The Business of Philanthropy

Charitable giving is declining in the UK, according to a report published by the Department for Communities and Local Government recently. In 2008/9, 74% of people said they had given money to charity in the four weeks before the survey. The figure in 2005 was 78%. 

This pattern is mirrored in the US, where The Chronicle of Philanthropy reported that during 2009 the largest charities saw an 11% drop in income which was their largest drop since the group began tracking donations more than 20 years ago. For smaller charities that do not have the resources to market their cause, it is realistic to expect that perhaps the drop is even more significant.

Whilst on the face of it reports such as these present a depressing picture for charities in general, there is another, more optimistic side to the debate which seldom makes the headlines. In the UK many charities are still performing essential social welfare roles that are outsourced by the government and local councils. They are able to perform these roles more cost effectively than many councils, so funding for them is still strong.

Equally, many philanthropic organisations are simply giving more. This is particularly true in the US where many of the US ultra wealthy define their wealth by how much they are actually giving away to their charitable foundations or other worthy causes. For instance Gates and Buffett have pledged to give $600bn of personal wealth away. This contrasts with one of the UK measurements of giving where the emphasis is on the number of people donating, not their total donations.

The overall picture may be muddied still further by the fact that, there are many charitable foundations that are now run for a fixed period. The thought process behind such an approach is that the world needs the money now and by giving it now it can make a sustainable difference for the future. A good example of this is Atlantic Philanthropies who have a mandate to give away $4.6bn by 2016. Such short term projects are bound to affect the volatility of the sector’s data, particularly when the sums are so large.

Starting the process of giving

Nowadays, the philanthropic landscape is beginning to change noticeably.  Reductions in social welfare spending by governments, coupled with substantial increase in wealth amongst private individuals have led to the growing importance of private giving. Wealthy individuals may now find themselves helping to partially fill a gap left by government, or they may elect to pursue their own more personal goals, supporting causes that are close to their heart and culture.

The world of philanthropy is consequently clearly more complex than at first seems the case. What is certain, though, is the fact that there is always room for additional and more effective philanthropy. For any family who wants to give, there remains the question of what is the most effective way of starting the process?

A good way to start may be to evaluate the worthiness of projects. Of course if any family is interested in a particular cause then that is an ideal starting point. However, if there is a blank canvass then an evaluation needs to take place to set the direction of the giving. Since there are over 180,000 registered charities in the UK alone and over 1 million not for profit organisations in the US, this is not a light undertaking. Normally such an evaluation might consider:

·         ‘Worthiness and need’ - for instance, different individuals will give human causes, environmental causes and animal causes different priorities.

·         Once a cause is evaluated a secondary level of consideration would be to consider the metrics of the charities that operate within that sector. Normally basic metrics would include:

§  The size of the charity.

§  The number of employees that the charity has

§  What are the margins that the charity operates within? For instance, how much of every £1 reaches the end user?

§  Is the would-be philanthropist seeking a one-off effective intervention or a longer term commitment?

§  Structure also needs to be considered, and whilst it is often flattering to one’s ego to establish a foundation in one’s own name, it can be expensive and time consuming to do so. In many cases it may be just as effective to contribute to someone else’s foundation. The most notable case of this is Warren Buffett’s contribution into the Gates Foundation.

Tax planning remains key, and very often the most effective tax breaks are granted by an individual’s home jurisdiction. However, there are many progressive jurisdictions emerging which have passed very generous laws for philanthropic endeavour. For this reason jurisdictions such as Singapore could be considered in the planning process. The Singaporean government has laws that give generous tax rebates on Singaporean sourced income for philanthropic projects on a worldwide basis, not just those located in Singapore.

Investing the funds requires care. The actual investments reinforce the effectiveness of the good (or undermine it for that matter) and a mandate needs to be clearly established about what comprises an ethical company. This is not an easy issue to determine, but also needs clarification from the start.

With investment funds, the historic philosophy was to grow the pot and to use the excess to fund worthy endeavour. As previously outlined, current thinking has evolved for some charitable foundations that they are now trying to deliver as much effect as possible in the shortest time frame available.

There is an effect on families too. Most philanthropists freely state that their philanthropic endeavours are the elements of their life that give them the most satisfaction. With younger family members who have no interest or aptitude in the family business, running the family charitable foundation can provide a positive and effective outlet for their energies.

Running philanthropy like a business

Although philanthropy is not a purely commercial enterprise per se, there are many aspects of running a philanthropic structure that are really quite similar to the requirement of running a business. Maintaining strong governance, allocating expenditure, striving to make a profit, budgetary control and seeing a measurable return are all common factors.

Philanthropists today often go beyond the traditional forms of grant-making.  They are embracing new ways of giving, such as venture philanthropy, microfinance and socially responsible investing.  Philanthropists want to be engaged in their giving, using their own business experience and expertise to support their chosen causes more closely.  As they become more sophisticated and strategic in their giving, donors increasingly want to see the impact of their support, and they are demanding increased accountability and transparency from charities.  Today’s philanthropists want to be confident that their money is being used both effectively and efficiently and will have very specific criteria to measure and evaluate how the money is being used. 

Bringing these themes together into a coherent, effective and well managed whole requires a broad skill set which will certainly include an understanding of global financial flows, international taxation, international investment, governance and the ability to create the most appropriate structure for the charity, whether this is a trust, foundation or other vehicle.  International trust and foundation  specialists such as Vistra, who have 20 offices across 18 jurisdictions can play a vital role in this regard, setting up and running appropriate philanthropic structures for clients.