Times are tough for US foundations. Stock market declines have pummeled their financial assets even as federal spending cuts have increased the need for their support of social services and the arts. Press reports of mismanagement at, for example, The Nature Conservancy and the Red Cross 9/11 fund have increased public cynicism. Some foundations have come under scrutiny for seemingly lavish pay packages and perks for board members and executives.

Partly in response, the US Congress is considering legislation (HR 7) that would increase the amount that foundations must disburse annually to maintain their tax-preferred status. At present, they can count operational expenses and executive salaries toward the 5 percent of assets they have to pay out each year. The pending legislation could change that, forcing most foundations to increase their grant making. Regardless of the outcome, the debate over how foundations spend their money will continue.

Recently, Les Silverman, a director in McKinsey’s Washington, DC, office, talked with Ralph Smith, senior vice president at the Annie E. Casey Foundation, in Baltimore. In addition to chairing the foundation’s management committee, his portfolio includes oversight of two initiatives—Making Connections and Family Economic Success—as well as other major efforts to improve...