s mission or a project’s purposes have not, as a rule, been relevant to our consideration of a request.

The results can be counterintuitive – we can end up funding, for example, a well-structured campaign of only the narrowest importance, while declining a proposal that promises substantial impact but that is financially a less sure bet. We have, without question, funded many, many organizations confronting pressing social issues, pursuing innovation or advancing best practices in a field. The problem is that none of those considerations was central to our decision-making.

A fifth problem with our approach is that we fail to place requests into context.

Focusing inwardly on an organization’s adherence to a fundraising formula dramatically constricts our consideration of the context within which the organization is working.

Not only are there exponentially more nonprofits now than there were 20 years ago, but they also take every conceivable shape, size and purpose. Entire new fields have been born.

Kresge’s grantmaking has simply not been set up to take any of this into account. For our purposes, funding a hospital is the same as funding a student center is the same as funding a homeless shelter. We have concluded that mushing together such disparate disciplines – each with its own complex environment – serves us, and our grantees, poorly. It is simply not the way the world now works.

III. The New Framework

So first I describe a grim nonprofit environment, then deconstruct my venerable institution. Have I depressed you sufficiently? That will teach you to let me crash your conference.

It’s not particularly pleasant to hold this kind of mirror up to our work. But the more positive aspect of the exercise is to figure out how to depreciate the asset – determining what aspects of our past work continue to have value and should be carried forward and what aspects no longer serve us so well and should be discarded.

The changes we are pursuing fall into four broad categories: recasting our capital-challenge grant program, promoting a broader spectrum of nonprofit capitalization strategies, advancing selective fields of interest and contributing to the revitalization of Detroit. Let me use this third section of my remarks to say a word about each.

Recasting the Capital-Challenge Grant: Values and Context

The first, and most important, change we are pursuing is to strengthen our capital-challenge grant program. Strengthen it. Not discard it. Not marginalize it. But infuse it with qualities that will reinvigorate its role as the indispensable bedrock of our work.

We have begun with a number of adjustments to our internal grantmaking machinery. I won’t bore you with them, but suffice it to say that we are re-engineering how we provide information about the way the program works, how we interact with potential grantees and how we process applications. All these are designed to make our program more transparent, flexible and responsive. We’ll use our website over the next number of months to communicate these changes more precisely.

At a more fundamental level, however, we are responding by pulling value judgments into the center of our work.

The Values Lens

On paper, our old institutional ethic of neutrality made it appear that we had a wide-open door at Kresge, welcoming any organization of a mind to try to navigate our system. The reality is a bit more complex, however – although the door was open, it was perched on an extremely high threshold of fundraising rigor that was difficult for the vast majority of organizations to climb. There are a number of ways to lower that threshold and let more people in. One way is to recognize that values other than fundraising prowess need to be taken into account.

We’ve used the last couple of grant cycles to explore what some of those values should be. The absence of one would not be grounds for excluding a proposal – each would instead serve like a weight on a scale, with greater priority being given to those proposals that seem to possess a “heavier” collective weight. A few examples:

  • Low-income opportunity – How does the organization’s work expand opportunities for low-income people to connect to the supports they need to improve their quality of life and participate more fully in the economic mainstream?
  • Community impact – Will the project have a beneficial impact on the broader community?
  • Institutional transformation Will the project have a catalytic impact on the organization’s operations?
  • Risk – Does the project take a reasoned risk in addressing the tensions of communities in flux, for example, trying new ways of broadening access of new immigrant communities to traditionally foreboding institutions such as hospitals, schools or social-service agencies?
  • Environmental conservation – Does the project advance sustainable building practices, environmental stewardship, historic preservation or sound land-use planning?
  • Innovation – Does the project have the potential to advance innovations or best practices in a field or promote interdisciplinary approaches to problems that defy solution by a single sector?
  • Diversity – Does the organization’s staff and board reflect the populations the organization serves?

These values have also caused us to recalibrate our basic fundraising analysis – relying less on formulaic gift charts and more on an analysis of an organization’s capacity for growth and long-term stability. The pivotal question remains whether the campaign has a chance of succeeding, but we will be less focused on whether that will be achieved primarily through individual gifts.

The Context

How these values play out will vary dramatically from one field to another. Low-income access means one thing in health care and another in arts and culture. Investing in environmental sustainability may be an indefensible expense for a homeless shelter but a routine expectation for a private college. We ultimately have to develop enough knowledge to know where an organization or project fits within the forces shaping a field.

Diversifying Our Tools by Emphasizing Capitalization

But these changes in our facilities capital-challenge program take us only part of the way toward the balanced response we seek. Our toolbox needs to change, too.

We are accordingly exploring how we can supplement facility grants with other ways of meeting the capitalization needs of nonprofits – a fancy way of saying that we want to look at the wide spectrum of supports necessary for an organization to grow.

As nonprofits grow and take on increasingly complex operations, they rarely assess their business model. Trying to figure out month-to-month how to pay the janitor makes it tough enough. It is usually overwhelmingly difficult to map out how to secure the resources necessary to invest in technology, acquire equipment, build cash reserves and endowments, provide for stable program development and create reservoirs of working capital to meet both episodic and ongoing needs.

We’re not yet sure just how we might best help, but we’re looking at some ideas:

  • We might, for example, rely on intermediaries such as the Nonprofit Finance Fund to help organizations engage in more sophisticated business planning.
  • We might select a relatively few organizations with whom to work in building a working-capital reserve.
  • We might invest in innovative financing instruments that enable nonprofits to tap traditionally inaccessible forms of investment capital.
  • And we might stay with some of our capital-challenge grantees after a facility is built to help them develop endowment or leadership-development strategies.

Strengthening the Infrastructure of Selected Fields

Strengthening our core capital-challenge grantmaking, coupled with this “stretching” of our grantmaking from “capital” to “capitalization,” is the first tier of our conversations about change. When we contemplate what will really make a difference in the lives of our children and our grandchildren, however, it’s difficult to stop there.

It is hard to justify grantmaking that does not aspire to make a real dent – whether in poverty, climate change, health disparities or countless other challenges. Philanthropy should, as the great philanthropoid Paul Ylvisaker noted, serve as society’s passing gear.

This carries, however, the necessity of picking some points of leverage, taking some of those large bets I described earlier. We have accordingly concluded that we have to supplement our support for individual organizations with an attention to activities that will help advance larger fields of work.

How might we, for example, strengthen the emerging energies surrounding community-based provision of high-quality affordable health care, help South African universities contribute more meaningfully to that country’s noble democratic experiment or add value to others’ efforts to mitigate and adapt to climate change?

Working this way will require that we utilize those additional tools I mentioned earlier – convening, supporting policy and advocacy, underwriting research, pursuing strategic communications and the like.

Investing in the Revitalization of the Detroit Region

There is one more piece to our conversations – the commitment to working intensively, comprehensively and over time in one’s home environment.

Kresge has significant roots in Detroit. We need to put our financial resources, our institutional credibility and our national connections on the line to help our community regain its economic health and civic self-confidence.

I’m asked all the time when I travel whether Detroit can come back. I may be confused about a great many things. But not about this. The answer is: Absolutely. It can come back. It will come back.

Nobody should minimize the challenge. And yet there is an extraordinary confluence of energies in Detroit, opening a window of opportunity our town hasn’t seen in more than a generation.

I’m excited by the prospect of pushing Kresge right into the middle of these developments. Our standing as the “hometown foundation” with national and international connections and a big bank account permits us to serve in multiple roles. In some cases, we can provide the glue money that holds an effort together. In others, we can help accelerate the pace of change. And in yet others, we can seek to be catalytic, changing the basic chemistry of what’s being done. It should be exciting.

IV. Conclusion

So let me conclude with three suggestions about what this might mean to all of you.

First, it will, to be blunt, be more difficult for your institutions to succeed within Kresge’s capital-challenge grant program.

Historically, it is exactly this audience that has proven most successful with Kresge – high-quality, selective colleges and universities with strong institutional advancement programs, major gift capacity, ready access to capital and wealth and large endowments. These very qualities will, as we move to a more values-based approach, make it more difficult for you to demonstrate that our marginal dollars should move in your direction, at least for facilities or endowment capital. They will not preclude an application; they will, however, raise the bar.

This may be particularly true for requests for “must have” amenities – fitness centers, student centers, athletic facilities and the like – that are often driven by the need to attract more students in a competitive marketplace, as opposed to making a direct contribution to academic mission. Not that the line is always clear or that these kinds of projects don’t enable you to build a firmer base of support or serve any number of other useful purposes. But they would not, at least to us, represent the most strategic deployment of our resources.

Second, and in a related vein, the value that will likely carry the greatest weight in Kresge’s future capital-challenge grant universe will be “access” – the extent to which higher education applicants have extended themselves to students who have not had access in the past and the extent to which these applicants have taken steps to increase the likelihood of retaining those students.

As an imperative flowing from both the flattened global economy and the increasingly bifurcated domestic economy, post-secondary education attainment rates in this country must improve. That, in turn, will require the lowering a host of primary barriers to access and success for low-income students and students of color.

Kresge has to broaden its view to take this into account. Our attitudes toward community colleges and public institutions are illustrative. Public comprehensive and two-year institutions enroll the majority of the nation’s low-income and minority students, with nearly half of these students entering post-secondary education through community colleges. Yet, Kresge currently excludes community colleges from the capital-challenge program. Similarly, public institutions generally have presented fundraising and annual giving profiles that don’t fit well within the Kresge model and have accordingly been relatively uncompetitive.

As we review our higher education applications within the capital-challenge program, therefore, we will increasingly take a number of factors into account, including the level of financial assistance provided through Pell grants and other sources, the existence of articulation agreements with community colleges that facilitate transfer and graduation and the adoption of other special enrollment and retention efforts that enable institutions to attract, enroll and sustain students through graduation.

Third, beyond access, other values will be significant in our assessment of capital-challenge requests from higher education institutions.

For example, given the enormity of the climate-change challenge, an institution’s commitment to sustainability and environmental stewardship will be critical. Similarly, we will pay closer attention to the significant role colleges and universities can have in the economic and social health of their broader community.

Let me stop there. I can only imagine that you have some reactions. I look forward to hearing them.

Thank you.

[1] See Edward Skloot, “The Nonprofit Sector and the Market: Challenges and Opportunities,” in Beyond the Money: Reflections on Philanthropy, the Nonprofit Sector, and Civic Life, p. 77 (Surdna Foundation: 2007). Skloot observes:

To find the right strategy will require going beyond those familiar archetypes that frame our knowledge. You know, government regulates and defends us; the private sector provides goods and services for us; and nonprofits foster the civic and charitable spirit in us. These are all true, but they’re much too one dimensional.