Paul J. Jansen and David M. Katz

The McKinsey Quarterly, 2002 Number 1

Society pays a price when foundations and nonprofit organizations stockpile their assets.  Donors should ask not just how, but how soon, their gifts will be used.

In spite of the current economic slowdown, the US nonprofit sector remains financially strong.  Foundations and endowed nonprofit organizations have accumulated almost $1 trillion in investment assets, $450 billion of it belonging to foundations and more than $500 billion to endowed nonprofit organizations.  The portfolios of the largest of these institutions top $4 billion.  Even allowing for a short-term slowdown in charitable giving, a slowdown that many nonprofit leaders expect, an additional $1.7 trillion to $2.7 trillion is projected to flow into the sector over the next 20 years.

Foundations and endowed nonprofit organizations have traditionally been cautious in distributing their bounty.  In 1999, foundations took in more than $90 billion in new contributions and investment returns but distributed under $25 billion.  Indeed, foundations and endowed organizations have typically distributed about 5 percent of their assets each year.

But in some cases, building the endowment appears to have become an end in itself.  A large endowment helps attract top talent and increases the prestige of the institution.  Donors perpetuate this syndrome by showering their gifts on well-endowed institutions.  The question of how much is enough often appears to be overlooked.

Today’s low distribution rates amount to an implicit decision to hold back funds in the expectation that worthier causes will appear in the future.  But many current social needs are already overwhelming.  Numerous foundations and endowed nonprofit institutions ought to spend their wealth sooner rather than later, and donors should favor organizations that put their gifts to work straightaway.