What’s The Point of Philanthropic Foundations? Part 1: Definitions

The last few months have seen a growing number of stories about the apparent failings of philanthropic foundations. Just in recent weeks, an article in the Financial Times reported on a new report from Pro Bono Economics which suggests that UK grantmaking trusts and foundations are “hoarding” their assets, and that if they distributed just 3% of their assets it would result in an additional £300 million per year for charities. An article from the Chronicle of Philanthropy’s Alex Daniels (via Associated Press), meanwhile, detailed an announcement from the Brooklyn Community Foundation that it is to ditch the word “foundation” as part of a rebrand (to Brooklyn Org), on the basis that the word carries implications of being “top-down” and “controlling” and doesn’t resonate with a new generation of younger donors. This all comes on the back of the news over the summer that the UK’s Lankelly Chase Foundation is to dismantle itself on the grounds that philanthropy in its current forms (and particularly the foundation model) is inextricably linked with “colonial capitalism”, and can only ever, therefore, be part of the problem rather than part of a true solution to inequality and other societal challenges.

(image by Alan Levine, CC BY 2.0 license)

In light of this, it seems like a good time to ask a question: what is the point of foundations? Now clearly I have phrased that in a deliberately stark and confrontational way in a brazen attempt to turn this article into clickbait, but if we put that aside for a moment the actual point is an important one. Why do we have foundations? Are they something which serves a clear role in society today (and if so, what is that role?) Or are they a solution to yesterday’s problems; no longer relevant, and in need of reform or dismantling?

In the hope of shedding some light on this question, I want to take a look in this series of 3 articles at what foundations actually are, what we know about their historical origins, and how this can inform our thinking when it comes to debates about the role and legitimacy of foundations today.

What is a foundation?

The first thing we need to do before we try to trace the history of foundations is to address the rather obvious elephant in the room: what even is a foundation? The term certainly gets used all the time in the philanthropy world, as if its meaning should be entirely apparent to anyone,  but as soon as you try to come up with a definition you realise that it is far harder than you might think. It’s tempting to adopt Dwight MacDonald’s 1956 description of the Ford Foundation as “a large body of money completely surrounded by people who want some” and be done with it, but whilst that is certainly a good one-liner, it probably doesn’t get us very far. The problem is that the range of things that “foundations” do, and the range of forms they take, is vast. There are plenty of organisations calling themselves “foundations” which don’t necessarily do the things we would associate with the term; and conversely there are plenty of organisations which do do the things we associate with foundations, but don’t describe themselves as such. And when we expand our horizons, either by taking a historical view or by looking at foundations in a broader global context, this complexity increases exponentially.

(Image by Gigi Altarejos, CC BY-SA 4.0 license)

The US is often taken as the spiritual home of the modern foundation (for fairly good reason, as we shall see), and there is at least a definition in US law of what it means to be a private foundation. But many who have tried to survey the US foundation landscape have pointed out that even here it is a challenge to do justice to the full breadth of the term “foundation” and how it is used. For one thing, foundations differ greatly according to where their resources come from and how they choose to operate. There can be foundations set up by a single individual, family foundations, corporate foundations or community foundations; and any of these might operate as grantmakers (i.e. distributing money to others), or as operating foundations (i.e. doing the work themselves), or as a hybrid of both.

Just to add an exciting extra dimension to this state of affairs, in some places – like the UK – we quite happily use the term “foundation”, but it doesn’t actually have a defined meaning in law. We have charitable trusts and endowed charities, but there isn’t a separate legal form you can point to that makes something a “foundation”. (Although, in spite of this apparent obstacle, there are organisations in the UK that call themselves foundations and have been quite happily getting on with things for a hundred years or more). As philanthropy academic Tobias Jung explains:

“In civil law systems such as Germany, it is usually the case that [a foundation] is a specific, codified legal structure. However, in common law systems, such as the UK it is customary to use the foundation label in an uncodified manner to point to an entity’s specific activities or to the public benefits it provides. Beyond this, things get conceptually and practically messy.”

It fairly quickly becomes apparent, then, from reading any of the literature on the history or theoretical underpinnings of foundations that about the one thing everyone can agree on is that it is impossible to find an exact definition of the word “foundation”. Although that hasn’t stopped people from positing suggested definitions that attempt to capture the essence of what we mean when we refer to something as a foundation. Perhaps the most influential of these is the definition offered by F Emerson Andrews, one of the dominant early figures of US foundation research, who suggested in his book Philanthropic Foundations (published in 1956 by the Russell Sage Foundation) that:

“A foundation may be defined as a nongovernmental, nonprofit organization having a principal fund of its own, managed by its own trustees or directors, and established to maintain or aid social, educational, charitable, religious, or other activities serving the common welfare.”

More recently, the foundation scholars Helmut Anheier and Stefan Toepler have argued that:

“In its most basic form, the foundation idea is based on the transfer of property from a donor to an independent institution whose obligation it is to use such property, and any proceeds derived from it, for a specified purpose or purposes over an often undetermined period of time.”

Both of these leave plenty of questions unanswered, but they do suggest at least a few key features that we might take as definitional of foundations:

• They have assets – traditionally this is an endowment, where a sum of money is invested and the returns used to provide funds that can then be distributed, but it doesn’t have to be. A foundation might, for instance, be set up to take ownership of a particular institution or piece of property. Some foundations also operate as “pass-throughs”, where they don’t have permanent endowments but instead receive regular (or in some cases irregular) donations from an individual donor, a family, or a company.
• They are independent – i.e. independent of government and independent of their founders (at least in terms of having separate existence and additional governance, although in many cases founders are also trustees and still maintain a dominant level of control).
• They have defined purposes – which in most cases meet relevant requirements to be considered charitable. (Although, as we shall see, in some cases the purposes that foundations have been set up to achieve are remarkably broad…)
• They are not-for-profit – i.e. they do not exist for the primary purpose of seeking or delivering financial returns (which is a criterion that some cynics might suggest one or two foundations have lost sight of, perhaps…)
• They are long-term – in the majority of cases, endowed foundations are established in perpetuity (i.e. with no fixed end-date); and as we shall see, this has been a major source of controversy throughout the ages. Some foundations are established with deliberately limited life-spans, but even in these cases they tend to exist for at least around 20 years.
• They are tax-advantaged – both in terms of not being subject to certain taxes that their for-profit equivalents would have to pay, and in terms of being legitimate recipients of donations that are themselves then eligible for tax reliefs. (As we shall see, this only applies in the modern context, as historically-speaking the idea that charitable donations should receive tax relief is a relatively new development).

Two further features that we can’t take as definitional (because they don’t apply to all foundations) but are important, are:

• They make grants – i.e. distributions of money to other organisations doing work that is felt to have a good chance of contributing towards delivering the foundation’s mission. In cases where the foundation is endowed, these grants are usually made out of the investment returns rather than from the endowment assets themselves. The idea of grantmaking is certainly part of the dominant paradigm of what it is to be a foundation, but it is important to recognise that this reflects to some extent the outsize influence the US has had in this area, and that in other places in the world it is far more common for foundations to adopt an operating model, where they do the work themselves rather than funding others.
• They make investments – foundations that have endowed assets generally use these assets to produce returns that can then be distributed in the form of grants, and this is usually done through making financial investments. (As we shall see, one of the major areas of current debate concerns the extent to which this investment activity is in line with, or entirely separate from, the foundations core mission). Again, this is a big part of our understanding of what a “typical” foundation looks like, but as we have already noted, not all foundations have endowments, so we need to take some care about making assumptions when it comes to investments.

Having outlined some features that might help us understand what we mean by a “foundation”, in the second part of this essay series we will turn to the question of why we actually have such entities.

READ PART 2 HERE.

READ PART 3 HERE.