Private foundations — the charitable impulse

What lies behind the evolution of this vast and sophisticated philanthropic force?
Bridge International Academy in Mombasa, supported by the Gates Foundation © Bridge International Academy

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It has operations across the globe, more than $41bn in assets and in 2014 it spent almost $4bn. This is not a company, it is a private foundation — the Bill & Melinda Gates Foundation. And while it is one of the world’s largest, it is part of an army of thousands of institutions that collectively distribute tens of billions of dollars a year, driven by the passions of wealthy individuals.

Private foundations wield considerable power and influence. Most are grant-making organisations, but others operate as fundraising institutions. Some are highly vocal advocates for causes. At others, founders prefer to remain under the radar.

While many are small, unstaffed family affairs, the largest are well-established institutions with national offices and overseas branches staffed by everyone from chief operations officers to IT support workers. In the US, the numbers are impressive: more than 87,000 institutions collectively hold about $800bn in assets.

So what lies behind the evolution of this vast and sophisticated philanthropic force? Generosity is undoubtedly part of it, but a cocktail of factors has driven the growth of private foundations.

A desire to reduce tax obligations is in the mix. In the US, assets given to a person’s foundation are removed from their taxable estate.

But the story does not end there. In the US, individuals’ desire to help solve social problems goes back to the country’s early history. As communities moved west, setting up schools and hospitals, the government was rarely involved in the provision of public services. Self-reliance was the spirit of the age.

This spirit guides many of today’s founders. “Certainly there is the do-it-yourself mentality of, ‘we’re going to fix these problems; we don’t need government; we can do it through a management mindset’,” says Mark Kramer, co-founder and managing director of FSG, a non-profit consultancy.

Underpinning the sector’s recent expansion has been rising wealth and what Bradford Smith, president of the US-based Foundation Center, describes as “the remarkable ability of the global economy to manufacture billionaires”.

Of course, altruism cannot be underestimated. “The charitable impulse is a large reason why American philanthropy has grown so remarkably over the past century,” says Darren Walker, president of the Ford Foundation. “If you look at the names that bookend philanthropy, the investments that these philanthropists made in education, public health, food security and the environment have been transformational,” says Walker.

Melinda Gates visits a health project in Dakar, Senegal © Bill & Melinda Gates Foundation

The wealthy individuals Walker is talking about — from John D Rockefeller, the oil tycoon, and Andrew Carnegie, the industrialist, to Bill Gates, the technology entrepreneur, and Michael Bloomberg, the media owner and former New York mayor — are all US philanthropists. Yet the foundation sector is growing elsewhere, too.

In the UK, rising numbers of rich individuals and shrinking government funding for social services have prompted the growth of foundations. There was an increase in grant making of 6.4 per cent in 2013-14 by the top 300 institutions, according to the Association of Charitable Foundations.

“It is more of a mixed bag in the UK, but there is a movement that is quite exciting now of people who are looking to use money to solve problems,” says Jake Hayman, chief executive of Ten Years’ Time, a philanthropic consultancy.

In India, institutions such as the Azim Premji Foundation and the Shiv Nadar Foundation have risen to prominence as vehicles for private donations.

Not all parts of the world provide fertile ground for philanthropy. In many Latin American countries, the absence of tax incentives for charitable giving and a traditional reliance on the government and the church to deliver social services has stunted the growth of private foundations.

“The landscape in Latin America is primarily corporate foundations,” says Sean McKaughan, chairman of the board of the Brazil-based Avina Foundation, created by Stephan Schmidheiny, the Swiss entrepreneur, in 1994. “You do have some individuals that step up American-style operations but it is few and far between.”

And while the figures look large, the financial clout of private foundations needs to be put into perspective. “[US] foundations’ annual giving is about $40bn,” says Kramer. “Total government spending at state and federal level in the US is about $3tn. And the revenues of private companies is $23tn.”

An Afghan health worker administers the polio vaccine © Getty

Nor have the creators of foundations always been well loved. “It is important to remember that John D Rockefeller and Andrew Carnegie were reviled during their lifetimes by much of the American public,” says Walker.

In some places, the worry is that philanthropists wield too much influence over healthcare or education, but suspicion of the government tends to trump this fear in the US. “The American ethos accepts and embraces the idea that private philanthropy has a role to play in creating and supporting public good,” says Walker.

Even so, the old model of wealth accumulated at whatever cost to society followed by a period of “giving back” is coming under scrutiny. Kramer and others argue that businesspeople should pursue social good through their commercial operations rather than after making their money.

But business models cannot fix every social problem. Education and healthcare lend themselves to revenue-earning social enterprises, but it is hard to imagine turning a profit on ending domestic violence.

For Walker, this means the private foundation’s role will remain important. “We need to continue to innovate around market-based solutions but there are things the market can’t solve,” he says. “If anything, we will need more philanthropy in the future.

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