Conceptually, to what sort of standard or standards, if any, should giving advisors of various sorts be held, by whom, and how?
This article, republished with permission, originally appeared in Inside Philanthropy on January 27, 2022.
Within the financial-services industry, there has been an ongoing debate for years now about the legal, moral and ethical standards to which certain types of advisors should be held.
Risking oversimplification, investment advisors, who work directly for the client, have historically been held to a “fiduciary” standard—they must place the client’s interests ahead of their own—by law, regulation and licensors. To the client, they have a duty of loyalty and care.
Investment brokers, by contrast, also make recommendations to an investor, but work for the broker-dealers that employ them. The brokers need only believe that their recommendations are “suitable” for the client, a lower standard than the advisors’ fiduciary one. To some, that’s not good enough.
What does this have to do with philanthropy? While finance is a different field in many ways, some comparable debates have been happening in the world of charitable giving, as foundation trustees, program staff and consultants grapple with a surprisingly tricky question—for whom, exactly, do we work? The board? The donor or donors? The deceased? Or, as a current trend in giving suggests, community members?
While it’s unlikely grantmakers will ever be governed in the same way as financial advisors, and shouldn’t be, the debate about the standard to which financial advisors should be held offers insights into how givers and their advisors should think about these questions—in general, but specifically in terms of respect for donor intent and the degree to which personal considerations should matter, if at all.
A thought experiment
A Department of Labor rule that would also have applied the fiduciary standard to brokers was to have been phased in starting in 2017, but lawsuits delayed it and then a 2018 Fifth Circuit Court of Appeals ruling prevented its implementation. There may be future attempts to at least widen the fiduciary standard’s application.
Few seriously propose that there be legal, regulatory or licensing standards imposed on those who provide advice to philanthropists, foundations or grantmaking organizations, and that would be a decidedly bad idea. One could perhaps imagine a voluntary “regulatory” framework revolving around certification and a set of standards or best practices, but it would be quite difficult to develop consensus around the project and maybe even more difficult to make it actually workable in practice. Probably a bad idea, too.
For potentially helpful insight, however, a thought experiment: Conceptually, to what sort of standard or standards, if any, should giving advisors of various sorts be held, by whom, and how?
“Foundation staffs don’t like to hear it, but we all work for a dead man or woman, a boss like any other, who expects money to be used efficiently and effectively,” Carl Schramm told me three years ago, recalling his time as president of the Ewing Marion Kauffman Foundation. That’s right. Foundation program officers owe that which would be considered a fiduciary duty of loyalty and care to the original donor or donors. As in the case of Kauffman Foundation donor Ewing Marion Kauffman, the “boss” or “client” may even be dead.
The foundation president works for the donor, and foundation staff work for the president and must place leadership’s interests ahead of their own. To the degree it’s necessary to better articulate or clarify those interests, that’s the board of directors’ job. And it’s the board and its selected executive or executives who should hold staff to the high standard. To the degree program staffers may compromise their ability to meet it, intentionally or not, the board and executive should internally hold them accountable—up to and including severing the employment relationship.
The duty is certainly breached if there’s an actual outright undisclosed conflict of interest, financial or otherwise, of course. Short of that, though, there’s a wide spectrum of more nebulous factors that could risk breach, and there should pretty much always be a touchy sensitivity to it—ranging from serving formal roles at or with grant-recipient or -applicant organizations to allowing themselves to be seen as “playing favorites” in making recommendations or evaluating performance.
“I remember when I came to the Kauffman Foundation, I discovered that any number of our staff people were on the boards of entities that were supported by the foundation. My very first management act was to disturb this custom,” Schramm also said. “The people serving on these boards effectively were being treated as if they were the children of Ewing Kauffman. Foundation leaders must remember the corpus they husband is not their money.”
Former Lynde and Harry Bradley Foundation President Michael S. Joyce, for whom I worked, strongly held this same position. The thinking sure seems in serious tension with much of contemporary establishment philanthropy’s desire to think well of and draw attention to its obviously high abilities, including to oversee the affairs of grant-recipient groups—which have to let foundation officials meddle in their affairs, whether or not they’re adding value beyond cutting the checks.
Program officers should internally hold themselves to the same standard, too, with the necessary, but unfortunately uncommon, humility and discipline to do so. Were there an imaginary “fiduciary standard” for program officers in big American philanthropy, it’d currently be often outright breached, and more often—too often—seriously compromised.
Widening the spectrum
For more nebulosity, widen the spectrum to include “independent” advisory board members, outside reviewers and consultants. In most cases, for their wisdom and advice, they will have been retained by the foundation or grantmaker to whom they thus owe something. In most cases, as well, they’ll be employed by another entity to whom they also owe something in return (not unlike investment brokers in our analogy).
That which they owe to the client, and separately to the employer, might conflict, or at least be in tension—good as they’ll likely be at rationalizing away or reconciling any such dissonance. When considering already-existing professional and personal connections, for example, an advisor might plausibly think that these are why they were asked to participate in the first place, after all. Or maybe the firm’s other clients fully share this one’s goals and worldview—or, at least, they largely overlap—so tailoring guidance to other donors’ interests isn’t wrong or anything. As always, moral and ethical compromise is awfully tempting.
By this thinking, some forms of “participatory grantmaking” may also raise a concern. Participatory-grantmaking proponents urge that the actual, real-life people affected by a philanthropy’s work should be more involved in it in many potential ways. The anti-elitism giving rise to the concept is laudable, to me, and should be encouraged.
The specifics of how to put this concept into action are still being debated and defined. If it becomes the case that those affected by a grantmaker’s work who are part of a participatory-grantmaking structure are working for or affiliated with existing or would-be grantees—and, specifically, somehow formally “in on” the grantmaker’s decision-making process—well, then duty-confusing and standard-stretching compromise might be even more tempting than in the already fret-causing cases of advisors and consultants.
Given the involvement of humans beings in many grantmaking advice exercises, regression away from the equivalent of a “fiduciary” and toward a “suitability” standard seems a real risk. It should be and often is borne knowingly by client givers in these cases, of course, but it should never be forgotten by any involved parties.
The fact that it’s almost always good enough to meet a de facto lesser “suitability” standard, if it becomes more the norm in philanthropic advising, would be too bad.