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Wednesday, June 11, 2003

Foundations and Agency Costs-I'm no expert in foundation management, but this is an interesting piece. Charitable foundations are required to pay out 5% of their assets each year in grants; currently, their administrative expenses count towards that 5%. There's a law on the books to not allow administrative expenses to count, and the big foundations are bringing out the big lobbying lumber. If I'm doing my math correctly, the average top 100 foundation gives away $90 million a year and spends $8.3 million doing so. There seems to be an administrative inertia that has a lot of money being spent by these foundations on top academics, ex-politicians and other members of the left-leaning elite to run the big foundations. A Weekly Standard piece last year pointed out the relationship between Bill Moyers and the Schumann Foundation, who paid him a big salary and financed his TV projects. If foundations have to give away 5% plus the 1%+ of operating expenses, it might start to eat into the firms endowment, jepordizing the gravy train. That will either mean they will give less or start to trim expenses. There seems to be little incentive to trim expenses in the foundation world, for they are accountable only to a board of directors who might be in on the cushy saleries. In business, we call that agency costs, where the management is looking to line their own pockets rather than look after the best interest of stockholders. Without stockholders, there is little to reign in such agency costs. In corporations, a proxy fight or hostile takeover is the market's responce to excessive agency costs. In goverment, it's oversight from the executive and/or legistative branches. However, there's little prospect in getting an inbred directorate to trim things down, unless some outside force steps in. It's interesting that the point man in the lobbying effort is Bill Paxon, a moderate Republican former congressman. I'd expect the Democrats to be more in opposition to this tax change, for trimming executive compensation in foundations will mean less cushy jobs for them and their allies. On the flip side, it might mean more propaganda projects being funded, shifting the gravy train away from the foundations to the organizations that they fund.

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