The Foundation Factor
America’s colossal private foundations act as near-peer political competitors to even the largest publicly traded companies. For example, four major foundations alone spend more than $400 million combined annually shaping the health care policy debate; for comparison, the leading trade association of the health insurance industry reported total annual expenses of $85.5 million in 2021.1 The energy sector operates under similar dynamics, as discussed below. As major corporations contend with the urgent demands of legislative battles and interminable rulemaking, foundations shape the elite policy consensus through massive investments in supportive research, experts and scholars, and issue-advocacy organizations. To manage this increasingly important factor, business leaders should consider “foundation relations” as an important complement to conventional government relations.
When John D. Rockefeller and Andrew Carnegie established some of America’s first private foundations in the early 20th century, such institutions principally promoted social welfare, education, arts, and culture. The tax-exempt status granted to foundations implicitly began with the Wilson-Gorman Tariff Act of 1894, which was the first revenue bill to stipulate that “nothing herein contained shall apply to… corporations, companies, or associations organized and conducted solely for charitable, religious, or educational purposes, including fraternal beneficiary associations.”2 Occasionally, these charities promoted policy aims, such as good governance, conservation, and foreign relations. America’s largest foundation in 1920 – the Rockefeller Foundation – boasted an approximate endowment of $5.6 billion (2022 dollars).3 Today’s analogue – the Bill & Melinda Gates Foundation – reported a total endowment of $67.3 billion in 2022.4
The Tax Reform Act of 1969 solidified the preferential treatment of private foundations, implementing only a modest tax on earnings, minimum 5 percent distribution, and enhanced reporting requirements. During the preceding legislative debates, some in Congress argued for a more aggressive approach: “More and more, the cream is slipping out of our tax system as the great fortunes go into tax-exempt foundations,” charged Congressman Wright Patman (D-TX).5 Despite such concerns, an accommodating tax and regulatory framework continued even as private foundations shifted priorities from social welfare and education to more politically contentious and ideologically charged goals.
Starting in the late 20th century, a wave of foundations emerged from the tech and finance fortunes in Silicon Valley and New York. These founders adopted a new, technocratic approach, “strategic philanthropy,” developed by Harvard Business School’s Michael Porter and captured in his November 1999 article, “Philanthropy’s New Agenda: Creating Value,” co-written with Mark Kramer, in Harvard Business Review.6
Porter and Kramer identified four “mutually reinforcing” elements to strategic philanthropy: carefully selecting grantee non-profits for alignment and viability; “signaling other funders” to support these grantees; playing a semi-management role with grantees to boost their performance; and sharing new ideas with grantees and peer foundations.7 America’s largest foundations have applied these principles to build a coordinated, integrated network of recipient organizations driving issue trends and influencing policy.
Strategic philanthropy began as a method for givers to target and achieve their specific missions in a scientific, technical way; in practice, it has led to the convergence of foundation resources behind similarly convergent, often left-leaning ideological causes. America’s largest foundations, with some notable exceptions, now form a powerful alliance driving policy change, often against the interests of the private sector firms that produced the very fortunes that made such philanthropy possible.
Case Study: The Energy Sector
Oil and gas companies spent just over $120 million in 2021 on direct lobbying expenditures.8 Of course, lobbying alone does not capture the scale of an industry’s efforts to influence policy. Consistent with the practices of other major components of the American economy, the fossil fuel sector for many years has maintained robust trade associations, most notably the American Petroleum Institute (API). API reported for 2021 approximately $226 million in expenses, of which more than half funded industry certification (not political) programs.
That year, Bloomberg Philanthropies alone contributed $197 million to 63 organizations as part of its project “to accelerate the transition to clean energy.”9 This funding supported universities, think tanks, and even foreign entities.
The climate-focused Windward Fund, managed by the left-of-center Arabella Advisors, has amassed hundreds of millions of dollars from private foundations. In a single year (2021), Windward received $16 million from the Gordon and Betty Moore Foundation, $15 million from Bill Gates’s Breakthrough Energy, $5.5 million from the David and Lucile Packard Foundation, $3.3 million from the William and Flora Hewlett Foundation, and $1 million from the John D. and Catherine T. MacArthur Foundation, among others. By contrast, the largest U.S. energy company, ExxonMobil, contributed $3.3 million in 2021 to “public information and policy research” (that is, external think tanks and advocacy projects).
Private foundations are poised to expand their influence over energy policy. As of July 2023, one joint project, “Invest in Our Future,” has accumulated $180 million from some of the largest private foundations interested in energy policy: the Rockefeller Foundation; the William and Flora Hewlett Foundation; the John D. and Catherine T. MacArthur Foundation; the David and Lucile Packard Foundation; and Breakthrough Energy.10 Invest in Our Future’s express purpose is to reshape the legal and regulatory environment through grantmaking activity.
The massive scale, advantageous regulatory treatment, and deeply anti-corporate ethos of most leading contemporary philanthropies require major companies to treat “foundation relations” as a critical component of managing political risk. Strategic philanthropy allows foundations to expertly exploit the competitive landscape and decisively deploy resources for maximum effect. To address this growing center of political gravity, business leaders should expand government relations and corporate affairs to engage foundations through research, cooperation, public debate, and where necessary, principled opposition.
1. According to Baron’s calculations based on the most recent IRS Form 990s and grant disclosures from these foundations (Arnold Ventures, Commonwealth Foundation, Robert Wood Johnson Foundation, and West Health). This number includes estimates from the Robert Wood Johnson Foundation’s grant portal categories and selecting grants listed under the “Disease Prevention & Health Promotion,” “Health Care Coverage & Access,” “Health Care Quality & Value,” “Health Leadership Development,” “Nurses and Nursing,” and “Public & Community Health” categories for the year 2022; “Nonprofit Explorer: America’s Health Insurance Plans,” ProPublica, https://projects.propublica.org/nonprofits/organizations/362087641.
2. Paul Arnsberger, Melissa Ludlum, Margaret Riley, and Mark Stanton, “A History of the Tax-Exempt Sector: An SOI Perspective,” Statistics of Income Bulletin, Winter 2008, https://www.irs.gov/pub/irs-soi/tehistory.pdf.
3. Calculations based on “The Rockefeller Foundation Annual Report: 1920,” Internet Archive, https://archive.org/details/the-rockefeller-foundation-annual-report-1920/page/296/mode/2up.
4. “Foundation Fact Sheet,” Bill & Melinda Gates Foundation, https://www.gatesfoundation.org/about/foundation-fact-sheet.
5. James Allen Smith, “From Populist Crusade to Comprehensive Regulation: the Tax Reform Act of 1969,” Rockefeller Archive Center, December 20, 2019, https://resource.rockarch.org/story/from-populist-crusade-to-comprehensive-regulation-the-tax-reform-act-of-1969.
6. Benjamin Soskis and Stanley N. Katz, “50 Years of U.S. Philanthropy,” Hewlett Foundation, December 5, 2016, https://hewlett.org/wp-content/uploads/2016/12/50-Years-of-U.S.-Philanthropy.pdf.
7. Michael E. Porter and Mark R. Kramer, “Philanthropy’s New Agenda: Creating Value,” Harvard Business Review, November-December 1999, https://hbr.org/1999/11/philanthropys-new-agenda-creating-value.
8. “Industry Profile: Oil & Gas,” OpenSecrets, https://www.opensecrets.org/federal-lobbying/industries/summary?cycle=2021&id=E01.
9. “Nonprofit Explorer: Bloomberg Family Foundation Inc.: Full text of ‘Full Filing’ for fiscal year ending Dec. 2021,” ProPublica, https://projects.propublica.org/nonprofits/organizations/205602483/202223189349104212/full.
10. Abby Schultz, “Donors Raise $180 Million Fund to Advance Clean-Energy Laws,” Barron’s, July 20, 2023, https://www.barrons.com/articles/donors-raise-180-billion-fund-to-advance-clean-energy-laws-d9049a7f.