Do Donors and Social Impact Investors Need to Use Exit Plans?
The launch of Charting Impact represents one more tool in helping donors and foundations make smarter charitable and investment decisions. We’ve seen the growth of the rating organization, like Charity Navigator and GuideStar, move the needle away from solely presenting financial metrics to the coupling these metrics with analysis of outcomes and impact. We’ve also identified the continued need to simplify information – specifically for donors – who do not have a general inclination to spend a tremendous amount of time researching where to possibly distribute their resources (see “Money for Good” report (PDF)).
These trends are all good and point to a day when real-time data and analysis will help the philanthropic and social capital investments communities better align their support with organizations that can significantly create positive social benefit. But, there’s one area where I’ve seen little discussion and which I want to tackle in this post.
Within the philanthropic sector, foundations often define and link exit plans to their funding for major initiatives or individual grants. The exit plans, i.e., the strategies to cease funding of an initiative or a specific grant, are established before funding begins or during the course of the grant period. In general (but not always), the exit plans are not a surprise for organizations receiving support, which allows for proactive planning and preparing by the grant recipients. And if a foundation’s priorities shift during the course of the grant period – such as when the Robert Wood Johnson Foundation refocused its efforts to address obesity – enough advance notice is provided to give organizations affected by the change time to adjust to new financial realities.
The efforts to provide better education and research tools to individual donors and investors rest on a simple idea. With better information and data, donors and investors will better align their resources with higher performing organizations. This improved alignment assumes that the individual will shift support from one lower performing organization to another higher performing organization. In general, no harm would come from such a shift since the amount would be relatively small in comparison to the organization’s budget.
However, there is more risk associated with such a realignment if the donor or investor in question provides support at a more significant level. In this case, when a donor or investor shifts the support away to a higher performing organization, such a decision – if it comes with little or no warning – might cause unintentional harm to the original organization. Ideally, the donor or investor should signal intent and prepare the organization for the loss of support with sufficient time for it to adjust accordingly, much like how foundations signal and communicate with their grantees.
Which begs the larger question: what is the proper exit strategy for an individual donor or social impact investor realigning support from one organization to another?