Corporate foundations: from benevolence to philanthropy

As corporate social responsibility (CSR) continues to move up the board room agenda, one area of CSR – community investment – continues to lag behind.  Corporate giving stubbornly remains at around 3% of total voluntary sector income, whilst average corporate giving as a per cent of pre-tax profits is well below 1%. 

Yet these statistics belie the good work that many companies and their corporate foundations are doing, and the impact that they are having, in their communities.  Indeed, the current financial difficulties faced by Northern Rock Foundation and Camelot Foundation (see lead article in this section) underscore the significance of their funding to the charities and communities they support. 

They also highlight the distinctive risks of corporate foundations – such as their reliance on a sole funder and the challenge of balancing the time and investment necessary to achieve longer-term, social impact with the pressures of corporate reporting of shorter-term financial results. 

Accountability and legitimacy

The benefits of a corporate foundation are many.  First, by definition a foundation’s purpose is charitable, so its grants cannot be confused with sponsorship and marketing.  Similarly, because its staff are professionals focused solely on their charitable work, their primary expertise is in grant-making.  In contrast, CSR staff may wear multiple ‘hats’, for instance also having responsibilities in marketing or human resources.  

Furthermore, because the foundation is at arm’s length, it mitigates reputational risk to the company whilst also freeing the foundation to take risks in its grant-making and to provide longer-term funding.  Foundations also tend to measure their impact more systematically than do CSR departments, and typically are more accessible to grant-seekers and the general public.  

“A foundation requires responsibility but gives legitimacy,” says David Emerson, Chief Executive of the Association of Charitable Foundations (ACF), which hosts Philanthropy UK.  It also can play an important role the company’s ability to recruit top-quality talent.  A survey published earlier this year by Deloitte  revealed that almost two-thirds of ‘Gen Y’ – the ‘Internet generation’ who were born between 1977 and 1995 – want to work for companies that allow them to incorporate community involvement into their professional development, but that this must be “authentic” corporate social engagement, and not simply a marketing campaign. 

Benevolence and philanthropy

Despite these benefits, deciding whether to set up a corporate foundation is not always straightforward, and there is no right or wrong answer: it depends on the company and its objectives.  But “it is important to have clarity in making this decision”, says David Carrington, Chair of Philanthropy UK’s Editorial Board and an independent consultant.  As past Director of The Baring Foundation, he led the rebuilding of the Foundation after the loss of its main source of income in 1995. 

Sarah Shillito, Head of The Vodafone UK Foundation, agrees: “The company must decide whether it makes sense for the business.  Is it purely benevolent – that is, just to ‘do good’ – or is it strategic, with an objective of making a real difference in a particular space?” 

Research by The SMART Company  revealed that, whilst many foundations seemed to have been established to provide a structure for the company’s charitable giving, the exact reason for their creation often is not known.  Alan Eagle, Manager of Abbey Charitable Trust and Chair of ACF’s business foundation network, advises companies to ask themselves some hard questions: “How is the foundation seen by the company and its employees?  Is it really needed, and wanted?  Or is it merely an extension of the company’s CSR programme?”  Eagle also explains that reasons for setting up a foundation have evolved.  For example, Gift Aid has obviated the need to set up a foundation purely for tax relief (although this applies only when giving to UK charities).

Furthermore, existing foundations may have outlived their original purpose.  CSR is still a relatively new concept, and many of the older foundations preceded formal CSR initiatives.  Another example is building society foundations, most of which were set up in the late 1990s to protect against ‘carpet-bagging’, but since have established their own identity as respected grant-makers. 

Scale and responsibility

As corporate foundations grow in size and impact, so does the potential risk to the charities and communities they support.  Shillito observes that there is potential for real damage if you are a significant funder: “The easiest, and least risky, giving is to make a one-off grant and then walk away.  However, that goes against what charities want as well as accepted best practice.  Writing only one cheque is lowest risk, but it offers limited riches.”  This impact is not limited to geographical regions, but also can apply to particular funding areas, especially less popular causes which have difficulty attracting funding. 

Emerson commented: “With scale comes greater responsibility.”  And there are a number of measures a company can take to help ensure the stability and sustainability of its foundation. 

First, companies can provide their foundations with a stable income.  For example, with multi-year funding foundations do not need to negotiate a donation each year, which creates uncertainty and inhibits longer-term grant commitments.  Vodafone UK Foundation negotiates three-year funding commitments on a rolling, annual basis.  Alternatively, guaranteeing income as a percentage of profits provides a firm commitment, but payments can be uneven and unpredictable.  Lloyds TSB – which donates 1% of its pre-tax profits to its four foundations – addresses this risk by calculating the current year’s donation based on an average of the last three years’ pre-tax profits. 

Another option is for foundations to apply an unusually significant donation in a particular year towards an endowment or towards its reserves.  “An endowment provides independent finance so that the foundation progressively has its own resources”, Emerson commented.

Governance is another important area, and the foundation’s board should include some independent trustees.  Carrington explained, “The role of trustees is to represent the foundation as an independent charity, and to protect the foundation’s interests – interests which sometimes may be in conflict with those of the company sponsor.”  Emerson added, “The involvement of independent trustees can help to mitigate the dependence of the foundation on its main funder.”  

Diversifying income sources may be an option for some corporate foundations, although this can be tricky and risks compromising the foundation’s relationship with its corporate sponsor. 
 
The foundations themselves also have a role to play.  Lisa Parker, Chief Executive of the Nationwide Foundation, says that, “The onus is on the foundation to be seen as a valuable asset.”  It is important for the foundation to be able to communicate its activities and value to the company’s management, its employees, as well as other stakeholders.  For instance, Nationwide customers recently voted for 1% of the company’s pre-tax profits to go to charitable causes, which will include the Foundation. 

Risk and sustainability

If the foundation reaches sufficient scale, then the company should begin thinking seriously about sustainability – not necessarily of the foundation itself, but rather of the communities it supports. 

Given the unpredictability of corporate foundations’ own income, best practice suggests that when making multi-year grants (even when there is no ‘break clause’), the full amount should be made against the current year’s income, and that the foundation hold sufficient reserves to fully fund all existing commitments (see sidebar on Charity Commission guidance). 

A foundation might also offer non-financial resources, such as the time and expertise of the company’s employees; however there is potential for this to create even greater dependency. 

Corporate foundations know well the risks of relying on a sole funder, and so should help the charities they support to reduce the same dependence.  This may involve tapering, or phasing out grant payments gradually, and being clear from the outset how the foundation will exit the funding relationship.  “It is important to ensure sustainability from the outset,” says Shillito, “We want to be sure that our funding is not just postponing a problem.” 

Corporate foundations also might choose to diversify their funding area.  For example, Vodafone UK Foundation focuses on “young people aged 16-25 years old who face exclusion, or who are already excluded, from society”.  However, these individuals face a variety of issues – from housing to crime to emotional well being – and so Vodafone is likely to provide support alongside other, specialist funders. 

The ultimate risk to a corporate foundation and its beneficiaries, of course, is the demise of its corporate sponsor.  The company may be acquired, move out of a community, or its business may fail.  Yet, whilst such dire circumstances generally cannot be foreseen, the company often can make provisions for the continuation of its charitable work.  “Companies have a responsibility to their communities,” says Eagle, “and should build this legacy into the foundation”.  “It is not just a question of what is legally binding, but what is morally binding”, Shillito added.

Good practice examples abound.  For instance, Royal London Insurance, a significant employer in Colchester in Essex, shut down its office following the buy-out of United Assurance in Wilmslow, Cheshire, and most of the staff were made redundant.  When they left, they gave a parting gift of £15,000 to the Royal London Community Fund which the Foundation endowed, and the Fund still gives one or two grants a year to support charities in the Colchester area.

Another example is British American Tobacco (BAT), which set up a Legacy Fund with the Hampshire and Isle of Wight Community Foundation.  Although BAT were not leaving the area they had closed down their production in the region with the loss of low paid jobs.  The company also established an endowment of £450,000 and contributed to the core funds of the Community Foundation.  Peter Stewart, Head of UK and Ireland Operations for BAT, explained that the programme would “establish a long-term legacy, [which would] give priority to improving skills and training in the local area, supporting the wider community, and attracting further funding for worthwhile projects”.  

Parker concludes, “The demise of a corporate foundation can leave a sudden and significant hole in voluntary sector funding.  Government and the Charity Commission should get behind corporate foundations.  They are a small but important percentage of charitable giving.”

Further resources

• Association of Charitable Foundations 
• The Philanthropy Directory on Philanthropy UK’s website

• CC3 - The Essential Trustee: What you need to know: addresses the responsibilities of trustees  
• CC14 - Investment of Charitable Funds: Basic Principles: address issues around a foundation owning shares in its company sponsor 
• CC19 - Charities’ Reserves
• RR7 - The Independence of Charities from the State: addresses issues of independence of charities and their trustees 
• SORP 2005 paragraphs 154-163: on grant commitments