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The key components of the current crisis – worthless assets, the credit freeze, the fear of counterparty risk, the Madoff fraud, the collapse of seemingly stable companies and even entire industries – have multiple causes. But among their terrifying consequences is a loss of trust. Banks don’t trust consumer or corporate borrowers, or other banks. Consumers don’t trust banks either. Individual investors mistrust advisors and fund managers. Few trust the controls of the government bailouts or the capacity of governments to manage financial institutions, whether in the US or in the UK.
The trust deficit is crippling for the philanthropic and charitable sector too. Both grant-making and grant-seeking institutions will need to be far more rigorous about potential conflicts of interest. Gone are the days when one could ‘trust’ that an individual has the institution’s best interests at heart regardless of the potential for personal benefit. Non-profits now have far more cause to worry that a donor’s pledge has no meaning. Donors now have to worry that non-profits have not invested their money with proper safeguards. These concerns existed before, of course, but they have never been so pervasive – and corrosive. As we know from our personal lives, once trust weakens, the slightest tremors cause sharper collapse, and the rebuilding process can seem endless.
Closing the trust deficit will take more than a resurgence of asset values. It will take increased openness and transparency by both donors and grantees about resources, commitment and risk factors. It will require funders to examine how they really can use their resources, including their capital, to strengthen the sector that creates social change. It will require non-profits to ask themselves if they really should combine forces with similar or complementary organisations to better achieve their missions. It will require funders to ask whether pooling their resources will create significant efficiencies for grant-seekers. Closing the trust deficit will take a deep acknowledgement that the donor/grantee relationship is actually a partnership with mutual dependency.
For this reason alone, the concepts of social investment are especially pertinent now. Whether used metaphorically (to describe a style of grant-making) or literally (to mean a loan or equity stake in an enterprise with a social purpose), the diverse approaches under the social investment umbrella can help build trust between the funder and recipient.
Social investment style grant-making – also variously referred to as ‘venture philanthropy’ or ‘high engagement philanthropy’ or ‘impact philanthropy’ – is ideally based on an open dialogue between funder and grantee about the whole of a non-profit’s goals, operations and capacity. Too much traditional grant-making is a painful dance in which the funder requests a proposal, and the non-profit tries to guess what the funder wants, but tries to provide as little internal information as possible, after which the funder creates conditions about what will be paid for and what must be reported and how. In investment-style grant-making (at its best), the funder seeks to understand with the nonprofit’s leadership what will make the non-profit successful and sustainable. Resources and reporting are then based on that plan. If it’s done right, this is a professional, respectful relationship.
Actual mission-related investing (known in the UK as mission-connected investment), in which the provider of funds expects a return of principal plus some earnings, is an even more powerful way to close the trust deficit. In this case, the non-profit and its funder are quite literally aligned: if the non-profit fails, then the funder faces a financial shortfall. Looked at more positively, both will benefit if all goes well. Despite this dismal economic climate, techniques and options in mission-related investing continue to expand and evolve. Ironically, with returns in safe investments so low, a loan to a community housing or microfinance or rural health care clinic at a low rate of return can actually seem quite reasonable to even the flintiest investment committee.
Social and mission-related investing offers the great potential of deploying much more capital into the social sector. Even more pertinent now, these techniques build the kind of partnerships between funders and recipients that we need for the current crisis, as well as to lay the groundwork for real change in the coming years.
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