August 16, 2004
Mission: Efficiency | Hank Schmelzer brings his corporate experience to the nonprofit world
By Taylor Smith
Though his career took a roundabout route, Hank Schmelzer, 61, knew from a young age that he wanted to end up in the world of public service. He got his wish in 2000 when he was offered the job of president of the Ellsworth-based Maine Community Foundation, a charitable resource for donors that has delivered more than $50 million in grants and scholarships since its inception in 1983. Schmelzer's long-time corporate experience ˆ he was a securities lawyer who shifted mid-career into money management ˆ taught him little about life in the nonprofit lane. But in the four-and-a-half years since joining MCF, Schmelzer has transitioned smoothly into the nonprofit world while drawing from his corporate background to bolster the foundation's operations.
Like much of the economic world, nonprofits were rocked by the economic recession that began in late 2000. Charitable giving slowed as donors tightened their belts, and nonprofit organizations suffered as their investments lost ground in the southbound stock market. Schmelzer's corporate and investment experience, however, helped him guide MCF's roughly $150 million in assets through the downturn to emerge relatively unscathed.
In fact, MCF was able to continue increasing the amount of grant money it awards each year, from $5.6 million in 2000 to $9.3 million in 2003. This year, MCF is on track to award more than $10 million in grants and already has raised nearly $20 million ˆ including the largest single gift in the foundation's 21-year history, a recent bequest from an anonymous donor. Mainebiz recently sat down with Schmelzer to discuss his shift from making money to giving it away, MCF's role as a charitable resource and the benefits of economies of scale.
Mainebiz:The Maine Community Foundation is a pretty high-profile organization in the state, but I'm not sure people are familiar with the concept of a community foundation. What exactly is MCF's role as a charitable resource for donors?
Schmelzer: As opposed to a private foundation like the Rockefeller Foundation, the Ford Foundation or the Libra Foundation here in Maine, we're a public foundation that's been formed through the multiple contributions of individuals. As a public foundation, we become, in effect, a catalyst for philanthropy. For people that have a philanthropic intent and want to set up a fund with us, we can manage their fund like a small foundation under this public umbrella. We manage about 700 of these funds within the Maine Community Foundation; the small ones are around $10,000 and the largest one now is about $15 million. The funds come from a number of areas. Some are from individuals, some are from transfers of charitable trusts ˆ we've received a lot of those over the years.
What role does the public play in a community foundation? Is there a higher level of accountability there than in a private foundation?
That's something that's pretty key to what we do. We feel as though we're very accountable to the community; we're very transparent. We make a point that the board, which is up to 30 members, represents the state from Eastport to Bethel and York to Presque Isle.
Interestingly enough, in our last board meeting, we had been talking for some time about the Sarbanes-Oxley Act, [an accounting reform act] which applies to public companies. We had taken a look at it and said, we think this is something we conform to for the most part, so why not make a few changes we've got to make and adopt these policies formally as part of our board practices? I think we're one of the first of the 65,000 foundations in the country to voluntarily adopt these policies.
For an individual or an organizational donor, what's the benefit of having the Maine Community Foundation manage those funds?
There are a lot of efficiencies that come from MCF managing these types of arrangements versus the small family foundations or a small, family-run charitable trust that's worth a couple of million dollars. For example, our investment program is pretty sophisticated: We have 16 investment managers we use across a variety of different asset classes, and our fundamental precept is asset diversification and management diversification. So with an investment pool of more than $100 million ˆ our assets are about $150 million, or $115 million in this pooled account ˆ we can go to multiple managers and we can diversify our assets in a way that a smaller foundation or a smaller charitable trust couldn't.
How so?
If you only have $2 million, you can't go to someone working in alternative investment products like distressed bonds or merger-arbitrage types of products. You need $3 [million] to $4 million just to get into [these products]. We probably have $5 million invested in that product ˆ it's a small part, but an important part of our investments.
So during the downturn in the investment market in 2000, 2001 and 2002, we came out of that basically unscathed, and it was because of the different asset classes we were involved in. At the end of 2002 we lost on an annualized basis about one percent, but then the market took off in 2003. It was [our] diversification across different asset classes that put us in the position where we didn't have to recover the 30% that we'd lost; we just took off and basically picked up about $20 million last year.
In what other ways is MCF a good option for a smaller foundation or trust?
The classic case is if you have a $4 [million]-$5 million foundation, how do you even solicit grant applications? Where's the staff to do that? If you have one person you're paying to do that work, this one person isn't going to have the skills for the administration, investment or grant sides of the operation ˆ it's hard to have one person who has all those talents. So we bring efficiencies and expertise into those areas. We have 19 people on our staff, with six in the finance area, seven in grantmaking and programs and five in the donor relations and marketing area. The people heading up each of those areas are skilled and well-trained in their particular area.
We also spend a lot of time trying to ensure there's a cross-functional working relationship with each of these groups. The donors are clients of ours, as are the nonprofit organizations that receive the grants. But in order for us to really support the nonprofit organizations, we first have to work with the donors and demonstrate to them the value that can come from working through a community foundation. We bring people together and get them to become engaged in philanthropy, and so we provide to our donors ideas about how they can make grants and how they can personally become engaged in the work of philanthropy.
Another service we provide along the same lines is to nonprofit endowments. We have over 50 nonprofit endowments [of $200,000-$300,000] that we allow to participate in this investment pool.
Can you give an example how the process works between donors, MCF and the nonprofit groups that receive the grants?
I'll give you an example of an anonymous donor that came to us four years ago with significant charitable resources. The donor wanted to work with us to make these resources available where the donor lived. We talked with the donor over the course of four or five months and determined what their interest was and then established several different funds to respond to this donor's interest. One area of interest was education and trying to keep people in some of the rural areas of Maine after they complete their college education. So we set up a small program where we would basically pay the person's college loan payments if they come to work in this particular area.
We also have in most of Maine's 16 counties committees of volunteers that represent us, and they have general funds ˆ like mini-foundations ˆ that make grants awarded by the volunteers in their counties. And this donor was interested in a particular county and wanted to add some significant resources to the fund for the donor's county, so we contributed about $500,000 to that fund.
Another anonymous donor set up million-dollar funds that were designated to the Maine State Library and the Maine State Museum, as well as another separate donor-advised fund designating that the funding can only go to a designated nonprofit.
If the donor knows where they want their money to go, why give it to MCF?
Well, if somebody just wants to give a million dollars to the Island Institute, they should just give it to the Island Institute. But if they want it as an endowment that flows to the Island Institute every year ˆ where five percent a year, $50,000 a year on a million dollar endowment, would go to the Island Institute ˆ they should go through us.
Again, part of the advantage of that type of arrangement is a lot of donors have an interest in some of these nonprofit organizations and some of them might be startups. But they're reluctant to give a significant amount of money to [these organizations] to manage in an endowment because they can just see a small historical society or something like that doesn't have the sophistication to manage a $300,000-$400,000 endowment. So they might give the endowment to us and see that the Mt. Desert Island Historical Society is the beneficiary. So they'll give us the money and we'll pay the five percent a year to the MDI Historical Society and manage the money while the historical society just takes the money and pumps it into their operations.
The world of philanthropy is very interesting, and it's complex. What we do is pretty sophisticated work ˆ more so than I appreciated when I first came here.
What kinds of changes have you made since becoming MCF president in 2000?
A lot of the work we've done is on trying to make nonprofit organizations take the best of the business world practices and adopt them for their own. They can run their operations better and therefore carry out their missions more effectively. When I first came, the foundation had grown dramatically in the preceding 18 years, but there were a lot of growing pains when I came in. There was a need to establish some business processes, and there was not necessarily appreciation among the staff for the need of some of these processes. You might say there was a little bit of a culture clash. I had to be careful that I didn't push too much or everyone would put up their arms and resist. At the same time, I had to push hard enough in order to get things done.
For example, we had an annual business plan, but it was pretty sketchy. We needed to have a well-formed business plan that was broken down on a departmental basis so each element of that plan [becomes] effective. And then, to bring the foundation's three parts ˆ the program, the development and the finance and administration ˆ so that they all matched together and you didn't have the silos, which was another bit of an issue we were wrestling with.
Coming from a corporate background, what were some of the things you learned from the nonprofit world?
I learned a lot about how strongly people in the nonprofit sector feel about the work they're doing. It's important to respect that, but also to try to find a way to integrate that enthusiasm and knowledge that people had for charitable and philanthropic work with a well-organized institution. I learned an awful lot about how to have an appreciation for that and how to be a facilitator ˆ to bring those two things together.
I've had a lot to learn about just what philanthropy is about, what family philanthropy is about, how you do grantmaking, what's good grantmaking. I've learned a lot, but as an old colleague once said, it's what you learned after you know it all that really counts, and I've got a way to go.
Through living in Somesville and working in Ellsworth, what's your outlook for the down east economy?
My impression of the down east economy is that over the long term ˆ the next 15 to 20 years ˆ it's going to be a boom town. Whether that gets up into Washington County I don't know, but there's going to be a lot of migration into the area from Rockland up to beyond Ellsworth. There's going to be a lot of movement into the area from the baby boomer and retiree generation, and that's going to put a lot of pressure on the infrastructure.
There are some very positive economic signs, I think; the whole area is much more vibrant now than it was 10 years ago. But it also means that there are going to be all sorts of challenges for housing for moderate and low-income people ˆ it's already a real issue up there. There also are health care issues; there are real issues on how to care for the elderly as the baby boomers move up there. But I think there's all kinds of potential there for really strong economic growth. If people can patch together some of the opportunities that would come from a collaborative effort for biomedical work between Jackson Labs, the University of Maine and the [region's] hospitals, it's pretty exciting to think about the possibilities for a pretty positive economic environment.
How long do you see yourself doing this?
For the foreseeable future. It's taken me four and a half years to learn the ropes and I'm just beginning to feel now as though I have an understanding of some of things that we can do that can make a difference. I feel fortunate and privileged to have the opportunity to work in this capacity and to work with a great staff that's very talented. To me, they're really devoted to doing the work that they do. We have a great board that's very supportive and the volunteers are a great group, so we have some great things going and I'd like to work with it for a while.
Like much of the economic world, nonprofits were rocked by the economic recession that began in late 2000. Charitable giving slowed as donors tightened their belts, and nonprofit organizations suffered as their investments lost ground in the southbound stock market. Schmelzer's corporate and investment experience, however, helped him guide MCF's roughly $150 million in assets through the downturn to emerge relatively unscathed.
In fact, MCF was able to continue increasing the amount of grant money it awards each year, from $5.6 million in 2000 to $9.3 million in 2003. This year, MCF is on track to award more than $10 million in grants and already has raised nearly $20 million ˆ including the largest single gift in the foundation's 21-year history, a recent bequest from an anonymous donor. Mainebiz recently sat down with Schmelzer to discuss his shift from making money to giving it away, MCF's role as a charitable resource and the benefits of economies of scale.
Mainebiz:The Maine Community Foundation is a pretty high-profile organization in the state, but I'm not sure people are familiar with the concept of a community foundation. What exactly is MCF's role as a charitable resource for donors?
Schmelzer: As opposed to a private foundation like the Rockefeller Foundation, the Ford Foundation or the Libra Foundation here in Maine, we're a public foundation that's been formed through the multiple contributions of individuals. As a public foundation, we become, in effect, a catalyst for philanthropy. For people that have a philanthropic intent and want to set up a fund with us, we can manage their fund like a small foundation under this public umbrella. We manage about 700 of these funds within the Maine Community Foundation; the small ones are around $10,000 and the largest one now is about $15 million. The funds come from a number of areas. Some are from individuals, some are from transfers of charitable trusts ˆ we've received a lot of those over the years.
What role does the public play in a community foundation? Is there a higher level of accountability there than in a private foundation?
That's something that's pretty key to what we do. We feel as though we're very accountable to the community; we're very transparent. We make a point that the board, which is up to 30 members, represents the state from Eastport to Bethel and York to Presque Isle.
Interestingly enough, in our last board meeting, we had been talking for some time about the Sarbanes-Oxley Act, [an accounting reform act] which applies to public companies. We had taken a look at it and said, we think this is something we conform to for the most part, so why not make a few changes we've got to make and adopt these policies formally as part of our board practices? I think we're one of the first of the 65,000 foundations in the country to voluntarily adopt these policies.
For an individual or an organizational donor, what's the benefit of having the Maine Community Foundation manage those funds?
There are a lot of efficiencies that come from MCF managing these types of arrangements versus the small family foundations or a small, family-run charitable trust that's worth a couple of million dollars. For example, our investment program is pretty sophisticated: We have 16 investment managers we use across a variety of different asset classes, and our fundamental precept is asset diversification and management diversification. So with an investment pool of more than $100 million ˆ our assets are about $150 million, or $115 million in this pooled account ˆ we can go to multiple managers and we can diversify our assets in a way that a smaller foundation or a smaller charitable trust couldn't.
How so?
If you only have $2 million, you can't go to someone working in alternative investment products like distressed bonds or merger-arbitrage types of products. You need $3 [million] to $4 million just to get into [these products]. We probably have $5 million invested in that product ˆ it's a small part, but an important part of our investments.
So during the downturn in the investment market in 2000, 2001 and 2002, we came out of that basically unscathed, and it was because of the different asset classes we were involved in. At the end of 2002 we lost on an annualized basis about one percent, but then the market took off in 2003. It was [our] diversification across different asset classes that put us in the position where we didn't have to recover the 30% that we'd lost; we just took off and basically picked up about $20 million last year.
In what other ways is MCF a good option for a smaller foundation or trust?
The classic case is if you have a $4 [million]-$5 million foundation, how do you even solicit grant applications? Where's the staff to do that? If you have one person you're paying to do that work, this one person isn't going to have the skills for the administration, investment or grant sides of the operation ˆ it's hard to have one person who has all those talents. So we bring efficiencies and expertise into those areas. We have 19 people on our staff, with six in the finance area, seven in grantmaking and programs and five in the donor relations and marketing area. The people heading up each of those areas are skilled and well-trained in their particular area.
We also spend a lot of time trying to ensure there's a cross-functional working relationship with each of these groups. The donors are clients of ours, as are the nonprofit organizations that receive the grants. But in order for us to really support the nonprofit organizations, we first have to work with the donors and demonstrate to them the value that can come from working through a community foundation. We bring people together and get them to become engaged in philanthropy, and so we provide to our donors ideas about how they can make grants and how they can personally become engaged in the work of philanthropy.
Another service we provide along the same lines is to nonprofit endowments. We have over 50 nonprofit endowments [of $200,000-$300,000] that we allow to participate in this investment pool.
Can you give an example how the process works between donors, MCF and the nonprofit groups that receive the grants?
I'll give you an example of an anonymous donor that came to us four years ago with significant charitable resources. The donor wanted to work with us to make these resources available where the donor lived. We talked with the donor over the course of four or five months and determined what their interest was and then established several different funds to respond to this donor's interest. One area of interest was education and trying to keep people in some of the rural areas of Maine after they complete their college education. So we set up a small program where we would basically pay the person's college loan payments if they come to work in this particular area.
We also have in most of Maine's 16 counties committees of volunteers that represent us, and they have general funds ˆ like mini-foundations ˆ that make grants awarded by the volunteers in their counties. And this donor was interested in a particular county and wanted to add some significant resources to the fund for the donor's county, so we contributed about $500,000 to that fund.
Another anonymous donor set up million-dollar funds that were designated to the Maine State Library and the Maine State Museum, as well as another separate donor-advised fund designating that the funding can only go to a designated nonprofit.
If the donor knows where they want their money to go, why give it to MCF?
Well, if somebody just wants to give a million dollars to the Island Institute, they should just give it to the Island Institute. But if they want it as an endowment that flows to the Island Institute every year ˆ where five percent a year, $50,000 a year on a million dollar endowment, would go to the Island Institute ˆ they should go through us.
Again, part of the advantage of that type of arrangement is a lot of donors have an interest in some of these nonprofit organizations and some of them might be startups. But they're reluctant to give a significant amount of money to [these organizations] to manage in an endowment because they can just see a small historical society or something like that doesn't have the sophistication to manage a $300,000-$400,000 endowment. So they might give the endowment to us and see that the Mt. Desert Island Historical Society is the beneficiary. So they'll give us the money and we'll pay the five percent a year to the MDI Historical Society and manage the money while the historical society just takes the money and pumps it into their operations.
The world of philanthropy is very interesting, and it's complex. What we do is pretty sophisticated work ˆ more so than I appreciated when I first came here.
What kinds of changes have you made since becoming MCF president in 2000?
A lot of the work we've done is on trying to make nonprofit organizations take the best of the business world practices and adopt them for their own. They can run their operations better and therefore carry out their missions more effectively. When I first came, the foundation had grown dramatically in the preceding 18 years, but there were a lot of growing pains when I came in. There was a need to establish some business processes, and there was not necessarily appreciation among the staff for the need of some of these processes. You might say there was a little bit of a culture clash. I had to be careful that I didn't push too much or everyone would put up their arms and resist. At the same time, I had to push hard enough in order to get things done.
For example, we had an annual business plan, but it was pretty sketchy. We needed to have a well-formed business plan that was broken down on a departmental basis so each element of that plan [becomes] effective. And then, to bring the foundation's three parts ˆ the program, the development and the finance and administration ˆ so that they all matched together and you didn't have the silos, which was another bit of an issue we were wrestling with.
Coming from a corporate background, what were some of the things you learned from the nonprofit world?
I learned a lot about how strongly people in the nonprofit sector feel about the work they're doing. It's important to respect that, but also to try to find a way to integrate that enthusiasm and knowledge that people had for charitable and philanthropic work with a well-organized institution. I learned an awful lot about how to have an appreciation for that and how to be a facilitator ˆ to bring those two things together.
I've had a lot to learn about just what philanthropy is about, what family philanthropy is about, how you do grantmaking, what's good grantmaking. I've learned a lot, but as an old colleague once said, it's what you learned after you know it all that really counts, and I've got a way to go.
Through living in Somesville and working in Ellsworth, what's your outlook for the down east economy?
My impression of the down east economy is that over the long term ˆ the next 15 to 20 years ˆ it's going to be a boom town. Whether that gets up into Washington County I don't know, but there's going to be a lot of migration into the area from Rockland up to beyond Ellsworth. There's going to be a lot of movement into the area from the baby boomer and retiree generation, and that's going to put a lot of pressure on the infrastructure.
There are some very positive economic signs, I think; the whole area is much more vibrant now than it was 10 years ago. But it also means that there are going to be all sorts of challenges for housing for moderate and low-income people ˆ it's already a real issue up there. There also are health care issues; there are real issues on how to care for the elderly as the baby boomers move up there. But I think there's all kinds of potential there for really strong economic growth. If people can patch together some of the opportunities that would come from a collaborative effort for biomedical work between Jackson Labs, the University of Maine and the [region's] hospitals, it's pretty exciting to think about the possibilities for a pretty positive economic environment.
How long do you see yourself doing this?
For the foreseeable future. It's taken me four and a half years to learn the ropes and I'm just beginning to feel now as though I have an understanding of some of things that we can do that can make a difference. I feel fortunate and privileged to have the opportunity to work in this capacity and to work with a great staff that's very talented. To me, they're really devoted to doing the work that they do. We have a great board that's very supportive and the volunteers are a great group, so we have some great things going and I'd like to work with it for a while.
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