Charitable giving and investment has long formed part of a corporate commitment to meeting social responsibilities. According to Charities Aid Foundation’sCharity Trends 2006 report, the top 500 corporate donors gave over £1bn to charity last year in the form of cash, time and gifts in kind.
While companies may share a common commitment to charitable support, however, the way they give can vary enormously.
One approach to giving which has received relatively little attention in terms of case studies or research is the corporate foundation model. The use of such structures dates back a number of decades and remains relatively popular among larger companies. But what exactly are corporate foundations, and what does their use mean for corporate charitable giving?
What are corporate foundations?
By the simplest definition, corporate foundations are registered charities whose income derives from a corporate source. Research by The SMART Company revealed that there are 126 of these foundations currently operating in England & Wales. Some were founded in the 1960s; many were set up during the 1990s, and nearly 20% have been registered in this decade. Between them, these foundations received just over £200m in income and gave just under £150m to charitable causes in 2004-5, accounting for around 18% of overall corporate giving. Predominantly grant-makers, they support causes spanning the arts, medical research, social exclusion, poverty and the environment.
The smallest foundation has an income of under £2000, the largest of over £25m. If corporate foundations have anything at all in common, it is their diversity.
Corporate foundations and corporate founders
The main factors that link corporate foundations are, of course, their creation by companies, and their statutory independence from their parent companies. A foundation is set up by a company as a separate charitable body, with its own governance and financial structure. A foundation must be independent of its corporate founder, and its trustees must always act in the interests of the foundation, not the founding company. Nonetheless, corporate foundations and their founders remain inextricably linked, primarily through their funder/recipient relationship, but also through sharing of personnel.
The strength of these linkages depends on how funding and governance structures are managed. A few foundations, most famously the Lloyds TSB Foundation and the Northern Rock Foundation, are funded through a covenant or endowment that promises the foundation a percentage of the company’s pre-tax profits. As the amount is based on a percentage, this means that annual income varies, but is nevertheless guaranteed. There is no onus on the foundation to ask the founder company for ongoing support. But the majority of foundations do not have this guarantee, funded as they are by a periodic donation by the founder company. While some companies may promise to give a certain amount for a certain number of years, this does not necessarily amount to a legal contract. Foundations must therefore work with the company to secure ongoing funding, which makes for a somewhat different relationship between foundation and founder.
Foundations are also linked to their founder companies through their trustees. Although it is difficult to find comprehensive information about where trustees come from and how they are appointed, research suggests that most foundations draw their trustees from the founder company, and that it is the company that makes the final decision on who is appointed. Trustees may be existing employees or directors, or employees who have retired. About 15% of foundations seem to have a mix of external and corporate trustees, while 6% have trustees who have no links with the founding company.
There are other connections. Some foundations share staff with the company – the administrator of the foundation may also administer another strand of the company’s community investment programme, or the foundation’s director may sit on the company’s corporate social responsibility board. Some foundations run the company’s employee involvement programmes, coordinating fundraising, volunteering and payroll giving. Indeed while some foundations form only a part of a company’s overall community investment programme, there are others who are the programme. Companies and their foundations are therefore bound together through a whole range of structures and relationships.
Maintaining independence
What does this say about the independence of corporate foundations? Can a foundation be truly independent when it relies on a company for income, runs that company’s employee volunteering programme and has as its trustees company directors? Most foundations say that from a governance point of view, yes – although careful management is needed. All the foundations interviewed during the research were quite clear that trustees always act in the interests of the foundation, regardless of whether they have links with the company.
Trustees are experienced in charity governance and understand the responsibilities of their role. Some foundations reinforce this by having a memorandum of understanding, which states clearly where a trustee’s responsibility lies. The governance systems that foundations are party to ensure transparency in accounting and reporting. Increasingly, those foundations with only company-linked trustees are looking at appointing at least one external trustee, something recommended by Charity Commission inspectors.
Other options may include using independent, external advisors, or intermediaries such as consultants who manage the day-to-day operations of the foundation.
Common interests
While a foundation’s governance structure can and should be separate, this does and should not preclude a close relationship between foundation and founder – indeed this is essential for all those involved. A good working relationship is vital to the foundation to ensure it receives ongoing funding and support, which in turn allows it to provide grants to its beneficiaries. The company is in most cases the major if not sole funder of the foundation, and inevitably has an interest in how its funding is being used and what impact it is having.
So why do companies create foundations, and what benefits are they realising from them? Again, this information is difficult to pin down, and as might be expected the motivations are diverse. At its most basic, a foundation provides a transparent and separate structure for giving. To some extent it enables a budget to be protected, so that the company’s community investment is sustainable. Because foundations must state and report on their funding priorities, they allow for clearer communication on what will be supported and what will not. This provides a strong basis for refusing funding, and discourages those from applying whose activities do not fit with funding criteria, thus easing the administrative burden of grant making.
Some foundations are set up with very clear business objectives in mind. In the 1990s, a cluster of building societies created foundations to receive any share allocations resulting from demutualisation, thus deterring potential “carpet-baggers”. For companies at risk from hostile takeover, a foundation – particularly one with a funding covenant – can act as a ‘poison pill’, as the takeover will cover not only the company but also the foundation. Other foundations have been created as vehicles for meeting certain social responsibilities, reflected in another cluster belonging to utility companies who, through the foundation, provide support to customers struggling with debt and poverty.
The future of foundations
In reality, the linkages between foundations and their founder companies are rich and complex. Companies must have an interest in their foundations, otherwise they would not set them up and continue to support them. The challenge is understanding this relationship separately from the legal framework within which foundations operate as independent, registered charities. This is an issue close to the heart of many corporate foundations and their funders, and is certainly an area worthy of further research and discussion.
More info;
Revealing the Foundations – a guide to corporate foundations in England & Wales was written and published by The SMART Company in October 2006. The research was funded by the Cabinet Office and the Charities Aid Foundation. For copies of the research, please contact The SMART Company on 020 7864 4141.
Amy Lunt is a senior consultant at SMART, joining from Islington Education Service. At SMART, Amy’s focus is on review and evaluation of community and sponsorship programmes, as well as developing SMART’s research activities. Contact Amy.Lunt@thesmartcompany.net
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