Woods Fund Chicago is far from one of the country’s largest philanthropic funders, but it may very well be one of the boldest, from its unapologetic focus on ending racial inequities to its amped-up 14% payout rate (with plans to bump that to 15% next year) and a definition of fiduciary responsibility that puts it at odds with the vast majority of U.S. foundations.
Woods Fund President Michelle Morales recently joined me for an in-depth conversation about that definition, philanthropy’s myths that have somehow become rules, and what makes her foundation’s board different (and how it got that way).
This conversation has been edited for length and clarity.
In a recent email you said that you and your board prioritize the existence of the organizations and sector you support over your survival as a grantmaker. How does it feel knowing this mindset conceivably means you’re at risk of working yourself out of a job?
I believe that we [funders] should all be working ourselves out of a job; particularly if we’re truly exerting as much energy as possible in undoing systems of harm. And so we know that our higher payout will impact the perpetuity of the foundation at some point. We’re deeply aware of that, but we know how underfunded community organizing and public policy is. Our North Star is strengthening that ecosystem, so we want to infuse it with as much resources as possible, and that may mean putting us out of work.
The idea of foundation perpetuity has been criticized, particularly in the current political environment. We know that funders with perpetuity in their founding documents can delete that provision, though doing so can be complicated in some cases. Do you think fealty to perpetuity makes any sense in a country and world that has been in upheaval since at least the COVID lockdown?
No. Fiduciary responsibility has really become a way of saying that if you are going to operate above a 5% or 6% payout that you’re being irresponsible. We’ve been operating outside of our investment policy statement for the last five years. We’re looking for a new investment firm partly to help us determine what our horizon is going to be. Is there a horizon? What do we need to be doing with our assets?
We have not quite gotten that type of support from our current investment manager, which is why we’ve been operating outside of the investment policy. But I’m grateful for the board to have the gumption to say this document is not serving the needs of the sector we’re supposed to be supporting. And for whatever reason, our investment policy statement, which was in existence before I joined the Woods Fund, didn’t even have any language in it on what to do during moments of crisis. It just talked about a 6% payout, and I think that that’s short sighted. We don’t live in a world without crises. If you don’t have a guiding document that says,”During moments of crisis, we’re going to do this,” I think that handcuffs leaders and boards in a lot of ways.
I think and I hope that folks are having the hard conversations with their boards on what it means for foundations to exist in perpetuity. In some ways, there’s a little bit of arrogance in that — as though the world will always need us. And also, are we setting up the conditions where the world will always need us?
We struggle with perpetuity. We have those conversations; we have those tensions with that language of perpetuity because, look, I understand that Woods Fund isn’t a huge foundation, but we’re one of the largest funders of organizing in Chicago. So I’m deeply aware what happens if we go away, which is partly why we are also trying to think about how we get these organizations [grantees] to be stronger. We have an advocacy strategy internally where we are trying to get other foundations to also support organizing in some way, shape or form. So yeah, long answer.
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In August last year, you wrote that Woods Fund had decided to turn the concept of fiduciary responsibility on its head, saying “At WFC, we believe we are fiduciarily responsible to the community and prioritize impact over returns.” What process led to that decision — was it a natural next step, or did you have some difficulty with it?
I think several things happened. COVID was the impetus and the catalyst. As I’m sure you’re deeply aware, so many foundations use the framing of, “We’re banking our returns for a rainy day.” COVID was an opportunity for me to really challenge our board at the time to say “This is the rainy day.”
We’ve been lucky to receive really decent returns. I remember our returns in 2019 were 11% so we were banking 5%, right? And we had been doing that for several years and growing our corpus. So COVID was a rainy day, right? The rain has not stopped.
We also knew, just like I think the world knew, that nonprofits were having a hard time fundraising — switching to virtual all the things that you would do in person before the move to remote work during the pandemic. We also knew that — because the organizations that we support are already underfunded — the following year, we knew we couldn’t go back to a 6% payout because they’re still dealing with the ramifications of not being able to fundraise. So that was the catalyst.
But in 2021 we started our strategic planning process. That allowed us to really go through a series of conversations wrestling with the notion of perpetuity, and wrestling with the notion also that we did not have a charter — because that was a myth within the board, [that] the charter said we had to exist in perpetuity. And I was like, “Whatever charter you’re talking about, I can’t find it. We don’t have the documents. I’ve reached out to our attorneys.” Learning that Woods doesn’t have a document requiring perpetuity opened the gate to really rethink what we should be doing as a foundation and what we should be contributing. We had a fantastic board member who came from the finance world, oddly, and he was the one that said, instead of shoving ourselves into this binary, why don’t we just focus on our impact — and if the impact means we exceed our payout, we exceed our payout. Hearing from him also helped to move the board in that direction.
This makes me wonder: Woods Fund seems like a decently organized foundation, but your staff and board didn’t even know that you didn’t have anything in your founding documents requiring perpetuity. How many other foundations do you think might be operating under the same misconception?
I think that happens a lot. I think there are myths in philanthropy that become rules. I’ll give an example. We shifted to trust-based philanthropy during COVID. We did away with applications. We did away with reports. Now, everybody did that in COVID, but we decided to keep it.
When I started talking more publicly about how we were deepening and leaning into the practices of trust-based philanthropy — which for us is a way for us to operationalize racial justice — I had foundation leaders ask me, “How are you legally able to do this?” Now I’ll tell you, Dawn, I had a moment that was like, “Oh, shit. I did not check with our attorney. Am I gonna get in trouble?” I reached out to our general counsel and reached out to our auditors and I was freaking out. And they’re like, “What are you talking about? You don’t need any of that. You don’t even need a grant agreement,” which is another thing people believe you need. So, as of this year, we did away with grant agreements. We just do an award letter that I sign, and that’s it.
I have to ask, what do you think stands out about your board that makes these kinds of decisions possible? What do you think sets your board apart from other foundations that seem to prioritize protecting their endowments over adopting a different definition of fiduciary responsibility?
After 2021, we had a pretty large shift in composition on our board. Historically, I think, like most foundation boards, ours was made up of civic leaders; notable names. All incredible people. We had, I think, one or two folks who came from the organizing world, but the rest were civic leaders. Between 2021 and 2022, we had five board members stepping down. It was a little bit more than half of our board, because we have a nine-member board, and it gave me the opportunity with other board members to start thinking about bringing people on who were much closer to community organizing — who are either community organizers or they’re very adjacent to community organizing.
That has shifted the conversations. I will tell you, in fact, I have to rein them in. That’s my biggest struggle right now. They want even more of a payout. I have to be like, “We’re already at 14%. The more we give out, the shorter our horizon becomes.” I have to lean a little bit to the other side.
That reconstitution of our board and bringing people on who are doing community organizing, who understand it, has really allowed us to move in a way that I know other foundations struggle to move.
For example, when the rollback of affirmative action happened, I laid out all of the legal risks. “We may get sued. This might happen. Blah blah blah.” We’re very race-explicit in our language, as I’m sure you saw on our website. And they were like, “We’re not changing anything. And if there is a legal fine, we have the resources. We’ll use our resources to do it.” So they really, really expect even bolder actions.
It sounds like the solution for foundations that want to be more proactive and bold is to replace their board.
(Laughing) I mean, that’s the easiest solution.
