Phil Henderson, President of the Surdna Foundation, Joins Denver Frederick

The following is a conversation between Phil Henderson, President of the Surdna Foundation, and Denver Frederick, Host of The Business of Givng on AM 970 The Answer in New York City.

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Phil Henderson

Denver: It was 100 years ago that John Emory Andrus created the Surdna Foundation to make access to opportunity available to one and all.  And that tradition has continued now for five successive generations. On this occasion of their centennial anniversary, it is a great pleasure to have with us this evening the President of the Surdna Foundation, Philip Henderson. Good evening, Phil, and welcome to The Business of Giving!

Phil: Great to be with you!

Denver: So, tell us about John Andrus, how this all got started back in 1917, and some of the key milestones of the Surdna Foundation over the course of the last hundred years.

Phil:  Well, it’s exciting to think that we’re at 100 years, but John Andrus is someone that most people have never heard of before. But he was a self-made millionaire back in the late 1800s… into the early 1900s, and he did a couple of different things. One is that he developed an elixir called “peptonoids,” precursor to Pepto-Bismol, made a bunch of money from that.  He developed a lot of natural resources and then decided in 1917 to leave effectively half of his fortune to charity through the Surdna Foundation– which was the inversion of his name “Andrus” – Surdna. And the first thing that the foundation did was to build an orphanage in honor of his wife who had been an orphan.  Then it built a nursing home across the street. Both are still functioning up in Hastings-on-Hudson, just north of Yonkers, on Broadway.

Denver: Well, let’s briefly examine the kind of programs that the Surdna Foundation supports, and they really fall into three main categories. The first is the Sustainable Environments Program.  What you’re doing here is taking a fresh look at our crumbling and old infrastructure. Tell us about this “new generation infrastructure” initiative that you have.

Phil: So we’ve always approached our environmental work from the point of view of how people experience the environment. So, we have not been so interested in wetlands or saving trees in the forest, but really understanding how people and the environment interact. And so that led us to really  think about the built environment around people– particularly in our urban areas where that infrastructure, as you say, has been crumbling– really needs a rethink, a reinvention.  So we’re actually thinking about how we’re building our cities, how we’re building our urban areas for the future. And so we’re using less energy, allowing people to have more walkable lives, allowing people to experience their communities in a different way.

Denver: Water management… and things like that.

Phil: Water management, where they get their food, how energy is produced – all of these things… really thinking toward the future.

Denver: The other thing you’re doing is you’re trying to create Strong Local Communities, and this is probably guided by, more than anything else, your commitment to social justice and equity.

Phil: That’s right. We think about economic opportunity through this program as being that some people have had a lot of economic opportunities; some groups of people had a lot of economic opportunity in the United States over the last several generations.  But others have been left behind. We’ve really been thinking about: how do we work in communities where there are groups of people, particularly people of color, immigrants, others who are struggling to find economic opportunity?  How does business development happen?  How does capital move? How do we find ways to trigger business growth, economic growth, job growth in these communities that have been somewhat left behind?

Phil

Denver: Give us an example of some of the things you’re doing in this realm.

Phil: There are groups in cities called “business accelerators.” In particular, business accelerators work with micro-enterprises and small enterprises to help them figure out what they need to grow –  Is it increasing their ability to manage the institution, the business that they’re running? Or is it the lack of access to capital?  And how can they improve the chances that these businesses will grow? And in particular, we’ve been focusing on those accelerators that are working with businesses that are run by people of color, by women, by immigrants who often have more difficulty penetrating those triggers to growth.

Denver: And you’re really looking at fast-growing businesses. Probably too much has gone to these micro-businesses that don’t generate a lot of jobs. You’ve really changed the focus of those fast-growing jobs.

Phil: That’s exactly right. We’re really trying to not focus on the mom-and-pop stores that will only ever employ mom and pop, but actually those businesses that are poised to grow and create jobs for people in the communities.

Denver: And the third focus area you have, Phil, is Thriving Cultures. And you’re one of these people who doesn’t believe that culture is just a nice thing to have,  an add-on after everything else is working. You really have it as an essential part of the fabric and the health of a community.

Phil: That’s right. We have, for a long part of our history, funded the arts. And we really in the last decade have expanded our understanding of that funding– away from simply funding arts training– but funding groups that are artistic in their orientation  but really are the fabric of the communities within which they sit. So community-based organizations that are using arts and culture as a way to both express where the community is, but also the aspirations that the community has.

…for a long time in the history of foundations, the investment side of the operations – the side of the operation where you’re investing in stocks and bonds – has been really separated from the other side of the foundation, which is doing the good social change work. And the idea of impact investing is that you should try to break down that barrier.

Denver: Well, one of the things that the Surdna has done around the occasion of your 100th anniversary is: you’re going to take about 10% of your endowment– which should be about $100 million– and you’re going to direct it to impact investing. And before we speak to your journey of how you got there, tell our listeners exactly: what is impact investing?

Phil: I think the important starting point is to understand that we drive the money that we have to spend for grants by investing a lot of capital. And for a long time in the history of foundations, the investment side of the operations – the side of the operation where you’re investing in stocks and bonds – has been really separated from the other side of the foundation, which is doing the good social change work. And the idea of impact investing is that you should try to break down that barrier. You should try to find ways to marry the goals that you have with your grantmaking with the goals that you have with your investing. So in other words, investing in the sorts of businesses… let’s say, energy companies or other folks that are doing their business in a way that is in sync with, or harmonious with, the mission that you have for your grantmaking.

Denver: So, if the federal law requires you to only distribute 5% of your assets, what impact investing is is about is the other 95%, correct?

Phil: Well, that’s right. It’s about the other 95% and really understanding how you can increase the amount of investing that you’re doing that is harmonious with your mission.

Denver: Well, you have provided a real service to other foundations who might also be thinking of heading down this road. In a report that you just issued entitled “Mapping the Journey to Impact Investing,” which details the process that you just went through, bumps and warts and all. Tell us a little bit about that journey.

Phil: The report was an interesting process for us because it was really reflecting on what was really a multi-year journey for us to come to the decision that we were ready to, as you say, devote 10% of our endowment toward impact investing. And the Surdna Foundation really approaches big challenges like this in a consensus-oriented way. So we started several years ago in a situation that many foundations find themselves in, which is: some people on our board, some people on our staff, were true believers that impact investing was the way to go.  And others were skeptics, who were worried about the impact on our returns, worried about distracting us from the core business of investing.

And so this process that we documented in this report was about: how do we learn together, about what are the opportunities in impact investing?  What does the market look like?  What are the tools that would be at our disposal?  What are the risks associated with going down this path? And that allowed us, through that learning process which we talk about there– as you say, warts and all– to come to the conclusion that we could do this, that it was worth making the effort and taking the risk.

…the natural instinct when you think about impact investing is: “How do we get rid of the stuff that we don’t like?” And I think that’s a very narrow view of what you could do in impact investing.

And so part of what our learning journey was… You can positively invest in things that you value. You can use your voice to talk about the issues that you care about in the investing world. You can use proxies to help push firms to improve their behavior.

Denver: One of the bumps you had along the way had to do with negative screens. Now, negative screens is when you eliminate certain kinds of investments like fossil fuels, and guns, and private prisons, et cetera. How did you handle that when you had part of the board who really wanted to eliminate those things and part of the board that wanted to continue?

Phil: Well, I guess the best way of thinking about this is when people talk about impact investing, often the first thing they think about is: “How do we get rid of the bad staff we’re investing in?” Because the Surdna Foundation has nearly $1 billion dollars; we have a highly diversified portfolio, as nearly all foundations of our size have.  And therefore we have investments in virtually everything. And so, the natural instinct when you think about impact investing is: “How do we get rid of the stuff that we don’t like?” And I think that’s a very narrow view of what you could do in impact investing.

And so part of what our learning journey was began with the idea that there’s more you can do than that. You can positively invest in things that you value. You can use your voice to talk about the issues that you care about in the investing world. You can use proxies to help push firms to improve their behavior. And so that expansion of the lens of what’s possible allowed us then to say, “Well, screens are not the only thing. We want to take on the question of screens, negative screens in due course… once we have a better understanding of how we want to approach the entire problem, including all of these other things that we want to do in addition to negative screens.”

Denver: Well, that’s a very smart way to do it. So you parked it for a while and began to focus on the positive aspects of it to be able to continue the process. Another way you accelerated your learning is: you went to a similar foundation– about the same size– to pick their brains a little bit. Tell us about that experience.

Phil: That’s right. So one of the things that we knew when we began this process is that we weren’t the first ones to think about this. Obviously, this is a relatively new area of work for foundations, but there are others who had come before us. And like we have in the grantmaking side of the foundation, we found that there were partners out there across the country who had things to teach us.

And so in particular, we thought the McKnight Foundation in Minneapolis, an organization we know well through the grantmaking side of the organization.  We knew that they had made a $200 million commitment toward impact.  I know the President and CEO of the McKnight Foundation very well, Kate Wolford. So Kate came to our foundation board and spoke to our board over dinner about how they went about this process.  And we sent a team to McKnight to really learn on the ground about: how they were staffing this, how they were thinking about the challenges, what were some of the hurdles they went through. And it was extremely informative and really helped us see in a very tactical sense: what were the steps that we still had to take?  Just extremely helpful!

We really wanted to make as a point of emphasis across our entire portfolio that who manages our money matters, as well as what they’re investing in.

Denver: Very smart of you. You know, one of the indirect benefits that came from this is that you first had to take a look at what you own. And in doing that, you looked at some of your fund managers and made some change as a result of that.

Phil: That’s exactly right. One the things that we did in the discovery process was to try to peel the onion back and understand, in all of these complicated investments, what we owned. And one of the questions that we asked in that process was: “Who are our money managers?” Not just what are they investing in, but who are they? And we realized that it’s not just an issue for us, but it’s an issue for the industry– That there are very few people of color who ran funds that are investable. There are very few women who are managing money, and we wanted to increase both of those things. We really wanted to make as a point of emphasis across our entire portfolio that who manages our money matters, as well as what they’re investing in. And so that was one very specific change that we learned as we looked at what we were owning.

Denver: Very interesting. Phil, how hard is it for a foundation– or for anyone for that matter– to measure the social and environmental performance of one of these entities that you might be investing in? Are there any standard metrics to measure it by? Or is it kind of an evolving field?

Phil: I would say it is an evolving field. In fact, we in the philanthropy business have been wrestling with the question of how to measure social impact for grantmaking for a long time. I think there’s some good thinking about that, but it is a challenging thing. So it’s not shocking that as you turn to the investment side of things, measuring the social impact of these investments is difficult, particularly because you’re dealing in an industry where numbers are fast and firm. You know what you’re investing in; you know what the returns are, so you know the performance of those assets. If you’re trying to, in addition, measure social impact alongside of that, that is going to necessarily feel a lot fuzzier than those hard numbers are going to feel. And so we’re trying to think about how we can help that.

And so one of the commitments we’re making this year in our centennial is to do some grantmaking this year… and going forward… to institutions like the Sustainable Accounting Standards Board (SASB), the Global Impact Investors Network (GINN) who are doing a lot of thinking about that, and trying to help foundations and other endowed investors have standards for how they think about social impact alongside those financial returns.

Denver: The age-old question about impact investing, Phil, has been: “Can you get the kind of   returns that you would expect if you were just making traditional investing, and not concerned about that social and environmental return?” Is there any data indicating whether there’s a sacrifice to be made, or none at all?

Phil: I think the way that we think about this is that the data is relatively fresh, and I would say growing, building over time. Our view is that there are a number of investable opportunities where you can make very good returns, but the number of investments is still relatively limited, so you have to be very careful. And the investable opportunities are growing over time, but I think it’s still early days to have definitive evidence as to whether there is a trade-off.

Certainly 10 and 15 years ago, there was an assumption that there was a trade-off. I think that assumption is going away now because investors like David Blood are demonstrating, through his Generation Wealth Investment Fund that there are companies that are actually very profitable and investable that are paying attention to climate and other things.  And that gives them a comparative advantage over time. And I think our bet at Surdna is that this is not something that’s a trade-off, but that the marketplace is relatively small right now. And you need to be very targeted and selective so that you’re actually able to achieve the returns that you’re achieving with your broader endowment.

Denver: Picking up on that thought, do you see that becoming a problem? Because as you and McKnight and FB Heron and others are directing more of your endowments to impact investing, is there a marketplace out there that can absorb all this capital?

Phil: Yes. It’s a really good question because not only those institutional investors, but also lots of private investors… families and others, particularly next generation investors, are increasingly interested. And what we’ve seen, what we saw through our learning process was there is growth in both. There’s growth in interest on the investor side, but there’s also growth in investable ideas. And so, those things are not always in sync, and in each sub-area of investing, there is more or less sync between the demand and the supply of investable opportunities. But our sense was this is an area that is growing incredibly quickly. And so over the next 5 and 10 years, I think we will see lots and lots of additional investable opportunities coming online that endowments like ours, and others who are interested investors, can invest in.

Denver: I think you’re right. Just to make this a little bit more real for our listeners: Can you give me an example of an impact investment that you have made or about to make?

Phil: Well, I mentioned the David Blood Generation Wealth Fund that we are just about to invest in, and that is very specific. It’s a relatively new investment for us, and we’re really excited about being able to join with a lot of others who have invested in this. Again, the business model here is trying to invest in companies that are using sustainability principles as a part of the way they develop their businesses.

Denver: Now that you’ve gone down this road, have you seen any change in the way your organization functions? As you mentioned before, you always used to have the investment side of the ball over here.  And on the other side of the office, you have the program side of the ball. With impact investing, there’s a hybrid, or there’s a melding. I was wondering if that’s changed the way staff interacts with each other in your day-to-day operations.

Phil: Yes. Absolutely! I think we’re beginning to see that change, and we’re certainly foreseeing that the change will be deeper for the foundation over time. Because you think about the fact that the skill sets to do those two different kinds of work are quite different. Being a grantmaker requires different sets of skills, expertise, networks. And investing is a completely different game.  

And so we’ve hired our first person who is sitting, straddling between those two worlds, again taking the lead from the McKnight Foundation, which helped us think about what are the immediate staffing needs as you get off the ground. And that person’s job is to help each side of the institution learn from each other and to really have information and ideas flow from the grantmaking strategy side into the investment side.  And likewise for things we’re learning on the investment side to better inform our grantmaking.

I think this mechanism of impact investing is one tool to connect those worlds and to be a translator because, of course, the language that we use in grantmaking and the language investors use are quite different, even if they mean the same thing.

Denver: And it’s been interesting from the little bit I’ve been able to observe, these diverse points of views have really energized each side. The investment people have a lot of good thoughts on grantmaking and vice versa. So, it is to that point that diversity really does end up with a better product.

Phil: I totally agree with that. And I think one of the places where foundations are often not as savvy is understanding what’s happening in the private sector, and how the private sector and markets are moving some ideas that we really care about on the grantmaking side. And I think this mechanism of impact investing is one tool to connect those worlds and to be a translator because, of course, the language that we use in grantmaking and the language investors use are quite different, even if they mean the same thing.

So creating networks, moving ideas around, using our voice to talk about what we’re seeing in the world – these are other ways that we can increase impact.

Denver: Well, having read your report, I do remember how important that language was to get everybody involved and get the board involved around a common set of words and standards. Speaking about the foundation world a little more generally, there was a recent report that was issued by the Center for Effective Philanthropy that indicated two-thirds of foundation CEOs believe that the potential for foundations to make a really significant impact on society is great, but most of them really don’t believe they’re taking full advantage of these opportunities for impact. What are some of the things that you think foundations need to do to realize this potential?

Phil:  I totally understand that point of view because I think often we struggle with the question of “Are we doing as much as we can possibly do?” Certainly, the money we spend does good things in almost all cases, but the question of whether we’re maximizing the impact of our dollars is an on-going challenge for philanthropy.

And the way I think about it is that sometimes we get mesmerized by the grant dollars that we’re spending– the grants that we’re giving to nonprofits– and often that’s not the most important thing we can do. Often, it’s about: how do we connect ideas among different grantees?  The Surdna Foundation is national in its focus. And so we often can see that what’s happening in Baltimore and what’s happening in Denver are related in a way that the two places might not know without us helping to connect them.

So creating networks, moving ideas around, using our voice to talk about what we’re seeing in the world – these are other ways that we can increase impact.

Denver: Along those lines, how do you get honest and effective feedback from your grantees? There’s a power dynamic there.  Sometimes grantees– the recipients of your funds– aren’t going to be quite as candid and honest as they otherwise might. How do you break down that wall to get that feedback, which will make you better and more effective?

Phil: I guess the way I think about it is: you can never quite break down the wall. You just have to be honest about the fact that it exists. And I think you always are in a position of people looking at you and seeing the pile of money that sits behind you, those grant dollars that they want.  So you need to recognize that that’s part of the dynamic of the relationship. And given that, I think it’s about trying to be honest, open to admit that we as a foundation certainly don’t have all the answers. And we need help knowing where the best places are to invest, and partnership is really critical to that.

And so, recognizing that there’s a power dynamic, sometimes naming that there’s a power dynamic, and then trying– even with that barrier– to build relationships where you’re getting good feedback over time.  And being good about parsing the feedback, and listening past the compliment that always starts the sentence, and listening for the punch line at the end.

Denver: That’s good advice, and I think part of it is what you just said:  Just get it out there; recognize that it exists. Once you get it on the table, you’re going to mitigate against it a significant amount.

You are a social justice foundation, and inequality has always been a big issue with Surdna.  Certainly now it’s a big issue across the entire country. What do you think is being done effectively in that regard in terms of trying to address that… finding pathways out of poverty? And what perhaps have we continued to do which just isn’t really giving us the return that we need?

Phil: I think that where we see the real interesting action these days is at the local level. I think we really see a lot of community-based energy, creativity happening at the local level. Mayors and elected officials and local folks who see particular challenges understand that the health of their community is about including everybody. That if you’re excluding segments of your city, your community from economic opportunity, from environmental health, from access to art and culture, that, actually, you are dragging down the entire community.

And so we see lots of seeds of really interesting things happening in Minneapolis and St. Paul, or in Atlanta or other places where…New Orleans where we’ve been investing for a great long time. Real optimism that those places are thinking in terms of looking toward the future, of where the demographics are taking us.  How do you build a real economic engine that can provide prosperity and growth for everybody?

Denver: We have so many parts of our society which are so short-term in their thinking. They get elected to a cycle or whatever the case may be. There’s a quarterly report or number that they have to hit. But I know, foundations are really in that position that you can take that longer view.  That’s where the benefits and the returns are going to come.

Phil: There’s no question about that, and I think being in our centennial year, it’s a great moment to reflect on that. We certainly feel… for the issues we care about, that there is a heightened need for the work that we do. But we also recognize part of our value to society is being around, recognizing that today’s crises are important and critical, and we should be doing everything we can now. But a generation from now, even 10 years from now, there will still be other things for us to work on if we care about economic opportunity, if we care about environmental health. These are not things that go away.

And so having that hundred-year perspective… thinking that in 1917, that was World War I, that was the Russian revolution…the world has changed a lot!  And yet there’s still work to do, and so we should anticipate going forward, it will be much the same.

Denver: Do you have any other plans or programs in store for your centennial, in addition to the impact investing initiative?

Phil: Yes, we do. I will give you at least the broad strokes. So, in a couple of weeks, the Center for Effective Philanthropy is going to be releasing a small report that we helped energize, which looks at half a dozen multi-generational family foundations like the Surdna Foundation and how they go about their business– as a way of creating a “compare and contrast.”

We’re going to be doing some grantmaking later this year around what we call “democratizing development,” which is trying to figure out how you get community more deeply engaged in a multi-faceted way in the development in all ways of their communities. And then because we’re a family foundation, 10 of our 13 trustees are from John Andrus’ family tree. We’re going to be doing some grantmaking to support the family philanthropy field.

Denver: Let’s talk about you being a family foundation. The very way you approach these challenges is with something you call “family-ness”– a bit of a clunky word.  But tell us how that impacts the way you go about your work, your governance, and the very culture of the organization.

Phil: So it’s interesting. As I say 10 of our 13 trustees are members of the Andrus family.  And the Andrus family is, I would just say as a side note, 485 living relatives, so substantial family over many generations.

One of the things that attracted me to the foundation was the sense that a family was engaged over many generations in the work of philanthropy. And I thought I was the only one at the foundation, but then I began to explore within the institution, and I realized that for our staff members who are professionals, who care about the issues they work on, that they actually like the feeling that is in the institution, that comes from that sort of DNA of being a family institution. The way we interact with our board and staff people, the way the board cares about not just the work that we do, but how the foundation shows up in the world.  All of this is sort of unique to a family institution.

Denver: Well, Phil Henderson, the President and CEO of the Surdna Foundation, I want to thank you for being here with us this evening. Tell us about your website and some of the information people will find there.

Phil: Well, the website is at www.surdna.org, and I would say you can find a couple of things. One is a lot of the things we talked about related to our programs.  But in particular, you’ll see some special work that we’re doing around our centennial. And I would just encourage you to click through to that centennial page… beautiful photos of many of the grantees that we work with and fund partners that we work with.  And behind those photos, some interesting things about the work that we’re doing this year.

Denver: Fantastic! Well, thanks, Phil. It was a real pleasure to have you on the program.

Phil: My pleasure, too.

Phil 2


The Business of Giving can be heard every Sunday evening between 6:00 p.m. and 7:00 p.m. Eastern on AM 970 The Answer in New York and on iHeartRadio. You can follow us @bizofgive on Twitter and at facebook.com/business of giving.

 

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