The authors of this article argue that corporate foundations can be powerful vehicles to help crystallise a sense of common purpose within a business. Corporate foundations can be effective focal points for companies committed to social good, and successful for businesses of all sizes.
Authors: Elizabeth Jones (main picture), partner, Emma James, associate and Sarah Gill, associate, Farrer & Co. The following article touches on philanthropy and the kind of structures that charities use. We hope readers find this content of value. As ever with guest contributions, editorial disclaimers apply. To comment, email email@example.com
Corporate commitments to philanthropy have grown sharply over the past couple of years, with the most recent analysis from the National Philanthropic Trust UK (NPTUK) revealing that corporate foundation giving in 2020 increased by 12.5 per cent, dwarfing the 0.9 per cent increase from families and personal foundations.
One reason for this increase may well be the increased profile of ESG – environmental, social and governance – concerns within business. ESG has risen rapidly up the corporate agenda, with businesses increasingly seeking to demonstrate a purpose-driven approach, both in their investment strategies and in their wider operations. It is against this backdrop that corporate foundations are beginning to grow in popularity as a means of delivering meaningful change.
A dedicated charitable focus
Due to the costs associated with creating a foundation, corporate foundations are more commonly formed by larger firms. However, even though many of the highest profile foundations have annual grants budgets in the tens of millions, size is not necessarily a bar. Many foundations, established by SMEs, are equally viable and successful on a small scale, often operating with impact in the communities local to the founding business.
Corporate foundations are usually funded mostly or exclusively by the founding business – but crucially, they operate as separate legal entities with independent decision-making.
As charities, corporate foundations in England and Wales are regulated by the Charity Commission and governed by charity law. This means that they are required to pursue the charitable goals set by the foundation, as opposed to the commercial goals relating to the business.
With this in mind, the trustees of a corporate foundation, irrespective of any position they have on the board of the founding company, must consider only the interests of the charity when taking decisions as trustees. Any situations where a conflict of interest or loyalty arises (for example, if the business is entering into a funding agreement with its corporation foundation) must also be carefully managed.
These requirements are vital to the success of corporate foundations, as they are separate from the constraints of the founding business and compliant with the requirements of charity law. With robust structures in place, many become more than just vehicles for corporate giving or employee volunteering, and instead act as a hot bed for innovation and meaningful action.
A corporate foundation can enhance a business’s reputation considerably. Most notably, foundations are one way of providing demonstrable and ongoing commitment to the not-for-profit sector.
However, the fact that foundations and their associated businesses will often share the same name can pose reputational risk.
For instance, if a foundation experiences regulatory issues, the founding business may also be tarnished by association, which could impact the business’s reputation and reduce confidence among shareholders, customers and the wider public. The reverse is also true, with any perceived poor behaviour from the corporate could potentially have a consequence to how the foundation’s stakeholders perceive it.
Maintaining clear lines of separation between the business and corporate foundation can help manage reputational risk, although where a foundation shares a name with a business it is unlikely to mitigate this risk entirely. Businesses should also consider the basis on which the foundation is able to use the business name and consider whether a contractual agreement between business and foundation can help to manage the situation for both business and foundation, by setting out expectations and circumstances where a foundation may decide to change its name.
A foundation operates with its own board of trustees (separate from the business’s board), who will usually include individuals from the business and a number of independents with no current connection to the business. Provided conflicts of interest are managed and the trustees act exclusively in the foundation’s interests, there is no barrier to people within the business being trustees, and the foundation is still likely to be capable of having the necessary independence. There is a balance to strike on independence though, and it is an important part of the foundation’s governance to keep a careful eye on.
Other options on the ESG journey
Corporate foundations are one option available to businesses keen to focus on their ESG impact. Businesses may test the waters with initiatives such as direct giving, starting out with employee fundraising schemes or payroll giving, and potentially extending this to using a ‘donor advised fund’ to funnel giving. (DAFs are philanthropic funds established under an umbrella charity that administers the fund on behalf of the donor.)
Others may prefer to make in-kind donations, for instance by partnering with a charity or by setting up a local volunteering programme and offering know-how and expert insight pro bono. Others again may focus on investing, for instance setting up a social investment programme or making social investments into charities or social enterprises.
Where corporate foundations come into their own is in their ability to gear efforts towards ESG objectives in a single-minded manner, unfettered by the commercial goals of the founding business and its shareholders.
Corporate foundations can be powerful vehicles to help crystallise a sense of common purpose within a business and help provide a manifestation of a company’s culture and ethos. Thanks to their separation from the core business, they can provide the dual benefits of delivering accountable action on ESG goals while providing a boost in satisfaction among employees and stakeholders at the same time.