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Center for Social Innovation

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Time Isn't Money When Applied to Charities, Says Article in New Journal Published by Stanford Business School

May, 2003

STANFORD GRADUATE SCHOOL OF BUSINESS—Charitable organizations like the Bill and Melinda Gates Foundation shouldn't feel pressured by pundits to distribute their assets faster than the legally required rate of 5 percent per year, argues Stanford faculty member Michael Klausner in the inaugural issue of the Stanford Social Innovation Review, published by the Stanford Graduate School of Business.

"[Some] argue that, just as investors would choose to receive a dollar today rather than a dollar a year from now, so too is a dollar of charity given today worth more to society than a dollar of charity given in the future," wrote Klausner, who is professor of law and Bernard D. Bergreen Faculty Scholar at the Stanford Law School. But this "discounted cash flow" approach is not helpful in thinking about foundation payout rates.

Klausner, who is an expert in nonprofit organizations, finance, and corporate law, wrote the article titled "When Time Isn't Money: Payouts and the Time Value of Money." He was one of the featured speakers at a recent event marking the launch of the new journal. Published by the Graduate School of Business' Center for Social Innovation, the Stanford Social Innovation Review highlights innovative ideas in nonprofit management, philanthropy, public policy, and corporate social responsibility.

His article provides a framework in which to analyze the issues related to foundation payout rates, Klausner told the audience. Good timing. Recent news stories excoriating the excessive retirement compensation package for Dennis Collins, former chief of the James Irvine Foundation, make the case for increasing foundation payout rates. Moreover, Congress is scheduled to debate the issue this summer.

As a starting point, Klausner explained that future generations are no less worthy of charity than the current generation, and that current charity comes at the expense of future charity. Moreover, "because charity deferred to the future earns a return in the foundation's investment portfolio, a dollar withheld from the current generation can be expected to yield more dollars of charity for future generations," he said.

Nonetheless, the framework he lays out would lead some foundations to adopt high payout rates, Klausner suggested. Payout rates, he argued, should depend on a foundation's mission and programmatic objectives. Some missions can be pursued most efficiently if grants are made sooner rather than later. For instance, if a foundation's mission includes conservation of wilderness areas, acting now is more efficient than acting later, when preservation options are worse. The same may be true of other environmental objectives, population control, research to combat infectious disease, and perhaps some social programs.

Higher payout rates may also be warranted for a foundation whose mission is more pressing now than it is expected to be in the future, Klausner said. Foundations whose mission includes support for the arts, for example, might get more bang for their buck by paying out more sooner than by trickling out support slowly. If those who enjoy the arts in future generations are wealthier than those who enjoy the arts today, there is little reason to sacrifice the current generation for future generations.

When it comes to legally mandated payout requirements, Klausner is cautious. He believes that the concern over foundations' administrative expenses should be addressed separately from payout rates. With respect to payout rates, he recognizes that low rates may reflect the personal interests of foundation executives, but he is also concerned that if the law imposes too high a payout rate, the option of perpetual existence may be unavailable, rendering this form of philanthropy less attractive. If that occurs, current and future charity may be in danger, Klausner warns.

Other articles in the new Social Innovation Review include a piece by Stanford Business School professor David P. Baron on what happens when companies and activists square off, and an entry by David Whiteman, associate professor at the University of South Carolina, on how nonprofits can harness the power of documentary film. "Our job is to start conversations, ask hard questions, disseminate the fruits of rigorous research, and showcase examples of what can be done to improve the lot of the world," academic editor Stephen Barley told the audience in his opening remarks. In the search for answers to social problems, "nonprofit organizations and foundations can learn much from business," he said. "But business can also learn much from the social sector. As an extension of the university, it is our job to stimulate that learning."

The first issue of the Stanford Social Innovation Review was mailed to subscribers in April. Subscriptions are available online at www.ssireview.org or by calling 650-725-5399.

—by Theresa Johnston

Stanford GSB News

Time Isn't Money When Applied to Charities, Says Article in New Journal Published by Stanford Business School

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