The financial sector requires a civil society watchdog

Lorenzo Fioramonti and Ekkehard Thümler

Non-profit organisations have suffered in the financial crisis, no less than their counterparts in the private and public sectors. But could this be a “Greenpeace moment”? May philanthropic foundations support the creation of a civil society conscience for international finance, ask Fioramonti and Thümler in an article published on the openDemocracy website.

The global financial crisis has ravaged economies in Europe and North America, and has severely affected many other regions of the world, including some developing and emerging countries.

The long-term consequences of this crisis are hard to predict, but all governmental responses (including the recent G20 in Toronto) point to a general downsizing of the public sector which will inevitably result in layoffs and cuts in the social sector and welfare systems.

Moreover, the events have revealed how fragile the entire European monetary system actually may be. The drastic reforms announced by major economies such as Germany and the United Kingdom attest to the gravity of the situation and may even be symptoms of a fundamental threat to the sustainability of the European social model.

In some countries, the economic crisis may spark a wider social crisis, affecting citizens and civil society, even though in some cases that may give rise to interesting new configurations of the public, private and third sectors.

The non-profit sector has also suffered the consequences of the financial downturn.

Public as well as private funding has shrunk, while social tensions are on the rise, thereby placing additional strain on non-governmental organisations, voluntary organisations and other non-profit entities already running on tight budgets.

As funding has plummeted, proposals for a ‘bailout’ for the non-profit sector have been voiced in a number of non-governmental forums across the Atlantic.

The Foundation Center, a United States-based service provider to philanthropic foundations, has set up a specific programme to focus on the economic crisis in order to support non-profits through the recession and help them strengthen their fund-raising skills.

Other foundations have launched programmes to help non-profits adapt to the new financial climate and reorganise their business model in an age of austerity.

Yet, a recent survey focusing on how US philanthropic foundations have supported non-profits during the recession, paints a rather bleak picture: poor communication, ad-hoc initiatives and little systematic help in responding to the real challenges of the downturn. Most foundations seem to
act poorly.

As regards overall financial support, the 2010 Foundation Giving Forecast Survey, put together by the Foundation Center, confirms the downtrend among the largest American foundations: a significant number of big philanthropists have cut their budgets due to reduced endowment income and sharp decline in asset value.

Whatever foundations are doing to help non-profits muddle through the financial crisis, their mainstream approach appears to be reactive at best. What is lacking is a proactive attitude by non-profits and, particularly, endowed grant-making foundations that may turn the crisis into an opportunity critically to review global economic mechanisms and contribute to reform of the financial sector.

There is a wide consensus that the financial crisis was caused by reckless behaviour on the part of many investment and commercial banks, encouraged by the liberalisation of financial markets, lack of effective public monitoring, and a generalised bandwagon mentality paving the way for mass investment in obscure financial products.

Along with many investors and businesses, foundations were lured into high-risk or fraudulent investments.

Against this backdrop, one may think that tackling the root causes of the financial crisis (rather than focusing exclusively on some of the symptoms) would be an important and meaningful goal for civil society as such, and philanthropic foundations in particular.

In the German weekly newspaper Die Zeit, non-profit specialist Helmut Anheier argued that the financial crisis should be seen as a window of opportunity for foundations, and called on them to ‘jump-start’ the creation of a watchdog organisation to rein in financial speculation and provide a genuinely public oversight of markets.

Indeed, unlike other areas within society, the financial sector is virtually unchecked: Not only does it take advantage of poor and often conflicted governmental oversight mechanisms, but it also thrives due to a strikingly limited presence of civil society actors.

According to Anheier, philanthropic foundations possess all the necessary qualities to support the development of a civil society infrastructure that may lead to the establishment of the “Greenpeace” of financial markets. Why not imagine a transnational network supported by national chapters and significant grassroots participation, a point of reference for citizens and other public advocates and the public eye on global finance; a campaigning organisation that could turn the spotlight of publicity onto the speculative tendencies of financial actors?

Foundations have not only the financial resources, the political clout and the communication tools, but also the autonomy and freedom to do the job. But have they made any moves in this direction? Are there organisational, economic or political reasons why foundations may find it difficult to play such a proactive role?

A quick survey shows some initiatives on both sides of the Atlantic. Possibly the most prominent example is the Institute for New Economic Thinking – founded in 2009 with a $50-million pledge by Janus-faced finance tycoon and philanthropist George Soros – which aims to revisit economic theory and practice with the long-term ambition to establish a new economic paradigm.

In Germany, most political foundations and the publicly funded Stiftung Wissenschaft und Politik (German Institute for International and Security Affairs) appear to have reflected upon the challenge, and some of them have convened meetings and issued publications on reforming financial markets.

Among the large private foundations, the Bertelsmann Stiftung has been funding a project on the “Future Social Market Economy”, which discusses the sustainability of German capitalism in light of the crisis.

In Great Britain, the Carnegie UK Trust set up a “Commission of Inquiry into the Future of Civil Society in the UK and Ireland”, which developed recommendations for more transparency, stronger local or social investment, and more significant involvement of civil society in financial matters.

These are, of course, some handpicked examples, and more research will be done in the coming months (we are planning to conduct a systematic survey in September-October 2010).

Yet, the overall picture does not seem to be very encouraging. Investment in this more ‘political’ domain is minimal compared with more traditional (social) areas of philanthropic involvement. The few foundations that have started investing in innovative research do not seem to have embarked on supporting public advocacy initiatives, let alone paid any attention to the possibility of supporting a strong watchdog role by civil society. This seems surprising, given how easily unchecked markets can wipe out the positive effects of decades-long social justice and service delivery work carried out by non-profits.

So, how can we explain this apparent reluctance of large foundations to become involved, in spite of their enormous potential as progressive social actors (and aside from the fact that, in a few cases, they may be constrained by statutory requirements)? We propose a few hypotheses:

• Lengthy process: Foundations are complex institutions, and it takes them time to adjust to new challenges. In some cases, there have been internal discussions and new projects may be in the pipeline, but nothing has been made official yet and no clarity is offered regarding when these new initiatives may begin.

• Lack of expertise: Foundations are willing to do the job, but having focused almost exclusively on social, legal and service delivery work. They lack the economic expertise and the staff (at present) to propose new initiatives in this field.

• Building alliances: Foundations are willing to take on the task, but they also recognise that the complexity of the matter requires a broad-based alliance among philanthropists, which may take time to build due to sectoral competition.

• Path dependency: Foundations may be less innovative than we think and therefore may be reluctant to become involved in entirely new fields. This would make them unlikely to be the ’first movers’, but it does not exclude the possibility of their jumping on the bandwagon once new initiatives have successfully taken off.

• Political caution: Monitoring and advocating in the field of international finance may place foundations on a highly political terrain with which they may not be comfortable. If this were the case, not only would they be unlikely to take the first step, but they would refrain from funding such large-scale initiatives in the long run.

• Conflict of interest: Foundations may be part of the problem, rather than the solution. With assets invested in the stock markets, and board members often very close to financial institutions (e.g. investment banks), foundations may not be able to play a neutral and independent role in such a field. They may not even think of themselves as fully autonomous when it comes to reining in economic powers.

The financial/economic crisis is one of the most significant challenges of our time. Although exerting a heavy toll on all countries’ economies, it can also become an opportunity to learn from our mistakes and do something to prevent it from recurring.

Civil society should be a force for good in society and should have a role in all sectors, including finance.

Whatever the challenges, if foundations fail to engage with financial reform, they will miss a crucial opportunity to contribute to sustainable and long-term social change – which, after all, is their mission.

Of course, not all foundations are equivalent, and we are aware of how diverse the sector is in reality. The constraints discussed above may prevent only some foundations from becoming involved in this ‘hot’ field, while others – we hope – will find it easier to grasp the importance and urgency of the task.

Alliances have to be forged across various fields and actors within civil society in order to pull together the best energies and resources. This would imply a stronger support for cutting-edge advocacy initiatives and a closer relationship with other social actors, such as grassroots movements, trade unions and active citizenship organisations.

Whatever civil society initiative may be born out of the ashes of the current financial crisis, it will need to grow organically, ideally from the bottom up and with participation from different sectors. Foundations should limit themselves to nurture this spontaneous process and help it get off the ground.

Needless to say, supporting such an alliance would require many foundations to rethink their role in society and become more ‘political’ and more critical of our economic system – the same system from which most of them originally sprang.

Their response will show the foundations’ potential or perhaps their limitations as drivers of social change.

Ekkehard Thümler is project director at the Centre for Social Investment of the University of Heidelberg (Germany); and Lorenzo Fioramonti is a senior Fellow at the same institution, and one of the authors of the documentary “The Age of Adaptation”, which deals with climate justice, the imbalances of economic growth and the need for an alternative development model.