Foundations and Their Institutional Context: Cross-Evaluating Evidence from Germany and the United States

Voluntas: International Journal of Voluntary and Nonprofit Organizations, Vol. 9, No. 2, 1998

Foundations and Their Institutional Context:Cross-Evaluating Evidence from Germanyand the United States

Stefan Toepler1,2

According to the relevant literature, the relationship between government and theprivate foundation sector in Germany is marked by a "paradigm of conflict" verysimilar to the one that has often dominated the U.S. discussion of government/nonprofit relationships in the past. More specifically, scholars often hold that thedevelopment of foundations in Germany is largely hampered by an administrativeand regulatory climate that weakens rather than strengthens the foundationcommunity. Two main arguments are brought forth in this context: First, theexpansion of the state bureaucracy into traditional activity fields of foundations"crowds out" the foundation sector; second, the structure of tax regulations isdetrimental to a "sound" development of foundations. However, while thesearguments figure prominently in the policy debate, they have neither empirically noranalytically been substantiated as of yet. Borrowing from organizational theory, thisarticle critically evaluates the arguments in the light of available evidence in an effortto contribute to a better understanding of foundations in an international context.

INTRODUCTION

In a panel discussion on public opinions of foundations3 and their donorsat the annual assembly of the Federation of German Foundations 25 years ago,

1Center for Civil Society Studies, Johns Hopkins University Institute for Policy Studies,Baltimore, Maryland.

2Correspondence should be directed to Dr. Stefan Toepler, Center for Civil Society Studies,Johns Hopkins University Institute for Policy Studies, 3400 N. Charles Street, WymanBuilding, Baltimore, Maryland 21218-2688; e-mail: [email protected]

3For the purposes of this paper, I define "foundations" as independent nonprofit institutionsthat have financial endowments and primarily make grants to other organizations. Operatingfoundations are therefore largely excluded from the analysis.

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0957-8765/98/0600-0153$15.00/1 C 1998 International Society for Third Sector Research and The Johns Hopkins University

KEY WORDS: foundations; Germany; United States; legal regulation and incentives; role offoundations; crowding out.

a number of foundation experts noted with considerable regret the lack of apublic scandal within the German foundation community. Curious as it maysound, the argument was that the publicity surrounding such a scandal wouldforce both the media and the public at large to acknowledge and develop agreater interest in foundations. Closer scrutiny by the media in turn would helpeducate the public about the substantial contributions of foundations to thegreater good of society and change the common perception that foundationsare somewhat superfluous institutions in modern society (Leisner, 1977). Whilepublic controversy has yet to materialize, interest in foundations has since con-sistently grown. Still, as some observers note with discomfort, foundations con-tinue to be seen as a societal "luxury" (Strachwitz, 1994) rather than as essentialparts of civil society and, according to Seibel, the lack of critical discussion mayserve as an "indirect indication for the relative insignificance of foundations inGermany's third sector" (1992, pp. 44-45).

The underlying reasons for the failure of the German foundation com-munity to exert a measurable impact on society have been debated at lengthin the literature, and arguments tend to center around the role of the statevis a vis the sector. More specifically, it is often held that the developmentof foundations is largely hampered by an administrative and regulatory cli-mate that weakens rather than strengthens the foundation community. Twomain arguments are brought forth in this context. First, the state bureaucracycrowds foundations out of their traditional core activities and leaves no spacefor private action for the public good; and, second, the structure of tax regu-lations is detrimental to a "sound" development of foundations.

The latter position is forcefully put forward by Flamig, who holds thatthe "discriminating effects of the tax laws" lead to a "deformation of the chari-table foundation sector," concluding that "the tax law constitutes the centralbarrier that prohibits the evolution of a prosperous foundation community"(1989, p. 165). Staudt, a proponent of the former line of argument, contendsthat in the context of growing state activism "private initiative is replaced bystate provision penetrating traditional fields of foundation activity" (1989, p. 9).A similar point is made by Karpen, seeking a comparative perspective: "TheGerman welfare state appears to have reached the limits of its growth, whilethe American [welfare state] is still evolving. [Accordingly] foundations in theUnited States still have a relatively larger opportunity for growth in areas whichare already permeated by the welfare state in Germany" (1980, p. 91).

These two distinct arguments—the "crowding out" and the "tax defor-mation" theses—have long dominated the discourse on foundations in Germanywithout ever having been tested. In this article, I will examine available evidenceto discuss these theses critically and, drawing on organizational theory, use theresults to offer an alternative interpretation of the perceived stagnation in theGerman foundation sector. Since the U.S. foundation sector often serves as a

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point of reference for the German discussion (see Flitner, 1972; Neuhoff, 1975;Karpen, 1980; Zimmer, 1994; Toepler, 1996), I seek the comparison to theUnited States in developing my arguments throughout the paper.

CROWDING OUT

For the large part, the crowding out thesis is based on anecdotal evidenceand has been developed in the absence of data comparable to those assembledin the United States by the Foundation Center in New York. However, withthe development of the first comprehensive, though still somewhat limited, da-tabase on German foundations, assembled in 1989/1990 and updated since(Bundesverband Deutscher Stiftungen, 1991; Brummer, 1996), it is now possibleto produce grounded evidence to question the validity of the crowding out as-sumption. In essence, the thesis states that a stronger state involvement willlead to relatively lesser foundations and lesser foundation activity. On a verygeneral level, this suggests that in countries with comparatively less governmentactivity (such as the United States), the foundation sector will show a strongereconomic presence than in countries with higher state activity (such as Ger-many). In a way, the argument is quite similar to crowding out hypotheses aspropagated by scholars such as Olasky (1992) in the context of government/non-profit relations in the United States. In this line of reasoning, significant dif-ferences should occur when foundation assets and spending in Germany andthe United States are compared to overall economic indicators.

Based on German foundation data, Anheier and Romo (1998) esti-mate that grant-making foundations in Germany held between $14 billionand $29 billion in assets and disbursed between $2 billion and $5 billion ingrants. At the same time, U.S. foundations held more than $160 billion inassets and made grants totaling $9.2 billion (Renz and Lawrence, 1993).Using the low estimate of $2 billion for Germany, foundation grants accountfor slightly more than 0.12% of GDP and 0.68% compared to governmentspending. In the United States, foundation grants account for close to 0.16%of GDP and 0.75% compared to government spending.4 The observable dif-ference in the Grants/GDP ratio does not lend strong (if any) support tothe crowding out thesis, and the difference is even less pronounced withrespect to the Grants/Government Expenditure ratio. However, foundationsare a rather infrequent institutional form, and measuring their impact interms of national economic indicators might not yield conclusive results.

4In 1990, German GDP was DM2450 billion and government expenditures amounted toDM444 billion; the U.S. GDP in 1991 was $5917 billion and government consumptionexpenditures were $1226 billion (Statistisches Bundesamt, 1995; U.S. Census Bureau, 1996).

Foundations and Their Institutional Context 155

Table I. Nonprofit Revenue Sources, United States and Germany, 1990

United States

Social services

Health

Education & research

Privategiving(%)

28

9

19

Publicsector(%)

51

36

21

Privatefees(%)

21

55

60

Privategiving(%)

7

3

2

Germany

Publicsector(%)

83

84

70

Privatefees(%)

10

13

28

Source: Salamon and Anheier, 1996, Appendix F.

Other authors, such as Margo, have already noted that, even in the UnitedStates, "foundation grants are (and always have been) a trivial fraction ofper capita income and foundation assets a trivial fraction of national wealth"(1992, p. 217). Salamon similarly concludes that foundations "hardly repre-sent a major force in the American economy" (1992, p. 19).

Another way to approach the crowding out assumption is by lookingat foundation activity in certain areas. More specifically, any differences inthe composition of foundation activity between the two countries shouldrelate to the level of government engagement in various fields. For instance,government spending for arts and culture in Germany amounts to approxi-mately 95% of total funding in this field (Toepler, 1991), whereas govern-ment support accounts for little more than 11% of contributions to artsand culture in the United States (cf. Cobb, 1996). In keeping with thecrowding out thesis, we would accordingly expect that German donors areless likely to establish foundations dedicated to supporting the arts. Thesame should be true in education and research, health and social services,that is in areas that have traditionally been the pillars of the welfare stateand where substantial differences in the extent of governmental socialspending exist. In Germany's more fully developed welfare state, public so-cial expenditures make up 23.4% of GDP compared to 12.5% in the UnitedStates (Salamon and Anheier, 1996, Appendix A). Moreover, governmentsupport is the by far most important revenue source for German nonprofitorganizations. As Table I demonstrates, half of social service organizations'revenue comes from the government in the United States, but 83% in Ger-many. In the health field, the government share of nonprofit revenues ismore than twice as high, and in education and research more than threetimes as high, as in the United States (Salamon and Anheier, 1996). Withthe significant differences in the role of government funding in these areas,similar differences in the relative presence of foundations in these areasshould be expected.

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Foundations and Their Institutional Context

Table II. Funding Domains, 1990/91

Germany

Human/social servicesHealthEducation & researchArts & cultureEnvironmentInternational

Other

Total

All foundations(stated

purposes) (%)

31.45.3

35.910.83.42.2

11.0

100.0

50 largestfoundations(grants) (%)

27.02.6

31.610.112.16.4

10.2

100.0

United States

Sample of 846foundations(grants) (%)

14.216.933.414.14.94.0

12.5

100.0

Sources: Renz and Lawrence (1993, p. 49); German Foundation Database, compiled by author.

Are there significant differences between the relative importance offunding domains that would indicate a crowding out of foundation activi-ties? The German data so far do not allow an accurate assessment of fund-ing domains. In the original survey, foundations were only asked to classifytheir purposes, as stated in the charter, but not to state the amount ofgrants distributed in each area. Thus, it is not yet possible to determinethe actual grant making per field. However, utilizing additional informationsuch as annual reports, I estimated the distribution of grant monies for thelargest 50 German grant makers as a rough measure. Table II shows theboiler plate of purposes in main grant making categories for all Germanfoundations, the distribution of actual grant-making for the largest Germanfoundations, and the Foundation Center's sample of 846 U.S. foundations(Renz and Lawrence, 1993, p. 49).

As Table II shows, the overall distribution of purposes does vary fromthe actual grant making of the largest foundations in Germany. However,the variations do not significantly change the overall pattern. The most im-portant difference occurs in the environmental field: While only slightlymore than 3% of all foundations have purposes related to the environment,fully 12% of the largest foundations' grant monies are channeled into thisfield. This variation is due to the impact of the Federal Foundation forthe Protection of the Environment (FFPE) established by the federal gov-ernment in 1990 as an independent private law foundation. This founda-tion's grant making alone accounts for 77% of the 50 largest foundations'environmental spending and 9.3% of total spending. Excluding the FFPEfrom the analysis would leave the largest foundation's environmental spend-ing at 3.1% and further reduce the variations in other fields.

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With this caveat in mind, differences in scope between German and U.S.foundations can be explored. With roughly one-third of total grant monies,education and research receive the single largest share of foundation supportin both countries (Table II). While this field is closely followed by social serv-ices in Germany with about 31%, U.S. foundations spend only about half asmuch on human services (14.2%) as German foundations. On the other hand,U.S. foundations devote a considerably larger share of their resources to thehealth area than do German foundations (17% versus 5%). Apart from thesefunding domains, arts and culture is the only other field to receive substantialfoundation support in both countries: U.S. foundations devote 14% of theirgiving to the arts, compared to almost 11% in Germany.

By and large, observable differences in scope do not point clearly toa crowding out of foundation activities by a strong government presence.In both countries, foundations show a similar presence in education andresearch. The relative interest of foundations in arts and culture is onlyslightly higher in the United States despite the comparatively weak role ofgovernment. An exception is the health arena, where it can be argued thatthe comprehensive health insurance system in place in Germany could haveleft donors less inclined to devote foundation resources to this field. Thesame argument should also apply to social services, where we neverthelessfind a much more substantial foundation involvement in Germany than inthe United States, although the high share of German foundations activein the social field might largely be a historical legacy. Approximately one-third of all grant-making foundations were established before World WarII, when social purposes were more prevalent.

In a way, this is borne out in Fig. 1, which details the percentage shareof major activity fields in Germany from 1945 to 1993. As the figure shows,the share of human services (that is, health and social services) among pur-poses selected for newly established foundations has gradually declined inthe postwar period. However, while this decline in donor interest coincidedwith the expansion of the welfare state in Germany, human services is theonly field that shows such a trend. Education and research in the early 1990s,on the other hand, had roughly the same share as in the late 1940s, with amarked increase in the 1960s and a decrease to the prior level during the1970s. Interestingly, the substantial increase of educational and research pur-poses among foundations founded in this decade coincided with an educa-tion reform initiative of the state that led to extensive public investment,especially in higher education (cf. Katzenstein, 1987). Following the logicof the crowding out thesis, the interest of donors should have declined ratherthan increased in this period. Finally, Fig. 1 also shows that purposes relatedto arts and culture have continually grown over the past five decades, indi-cating a "crowding in" of foundations rather than a crowding out.

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Fig. 1. Percentage share of foundation purposes in Germany, 1945-1993. Note: Includesmultipurpose foundations. Source: Toepler, 1996, p. 131. Reprinted by permission ofMaecenata Publishers, Munich.

LEGAL REGULATION

The state's posture toward foundations expressed in the regulatoryframework and the provision of tax benefits arguably plays a decisive rolein the development of the foundation sector. As noted above, in theGerman context, the argument goes that the state tends to raise obstaclesto the establishment of foundations rather than providing an encouragingregulatory framework. Accordingly, the structure of the law pertaining totax benefits is said to endanger the health of the independent foundationsector (Flamig, 1989). Since an evaluation of this argument against anideally constructed legal framework for foundations is of little practicalrelevance, the following section contrasts relevant tax and regulatoryprovisions contained in German and U.S. law. Legal scholars in Germanyhave long observed and commented on different aspects of U.S. lawspertaining to the foundation sector (see, for example, Conviser, 1964;Neuhoff, 1975; Karpen, 1980; Westebbe, 1993), since U.S. law is generallyseen as especially advanced and encouraging. For the analytical purposesof this section, it is useful to distinguish between two aspects of the legaltreatment of foundations: the provision of incentives for the establishmentof foundations and regulation affecting foundations already in existence.Both aspects influence the development of the foundation sector, albeitdifferently. The degree of incentives for donors provided in the law mayhave an impact on foundation births, while other regulatory provisionsmay affect economic viability, such as asset growth and the value andamount of grants.

Before proceeding with the main argument, however, I should note thatregistration requirements and governmental supervision often constitute anotherimportant regulatory barrier and potential disincentive for the formation of foun-dations as well as other nonprofit organizations. Apart from the burdensomenessand duration of the process and the discretion left to the supervisory authorities,the basic approach to granting legal personality is of importance (Salamon andFlaherty, 1997). In common law countries, organizations are often eligible forlegal status without further governmental approval as long as they comply witha set of requirements or norms set by law (normative system). In civil law coun-tries, on the other hand, the law often mandates an explicit concession by thegovernment before an organization may assume legal personality (concessionsystem). The latter is especially the case with foundations. With respect to thisdistinction, it could be argued that the regulatory environment is more likely toexert a negative influence on the formation of foundations in Germany but isless likely to do so in the United States. Indeed, the discretion of the relevantsupervisory authorities in Germany (Stiftungsaufsichtsbehorden) in granting suchconcessions for foundations has often been criticized as a major impediment inthe past. As the more recent legal interpretation suggests, however, the super-visory authorities may not deny the concession if the foundation is set up inaccordance with legal prescriptions (cf. Toepler, 1996, p. 88).

Taking into account that private foundations in the United States have alsobecome subject to a substantial body of supervisory regulation, it seems fair toassume that remaining differences between the two countries are not likely tohave a major impact on the development of the foundation sector. This assump-tion is supported by Karpen's (1980, p. 82) conclusion that, with respect to foun-dations, the modified German concession system is comparable to the modifiednormative system in the United States. Similarly, in his comparative survey of thesupervision of foundations in six countries, van der Ploeg (1995, p. 268) classifiesthe United States and Germany in the same group of countries featuring sub-stantial legislation and a legitimacy control exercised by the government. In sum,a closer analysis of regulations pertaining to the registration and supervision offoundations is likely to produce additional support for the main argument putforth in this article. However, since the available literature already provides suf-ficient indications to this effect, I will not pursue this issue further.

How then do the incentives provided by the law differ between Germanyand the United States? The most prominent type of incentive is the deducti-bility of donations available to individuals and corporations. In Germany, taxincentives for individual donors are limited compared to the United States,which is often seen as the major obstacle for future growth of the sector. Morespecifically, the ceiling for income tax deduction for individual donors is 5%or 10% of gross income depending on the purpose: Donations to organizationspursuing religious purposes or other "specifically recognized purposes," or to

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"specifically recognized organizations," can be deducted up to 5% of income.The higher ceiling of 10% only applies to donations to organizations pursuingeleemosynary or social, educational and scientific, and specifically recognizedcultural purposes. Donations to organizations pursuing other purposes suchas environmental purposes are only deductible if channeled through govern-ment agencies (although this provision is currently slated to be eliminated).By contrast, individual donations to private foundations in the United Statesare deductible up to 30% of "adjusted gross income" (or 20% for gifts ofcapital gain property). Not taking into account that other factors, includingthe income tax rate (which is higher in Germany than in the United States),also influence a donor's decision, the deductibility ceilings in Germany appearcomparatively restrictive, which would lend some support to the argument thatthe unfavorable tax treatment does not encourage the establishment of privatefoundations.5 However, there are a number of other important issues involvedthat put the higher U.S. deductibility into perspective.

First, whereas German tax law does not differentiate between privatefoundations and other types of nonprofit organizations, the Tax Reform Act(TRA) of 1969 introduced such a distinction in the United States. Donationsto public charities—that is, tax-exempt organizations that are not donor con-trolled and thus not classified as private foundations under the InternalRevenue Code—are deductible up to 50% of adjusted gross income. Thistwo-tiered deductibility system provides a competitive disadvantage for pri-vate foundations vis a vis public charities, potentially leading to a diversionof charitable resources away from the foundation sector.

Second, perhaps more important, is another provision introduced in theTRA 1969 that also led to a considerable diversion of resources away fromthe foundation sector: the excess business holdings rule (Simon, 1995). Ac-cording to this rule, a foundation and its "disqualified persons" may not holdmore than 20% of the stock in a company and, if endowed with control stock,must divest any excess within five years. Since a considerable share of U.S.foundations and some of the largest had been endowed with controlling stockbefore 1969 (Boris, 1987), the impact of this rule has been discouraging todonors (Simon, 1995). Under German law, on the other hand, there are noregulations comparable to the excess business holdings provisions. Accordingly,

5In principle, the effects of the per annum deductibility limits can be ameliorated by the extentto which the law allows the carrying forward (or backward) of large donations exceeding theceiling for deductions in the year the donation is made. In the United States, donors mayclaim deductions for such donations in the current and the following five years, whereasGerman law grants donors the option to spread donations in excess of DM50,000 over atotal of eight years. Deductions for such donations may be claimed for the current, the pasttwo and the following five years. Although German law grants such carryovers for eight yearsas opposed to a total of six years in the United States, this benefit does not fully compensatefor the lower annual deductibility limits.


foundations are allowed to own and control publicly traded corporations aswell as closely held businesses, which is a major incentive. To endow a tax-exempt charitable foundation with controlling stock or a family business mayensure the continuation of a company if there are no heirs, or prevent powerstruggles among heirs or inheritance taxes from breaking up the company (cf.Weaver, 1967, pp. 74-77). In fact, the option to transfer business property tophilanthropic foundations is frequently seen as a crucial propellant for therecent growth of the sector in Germany (Karpen, 1980).

Third, in addition to the excess business holding rule, U.S. tax lawalso imposes extensive self-dealing prohibitions on private foundations en-compassing practically all financial transactions between a foundation andits "disqualified persons," even if such a transaction would benefit the foun-dation (Freeman, 1991, p. 122). German law, however, does allow a limiteddegree of self-dealing as an additional incentive for donors. Specifically,foundations are allowed to use up to one-third of income to pay a pensionto the founder or his or her immediate family for two generations or tomaintain the founder's graveside.

Finally, there are two other aspects of the tax incentive issue thatfurther erode the assumption that German foundation law is highly dis-criminatory in a comparative perspective. So far, only inter vivos contribu-tions to foundations out of current income have been discussed.Endowments by bequest, however, are fully tax exempt in both countries.Furthermore, as regards donations by corporations, the tax incentives pro-vided are much more equal than in the case of individuals. The limit fordonations of U.S. corporations is set at 10%, whereas corporations in Ger-many are subject to the same limits as individual donors at the 5% to 10%level, as described above.

Concerning regulation affecting foundations after their establishment,the most important stipulations relate to the amounts that foundations arerequired to disburse. In the United States, fear that foundations be usedas mere tax shelters led to the imposition of a "pay-out requirement" inthe TRA 1969. Currently, U.S. foundations must disburse the equivalentof 5% of the market value of their assets as qualifying distributions. InGermany, foundations are principally subject to the same rules that governall nonprofit organizations. However, although tax-exempt nonprofit or-ganizations are generally prohibited by law from accruing assets and mustspend all income immediately—or, at least, in a timely manner—for theirtax-exempt purposes, foundations are allowed to retain one-quarter of netincome for asset-building purposes. Which solution is more favorable forfoundations depends on the return on investment. As a rule, the Germanstipulation tends to be more favorable in low-interest periods (see Toepler,1996).

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Fig. 2. Birth rates of U.S. and German foundations. Source: Toepler, 1996, p. 198.Reprinted by permission of Maecenata Publishers, Munich.

To sum up, a closer review of U.S. and German tax regulation revealsthat the regulatory environment for foundations in Germany is, comparativelyspeaking, not as discouraging as the literature suggests. With the exception ofdeductibility limits for individuals, it rather appears that U.S. tax law in thewake of the TRA of 1969 affords less encouragement overall and is generallymore restrictive. (For a critical discussion of the effects of the Tax ReformAct of 1969, see Simon, 1987,1995.) Indeed, this is also borne out in the data.As Fig. 2 shows, the birth rates of new foundations in the United States de-clined considerably during the 1960s, reflecting the impact of the TRA 1969,and increased again only in the 1980s. In Germany, however, we see a slowerbut more gradual growth. What is more, though many fewer new foundationshave been established per decade in absolute terms, the percentage increaseof foundations in Germany has been higher than in the United States sincethe 1970s. Thus, available evidence indicates that while the regulation of foun-dations in Germany may not have propelled postwar growth, it has nonethelessnot been detrimental to the development of the sector.

DISCUSSION

Traditionally, the relationship between government and the founda-tion sector in Germany has been dominated by a "paradigm of conflict."The lack of societal recognition of the contributions of foundations waslargely explained by an unfriendly environment in which the state aimedat displacing foundations by taking over traditional fields of foundation ac-tivities and furthermore created a legal and tax framework designed to hin-der future growth. The analysis presented here, however, does not support

either contention, rather pointing to "friendly coexistence" as an appropri-ate descriptor of the government/foundation relationship. German tax lawallows a number of important incentives that the stricter U.S. regulationsprohibit. As the evidence also suggests, strong government presence in thetraditional core areas of foundation activities does not necessarily displacefoundations. Indeed, founders in Germany consistently remained interestedin education and research, and have shown growing interest in arts andculture despite state dominance in these fields.

If it is therefore not the case that implicit or explicit government ac-tion has inhibited the German foundation sector, how do we then explainthe lack of a broad acknowledgment of the role of foundations in Germansociety? Unfortunately, broader and in-depth studies of foundations as anorganizational field that would help address such a question have yet tocommence. Nevertheless, it should be possible to posit a number of propo-sitions that might help guide such research in the future. More specifically,the hypothesis is that a better understanding of foundations and a moreaccurate assessment of their place in society must rest on an analysis ofthe sources of legitimation and of related issues of organizational fre-quency, size, and age.

At the heart of the German case lies the realization that foundations,as other powerful institutions in society, need to ensure broad social accep-tance in order to survive and justify their claim on resources. Increasedawareness and recognition within the larger public is but one way to generatesupport for the activities and further development of foundations. The lackthereof, however, might indicate a lack of legitimacy as one of the centralresources on which organizations depend. This corresponds with the viewof legitimacy as a result of positive societal evaluations of organizationalgoals due to a close fit between societal and organizational values (see Scott,1991). In the German case, however, such an evaluation has not taken place,leading to uncertainties regarding the closeness of the fit between the valuesof society and the values that foundations perpetrate. As Strachwitz ob-serves, "little is known about foundations in the public and ideas about themare peculiar" (1994, p. 15), while "the social relevance [of foundations] inthe United States is considerably higher."

From a comparative point of view, this implies that the relevance thatfoundations appear to exert as well as the legitimacy they seem to enjoyin American society is tied to a broad public consensus about their socialutility. In the absence of any specific data on the public's actual knowledgeand opinions of foundations, this possible explanation of the differences inthe societal recognition can neither be validated nor repudiated. Neverthe-less, anecdotal evidence suggests that there might indeed not be such broadconsensus in the United States.6 Furthermore, taking into account that

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foundations are only slightly more infrequent in Germany than they are inthe United States (Anheier and Romo, 1998), it appears to be unlikelythat legitimacy drawn from a broad public consensus is a strong explanatoryvariable for the perceived relevance of foundations in the United Statesand the lack of such relevance in other countries.

Keeping the data caveat in mind, the argument indicates that the gen-eral environment for the foundation sector in the United States is not nec-essarily more favorable. Still, the perception remains that foundationsoccupy a significantly more prominent role in U.S. society and exert a con-siderably higher impact on public policy than foundations in other Westerncountries. How can we account for this perception? The most convivialexplanation relates to historical differences in the goal orientation of foun-dations. While foundations in Europe remained true to charitable tradi-tions, the "modern philanthropic foundation" emerged in the United Statesearly in the 20th century, which departed from traditional almsgiving to-ward an examination of the "root causes" of social problems (Karl andKatz, 1981, 1987). With the new emphasis on exploring the causes ratherthan remedying the effects, U.S. foundations advanced to the center of thepublic policy debate and their action began to change the national agenda.This view of the rise as well as the role of the modern philanthropic foun-dation has become a guiding, and legitimizing, paradigm of foundationthinking in the United States and elsewhere (see, for example, Bulmer,1995). Clearly, American foundations did have substantial influence onvarious aspects of public life and the "modern philanthropic foundation"paradigm has made a significant contribution toward understanding thisinfluence. However, the interpretation of the role of foundations in thisview also has a number of shortfalls that might lead to a somewhat distortedunderstanding of foundations as an organizational field.

The main problem associated with this interpretation relates to the factthat it is based on the analysis of the emergence and history of a small numberof large foundations, including and most notably the Carnegie Corporation andthe Rockefeller Foundation. In fact, almost all major U.S. studies of the roleand impact of foundations on society derive from (often historical) case studiesof a select few foundations (see, for instance, Nielsen, 1972; Lagemann, 1983,1989; Berman, 1983; Wheatley, 1988). While these studies are most valuable

6As Freund, a longtime foundation officer, put it: "Foundations are a mystery to most people.The general public, lacking a good understanding of what their purposes are or even whatthey have achieved, fail to appreciate what they are able to accomplish for the benefit ofsociety. Foundations are most known for their sponsorship of public television programs andthe underwriting of local sports teams and cultural events" (1996, p. 1). Lemann (1997)similarly states that foundations are the type of major actor in society that draws the leastpublic attention and is largely ignored by the press.


and insightful, the inherent danger lies in generalizing their findings over theorganizational field, which potentially leads to a "reversed ecological fallacy"by attributing individual-level findings to the aggregate level. In other words,these studies demonstrate that some foundations have played a major role inAmerican life, but they do not imply that all foundations, or the foundationsector as such, play a similarly important role. Nevertheless, the foundationliterature often implies as much by pointing to the special competencies andcontributions that foundations of the modern philanthropic type exhibit in closeproximity to the total number of foundations, their assets and grants (for ex-ample, see Freund, 1996, p. 2).7 However, that the impact of foundations-based on their orientation towards the tackling of root causes of social problemswith the concomitant innovation and experimentation potential—extends be-yond the success stories of some larger philanthropic enterprises is far fromproven. Instead, the impact of the largest foundations might just have been afunction of size, as their economic resources allow them to draw both manpowerand attention in a way that is beyond the reach of small and medium-sizedfoundations. Small and medium-sized foundations account, however, for thepredominant majority of organizations, although they control only a fairly smallshare of the economic resources in the field.

Besides generalizations over the field, another potential pitfall in thiscontext is generalization over time. Many of the high-impact cases generallycited are drawn from the past, ranging from the reform of medical educa-tion and the extinction of the hookworm earlier in this century to the in-ception of the public television system in the 1960s. References to morerecent foundation undertakings of similar success, on the other hand, arerare. While this may be due to a lack of current study of foundation in-fluence, it might also be the case that the impact of foundations has beendeclining from its defining heydays in the first half of the century. An in-dication of such a trend might be that the Carnegie Corporation was forcedto shift strategies after World War II in order to find ways to sustain impactin a changing environment with an ever-growing number of public policyactors (Lagemann, 1989, p. 260). Currently, the ability of foundations toexert a substantial impact on society is debated. While some expect an in-crease of foundation influence based on the growth of new resources flow-ing into the sector (Lemann, 1997), others dispute that foundations haverecently been able to make a "detectable dent" in the major social problems(Nielsen, as quoted in Freund, 1996, p. 12).

7Even noted foundation scholar Waldemar Nielsen recently implicitly equated the donor'sdecision to establish a foundation with the wish to address root cause-type activities, suchas "to help cut the crime rate, raise educational achievement, improve health care, or improveprotection of the environment," as opposed to simple decisions as to whether to give to theUnited Way or the donor's alma mater (Nielsen, 1996, pp. 14-15).

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With respect to an evaluation of the performance of the German foun-dation sector, this discussion implies at least the possibility that the U.S.foundation debate is clouded by institutional myths distorting an accurateassessment of the organizational field by focusing on a small number ofhighly successful foundations early in their genesis. From this flow twopropositions in need of further exploration. First, discounting for the impactof relatively few large U.S. foundations, the actual role and influence of themajority of the sector is not substantially different from what we find incountries such as Germany. Second, the establishment of such high-impactphilanthropies as the Carnegie and Rockefeller Foundations coincided witha policy environment that provided windows of opportunity for emergingactors to yield substantial influence, thereby fostering institutional myths.Moreover, the Carnegie Corporation and Rockefeller Foundation, with theirhigh national profiles, served as emulation models fostering the institution-alization of the new organizational field. Similar windows of opportunity maynot have existed for large-scale German foundations, either because centralissues had been settled by the time they emerged or because the policy proc-ess is less open to independent outside actors. Significantly, large founda-tions based on Germany's industrial wealth with few exceptions onlyemerged at a late stage: the Thyssen and Korber Foundations in 1959, theVolkswagen Foundation in 1961, and the Krupp Foundation in 1969. With-out nationally prominent models to select for emulation prior to the 1960s,the construction of the foundation field in Germany is likely to have takenplace along different boundaries, which would explain much of the perceivedand real differences between the two foundation sectors.

CONCLUSION

Governments in Germany as well as in other Western countries haverecently begun to call on private initiative and foundations to help fill thegap left by reductions in government spending. The current era of devo-lution places similar demands on foundations in the United States. More-over, governments have also begun to initiate so-called pilot ordemonstration programs to seek out new and innovative ways to solveemerging problems without committing to long-term financial support. Thistrend constitutes a role reversal in the foundation context. Traditionally,foundations have seen it as their role to incubate and nurture new, inno-vative approaches and leave the responsibility to continue successful pro-jects to the state. These new demands on foundations are largely at oddswith the conventional way foundations have defined their role and respon-sibilities in society. What seems necessary therefore is a close reexamination


of the actual potential of foundations to fulfill such demands and of theparameters that guide foundation behavior. A useful way to approach suchan assessment and gain a clearer understanding of foundations as an or-ganizational form is to perform a broader analysis of the institutional en-vironments in which foundations operate. As organizational theorysuggests, organizations receive legitimacy by complying with beliefs, rules,and requirements set by their institutional environments. Such require-ments include both legal regulation as well as "generalized belief systemsthat define how specific types of organizations are to conduct themselves"(Scott and Meyer, 1991, p. 123).

This article attempted an analysis of some aspects of the institutionalenvironments of foundations in a comparative perspective. It also providedan initial discussion of the possible origins and determinants of the gener-alized belief systems that govern foundation thinking and behavior. Thediscussion suggested that a closer analysis of existing institutional myths inview of organizational realities might open the way for a better under-standing of foundations and their proper place in modern society. This isconsistent with Ylvisaker's remark that the "familiar rhetoric about foun-dations and their raison d'etre. . . supplies only fragments of an explana-tion of how foundations—in all their divergent forms and idiosyncrasies—fitinto the structure and workings of society" (1987, p. 375). The discussionalso suggested that a better understanding of the foundation form shouldbe informed by a better understanding of the institutionalization of theorganizational fields in a comparative perspective (DiMaggio, 1991).

ACKNOWLEDGMENT

I wish to thank Tymen van der Ploeg and Wino van Veen for theirhelpful comments on the legal arguments in this paper. I am also gratefulto Helmut Anheier for suggesting a reconfiguration and expansion of myoriginal conclusions. Any shortcomings that remain, however, are solely myresponsibility.

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Documents

Foundations and Their Institutional Context: Cross-Evaluating Evidence from Germany and the United States