John Lucero
CDFIs and the Private Sector: Sustainable Subsidy through Strategic Philanthropy
Introduction
“ Most of today's development banks operate with varying levels of external subsidies from investors, members, donors, or volunteers” (Parzen & Kieschnick, 1992). High operating costs, small scales of operation, high levels of risk, increasing need for patient money, and other characteristics of Community Development Finance Institutions (CDFIs) suggest that dependence on external subsidy will persist, especially in the face of growing competition for low cost, socially-responsible capital.
This paper examines the potential for CDFIs to utilize private-sector philanthropy as a sustainable source of subsidy. It begins with a review of literature relating to corporate and business philanthropy and illustrates the emergence of a new trend: strategic philanthropy. Strategic philanthropy is the notion that private sector goodwill should improve the giver’s profitability as well as fulfill a social need. In light of this growing trend, the author suggests ways in which CDFIs can utilize their defining and common attributes to fit into the strategic philanthropy objectives of private businesses and access private-sector capital. The examination focuses, but is not limited to, three main areas: 1) the ability for CDFIs to incorporate volunteer labor and pro bono services into their operating structure; 2) CDFIs as a point of access to underserved but profitable inner city consumer markets; and 3) community and economic development as a common objective of both CDFIs and private businesses. In addition, the author offers additional information useful to the CDFI attempting to access philanthropy capital and concludes that the field is ripe for further inquiry.
Overview of Philanthropy
The number of non-profit institutions in the U.S. has escalated significantly in recent years. According to a 1997 Urban Institute report, there are more than one million groups recognized by the IRS as non-profit organizations, 600,000 of which had charitable, tax-exempt status under Section 501(c)(3) of the IRS Code as of 1994. “Between 1989 and 1994, the number of public charities reporting to the IRS grew by 6.3 percent annually, compared with national population growth of 1.1 percent” (DeVita, 1997). As a result, competition for capital from traditional sources--foundations and socially-minded investors, for instance--is growing more intense. At the same time, many non-profits and their causes face cutbacks in funding from the federal government as well as umbrella organizations such as the United Way (Mckenna, 1995). It follows that the capital necessary to fund the operations and mission of CDFIs will have to increasingly come from the private sector. “‘Many community and civic groups, reeling from cutbacks in federal and state programs, are looking to local companies to fill the gap.....budget cuts are creating a lot of uncertainty among community organizations. ÔThey expect us to be part of the solution’” (Miller, 1997a).
The private sector represents a significant source of financial capital for CDFIs, particularly when capital is sought through charitable giving and sustainable philanthropic partnerships. According to the American Association of Fund Raising Counsel, the 1995 level of charitable gifts by companies and corporate foundations was $7.4 billion. Even after adjusting for inflation, this number, which represents a 7.5% increase over 1994 levels, exceeds the previous record for annual giving of $7.32 billion set in 1986. Since 1995 the number has continued to grow, and 1996 levels increased another 7.6% to $7.9 billion (Counsel, 1997; Miller, 1997a). “The trend will likely escalate as corporations continue to search for ways to stretch their promotional dollars. In fact, most major corporations now have sponsorship programs representing 10 to 25 percent of their marketing budgets” (Johnson, 1994).[1]
These statistics illustrate the potential of private businesses and corporations as sources of cash and in-kind resources for CDFIs. To actually access this capital, however, it is not enough simply to recognize how much funding is available from the private sector. Tends in business giving must also be examined. For example, corporations are increasingly emphasizing noncash contributions such as property, equipment, and company products (Miller, 1997a). Survey results published by The Conference Board--a business research organization located in New York City--indicate that, although 95% of their respondents donate cash, two-thirds also participate in in-kind giving, 53% make product donations, and noncash giving accounts for 17% of respondents’ total giving (Miller, 1997a). Such information can give a CDFI insight on how to attract donations. For instance, CDFIs interested in sustaining giving levels with a particular corporation may ask for noncash contributions which enable corporations to “keep giving levels up when their cash coffers are low” (Miller, 1997a).
Finally, an investigation of private-sector giving does more than indicate that corporations are taking their social responsibility seriously or reveal trends such as an increase in in-kind giving. Most importantly, inquiry into private-sector philanthropy explains why business give the way they do and uncovers a new type of private-sector giving--strategic philanthropy. For the CDFI which relies so heavily on external subsidy, an understanding of the motivations behind private-sector giving is key to tapping the private sector as a capital resource. The most fundamental piece of knowledge for the CDFI, as recognized by Keith E. Ferrazzi, a national director at Deloitte & Touche Consulting Group, is that “companies are realizing that philanthropy is simply good business” (Miller, 1997a).
Strategic Philanthropy
“Strategic philanthropy” is a term that has developed from the realization that an effective corporate philanthropy program can benefit society while also serving business interests (Riggan, 1997). Any grant can be a source of good will, but strategic philanthropy is meant to improve company profits through targeted giving that corresponds to company interests (Riggan, 1997). Instead of simply donating resources to worthy causes, corporations now look for giving opportunities that are “newsworthy or reach specific constituencies such as elected officials, and create specific positive impressions” (Riggan, 1997). For a business engaged in strategic philanthropy, success is measured as much by social benefit as it is by improvements to the bottom line.
With a strategic approach, companies invest in philanthropy for a number of social and business reasons, fostering pivotal relationships, burnishing images and generating positive impressions useful to business development, including newly developing markets. It also establishes connections between corporations and institutions with complementary missions, such as the universities that supply the field with ideas and talent, or community organizations which provide legitimacy to the utility's expansion plans. Frequently, working partnerships are developed with these players. Finally, strategic philanthropy can help companies indirectly market products and services, often to clearly defined market segments (Riggan, 1997 emphasis added).
The move towards strategic philanthropy suggests that businesses will be interested in establishing meaningful and sustainable relationships with socially-committed entities. Some corporations, for example, “want to Ôown’ a cause. Whether it be Avon with breast cancer or McDonald's with Ronald McDonald Houses, companies are making a long-term commitment to one cause and trying to make a difference...” (Cooper, 1997). Long term relationships lead to strong bonds of identity between businesses and non-profits and help develop an ethical and caring reputation for a company. According to Carey Raymond, principal at Boston-based The Image Development & Public Relations Group, “Long-term commitment offers ongoing media attention and makes consumers, employees, shareholders, and the community embrace the company. This positive perception has an impact on profitability" (Cooper, 1997).
[C]ompanies are responding to a growing insistence by customers to deal only with businesses that have a good image--an image that philanthropy can build. Firms also feel a need to help fill the gap created by cutbacks in federal and state aid to nonprofit groups, as well as to polish their own tarnished images when they, too, have downsized. And finally, corporations now often are run by baby boomers who grew up with a sense that philanthropy is an important corporate responsibility (Miller, 1997a).
Strategic philanthropy is not just for major corporations. Local business can profit from it, also--especially when the sustainability of the business depends on the impact of its giving. In Green Bay, Dan Bollom, CEO of Wisconsin Public Service Corp, after realizing that there was a shortage of qualified job applicants in the community where his company is located, played a key leadership role in a business-education partnership which aims to transform 10 school districts in the Green Bay Area (Riggan, 1997).
In light of the growing competition for private-sector contributions and the popularity of strategic philanthropy, socially-oriented entities that hope to secure contributions or establish sustainable relationships with businesses must develop their approaches wisely. Being a successful donation-seeker entails more than emphasizing the benefit that a contribution or partnership holds for the company. One must first identify opportunities for mutual benefit. Identification requires thoughtful consideration of the qualities and strengths unique to the recipient that can be put to work to fulfill the needs and desires of the giver.
The following sections further examine the phenomenon of strategic philanthropy in light of the many common operating characteristics and human and financial capital needs of CDFIs. It is hoped that this investigation will be useful in suggesting ways for CDFIs to take advantage of the changing trends in private-sector giving as well as identify opportunities for CDFIs to add value to their own operations and those of private-sector entities through strategic philanthropy. The next section focuses on three key attributes of CDFIs: their need for volunteer and pro bono services; their access to underserved and profitable consumer markets; and their role in community and economic development
Volunteerism and Pro Bono services
Most, if not all, development banks derive critical benefit from the participation of volunteers. In fact, even mainstream financial intermediaries rely on the contribution of donated labor. In contrast to commercial banks, for example, “credit unions usually include a board of five to nine volunteers who together donate fifty hours per month, a supervisory committee of three to five volunteers who together donate twenty hours per month, and a credit committee of four volunteers who together donate fifty hours per month” (Parzen & Kieschnick, 1992). For the CDFI, volunteer labor is instrumental in reducing staff compensation which can be a major percentage of operating expenses. According to Parzen and Kieschnick, employee compensation comprises 45% of operating expenses and staffing costs are 35% higher than the average financial institution (Parzen & Kieschnick, 1992).
Volunteers can reduce operating costs for the CDFI in other ways. Technical assistance, for instance, represents a large financial burden for development banks since it is costly to provide and often too expensive for borrowers to pay for. Shifting the cost of technical assistance elsewhere is another common way in which development bankers improve their cost structure (Parzen & Kieschnick, 1992). Lincoln National “loans” executives to non-profit groups; the objective is to lend the executives' financial and organizational skills to the non-profits' projects (Mckenna, 1995). Venture Fund, a $1.25 million venture-capital fund in San Francisco, partners with an investment-banking firm which accepts the costs of identifying, reviewing, and underwriting the deals in which the venture fund invests (Parzen & Kieschnick, 1992). The provision of technical assistance further benefits CDFIs by reducing lending risk. In Los Angeles, Merril Lynch provides business management and development services to borrowers of CDFI funds (Lynch, 1997; Seiberg, 1996).
To summarize, committed volunteers contribute greatly to the sustainability of CDFIs by: lowering costs and allowing these entities to focus their financial resources on lending and economic development; bringing in professional expertise from the private sector; and facilitating long-term relationships and reducing staff turnover . Volunteers can also play a role in reducing a CDFI’s exposure to risk by offering technical assistance and business advisory services. Obtaining long-term and valuable volunteer service, then, will continue to be an important goal for the CDFI.
Happily, volunteering programs are also valuable to corporations and private businesses.
A joint survey performed by IBM and the School of Business at Columbia University showed a positive correlation between community involvement and return on assets, return on investment, and employee productivity (Caudron, 1994a; Caudron, 1994b). Private-sector entities are becoming aware of the returns that volunteer programs and charitable service provision bring to their bottom line. In a recent poll by Boston College's Center for Corporate Community Relations, “of some 181 community-relations executives surveyed 79% indicated their companies conduct volunteer programs; 51% loan executives to community causes; 33% have formal policies providing paid time off for volunteer work; [and] 73% offer awards or other recognition for volunteer service....” [Miller, 1997 #62].
The emerging corporate trend of encouraging volunteerism also improves employee morale, strengthens employee loyalty to their company, and provides opportunities for employees to learn new skills useful in their work (Caudron, 1994b; Deady, 1994; Flynn, 1994; Mullen, 1997; Svendsen, 1997; Yafie, 1996). Volunteerism “improve[s] workers' sense of identity with their firms, which in turn can translate to lower turnover and absenteeism” (Miller, 1997a). It helps companies improve their images within certain communities. As Geoff Gephard, executive director of Arts United, the umbrella fund-raiser for arts puts it, “People give to people" (Mckenna, 1995).
Moreover, because volunteerism and service provision does not represent a cash outlay, businesses may prefer it over cash donations and find it easier to sustain during hard times. This also allows small and young businesses to reap the benefits of corporate philanthropy. In Fort Wayne, Indiana, Don Wood, president of a local business called 80/20, donated materials to be used in the creation of a children’s exhibit at a local museum. “Science Central got materials for an exhibit; Wood contributed to an educational cause that appealed to him and gave his small, young company exposure. And he got the pleasure of watching his grandchildren climb all over the exhibit on opening day” (Mckenna, 1995). Small businesses represent an important source of private sector capital for urban CDFIs since in some cities they account for an increasing amount of employment (Mckenna, 1995). The donation of materials can also help CDFIs overcome the burden that fixed costs often pose to their small-scale operations.
As we have seen, the provision of volunteer and pro bono services can be beneficial to both CDFIs and private-sector entities. Considering the value of volunteer labor and pro bono service provision to CDFIs, these institutions will want further develop strategies to attract in-kind services.
Market exposure
There are other attributes of CDFIs that make them desirable targets for the strategic philanthropy efforts of private businesses. CDFIs and private businesses share common ground in that they are both entities which can fulfill their respective missions by targeting underserved, often minority, inner-city populations. Notable individuals such as Michael Porter of the Harvard Business School and John McIlwain, President and CFO of Fannie Mae, have long touted the untapped wealth of the inner-city consumer market (McIlwain, 1997; Porter, 1995). According to Market Segment Research & Consulting Inc., Miami, disposable income totals approximately $244 billion for Hispanics, $341 billion for African Americans and $107 billion for Asians (Theodore, 1996). One of Blockbuster Video’s most profitable stores nationally is located in Harlem, while some of the most successful McDonalds franchises are located in inner cities (McIlwain, 1997). “Strategic philanthropy can help companies indirectly market products and services, often to clearly defined market segments” (Riggan, 1997). Thus, CDFIs can be useful vehicles for corporations wishing to improve exposure and image within urban markets and among minorities. Corporations are finally taking note of this market and use giving programs to initiate new business--one of the top three motivators for strategic philanthropy (Yafie, 1996).
CDFIs can initiate sponsorships and partnerships with private companies to increase operating revenues and improve accessibility to financial capital by targeting sponsors with similar goals and demographic audiences (Allen, 1996; Johnson, 1994; Mullen, 1997). Essence Magazine and Anheiser Busch are examples of just two companies that are focusing their sponsorship efforts on minority populations in order to create cross-promotional, public relations and other marketing possibilities (Theodore, 1996; Walters, 1997).
Recently, Merril Lynch announced a $77 million, three-year pilot partnership with The Greenlining Institute and The Orange County Alliance, two organizations that represent CDFIs and other entities involved with economic development among minorities in urban Southern California. “Designed to tap the enormous entrepreneurial energy and economic potential of Southern California's culturally diverse communities,”the program will include $20 million in lending to small businesses in historically underserved markets; $5 million in small business equity investments; $250,000 in complimentary business advisory services to established small businesses in target communities; and $150,000 in advisory services through a regional multi-ethnic business association to provide planning services to very small businesses (Lynch, 1997; Seiberg, 1996). Besides being consonant with the objectives of CDFIs, the partnership serves the interests of Merril Lynch. According to Merrill Lynch Chairman and Chief Executive Officer Daniel P. Tully and President and Chief Operating Officer David H. Komansky,