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Foundations Can Go Where Government Grants Fear to Tread, Says Gates Foundation Leader

March, 2004

Bill Gates Sr. & Mimi Gardner Gates

Bill and Mimi Gates

STANFORD GRADUATE SCHOOL OF BUSINESS—In a rare appearance on stage together, Bill Gates Sr., co-chair of the Bill and Melinda Gates Foundation, and his wife, Mimi Gardner Gates, director of the Seattle Art Museum, spoke about philanthropic giving from the perspective of a donor and a grantee. The discussion drew a large crowd to Bishop Auditorium on February 26 as part of the ongoing Philanthropy Discussion Series cosponsored by the Haas Center for Public Service and the Business School's Center for Social Innovation and moderated by Business School lecturer Laura Arrillaga.

Gates, who directs and guides the $26 billion Gates Foundation, said the public has become increasingly interested in the activities of foundations. This is being driven by current corporate scandals, especially reports of excessive executive compensation, he said, adding that foundations are not heavily regulated and there is little accountability about how they spend. "There is clearly a basis for public interest and concern for regulation," said Gates. "It raises the whole question about the intersection of the foundation world and the public world."

The implied social policy of foundations says "it's as good to have private money going to private charitable purposes as it is to have money coming from the government for governmental purposes. It's significant," said Gates. And, in his mind, it's a social policy that works. Because foundations support such a wide array of issues, the giving most likely mirrors how taxpayers and the government would also spend their money. "Unquestionably, it generates a whole lot of value," he said. Foundations are especially important because they can use their money to take risks in research and cutting-edge social programs that the government can't afford.

Indeed, the importance of foundations is only set to increase, said Gates, with $40 trillion to $130 trillion of wealth to be inherited over the next 40 to 50 years. "There will be a whole array of immensely wealthy people who will create private foundations," he said.

Giving and Measuring Success
Many foundations have been upset by recent legislation that requires them to distribute 5 percent of their assets to charitable causes each year (in the past, that chunk also could pay for foundations' administrative expenses). Gates said the uproar is unfounded. "The assumption is if you don't spend 5 percent you're going to jail," he said. "The only significance of not giving 5 percent is you pay a 2 percent tax on investment income rather than a 1 percent tax. It's not exactly the end of the world."

Another hot-button topic in the foundation world is the debate over the value of "measurable success"—or how a nonprofit can numerically prove a grant has been put to good use. In Gardner Gates' opinion, finding a shared vision of measurable success can be helpful to a nonprofit because it prevents ambiguity and makes organizations think carefully about their future. However, if the process of applying for a grant or meeting certain metrics is too laborious, it can hurt the organization, she added.

Foundations are known to be sticklers about metrics, but Gates admitted that it is often impossible to quantify success. "It's quite a natural urge to want some objective measurement of outcome. It's very hard to get," he said. The Gates Foundation, for example, is working to prevent young people in the Seattle area from growing up to be "dysfunctional citizens." "If someone can tell me exactly how to spend a dollar to do that, please drop me a postcard," he said. "We're finding it complex. It's amorphous enough, we'll probably never get a clear response."

Some initiatives—like preventing deaths in Third World countries from illnesses that no longer exist in rich countries—are easier. "Just watch the numbers. Over time, the numbers will change or they won't," said Gates. "I will say, there's a certain sense of satisfaction involved in charity of that kind."

Both speakers agreed that taking risks is critical for both foundations and nonprofits. Of course, risky investments often don't pan out. The Gates Foundation once learned the hard way. It awarded a former Microsoft employee about $60,000 to introduce computers to a certain part of Africa. But after sending off the money, the foundation never heard from the grantee again. "It was excessive trusting," recalled Gates. In other cases, like putting money toward vaccine research, the high risk of failure is a known factor. Some of the studies the foundation has supported have amounted to nothing. "It's wasted money," he said, but the foundation supports drug research "knowing that some of the money won't be worth a damn."

Some risks have paid off heartily. The foundation spent $250 million putting 47,000 computers in libraries of poor neighborhoods and trained 11,000 librarians. The result: There are now 14 million regular users of those computers, a third of whom earn less than $24,000 a year.

Foundations and Nonprofits: Beyond the Money
The importance of foundations to nonprofits such as the museum she heads extends beyond the monetary grants, Gardner Gates said. Foundations provide about 10 percent of the Seattle Art Museum's budget every year, but just as important, they push the museum to make organizational changes and take risks. Multiyear grants are especially critical, she said. A recent $1.2 million grant from the Wallace Foundation, for example, allowed the museum to reach deeper into the community, involve new audiences, and broaden board and staff. "It's changed the way we think and operate, and how we plan for the future," she said.

Foundations are also sources of knowledge and expertise for the museum. Many are equipped with research and studies that allow the museum to leapfrog tough issues and challenges. They also help the museum leverage private and federal dollars. When the museum won a $1.5 million Mellon Grant for conservation, it had to raise an additional $3 million for the project, which increased the level of professionalism surrounding the project, said Gardner Gates.

About the Philanthropy Discussion Series
The Philanthropy Discussion Series brings in some of the leading thinkers and practitioners in foundation philanthropy. Speakers address foundations' accountability, effectiveness, community responsiveness, and civic mission.

Upcoming Speakers:

April 8, 2004
Jim Canales, President and CEO
James Irvine Foundation

April 19, 2004
Susan Berresford, President
Ford Foundation

May 4, 2004
Tom Tiereny
Bridgespan Group

Dates to be determined:

Steve Young, Founder, Forever Young Foundation

James Allen Smith, Senior Advisor, Getty Trust and current holder of Nielsen Chair, Georgetown University

Related Links

Center for Social Innovation
Stanford Social Innovation Review
Stanford Project on Emerging Nonprofits
Gates Foundation

Other Speakers in the 2003-04 Philanthropy Discussion Series

Sally Osberg, The Skoll Foundation