The previous issue of Philanthropy Impact Magazine (December 2013) included two articles which pointed to desirability of humility in philanthropy. Russell Willis Taylor in “Giving, Not Getting”, reflected on the downsides of people becoming involved in philanthropy mainly for personal brand building and/or those who bring market-based values which are not always appropriate to achieve societal good. David Gold’s “Beware The Dark Side of Philanthropy” gave practical advice for individual philanthropists on how to avoid many unhelpful practices.

Building on these contributions, this article focuses on foundations, institutions set up for public benefit which have their own funds. In practice most of these operate as grantmakers.

Fleishman (and others) have highlighted the (USA) foundation sector’s lack of accountability and transparency. And there is a long history of criticism of foundations on these grounds. But an equally long understanding of the unique quality of foundations lies in independence, both from Governments and the need to operate in ways which reflect popular opinion.

In the UK charities generally (particularly larger charities by assets or income, which many foundations are), and foundations specifically, have since 2010 experienced unusual levels of interest from the Government or Parliament, including proposals (since dropped) for limits on tax relief on major charitable donations and a US-like mandatory pay-out by foundations. The UK International Development Select Committee has reported on “Private Foundations”. Their use of the word “private” is significant - charities in the UK aren’t normally described as private and UK foundations are nearly all registered charities – so the description arguably reflects ignorance or worse a perception within Parliament about the nature of foundations.

Another theme is to question the spending by charities which is not focussed on the delivery of so-called “front-line services”. Many foundations explicitly adopt strategic approaches, not prioritising supporting current needs but instead funding innovation or preventative work. The UK Government’s announcement in 2010 of its “reforms” of the national lottery, included capping the spending on administration and communication by national lottery distributors. The Government explicitly justified this based on its own research into the supposed “best practice” of selected independent grant-making foundations. (The research was however flawed as the Government did not appear to understand that most of the foundations analysed invest - and spend - on the basis of “total return”; the Government’s analysis simply used their much smaller actual income which accounting standards require them to report.)

But it is not just the Government. UK foundations have recently come under media scrutiny: Princess Diana fund cynically hijacked by the Left: How money is being diverted to pro-immigration campaign fund (Daily Mail, 12 April 2013) and, although not about an endowed foundation, a BBC Panorama programme  focussed on Comic Relief’s unethical investments, failed commercial investments and staff costs (broadcast, 10 December 2013).

In the UK foundations appear more vulnerable politically than ever before. What can they do to avoid a threat of Government interference and maintain their much-valued independence? Answers include accountability, transparency and self-regulation.

Accountability

Formal accountability in the UK (and some other European jurisdictions) is greater than in the USA (in the UK through more detailed filling requirements of the Charity Commission) compared to the information which US private foundations are required to file with the US Internal Revenue Service). Legal accountability for UK foundations does not differ from other charities. They are all obliged to report annually their organisational details and file their financial statements. Since 2006 the latter must include a report on how they deliver public benefit. However there are many, significant foundations, whose public benefit reports does not give the level of detail shown in the model report published by the Charity Commission for a hypothetical foundation The Rosanna Grant Trust.

But how much reliance can be placed on accountability to the Charity Commission? The UK Public Administration Select Committee has recently declared it to be “not fit for purpose” (although the starting point for their investigation was the tax status of a registered charity, the Cup Trust, whilst the Charity Commission is not formally responsible for tax issues of the charities it regulates). However the Charity Commission’s CEO Sam Younger said in giving evidence in Parliament to the Committee that the Charity Commission “barely has enough money to regulate effectively”. So it seems unlikely the Commission will use its hard-pressed resources to raise the standards of the public benefit reporting by foundations.

A form of accountability can be derived from academic research. Research on foundations is limited outside the USA (and there scholars focus on American foundations as subjects). In the UK there are a handful of small research centres, the Centre for Philanthropy & Giving at Cass Business School, and at Kent and Strathclyde. In the rest of Europe the number of serious research institutes is similarly low.

Anthony Tomei (formerly Director of the UK Nuffield Foundation and now at King’s College London) writing in the Voluntary Sector Review argues that for UK foundations wanting to influence social change, the limited accountability requirements of charity law are not enough and they need to adopt a wider concept of accountability to achieve legitimacy, and that without the latter they will not be effective. Though he wisely points to the risks that increased accountability to stakeholders brings, as well as the opportunities for legitimacy.

The Hidden Hand

Increasing transparency (the “glass pockets” approach for foundations) interests many foundations. It is line with changing societal expectations of open data, particularly the freedom of information/rights to information for citizens in respect of their Government and public bodies (the freedom of/right to Information legislation has in some jurisdictions come as a result of the patient support given by foundations to campaigners over many years)..

Throughout the world, developing countries face huge challenges in accessing up-to-date information about aid – information that they need to plan and manage those resources effectively. Similarly, citizens in developing countries and in donor countries lack the information they need to hold their governments to account for use of those resources. International Aid Transparency Initiative (IATI) aims to address this by making information about aid spending easier to access, use and understand (for more information on IATI see the article in Philanthropy Impact magazine Issue 3: Summer 2013).

The UK Government was the first organisation to publish to IATI standards. The Gates Foundation recently committed to IATI, joining a small but growing number of foundations led by the USA William and Flora Hewlett Foundation and Comic Relief in the UK.

The push for transparency by foundations is strongest in the international development sector, reflecting the work of advocacy groups (in the UK) like Publish What You Fund, 360 Giving and the Alliance for Useful Evidence. However where a foundation funds both international development and domestically, the impact can affect domestic data. Recently the Big Lottery Fund, a UK national lottery distributor has released a mass of data covering its funding going back to 2004 as part of a commitment to openness and transparency.

The Center for Effective Philanthropy, a US non-profit, is the global leader for standardised anonymous surveys of the stakeholders of foundations. Most participants commit to publish their survey results (although this is not a condition). Well known to large >$5m pa spend US foundations, it has been used by foundations in the UK, Ireland and Israel and elsewhere. Paul Hamlyn Foundation is the first UK foundation to have commissioned a grantee survey twice and the first to commission an applicant survey. PHF has published its survey results. CEP has just launched a cut-down basic grantee survey for foundations spending <$5m pa.

Self-regulation.

Developed systems of self-regulation require: agreed standards, auditing of compliance, a complaints processes and redress/sanctions. In practice such developed systems are often created and maintained if they are initiated in a statutory framework (eg the UK Charities Act 2006 provided for the establishment of a self-regulatory body for fundraising by charities, which led to the creation in 2007 of the self-regulatory Fundraising Standards Board).

Current approaches for foundations are a long way from this. The UK Association of Charitable Foundations, a national membership body for over 300 UK foundations only requires its members to support ACF’s objects, “promoting the collective and individual effectiveness of such trusts and institutions and better methods of administration and management of their resources”. ACF does not have an agreed set of standards or code of conduct; its diverse membership appears content with the good practice guides it publishes.

ACF is one of eight main voluntary sector membership/infrastructure bodies and evaluation specialists who together established the Inspiring Impact initiative, This seeks to change the thinking and practice of impact measurement. As part of this, ACF as the lead partner for funders, commissioners and (social) investors, has published “Funders’ principles and drivers of good impact”. Funders are invited to sign up to the principles; to date, 27 have.

The European Foundation Centre has “Principles of Good Practice”, in origin 20 years’ old and it has published an audit of compliance by its members with the current, 2006 version. However Boudewijn de Blij of the Stichting Fonds 1818, writing in the most recent issue of the EFC journal Effect, describes his experience as Chairman of an EFC Task Force charged by its membership to “raise the bar” with higher standards in the Principles of Good Practice, only to find that the same members weren’t ready to accept such high standards. De Blij politely attributes this to “a hint of cognitive dissonance in the European foundation sector between thought and action”!

The US Council of Foundations, like the ACF, does not require its 1,700 member to adhere to a code of practice or set of standards. However a sub-set of them have signed up to the “National Standards for (US) Community Foundations”. This is an exacting set of standards. Membership applications are peer-reviewed and subject to five yearly reaccreditation

The National Committee for Responsive Philanthropy is the self-declared “watch dog” of foundations in the USA. It is committed to holding foundations accountable to the highest standard of integrity and openness. No comparable institution exists in the UK, though the late Luke Fitzherbert at Directory of Social Change worked tirelessly to ensure that UK foundations were open about their work in a comprehensive Directory of UK Grantmaking Trusts, and was not afraid to name and shame some UK foundations who weren’t open.

The influential US Philanthropy Roundtable seeks to protect philanthropic freedom, both for foundations and individuals. It strongly opposes the creation of a new regulatory agency to oversee US foundations and charities. It also opposes any initiative for formal mandatory industry-wide self-regulation as an alternative to IRS oversight.

Conclusion

In a period of comparative austerity, with huge pressures on reduced Government spending, the income of foundations is an important and enviable source of unconstrained funding. Many parts of society will be interested in what foundations do, how they do it and what they are achieving. Foundations themselves have got an interest in ensuring that every penny counts. For those foundations which are endowed, but which have not yet made mission or programme related investments, even their assets could be considered a tempting target for unthinking but populist approaches, even attacks. Whilst the outcome may not be as drastic for foundations as the dissolution of mediaeval monasteries, which were also endowed institutions set up for public benefit, foundations need to be more accountable and open, and set themselves appropriate standards of conduct, if they are to continue their important work.