Georgetown University law professor Brian Galle’s interesting new paper “The (Quick) Spending and the Dead: The Agency Costs of Forever Philanthropy” examines whether leaders of private philanthropic legacy foundations “depart significantly from the preferences” of their original donors.
Specifically, Galle finds that a philanthropic foundation’s “overhead, or the ratio of administrative expenses to grants made, jumps by about 12% as soon as the organization’s last living donor dies. Payout rates, or the share of assets spent each year” on actual grantmaking, “move sharply in the opposite direction, falling about 7% at that time.” He argues “these changes are caused directly by the death of the donor and not some other factor that happens to correlate with the age of the charity.”
Idiomatically, in other words, when the donor “cat’s” away, the foundation “mice” will play.
Galle’s pieces of evidence are helpful to those who’ve long argued that donors—cats, in the locution (though with only one life)—should be much more protective of their intent while endowing and setting up their foundations, taking certain steps to ensure adherence to it. The most-certain such step would be to “spend out” the assets during a donor’s lifetime, of course.
The evidence is also relevant to the current and likely growing debate about whether private foundations should—or even should have to—increase the percentage of their assets they annually pay out, above and beyond the required minimum of five percent necessary for foundations to retain their tax-exempt status.
Some high-profile liberal advocacy groups, citing the country’s current crises and their adverse effects on nonprofit grant recipients, are urging Congress to double the minimum annual payout to 10% for three years.
Galle interprets his own findings as evidence of what he considers and labels “substantial agency costs.” “Since the timing of the donor’s death is relatively random, these outcomes offer convincing causal evidence that the ability of a donor to monitor her foundation’s managers importantly affects whether those managers follow her wishes,” he writes.
“[O]verhead and payout changes in the direction I observe strongly suggest that managers, once free from direct oversight”—the agents, or our idiomatic mice—“are operating the firm for their own comfort and security,” according to Galle. (“Foundation employment is good, steady work,” he later observes in passing, as he also does that permissible administrative costs can include “semi-annual board meetings in Key West.”)
“Thus, by unnaturally extending the lifespan of foundations, law is encouraging wasteful allocation of taxpayer-supported charitable resources,” Galle writes. The magnitude of the gaps “between donor preferences and managerial behavior suggest that perpetual philanthropy is not the best use of social resources,” he later notes.
To reduce the “the agency-cost problem,” among other things, Galle recommends “maintaining or increasing legal requirements for mandatory distributions by private foundations, and closing legal loopholes offered by” donor-advised funds, which are not subject to any payout requirement.
A Sum of All Fears
In sum, then—now (clearly over-)extending the idiom—don’t be a donor cat. If you are, certainly don’t die. If you do, or know that you will, fear a veer from your intent by managerial mice, and try to avoid it.
If you’re a manager mouse, don’t veer from, but adhere to, the cat’s intent. And instead, maybe fear those who have their eyes on “your” foundation’s funds and how they’re spent.
This article first appeared in the Giving Review on June 18, 2020.