Accountability of Philanthropic Foundations

V Santhakumar

After we published three articles on the challenges by faced philanthropic foundations in India here, some readers wanted to know our perspective on the need for accountability of these foundations. This is becoming an important concern among academics at the international level too. There is also a context or background to this growing concern. In general, there is an increasing demand for accountability of all institutions including governments (Rourke, 2014). The amount of money disbursed by philanthropic foundations for social sector in comparison with other development organizations has been increasing (OECD, 2018). Governments, especially in developing and poorer countries are becoming more open to the participation of these foundations in the delivery of public services.

There have been allegations on foundations regarding the role they have played in reorienting public discourse in a direction contested by a number of academics and social scientists. The use of financial incentives, competition and privatization in the provision of school education is one example¹. It is also argued that these foundations are imposing a culture of measurement (of tangible outcomes) and this is leading to a neglect of intangible attributes in education. There are also allegations about influencing the choices regarding medicines due to the funding intervention of one or other foundation². Information revolution and social media also put pressures on philanthropic foundations since there can be correct or incorrect allegations spreading very fast³.

Certain attributes of philanthropic foundations also aggravate these concerns. First, they have substantial endowments, and hence, they do not have to seek resources from any other source. In the case of NGOs, the dependence on a single source of finance would increase pressure on accountability but many countries have relaxed norms regarding accountability and governance of philanthropic foundations. Most of these philanthropic foundations have resources generated through private/corporate (for-profit) firms, and hence, there is a lingering suspicion about the possible influence of the `profit motive’ in the actions (even if these are formally not-for-profit organizations).

It is in this context that current discussions on the accountability of philanthropic foundations take place⁴. There are also attempts to come out with models or guidelines or principles of accountability for these foundations⁵.

Accountability can also be seen as principles (such as integrity, understanding, respect, responsiveness, fairness, cooperation and collaboration, and effectiveness) that foundations have to adopt and follow voluntarily, rather than be imposed by society. In this context, we discuss theoretically, the nature of accountability measures that are required for philanthropic foundations, and the challenges in the use of such measures especially in the developing countries, such as India.

The theoretical discussion is based on a comparison of foundations with private/corporate firms, and governments (in terms of the required accountability measures). This is informed by the economics of institutions⁶ and also the direct and indirect experience of the author as an analyst of different kinds of institutions/rules in developing economies and as someone with an exposure to the work of non-governmental organizations and foundations in India⁷. Certain aspects that necessitate accountability measures for private-companies and governments, which have been discussed in the economics literature, are also mentioned here since this article is aimed at a wider set of readers (not just economists.)

Need for accountability measures

Here, we define accountability measures as those required to ensure that foundations have a clearly stated purpose, these do not have or pursue any hidden objectives which are harmful for (certain sections of) the society, their actions do not lead to any uncompensated harms to any party, and there is a sincere effort on the part of these organizations to see that their actions are effective in creating the intended positive impact. Hence, accountability measures are those processes followed by foundations voluntarily or otherwise and demanded and enforced by the different arms of society (including governments).

Private firms
Accountability measures are needed for private firms. There are three features of private firms that need to be considered in the design of appropriate accountability measures. Even when such a firm operates in a ‘free market’ (or with conditions which approximate those of perfect competition), there is a need for regulation by the state/society. First, is the need for regulations that enable effective and smooth transactions between consumers and the producer. For example, information asymmetry is an issue in most markets, and regulation is needed to communicate a signal to the consumer that the product meets a certain basic quality standard. This is also linked to the measures (like those protecting consumer rights) which are used to avoid the malpractices of producers or sellers.

Secondly, regulation is needed to ensure that private firms do not impose an uncompensated negative externality (such as pollution) on others. There could be a certain societal intervention in the way private firms treat their employees (to provide minimum wages, minimal social security, rights regarding holidays and maternity benefits, protection from sexual harassment in workplaces and so on). The financial accountability expected from a private company (like mandatory auditing) is aimed at solving the problem of information asymmetry encountered by different stakeholders – those (individuals or institutions) who may provide loans, those who collect taxes, vendors who supply inputs, and those who buy shares (if it is selling shares to public).

However, a typical private firm which is owned by an individual may not require an internal accountability measure to achieve effectiveness. This is due to the perception that the firm has the obvious incentive to be efficient and losses, if any, due to the inefficiency or the incorrect reading of market signals would be borne by the owner. Moreover, the collapse of a private firm (due to its inefficiency or inability to meet the market requirement) is not considered socially harmful. However, the firms owned by a large number of shareholders need an additional accountability measure. This is so since the majority share owner or the managing professionals may not take into account the interest of all shareholders. This is the basis of rules regarding corporate governance and related accountability measures.

Governments
Governments provide what can be broadly called, public goods. There are no well-functioning markets for such public goods. Even when private firms provide these services, there can be market failure, and hence, governments have a role, either directly in providing or indirectly, in regulating the provision of these services. If government organizations provide such services, those who are providing these on behalf of governments, that is, politicians and officials are not bearing the cost of provision. It is known that they don’t have the incentive to be efficient and effective under normal circumstances. They may not have adequate incentive to assess and respond to the actual demand of consumers (or people at large). Even if elections take place periodically, these are imperfect instruments to communicate the demand for any particular public service. Hence, the accountability measures, necessary for government organizations, should a) align the provision of services with the needs of society; (b) see that there are no negative externalities associated with the actions of governments, and; (c) ensure that the possible ineffectiveness and inefficiency in governments are reduced. The last one also requires elaborate measures to ensure financial accountability. The use of independent auditing (like that of the Comptroller and Auditor General –CAG- in India) is needed for this purpose. There are also accountability measures for merit and distributive justice to be taken into account in the recruitment and management of employees in government organizations as these organizations/their managers may not have the incentive to consider these factors.

Philanthropic foundations
Philanthropic foundations are somewhat in between private firms and government organizations. These are likely to be involved in the provision of social or public services but there are no markets to discipline them. In that sense, the issues faced due to this problem by government organizations are relevant in the case of philanthropic foundations too. Moreover, foundations are not subjected to the process of democracy which in the case of a government, can exert certain pressure. People can exercise voice and exit options to discipline governments, but these are not valid in the case of a foundation. Therefore, issues faced by philanthropic foundations with regard to accountability measures are more severe than those by government organizations and must be adhered to because: (a) if a foundation wants to contribute to social welfare, it may need additional ways to ensure that its purpose and actions are aligned; (b) if a foundation has a narrow or private interest, then society may have to see that such interests do not work against the social welfare.

What if a foundation which aims at enhancing social welfare fails due to the non-alignment of its intentions and actions?
It could be a loss for the society since such a failure would lead to the wastage of resources which otherwise could have benefitted it. However, there is a no legitimate reason for those who have not contributed resources to the foundation to argue for (or impose) accountability measures on the foundation to minimize this problem. Moreover, unlike governments, it is the trustees of foundations who are bearing the cost of their actions, and hence, there could be internal incentives to be effective, based on the real objectives of these organizations. Or the trustees may use different strategies to ensure that the expenditure of the foundations is oriented to meet its objectives (but whether these objectives are aligned with the requirements of the society, an issue discussed in the previous paragraph, is an open question). There is no presumption here that such strategies would be successful since there could be unavoidable or uncontrollable problems affecting the success. Moreover, there could be a trade-off for the trustees too. Even when they are interested in the effectiveness of the actions of the foundation, the cost of ensuring these could be very high, and that may influence their real efforts for this purpose.

This concern about effectiveness and cost of ensuring effectiveness of actions may determine the relationship between the trustees and managers of the foundation, or the ways by which the former selects the latter. There can also be a change in this relationship over time. If foundations are started with the personal wealth of individuals, and the endowment remains in perpetuity, who becomes trustees over time after the founder(s), may have an impact. It may be possible to have professional trustees (and the personal interest of the founders in the activities of the foundation may decline) over time.

Despite all these problems, there need not be an excessive social concern (or socially determined accountability measures) to see that the expenditures of the foundations are in order since the trustees, in general, have the incentive to be concerned about it. However, this is the situation when the wealth of the foundation is drawn from one or a few individuals. There can be foundations which pool resources from a large number of private individuals (or givers). Then, there can an accountability issue between the large number of givers and the managers or managing trustees of the foundation⁸. This situation is more like that of a corporate firm and accountability measures needed for such a firm (beyond those of a private company) may become valid for such an `aggregate’ or `corporate’ foundation.

However, this argument is not valid in the case of foundations which are the Corporate Social Responsibility (CSR) arms of the corporate firms. One major accountability issue here is the possible misalignment between the interests of shareholders of the corporate firm and the actions of managers who decide on the spending of CSR funds. Since CSR funds are mandated by the government, it may be interested in seeing that the funds are used in reality, and also for the purposes which are in tune with the mandate.

Financial accountability measures and tax concessions
There are arguments for stringent financial accountability measures for philanthropic foundations based on the practice followed in many countries to provide different kinds of tax concessions to these organizations⁹. For example, taxes may not be recovered from the annual incomes arising out of the investments of philanthropic foundations, in the hope that these may help spur social development. The argument is that there is a social opportunity cost of the funds available to foundations since society loses higher tax incomes (which it could have received if such funds were used for other purposes), and hence, society should take steps to get the maximum benefit from such funds¹⁰. In that sense, the resources of the foundations may be seen as public money¹¹. This can be one objective when governments insist that altruistic expenditures should be in certain sectors. For example, it mandates that the funding allocated as part of CSR should be used in certain domains like education and healthcare, based on some presumption of the relative social value of such spending. There are also arguments, based on this reasoning, for investing a major part of the resources for the welfare of the poorer or marginalized sections of the society.

However, this argument may not be that relevant in developing countries where the share of GDP collected as tax is anyway lower, or where the corporate tax rates are not high. Even if the resources are not allocated as tax-exempt charitable funds, there can be other sources of (capital) investments from which governments may not recover taxes (in the hope that these may facilitate economic growth). Hence, we do not see this as a compelling reason for any additional accountability measures to be imposed on foundations.

Similarly, philanthropic foundations need not have accountability measures for employee management beyond the ones used in private companies. There are challenges in managing employees in a foundation or such not-for-profit entities¹², but these cannot be solved through externally mediated accountability measures. The financial accountability measures (like auditing) can also be similar to that of a private firm.

Accountability measures in practice

Considering the discussion in the previous paragraphs, we now discuss the different ways philanthropic foundations practice or are subjected to different accountability measures. It is obvious that there is a need for transparency in the actions of foundations for a number of reasons. People at large should know the objectives of the foundations and the details of their actions (location, target population, etc.). This may enable people or government to identify conflicts of interest if any. Though there are arguments for greater transparency regarding the nature of boards (trustees and members), and these may be useful, my sense is that these are not very important. Instead, higher transparency in actions that have a bearing on society is more important. The financial accountability (to the level that is practised in the case of a private firm) would provide adequate information on the sources of income, and that may also provide information on possible conflicts of interest. For example, appropriate information may come out if a foundation has shares in a company selling a particular product (say, a medicine), and if that product is promoted through the actions of the foundation, through an auditing process which is carried out, usually in a private firm.

Additional accountability measures
Additional accountability measures depend on the core working strategy of a foundation. For example, certain foundations may be interested in investing in R&D and in the development of new products which are useful to the society but for which there may not be adequate investments on the part of for-profit firms. In such cases, foundations should also go through the normal accountability measures that are relevant for the development and dissemination of such products. On the other hand, certain foundations may work with other organizations (like NGOs) to further social objectives. Here, there could be a need or pressures for accountability measures from both sides. Though NGOs may become `contractors’ in this regard, there could be resistance as they may want the status of an equal partner. Cost-cutting measures, such as minimal overheads allowed to NGOs may work against the sustenance of these organizations (which could be socially beneficial). Hence, there are concerns and voluntary decisions on the part of foundations to strengthen NGOs (rather than seeing them as contractors to be used at the lowest cost).

Transparency in selection of partner NGOs
Another concern in this regard could be about the way foundations select their partner NGOs. There could be strategies like open competition and expert assessment for the selection of partners as a way to achieve transparency. The internal concern of foundations about the effectiveness and efficiency may become an important factor here.

Outcome-based strategic philanthropy
Ensuring that funding leads to expected impacts can be a major concern. There could be certain trade-offs in the process followed (like open competition) and the need to ensure the expected outcomes in certain cases. Foundations may come out with new strategies to address these issues. The whole emphasis on monitoring, evaluation, performance-assessment, outcome-based funding and so on could be seen as a reflection of the internal concern about the accountability (which is connected to the effectiveness of organizations). These strategies may evolve into what is called strategic philanthropy¹³. Of course, these measures may lead to certain other issues like the neglect of intangible and not-so-measurable and longer-term outcomes¹⁴. Moreover, social outcomes are determined by a number of factors, and all of these cannot be controlled by the funding or implementing organization. Hence, a focus on outcomes may become unrealistic or may create inorganic results (hence, cannot be sustained or scaled up). How can foundations accept this reality and change practices without diluting its concern for effectiveness, is also an issue. There are also strategies used to make these measurement- or outcome-based approaches palatable to different stakeholders¹⁵.

The challenges in getting expected outcomes through partners (like the NGOs) may encourage foundations to start their own operating arms. Whether to fund actions of other agencies or to directly carry out activities (or to be an operational organization with own funding) would become an important decision then¹⁶. Since foundations have greater control over its own operating arms (and their employees), such a strategy may help them to pursue processes rather than funding (other organizations) on the basis of merely (measurable) outcomes. In essence, these struggles and strategies of foundations are also due to the concern about accountability (to see that the resources spent lead to desirable outcomes for the society).

Accountability in management of employees
The management of employees within a foundation faces certain challenges which are somewhat different from that in private companies, and that may create certain constraints for the achievement of effectiveness and efficiency¹⁷. Since the employees of such organizations cannot be motivated through financial incentives beyond a point and strategies for enhancing intrinsic motivation are important in these organizations, there can be a connection between intrinsic motivation and internal accountability measures. These may include those between management and employees and those between different tiers of employees. The fact that the employees deal with the outside world and carry out tasks which serve certain social purposes would also mean that each employee is accountable for certain social expectations too.

Accountability in working with government
Another way by which philanthropic foundations can subject themselves to a higher level of accountability is by working with the government. Though some view this association with governments as problematic (either due to a possible dilution of the role of governments¹⁸ or the due to the possible loss of autonomy of foundations), its potential to enhance the accountability of foundations is not assessed adequately. Foundations can provide a social or public service directly to a section of the society or in collaboration with a non-governmental organization. However due to the nature of public service, and also other issues discussed in the previous sections, such a provision of public service may not have intrinsic mechanisms to ensure that the service provided is aligned with the interest of the society at large. Working with the government can address this problem to a great extent. By doing so, philanthropic foundations would be subjected indirectly to the government’s accountability to the people. Through this process, foundations would also benefit from the `political’ ways of knowing what people need or demand, and their opinion of a service provided. Moreover, foundations also can get the information from, and implementation support of, the channels of governments that connect with people.

The downside is that the `imperfections’ of governments’ accountability can also influence the functioning of philanthropic foundations (and we discuss this issue in detail in the following section). There are also challenges in working with the government and some of these are discussed here. There is a widespread concern that through this process, foundations may influence the actions and policies of governments¹⁹. Though this requires greater transparency on the part of foundations or a greater willingness on their part to subject their actions to public scrutiny, the crucial issue is the accountability of governments.

The way forward

Whether philanthropic foundations work with civil society directly (and encourage the governments to deliver services better) or work with governments directly, the end result, as noted earlier, depends on the responsiveness of governance in a social context. The achievement of higher accountability in the work of foundations in terms of whether these meet the felt needs of people at large is possible theoretically when these external organizations work with governments, but the realization of this theoretical possibility too depends on the responsiveness of governments. Even if a foundation works independently, the functioning of the accountability measures that it is subjected to, depends on the effectiveness of the government. For all these reasons, it is not useful to think about the accountability of philanthropic foundations in isolation from that of governments.

This can also lead to a vicious cycle. In cases where governments are not very accountable to their citizens, the delivery of public or social services may not be adequate, encouraging the external organizations, like foundations to intervene, but then, there could be issues with the accountability of these external organizations too. Is it possible for foundations to help in getting out of this vicious cycle? If improving governance is important to enhance the quality of social/public services (a task that most foundations have taken up as a desirable agenda), then improving governance could be part of this agenda (without any presumption that these foundations alone can do much in this regard), which is directly connected with the accountability of governments to people at large. Could there be a role for philanthropic foundations in this regard?

There could be a couple of possibilities. Since one objective of foundations is to try out socially beneficial innovations, they can practice socially desirable and newer accountability measures voluntarily (without the enforcement by others). The guidelines suggested by the Council on Foundations (and European Foundation Centre) are aimed at operationalizing such an approach. For example, there could be efforts to improve the working relationship with citizens by making more information available (again, voluntarily) regarding the actions of foundations and the rationale behind them (suggested here). Such a measure needs to go beyond the provision of data to the public to the pro-active building of relationships of trust and reputation²⁰.

If we expect that foundations are genuinely interested in improving the social situation (and there is no reason to distrust most of these organizations), a part of their actions could be to enhance the accountability of all organizations, including governments. The accountability of government depends not only on the formal institutions (elections, judiciary, and so on) but also on the way the majority of citizens use and respond to these institutions. Citizens have voice and exit options and the accountability of governments depends on the effective exercise of these options that are aligned to achieve desirable goals for society. Strengthening these processes and enabling people to make informed choices in this regard are important and philanthropic foundations can play a certain role here. There could be medium and short-term strategies for this purpose. Strengthening civil society, media, public debates, and so on, could be important short- or medium-term strategies.

I would also argue that quality education for all could be an important longer-term strategy. In contexts where the majority is educated, the demand for accountability of governments could be high²¹. This demand for accountability can also extend to other organizations (like philanthropic foundations) which intervene in the provision of public or social services in collaboration with governments or independently. For this reason, foundations should have an interest in quality education for all, if they are interested in subjecting themselves to a higher level of accountability standards.

Author

V Santhakumar, Professor, Azim Premji University

References

Brody, E. and Tyler, J. (2009) How Public is Private Philanthropy, Washington, D. C.: Philanthropy Roundtable.

Glaeser, E L. Ponzetto, G A M. & Shleifer, A. (2007) Why does democracy need education? J Econ Growth (2007) 12:77–99.

Organisation for Economic Co-operation and Development. (2018) Private philanthropy for development. Paris, France: Author. Retrieved from https://read.oecd-ilibrary.org/development/private-philanthropy-for-development_9789264085190-en#page1

Reubi, D. (2018) Epidemiological accountability: philanthropists, global health and the audit of saving lives, Economy and Society, 47:1, 83-110, DOI: 10.1080/03085147.2018.1433359

Rourke, B. (2014) Philanthropy and Limits of Accountability – A Relationship of Respect and Clarity, Philanthropy for Active Civic Engagement. Kettering Foundation.