Finance

Cons Of Starting An Endowment

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Recently there have been some conversations around my organization and town in general about whether it is worthwhile to try to bolster an existing endowment. People have mentioned that there has been a trend away from establishing endowments in recent years. I started wondering what the thinking behind that was and what the alternatives might be.

It just so happens Non Profit Quarterly reprinted a piece that talks about the pros and cons of establishing and endowment.  On the con side is the issue is the idea that you are locking up money the organization could use now and disbursing it in the future when the same dollars don’t buy as much. Thirty years ago it may have seemed really attractive to learn that the organization would be receiving $25,000 a year from the endowment. In 1989 that could cover the salary for a position, but that money doesn’t go as far today. (Though there are plenty of places offering $25,000 as a salary.)

Current needs is the one that at least one of your board members will bring up, and is very possibly the reason why your board will vote not to have an endowment. “Why should we put a million dollars in a bank account when we can use that to serve a million more lunches?” Or buy a hundred thousand more books. Or facilitate a thousand more adoptions. Or renovate the façade of the theater. Many nonprofits are in dire need of more money, and most can at least think of an immediate way to use more….Some people go so far as to say it’s not ethical to lock money in the bank when there are so many necessary ways to spend it now. Before you know it, you have bad press and declining donations—and you wish you’d never thought of raising an endowment.

You may look jealously upon organizations receiving large payouts from their endowments, especially universities, but by and large these groups have a staff that is actively managing an endowment. A staff is required to grow an endowment to the size it yields enough to support your activities. But you need to have started with a large enough endowment to support a staff in the first place.

Enough Sins To Go Around

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A couple weeks ago Ali Webb wrote the provocatively titled Philanthropy’s Seven Deadly Sins on Non-Profit Quarterly.

According to Webb they are,

Blindness to privilege
Dismissing community knowledge
Misplaced accountability
Poor partners
Failure to learn
Risk aversion
Lack of transparency

Some of the sins were more specific to philanthropic foundations than non-profit organizations in general, but I saw some parallels with topics I have discussed in the past.

I am relatively sure most people recognize that “Blindness to Privilege” is a significant issue right now.

Carlisle observes that, “There are increasingly few places in the country where there’s not going to be significant racial and cultural differences…where people who have been very sheltered or in dominant culture settings are beginning to say, ‘Wow, we are fish in water. We didn’t know we were fish. We didn’t know we were swimming in water.’”

Don Chen, Director of the Equitable Development Team at the Ford Foundation, remarks that he wishes he “had a dollar for every organization that comes to me and says our board came up with a new strategic plan, and we are going to focus on equity. These same people aren’t talking about equity as a core value or a core component of their mission; they are often talking about equity as a topic. That’s a warning sign for me because it could be dropped like any other topic.”

In the sin of “Dismissing Community Knowledge,” I saw some familiar phrasing.

Keller observes that too often, “we ride into communities, stand before them, and tell them what they need to do to solve their problems. Then we ride out, expecting programs to be scaled and sustained.”

“Foundation people tend to over-intellectualize but under-experience the challenges of those they seek to serve with no authentic proximity to the issues,” says Carlisle. She continued, “The validity that comes with seeing and understanding different world views, which are not dominant culture, can have extraordinary outcomes.”

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Chen calls it “drive-by grantmaking,” where foundations make a grant and then go away for a year or two. “Local folks have a BS meter and they know if you don’t trust their knowledge,” says Harris.

For me, this echoed what Marc Folk of the Toledo Arts Commission said about riding into a community on a white horse and Margy Waller’s “We’re From The Arts and We Are Here To Help,” post I wrote about two years ago. Likewise, Ronia Holmes piece about arts organizations being bad at community outreach which I also wrote about also has resonance with this “sin.”

From a recipient point of view, the “Failure To Learn” sin encapsulated a lot of the issues non-profits face today with the expectations of funders. If you read Vu Le’s Nonprofit AF blog, you will be familiar with these gripes.

“In philanthropy, we don’t always clean up our messes when we change priorities and make transitions.” Hegarty offers that the unwillingness to learn may stem from “a tendency to think we are the smartest persons in the room and the assumption that we have all answers and understand all the angles.”

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Another possibility that Chen offers is that the field is “delusional” about what was or could be accomplished with the amount of money offered. Sometimes, Chen said, the sector believes it is “smarter than everyone who ever came before. Especially when working in in under-resourced, low-capacity places, philanthropy tends to think it has super powers.”

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“We ask a lot of our grantees and then what they share with us goes into a black hole. We never do anything with the information to further the work,” said the officer. “Without processing the information and developing a vehicle to get it back to the grantees, much learning is lost.”

All of this is something to think about. It is difficult to effect the change we like as fast as we think we should, but being reminded of these concerns on a semi-regular basis feeds progress.

Often We Pay More For The Illusion Of Control

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If you want a lesson in the power of custom and pricing psychology winning over objectively better options, check out this New Yorker piece on failed attempts by restaurants to eliminate tipping.

Research conducted by Michael Lynn, at Cornell University, who is the foremost academic authority on tipping, has shown that people of color receive lower tips than their white colleagues, which arguably qualifies tipping as a discriminatory pay practice. The system perpetuates sexual misconduct, because service workers feel compelled to tolerate inappropriate behavior from customers who hold financial power over them. As restaurant prices have risen, gratuities—which are tied to sales, as a percentage—have too, so that there is now a substantial and hard-to-defend disparity between the pay of the kitchen workers who prepare food and the servers who deliver it.

A statistical model created by Ofer Azar…found only a small correlation between tip size and service quality, leading him to conclude that servers were motivated mainly by other factors …Another study by Lynn showed that perceived service quality affected tip size by less than two percentage points. A female server, by contrast, can expect to hike her tips by an average of seventeen per cent if she wears a flower in her hair.

A number of restaurant groups and owners have tried to eliminate tipping to help resolve this issues. Some have decided to eliminate tipping and set their prices higher in order to provide health and leave benefits in addition to a living wage.

While there have been some difficulties finding people who are willing to work in a no-tipping environment, the bigger problem is resistance from customers.

New research by Lynn shows that when restaurants move to a no-tipping policy, their online customer ratings fall. One factor that explains that dissatisfaction is how we, as consumers, respond to “partitioned” prices versus “bundled” prices. A partitioned price divides the total cost of an item into smaller components—say, a television listed for a hundred and ninety dollars that has a ten-dollar shipping fee. A bundled price would list the television, shipping included, for two hundred dollars. Consumers tend to perceive partitioned prices as cheaper than bundled ones.

Later the article notes people have an aversion to service charges. Even though people will typically tip 20%, if a 15% surcharge is automatically added in the place of tipping, people perceive it as a “gotcha” even though it means they will pay less. People also believe that service will suffer in the absence of tips.

There is a lot in this article that speaks to the value of using psychology in pricing strategy and providing the perception of the consumer being in control.

If you have ever shopped on sites like Amazon where there are multiple sellers of an item, if you pay attention you will often see items that are offered a few dollars cheaper than the rest of the group—until you get half way through the transaction and you realize that with the shipping and handling it is much more expensive than the sellers who offered free or included shipping. I often wonder if they are counting on people not noticing or deciding it is more trouble to back out of the transaction and starting anew with another vendor.

Surcharges on ticket sales would likely disappear immediately if the sales weren’t restricted to a single service. (Ticket prices rarely fall below face value on re-seller sites.)

Speaking about the ethics and motivations behind your pricing does gain traction with certain demographics and may make them more willing to pay a higher price if they know people are being taken care of. But this New Yorker story seems to suggest tricks like ending a price with a 9 rather than a 0 will still be a significant motivator of purchasing behavior.

Knight Fdn Looks To Fund Technology Connecting People With Art

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A heads up to people who have, (or know people with), innovative ideas using technology to connect people with arts and culture, the Knight Foundation is looking for project ideas via the Knight Prototype Fund.

Unlike some of the other projects the Knight Foundation funds, these projects don’t need to be set in the communities it traditionally supports which is why I wanted to bring it to everyone’s attention. As the prototype term suggests, they expect some of the concepts to be in the early stages of development.

Applicants don’t necessarily have to work for an organization. We’re looking for ideas from arts organizations, artists, technologists, designers, educators, researchers and others inside or outside of institutions who are eager to experiment. We’re open to diverse approaches and perspectives on the use of technology to connect people to the arts, and seek to identify projects that have the potential to be replicated by others in the field.

What can we build to help arts organizations expand their use of technology? How can we use the qualities of new mediums to create unparalleled experiences? How can we replicate solutions, so that more in the field benefit? How can we learn more about the people we are trying to reach and design solutions that understand their needs? How can arts institutions provide magic outside of their four walls? How can cultural organizations breathe warmth into technology?

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We hope to invest in projects that have provocative questions at their core that can only be answered through the act of making them a reality. Grantees will join together over a nine- month sprint to learn innovation techniques and test ideas.

They anticipate the average grant will be around $50,000. Deadline is March 6. They are hosting an online Q&A from 1 to 2 pm ET on February 21 (connection instructions at bottom of the page)

As an example of the type of thing the Knight Foundation has been doing lately, they partnered with the creators of Pokemon Go to see if similar games or tools could help build community.

It sounds like they would be open to projects that pushed the envelop even further as well as repurposing existing tools in a manner few people have considered.

One of the things I most appreciate about what the Knight Foundation proposes is that they are going to provide applicants with training in innovative methods as well as bringing them together to learn from each other. This acknowledges that innovation isn’t generated in a vacuum or emerge from a lone genius working in a garage, but rather builds on past work in new ways, often in collaboration with others.