John E. Marshall III, President/CEO, Kresge Foundation: Building Nonprofit Capacity Through Challenge Grants

June 21, 2006
John E. Marshall III, President/CEO, Kresge Foundation: Building Nonprofit Capacity Through Challenge Grants

Over the last century, certain foundations have become identified with specific causes or innovations: Carnegie and children's programming for public television, Rockefeller and the Green Revolution in food production, Mott and the growth of community foundations, Gates and global public health. And then there's the Kresge Foundation, which, since its establishment in 1924 by S.S. Kresge, the founder of the S.S. Kresge Company (later known as Kmart), has embraced a type of support — the challenge grant — and transformed it into a powerful, multi-faceted tool designed to build the capacity and effectiveness of its nonprofit grantees.

Recently, Philanthropy News Digest spoke with John E. Marshall III, Kresge's longtime president and CEO, about the evolution of the challenge grant at the foundation, the importance of effective board leadership to the success of nonprofit organizations, the role of foundations in helping society adapt to disruptive change, and the foundation's new "green" headquarters building in Troy, Michigan.

Marshall joined the foundation as vice president in 1979, was named president in 1987, became a trustee in 1991, and was promoted to CEO in 1993. Prior to joining the foundation, he served as executive director of the Rhode Island Foundation (1975-79), associate director of development at Brown University (1972-75), and as advertising manager for U.N. Alloy Steel Corporation in Boston (1968-70).

An alumnus of Brown ('64), he serves or has served on the boards of the Detroit Downtown Partnership, the Health Foundation for the Americas, the Detroit 300 Conservancy Endowment, City Year Detroit, New Detroit, and the Association of Hole in the Wall Camps Foundation. He also is a member of the Community Foundation for Southeastern Michigan's GreenWays Initiative Leadership Advisory Committee and the Detroit Riverfront Conservancy board, and serves as co-chair of the Panel on the Nonprofit Sector's Working Group on Self-Regulation and on the Council on Foundations' Working Group on Stewardship Principles for Independent Foundations.

Mr. Marshall will retire as president and CEO of the foundation on June 30.

Philanthropy News Digest: You've described the Kresge Foundation as the most misunderstood foundation in America. In what way is it misunderstood?

John Marshall: I think most people see our main interest as being in the built structures we support. We're known for capital funding — nobody does it as extensively as we do, and so people often think that's our primary interest. But it isn't. Actually, we take a very hands-off approach to the capital projects presented to us, in that we really don't intrude that much on individual boards and staffs with respect to the planning of a project. People think we do, that that's how we add value, whereas we like to think we do that by using a capital campaign as an opportunity to engage with a nonprofit when it is focused on trying to accomplish something that will move the organization forward. If we can get to the organization early enough, we feel we can help it build on its existing capacities in a variety of ways, in addition to having a building at the end of the process.

PND: Is that what you mean when you describe Kresge's role as that of a catalyst rather than a funder?

JM: Yes. If the building of a building by definition requires a lot of people to work together, our view is that the process can and should be used to achieve something bigger than the sum of its parts. I'm talking about obvious things like the ability to offer improved or expanded programming or to develop a stronger base of support. The difficulty comes in measuring something like that. The way we do it is to look for evidence of growth in the number of new gifts, in larger gifts from existing funding sources, in a board of directors that has engaged with and invested in the process and reaffirmed their commitment to the organization, in executive directors who have a new set of milestones or benchmarks against which to measure the development of their organizations, in higher organizational visibility, and so on.

PND: Kresge is famous for awarding challenge grants. Has the challenge grant always been an important instrument in the foundation's toolkit?

"...a Kresge challenge grant creates both an opportunity and a deadline that requires people to work against a carefully conceived plan...."

JM: Yes, almost from the beginning. I think the origin of the challenge grant here was based in a desire to make the application process manageable for both the applicant organization and the foundation, which in the early days was just a small group of officers of the S.S. Kresge corporation. In business terms, I think Mr. Kresge — who was a businessman, after all — wanted to know that people who received money from his foundation would use it to accomplish two things: raise the rest of the money they needed to build the building they wanted to build; and two, to sign a contract with a builder so that everyone could be reasonably sure the building would be built. What we've done with those two simple expectations is to fold them into a much more elaborate capacity-building process that pushes a nonprofit to achieve some of the other growth milestones I mentioned. And the challenge grant helps to drive that because it creates both an opportunity and a deadline that requires people to work against a carefully conceived plan if they hope to make it happen.

PND: You mentioned the importance of effective board leadership to the success of nonprofit organizations. Have you and your colleagues developed metrics to measure board effectiveness in a nonprofit context?

JM: Carrying a project such as the ones we fund to a successful conclusion requires leadership. In fact, we will not engage with a nonprofit unless it is able to demonstrate leadership at the board level. If an organization comes to us with directors that have not committed their own personal gifts to the project in question, or that have not agreed to work within the campaign structure to help bring the project to the attention of others, we simply don't see it as an opportunity to build capacity and are unlikely to fund that project. We also expect that an organization will come to us with several of the larger gifts needed for a successful campaign already committed, as well as with a campaign organization already in place and functioning in terms of securing gifts from individuals outside the organization.

PND: Do you have those expectations regardless of the size of the organization?

JM: The expectation that boards will commit their own funds and that they will provide leadership? Absolutely. We realize that some organizations do not have boards that are populated by people of great discretionary income or wealth, so in those cases we want to see leadership by participation — essentially, show us that your board members have given according to their ability to give.

PND: What do you do in situations where a board and staff are prepared to lead but the community being served is challenged in its ability to support an organization?

JM: In those situations, we inquire as to the incremental growth that is planned, realizing that transformational change is a step-by-step process, and we hope to learn from their experience.

PND: Is it your view that growth and success are synonymous in the nonprofit world?

"...the nonprofit that has a healthy, alternative stream of support from a committed donor base is more likely to innovate...."

JM: Not growth for growth's sake. But an organization that is able to support its programs with ever-increasing donated and volunteer support obviously has more options than an organization that can't. Remember, in much of the nonprofit sector, where operating costs are largely supported by contracts, reimbursements, and earned income, the role of internal stakeholders in governance and program origination can be overwhelmed by the needs and agendas of funders. In my opinion, the nonprofit that has a healthy, alternative stream of support from a committed donor base is more likely to innovate in its programming and do a better job of serving the community whose mission it is to serve than an organization that has to rely on contracts and outside funders.

PND: Earlier this year, you and your colleagues unveiled a newly renovated "green" headquarters building. Can you tell us what's special about the building? And how did a Midwestern foundation like Kresge get into the sustainable design business?

JM: We got into sustainable design because we were starting to hear about it from lots of different people. Finally, at our last board-staff planning retreat, we asked ourselves whether, as a funder of capital projects, we should take a position on sustainable design. As I said earlier, we try not to intrude in the project-selection process, but with a new technology paradigm emerging we felt it was time to ask whether we should encourage nonprofits to be part of the workout of some these strategies and approaches. And the answer from our board and staff was yes.

So, we developed a three-part program. Part one focuses on educating nonprofits, which we do through an area of our Web site and two very informative pamphlets that explore sustainable design and green building techniques. Part two is centered around planning grants, which we offer to qualified organizations — in part because we've learned that truly integrative green design is more costly than traditional design. At the same time, the earlier in the design process an organization explores its sustainable design options, the more money it's likely to save over the long haul. And the third part of the program revolves around bonus grants to organizations that go through our normal challenge grant process and decide to have their projects certified under the U.S. Green Buildings Council's LEED Program. The idea is that we can use those grants to reward nonprofits for having been early adopters and for calling attention to the fact that nonprofit organizations are successfully adopting green building practices.

Not surprisingly, we've had a good response to the program. We've exhausted the planning-grant fund twice and replenished it both times, and the bonus grants...well, it takes a year after a project has been completed to be certified under the LEED program, so we've paid out only one or two of those. But we've committed to a good number of them, and the education component of the program is very popular. We're seeing lots of traffic to the Web site, and we've been doing some orientation meetings around the country in conjunction with the Nonprofit Finance Fund in New York.

Now, you also asked what's special about our building. For us, the really special aspect of it is that we have combined a stone farmhouse built in 1850 with a brand-new structure that employs many of the new approaches and techniques we've all read about — everything, that is, except solar and wind power. For most people who visit us, the elements that are really interesting are the geothermal closed-loop well system for heating and cooling the building, the use of so-called green roofs on a limited basis, and the way the building is sited, which allows us to shade the building's interior spaces from the most intense effects of the sun but also, through the use of light shelves, to bounce sunlight off the ceiling, thereby greatly reducing the need for conventional lighting. The building also has a raised-floor HVAC system, which means that only the first six feet of the vertical interior space need to be conditioned, instead of all the way up to the ceiling, which is the norm with conventional HVAC systems. And we divert rain runoff from the parking lot through a special paving application and from the roofs into retention ponds and a cistern. The collected rainfall is partly used for irrigation of the green roofs, but mostly it is simply absorbed naturally so as not to overcharge the municipal storm sewer. All of these systems are up and running and are being monitored, and we've taken steps to integrate the whole site into an educational component of the program. For example, nonprofit leaders who visit us — and we have four hundred to five hundred appointments a year with agencies that are seeking funding — are introduced to these concepts. We have also pledged to report our findings, in terms of what worked and what didn't, to the broader public.

PND: I grew up in the Midwest and know that it's cold and cloudy for a good part of the year. Are you saying that green building design and green concepts can be adapted to any environment and climate, even cold and cloudy ones? And is that message being heard by nonprofits in sun-challenged regions of the country?

JM: More and more so, yes. We talked ourselves out of solar and wind power, but some of the simplest things you can do are the most effective in terms of keeping a building light and open-looking without letting a lot of solar radiation in and putting a tremendous load on the HVAC system to cool the building.

PND: Do you think Kresge will be funding sustainable design a decade from now?

JM: That will depend on the experience of our grantees and our own project.

PND: While we're on the subject of the Midwest, do you despair of the region's economic future? And if not, what do you see as potential catalysts for its economic recovery and long-term viability?

JM: The industrial Midwest is certainly challenged these days, and everyone is aware of that. But people in Detroit and other metropolitan areas in the region are used to a cyclical economy. Sometimes the local economy is in sync with the rest of the country, and sometimes it isn't. People in this part of the country have lived through booms and busts in the past, and so they're not inclined to adopt a sky-is-falling mentality. That said, the current downturn is deeper and probably has lasted longer than previous downturns, and that has everyone concerned.

"...History teaches us that every economy goes through periods in which it has to adjust to disruptive change — we're not going to get a pass on that...."

On the plus side, the region possesses a wealth of engineering and design talent, and if down the road there is less demand for that talent on the automotive and auto supply side, it stands to reason that those talents could be applied to related or even unrelated industries. History teaches us that every economy goes through periods in which it has to adjust to disruptive change — we're not going to get a pass on that. The economy of this region was once driven by timber, then metal fabrication, principally for use in building stoves, and then the auto industry. So, change is inevitable, and change will come. The second-largest industry in Michigan is agriculture, which would probably surprise most people. We also have a concentration of major health centers and universities in Michigan, and those are areas, along with information technology and the finance and knowledge-related businesses, that show promise and are likely to help drive our economy in the future.

PND: Do foundations have a role to play in helping the region navigate that transition?

JM: Well, we certainly do in terms of supporting nonprofits that are engaged in supporting that process. The Kresge Foundation has had a special program in Detroit for the last thirteen years through which we have committed about $140 million and which, in turn, has generated in excess of $1 billion in project development funding, a lot of it bricks and mortar but some of it for endowment and program. But perhaps our greatest contribution, and the area where other foundations are most likely to have an impact, is in working to make the region a place where people want to live and build a future. Before people will do that, they need to be assured that the quality of life a region has to offer — from its schools, to its arts and cultural opportunities, to its healthcare systems — lives up to their expectations. I don't think you can underestimate the importance of that.

PND: Helmut Anheier and Diana Leat, the authors of a new book about philanthropy, have written that "The potential of foundations is largely unfilled due to a low-key malaise affecting the foundation sector." They further suggest that this malaise is not about money or governance or debates about pay-out; it's about "a lack of awareness of what is possible and the largely unrealized potential of foundations." Do you agree? And are foundations doing the best they possibly can in what is a rather challenging environment for nonprofits?

JM: Well, I can't presume to know what evidence they would point to from just that quote. But remember, the foundation field is extremely diverse and full of people and organizations working on lots of different problems from lots of different directions. You have everything from small family foundations that were set up two or three generations ago and are still operated by family members as a family activity, to very large staffed foundations with relatively high administrative expense ratios, to operating foundations that create and run their own programs and grantees. Here at Kresge, we take the position that if you find a mechanism that strengthens an organization and find people that are eager to go through your application process and value your grant not as the be-all and end-all, but rather as a useful tool in a toolkit full of useful tools, you have a good chance of strengthening that organization and, in the process, strengthening the community or communities it was created to serve. We also take the position that there is more talent and innovation in our community of nonprofits that is waiting to be released than probably can be imagined or prototyped by any group of staff members or trustees. We certainly acknowledge that foundations have been responsible, directly or otherwise, for great breakthroughs in science and for the development of pioneering social models. Yet, behind most of those breakthroughs are groups of committed people, volunteers and paid staff, who created a platform from which those discoveries could be made and implemented.

PND: Do you worry that foundations are too wedded to 20th century models and practices to remain relevant and/or have impact on the problems of the 21st century?

JM: Every field needs to be prodded by individuals and entities willing to take a different path and to push others to try new ways of delivering what they have to deliver. I welcome any development that challenges conventional thinking. But I also worry that we live in a culture in which change is supported for the sake of change itself. For example, while the Coca Cola Company has a lot of products to keep itself growing in the 21st century, my suspicion is that Classic Coke is still one of its more successful products.

PND: You're getting ready to step down as president and CEO of the foundation after almost fifteen years as CEO and twenty years as the foundation's president. As you look back on your tenure, what are you most proud of?

"...what we have been able to do here is to take a model that was working and refine it into one that works better...."

JM: Actually, it's twelve as CEO and not quite twenty as president. But looking back, I would say that what we have been able to do here is to take a model that was working and refine it into one that works better with respect to building capacity within the nonprofits we support. There have been many occasions when an organization told us that whether or not their application resulted in a grant, our process was not only helpful but in some cases encouraged people to step forward with an extraordinary act of leadership; that's what the process is designed to do — to turn a capital campaign into a truly transformational experience. The sessions that work best here are those that involve the director or president of an organization, a board or campaign chair, and the director of development. Those three positions are critical to the kind of creative planning that results in growth, and coming out here to talk to us oftentimes creates an atmosphere in which a lot of important issues end up on the table. In fact, I sometimes think that a good deal of the hard work is done on the plane ride out to see us and the return trip back home.

PND: Rip Rapson, former president of the McKnight Foundation in Minneapolis, was named to succeed you last December. Was your board as careful in choosing your successor as it is in awarding grants, and were you involved in that process? And what makes Mr. Rapson well suited to be the next president of the Kresge Foundation?

JM:  I'm sure that the search committee, and then the full board was careful in the search; it took a great deal of their time and effort! I was not part of the process except for briefing the board on what I felt were appropriate skills and experiences and to meet with the three finalists as a resource to their own inquiries. I have met Rip at a few conferences and have found him to be an intelligent, concerned grantmaker, and I wish him all success in his new role.

PND: A final question: What is your greatest hope for the colleagues you'll be leaving behind, as well as the field as a whole?

JM: My greatest hope for my colleagues is that they truly understand the privilege of the professional positions they occupy, that they take advantage of them to learn from their applicants, that they continue to appreciate that there are limits to their respective roles and responsibilities, but that they also appreciate the collective accomplishment of the nonprofit organizations that approach them for support. Foundations provide about 5 percent of all the funding contributed to nonprofits every year, while individuals contribute something on the order of 80 percent to 85 percent. With that in mind, we have long felt here that the real value of our programs lies not so much in the collaborative programs we develop with other foundations or corporations or government — although those are extremely valuable. Instead, the greatest potential for leadership in the nonprofit sector lies with individuals. As Tocqueville first observed back in the 1830s, when Americans see a need they form a committee and address it. And because that impulse continues to drive many of our most established nonprofits, not to mention the countless number of new ones formed every year, we believe that the way foundations can be most effective is to empower creative individuals by building the capacity of nonprofit organizations.

PND: Well, thank you for your time this morning, Mr. Marshall.

JM: Thank you.

Mitch Nauffts, PND's editorial director, spoke with John Marshall in May. For more information on the Newsmakers series, contact Mitch at mfn@foundationcenter.org.