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Inherited Wealth May Pay Bills, Not Do Good

May 2004

STANFORD GRADUATE SCHOOL OF BUSINESS—Many believe the foundation sector is on the cusp of a golden age. Baby boomers will soon inherit a tremendous amount of wealth and will be able to start to seriously give away their money.

But even with this rosy picture, Kathleen McCarthy, director of the Center for the Study of Philanthropy at the City University of New York, says the future of foundations is less secure than most people think. McCarthy spoke at the Stanford Graduate School of Business May 13 as part of the Philanthropy Discussion Series.

One problem, she says, is that the wealth inherited by baby boomers might not end up in the coffers of nonprofits. With the mounting deficit and the possible problems for the U.S. Social Security system, boomers may be forced to use their wealth to pay for medical bills and living expenses.The deficit also could push Congress to create new legislation for foundations that would increase their taxes or impose grant requirements to help pay for budget shortfalls and social programs that would otherwise be cut. Another concern is recent foundation scandals that McCarthy says she believes will continue to surface and that could spark tighter congressional regulation and legislation.

In many ways, foundations are already dealing with new challenges. Since September 11, making grants to international community foundations and nongovernmental organizations has become increasingly difficult. Under suggested U.S. Treasury guidelines, foundations are encouraged to complete meticulous examinations of their grantees and obtain detailed information about their banking practices, subcontractors, and board members."The amount of oversight is extraordinary," says McCarthy."It creates enormous burdens."

McCarthy admits she is a pessimist, but she also spent much of her speech talking about how foundations can fuel civil societies and democracy. The foundation world has changed dramatically over the past two decades. More than 60,000 foundations now exist, and the number of community foundations has skyrocketed worldwide. But more important than the sheer numbers is the fact that "it's all very, very new. Many of these initiatives are less than 20 years old, and the majority less than five years old."The profile of donors also has changed, with the addition of many more women and minorities who are fueling projects like Diaspora and Mexican hometown initiatives.

With their large scope and financial force, foundations can help define emerging problems that go beyond the government's purview and also include groups that are excluded from democratic policies—for example, one organization provides financing schemes for women in Bangladesh to help increase self-support. Engaging in public-private partnerships and promoting social advocacy, foundations enable disadvantaged groups to playa role in public policy. This is particularly important in some parts of the world where social advocacy can resolve disputes before they erupt into violence. Foundations also help democratize access to capital and foster economic development.

Are nonprofits just a Western idea and not the right fit for other cultures? Dismissing that idea, McCarthy says that many of the leaders of international nonprofits are very similar to her: boomers who had been protestors in the 1960s and shut out from government and academic posts.They were driven to start nonprofits by their desire to contribute to society, not by Western influence.

Still, while international nonprofits are flourishing, they are likely to face serious hurdles in the future. In Communist countries, for example,nonprofits have successfully worked on natural disaster relief projects.But McCarthy says she wonders what will happen when these nonprofits start voicing opinions that clash with the government's ideas. She says she also worries about international funding drying up as regulatory oversight increases.

About the Philanthropy Discussion Series
The Philanthropy Discussion Series, sponsored by the Business School's Center for Social Innovation and Stanford University's Haas Center for Public Service, brings in some of the leading thinkers and practitioners in foundation philanthropy. Speakers address foundations' accountability,effectiveness, community responsiveness, and civic mission.

Related Links

Center for Social Innovation
Stanford Social Innovation Review
Stanford Project on Emerging Nonprofits
Center for the Study of Philanthropy

Other Speakers in the 2003-04 Philanthropy Discussion Series

Susan Berresford, Ford Foundation
Jim Canales, Irvine Foundation
Bill Gates Sr., Co-Chair of the Bill and Melinda Gates Foundation
Sally Osberg, The Skoll Foundation