What makes a foundation embrace big risks?

November 14, 2014

By at least one measure, the Kresge Foundation has made the biggest bet, among all national foundations, on the future of Detroit. The question is: What led them to accept the risk?

 

Here’s a further thought on my last post, about the Kresge Foundation’s ambitious, high-risk effort to help Detroit come out of bankruptcy as a stronger, more stable city.

 

Some perspective is valuable here: Those who have followed the press coverage of this story might have the impression that it was the Ford Foundation that made the most dramatic investment in the “Grand Bargain” that ushered the city out of its political Debtor’s Prison. In dollar terms, it’s true, the Ford contribution was the largest. And Ford did, without question, play a critical role — alongside Kresge, the John S. and James L. Knight Foundation, the Community Foundation for Southeast Michigan, and the Art Institute itself — in rallying other funders and ensuring that the necessary money would be raised. But relative to the size of its endowment, the Kresge Foundation made by far the largest sacrifice to assemble the $380-million foundation pool behind Detroit’s Grand Bargain. Kresge pledged $100 million from its $3 billion in assets; Ford, with $10 billion-plus, pledged $125 million.

 

So by any meaningful measure, Kresge has made a uniquely enormous bet on Detroit’s ability to move past this ordeal. Viewed from its headquarters in Troy, Mich., 20 miles from central Detroit, the decision must have seemed both more urgent and more fraught than for any of the other large national foundations located farther away. Kresge executives, staff, and trustees, having worked on Detroit’s challenges at the front lines for years, surely understood not only the importance of the proposed rescue effort, but the long odds of its success, at least as well as any other contributor. What might have led them to embrace the uncertainties, rather than distance themselves by adopting what plenty of neutral observers would have considered a prudent skepticism?

 

Several weeks ago, the CEO of the Helmsley Charitable Trust, John R. Ettinger, spoke to Duke’s Foundation Impact Research Group about two separate topics, one of which may shed some light on the exceptional boldness of Kresge’s Detroit strategy.

 

Mr. Ettinger spent most of his time on the subject of grantee networks (I wrote about that part of his talk in this earlier post), but at the end of the session (beginning at 35:54 in this video), he shifted his focus to the subject of risk — specifically, what makes foundations accept or avoid it. He cited behavioral research showing that accomplished golfers tend to putt more cautiously when they are on their way to a birdie. They become more aggressive when they are trying to avoid or minimize a bogey. The near prospect of a win, he speculated, may tend to make people more risk-averse (why mess with a good thing?); but in the face of impending disaster, they might take more of a chance (things can’t get much worse; maybe I can make them better). He speculated — but couldn’t say with confidence — that foundations might, on average, follow the same pattern.

 

Now, this birdie-bogey dynamic surely isn’t the main story behind the Kresge Foundation’s willingness to venture such large sums on the prospect of a resurgent Detroit. Among other things, if Detroit’s post-bankruptcy plans end up failing, there’s almost no chance that it will be blamed on the foundation, or even on philanthropy as a whole. The city’s difficulties are much too big for that. In other words, this was never going to be Kresge’s bogey.

 

Besides, most of the foundation’s other investments in Detroit stand, at least individually, on solid ground. Even if the city’s post-bankruptcy government is a disappointment and its underlying problems continue to fester, it’s quite likely that many Kresge grants will still be successful on their own terms. Foundation-supported transit systems are well planned and likely to be built; important city assets like Eastern Market and the Institute of Arts will surely bolster the quality of life in whatever kind of city Detroit becomes. Thousands of low-income pensioners will be better off than they would otherwise have been.

 

Still, it’s possible to imagine that the sheer scale of Detroit’s calamity, almost at the foundation’s doorstep, may have steeled its nerves and made an all-out investment seem like the right thing to do. It’s important to remember that until recently, the Kresge Foundation had mainly supported the construction of buildings — far from a risk-free business, of course, but certainly on the safer end of the spectrum. Once its thoughts shifted away from purely capital projects — which are the rough equivalent of putting for birdie after birdie — then the chance to do something daring, in the interest of staving off a gigantic urban collapse, might have seemed more palatable than it would have under other circumstances.

 

A note like this must conclude the way Mr. Ettinger concluded his remarks: This is at most a hypothesis, not a finding. A great deal more thought and research would be necessary to decide whether the idea is really applicable to foundation strategy. Furthermore, the story of Kresge and Detroit is but one case of foundation risk-taking — a case in which many other powerful forces and strategic calculations are involved. The only thing that’s certain is that the Kresge Foundation has made an audacious choice, which some other foundations probably would not have made and which Kresge itself would not even have considered not so long ago.  It might therefore be worth a little additional study to see what can be learned, not only about the organizational psychology of risk-taking, but about the best way to set a foundation’s priorities when the possibility of disaster looms on the horizon.

 

[Photograph: Flickr user Aiky RATSIMANOHATRA]

 

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Rip Rapson
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The Kresge Foundation