A New Model of Classification 58

This paper puts forth a hypothesized paradigm of philanthropic grantmaking organizations defined by two key characteristics: the funding model employed and mission focus of the

organization. It is a system to classify organizations based on how they receive funds and how they spend funds.

The funding model captures tax code regulation, revenue source type, and expenditure requirements. Philanthropic organizations are primarily funded through one of two options: endowment or donation-based. Endowed organizations are initially setup with a large sum of money to be invested so as to produce additional money over time. Grants and expenses are spent

from the endowment each year. Donation-based organizations have little or no endowment. Instead they rely on donations and outside grants to create their revenue, which is then used for operating expenditures, program expenses, and their own grantmaking.

This distinction by funding structure classifies private foundations, including non-operating and operating, as endowed organizations. This includes family and corporate foundations. Donation based organizations are comprised of public charities, which includes group entities. It also includes community foundations. Supporting organizations, although public charities are grouped with endowment-based organizations because their funding comes from a single donor, family, or business and they behave more like a foundation, as discussed previously.

The second classification used in this model is to separate organizations based on their mission focus. Mission focus addresses how organizations give: do they have a specific focus in their mission or do they operate within a general purpose. This captures if organizations are strategic in their giving as more focused organizations are more likely to reach innovative outcomes. As discussed previously, nonprofit organizations often have vague missions due to the large public good problems they are attempting to tackle, making it challenging to evaluate their effectiveness. McDonald (2007) puts forth a model of mission-driven innovation, which argues and shows that nonprofit organizations with clear and explicit mission lead to more innovation by focusing the attention of the organization to accomplishable goals and providing goals that can be evaluated (McDonald, 2007).

Additional literature on mission statements and performance uses content analysis to assess if different words or phrases are associated with organizational performance. Short & Palmer (2007) do so with a sample of business schools and find language around activity and action is positively associated with external rankings (Short & Palmer, 2008). From the for-profit literature, Bartkus &

diversity, are significantly associated with corresponding behaviors (Bartkus & Glassman, 2007). While Bart & Laurier (1998) find that mission statements that listed organizational values and purpose had higher firm performance (Bart & Baetz, 1998).

The challenge with using a mission statement to measure strategy is in a smooth assignment process of coding organizations as focused or general in purpose. A classification system is only as valuable as it is usable so it must have an objective coding system so as to be applied broadly. To account for this, a signal variable is coded as focused if nonprofits meet one of three criteria based on the number of fields of interest, types of support provided, and key words in mission statements. Regarding fields, organizations that are only interested in one broad field (e.g. Education or Health) or two subjects (e.g. Cancer Research, Breast Cancer) are coded as focused. This allows for minor flexibility in interest areas but maintains a focus in attention. Organizations are also coded as focused if they provide support for research or program-related investments (PRI). These types of support are included because they are associated with outcome-oriented strategies, especially in comparison to alternative types of support such as building support or capital campaigns.

Finally, nonprofits are also coded as focused if their mission statements contain words related to strategy, collaboration, efficiency, outcome-orientation, or social innovation. (See

Appendix Table 3.1 for list of words used). The list of words was chosen based on the key principles surrounding strategic grantmaking articulated previously. Various sets of words were tried in this sampling process and tested on a sample of mission statements for accuracy. In addition, a more restrictive signal variable was also created that omits the criterion regarding types of support. The data were analyzed using this system as well and produced similar results, but were slightly smaller in magnitude. Appendix Table 3.2 shows the distribution between the two systems.

These two classifications, funding structure and mission focus are exogenous to each other, producing four classifications of philanthropic organizations (Figure 3.7). The first category of

strategic or venture foundations are endowed and mission-driven organizations. With endowments, strategic foundations should have little if any other revenue sources funding their operations. Given their mission focus, these foundations should be following venture-like practices and providing larger and longer-term grants with administrative support while also fostering relationships with their grantees (Feldman & Graddy-Reed, 2014; Fleishman, 2007; Letts et al., 1997).

Strategic or venture public charities are also mission-based organizations but are donation- based, meaning they receive most of their revenue from private donations, grants, and fee-for- service programs. Strategic charities are similar to strategic foundations in their high-mission focus, making them likely to exhibit similar grant-making behavior of larger and longer-term grants. However, their less-secure funding structure should affect their giving strategy. Strategic charities should be more likely to incorporate revenue generating streams like royalty stipulations and

licensing agreements than their foundation counterparts, which will help improve their own financial security. They should also be more likely to cultivate partnerships between grantees and outside stakeholders to help secure follow-on funding for successful projects (Bercovitz, Feldman, & Graddy-Reed, Working Paper; Feldman & Graddy-Reed, 2014; Ledford, 2011).

Non-strategic public charities are donation-based and have general social aims. They are similarly funded from private donations and grants and program revenues. However, they are not mission focused. Instead they have a set of general aims that motivate their grant-making efforts. This is likely to lead them to be less dynamic in their funding strategy overtime, less likely to be evaluating their impact, and more likely to provide smaller grants across more types of projects and in less goal-oriented areas. Traditional foundations also have general social aims but are endowed. Because they have no revenue pressures and less focus, they are more likely to provide smaller grants in multiple areas and payout a smaller percentage of their endowment each year than their

Looking back to the set of example nonprofits, Figure 3.8 updates the set to include their category with this classification system (non-grantmaking organizations are excluded since this system refers only to grantmaking entities). As can be seen from the table, the new classification system crosses over self-identifying terms, IRS legal structure, funding sources, and focus areas to describe nonprofits by their revenues funding structure and expenditure focus.