More and more family firms are creating foundations as vehicles for their philanthropic endeavours. John Oddy from Foundation Source explains more.
It used to be that good corporate citizenship consisted primarily of grants to community organisations such as soup kitchens and little league teams. But what were once a few ad-hoc donations from the company director’s checkbook have now evolved into something far more sophisticated. For many companies, philanthropy is closely tied to corporate identity, supporting the company’s marketing and branding objectives, engaging its employees, and enhancing its relationship with the community (or communities) it serves.
The emerging trend is for a company’s values, interests, and brand to be integrated into everything that it does, including and especially its philanthropy. And for companies that seek optimal integration between their charitable efforts and their corporate identity, a foundation is often the vehicle of choice because a foundation, which has a core philanthropic mission, lends itself to a more strategic approach to giving.
Although corporate foundations still provide support to worthy organisations in their local communities, many also choose to focus their efforts on a signature charitable issue or cause that they can ‘own.’ By concentrating their grant-making on a core issue, especially one that is aligned with the company’s business interests, companies find that they can have a significant social impact while reaping other substantial benefits: heightened brand awareness; deep engagement with employees; good will with the community; and positive publicity for both the foundation and its parent company.
Moreover, by choosing an issue that aligns with the business and with which it is therefore familiar, the company enhances its chances for success. Instead of finding its way on unfamiliar ground, the foundation can harness the company’s core competencies including its native expertise, resources, and networks.
The Corporate Foundation: An Example of Excellence
Consider a technology company that routinely hires outstanding individuals with backgrounds in science, technology, engineering, and math (STEM). As the company may want to support and encourage the next generation of talent in these fields, it could simply make grants to colleges and universities with academic programs in STEM subjects. Instead, suppose the company established a competition providing financial awards to graduate students in STEM fields. Faculty could nominate promising students who compete on the merits of their original research and experiments.
This program could achieve charitable ends while indirectly benefiting the company’s business. Such a prize competition could:
- Foster new STEM talent by providing financial awards and recognition for outstanding achievement
- Promote the company’s efforts to prepare the next generation for STEM careers
- Align the company’s philanthropic pursuits with its commitment to high-tech innovation
- Build brand equity by linking the company’s name with scientific innovation
- Provide opportunities for employees to mentor and cultivate talent
By creating a competition instead of making a group of unrelated grants, the technology company could have a focused strategy, supporting its business aims while making a real and appreciable difference in the lives of more young people.
Despite the clear value in aligning a company’s business and philanthropic goals, it is possible for a business and its foundation to be too closely integrated, ultimately creating compliance concerns. Even though the foundation is connected to the company, the IRS expects it to operate exclusively for charitable purposes as a legally independent entity.
When the activities of the corporate foundation appear to primarily benefit the business and not the public, the potential compliance violations can result in negative publicity, tax liability, and even the loss of exempt status.
For example, suppose the technology company required all participants to surrender their competition entries to the company, retaining all intellectual property rights to the research.
Or perhaps the foundation asked competitors to solve a problem so narrowly defined that the solutions were really only useful to the company, rather than the technology industry as a whole. If these actions significantly redirected the benefits of the foundation’s award program to the company, it might call into question whether the program was truly charitable, or simply self-serving.
Furthermore, let us say that the company wishes to recruit employees from the foundation’s awards program. This would not necessarily be disallowed by the IRS, but the foundation’s managers would need to determine if any of the particulars might cause the program to stray into questionable territory.
Would the results of the award and the names of the recipients be widely publicised, allowing other competing employers the opportunity to recruit those individuals as well?
Would the foundation or the company do anything to restrict or discourage award recipients from considering offers from other employers?
The answers to these questions could mean the difference between a compliant philanthropic program and one that might result in violations.
Generally speaking, the IRS expects corporate foundations to engage in activities that meet a recognized charitable need, benefiting broad and diverse constituencies. Conversely, the IRS prohibits corporate foundations from engaging in activities that have the net result of conferring the following upon the company: financial return, competitive advantages, or preferential treatment in the marketplace. If a proposed activity primarily benefits the company instead of the public, the project might be best funded through the company, rather than the foundation.
Even so, there are circumstances in which a company may receive “tenuous and incidental” benefits from its corporate foundation that pose no compliance problems. For example, when making a donation, a corporate foundation could ask its grantee organisation to credit the company rather than the foundation.
Although this might seem like a conflict of interest, the IRS sees this as a “tenuous and incidental” benefit because it would be difficult to quantify how such an acknowledgement benefits the company in any substantial way.
In creating a philanthropic strategy, it is important for corporate foundation managers to remember that the company’s charitable goals take precedence; the business agenda is a secondary consideration. The more the foundation’s purpose benefits the company, the greater the need to develop policies and practices for avoiding potential violations.
In conclusion, when a company and its foundation pursue their respective missions compliantly and in tandem, the result is a powerful and uplifting force in society, achieving results for both the business and the greater good.
About the Authors - Foundation Source is the USA’s largest provider of comprehensive support services for private foundations, bringing unparalleled knowledge and expertise to clients across the country. For more information please visit their website at www.foundationsource.com