Charity Village® Research: Parallel foundations --- too many, too trendy, and too hasty

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Parallel foundations --- too many, too trendy, and too hasty
by Allan Arlett,
November 27, 1996; Canadian FundRaiser

Increasingly, charitable non-profit organizations are setting up parallel foundations. The 1995 Association for Healthcare Philanthropy annual survey Giving in Canada for fund year 1995 reported that 92% of the responding hospitals had parallel foundations.
The motivation has generally been one or more of the following situations:
Lack of time - the organization needs to begin fund raising but has a board that is too involved in the issues around the programs and services and/or the task of managing the charity, to take on this responsibility.
Lack of knowledge - existing board members do not have the expertise, influence and affluence to take on this task.
To formalize the separation between operating, endowment and/or capital funds - There is also the opportunity to raise operating funds through the parent body and capital/endowment funds through the foundation in a different time sequence from each other, to try to keep one program from competing with the other.
"Not our job" - The board is supportive of the organization's mission for a variety of reasons, and does not see fund raising as its collective or individual responsibility.
Out of sight - To provide a place in which to deposit surplus funds to protect them from possible encroachment by government.
Separate organization needed - In some cases, organizations may have developed or want to develop a significant endowment, and a foundation would provide the opportunity to recruit individuals with special skills and responsibility for overseeing/raising endowment funds.
Affirmation of longevity - As Jane Burke-Robertson and Boyd McBride have noted, "The foundation is the ideal vehicle to solicit and receive planned gifts ... made with the charity's long term future security in mind …in the eyes of the donor, the …foundation tends to act as a public affirmation that the charity will be around for the long term."
Eliminate bureaucratic restrictions - Robertson and McBride also note that, "One of the advantages a fund raising foundation has over the parent organization is its ability to hire fund raising staff at `market rates.'…the human resource policies of many charitable and social service organizations make it impossible to pay enough to attract the fund raising talent needed." This problem can be circumvented through the establishment of a separate foundation.
Asset protection - Blake Bromley has argued that parallel foundations allow the charity to protect assets should there be a legal suit involving the parent organization. He has also noted that "a parallel foundation can act as landlord and lease property to the charity, thereby creditor-proofing some assets."
The thing to do - The view seems to be, "Other organizations have them so they must be good! It will help in the fund raising for our organization."

A separate entity focusing on fund raising can indeed help to make it happen faster than might otherwise be the case. A parallel foundation can address some of the points identified above. Not only is there the opportunity to recruit senior volunteer leadership in support of the organization, but also some of those recruited to the foundation are ideally individuals with profile, whose involvement with the organization will enhance its profile and prestige.
The fact that they will have a control over the way in which the funds raised are allocated to the parent organization can add to the attractiveness of a seat on the foundation board. And finally, since the foundation board has a defined role and is free of the time consuming issues facing the board of the parent organization, recruitment for the foundation is easier.
There can be downsides

A separate legal entity must be established, with all this entails - bylaws, separate board meetings, minutes, annual meeting, nominations committee, financial statements, preparing tax returns and related documents to governments, etc.

While some overlap should exist with board members of the parent board, it will be necessary to recruit and orient another complete group of board members.

Since there are separate chairs and a number of different board members involved in each of the two organizations, their respective missions, goals and objectives can begin to diverge over time. Unless the bylaws of the foundation provide for the board of the parent body to make up a majority of the board of the foundation, an independent foundation can make decisions that clash with those of the parent body.

Parallel foundations have more stringent disbursement criteria than a charitable organization. The disbursement quota for charitable organizations and foundations is 80% of the receipted donations of the previous year, with some exceptions, but a parallel foundation must also, in addition, dispense in any year an amount equal to 4.5% of the value of the investment assets of the foundation. Additionally, where a charity makes a donation to a foundation, 100% of the amount donated to a private foundation, or 80% of the amount donated to a public foundation, must be spent the following year, a restriction that does not apply to an operating charity.

Many organizations have set up foundations but have failed to improve their fund raising. Fund raising requires a plan, a commitment from the foundation board to use their influence and affluence in its support, and, where needed, the staff to work in support of the board and volunteers.

A recent complication has been added to the establishment of new foundations in Ontario, by the provincial Office of the Public Trustee, making it very difficult to establish foundations whose principal object is to raise funds.

The standards developed by the Canadian Institute of Chartered Accountants seem to be moving in a direction whereby accounting standards will require disclosure of the foundation's assets and income on the financial statement of the parent charity. This would no longer enable the parent body to keep funds from government view.

Avoiding the negatives
Few things are without some risk, but there are some actions which can be taken to help avoid the negative aspects of a separate foundation.

If the major reason for establishing the foundation is to become more active in fund raising, be careful to identify this at the outset and to recruit board members accordingly, ensuring there is no confusion or misunderstanding on this point.

Set clear job descriptions for the chair and all other board members. Make it clear that both active fund raising and personal financial support are fundamental roles of each of the foundation's members.

Ensure the bylaws require that all grants by the foundation must be to the parent organization.

A number of representatives of the parent body must be members of the foundation board, including at least the volunteer head, chair/president, and the treasurer.

Any staff assigned to the foundation must be accountable to the chief staff person (president, executive director) of the parent organization.

Effective communication between the parent organization and the foundation is an essential, to ensure that there is, at all times, agreement on future direction and policy.

The issue of control
There are many ways to address this important question:

The parent body has a number of ex officio appointments on the board of the foundation. Robertson and McBride point out, "The bylaws could then provide that certain types of decisions (or all decisions) requiring a resolution of the directors must include the vote of the ex officio director(s). The bylaws and letters patent could also provide that they may not be amended without the unanimous approval of the directors of the foundation."

The boards of both the parent body and the foundation can have the same members. This approach, of course, negates one of the advantages of establishing a foundation - the opportunity to recruit individuals who can take on the fund raising for the foundation.

The bylaws of the foundation can require that the voting members are limited to the directors of the charity.

The parent body may have a majority or two-thirds of its directors as members of the foundation.

The bylaws can require that the bylaws and letters patent of the foundation can only be changed under specified procedures.
In many instances, the reasons for establishing a foundation have not been given the careful thought or planning that is required. Foundations, like other things, can work well or badly. As Blake Bromley puts it, directors of charities should first ask themselves, "Why should I use all my good will, pay the costs of setting up a parallel foundation and direct donors to give to an arm's length entity? Why would a donor give to a parallel foundation rather than the charity? Is this in the best interests of the charity?"
Without reasoned answers to these questions, you could be in for some legal risk. If you set up a parallel foundation because it's the trend, it can expose you to vulnerability down the road if problems arise. Bromley's advice: Get help from someone who can shepherd you through these issues , and then take advantage of all a parallel foundation has to offer. "Just setting up a foundation isn't going to magically produce results, but there are many shades and subtleties to what you can get out of it."
Based on a presentation at the 2nd Annual Fund Raising Congress, in November, 1996. Allan Arlett is a principal in The Arlett van Rotterdam Partnership, Toronto, Ontario. For more information call (416) 694-1226, fax (416) 694-9475 or eMail avr@inforamp.net.