The Warner Foundation's recent decision to close its office and stop taking unsolicited grant requests has raised concerns about the fate of small, social-change nonprofits that had been the focus of its philanthropy. by barbara solow From the start, the Warner Foundation did things differently. When its founders set up the Durham-based family foundation in 1996 with proceeds from the sale of a software company, they committed themselves to helping organizations working on hard-to-solve racial and economic justice issues. Unlike most other grantmaking organizations, the Warner Foundation was willing to give multi-year grants to small nonprofits. And the amount of money it gave away each year consistently exceeded the 5 percent of assets required by the federal government--financial forms on file with the Internal Revenue Service show Warner Foundation grants were 14 percent of assets in 2002.
So, when the foundation announced two years ago that it was suspending grantmaking while reviewing its mission, it made some people uneasy. When the board announced this May that by the end of 2004 the foundation will close its office, eliminate staff and stop taking unsolicited grant requests, unease turned to dismay in some quarters.
"They are saying, 'We are going to take our ball and go home,'" says Peter Skillern, executive director of the Community Reinvestment Association of North Carolina, which received support from the Warner Foundation for its organizing work against predatory lending. "The rest of us are saying, 'Well, it is your ball and you've got a right to do that. But the consequences are we are not going to be able to play the game as well.'"
The Warner Foundation's decision arrives at a time when many nonprofits are already struggling with reduced public and private funding.
"We're not sure what all the implications are. But this does add to the uncomfortable feeling about how many foundations are cutting back," says Kay James, executive director of the Durham Public Education Network. James had hoped that the Warner Foundation's recently adopted focus on closing the achievement gap in public schools made it a natural partner for her group. "The achievement gap has also been our focus for years," she says. "We were looking forward to their gearing up and we're very disappointed that they are now gearing down. It's kind of unusual to have a full staff and no grants for a year and then say you'll have no staff but you will have grants. The flip-flop is huge."
Warner Foundation leaders say the changes are aimed at sharpening the organization's effectiveness by reducing administrative costs and giving the board the ability to target specific groups for support.
"This is really the next step in the evolution of the foundation," says outgoing Executive Director Tony Pipa, one of five staff members at Warner. "The founders, board and staff have always placed a high premium on impact. What they want to do is get as much of the money as possible directly into the hands of grantees."
What's difficult to say at this point, while things are still in wind-down mode, is what future role the foundation will play in helping the small, social-change groups that have been its focus from the start. The board has yet to announce when it will begin making grants again or what issue areas it will be supporting.
The Warner Foundation is certainly not alone in its decision to pare operations. Statewide and nationally, many foundations have seen the value of their investments drop due to steady stock market declines. The New York-based Foundation Center reports half of the country's top 50 funders experienced a decline in assets after the stock market slide began in 2000. (That picture is now improving, the center reports.)
Many foundations have moved to reduce expenses or grantmaking as a result. Financial pressures have also led some foundations to review their missions. Locally, the A.J. Fletcher Foundation in Raleigh has also stopped taking unsolicited proposals and has shifted its priorities from arts to social services.
Leaders of other progressive North Carolina grantmakers view the Warner Foundation's decision to reorganize in a positive light.
"They've always been thoughtful and reflective about their grantmaking," says Mary Mountcastle, chair of the board of the Z. Smith Reynolds Foundation in Winston-Salem, which recently reduced the number of its grantmaking cycles to allow time for more long-term planning. "I think it took real courage for them to say they need to step aside while they look at some of these big questions about the impact they want to have."
But for many nonprofits, stepping back adds up to a loss for grassroots organizations--especially those in African-American communities and the field of education reform, where the Warner Foundation had been poised to make a difference.
"We kind of have to wait and see what happens," says Nayo Watkins, executive director of the Durham-based Mekye Center for struggling elementary school students, a past recipient of Warner Foundation grants. "But for us, this is a terrible loss because this was a funding source that was local and that you could see in the community. It means that small organizations don't have access to that kind of support. I feel that's unfortunate."
Michael Warner and Betty Craven are the first to say the development of their foundation has been rapid--and surprising.
"It's been a real learning experience," says Craven, a former director of international student services at N.C. State University. "In every stage, I think we've made contributions."
Good fortune sparked their entry into philanthropy: In 1995, Warner, a computer programmer who had taught at Duke, sold a hospital management software company he'd co-founded for $240 million worth of stock. Warner and Craven, both North Carolina natives, decided they wanted to use some of that money to improve life in their home state. After meeting with leaders of several grantmaking organizations, they set up a $2.5 million trust fund at the Triangle Community Foundation to help poor, minority communities.
In 1996, they created the Warner Foundation, which began awarding grants in 1998. In 2000, the foundation opened an office across from Durham Athletic Park and hired staff--including Pipa, who'd been an influential member of the community foundation. For a mid-sized funding organization--the Warner Foundation's assets have fluctuated between $15 million and $7.5 million in recent years and are now around $9 million--the foundation was generous with its grants. And it frequently chose to support unsung groups in small communities.
Warner says the foundation was getting on the order of 300 applications a year. "That's a lot to evaluate," he says. "You needed a staff."
Yet, only a year after hiring many of those employees, the board decided to suspend grantmaking while the foundation undertook a study of its funding impact.
Seated at a table in a local bookstore coffee shop, Warner and Craven reflect on the decision that came out of that study--to zero in on the public school achievement gap. "We'd been focused for a while on improving the economic situation for African Americans and Hispanics," Craven says. "We had our fingers in a lot of different pies--housing, jobs. We started feeling that we were spread too thin. And we thought if we could focus on education, we could hit all of those other issues."
In June 2003, the foundation announced its new priorities and the start of a "second phase of planning to concentrate on designing the grant-making strategies it will undertake to help close the educational achievement gap," a press release said.
But the more they researched those strategies, Craven says, the more overwhelming the mission began to seem. "Education is so complicated," she says. "The staff was making recommendations but the price tags were much bigger than the things we'd been doing."
"We didn't realize this was out of our league," adds Warner. "We were helping 300 to 400 people a year. But then there'd be 1,000 people dropping out of high school. We were losing ground."
The foundation's assets were also losing some ground. In 2002--a particularly poor year for the stock market--they fell by $2 million, according to financial forms on file with the IRS. Grants that year were 14 percent of assets, while administrative and operating expenses were around 8 percent. But it wasn't just short-term financial pressures that foundation leaders were concerned about. Even if the stock market hadn't taken a $2 million bite out of assets, "we realized we still wouldn't have the money to do what we wanted to do in education," Warner says. "We would have been talking about spending ourselves down in four to five years."
While the decision to turn grantmaking over to the board may appear arbitrary, the couple says it was the product of hours of careful thought and discussion.
Still, they concede it was not a democratic one.
"To be honest, this was a decision by the family members of the board. The staff was not involved," Warner says. "It wasn't an easy decision. But we just felt that for our size foundation, too much of the money wasn't going into the community."
One reason the board decided to keep the Warner Foundation open till the end of the year was to allow staff members time to find other jobs, the couple says. In the coming months, they will compile research done on the achievement gap in hopes it will be useful to others working on education reform.
Warner and Craven say the foundation will likely continue to award grants at a level above the 5 percent required by the government. And they will try to choose organizations and issue areas where they can have a tangible impact.
"What you try to do is be a good steward of the funds," Warner says. "You take care of the money but you also have to spend money in ways that have an effect. If you don't change and you're not doing a good job, then you're not being accountable."
Accountability has become a watchword in American philanthropy due to increasing scrutiny of foundations by government and the media. Concerns about hefty salaries and retirement packages at some foundations led Congress to introduce a bill in 2003 (H.R. 7) that would have barred foundations from including administrative expenses in the minimum 5 percent of assets they are required to pay out each year. Although the bill never made it out of committee, the payout debate continues.
A key related issue is the effectiveness of foundation grants, notes Peter Frumkin of the Hudson Institute in a recent paper called "Trouble in Foundationland." He argues that the real problem isn't that so many foundations stick to the 5 percent giving level as that so many stick to the same payout level each year, without analyzing the impact of their grants.
"Without any real way to hold foundations accountable, many worry that institutional philanthropy will never have the impetus to improve its performance and become more effective," Frumkin writes. "Accountability and effectiveness are thus locked in a strange relationship of mutual dependence, in which progress on one dimension will likely lead to progress on the other dimension. Conversely, lack of progress on one dimension will almost certainly stall progress on the other."
So how do you measure the effectiveness of foundation grants?
"That's the $64,000 question," laughs Gayle Williams, director of the Winston-Salem-based Mary Reynolds Babcock Foundation. "If we are funding an organization and they get a specific change, who knows what contributed to it? It's a very murky area, especially in social justice work."
Local observers say the complicated relationship between accountability and effectiveness is also present in the Warner Foundation's decision to change the way it operates.
"It's a struggle sometimes for foundations to find the right entry points, particularly for those foundations interested in systemic change," says Tom Ross, director of the $400-million-asset Z. Smith Reynolds Foundation, another of the rare funders that focus on social justice issues. "The Warner Foundation sees themselves as not having huge assets. So what they use, they want to use really well."
But effectiveness is only one part of the picture, nonprofit leaders say. Relationships with people on the front lines is another.
Chris Estes is director of the North Carolina Low Income Housing Coalition. His group had to scale down a project it had launched with Warner Foundation support when the foundation announced it was shifting its grants to education.
"I think people have discovered that spreading small grants around doesn't really change the big issues," Estes says. "Foundations might be better off by really investing in organizations over time. And that presents a challenge because most funders and boards are too far removed from what the issues are."
For poor and minority communities, that's an especially thorny point, says Richard Brown, an organizer with the Community Reinvestment Association. "For us, the question is, 'Are you really in?'" he says. "This starts to tick away at what the real issue is, that you as poor African Americans are not equal partners in the conversation. We should be sitting at the table and having this conversation."
Local nonprofit leaders hope the Warner Foundation will come roaring back with renewed energy. But worries persist that the shift to a board-driven model of philanthropy will change the role the foundation has played at the grassroots.
"The gist of what they are trying to do is be more effective by maybe giving larger grants in fewer places," says Nayo Watkins of the Mekye Center. "I can certainly understand the rationale of doing that. But for smaller organizations, it feels like distance. I had hoped when they announced they were going to take a year off, there would be some dialogue with people in the community. To my knowledge, that didn't happen."
The Warner Foundation