Building solid foundations through corporate philanthropy

When some of the world’s richest companies and individuals started giving away money in volumes late last century, surpassing the philanthropic efforts of 19th Century Americans John D Rockefeller and Andrew Carnegie, they revived a mechanism as old as modern capitalism itself.

Charitable foundations date back to Tudor times when philanthropists used them to shore up the finances of medieval trusts and found schools and alms houses. Now they are back in vogue with a corporate flavour in what Philanthrocapitalism, a book by economists Matthew Bishop and Michael Green, claims to be the fifth golden age of philanthropy.

While its forebears rose around the birth of capitalism in the Renaissance, return of peace, stability and economic growth in the early 18th Century, industrialisation of the mid-19th Century and accumulation of mega-wealth in America in the early 1900s, the fifth age is distributing vast fortunes derived from the stock market boom of the 1990s and early ‘noughties’.

And this time, the corporate foundation is playing a much greater role. In the UK, there are now about 140 corporate foundations which give away combined annual grants totalling £250 million, according to the website CharityFinancials. This compares to 126 foundations identified by a 2010 report funded by the Charities Aid Foundation and Cabinet Office. Some 52 of the total were set up in the 1990s, according to The Institute of Fundraising.

Two years ago, the US-based Foundation Center identified 2,629 corporate foundations with total assets of $23.2 billion, representing three per cent of charitable foundation assets, the largest of which is the Bill & Melinda Gates Foundation, with $3.2 billion of assets. Defined as registered charities whose primary income is derived in some way from a corporate source, corporate foundations distribute seven per cent of the total given by all UK charitable trusts and foundations.

Yet they are becoming a powerful form of philanthropy. In the UK, the top six corporate foundations by assets are those of Lloyds Banking Group, Shell, Vodafone, Lloyd’s Register, Goldman Sachs and mining group BHP Billiton. Each of these foundations distributes more than £10 million a year and together the six represent nearly half of the total grants of the UK’s top 50 corporate foundations.

‘Corporate foundations come in a wide range of forms, depending on whether the company is public or family owned,’ says Bishop. ‘In Europe, there has been a tradition of foundations being used to allow families to avoid inheritance laws and taxes that would have hit their ability to keep control of the family firm.’ Indeed the top ten companies in Denmark are all owned by corporate foundations, as are Sweden’s Ikea and Germany’s Bertelsmann, though Bishop doubts the quantity of their philanthropy. ‘None of them give away very much compared with their total assets,’ he observes, ‘even though the market value of their underlying firms makes them arguably some of the wealthiest in the world.’

In America, moreover, Bishop says corporate foundations have ‘often been regarded by the chief executive as a pot of money to support their pet causes, from local arts groups to cats homes’ or to keep powerful politicians happy by supporting their favourite charities. This is now coming under increasing regulatory scrutiny with chief executives and boards having to justify foundation activity in terms of how it supports their core businesses and prove that it is not a way of boosting profitability by taking costs off the books.

In Europe, there has been a tradition of foundations being used to allow families to avoid inheritance laws and taxes that would have hit their ability to keep control of the family firm

At the other end of the spectrum, Corporate Foundations: A Global Perspective, a report published in 2014 by global corporate responsibility consultancy Corporate Citizenship, found that the nature of corporate foundations is changing from that of ‘an altruistic grant-giver to a more strategic business tool’.

The Sage Foundation, founded by accounting software business Sage Group last year, is a good example. ‘What our chief executive Stephen Kelly and board want to do is to create corporate philanthropy that really links our colleagues with our communities and our customers and partners,’ states its vice-president Deborah Wall. ‘We service entrepreneurs at Sage and what we’re trying to do through Sage Foundation is to actually change lives and make an impact where the need is the greatest.’

There’s no endowment. Instead, Sage’s 2+2+2 formula sees it give annually two per cent of the company’s free cashflow, the same percentage of its 13,500 employees’ time and two ‘smart technologies’ for charitable causes.

The foundation works with youth, military veterans and women funding initiatives in healthcare, education, entrepreneurial skills and diversity. Sandra Campopiano, Sage’s chief people officer, is adamant that aligning the foundation closely to the company’s entrepreneurial culture produces genuine business gains. Even when it provided disaster funds to the north of England after last year’s floods, she says the focus was on helping entrepreneurs caught up in the chaos. ‘Sage has five values and two of them – making a difference and doing the right thing – are particularly relevant to the foundation,’ says Campopiano. ‘The foundation also helps us attract and retain talent and is really good for Sage’s business. It goes well beyond corporate social responsibility because it is already woven into the fabric of the business.’

The Lloyd’s Register Foundation is one of the world’s oldest corporate foundations, dating back to 1760. Its first grants were made in 1877 when it provided funding for two naval engineering students at Greenwich, which led to an international programme of university scholarships in marine engineering and naval architecture. The scheme was in keeping with Lloyd’s Register’s original work in detailing the conditions of ships which were being chartered by merchants and insured by underwriters. Its strategy altered in 2012, when Lloyd’s Register, the underlying commercial organisation which today provides surveys on ships and other assets, converted from an industrial and provident society to a limited company, with 100 per cent of its shares owned by the Lloyd’s Register Foundation. Its structure is now close to the Scandinavian model.

Unlike those companies that Bishop criticises, the business gives the foundation a much larger proportion of its profits, donating £30 million this year to fund science and engineering research and development, big data, robotics and education. The foundation has a niche focus on ‘design, manufacture, construction, maintenance, operation and performance for the purpose of enhancing the safety of life and property at sea and on land and in the air’.

Lloyd’s Register is now there to ‘make money for the foundation,’ says group communications director Mark Stokes. ‘About 67 per cent of what we do as a commercial group is actually charitable activity as well because it’s about ensuring that the public is kept safe on large, high-risk assets like ships, oil rigs and power stations. We see this as a 21st Century model for social business because there’s no money escaping the loop and going to shareholders outside the charity.’

It goes well beyond corporate social responsibility because it is already woven into the fabric of the business

For example, Lloyd’s Register generated pre-tax profits of £62 million in the financial year ending March 2015. After tax payments totalling £20.2 million, it paid the foundation £11.5 million and reinvested the balance in the business.

Elsewhere, Lloyds Bank Foundation focuses on funding small and medium UK charities dealing with disadvantage. The Shell and BHP foundations are inclined towards environmental issues and the developing world while the Vodafone Foundation unsurprisingly links itself to implementing digital technology that enhances people’s lives in the areas of UK health, education and disaster relief.

During its 25 years, Vodafone’s local foundations operating in 27 countries have invested a combined $1 billion in their communities and supported more than 2,500 organisations. Helen Lamprell, a UK trustee of the Vodafone Foundation, says the initiative has helped Vodafone and its employees make a ‘massive difference’ to their communities. ‘Technology is playing an increasingly vital role in bringing communities together,’ she adds, ‘and the foundation’s commitment to using technology for good remains as strong as ever.’

In the US, The Cigna Foundation, funded by US private health insurance group Cigna, says its commitment to enhancing the health of individuals and families and the well-being of their communities also has a direct link to the business. Focusing on global workplace wellness, the foundation makes ‘world of difference’ grants, supporting not-for-profit organisations helping people navigate health care and social services systems.

‘Investing in the health of our communities directly connects with Cigna’s overall success as a business with a mission to improve the health, wellbeing and sense of security for those we serve,’ says executive director David Figliuzzi. ‘The Cigna Foundation is an important part of Cigna’s strategy. While Cigna serves its customers, the Cigna Foundation serves the communities where those customers and our own employees live and work.

‘Opportunities to achieve best health are often limited by factors outside an individual’s control, such as ethnicity, race, gender, geography and economics. But when a broad range of community voices is mobilised to address these issues, people can be empowered to take better care of their health.’

Bishop says the motivations of businesses that fund corporate foundations can also include boosting brand reputation. ‘The Nike Foundation promoted the Girl Effect, which helped lose its reputation as a sweat shop,’ he says. ‘It is now pushing the Sport Effect, a campaign even closer to its core business goals. [Sir] Richard Branson is the master of supporting good causes to polish his brand, through his Virgin Unite corporate foundation. And philanthropy is also used to boost a company’s ‘licence to operate’, especially when it is engaged in a controversial activity. It is now fashionable for mining companies in areas with indigenous communities to give through their foundations to provide education and community centres.’

Despite differences in the types of foundations and motivations for funding them, their executives say adherence to some key principles is vital. ‘You’ve got to have an absolute buy-in from the directors of the business,’ says Wall, who previously worked at Virgin Unite. ‘The reason Virgin Unite is so successful is the same; it comes from the very top. It only works if they really believe in it because everybody has a day job. Everyone has challenges of delivering sales or support and if you don’t get that buy-in from the top, it’s really difficult.

‘You also have to measure the impact. We’re very young but are going to start that soon. We already measure the five days’ volunteering per employee per year as a key performance indicator. It’s a very optimistic number of days for a business like ours but I would hope we would meet it with the vast majority of the workforce by the end of year three.’ If corporates can truly align their giving with their business objectives through corporate foundations, they can potentially achieve a meaningful lasting inheritance.

But there are plenty of challenges ahead. A 2013 report by the Corporate Citizenship lobby group found that many UK corporate foundations do not have a committed funding formula in place, so the founding company is not bound to fund the foundation at any particular level or in perpetuity.

CharityFinancials, meanwhile, worries that a company could lose its sense of corporate social responsibility by removing charitable decision-making from the heart of a company. It also notes that the Charity Commission has raised questions over the independence of some corporate foundations. It adds: ‘There are reputational risks for the corporate foundation, and potentially the company, if the public perceive that the corporate foundation is for the benefit of the company rather than the public.’

If corporates can truly align their giving with their business objectives through corporate foundations, they can potentially achieve a meaningful lasting inheritance

Then there is criticism that corporate philanthropy’s main achievement is in public relations and advertising, rather than meeting genuine societal needs. ‘Company management should be clear as to how their firm’s philanthropic activity connect to its core strategy for making money,’ argue Bishop and Green in Philanthrocapitalism. ‘Otherwise, it may not achieve much impact and even if it does there is a high probability that it will be the first thing to be cut if times get hard.’

The best approach, they argue, is for companies to view their giving through the metric of long-term return on investment, like they do for research and development expenditure. ‘Well-run companies know that they cut back on R&D at their peril, even if the impact is only felt in the long-run,’ they write. ‘Likewise, they should be reluctant to reduce their philanthropy if they believe that it has bottom line benefits.’

Maybe the greatest challenge before corporate foundations lies not in their lofty goals or giving targets but in their own sustainability. Breaking their prior connection to boom and bust economic cycles would be a good way of demonstrating that they are here to stay this time around. Mark this trend down as one to watch.

This article appeared in Issue 110