Arwen Lowbridge, Adam Natale, and I are in Los Angeles this week. We’re meeting with LA artists, service organizations, and others in an effort to gather information about the LA arts community’s needs. If you’re in town, feel free to drop me a line at adam [dot] huttler [at] fracturedatlas [dot] org.
There’s a great case study in the current issue of CultureWork titled “How Can Arts Leaders Play an Active Role in Cultural Planning Initiatives in Their Local Communities?” Tina Rinaldi recounts her experience being tapped to Chair a Mayor’s Cultural Policy Review Committee in Eugene, OR. Among her insights:
After participating in the Cultural Policy Review, I believe strongly that arts leaders who want to play an active role in cultural planning must lead beyond the direct needs of and benefits to their organization’s narrow interests. In order to do this, arts leaders must understand and engage with the broader political and economic landscape in which they operate.
Nothing earth-shattering there, but a nice reminder nonetheless.
I’ve often argued that the traditional non-profit model discourages necessary risk-taking. It does this for a few reasons:
1) Employees can’t own stock, so they don’t benefit from financial success. Yet they’re still vulnerable to financial failures (i.e. they can lose their jobs or suffer career setbacks). To a lesser extent, the same is true for non-profit Board members. When someone’s got no stake in the upside but is still exposed on the downside, the rational response is extreme conservatism.
2) The culture of the non-profit sector is such that managers go to absurd, herculean efforts to avoid admitting failure, mostly in an effort not to embarrass themselves in front of funders.
3) Non-profit organizations are chronically under-capitalized. By failing to build reserves or hoard surpluses, we end up in a situation where each budget is a tightrope. A single serious misstep is enough to pose an existential threat to the organization.
So, if the non-profit sector is going to get more comfortable with risk, it needs to start acting more like the for-profit sector, right? It’s true that for-profit businesses rarely experience any of these problems. Unfortunately, they tend to swing too far in the exact opposite direction.
Unless you’ve been living in a cave (yes, your art studio counts), you’re aware of what’s going on with the financial markets. Huge, venerable institutions are collapsing (Lehman Brothers), teetering on the brink getting bailed out by taxpayers (AIG), or being sold for a fraction of their recent valuations (Merrill Lynch). A significant contributing factor to this mess is the fact that free-market capitalism - for which I am generally a sincere cheerleader - actually encourages excessive risk-taking. The reasons for this are a mirror image of those I listed above:
1) Companies “incentivize” their employees by granting stock options. The nature of an options contract is that it magnifies the gains from a stock’s upward movement but becomes worthless long before the stock itself does. Here’s how it works:
Let’s say your company’s stock is at 100 and you’ve got an option to buy stock at 105. Until that stock reaches 105, your option isn’t worth much. When the stock hits 106, it’s worth roughly $1/share. At 115, it’s worth $10/share. Etc. Now, imagine you’ve got to choose whether or not to take on a risky project with a 50/50 chance of success. If it succeeds, your company’s stock will go to 110. If it fails, your company’s stock will go to 60. If you’re a shareholder, this is a terrible deal: heads you win $10, tails you lose $40. But for the employee holding the options contract, it’s a golden opportunity: heads you win $5, tails you lose $0.
This is obviously a greatly simplified example, but you get the point. Options grants encourage employees to take big risks that aren’t necessarily in the best interests of the company’s shareholders.
2) Executives of publicly traded companies are equally eager to avoid admitting failure, but it has the opposite effect as in the non-profit sector. For a publicly traded company, the critical time not to screw up is in your quarterly earnings report. Wall St. is ruthlessly impatient. The markets rarely are willing to wait for long-term investments to pay off. Rather, they focus almost exclusively on a) earnings per share in the last three months and b) predicted earnings per share in the next three months. Miss your estimate and your stock price gets clobbered. Beat your estimate and it soars. This pressurized environment acts as an amplifier for the misaligned incentives in point #1.
3) The sophisticated capital markets that large corporations can access mean that companies not only are rarely under-capitalized, they’re often hyper-capitalized. This was a huge part of the problems we’re seeing in the current crisis. Companies like Lehman and Merrill were leveraged up the wazoo, effectively investing $30-40 of borrowed money for each $1 of collateral assets. As long as those investments keep going up, profits are multiplied many times over. But as soon as they start to fall, the proverbial house of cards collapses.
In both cases, the essential dysfunction comes down to what’s known as the “agency problem“. The term refers to a category of conflicts of interest that arise between management and other stakeholders. These conflicts most often occur when incentives are misaligned or when management has access to information that isn’t available to shareholders, Board members, creditors, etc.
The main mechanism for addressing these problems in the for-profit world is government regulation. We’re going to hear a lot about this over the coming weeks, as the feds debate what kinds of new rules need to be imposed on Wall Street. In theory, such regulations are designed to mitigate the agency problem and protect shareholders, customers, etc. from excessive risk.
There’s no such easy solution on the non-profit side. You can’t force non-profit managers to acquire stiffer backbones by government fiat. However, you can tap into our tendency to dance shamelessly to the tune of our funders. Any meaningful shift in the non-profit sector’s culture of risk must therefore begin with a shift in strategy from our leading philanthropists.
I was at an event a few years ago with a bunch of peers from the arts service community, including Ben Cameron, who was then head of Theatre Communications Group but is now the Program Director for the Arts at the Doris Duke Charitable Foundation. Ben observed that, for the most part, arts funders were acting like consumers rather than investors. His point was that most funders focused on short-term, narrowly defined, project-based support, instead of identifying important organizations doing exciting work and providing the financial resources for them to leverage their native strengths over the long-term.
If our biggest foundations could break the habit of cautiously supporting tiny, specific aspects of an organization’s activities and begin ensuring sufficient capitalization and providing multi-year general operating support, we’d go a long way towards fixing at least 2 of the problems I identified at the beginning of this post. (The good news is that I’m starting to see a few moves in this direction, but that’s a subject for another post…)
The issue of incentivizing employees and Board members by ensuring that they benefit when the organization thrives is a lot trickier. IRS rules prevent “private inurement” from contributions given to a 501(c)(3), so any kind of explicit sharing of a revenue surplus would be illegal. At Fractured Atlas we’ve tried to work around that limitation by awarding annual performance-based group bonuses that, while meager by Wall Street standards, are meatier than at any other small non-profit I know.
Bonuses help, but they’re not a panacea. That’s partly because non-profit employees tend to be motivated by largely non-financial factors (e.g. belief in the organization’s mission, aesthetic appreciation of its work, etc.). Harnessing those passions in a way that encourages responsible risk-taking is difficult but potentially powerful.
Measurement is one tool. To the extent that you can quantify “mission return on investment” (whatever that means) and make that transparent throughout the organization, people become more likely to appreciate the “upside” of a given project or decision.
Culture remains the most important factor, though. We need to constantly remind each other that it’s okay to fail. In fact, if you’ve never suffered a complete, humiliating, public failure, then you’re probably not trying hard enough. Time to grow some cojones and take a chance.
Fractured Atlas member Juli Borst, an opera singer, was featured in a segment called Money Makeover on this morning’s Today Show. In the segment, a financial adviser helps Juli get her financial house in order, which includes signing up for health insurance. When they’re explaining all the steps they took, Fractured Atlas gets a nice little mention. Check it out: Singer Gets Money Makeover. Thanks for the nod, Juli!
Whatever your political views, hopefully we can all agree on two things:
Fortunately, our community is pretty good on this latter count. Studies have consistently shown that artists vote at a substantially higher rate than the general public - around 80-85% for federal elections. But, of course, before you can vote, you have to register! Don’t neglect this important step and don’t wait until the last minutes. Here’s a list of state-by-state registration deadlines if you want to cast a ballot this November.
To help you along in this process, Fractured Atlas has partnered with Rock the Vote. We’ve got our own little widget that you can use to register instantly online:
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So no more excuses and no more delays. Register. And vote.
* Yeah, yeah, I know you live in a solidly blue (or red) state and one vote won’t make a difference and neither of the parties really represents you, etc. I used to be the same way until I came to my senses around 2002. Get over yourself and exercise your most fundamental democratic right. Either that or quit your whining when everything goes to sh*t.
Charity Navigator just published an updated listing for Fractured Atlas. Not only did we keep our 4-star rating, but our overall score increased by a few points.
Of course, charity rating systems like these need to be taken with a grain (or two) of salt. But it’s still nice to know that someone thinks we’re doing a good job!
We’ve just created a “Group” on LinkedIn for members of the Fractured Atlas community.
If you’ve got a LinkedIn profile and are interested in a little networking, you should consider joining the group.
Today’s Metro New York reports on a scary crime wave in Williamsburg, Brooklyn:
Of Brooklyn’s police precincts, Williamsburg’s 90th, which encompasses the gentrifying South Side plus its central and east sections, has seen the greatest rise in crime over the past year — 13.49 percent — according to Compstat data. The neighboring 94th precinct, which includes Williamsburg’s tonier North Side and Greenpoint, has seen a 6.38 percent crime hike — the borough’s second-highest increase.
“Gang violence in the community [has] re-emerged into something we haven’t seen since the 1980s,” said William Orellana of community group El Puente.
Williamsburg (and neighboring Greenpoint and Bushwick) may have the highest density of artists of any neighborhood in the country. And although there was a vibrant Latino arts community there for decades, the Williamsburg of today is best known as a hipster haven, thanks in large part to the huge influx of (mostly White) artists who’ve come in droves since the mid-90s.
Reading about the sudden surge in gang violence made me think of a post I read on the Freakonomics blog yesterday:
The paradox of economic growth is that the same mechanisms that create great wealth –secure property rights and rule of law guaranteed by an independent judiciary — also give rise to great inequalities in its distribution. Private property provides a powerful incentive to produce wealth for oneself while simultaneously denying that same wealth to others. Wealth does trickle down to the rest of the population, but often not fast enough to avoid political strife and worse….
Economic libertarians argue that this growing inequality is unimportant: aren’t the poor of 2008 still far better off in terms of real income, health, life expectancy, and material comfort than even the richest citizen in 1900?
The fallacy of this argument is that human beings do not measure their well-being by absolute real income or longevity — but rather in relative terms. To paraphrase H.L. Mencken, a wealthy man is one who earns more than his wife’s brother-in-law.
Further, a growing body of research reveals that the social and medical costs of inequality are high…. Among both American states and Canadian provinces, homicide rates closely track income inequality, even after the absolute level of income itself is carefully controlled for. That homicide is not driven by poverty alone is demonstrated by Canada, where, because of aggressive redistributive policies, the poorest provinces have the lowest inequalities and also the lowest number of violent deaths.
It’s impossible to say right now what exactly is or isn’t going on in Williamsburg. But I know for a fact that the extremely rapid gentrification of the past 10 years has created a lot of resentment and pent-up hostility towards the newcomers who are changing the face of the neighborhood. I wouldn’t be at all surprised to learn that this is a contributing factor in the current crime wave. The irony is that artists tend to see themselves as victims of the gentrification process (since they can rarely afford to stick around in a neighborhood after it’s become hip), while to other neighborhood residents they look an awful lot like the perpetrators of that gentrification.
This all points to the importance of sustainable economic development built on a foundation of neighborhood self-determination. Rising real estate prices cannot be the only measure of urban economic progress. As with any ecological system, diversity creates strength. As a society, we desperately need to develop better strategies for urban economic sustainability. And as artists, we can’t continue to feign ignorance of our role in these processes.
A great nation needs all kinds of heroes. Soldiers. Diplomats. Defense attorneys. Firemen. Graphic designers?
There is very little doubt that George W. Bush was elected President in large part thanks to a crappy ballot design. (Really, it’s hard to imagine a worse layout.) Following the 2000 election debacle, there was much talk of subpar ballots in use throughout the country. Since then, however, very little has been done to fix the problem.
Richard Grefé and Jessica Friedman Hewitt of AIGA (a design trade association) are working to educate the powers that be about what good ballot design might look like. Let’s hope someone’s paying attention.
Watching the Democratic National Convention last night, I was struck by one of the most significant but rarely discussed aspects of a potential Obama presidency. Barack Obama would be the first president in memory - to my knowledge the first since Teddy Roosevelt - to come from an urban background. He grew up in Honolulu and has spent time in Los Angeles, New York, Chicago, and Boston. This isn’t merely a biographical curiosity. It contributes to an unprecedented focus on urban policy for a major national politician.
America’s cities are stereotyped either as enclaves of effete, intellectual socialists or as concrete wastelands packed tight with welfare-dependent leeches. Authentic American individualism and entrepreneurship comes from the midwest, right? Not so much. The reality is that our cities provide massive subsidies to rural America. This is perhaps best illustrated by a report from the Tax Foundation showing a breakdown of which states receive the most federal aid compared to their tax contribution and which receive the least. (If you’re feeling feisty, check out this hilarious but informative rant from the day after the 2004 election.)
Over the coming years, America’s dependence on its cities is only going to grow, and our cities are going to play a bigger and more important role in the 21st century economy than they have in decades. Mainstream policymakers are finally starting to understand the creative economy - which is inextricably linked to urban environments - and its potency as an engine for economic development. Cities are hotbeds of creativity, innovation, and entrepreneurship. At the same time, rising fuel costs and environmental consciousness highlight the benefits of mass transit and population density.
Yet the myth of rural/suburban authenticity and urban sloth is so entrenched that politicians with ambitions to national office wind up tripping over each other in an effort to see who can most shamelessly pander to the farm lobby.
All of this goes to show why it’s significant that Barack Obama has quietly made urban policy a centerpiece of his campaign platform. His urban policy plan contains some of his most detailed prescriptions, including symbolic steps such as the creation of a White House Office on Urban Policy and major investments in things like public-private business incubators.
The Obama campaign has published an arts platform as well, but I believe its ultimate potential impact on the arts community would not be as great as that of a more broad-based investment in America’s cities.
Cities provide the social context for so much of our collective artistic output. Yet rising real estate prices, deteriorating infrastructure, and a host of other problems are driving artists from cities like New York in droves. Some are landing in places like Philadelphia that are savvier and more progressive regarding urban cultural policy. But many others are bidding farewell to the US altogether and heading for foreign cultural hotspots like Berlin.
Retaining a vibrant arts and cultural sector in American cities won’t require massive public subsidies or a huge increase in the NEA’s budget. Artists are experts at making do with very little and generally rise to the challenge when given a chance to prove their worth through merit-based processes. What we need is a proverbial level playing field. In part, that means paying our cities even a fraction of the attention we’ve historically paid to rural America.
P.S. - Mainly out of genuine curiosity but also in the interest of fairness I did some research on John McCain’s urban policy and arts policy positions. Alas, it turns out that he doesn’t have either (at least not published by the campaign). The only comments I could find from McCain on urban issues were, uh, a bit scary.
