News analysis: Foundation control under scrutiny

Mathew Little

Corporate foundations are proliferating, but how independent are they from their founders?

Corporate foundations are an increasingly popular way for UK plcs to demonstrate their charitable credentials. According to a report published by the Smart Company last week, of the 126 corporate foundations in England and Wales, 52 were set up during the 1990s and a further 24 since the turn of the millennium (Third Sector, 11 October).

But as the research for the Cabinet Office and the Charities Aid Foundation shows, the adjective 'corporate' can apply to more than just the foundation's origins. In some cases it means that the charity is little more than an adjunct to the parent firm's marketing strategy.

In a telephone poll, 10 out of 29 foundations admitted that, despite their status as independent registered charities, they were either completely or nearly completely controlled by the companies that set them up.

"By law, corporate foundations must be independent of their corporate founders," says the report. "In practice, the level of independence varies significantly, from foundations whose activities are intricately linked with the founder firm's CSR strategy to those that are totally independent."

Fifty-two foundations draw their trustees from existing or previous employees of their parent companies. Many are run by staff from the companies and are reliant on them for their income. In such circumstances, according to Amy Lunt, author of the report, "pure independence becomes very difficult".

She adds: "But I think foundations would say they can address the problem because their trustees are expected to put on their foundation hats when they work for the foundations."

The case for Diageo

The Diageo Foundation was described as "integrated" with its corporate founder in a 2003 report on corporate foundations from Business in the Community. The foundation's trustees are appointed from within the company by the Diageo board. Its one member of staff is employed by Diageo.

Manager Lynne Smethurst says the foundation exists primarily to support the drinks firm's CSR strategy. "We tend to do programmes in markets where we have a business presence," she says. "We have very close links with the senior management on the kinds of projects and programmes we are doing and our strategy."

So how does Diageo.org retain independence from Diageo.com? "The strategy is decided by the trustees," says Smethurst. "But there is a clear link with what Diageo is doing as a business. That's how we manage to leverage additional funding, but one doesn't necessarily rely on the other."

Stephen Lloyd, a partner with specialist charity law firm Bates Wells & Braithwaite, says the report's conclusion that some corporate foundations are under the thumbs of their founders is "explosive" and could lead to investigations by HM Revenue & Customs.

"It's a misuse of a charity," he adds. But proving that the independence required by UK charity law has been infringed is not simple. The legal independence of charities is not absolute. The Government can set up charities, nominate trustees and issue directions to registered charities, for example.

But when a foundation's trustees decide to align its policy with its corporate parent, that is another matter.

"If the trustees are voluntarily saying to the company's board 'we want to support your CSR policy', that's a problem," explains Lloyd.

According to Sarah Atkinson, head of corporate affairs at the Charity Commission, the crucial question is how a corporate foundation makes policy.

"If decisions are being made by a foundation on the basis of what's good for its parent firm, that's not acceptable to us," she says.

"It might well be that the work a foundation is doing has an incidental benefit to the company, but that can't be the reason why decisions are made."

Atkinson adds that the regulator will look at whether clarification is needed for corporate foundations. "We don't want a bureaucratic response to this, but if there is some evidence that foundations are ambiguous, then we need to act," she says.

Charity law currently relies on the optimistic notion that company-appointed trustees will put aside the interests of the firm that pays their salary when they enter the foundation's boardroom.

Lloyd says this is not enough. "It surprises me that there is no guidance in this area from the Charity Commission," he says. "I believe that there should be. I think there should be a number of trustees - equivalent to the quorum of the trustees' meeting - who are genuinely independent and who are not current or past employees, so there is some water between them and the company."

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