Some foundations simply do not disburse enough in grants, and many more lack a clear strategy for matching their spending levels to their missions. Instead of employing a tactical approach to payouts, they stubbornly stick to the minimum annual distribution requirement of 5 percent of assets.

Moreover, many try to protect their assets in perpetuity even when not required to do so by trust instruments or other stipulations. One reason for this conservative–or perhaps parsimonious–approach to philanthropy is that trustees typically are executives from the corporate world who are more comfortable maximizing financial performance and preserving assets than giving money away.

With tens of trillions of dollars in intergenerational wealth changing hands over the next 50 years, thousands of new private foundations will likely appear. The payout stakes will grow higher, and demands that foundations improve their spending decisions will grow louder.

The Senate Finance Committee has been hammering at a staff discussion draft, first introduced in June 2004, which includes ideas to cap the allowable overhead. Several well-publicized episodes of questionable foundation spending on perks and salaries have emboldened those who call for tighter rules.

Disallowing all overhead would be a mistake. Some expenses, such as reasonable costs of screening grant applicants and monitoring grantees, should count because they help ensure sound philanthropy. Outlays for first-class travel and excessive trustee fees are another matter. Congress should step in with a sensible round of surgical reforms.

But foundations also must transform the way society perceives their role and responsibilities. Foundation presidents and boards of trustees must lead the way in shaping this change in institutional thinking. They should begin with a no-holds-barred debate on the payout issue–a debate that includes not only foundations, but also grantees, regulators, policymakers and others with a stake in what foundations do. Such a discussion would likely erase the presumption that foundations fulfill their duty simply by distributing the legal minimum.

A good strategy requires foundations to be both deliberate in crafting their payout plans and flexible in executing them. They must carefully and regularly evaluate their philanthropic goals and the needs of grantees, then try to meet their grant-making objectives with the most prudent allocation of financial resources. A foundation might defer grants, for example, if it believes needs will be greater or solutions to problems more effective in the future than they are now. On the other hand, a foundation might accelerate its payouts if its philanthropic goals are justifiably immediate or a social problem threatens to worsen if spending is delayed.

Part of that debate should focus on small grant-making foundations–those, say, with assets under $1 million, or even $10 million. Such organizations have ballooned in number in recent years, according to the latest IRS statistics. The number of those with less than $1 million in assets increased some 60 percent between 1992 and 2002 to more than 40,000, or two-thirds of the total. Some in the nonprofit and regulatory world advocate banning the smallest foundations altogether, on the grounds that they may lack adequate accountability standards and safeguards against tax-law abuse. They argue, too, that while small foundations hold only a thin slice of total foundation assets–and thus of grant making–their growing numbers impose an onerous burden on government regulators. In 2003, authorities in New York Attorney General Eliot Spitzer’s office went so far as to recommend that Congress consider eliminating tax exemptions for foundations with less than $20 million in assets. That idea has gained no traction thus far, nor should it. Putting arbitrary limits on foundation size is tricky territory. It can quash the promising, innovative foundation as easily as the amateurish or downright shady one.

A great many of the problems surrounding grant making would be solved by better self-governance in the foundation world itself. Philanthropy is serious business, and it demands serious management.

Illustration by Matt Mahurin.

Thomas J. Billitteri is a Fairfield, Pa.-based independent writer and researcher who specializes in nonprofit issues.