Foundation Transparency: Game Over?

The tranquil world of America's foundations is about to be shaken, but if you read the Center for Effective Philanthropy's new study — Sharing What Matters, Foundation Transparency — you would never know it.

Don't get me wrong. That study, like everything CEP produces, is carefully researched, insightful, and thoroughly professional. But it misses the single biggest change in foundation transparency in decades: the release by the Internal Revenue Service of foundation 990-PF (and 990) tax returns as machine-readable open data.

Clara Miller, president of the Heron Foundation, writes eloquently in her manifesto Building a Foundation for the 21St Century: "the private foundation model was designed to be protective and separate, much like a terrarium."

Terrariums, of course, are highly "curated" environments over which their creators have complete control. To the extent that much of it consists of interviews with foundation leaders and reviews of their websites — as if transparency were a kind of optional endeavor in which foundations may choose to participate, if at all, and to what degree — the CEP study proves that point.

To be fair, CEP also interviewed the grantees of various foundations (sometimes referred to as "partners"), which helps convey the reality that foundations have stakeholders beyond their four walls. However, the terrarium metaphor is about to become far more relevant as the release of 990 tax returns as open data literally makes it possible for anyone to look right through those glass walls to the curated foundation world within.

What Is Open Data?

It is safe to say that most foundation leaders and a fair majority of their staff do not understand what open data really is. Open data is free, yes, but more importantly it is digital and machine-readable. This means it can be consumed in enormous volumes, at lightning speed, directly by computers.

Once consumed, open data can be tagged, sorted, indexed, and searched using statistical methods to make obvious comparisons while discovering previously undetected correlations. Anyone with a computer, some coding skills, and a hard drive or cloud storage can access open data. In today's world, a lot of people meet those requirements, and they are free to do whatever they please with your information once it is, as open data enthusiasts like to say, "in the wild."

Today, much government data is completely open. Go to data.gov or its equivalent in many countries around the world and see for yourself.

The theory behind open data, increasingly born out in practice, is that making information available leads to significant innovation for the public good, while the demand for and use of such data also improves its accuracy and quality over time. And some open data is just fun: one of my personal favorites is the White House visitors list!

What is the Internal Revenue Service Releasing?

Thanks to the Aspen Institute's leadership of a joint effort — funded by foundations and including Foundation Center, GuideStar, the National Center for Charitable Statistics, the Johns Hopkins Center for Civil Society Studies, and others — the IRS has made 1 million Form 990s and 40,000 Form 990PF available as machine-readable open data.

Previously, all Form 990s had been released as image TIFF files, essentially a picture, making it both time-consuming and expensive to extract useful data from them. Credit where credit is due; a kick in the butt in the form of a lawsuit from open data crusader Carl Malamud helped speed the process along.

The current test phase includes only those tax returns that were digitally filed by nonprofits and community foundations (990s) and private foundations (990PFs). Over time, the IRS will phase in a mandatory digital filing requirement for all Form 990s, with the intent to release them all as open data. In other words, that which is born digital will be opened up to the public in digital form. Because of variations in the 990 forms, getting the information from them into a database will still require some technical expertise, but it will be more feasible and faster than ever before.

The Good

The work of organizations like Foundation Center — which has built expensive infrastructure in order to turn years of 990 tax returns into information that can be used by nonprofits looking for funding, researchers trying to understand the role of foundations, and foundations themselves seeking to benchmark themselves against their peers — will be transformed.

Work will shift away from the mechanics of capturing and processing the data to higher-level analysis and visualization to stimulate the generation and sharing of new insights and knowledge. This will fuel greater collaboration between peer organizations, innovation, the merging of previous disparate bodies of data, better philanthropy, and a stronger social sector.

The (Potentially) Bad

The world of foundations and nonprofits is highly segmented, idiosyncratic, and difficult to understand and interpret. GuideStar and Foundation Center know this.

But many of the new entrants who are attracted by the advent of open 990 data do not. They will most likely come in two forms: startups claiming their new tools will revolutionize the business of giving, and established private-sector companies seeking new market opportunities. Neither is intrinsically bad and both could lead to some degree of positive disruption and true innovation.

The potential downside could be two-fold. Funders inevitably will be intrigued by the startups' technological prowess and newness and divert funding toward them. Foundations are free to take risks, which is one of their virtues. But while needs grow, funding for the data and information infrastructure of philanthropy is limited, technology literacy among foundations is relatively low, and many of these startups will prove to be shooting stars (anybody remember Jumo?).

The second category of new entrants is far more complex and will come in the form of for-profit data-analytics companies. Some of these have business models and immensely sophisticated black-box technologies that rely heavily on government contracts for defense and national security. They will be lured by the promise of lucrative contracts from big foundations and mega-nonprofits and the opportunity to demonstrate social responsibility by doing good in the world.

But these for-profit analytics companies will quickly discover that there is only one Gates Foundation among the 87,000 private foundations and only a handful of richly-resourced nonprofits among the 1.3 million in the IRS registery. And those who choose to contract the services of "Big Analytics" will need to consider the potential reputational consequences of aligning their "brands" with the companies behind them.

Sound defensive? Not at all: Foundation Center welcomes the competition, has been building for it since 2010, and knows the challenge can only make us and the social sector better.

The Ugly

Once 990 data is "in the wild," it is possible, if not probable, that conclusions will be drawn that foundations find uncomfortable, if not unfair. Those who are new to the field and relatively uninformed (or uninterested) in its complexity may make claims about executive compensation based on comparisons of foundations of wildly disparate size and scope.

The same could be done with overhead rates, payout, or any other figure or calculation that can be made based on information found in the 990-PF. Some foundations already chafe when responsible sector advocates like the National Committee for Responsive Philanthropy (NCRP) use Foundation Center data to rank foundations according to its Criteria for Philanthropy at Its Best. Imagine claims coming over the transom from individuals and organizations whose core values do not include a belief in the practice of philanthropy and a normative vision for how it could be better.

Another potential consequence lies at the intersection of the open 990 data and the growth of impact investing. This was the spirit in which Clara Miller introduced her terrarium analogy to highlight what she sees as the artificial disconnect between the controlled, strategic, and curated world constructed by the grants side of foundations and the sometimes contradictory forces at work in the larger economy in which their assets are invested.

Foundations like Heron are striving to put 100 percent of their assets toward mission, while others like the Rockefeller Brothers Fund are divesting their investment portfolios from fossil fuels and, rather than exacerbate the problem, are re-investing those assets in ways that further the goals of their climate change grantmaking.

A recent (and as yet unpublished) Foundation Center survey found that 60 percent of foundations do not engage in impact investing and have no plans to do so. That is their choice, but open 990 data may well put them in a position of having to publicly explain it.

For example, using Foundation Center databases, I searched across several hundred thousand foundation 990-PF returns and found thirty-seven foundations that hold Corrections Corporation of America stock in their investment portfolios. These foundations may well believe, as the majority of foundations insist, that the purpose of the investment arm of the foundation is to generate the highest sustainable return possible in order to fund the mission through grants. But if a foundation holding that stock is striving to work on juvenile justice or improve the lives of black men and boys, an investigative reporter or activist might well ask why they are investing in a corporation that runs private, for-profit prisons

It's 10:00pm, Do You Know Where Your 990 Is?

With the game over for foundation transparency, the big takeaway is to know your 990-PF (or 990 for community foundations). Before you know it, it will be transformed from a bureaucratic compliance document into one of your foundation's key communications vehicles.

Right about now, you may be thinking: "What about the website re-design we spent all that money on, with our new logo, carefully crafted initiative names, and compelling photos?" It's still important, and you can follow the lead of those foundations guided by the online transparency criteria found on Foundation Center's Glasspockets website.

But while fewer than 10 percent of all foundations have websites, they all file 990 tax returns. As the IRS open data release unfolds and mandatory digital filing kicks in, the 990-PF will become one of the primary sources of information by which your individual foundation will be known and compared to others.

I recently asked a group of foundation CEOs whether they ever had an in-depth discussion about their 990-PFs among their board members and was met with blank stares. In a world of digital transparency, this will have to change. As 990s become a data source and communications vehicle, the information on them will need to be clear, accurate, and ,above all, a faithful representation of how each individual foundation makes use of the precious tax exemption it has been granted to serve the public good.

A few simple tips for starters:

• Take advantage of Section 15 (block 2) to talk about your priorities, grant process, limitations, and restrictions.
• In Section 15 (block 3), write the correct legal name for each grantee organization and include its EIN or BRIDGE ID
• In the same section, write clear and compelling descriptions for the purpose of each grant (more than you might think, people look at foundations by what they fund).
• Make sure all numbers on the form add up correctly (you'd be surprised!).

Regardless of how each of us may feel about the greater transparency demanded of foundations, it is inevitable. Philanthropy is essential to American society and a positive source for good in a challenging world.

As the terrarium walls insulating individual foundations fall, we will surely face a few moments of anxiety and discomfort. But greater transparency, fueled by open IRS data, can only make us more conscientious stewards of our resources, more effective decision makers, and better collaborators on our way to achieving greater impact in the world.

Game over? It's just beginning!

Brad Smith is president of Foundation Center. This post originally appeared on Glasspockets' Transparency Talk blog.

Comments

[Phil Buchanan]

Brad,

Thoughtful post and I appreciate your referencing CEP's research. To clarify, our report was based on analysis of how foundation CEOs and grantees see transparency (as well as analysis of foundation Web sites): who they think the audience is, what they think transparency is.

The 990-PF, whether in old-school or digital format, just wasn’t a focus of those we surveyed when they discuss transparency. (As we noted, “Of foundation CEOs surveyed, 38 percent mention [in response to a question about what it means to be transparent] foundation finances, including information about investing, accounting, and Form 990s or 990-PFs, but only four percent of nonprofit CEOs raise this topic…)

You are arguing that the 990-PF should be and will be a focus of discussions about foundation transparency. Our research suggests that it isn’t currently, at least among foundation and nonprofit leaders. Maybe this is because a majority of the large foundations in our study already post their 990-PFs on their Web sites. We don't have the data on this for a decade ago, but I imagine it was less.

In any case, had the 990-PF emerged as central to conceptions of transparency among our respondents, we would have reported that! But it just didn't.

So in that sense it’s not clear to me we “missed” anything, any more than a poll of likely voters "missed" something if it doesn't show strong support for the candidate we think is best.

Perhaps the foundation world will indeed be shaken, as you predict, by the digitization of 990s and 990-PFs.

It will be interesting to watch what happens.

Phil Buchanan
President
Center for Effective Philanthropy

Note: I posted this comment on Glasspockets.org late last month when Brad's post went up there. Noticed today that Brad's post has now been posted here as well and so am posting my comment here, also.

[Chris Thompson, Dir. of Research, BoardSource]

Brad,
Thoroughly enjoyed your thoughtful piece. As an "old-fashioned" 990 researcher, I look forward to the New World of nonprofit ez-data, but am still struggling with the access, XML, SML, AWS doorway issues after two days at it, so it's not as easy as the IRS make out. I wonder too, following your theme of the shift in priorities now that we (supposedly) don't have to struggle with simply capturing data or manually re-entering it from images, if we should be pressing the IRS more to enforce timely filing and filling it out correctly? I come across all the time "missing" Schedules (especially "J"), incomplete forms, and excuses in Schedule "O" like "we don't have to give our compensation information because we use the services of an external payroll processor." etc. etc.
-Chris

[Bradford Smith]

Thanks Chris for your informed and thoughtful comment. For those of us who have for years toiled with the TIFF and PDF versions of 990s we will miss their undeniable charm. I didn't want to drag readers through the weeds of schema that you are referring to, and summarized all that as technical challenges people will still face in actually grabbing and using the data. Smart programmers, however, will figure that out. You bring up a really interesting issue about how to achieve greater accuracy and quality in the data reported by nonprofit and foundation filers. I know this is on the radar screen of the Aspen Institute effort mentioned in the blog and I imagine that part of the answer may lay in enforcement, though the IRS' capacity to do so will be limited. The theory behind open data, of course, is that open access leads to wider use, innovation and creates incentives to improve data quality. I also imagine that technology can be of help. Australian regulators recently told me that they use software to reconcile many of the errors, mathematical and otherwise, made on their equivalent of the 990s.