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Promoting Philanthropy

The Atlas Family Foundation has a longstanding commitment to the advancement of private and public philanthropy in the Foundation's focus areas and the promotion of effective and responsible practices in the field of early childhood education and intervention.

The Foundation has an emphasis on relationship building among grantees and other foundations, listening, building trust, sensitivity to diverse cultural and ethnic communities, collaborations among other funders and between grantees, involvement with outstanding people, exposure to innovative ways of thinking about problems and solutions, long-term commitments, and a willingness to fund organizational infrastructure.

The Foundation supports services through direct grants, commitment to public policy and systemic changes, and by building collaboratives between funders and between funders and non-profit organizations.

The Application of an Investment Model to Grantmaking
An Introduction to The Atlas Family Foundation

By Richard Atlas

The Atlas Family Foundation was formed in 1985 following my selection as a General Partner of Goldman, Sachs & Co., a global investment bank established in 1869. In May 1999, when the firm went "public", Goldman Sachs was the last remaining general partnership among the world's major investment banks.

In 1984, as a new Partner I was given the opportunity to utilize the Firms legal, accounting and administrative resources if I wished to establish a private foundation. This would facilitate the tax-free transfer of appreciated stock from private investment funds that the firm managed, allow full current market value for charitable deductions and provide the opportunity to build assets in a tax free entity for current and future distribution. Longer term it would allow for more thoughtful investment of these charitable assets into the community.

One of Goldman Sachs core values is a focus on creating and sustaining long-term, trusting relationships with clients. In fact, the Firms first business principle states, "Our clients' interests always come first. Our experience shows that if we serve our clients well, our own success will follow." Goldman Sachs was organized along a regional structure. By living and participating in the communities within which we did business, relationships were developed that, over time, created competitive advantage. In addition, the firm understood that healthy communities were necessary in order for our clients to optimize their prosperity. It was in our client's interest, thus our own, that the intelligent commitment of charitable resources would ultimately benefit us all.

The formal establishment of our family foundation was the beginning of a more thoughtful approach to the practice of philanthropy. Nevertheless, for many years, we continued responding to fund raising solicitations and appeals from friends and business associates without a plan to what we were trying to accomplish. At the end of each year as we summarized our "charitable contributions" for tax purposes, we realized there was never a coherent theme or strategy to our philanthropy. The day-to-day processes of managing family and career responsibilities seemed to distract our attention from intelligent giving. While this disorganized approach to philanthropy made no sense we didn't take the time to think about how to actualize a more strategic approach to grant making.

From the mid-80's into the mid-90's the investment banking business soared. Much of the world moved toward market driven economies, East European governments became more democratic, and regulations and controls limiting trade and finance between countries were significantly reduced. During this period of time, Goldman Sachs competitive position improved and the Firm reached historic levels of profitability. While the fruits of this success benefited all of the firm's employees, the majority of the profits accrued to the equity owners, the Partners. This success, created economic security for our Partners at a relatively young age, thus allowing us the opportunity of earlier retirement than what was available to most people.

Toward the end of 1993 I began to think seriously about what I wanted to do following my career at Goldman Sachs. I had just concluded my twenty-fifth year at the firm and was feeling the urge to move on to another stage in my life. My interest in nurturing the community had evolved over time into becoming the most satisfying of my activities. I retired at the end of our 1994 fiscal year to devote my time to my family and our local community.

In anticipation of my retirement, my wife, Lezlie, and I began to focus, study and think about developing a personal philanthropic vision. I visited many well-established foundations in California, both large and small. I learned about grant applications and reviews, site visits and due diligence. I observed the decision-making processes in foundations - some that were staff driven and others that operated with significant board direction. I saw the uneven distribution of power and influence between grantors and grantees and examples of how this distorted the integrity of communication between them. I learned what is often lost when the relationship between grantors and grantees is not open and trusting. I saw how reticent grantees were to admit failure and wondered about the waste to the community when we are prevented from learning about what went wrong and how to make it better. I began to wonder why there was so little attention paid to the evaluation of outcomes. Why was there a reticence to spend money to learn what was effective, what wasn't and why. I analyzed the difference in returns on human capital between preventive and corrective strategies. And then began to think about the application of an investment model to the process of grant making.

My experience in investments had taught me that the creation of wealth is most likely to come about through the focus and concentration of resources. Contrarily, diversification strategies are most appropriate for the preservation of existing wealth. Over time I learned that most foundations are very broadly diversified both in the areas they fund (Culture, Health, Education, Youth, Adults, etc.) and the portfolio of grantees (non-profit agencies) they support. Yet, I wondered why should our investment in community assets be governed by different rules than those that apply to the financial assets that fund the giving?

While most of the foundations I visited had significant financial assets and were broadly diversified in their investment portfolios (stocks—large cap & small, growth and value, bonds—government, corporate, high-yield and foreign, commodities and real estate) as well as in their grant making, Lezlie and I had more limited financial resources. In order for us to create long-term, sustainable impact on our community, it was going to be necessary for us to concentrate our grant making: we would be narrow and deep.

Soon after my retirement from Goldman Sachs, I was elected to the Board of a new California-based foundation, The California Endowment. The Endowment came about through the conversion of Blue Cross of California from a non-profit health insurer to a for-profit insurer to be known as Wellpoint Health Network. In allowing the conversion, regulators in California, the Attorney General, whose office oversees foundations, and the Commissioner of Corporations, who regulates for-profit businesses, negotiated with Blue Cross/Wellpoint, mandating that the net worth that had been created through Blue Crosses non-profit status for 60 years was properly the property of the citizens of California, rather than the management of the soon-to-be for-profit company. Their logic was based on the fact that for 60 years, Blue Cross as a not-for-profit health insurer had never paid taxes. Thus, the citizens of California had been denied the services a tax paying Blue Cross would have funded. The Endowment was initially funded at $2 Billion (currently $3.5 Billion). Its mission was established to "…improve the access to and enhance the quality of health care for underserved populations in California."

During The Endowment's initial six months of operation, I served as Interim- CEO while our Board conducted a search for a permanent leader. Leading a large new foundation was an incredible privilege. Through my exposure to a diverse Board, whose membership mirrored the diversity of California, an incredibly dedicated and knowledgeable staff and access to knowledgeable outside consultants, I learned about health care in its broadest definition, and the issues, obstacles and challenges faced by people of low economic and educational status.

In addition, during this period we made decisions on organizational structure, grant making policies and philosophy, asset allocation and the selection of investment managers for our investment portfolio, and began the development of a relationship-based culture between the board and staff.

My experiences in this responsibility had important consequences for the evolution of The Atlas Family Foundations mission and grant making style. This was primarily due to my exposure to the communities The Endowment served; ethnic minorities, women, children, the elderly, disabled, and immigrants (both documented and undocumented). In addition, I gained an understanding of the impact of culture, geography and economic status on health outcomes and disparities among different populations.

Lezlie and I reviewed what I had learned during this period of analysis and through my role at The California Endowment. Along with Janis Minton, our Executive Director, we began to put together a mission and vision for what we wanted to accomplish and how we would make it happen. Ultimately, the Atlas Family Foundation trustees decided to work in low income, high-risk communities which did not have natural constituencies of support. The traditional institutions that we formerly funded, such as our and our children's former schools and local museums and hospitals, generally catered to middle income communities with access to resources that the underserved could not reach. We envisioned a portfolio of grantees representing the cultural and ethnic diversity of our community. This served our desire to gain exposure to and knowledge from the complicated and chaotic world close by.

The Atlas Family Foundation concentrates its charitable resources in early child development and parenting education programs impacting children from conception to 3 years of age and their families. Early childhood is both the most critical and the most vulnerable time in any child's development. Research demonstrates that in the first few years the ingredients for intellectual, emotional, and moral growth are laid down. Early intervention programs taking corrective action on children's social, emotional and cognitive problems as they are developing have high success rates and are relatively inexpensive. As children get older, the interventions are much more costly and the probabilities of success much lower. Failing children in their early years has long term results, all of which are negative.

When there are secure, empathetic, nurturing relationships, children learn to be intimate and empathic and eventually to communicate feelings, reflect on their own wishes, and develop their own relationships with peers and adults.

Our commitment to early child development is not just a social concern. Human beings have to be able to work cooperatively, compassionately, and empathetically with others in a group in all aspects of life. It takes cooperation and organization for family, community, or societal groups to function. This requires the capacity for empathy and compassion, for understanding and for coping with feelings in constructive and mature ways. New generations of children will be able to carry out these functions only if they are reared in nurturing, empathetic families. Advanced societies, in order to compete economically and militarily and through stable government structures, require nurturing care for the children who will become adults. In essence, behind the competitive advantage in evolution, lies nurturing care.

By having the discipline to stay focused, our ability to impact the problems we are addressing is much greater than if we were to be more diversified. What all of this means, of course, is that we are not supporting many worthwhile programs that do not fall directly within our mission.

We also approached philanthropy utilizing some of the same values and strategic approaches that I found successful in my professional career. This included an emphasis on relationship building (among other foundations and grantees), listening, building trust, sensitivity (to diverse cultural and ethnic communities), team work (collaborations), involvement with outstanding people, exposure to innovative ways of thinking about problems and solutions, long-term commitments, a willingness to fund organizational infrastructure, and ultimately, the application of an investment model to grant making.

The Application of an Investment Model to Grant making

Grant making Foundations primarily engage in two activities:

• The business of investment management to support and increase grant making capacity, and
• The process of making grants to influence individual and community change

In most cases we contract-out the management of our investment portfolios. Often we engage an investment consultant to help us develop investment guidelines, an asset allocation strategy, assist in the selection of investment managers, set appropriate performance benchmarks and help us manage the ongoing investment process, monitor and understand the investment results.

While the grant making process is generally internally managed, when we approach areas where we lack knowledge and experience, some of us will engage consultants.

Following almost 27 years at Goldman, Sachs & Co., dealing with institutional and wealthy private investors worldwide, I came to the world of philanthropy with no preconceptions about the fields' best practices. Through the lessons learned in founding and operating our family foundation, the observation of clients' philanthropy and the sharp learning curve I experienced as initial interim-CEO and Board member of The California Endowment, I began to recognize many similarities between successful grant making and successful investing.

The similarities included the following:

• Developing a philanthropic mission and vision was similar to an investor defining his/her investment objectives.
• Establishing grant guidelines consistent with the Foundations' mission in order to direct and assist potential grantees resembled an investor establishing investment policies and guidelines.
• As fiduciaries in managing our investment portfolio, we develop an asset allocation plan to help us diversify among different asset classes (stocks, bonds, real estate, cash, etc.). In the world of philanthropy we might allocate distributions between responsive grants and strategic initiatives, or in the case of many foundations, between program areas such as education, health, economic development, culture and others.

Yet, while the similarities were basic, I was very surprised to find that many foundations apply much different standards of discipline and due diligence to the implementation and evaluation phases of their philanthropic and investment strategies. Investors with informal or undisciplined processes often are disappointed by the results of their investment activities. I believe the same is true with philanthropy.

In his book "Inside American Philanthropy: The Dramas of Donorship", Waldemar A. Nielson writes:

"It might be logically assumed that when successful business leaders start what is often the last great enterprise of their lives, they would seek sound advice from people familiar with the field, review the experience of other institutions, assemble a board and staff of proven competence in philanthropy, and define the progress of their new foundation based on a thorough study of social or scientific needs and opportunities."

"But in most cases, they turn to family members and old friends. Donors rarely define any clear philanthropic objectives of their own. Instead they craft a foundation charter simply by taking the boilerplate language ordained by the tax code."

These observations are very consistent with what I have seen.

Investment decisions are based primarily on the rigorous economic, financial and currency market research, which analyze business conditions, interest and exchange rates worldwide. In addition, fundamental corporate analysis by industry experts is based on close contact with management and comparison across industry groups throughout the world. We invest in good companies considered to have strong management and proven track records.

Do we maintain similar standards of in-depth, quality analysis to our up-front review of potential grantees? Do we look for agencies or organizations that have?

• Strong and deep management with a history of continuity,
• An annual planning and budgeting process,
• A well thought out strategy including a 3-5 year plan on how they plan to:
• Impact their client base,
• Build an important competitive position in their line of service,
• Insure that resources are consistent with strategy,
• Develop and maintain fiscal integrity,
• Form and inform an independent and committed Board, and finally
• Establish a process by which they are able to monitor and evaluate their performance?

Leslie Kautz, an investment advisor to large foundations and endowments adds, "I think a factor to assess regarding grantees is whether they have organizational attributes that allow individuals that work there to be excellent. A common attribute of good investment managers is employee ownership. I have been thinking about where the analogy to employee ownership would be in the non-profit sector. There's no parallel to the prospect of significant wealth, but the other distinguishing characteristic of employee-owners that is replicable is autonomy. Perhaps a goal of philanthropists should be to give their grantees more autonomy to act according to their best ideas and be freed from things that distract them from their true mission, e.g., fund raising. This is another argument for grant making to build capacity, e.g., computers, voice mail, Web sites, and other forms of technological and organizational leverage."

How many of us require the same fiduciary prudence in our grant making that we expect in the management of our investment portfolios?

It has also appeared to me that in many cases foundation trustees are much less involved in understanding the contexts surrounding their grant making decision responsibilities than they are in the decision making processes practiced in their profession. For example, how much time do trustees spend on understanding the communities they are serving and analyzing and understanding the outcomes and community impact of their grants?

In fulfilling their Board responsibilities corporate directors are required to possess an understanding of the key economic dynamics of their industry. Do our foundation trustees hold themselves to the same standards of knowledge and understanding when it comes to their philanthropic responsibilities?

The best directors do. According to Nielson:

"They have large ambitions for their philanthropy and big ideas about how their foundations should function. They apply their entrepreneurial talents to their grant making as they did to their business. They spend hours talking with creative leaders in the fields of their philanthropic interest."

It has occurred to me that many of the successful investment paradigms that have been established over the years by professional investors can be applied to grant making. What are the rules one must follow if philanthropy is approached as a process of investment rather than charity?

• Have a clear sense of what it is that you wish your philanthropy to accomplish
• Do you want to focus or do you want to diversify? In the world of investing, focus carries high returns as well as high risks. While most of the wealth created in the world has come from a focused approach, diversification has been shown to be the best approach for wealth preservation. Focus may enhance our ability to impact an area of interest. Diversification spreads our giving over a broader arena of activity but may not allow us to have sufficient impact or achieve excellence in all we do.
• Where are each of us and our foundations located along the spectrum of "preservation and growth"? Are our vision, mission and values supportive of grants that preserve and grow existing programs, encourage new programs, or some combination of all? Does it come about through a well thought out plan or through happenstance? Again, do we manage this process with the same level of prudence we attach to our investment portfolio?
• Understand and try to quantify the risks you are taking to insure that you are comfortable and can sustain them. This should occur prior to funding an investment or a grant.
• Are we diligent and disciplined about accepting risk only where we believe we will be fairly rewarded? We may decide to take a large risk if the impact or return it offers is significant in bringing us to our goal or if failure carries with it the opportunity to learn something meaningful that will enhance our success longer-term. The key here is to know what you're getting yourself into at the front end: minimize surprises.
• Have a long-term perspective. Longer holding periods dramatically reduce the risk of loss. For example, in the case of common stocks, annual returns have been positive for 49 out of the last 69 years, five and ten-year rolling returns have been positive for 58 of 65 and 60 of 65 years respectively, and twenty year rolling returns have been positive for 50 out of 50 years.
• While few of us are likely to fund many programs consistently for ten or twenty years, we all can recognize that significant incremental knowledge as well as leverage can accrue through the knowledge gained from longer-term relationships. In fact, there is a body of program science that supports the theory that long term commitments are essential to change and positive outcomes.
• While multi-year commitments to our investment managers are typical, the same is generally avoided in grant making. Why? Also, most successful investors have low turnover in their investment portfolios. Turnover carries with it transaction costs that eat away at investment returns over time.
• Most funders are concerned that their grantees may become dependent upon their support. Yet, if a program is consistent in its ability to impact its constituents, does it make sense to withdraw our support?
• We often times require prospective grantees to develop new ideas or new approaches in order to receive funding, often-times under-funding successful programs that require operating funds to sustain their impact. In the process, staff people spend time re-merchandising, re-packaging and grant writing rather than delivering effective services. Would we require a successful investment manager to leave a successful investment strategy to pursue something new and innovative in order to retain our account? No, just the opposite.
• In the field of real estate investment, successful properties require continual up-keep and reinvestment to maintain value. This requires the investor to insure the availability of operating funds necessary to sustain the property through difficult market cycles. Why is it that most funders resist funding core-operating expenses?
• Many investors fall into the trap of pruning their flowers and watering their weeds. They have difficulty taking a loss since it confirms failure, while taking investment profits is experienced as a personal success. Sometimes foundations engage in a similar practice through their natural instincts of "bailing-out" ailing organizations.
• While successful investors prune the weeds and nourish the flowers, funders will often help sustain an organization that can and should die.
• How do we differentiate between an organization that has only a past and one that also has a future?
• Most of our investment portfolios have similar characteristics: We invest in good companies considered to have strong management and proven track records.
• How rigorous are we in studying the management and leadership skills in the agencies we are funding?
• What about the quality of key staff reporting to the executive director? Is there training for the next generation of leaders?
• How effective are we in understanding the comparative advantage or incremental impact that a program promises?
• Do we make demands of our grant making teams (Program Officers) similar levels of intense analysis that we demand of our investment managers?

Leslie Kautz adds, "I think there is a lot of focus among grant makers on building processes and organizations, and a general reluctance to back charismatic individuals. This is often a mistake, and a clearly useful analogy comes from venture capitalists. VC artists will chase talented, exceptional individuals with the capacity to make things happen to the ends of the earth, almost regardless of their ideas, per se. Likewise some investment managers depend on individuals more than process. While this carries some risk, it's a great strategy for achieving investment results in many cases. Philanthropy is a perfect avenue for backing exceptional individuals doing things in the community that are not properly recognized and rewarded in a market economy, but are nonetheless critical to our society."

• How involved should grant makers be in the daily life of the organizations we fund?
• For long-term sustainability, service organizations require the same administrative and leadership infrastructure as successful for-profit businesses. Yet, where do they get the teaching and mentoring resources they require and who will fund their training?
• Venture capitalists, who invest funds in promising start-up firms, hold Board seats, provide technical assistance and many times have further significant involvement in the affairs and governance of the companies they capitalize.
• As grant makers, I have been a bit surprised at our reticence to "get more involved" with our grantees, especially in the area of technical assistance. Individuals lead most of the organizations we are funding with little background in the management, administration, marketing and financial functions upon which their organizations are dependent.
• Whatever the investment vehicle, analysis of returns is always of paramount importance. In the securities portfolios endowing most foundations, benchmarks are established against which the performance of the financial assets is evaluated. These benchmarks are different for each of the asset classes, thereby allowing us to properly measure results against appropriate values. Benchmarks are established in consultation with the investment managers responsible for each piece of the investment portfolio.
• Do we require our grantees to work with us to jointly develop and agree upon evaluation benchmarks appropriate for the program to be funded?
• Would we allocate investment funds to an outside investment manager prior to the establishment of evaluation criteria?
• The process of evaluation is as important as the outcomes: There is so much to learn from documentation of results:
• If we are short of our benchmarks, we have the opportunity to make mid-term corrections. We also, upon further review, may conclude that our project should be shut down and the resources reallocated.
• If we are hitting our benchmarks, documentation may facilitate access to additional funding as well as the probabilities of replication of the program in other settings.
• We also may find that the benchmarks were inappropriate. In this case, we must be objective and not readjust the "bar" just because we couldn't jump over it.
• Evaluation of outcomes have certain short-comings:
• They can be expensive; would the dollars spent on evaluation be better invested in direct service?
• They can take along time to complete; does the delay in obtaining the information limit its usefulness?
• It is very difficult to isolate the effect of a program on outcomes as there are so many other issues impacting the area.
• Nevertheless, evaluation is a terrific tool for learning as it is informative in nature. The information generated from evaluations should improve our decision-making.
• There is as much to learn from our failures as our successes.

Leslie Kautz adds, "Clearly any grant should be accompanied up front by a set of clear, realistic goals the grant is expected to attain, but I think benchmarking can be overdone in philanthropy. Setting benchmarks and paying minute attention to them makes sense in investment management because passive alternatives are so easily available, and the impact of failing to meet a benchmark can be measured to the last penny. In most other endeavors it's not even remotely so clear cut. What's more important is performance attribution. Performance attribution tells you where you've made mistakes, and what has worked well, and what the impact of various decisions has been. Creating relationships where the goal is to learn from mistakes, not to avoid them, is critical, and performance attribution is a tool for accomplishing that."

Evaluation can provide feedback to grantees allowing them to build on a successful approach, revisit and revise strategies not meeting expectations, by informing the broader community, facilitate the attraction of additional resources to proven interventions, and prioritize to those approaches offering the highest returns. Not investing in evaluations prevents grantors and grantees from intelligently allocating scarce philanthropic resources to the highest return community investments.

In Summary, it is the scarcity of resources that most influences the application of an investment model to grant making. Limited resources require us to be thoughtful at the front end; in the development of a vision and mission, the selection of board members and staff to mirror the communities and areas that we will serve, the thoughtful establishment of policies and guidelines and most important, the implementation and evaluation of a grants programs.

Richard Atlas
April 6, 2005