A civil society watchdog for financial markets: where private foundations stand

One might have expected charitable foundations - the financial muscle behind many civil society initiatives - to be keen to support pressure groups or policy research bodies concerned with financial markets structures and players. But the authors have found only weak evidence that foundations really want to engage with the issues and much caution about doing so. The challenge is there, however: formulate a vision and write a plan and the money might, just, be available.

Over two years after the fall of Lehman Brothers, the world economy is still struggling with the largest recession since the Great Depression of the 1930s. In spite of the turmoil, there is little evidence that we have learned the lesson. Banks have resumed their old habit to pay obscene bonuses to their CEOs and top management (even when they sink clients’ investments and retirement savings), speculation is back on track as it was before 2008 and few serious reforms have been introduced to more effectively monitor and govern financial markets.

Thus, we would like to go back to some of the fundamental questions posed in our previous article, in which we argued in accord with Helmut Anheier that the financial markets are virtually unchecked by public interest organizations (unlike other important actors in society, from government to private companies) and therefore time has come for a civil society ‘watchdog’ of finance. In our article we argued that the ongoing crisis might provide a fertile terrain for what we call a ‘Greenpeace moment’ in the field of finance and wondered if philanthropic foundations were ready to provide the resources needed to build this broad and participated civil society coalition.

Keeping in mind the enormous diversity of the foundation sector, we obviously did not expect that just any foundation could make a difference. But we hoped that our article could at least trigger a debate and stimulate some thinking around the following question: what can foundations do to address the root causes of the crisis (that is, the unaccountable and unchecked behaviour of financial actors) rather than simply focusing on treating the symptoms (that is, the social impact of the crisis)? After all, so much social work, day-to-day community involvement and other interventions in the social sectors have been wiped out by the economic downturn. Does it make sense to continue investing single-mindedly in social welfare initiatives, when the bursting of a financial bubble can easily plunge our countries into an economic recession threatening the very basic foundations of our societies? Shouldn’t civil society become active in this field and learn from this experience so that it will not happen again? Can we expect at least some foundations (along with other public-good oriented institutions) to be the driving force behind such a civil society watchdog, in line with their proclaimed interest in serving the public good and being agents of change? For instance, can they provide the much-needed resources to build the necessary infrastructure so that civil society can bridge the information asymmetry and effectively monitor the behaviour of financial actors? What foundations are more willing to take the lead? And what activities are they already supporting in this field?

With a view to answering these questions, we conducted an international survey of foundations based primarily in Europe (where the economic crisis is challenging the traditional welfare state) without excluding other regions of the world, from North America to Asia. We sent our questionnaire to over 400 directors and other key staff of private foundations over a period of two months (November 2010-January 2011) and received 85 responses. In what follows we present some of our findings and a first tentative analysis, which is at the same time critical and encouraging.

The overall result of our survey is that most foundations are not active in this field. We draw this conclusion not only from the number of negative responses, but also from the feedback of those that did not complete the survey arguing that the topic did not at all fit their areas of work. When the respondents are asked if their organizations provide funding, sponsor or directly operate any activities/campaigns that may help “address the root causes of the financial crisis”, a majority of respondents (over 76%) answers “no” (Figure 1). The number of negative answers grows even further when respondents are asked if they know other foundations that may be involved in this type of work: 84% provide a negative answer. The same trend holds true if we look at future developments: almost 8 foundations out of ten admit not having any plans to fund (or continue funding) projects/campaigns that aim at addressing the root causes of the financial crisis.Figure 1

Some examples of what is being done

Notwithstanding a large majority of respondents that appears to be insecure, indifferent or uncommitted with respect to the role that civil society should play as a financial watchdog, some foundations (roughly a quarter of our sample) are involved in the field and have been promoting some type of initiatives and projects. The various examples they provided can be roughly grouped into 3 categories: 1) research initiatives aimed at rethinking our financial and economic framework; 2) advocacy campaigns aimed at promoting transparency; 3) projects to support ethical investment.

Within the first group, we find – among others – references to initiatives such as:

In the second category, we find references to campaigns such as:

Finally, in the third group, we find campaigns such as the one-stop-shot for green and ethical finance Your Ethical Money, the campaign for responsible pension investment to promote social change Fair Pensions and, among others, the Social Business Tour promoted by social entrepreneurs in 2010.

These are important areas of work and some of these projects are pioneering projects leading the way for more and more organizations to come aboard. Although often focusing on specific issues and only marginally on financial transparency and accountability, some of these initiatives may become interesting ‘incubators’ to test the feasibility of an international watchdog movement of financial markets. Of course, a ‘Greenpeace moment’ would require more support, more popular participation and more outreach capacity. It would also need to play a more ‘political’ role as well as adopt innovative advocacy strategies in order to stand out in public consciousness and influence citizens’ opinions and behaviours.

Problems of autonomy and willingness

In the public discourse, foundations are often described as flexible and innovative public-good oriented organizations. Not only nonprofit specialists, but also some politicians and opinion makers have been arguing that foundations should be playing a more central role in the evolution of the European welfare system and similar arguments have been put forward elsewhere in the world. In particular, the idea is that foundations can more easily ‘get the job done’, while public institutions are often burdened by over-bureaucratic processes and political pressures. Our survey reveals that, with respect to the idea of promoting a civil society watchdog of financial markets, the opinions of the CEOs and key staff we interviewed can be divided into three camps: a majority of 50% who believe “foundations possess the autonomy, innovative character and resources to support civil society’s monitoring of financial institutions” (Figure 2, in green). Only 21 % (strongly) disagrees (Figure 2, in red), while 29% neither agrees nor disagrees (Figure 2, in yellow).

Figure 2

Let’s go step by step. First of all, it is interesting to note that about 1 respondent out of 5 either disagrees or strongly disagrees with the idea that foundations are autonomous and innovative enough to support a civil society watchdog of financial markets. When looking at the explanations provided by respondents, we see a general acknowledgement that many foundations are actually risk adverse and “refrain from getting involved in new sectors”. Some of them have been working almost exclusively on social welfare projects and their constitutions forbid them from entering new terrains. There are also issues with the boards of directors and “legal requirements that need to be fulfilled”. Some argue that “the thematic focus of a foundation is hard to change”.

Nonetheless, albeit a significant portion of respondents are not enthusiastic about the “autonomy, innovative character and resources” of private foundations, at least a half of them believes that foundations would be well equipped to take on the task. Then again, why have they not done so yet? In Figure 3, we report the responses to a question concerning the “willingness” of foundations to support a civil society watchdog of financial markets: over 60% of respondents provide a negative answer (Figure 3). Therefore it must be concluded that even some of the respondents that support the ‘autonomy and innovation’ argument recognize that there might be some ‘willingness issues’ at play. So, can we explain this lack of commitment?

Figure 3

Explaining why certain foundations might not want to get involved

A first set of answers focuses on the demand side of the problem, that is, the lack of an already existing and credible interlocutor in civil society: “civil society is not sufficiently organized nor knowledgeable to undertake effective monitoring of financial institutions”, “if there is a civil society group with a great proposal, we will fund it. But so far we haven’t heard anything”, “it is questionable whether civil society can truly fulfil a monitoring role as outsiders”. Another, group points at the supply side of the problem, that is, the lack of a proactive role of foundations, highlighting that foundations have other missions, interests and goals than working towards the change of financial markets. There are also qualification issues at play. For instance, some respondents call into question the very idea that foundations are the right addressees for such a call. In their view “monitoring is the role of the state”.

Others underline the lack of resources: “this is not what foundations have been established for. Therefore they lack the instruments and knowledge”, “given the amount of specialization required to monitor financial operations and the absence of control by public authorities, it would be presumptuous to think that foundations can help” so that, in effect, “the lack of willingness to get involved may be the result of a rational choice”.

Another group stresses the limited power and capacities of foundations: “we are too small and too flighty [sic!] to offer a true balance against the size, scope and power of financial institutions”, “I feel we are not confident than we can make a difference”, while some respondents point to a lack of interest: “while some change is under way, most foundations sill aim to maximize investment income from their portfolios without giving attention to these important issues”, “the fact is that very few foundations pay much attention to how they get their own money, nor show a great interest in examining the financial and corporate sectors”.

And finally, there is the general tendency to prefer welfare issues and shying away from more ‘political’ advocacy: “Foundations could play a key role here, but my experience is that few are interested. Welfare issues are much more attractive”. According to one respondent, most foundations have become reluctant to support controversial campaigns and any social movement that might challenge the status quo:

They have become afraid of controversy. It’s very sad. Recall the 1960s when it was Ford and other USA foundations to fund the civil rights struggle? Today Martin Luther King Jr. would never be able to get a grant, as he did then. I think it’s lack of will and interest, and perhaps a sense that government should do it.

It is interesting to note that most of our respondents acknowledge the limited commitment or active disengagement of their foundations. As illustrated in Figure 4, over 54% admit that their foundations should do “more” to address the root causes of the financial crisis (rather than its symptoms) and support civil society with expertise and resources to hold financial markets accountable to citizens (Figure 4).

Figure 4

Conclusion: what to do?

Obviously our survey does not offer a statistically significant representation allowing for easy generalizations. The foundation sector is a composite universe of hundreds of thousands of organizations, with different and at times competing agendas. However, we hope that this survey and the questions it raises will steer a more general debate about what civil society can do to monitor financial markets and watchdog against its speculative tendencies. The task at hand is definitely complex and will require significant resources and knowledge. But the same can be said about a number of areas where civil society advocacy has covered significant ground in the past decades. Advocating for human rights requires a lot of technical information, field research, access to secret documents and also personal risks. Yet, this has not prevented civil society (and the foundations providing resources) to build a strong information basis, data and global advocacy campaigns. Advocating for the environment necessitates significant research, expensive tools and an excellent knowledge of biological and physical processes. Notwithstanding the challenges, the influence of environmental organizations and their capacity to affect political decisions is nowadays recognized by everybody. So, why shouldn’t it be possible to do the same with the financial markets? Of course, there is a lot politics and conflicting interests that need to be overcome, but the dramatic impact of the financial crisis undoubtedly calls for a new and dynamic role by civil society in this field.

Foundations can support this process in three ways that are not necessarily mutually dependent but certainly reinforcing. First of all, they should recognize the fundamental value of ethical investment, both in the way in which they accumulate resources (‘where does the money come from?’ ‘was it generated ethically?’) as well as in the way in which they administer their own endowment and capital. It is no longer acceptable that foundations claiming to be concerned with the public good invest their resources in conventional (often high-risk) schemes. They should exclusively interact with ethical banks, use their pension funds to promote social welfare investments, demand full transparency and accountability by their banking counterparts (and, ideally, by their donors), guarantee openness in their internal decision-making processes and, quite importantly, reform their salary scales according to widely-accepted principles of proportionality and appropriateness. By rethinking their internal functioning and their investment policies (and making all of this public), private foundations can already help reshape the financial system a great deal. These reforms are within reach for any foundation, big or small, international or local. Whether concerned exclusively with social welfare issues or some other niche area, these changes should be part and parcel of any public-benefit organization.

The second option concerns the pioneering small-scale initiatives identified by our survey, whose full potential may be brought to bear if foundations were to make use of their convening capacity to connect such ‘disparate experiences’ and provide a neutral locus for interaction, networking and cooperation (at the national and international level).

Of course, the most innovative and courageous foundations can do even more, thus moving to the third level of action. By getting involved, directly or indirectly, to support civil society’s action as a watchdog of the financial sector and sustain a fully-fledged social movement they may help citizens keep international finance in check, thereby strengthening our social welfare and, ultimately, our democratic societies. As underlined by the CEO of a foundation,

Foundations are themselves crucially important actors of civil society and depend on the legislative framework and also the financial institutions which allow for their activities to continue. A critical civil society is a guarantor of transparency and good governance, and these are the two core values needed for the development of responsible financial institutions on which foundations depend to carry out their work.

In our view now, time has come for progressive foundations to take a bold stance, even if this implies abandoning the safe ground of uncontroversial gift-giving to move towards an unknown and potentially contested territory. The global economic crisis might provide a unique once-in-a-lifetime window of opportunity for real change. 


Note:

We are grateful to Anika Strifler and Daniel Bader for their valuable support in the administration of the survey and the gathering of data. 

About the authors

Ekkehard Thümler is Project Director at the Centre for Social Investment of the University of Heidelberg (Germany).