Good Governance—and Other Not-so Secret Recipes for Making Family Foundations Work
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In the midst of the greatest wealth transfer in history, family foundations are dealing with an array of challenges that arise from the inevitable passing of the torch from one generation to the next. In a recent article, we highlighted Northern Trust’s white paper on the subject, which proffered advice and action items for family foundations to engage next-gen participants, andz connect older generations to philanthropy’s modern approaches and instruments.
On the heels of that white paper, the National Center for Family Philanthropy recently released its “Trends 2020” report, which surveyed over 500 family foundations with at least $2 million in assets or $100,000 in annual giving. Chock-full of numbers, “Trends 2020” is less about nudging foundations in a certain direction, and more about capturing the broader mood of the moment with a ground-level examination of today’s family foundation landscape. That said, Virginia Esposito, founder of the National Center for Family Philanthropy, did remind me that “Trends 2020” is “not just a report card. It’s a way to help others measure what’s going on in the field.”
A key takeaway from “Trends 2020” won’t be news to regular readers of Inside Philanthropy: Younger family foundation participants (including younger individuals who work at older family foundations, and younger donors with their own foundations) have very different viewpoints than their forebears on key issues such as mission, governance and grantmaking.
To see how those differences manifest, let’s take a deep dive into the report itself. But first, some interesting stats about family foundations:
By conservative estimates, family foundations represent over 60 percent of the approximately 90,000 grantmaking foundations in the United States, which means there are more family foundations than all other forms combined.
Close to three-quarters of all family foundations have less than $10 million in assets, and more than 70 percent were formed in the past 30 years.
Nearly two-thirds of family foundations have a geographic or place-based focus, and about half focus on specific issues—however, this dynamic is shifting (more on that below).
While the Northern Trust paper focused on the interpersonal dynamics at play between older and younger generations, “Trends 2020” is keyed into the practical steps foundations are taking amidst this seismic shift.
The Secret Family Recipe: Governance
One of the most intriguing findings of the study is the role that good governance plays in both the engagement of family members and the impact a foundation has over time (as opposed to, say, a focus on grantmaking or learning about issues). The report finds that foundations who mark themselves as “very effective” across key measures of operations, family dynamics and impact all place a higher priority on governance than they do other factors. The reason? Governance is a wellspring from which success in all other areas flows. It is the area where members access the best information the board needs, and ensures that the practices and policies are suitable to the mission. Let’s face it: Drilling into governance issues isn’t exactly why people are drawn to philanthropy, but it is the hard work that needs to be done before the more engaging aspects of the role can be addressed.
As Esposito explained, “The allure of the grantmaking work or the comfort of the investment work (to those with a finance background)—those are immediately attractive. But if you want your foundation to be well-grounded and effective across generations, you have to do the work that governance requires.”
The statistics bear this out. Over half of family foundations have a multi-generational board; 10 percent of boards are made up of three or more generations. And this naturally leads to governance challenges, such as time constraints, geographic dispersion of family members and differing ideas/motivations across generations. And with more than a third of respondents saying they plan to increase next-gen board representation over the next four years, as well as provide more of a voice for younger generations in governance and operational decision-making, it’s crucial that boards emphasize strong governance from the outset.
Perhaps a cautionary tale will prove helpful here. Several years ago, we reported on the Schwan Foundation. Marvin Schwan left a foundation composed of a board of trustees and a Trust Succession Committee (TSC) meant to oversee the trustees’ administration of the foundation. The glaring problem was that members of the board also served on the TSC. So when the board made questionable investment decisions (losing $600 million of the foundation’s $1 billion in assets), Schwan’s two sons sued to obtain the financial information related to the investment losses. However, their case was dismissed by a South Dakota circuit court because they represented a minority of the TSC.
An extreme example, sure, but a stark reminder of the impact that good (and bad) governance can have on a family foundation.
The Changing Face of Family Foundations
Family foundations are becoming more diverse, multi-generational, and less… well, familial. One-third of family foundations have diversity, equity, and inclusion (DEI) initiatives in their future plans. DEI is much more common in family foundations established over the past decade, with newer foundations two and a half times more likely to report that they assess DEI outcomes (34 percent vs. 13 percent), and over three-times more likely to analyze the racial and ethnic demographics of grantees (32 percent vs. 10 percent). Yet despite this increase in DEI, just one-third of family foundation boards include at least one person of color, and only 10 percent have LGBTQ representation. Gender distribution of family foundation boards continues to be fairly even.
Meanwhile, non-family members play a significant role in the family foundation landscape, having increased both in absolute numbers and as a percentage of family foundation boards over the past five years. Nearly 70 percent of family foundations have non-family staff, and a full two-thirds now include non-family board members. In 2015, nearly one in four family foundations had two or more non-family board members. Today, roughly that same percentage reported having three to five non-family board members. So non-family board participation is clearly on the upswing.
While a majority of founders surveyed are still actively involved in their foundations, the percentage has declined in recent years, from 64 percent in 2015 to 56 percent today. Unsurprisingly, when a founder is actively involved, the foundation is much more likely to closely follow donor intent (76 percent), compared to when a founder is not involved (51 percent). The “Trends 2020” report also noted the generational difference in regard to internal processes between founders and next-gen or non-family staff. As the report itself states: “Founders are much less likely to express interest in measuring the impact of the foundation’s giving, to place value in communicating the goals and results of the foundation’s giving, or to look for ways to formally integrate outside perspectives into the grantmaking process and/or governance structures of the foundation.”
Areas of Interest
Another of the key findings of “Trends 2020”is that areas of interest differ across generations. Over 80 percent of older and larger family foundations focus their giving geographically, while a similar percentage of newer family foundations (those formed in the last decade) focuses giving on issues. These findings represent a slight uptick over the last five years (from 78 percent to 81 percent) for older foundations, and a significant uptick (from 61 percent to 82 percent) for younger foundations.
This likely has to do with a shift in perspective among younger generations, many of whom earn their wealth online, and hence don’t feel a localized pull to any single community or region. They maintain a global outlook, and are more likely to have international friends and networks than previous generations. One must stop and wonder, of course, how this will impact communities dependent on localized giving.
“What is the future of place-based foundations?” Esposito asked. Once ideas trump geography, dollars previously allocated to specific cities, states and regions may start to flow elsewhere. Esposito did point to foundations in small towns that have been successful in leveraging national grants through an issues-based approach, but it remains to be seen how things will shake out over the long term.
One consistency over the past five years is the top two areas of focus for family foundations in the aggregate: education and poverty. Yet even here, shifts are taking place, with newer foundations tending to lean toward basic needs funding (alleviating hunger or homelessness, for example) and economic inequality issues. In contrast, interest in education is waning. Only 23 percent of younger foundations list education as their top issue, as opposed to 42 percent of older foundations. That’s a significant drop, and one that could presage a shift in giving patterns over time.
According to Esposito, this has more to do with younger foundations moving toward certain issues (poverty, inequality, economic opportunity, social justice) as opposed to moving away from education. But perhaps a further examination needs to be undertaken to fully understand the transition here.
In a recent article, we highlighted the latest “Trends in Education Philanthropy” report from Grantmakers in Education. Of the nearly 100 education funders surveyed, more than half were listed as “family, private or independent foundations.” So a shift away from education by family foundations is bound to have an impact on education funding as a whole, which is already experiencing quite a dramatic shift (see the above link for more).
Impact Investing and Operational Changes
Northern Trust’s white paper highlighted the tension that exists between family members when it comes to the issue of impact investing. Some family members—especially those in older generations—can be turned off by the notion of exclusionary giving. Yet impact investing remains an important consideration, thanks to its rapid adoption by younger generations. Since 2015, the number of family foundations engaged in impact investing has doubled, with nearly one-fourth of all family foundations surveyed saying they plan to implement impact investing strategies in the near future, and nearly one-third saying they plan to expand their impact investment.
Foundations created since 2010 also have novel strategies in regard to asset management and payouts. The majority expect to receive additional assets in the next four years, and half plan to increase their payout rate (vs. just over a quarter of all others). One prime example of this cultural shift among family foundations is Nathan Cummings. While it’s true the foundation does not qualify as “new,” Jamie Mayer recently took over as the foundation’s first-ever fourth-generation board chair. Mayer highlighted her foundation’s efforts to be more supportive of its grantees, including upping its payout rate to 6.75 percent, and increasing the size of its discretionary grants. Her focus on strengthening her foundation’s integrated framework and connecting disparate partner organizations is a prime example of a millennial leader applying a next-gen mindset to a relatively older family foundation.
Next-Gen Engagement: The Way Forward
While not as forward-looking as the Northern Trust white paper, “Trends 2020” provides a helpful snapshot of where family foundations currently stand. Yet if there is one key takeaway from “Trends 2020” for family foundations in need of a go-forward strategy, it may be this: Maintaining strong family relationships helps sustain family involvement in the foundation.
And foundations are recognizing this reality. Sixty-one percent of family foundations today claim to see the value of stronger family relationships, up from only 43 percent of those surveyed in 2015. And more than half of family foundations cited the “impact of our giving” and “our commitment to donor or family legacy” as important factors in sustaining family involvement. So if family foundations are looking for ways to engage the next generation, those are two great jumping-off points.
Perhaps Virginia Esposito, the NCFP’s founder, put it best in the report itself: “My experience with donors is that many of them are charmed by the notion of doing this work with their family, but they never actually tell their family why they’re so charmed. So you may have people at the table who are there out of a sense of responsibility or duty or respect for mom and dad. But you’ve never sat down with them and said, ‘This is why you’re here.’”
