New Book Floats Plan to Make `Arrogant' Foundations Accountable

Jan. 22 (Bloomberg) -- John Abele, the billionaire co- founder of Boston Scientific Corp. once asked philanthropy expert Joel Fleishman how he could find information on the successes or failures of U.S. foundations.

``I laughed and said `John, that's the million-dollar question,''' Fleishman recalled in an interview. ``There isn't any such place, because foundations don't ever report what they've done in any detail.''

In his new book, ``The Foundation: A Great American Secret,'' Fleishman urges philanthropists to fill the knowledge gap. He says foundations must share more information with each other, with organizations seeking grants and with the American public, which supports a system that gives foundations special tax advantages.

``Foundations have long been, for good and ill, the least accountable major institutions in America,'' Fleishman writes in the book, published this month by PublicAffairs.

He writes that foundations ``operate within an insulated culture that tolerates an inappropriate level of secrecy and even arrogance in their treatment of grant-seekers, grant-receivers, the wider civic sector, and the public officials charged with oversight. This needs to change.''

Fleishman's book is fuel for an ongoing movement to increase accountability and improve governance at America's 68,000 charitable foundations, which will give away about $35 billion this year. Fleishman is co-chairman of a committee of Independent Sector, a Washington-based coalition of charities and foundations, that on Jan. 12 proposed 29 principles for how charitable organizations should report to boards, avoid conflicts of interest and raise money.

Behind the Scenes

Meanwhile, the massive accumulation of money at the Bill and Melinda Gates Foundation, the world's largest philanthropic organization by assets, has drawn attention to the often behind- the-curtain work of foundations.

Though foundations account for a fraction of the $260 billion in annual charitable giving by Americans, Fleishman says foundations are significant because they often finance charitable efforts that otherwise would struggle to attract support.

U.S. foundations currently have to do little to keep their tax-exempt status. They must pay out at least 5 percent of their assets annually and file a Form 990 with the Internal Revenue Service.

No Annual Reports

Unlike public companies, foundations aren't required to produce annual reports, and while many large foundations do so voluntarily, their reports ``lack objectivity'' and often are little more than compilations of success stories, Fleishman said.

Fleishman, a professor of law and public policy at Duke University and former president of the U.S. arm of Bermuda-based Atlantic Philanthropies, says foundations and U.S. lawmakers have a role in creating a better system. In his book, he urges foundations to create an enforcement board to hear complaints from people denied information they are seeking.

The understaffed IRS can't keep up with monitoring tens of thousands of foundations -- not to mention the rest of the 1.8 million tax-exempt U.S. organizations, he said.

As a fix, Fleishman suggests that Congress create a foundation self-regulator, similar to the role played in the securities industry by the National Association of Securities Dealers, now called NASD. The IRS would delegate authority to a private, nonprofit regulator of foundations, just as the NASD is deputized by the U.S. Securities and Exchange Commission to oversee securities dealers and levy fines.

Fleishman also called on the government to consider enacting a freedom of information law for foundations, similar to laws that require government agencies to provide certain internal documents when requested.

`Correct Balance'

Steve Gunderson, president of the Washington-based Council on Foundations, which represents 2,000 organizations, including many of the nation's largest foundations, said any new independent or government oversight agency must promote charitable groups, not just regulate them.

``We have to be very careful that we get this correct balance between promoting and growing philanthropy in size and service, and also addressing the abuses of what I honestly believe is a very, very small percentage of the sector,'' Gunderson said.

In speeches, Fleishman routinely cites the experience of Abele, who focused on philanthropy after his tenure at Boston Scientific ended in 1996. Abele was developing strategies for his new family foundation and wanted information on how to gauge the results of American foundations when he turned to Fleishman -- a board member at Boston Scientific -- for guidance.

Unwise Spending

Abele's estimated net worth of $2.7 billion earned him the 258th spot on Forbes magazine's 2006 list of wealthiest people in the world. His foundation, the Milwaukee-based Argosy Foundation, supports programs in education, the environment and the arts, with a focus on funding contemporary classical music.

Abele, chairman of Argosy, said that Fleishman is working ``a fertile field, and one that hasn't been plowed that much.''

``There were gazillions of foundations started in the '90s into the 2000s, and most of them are not well thought out,'' Abele said. ``It is very difficult to spend philanthropic dollars productively. People can get very mistaken about what they're supposed to do and why.''

(Laurence Arnold is a reporter for Bloomberg News. The opinions expressed are his own.)

To contact the reporter on this story: Laurence Arnold in Washington at larnold4@bloomberg.net

To contact the editor responsible for this story: Manuela Hoelterhoff at mhoelterhoff@bloomberg.net.