Will Foundations Be More Effective in China?

Over the last 2-3 years, one of the more interesting developments in China’s philanthropic landscape has been the explosion of foundations that have come onto the scene. Interesting because as the number of foundations, and the number of celebrities/ CEOs opening their own foundation, grew there was a general belief that this would improve the mechanisms for giving, transparency, and impact.

However even as the number of private foundations is now greater than public foundations, which would normally be taken as an encouraging sign, there are now more discussions about the impact thus far has been and how things will move forward.

To date, much of the discussions have been focused on the fact that much of the money is sitting idle on the sidelines as many foundations either (1) don’t have the staff who are capable of transacting or (2) there are no qualified groups ready for the money.

Which is a problem because, according to much to many, these foundations are being seen as “the answer” to China’s philanthropic development.  They were going to bring the money, which would improve NGO capacity/ impact, and would (most importantly) demand a higher level of transparency from benefactors.  To some that was all that was needed.

When reading the article Philanthropy’s New Agenda: Creating Value, by Michael Porter and Mark Kramer, the proposed early in the article that the reason foundations exist, particularly grant-giving foundations exist is to be

intermediaries between the individual donors who fund them and the various  social enterprises that they, in turn, support. But if foundations serve only as passive middlemen, as mere conduits for giving,then they fall far short of their potential and of society’s high expectations.

Foundations can and should lead social progress. They have the potential to make more effective use of scarce resources than either individual donors or the government. Free from political pressures, foundations can explore new solutions to social problems with an independence that government can never have.

Which in my mind is certainly not the case in China (at this time) practically, but is being sold as such.

In fact, unknown to many donors who I speak with about foundations in China, few realize just how these foundations are established, to whom they are investing money with, or what the real impact will be.

That while the word (and structure) “foundation” is supposed to be linked to “independence” of thought, operation, and accountability, the reality in China is that many of these foundations are still closely tied to the large GONGOs that everyone has been trying to get away from.  A condition that only really become focused on when Jet Li looked to separate himself from the Red Cross.  An organization that he leveraged to get started, raised a lot of money for, and then hit the administrative wall.

So, while donors may have in mind independent organizations who are raising money in the name of a good cause, and are then building an organization that then seeks out (and invests in) the “strongest partner”, the facts are actually quite different.

Which leads to the first issue.  That, as organizations dependent on GONGOs for a legal and programming shelter, the impact of the foundation as a separate legal structure looking to fund social innovation is largely lost to the policy needs of the GONGOs.  Policies that are set on a yearly basis, based on policy objectives set by those behind the 5 year plans, and create a reward structure that supports the implementation of those policies.  And nothing else.  In fact, were a large foundation to look for a partnership, one of the biggest issues they would face would be the fact that the GONGO tied into a reward system that sees their partnership as more risk than reward.

Which has an impact on operations.

This brings about the second, and perhaps more important, issue.  Which is that the foundation may ultimately find itself unable to work with certain groups or issues because it would not align with the needs of the GONGO… and the GONGO will have certain requirements before it is able to release the funding.  So, even if the foundation finds the program and organization worth funding, it may be difficult to.

However, all this aside, when reading further into Porter’s article, I realized that there was another conversation that still needed to take place.  Related to the fundamental efficiency of foundations, and whether or not these are the best vehicles financially to put the most money to use.

When an individual contributes $100 to a charity, the nation loses about $40 in tax revenue, but the charity gets $100, which it uses to provide services to society. The immediate social benefit, then, is 250% of the lost tax revenue. When $100 is contributed to a foundation, the nation loses the same $40. But the immediate social benefit is only the $5.50 per year that the foundation gives away – that is, less than 14% of the forgone tax revenue.

Keeping in mind that the basic regulations and tax codes surrounding NGOs has a long process before completion, and the only time private individuals are given full tax deductible status is in the face of a national disaster, the economic model that Porter lays out in the above is a very important one. Particularly as China’s planners look at finalizing the various legal and tax mechanisms that govern foundations and NGOS.

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