The Ethics of Fund Raising for "Replacement Dollars"

Philanthropy is a compact between a doer and a donor to get something of mutual interest done. The compact requires both parties to state their intentions clearly, to agree on an outcome, and to keep their word. If those conditions are met, the agreement is ethical. If, however, the doer induces support from the donor on false pretenses, that is a violation of every known code of professional fund raising ethics.

What, then, should we make of the use of the increasingly common practice of raising “replacement dollars”? Let’s look at a few scenarios.

• An institution asks for private support to build a new structure. It has already fronted some or all of money for that purpose. As new private dollars come in, they replace fronted funds, freeing them up for some other use. Is that ethical? Essentially, yes, if the donor knows that debt has already been incurred and their support is alleviating that debt. If the institution fronts the money and is prepared to see the project through but tells prospects the building won’t go forward without their support, an element of deception has crept into the compact. Some donors want to make sure that the private contributions are absolutely essential, either to meet a critical need or an important opportunity. If the institution has the ability to front the money, some donors will reason, they don’t really need my support. That’s why it is imperative that the institution be frank and forthcoming; donors have the right to determine the role they want to play and the criteria they wish to apply in making their gifts.

• An institution announces a drive for additional financial aid both to respond to greater student demand and to remain competitive in their admissions. The institution has already committed $20 million per annum from its annual operating budget to financial aid. As donors respond to the call for more financial aid support, the institution redirects the investment in direct proportion to the new dollars thereby maintaining a $20 million annual commitment. Ethical? Nope. The institution claimed there was a greater need and a new opportunity. In that case donors would assume that new dollars were building greater institutional capacity, that their support was augmenting existing commitments to meet new challenges. Further, if the institution implied that new money was creating new levels of opportunity but did not cap or control the expenses that drive up tuition, they failed to tell donors the fully story. New donations might never keep pace. Indeed, in such a case, ever larger amounts of money given to financial aid might only serve to cover lax fiscal management. Even if the financial aid campaign were successful in meeting its stated goals, the institution’s competitive posture, in terms of its ability to give greater amounts of aid to more students, could have actually declined. The push for “new” dollars to meet greater challenges was a ruse for maintaining the status quo. Okay, so what if the institution just asked for financial aid without making any claims about the need or improving its competitive posture? Well, that would certainly be preferable but there should be no implication that the overall financial aid picture will improve, only that donors will have the joy of giving to an area that provides a lot of psychic rewards. The trouble with that approach is that it’s not likely to generate significant support. Again, there’s nothing wrong with an institution saying “we could use your support; anything you give will make a difference, just pick the portal of your choice.” But, in general, the more a donor gives the more s/he wants to know, in precise terms, the difference made or improvement rendered.

• An institution hosts a number of heads of state each year and the tab for doing so keeps growing. Someone in development locates a donor interested in underwriting a high-level speakers series and the president says, “Rather than create something new, maybe we can put her name on the existing speakers program in exchange for budget relief.” In this case, the replacement seems to work; the donor wants to bring in and be associated with prestigious speakers, and it would be hard to surpass what the president’s office is already doing. The donor knows exactly what she is getting and the institution knows it can deliver. The donor gets prestige and performance; the institution gets budget relief. Yes, the money being used for that institutional purpose will be redirected but, presumably, not in such a way to lessen or undermine what the donor seeks to accomplish or to pretend that gift will achieve something that it cannot. Candor is the key.

As I have detailed in earlier posts, Americans' trust in their institutions is eroding. They see them as bloated, poorly managed, and aloof. In such an environment, we need to recommit ourselves to the highest ethical standards in our fund raising practices. Every new gift puts either more rock or more sand in our foundation.