The McKnight Foundation’s Secret Sauce
Kate Wolford, President, The McKnight Foundation
The McKnight Foundation, a Minnesota-based family foundation, has a $2 billion endowment that puts it in the top 25 largest privately held foundations in the U.S. The McKnight Foundation seeks to improve the quality of life for present and future generations through grantmaking, collaboration, and strategic policy reform in the following areas: arts, education and learning, environment, the region and communities, agricultural research, and neuroscience research.
In March 2014, The McKnight Foundation announced it would dedicate $200 million, or about 10 percent of its endowment assets, across four strands of impact investing with initial allocations of $50 million each:
- Mission-Related Investments (Public Markets)
- Mission-Related Investments (Private Markets)
- Mission-Driven Investments
- Program-Related Investments
McKnight’s decision to launch its Impact Investing Program came after a year of intense debate and study involving the McKnight board, staff, and financial consultants. In the philanthropy world, taking a year to commit to something as intense as $200 million in impact investing is practically fast-tracking the decision. Which is why other foundations are intrigued by — and regularly contact Kate Wolford to ask about — the process of how McKnight studied the issue and then made the decision to go forward with a major commitment to impact investing.
One colleague wrote to Wolford, “I cited you as an example of a foundation that’s figured out how to get going with an impact investing program rather than spending a few more years handwringing about whether to do it!”
Essentially, what Wolford’s colleagues want to know is how did she and McKnight avoid falling victim to philanthropy’s common malady: paralysis by analysis?
Wolford’s answer often references what she calls McKnight’s “secret sauce,” which includes generous doses of these two ingredients:
- “Deep learning and exhaustive conversations among our board and staff.”
- “Vigorous debate and an inherent commitment to thoughtful implementation.”
Kate Wolford explains … that the process of creating McKnight’s Impact Investing Program began in the best possible place: the board room.
We are a family foundation to the core, and McKnight’s very active board still includes direct descendants of the founders. Fourth-generation family members are keen to align more endowment dollars with program goals, mobilizing our “other 95 percent” beyond grant dollars.
The germ of the idea for impact investing came from the younger members of the McKnight family, who brought the discussion to the board table. I think these younger members wanted to do more with their own investments, and they also saw the limitations of tapping only 5 percent of a foundation’s endowment for mission — the 5 percent that federal tax laws require private foundations to distribute annually for charitable and administrative spending. Specifically, climate change was a big driver for family and other board members. They are excited about what we are doing, and now some individuals who in the past were more interested in our grantmaking than our investment portfolio are now equally interested in our investments.
The staff is onboard with impact investing, but it is super exciting to me that the idea came from the board and that the board continues to be the moral force behind what we are doing with our Impact Investing Program.
After conceiving the impact investing idea, McKnight began the process of bringing the Impact Investing Program to life.
Our board established a work group consisting of our board chair, two directors who serve on McKnight’s Investment Committee, one director who does not serve on the Investment Committee, and several staffers representing key administrative, program, and finance functions. The board also hired consultant Imprint Capital to guide our process.
During a year of intensive exploration, we learned about opportunities and challenges across asset classes, about the current field of impact investing, and about field enhancements we might be able to help incentivize or create. We explored a variety of ways to structure and staff a program. And we sought out the informed wisdom of philanthropic colleagues. Former W.K. Kellogg Foundation President Sterling Speirn, for example, spoke with our full board about Kellogg’s experience in mission-driven investing.
The work group’s members updated our board at each quarterly meeting, and the board’s annual retreat focused on impact investing. At that retreat, we made key decisions about the four strands of impact investing, about the amount to be invested in each, and about extending our relationship with Imprint Capital to help us implement the program.
Some basic assumptions kept McKnight grounded during the exploration of impact investing.
We started with some givens: that we would, of course, fulfill our fiduciary responsibility to the stewardship of our endowment and would never lose sight of our commitment that McKnight would exist in perpetuity.
We also appreciated that impact investing is relatively new, and there is a lot of hype in the field. So while we were hopeful and optimistic, we also maintained a healthy skepticism. We knew there was going to be a learning loop.
Most important, while we appreciated that our planning and debating were essential, what will matter most in the end is implementation. Our real test will be how well we execute our approach, learning and adapting our practice while sharing our experience with the broader field.
McKnight’s (and Wolford’s) expectations for impact investing start with the four strands but also include collateral benefits.
McKnight has a strong commitment to accelerating the transition to a low-carbon economy, and we think impact investing will better align our endowment with sustainability. One key advantage of the four strands is that they give us flexibility to match the right tool to the task. Two of the four strands — Public Market and Private Market — will include funds with strong sustainability themes and have financial benchmarks similar to those in the rest of our portfolio. For the other two — Mission-Driven Investing and Program-Related Investing — we are seeking much tighter alignment with program goals, including ways to stimulate innovation or bring opportunities to scale in Minnesota.
Impact investing allows us to engage with and learn from groups and individuals we would not ordinarily work with and will provide us with a new toolbox that we can use in other programs to achieve our mission. We believe we can learn more about markets in ways that will make our grant making smarter. Although we are aware that the marketplace is not the solution to all problems — and in fact has created some of the problems that we are working to solve — we also want to leverage the power of the marketplace to create change.
In its most direct form, impact investing success can be defined as furthering a foundation’s mission while earning an acceptable return on investment, however “acceptable” is defined (market rate, for example). McKnight introduced a third element of success.
Beyond the basics of program and financial success, our board expressed an equal commitment to learning about this emergent field. We want to learn in ways that inform our own practices, of course, but we also want to document and share what we have learned to be useful to others.
And certainly we have been the beneficiary of both the learning in this field and a generosity of spirit among colleagues who have offered advice about program design, structure, staffing, and measurement.
For any foundation executive or board member contemplating a move toward impact investing, Wolford offers five essential truths.
First, make sure your board is committed to exploring the idea and then, if the exploration is positive, make sure the board is committed to going forward with impact investing. At McKnight, we were so fortunate not only that the board was committed, but that the idea of mission investing originated within our board.
Second, ensure a deep commitment to cross-organizational collaboration. At McKnight, this included the support and work of the cross-functional group of board members (investment committee and non-investment committee members) and of staff (from finance and from program). As we launch, this cross-organizational buy-in is our greatest asset.
Third, to thine own self be true. My growing sense is that foundations will be most successful in impact investing if they do it in ways that are consistent with the foundation’s “personality.”
Fourth, do not create a new silo for impact investing. Integrate it with your current program so that you will be using everything you have already learned from grant making and your other work to inform how to conduct impact investing.
Fifth, given that this is emergent work, enter it with curiosity, humility, and adaptability.
About the Author
Kate Wolford became president of The McKnight Foundation in December 2006. Prior to joining McKnight, Wolford spent 13 years as president of Lutheran World Relief (LWR), a global grant-making and policy advocacy organization. From 1991 to 2006, she worked at LWR, where she was named president after two years serving as program director for Latin America. Previously, she established Church World Service's Caribbean regional office for community-based development and worked with Servicio Social de Iglesias Dominicanas.
Wolford has a BA in history from Gettysburg College, an MA in public policy from the University of Chicago, and an MA from the Divinity School of the University of Chicago. Wolford serves on the board of directors of Greater MSP, The Johnson Foundation at Wingspread, and Living Cities.