Updated on June 30 at 2:41 p.m. ET

Foundations make up a big part—about a sixth—of all the charitable giving that happens in the U.S. But some would argue that their biggest impact comes not from the money they give away, but from the far larger pile of assets they hold.

Most of the attention foundations receive is for the grants they make. U.S. law requires most foundations to pay out at least five percent of their net assets to charitable causes every year. That often leaves 95 percent of their holdings: a collection of assets that attracts much less attention. In 2012, a little over $300 billion was given away in total in the U.S.—that’s everything from foundation grants to money people gave at church. That year, foundations reported more than $700 billion in assets.

Typically, that heap of assets is managed like any other, to maximize its financial value. One set of people in a foundation would manage it, and another set would manage the grant-funded programs the foundation oversees. But a growing number of foundations are exploring impact investing with their portfolios—seeking not just financial returns, but social benefits.

Few foundations have gone further in this direction than the F.B. Heron Foundation, which aims to alleviate poverty and is based in New York. A few years ago, Heron announced that it was going to stop thinking of its capital in two parts—assets and programs. Instead, wrote Clara Miller, Heron’s president, “Our fundamental question for deployment of all capital will be, ‘What is the highest and best use of this asset for furthering our mission?’ Financial returns to our own portfolio will be a necessary part of answering that question, but so will returns to society, to the organizations in which we invest, and to the fields of social endeavor on which we focus.”

Miller has advocated prolifically to her fellow philanthropic leaders for this approach in the intervening years, as Heron closed in on its goal of directing 100 percent of its capital in line with the approach. Miller recently announced that the foundation had met that goal and shared some of the lessons learned along the way.

One example Miller highlights came after the foundation began reviewing its investments to see whether any organizations were particularly effective at creating jobs for people trying to lift themselves out of poverty, the community at the center of Heron’s work. One organization—catalogued as a real-estate investment trust—stood out as an apparently enormous jobs creator. Upon further review, however, as Miller described in an interview with Alliance, the foundation discovered that its exciting find was the Corrections Corporation of America (now CoreCivic), the largest operator of private prisons in the U.S. “We ended up selling our stock in Corrections Corporation,” Miller told me.

With less than $300 million in assets, Heron isn’t a large foundation, and Miller has frequently expressed her belief that it can have a much larger impact in concert with other organizations. Having founded the Nonprofit Finance Fund (NFF) and spent three decades at its helm before joining Heron, Miller has spent much of her career immersed in the question of how nonprofits should structure themselves financially to have maximal impact and longevity.

I caught up with Miller after a panel she spoke on at the Aspen Ideas Festival, which is cohosted by the Aspen Institute and The Atlantic, to ask her a few questions about her experiences, both at Heron and at the NFF, and how they’ve shaped her views on philanthropy and nonprofits. A transcript of our conversation is below, lightly edited for clarity.

Matt Thompson: I wanted to start with your review over the past few years at the Heron Foundation, and how you decided to unite the two parts of your operation.

Clara Miller: Well, it was incremental. I mean, we made the decision after the financial crisis, basically. What happened was that our portfolio in community-development loans outperformed everybody during the financial crisis. Every asset class. Private equity, public equity, bar none. Government bonds—outperformed by a mile. But that was a tiny amount, maybe $10 million, and Heron itself is $300 million, and it’s kind of a rounding error on a rounding error on one day in the New York City economy.

So, you know, it was a day of reckoning. We basically said, “Okay, we’re at 40 percent, but thinking of all of our assets as aligned with our mission, why not 100 percent?” Because we had to admit that the financial crisis had led to the largest stripping of assets from the poor and old people we supposedly cared about in American history ... The world has changed, the economy is no longer reliable and dependable for people who want access to it. In fact, you know, we’re building these access strategies—like loans for people to own homes or training to get jobs—when there’s no jobs and if you get a loan without a job, you don’t have to be a rocket scientist or a trained banker to figure out that that’s not going to go well. So what we basically said was, “We are picking a target that is outside our zone of control, because that's what's important to the people we want to help.” And if the two sides of the organization—if the people who are grant makers and are talking to people on the front lines are not talking to people who are making investments, that’s suboptimal for our foundation.

Thompson: And you mentioned, in a president’s letter you wrote, that you were looking at your investments and at the real-estate investment trusts, and you’re seeing some of what your capital is going towards.

Miller: Well, I’ll tell you, the real-estate-investment-trusts situation was really interesting because we started out just kind of saying, “Well, let's look and see if there’s any real-estate exposures that have high employment.” ...So we looked and it was mostly pretty minimal. Then we got to one and it was huge compared to its peers. So we’re doing the comparison, and we said, “Whoa, we better invest!” And we go in, and of course: It’s Corrections Corporation of America.

We called the Corrections Corporation, and we said, “Look, we’re looking at your 10-K. And from what we see, you are, you know, you’re thinking about your prisoners as employees. It just sounds like that. Maybe you should clear it up if you don’t—if in fact you don’t—but ... And frankly, if you’re employing your prisoners, are you giving them a living wage? Maybe this is a really good thing. Maybe they could send money home to their families. We’re not suggesting that you’re necessarily doing something wrong.”

[Update: After the initial publication of this story, Amanda Gilchrist, a spokesperson for CoreCivic, responded to a request for comment on this point. “Incarcerated individuals are not considered or counted as employees by CoreCivic,” Gilchrist wrote. “SEC reporting requirements have very clear rules on what constitutes employment status, so there is nothing ambiguous in what’s in our filings.”]

At any rate, we went back and forth, we engaged a little bit with them. We ended up selling our stock in Corrections Corporation, because we thought if our mission is to help people and communities help themselves out of poverty, at this point in Corrections Corporation’s life, they’re probably part of the problem rather than part of the solution. And they’re not aligned.

Similarly, banks or financial institutions that were predatory lenders during the financial crisis, that kind of stuff. But we believe in redemption. I mean, we think that like financial returns, social returns go up and down and we should engage in not necessarily only dumping the stock or, you know, disinvesting or reinvesting, as the only strategy.

Thompson: One of those things that you mentioned in an earlier panel struck a chord, about the nature of philanthropy and being a program officer: As you try to figure out how to distribute money, all of a sudden your IQ goes up 12 points, and everything you say is wittier and funnier. How do you think about the ethics of grant-making?

Miller: I mean, it’s a huge topic. There’s lots of conversation about the power dynamic and how, you know, we should do all kinds of sitting around and listening for each other to get rid of the power dynamic. I just, I think we should just acknowledge it and move on. And I think that because I raised money from foundations for so many years.

It’s sort of the way you think when you’re a kid and you say, “Well, when I grow up and I have kids, I’m never going to be as awful as my parents are being right now to me.” And when I got to be a foundation president, I had a little bit of that fire in my belly, and said, “We’re not going to do this, and we’re not going to do that.”

I think it’s really to understand deeply—and this is where I come from—the financial role of a foundation. Because I think what happens in that relationship is that most foundation executives—they’re subject experts and they’re brilliant, but they’re not schooled in how money turns into mission, and what’s reasonable to expect. So then the dollars turn into a power conversation.

As I think Allan Golston [a fellow Aspen Ideas Festival panelist and a Bill and Melinda Gates Foundation executive] was saying, you know, just be clear: You guys are small and you’re small and beautiful, and that’s okay, because growth is hard. Most businesses, whether they’re for-profit or nonprofit, fail when they grow. And as long as you’re not going to have positive net revenue, when you grow, you’ll go out of business, and your programs will be destroyed.

It’s not personal. It’s not about their programs. It’s not about the importance of their work. It’s about something else.

Thompson: So that leads me to the Nonprofit Finance Fund. There are a lot of worthy organizations that don’t have any knowledge of how to build a sustainable enterprise. It’s not easy necessarily to come by that knowledge. And I’m curious if you took away from your time heading up the Nonprofit Finance Fund a set of steps or resources.

Miller: I can tell you it’s worse than you can possibly imagine. So I started, and to be perfectly clear about it, I spun it out of the New York Community Trust, where it was an energy-conservation project. I had no business background. I was an art major. And only somebody who is as clueless as I was at the time starts a nonprofit. [laughs]

So I know who we are. We throw ourselves into the mission and wake up a year or two later. And if you’re even vaguely successful at all, you realize you’re running a business and you say, “Holy cow, I have no idea what this is all about.” And actually, in some cases, that’s the same in the for-profit sector, except you start out with the idea that this has something to do with making money, and in the nonprofit sector you don’t necessarily start out with that mind-meld, if you will.

So I think that the impulse—that creative impulse at the beginning of a business—we shouldn’t mess with that even if it means terrible failure. Even if it means somebody fails, well, you learn from that. Creative destruction is part of learning. And as long as you fail when you’re small—I mean, it’s like kids, you know, if you’re learning to walk, you fall down, and you learn something, or you fall off the table.

The way they teach teach management of finance in the nonprofit sector is just eye-shutting in the most horrific way. It has to do with your overhead rate, and it’s just, it’s all about accounting. It gets into the weeds when those things are not as important as: What are your drivers of revenue? What are your drivers of expense? How does this machine fit together? This is a piece of technology, this enterprise. And once you start to embrace that, and you say, “Okay, we get it. Every time a kid walks in the door of my charter school, that child has a $25,000 price on his head,” there’s all sorts of stuff like that that are connections to the actual mission of the organization and have to do with the big-picture way of running the business. That doesn’t mean that the details aren’t important too. But if you start there you can understand why those things are important.

Thompson: I had this experience a couple years back that’s just really stuck with me, listening to a program officer who did not grow up with money. And he found himself in the unlikely position of making these big grants. He worked for a regional foundation making, you know, six-figure grants. And had this sort of crisis early on in his role there trying to figure out how he came to have this degree of authority.

Miller: Well, good for him. I mean, at least he felt it, right?

Thompson: And this is my thought: “Man, I kind of wish that more program officers had that experience.” And it made me think a lot about how wonderful it would be if there were more of a conduit for people who see needs all around them, people who are in poor or underdeveloped neighborhoods, people who see needs left and right everywhere they look to then organize around those needs. And I’m curious what your advice would be for someone in that situation.

Miller: So this is very hard because if foundations decided tomorrow morning, “Okay, we’re going to open our gates. We’re going to spend every last nickel that’s in our endowments. We’re going to just liquidate every single thing in our portfolio,” it would be, you know, 14 months of the U.S. K-12 public school budget. It’s not going to actually help anybody out of poverty. It’s not going to do any of those things.

And so when all eyes are on you, and all eyes are thinking, “Wow, $300 million dollars is a lot of money,” or “$36 billion is a lot of money.” We say, “Actually, you know, it’s not very much money.” So that is a very tough one. And so I’ve, I guess, retreated in a way. That’s why organizations go into policy. That’s why we look systemically.

And everybody says, “Oh, God. Systemic.” But I think you really have to. I don’t think we have any choice. I think that if we limit the focus to philanthropy, then we’re losing out. Then we’re not being accountable. Because the system is the system. The system is the entire economy and the government included, which is a huge part of the economy, right? And if we’re not engaging as a player in that system then we’re not going to get to the underlying problems that are really hurting people. And if we see our job as a grant-making bureaucracy as opposed to as something that’s there to try to change the system, we’ll really never get there.

It doesn’t mean that some local grants aren’t phenomenal and wonderful and important. Giving is a way of life. It’s not something that lives in these big boxes, that only wealthy people do, for heaven’s sake. Less-wealthy people give far more as a percentage of their income, and engage in philanthropic acts every day. So I think it’s about all of us.