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Humility in Grantmaking: A Challenge to Do More

Bobby Thalhimer
Advisor, LOCUS Impact Investing

This month, we feature a personal reflection from Bobby Thalhimer, LOCUS Advisor and a trustee of the Richmond Memorial Health Foundation and Chair of its Investment Committee. Bobby also served for 16 years as Senior Vice President for Philanthropic Services at the Community Foundation for a greater Richmond. He reflects on the impact that place-focused foundations have using traditional tools and challenges them to consider new ways to achieve impact in communities.

As a nearly lifelong participant in the work of charitable foundations, it is humbling to conclude that on the whole we have not been successful at our work. Yes, we have had many targeted successes with our grants, but intractable societal problems such as poverty, ineffective education and poor health continue to predominate in our nation’s poorest communities. Every city has pockets of marginalized communities, as do widespread rural areas. In this blog, I propose that we should not rationalize our overall performance by claiming victory based on relatively narrow successes, but rather we should endeavor to build upon them with the aim of lifting up and accelerating the work that residents, nonprofits, CDFIs and social enterprises in these communities are doing to bring about catalytic and transformational change.

Achieving a more comprehensive definition of successful community impact requires new tools. We will have to open our minds to new approaches of investing and making grants, which are our tools at hand. Thinking traditionally, a foundation’s investments are made in the global marketplace to maximize financial return, while a relatively small portion (5%) of those investible assets are granted within the foundation’s defined geographic footprint and programmatic focus areas.  Most foundations believe, as do I, that addressing societal problems will require consistent and creative focus over long periods of time. Thus, foundations tend to limit their grantmaking toward the lower end of what the IRS requires them to distribute; that is, 5% of assets less grant-related operating expenses.

What if we could deploy more than 5% of our assets in our own places without unduly risking the long-term role of our foundations? We can. We can invest a portion of our assets in our own communities—instead of in global markets—using techniques such as program-related investments (on which we do not need to distribute 5%), guarantees, credit enhancements and mission related investments.  Thus, we can accept below, or near market, returns and maintain the spending power of our foundation capital through inflationary times.

But doesn’t local place-based investing carry risks? Yes, but consider that community development financial institutions (CDFIs) have been investing in lower income neighborhoods and rural areas successfully for decades. CDFIs have become vital partners of traditional banks and grantmaking foundations. So, one way to invest locally is to keep a deposit at a CDFI bank or CDFI credit union, provide lending capital to a CDFI, make an equity investment into a CDFI, or participate as a co-investor with a CDFI on critical community projects.  Another way to invest locally for impact, is to make direct investments to fund vital community projects (like safe and affordable housing) that may need more patient and/or more flexible capital than what is available through traditional financing sources.

Humility is required to admit that traditional investments and grantmaking may not be sufficient if a place-focused foundation is to maximize its impact and successfully fulfill its charitable mission. Yet, consider how exploring place-based impact investing can help a foundation “punch above its weight” using new tools of deploying its capital. Think about how a foundation can lead, convene and influence others to invest in vital local projects.  By leveraging its invested capital for critical community economic and development projects, foundations can enhance the quality of life and prosperity for all of their residents.  After all, few broadly impactful projects can be funded by one foundation acting alone. What if we could get collaboration among other place-focused foundations, individuals, corporations and governments to follow our lead? What if we could lead in figuring out the near-term opportunity provided by “Opportunity Zone” provisions of the 2017 tax act, which provides incentives for taxpayers to invest in low-income areas.

In sum, a humble look at a foundation’s long-term success in accomplishing its mission will likely encourage its directors to explore three concepts:

1.     Re-define available capital beyond 5% of assets annually to enable a grantmaking foundation to invest some of its capital locally (rather than investments in the global marketplace).

2.     Think collaboratively with other grantmaking partners to maximize local impact.

3.     Broaden our definition of local partnerships to include governmental entities, CDFIs, for-profit corporations and individual philanthropists.