The Third Sector Report By Jeffrey Wilcox
December 17th, 2013 – It’s the one topic that is guaranteed to catch the attention of any nonprofit leader. In fact, the mere mention of its potential causes hearts to flutter and imaginations to run wild with intoxicating possibilities about changing the world.
The seductive nature of endowments is nearly universal. Whether to benefit the arts, education, social service, health care or the environment, the notion of a consistent source of ongoing revenue is undeniably inviting. After all, a healthy endowment holds the possibility of guaranteeing to a nonprofit that most, if not all, of its administrative overhead, for example, can be underwritten so that most, if not all, of its current fundraising can be channeled into direct service to the community.
The concept of an endowment is simple: A sum of money, known as a corpus, is set apart from all other assets to earn interest through wise investments so that the annual yield can be invested in the work of an individual or organization. The most common form of contributions to an endowment are bequeathed gifts written into the wills and estates of people both rich and poor.
The unique appeal of an endowment is that it establishes a legacy or pays tribute to those things most important to people while alive, and ensures their continuing affiliation and support after their passing.
The idea of endowments is ancient. The process originated in the Roman Empire as endowments provided philosophers and academics with perpetual support for their work to advance society, while also supporting their students through tuition scholarships. Education was the birthplace of endowments; and, in this country, Harvard University still stands at the top of the list among all nonprofit organizations with an accumulated $32 billion held in over 10,000 endowments.
Sadly, the economic times of the past 10 years prompted some nonprofit leaders to take it upon themselves to redefine an endowment as nothing more than an invested savings account or a ready source for unsecured loans. New York City Opera could well be the nation’s poster child. Its leaders applied these new definitions to an endowment of $51.6 million to cover operating deficits. The organization filed for bankruptcy in October taking down with it generations of opera patrons whose intentions weren’t to create a stockpile of corks to plug the holes of mismanagement.
Every healthy nonprofit should discuss the significant advantages that having an endowment offers in creating long-term sustainability. The key, however, is to balance romance with reality from the start.
There are four essential elements that should be a part of any endowment conversation. The first element is a promise that must be made and kept. Contributions made to this vital source of ongoing support is not a cover-up for building discretionary reserves. Smart philanthropists can smell a con job very quickly when a nonprofit decides to sell a quasi-endowment as being an authentic one.
The second element is a guarantee that even if the organization should go under, the endowment won’t go with it. If your organization is in the child abuse prevention and treatment business, for example, a contributor must have the assurance that their endowed contribution will be put to work to end child abuse and help its victims even if the intended nonprofit, itself, is no longer able to continue the battle. A strong partnership with the community foundation is the best way to uphold that guarantee.
The third element is that there is evidence that an endowment is a means to greater ends. Asking for a long-term contribution means the organization must be able to produce a thoughtful picture of what its longer-term view is for serving its mission.
The fourth element is visible stewardship. The most apparent forms of that are empowering a separate body to oversee the interests of the endowment, forming a separate corporation or, preferably, holding the assets with the community foundation.
Indeed, endowments are about all romance. They are mechanisms by which a passionate relationship between a person and one of his or hers greatest loves in life can be consummated. A well-endowed organization understands that the love of mankind, not the love of money, that is the definition of philanthropy and the unwavering basis of their endowment.
(Jeffrey R. Wilcox, CFRE, is president and chief executive officer of The Third Sector Company, Inc. Join in on the conversation about this article on Facebook or drop us a line at firstname.lastname@example.org)