The five per cent solution

Thursday, 01 April 2010
A way in which charitable giving could be made more effective in the current climate.

There is a lot of justifiable worry at the moment about the triple whammy that is hitting charities in the UK: donations were down by GBP1.3 billion in 2008/09 according to UK Giving 2009, and could fall further as the economy limps along; demand for their services is up, as unemployment rises and the recession takes its toll on the nation’s health; and public services are facing the biggest cuts in at least 30 years, as whichever party wins the next UK election struggles to put the country’s finances in order.

A range of ideas have been floated to tackle this charity funding crisis, such as improving the (already pretty good) tax treatment of philanthropy and thereby strengthening the giving culture in Britain. Welcome as they are, these initiatives will, at best, feed through slowly. In our ‘Philanthrocapitalist Manifesto’we argue that it is time to turn to an (allegedly) radical way to fill the funding gap now, when we need it most: introduce a 5 per cent payout rule for charitable foundations.

According to the latest comprehensive survey, by the Cass Business School, in aggregate the 100 biggest foundations in the UK (by donations) paid out 4 per cent of the value of their endowments in 2007. With total grantmaking by this group of GBP1,174 million, adding one percentage point to the average payout rate would add nearly GBP300 million to total giving. Or the sum could be even larger, nearer GBP600 milion, if the group of foundations that already pay out more than 5 per cent maintained their giving and the rest hit a 5 per cent minimum. Even then, that’s not enough to make up for the fall in giving during the recession, but it would offer welcome relief to beleaguered charities.

Why has such an obvious win not been considered?

The objection in principle is that this is an unjustified public interference in the private decision to give. This argument might work if charitable foundations were not recipients of generous tax breaks. Since the public is subsidising giving, surely it is reasonable to ask that foundations be asked, within limits, to serve the public interest of the taxpayers who are actually footing the bill?

Liberty-loving America crossed this bridge 40 years ago and a 5 per cent payout rule is now a relatively uncontroversial part of the social contract between philanthropy and wider society. American experience also suggests that the practical concern that a payout rule would deter giving is not something to lose sleep over.

Some may object that this rule would threaten the viability of our venerable foundations, which want to maintain the value of their endowments and grantmaking for centuries to come. Well, maybe. A payout rule could actually be a welcome challenge to endowment managers and trustees over the performance of foundation investments. One important tweak in the rule, however, would be to give some credit for ‘mission related investing’ that prioritises social or environmental returns over financial returns. Making allowances for this type of investment in calculating payout rates would be a useful stimulus to the UK social investment market.

Another complaint is that a payout rule emphasises quantity over quality. The point is well taken. UK foundations’ grant-making effectiveness is erratic, which needs to be tackled anyway (we make specific suggestions on how to do this in our manifesto). But that is not an argument against the payout rule. There may, however, be a case for giving new foundations an exemption to the rule for, say, five years while they put policies, people and plans in place, in order to be ready to give wisely.

Mandatory seatbelts in cars and the smoking ban in public places are examples of infringements of the rights of the individual that were imposed for the public good, resisted by a vocal minority and now accepted as an uncontroversial part of everyday life. Most foundations hate the idea of a mandatory payout rule, but they could learn to live with it, as their American counterparts have done. Given the state of our country, the public benefit from several hundred millions of pounds of extra giving now outweighs the rights of foundations to limit their generosity. It is time for Britain to embrace the 5 per cent solution.

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Matthew Bishop, Michael Green

Matthew Bishop is New York Bureau Chief of the Economist. Michael Green is an economist and writer.

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