Endowment building and use by nonprofits: An integration of theory and practice

Abstract This paper explores issues concerning endowment building, endowment management, and the general perceptions of endowment through the views of leaders of nonprofits that built an endowment. We find that endowment is generally considered meaningful to nonprofit leaders when it provides at least 5% of an organization's annual budget. The initiative for building endowment largely comes from boards of directors, executive directors, or some combination of both. However, external actors—especially foundations—play critical roles. The source of funds for endowments mostly come from major gifts including bequests, even though these gifts often were not solicited. Endowments serve a range of functions for organizations and do seem to alter organizational behavior and outcomes as suggested by the existing literature. Endowment aids organizational sustainability by supporting some reasonable level of annual operating costs. Many nonprofits use the flexibility and freeing up of resources provided by endowment funds for innovation, program enhancement, capacity building, and risk taking. For better or worse, endowments become a key part of a virtuous cycle of legitimacy where the nonprofits' accomplishments, relationships, and reputation attract resources to support activities in perpetuity, thus creating a more capable, stable, and accomplished organization to which additional support is more easily drawn.