Donors large and small often think that they can simply throw money at a problem and hope for the best. Successful giving requires more involvement than that.
By Leslie Crutchfield, John Kania and Mark Kramer, guest contributors
FORTUNE — American philanthropy will soon celebrate its centennial anniversary. On June 9, 1911, steel magnate Andrew Carnegie was granted a charter to create Carnegie Corporation of New York, giving birth to the first major private, secular, general purpose U.S. foundation. Oil baron John D. Rockefeller soon followed suit, incorporating his eponymous foundation in 1913. Up until that point, U.S. philanthropy was mainly made up of ad hoc charity — there was no platform for pooling American wealth and systematically giving it away.
One hundred years later, philanthropy is booming. Today, some 75,000 foundations operate in the U.S. alone — more than half of which were founded in the last two decades; they annually distribute nearly $40 billion.
Yet if philanthropy’s progress is graded not by the sums of wealth re-distributed but by its impact on problems — solving the public education crisis, reversing climate trends, delivering basic health care to the poor — then, unfortunately, you’d have to mark it “unsatisfactory.”
If givers today want to help solve more of the world’s complex problems, then they will need to change the way they give.
The perils of throwing money at the problem
All kinds of donors — whether they are business executives, family fund trustees, leaders of private or corporate foundations, or just generous individuals — fall prey to some common traps.
Many benefactors believe that simply because they donate to a cause, they’ll be successful. They tell themselves, “If I give generously enough, that will fix the problem.”
This misguided assumption was at the root of the recent kerfuffle surrounding Three Cups of Tea author Greg Mortenson, who ambitiously set out to build schools mostly for girls in across Afghanistan and Pakistan through his Central Asia Institute. A report from 60 Minutes claimed that many of the schools were failing or abandoned.
Reporters questioned the institute’s finances, the adequacy of its staff, and highlighted oversight troubles — for one, the organization had only three board members. Mortenson likely did not have enough boots on the ground or the staying power to ensure the job was done right in these remote and rugged areas.
It takes more than money to solve complex social and environmental issues. While funds are essential, in researching dozens of successful foundations and individual donors worldwide, we’ve found that the best actually participate in creating change.
The most effective philanthropists use several tools to tackle problems, applying non-financial assets such as their business know-how, networks, and influence to advance causes. They also don’t exclusively focus on supporting nonprofits. Top donors support for-profit businesses and advocate for government policy reform to further amplify results.
Take Joe Jacobs. In 1988, the late founder and CEO of Jacobs Engineering Group JEC , an $11 billion Fortune 500 company, established the Jacobs Family Foundation in San Diego, Calif., with the goal of revitalizing a nearby low-income urban community. The Jacobs family eventually helped transform a brownfield saddled with an abandoned aerospace factory into a $23.5 million commercial and cultural center called the Village at Market Creek Plaza. In the process, the foundation and its sister organization, the Jacobs Center for Neighborhood Innovation, helped to create hundreds of jobs and new career opportunities for the surrounding community.
The Jacobs foundation’s efforts exemplify many of the best practices that make philanthropists most effective — and in particular, two that fly directly in the face of conventional philanthropy wisdom.
1. Add business to your philanthropy
The Jacobs foundations focused on creating self-sustaining business enterprises. They purchased the brownfield and surrounding property, ultimately investing $4.35 million and using that investment as leverage to attract an additional $19.15 million in investments from others. Foundation trustees and staff worked hand-in-hand with local contractors, developers, architects and builders, attempting to source labor locally.
The foundation also helped create the first Community Development IPO, pushing for new California legislation enabling them to sell stock to local residents — many had never invested before — and reap the benefits of ownership. (Shares were priced at $200; residents who couldn’t manage the sum opted for a $10-per-month lay-away plan.)
A more traditional way for donors to address economic problems like these would be to write a check to a job-training program, or bolster local social services, and assume that would work. But the Jacobs family gave a lot more than grants.
2. Don’t be afraid to advocate
Many donors eschew advocacy. They instead prefer to fund programs that provide services because they produce tangible results and benefactors avoid dirtying their hands in politics. By contrast, the Jacobs family joined with nonprofits and advocacy groups and called in favors from policy elites to promote the controversial IPO legislation (it took six years and required teams of lawyers to unravel the restrictions to safely sell stock to low-income community members).
Going beyond the foundation
These lessons do not only apply to foundations; corporations can use them, too. Consider Mars, manufacturer of M&Ms and other chocolate brands. Mars wanted to help impoverished small-scale cocoa farmers in Cote d’Ivoire that supplied the majority of beans for its products. Many members of this African population lived on less than $2 a day, and the cocoa crop was at risk of over-harvesting and under-nourishment.
Initially Mars viewed supporting these farmers as a charitable endeavor that was consistent with family and employee values. However, it became clear to the company’s leaders that the welfare of cocoa farmers was a critical risk factor to Mars, not just a nice thing to do for African communities.
If improvements weren’t made, the suppliers of the one essential ingredient to making Mars’ candy products could jeopardize the company’s future. Research suggested that better farming practices and improved plant stocks could triple the cocoa crop’s yield, dramatically increasing farmer incomes, improving the global supply of cocoa and the sustainability of Mars’ supply chain.
So instead of taking a conventional corporate giving stance, Mars approached this social cause as a business issue. The company shared their knowledge of plant science with farmers, helping to develop in-country nurseries to grow a more disease-resistant, higher-yield cocoa crop.
Mars also advocated for government change: They coaxed Cote d’Ivoire policymakers to provide more agricultural extension workers with scientific and other expertise to help farmers further improve their practices and convinced World Bank officials to finance new roads, among other campaigns.
Companies like Mars seek to solve social and environmental problems not only because it’s charitable or will make them look good, but because it also advances core business objectives.
One hundred years ago, Carnegie brought dramatic advances to philanthropy by applying a new set of tools to an age-old concept. It’s up to a new generation of donors to deploy tools that meet today’s complex needs and deliver on that promise.
Leslie Crutchfield, John Kania and Mark Kramer are senior leaders at FSG, a global social impact strategy firm co-founded by Mr. Kramer. This article is adapted from their book, Do More Than Give: The 6 Practices of Donors Who Change the World, which was recently published by Jossey-Bass/Wiley.