FAMILY GIVING NEWS:

LEGAL AND ETHICAL ISSUES IN FAMILY PHILANTHROPY

May 2003, Volume 3, Issue 5

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TABLE OF CONTENTS:

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PRESIDENT'S MESSAGE

UP FRONT...
ETHICAL ISSUES IN FAMILY PHILANTHROPY

SPOTLIGHT ON...
LEGAL ISSUES IN FAMILY PHILANTHROPY

WHAT'S NEW AT THE NATIONAL CENTER

SPOTLIGHT ON...
GIVING TRENDS, TOOLS, AND OTHER NEWS

SPECIAL OFFERS FOR FAMILY GIVING NEWS SUBSCRIBERS

WHAT'S GOING ON: CALENDAR OF UPCOMING EVENTS

RESOURCE REMINDERS:
LEGAL AND ETHICAL ISSUES IN FAMILY PHILANTHROPY

PRESIDENT'S MESSAGE

The National Center for Family Philanthropy staff answers thousands of questions from donors, family members, and advisors. The ways the questions come to us may have changed over the years (we now get as many by email as we do by phone). The nature of the questions may also change (we used to hear from more of you dealing with a significant increase in assets).

The one thing that has not changed has been our commitment to respond to your questions with two things in mind: we do our best to get you the highest quality information possible; and, in gathering and presenting that information, we are always sensitive to the unique circumstances and challenges of family philanthropy – and your family philanthropy in particular. This issue of Family Giving News focusing on legal and ethical issues highlights that commitment in some very special ways.

When it comes to the legal issues for private foundations and public charities, we can’t work hard enough to ensure donor families and advisors have access to the best information. This doesn’t mean we think the law is different for family giving programs, but we do find donor families often have questions about their unique situations that require an interpretation of the law. Whether a donor wants to offer office space to the family’s foundation or host a family meeting to discuss program priorities, there are legal guidelines to ensure that personal commitment and personal benefit are clearly distinguished. Key National Center resources on the law include a popular feature from The Trustee Notebook on the legal responsibilities of trustees. The Resource Reminders section also cites an industry standard, Family Foundations and the Law, written by former Council on Foundations’ general counsel, John Edie.

However, donor families are often called upon to make decisions that go beyond what is legal to what is right. Wrestling with an ethical dilemma can involve governance, grantmaking or management in a test of your values and the extent to which your actions reflect those values. Several of the resources of the Institute for Global Ethics will be of special interest to those concerned with the effective and ethical stewardship of philanthropic resources. Institute president, Rushworth Kidder, authored the chapter on ethical issues for family foundations in our popular publication, Splendid Legacy: The Guide to Creating Your Family Foundation. The Institute has also adapted its respected curriculum on ethical decision making for the family giving audience and we are pleased to call this important work to your attention.

It is a pleasure to introduce you to National Center materials and services covering these topics and to acquaint you with excellent work from our colleagues. From time to time, we also hear about other publications that might be of particular interest. This month, we are happy to feature information on the Nonprofit Quarterly and the Stanford Social Innovation Review. In both cases, reduced subscription prices have been made available to Family Giving News readers.

These kinds of offers are just a small indication of the growing popularity of this monthly newsletter. More than 8000 of you now read Family Giving News and frequently “click through” to the featured links. Our success owes much to your feedback, suggestions, referrals, and questions. And I know it owes much to the care the editor, Jason Born, gives to each issue. Jason and I encourage you to continue to make this newsletter as responsive to your concerns and questions as possible by letting us hear from you. As we prepare for some changes to our website, we welcome your guidance about that resource too.

Legal and ethical questions are among the most popular we get. In times when the economy, media scrutiny, and the desire to be as effective and accountable as possible call for it, such popularity is to be expected. If there is an aspect to these issues we haven’t covered here, don’t hesitate to contact us. Answering your questions – whether by phone, email, letter, or personal visit – is the most rewarding work we do. You have added to our experience, our expertise, and our understanding. Through our work, we hope to return those gifts to you.

Thank you for your support.

Virginia M. Esposito

President

PS Congratulations also to TechSoup, one of our founding sponsors and recent winner of a national business plan competition for nonprofits. Please visit their site below, as well as the sites of our other sponsors to see what these terrific organizations have to offer!

Source:
Splendid Legacy

Family Giving News
Exclusive!

What is an Ethical Organization?
In this excerpt from “Why Did I Make All This Money? Values and Ethics in Family Foundations," author and noted ethics commentator Rush Kidder describes many of the key ethical dilemmas that come up during the governance and management of a family foundation. "It is imperative that the trustees and staff of family foundations understand the relevant legal frameworks for their activities," writes Kidder. "But knottier aspects of ethics can arise when both sides are right and where the best resolution may lie beyond the guidance of the law."

The excerpt addresses common situations involving ethical concerns, including: conflict of interest; transparency and accountability; abuse of power and privilege; handling inside information about nonprofits; and long- versus short-term spending. "How does a foundation decide which is the higher right? A framework for decisionmaking, put in place as the foundation is developing, can help trustees and staff recognize ethical issues as they appear. It can help the foundation identify the basic paradigms into which right-vs.-right issues tend to fall... and where clashes between good values become the drivers of the foundation's toughest ethical challenges."

Moral Values and Private Philanthropy
This paper from GrantCraft’s website addresses one of the most pervasive ethical issues in philanthropy: the tendency of nonprofits to “inflate” or exaggerate the potential of projects in proposals, and the actual results of these projects in grants reports. The author, long-time academic administrator and prominent ethicist Michael Hooker, presents a short story illustrating the (somewhat incongruous) dynamics between grant-maker and grant-seeker, and uses this example to explore what is wrong about many of these relationships, and what foundations can do to help correct this dynamic.

While directed primarily at foundation program officers, the paper presents a wide range of interesting observations, and is of interest to families and funders thinking about the ethics and dynamics of their relationship with grantees. “Philanthropy as an institution has an obligation to achieve a level of integrity well above that of society in general," writes the author. "The overriding purpose of the institution of philanthropy is to improve the world in all its aspects, particularly those that pertain to values. This purpose cannot be accomplished well if philanthropic agencies do not themselves exemplify the highest ideals and values.”

The paper provides thoughtful suggestions and perspectives for foundations seeking to establish more effective partnerships with each other, and with the nonprofits they support. While many of the ideas may sound similar to strategies and ideas being discussed today, it is interesting to note that the paper was originally written in 1987.

Source:
More than Money

The interview goes on to discuss Kidder’s concept of Ethical Fitness (“Being ethically fit involves constant practice and challenging yourself”), as well as particular ethical questions that families may be likely to face. “The challenge in a family dynamic of wealth is that the people involved often slip down to the next lower standard and assume that ethics is about right vs. wrong,” says Kidder, “[rather than] that there might be two “right” choices. From there, it’s a quick step to assume that “I’m doing it right and they’re doing it wrong,” and the situation quickly goes to blame and shame. If we can begin to recalibrate the moral compass, and think about ethics as right vs. right, that has a powerful impact on the way people relate to one another. When we’re not starting out on the search for right vs. wrong, the interaction is much more fruitful.”

Ethical Decision-making Factors
The following decision-making guide is adapted from the Institute for Global Ethics’ CD-ROM ethics training programs.

“Right vs. Wrong” Decisions

• Is it LEGAL?
• Does it violate your CODE OF ETHICS?
• What does your GUT FEELING tell you?
• How would you feel if this were on the front page of the NEWSPAPER?
• What would MOM (or some other ROLE MODEL) do?

“Right vs. Right” Dilemmas
When two equally important values are involved, do you choose the one that favors:

• TRUTH or LOYALTY?
• SELF or COMMUNITY?
• SHORT TERM or LONG TERM?
• JUSTICE or MERCY?

Source:
Institute for
Global Ethics

Source:
Foundation News & Commentary

This interesting case introduces a range of ethical issues associated with family philanthropy, including the question of personal vs. foundation philanthropy, honoring the intentions of the original founder, and the potential for creating dependency among one's grantees. The case features responses from several family foundation trustees with suggestions for how to resolve these and other questions.

Source:
Minnesota Council on Foundations

We value the participation of individuals and families in private, organized philanthropy. We value the donor's right and ability to direct charitable assets through the philanthropic vehicles and to programs of choice. We value the role that philanthropy and philanthropic citizenship plays in a civil society.

These three declarations are taken from the National Center's Statement of Values and Guiding Principles. This statement defines these and other values, including how the staff and volunteers of the National Center implement these values.

Source:
Bloomberg Wealth Manager

The article describes specific sections of the tax code that tend to cause problems for family philanthropies, and provides suggestions to help advisors educate and help their clients to avoid potential penalties, fines, and future scrutiny. Some of these suggestions include:

• Prepare a memo or share existing briefing materials that spell out in simple language the rules governing private foundations;
   
• Designate one trustee to be responsible for being "roughly familiar" with the rules, and who can be expected to call the professional adviser when questions arise; and
   
• Conduct a legal-compliance review every few years, in which the advisor looks at recent tax returns, board meeting minutes, and other relevant documents (including grant agreements).

Source:
National Center for
Family Philanthropy
 

Regardless of the outcome of the current probe, the press coverage given to this situation provides one example for why families should be careful to follow their conflict of interest policies clearly, and should not give even the appearance of improper conduct with regard to these types of situations.

Self Family Foundation Conflict of Interest Policy
Many family foundations develop written conflict of interest policies for their board members and staffs to review and abide by. The Self Family Foundation of South Carolina, a founding Friend of the Family, has developed a clear and concise statement to help guide its trustees.

The statement begins by acknowledging the important value that board member involvement in community nonprofits can bring:

The Self Family Foundation encourages board members to play an active role in the community by serving as board members or otherwise being involved with a wide spectrum of nonprofit organizations. This means that, from time to time, potential conflicts of interest or appearance of such conflicts will inevitably arise. It is the Foundation's policy to deal with such conflicts as openly as possible.

The statement goes on to describe how the foundation handles such situations where a board member or relative has a connection to an applicant organization. Please refer to the link at left to read the complete statement.

Special Offer for FGN Subscribers:
Request a complimentary PDF copy of this issue paper.

“Replication is anything but a cookie-cutter process. The objective is to reproduce a successful program’s results, not to slavishly recreate every one of its features,” notes the author, Bridgespan Group co-founder Jeffrey L. Bradach. “At the heart of replication is the movement of an organization’s theory of change to a new location. In some cases, this might entail transferring a handful of practices from one site to another; in others, the wholesale cloning of the organization’s culture. Whatever the specifics, the right choice – including whether to replicate at all – will be strongly influenced by the complexity of the organization’s theory of change and the degree to which it can be articulated and standardized.”

According to the article, replication requires answers to three critical questions:

1) where and how to grow;

2) what kind of network to build; and

3) what the role of the individual "centers" needs to be.

"Many replication efforts begin with expansion to a handful of sites, which can then provide useful lessons for broader initiatives. Learning from the planned - and unplanned - experiments that occur along the way is an important part of the implementation process."

See below for a special offer for FGN subscribers - save nearly 30% off the regular subscription price for the Stanford Social Innovation Review.

"We know, through years of congressional study, that our field is well-governed, and much of that is due to the scrupulous self-governance exercised by foundation boards. This is the message we carry to Congress and to the media, and we will continue to do so."

According to Rip Rapson, president of the McKnight Foundation, this has been the case at that foundation. "Over the last few years we've made fuller use of an array of tools that ultimately don't get entered in the ledger as grants but that contribute directly to our program work. Our belief and hope is that these activities augment the ultimate effect our grant dollars have."

For more information about the EdVestors model, see the link at left or contact Laura Perille at perille@edvestors.org.

Sharing the Wealth
This engaging look at the history and ongoing battle between those promoting the abolition of the estate tax and those seeking to ensure its continuation describes the current state of this “war” and the key actors on both sides (including none other than William Gates, Sr., father of the wealthiest man in the world).

The article describes the strategies and rhetoric used by both sides of the debate – as well as the intense passion that each side feels for their respective arguments. Near the end of article, Gates – who is firmly in favor of keeping the estate tax, or at least a modified version of it – acknowledges this very point, noting of his opponents in the estate tax fight: “I disagree with what they’re trying to do… but those are not bad people. They’re Americans, they’re playing the American game, and I don’t demean it by calling it a game – it’s the system we have, it’s the way we do things.”

“Every dollar that featherbeds a foundation executive doesn't help a person in need,'' the first article quotes Sen. Charles Grassley, R-Iowa, and chairman of the Senate Finance Committee. “You have to wonder how excessive executive salaries and retirement packages fulfill the vision of those who left their money to set up foundations.”  

Pablo Eisenberg, senior fellow at the Center for the Study of Volunteer Organizations and Service at Georgetown University, says in the Times article that such a change of rules is required in these times. “Foundations are acting like investment bankers and not grantmakers,” the article quotes Eisenberg. “They have no sense of responsibility to communities at a time when government funding and private funding are being cut.” 

At the same time, several foundation leaders quoted in the article note that there may be grave consequences to such a requirement – including everything from the end of permanent endowments to the likelihood that foundations would immediately begin reducing grants to smaller, grass-roots nonprofits and international causes due to the administrative time and expense required by such grants.

Still, many prefer the “personal touch” of the more traditional community foundations, which one donor describes as “a concierge service for philanthropy.” And some are downright critical of the financial institutions involvement in philanthropy. As Sterling Speirn, president of the Peninsula Community Foundation, says in the article, “It’s hard to think of them as public charities. They are not community-oriented… They are limited to the money management and the transactions.”

Place-based Philanthropy: Connecting with Others
The Philanthropic Initiative and the National Center for Family Philanthropy have teamed up with the Annie E. Casey Foundation on an initiative to encourage knowledge sharing among donors and foundations about “place based” strategies to improve the lives of children and families in disadvantaged neighborhoods. To promote and inform this effort, the Casey Foundation recently launched an on-line newsletter called Place Matters (www.aecf.org/initiatives/pbp) and is exploring a number of other potential approaches to establishing learning communities including developing seminars, toolkits, list-serves, and funding collaboratives. Through this initiative, the Foundation seeks to partner with like-minded foundations and donors to improve results for disadvantaged children and their families.

What do we mean by place-based philanthropy? Based on their experience, the AEC Foundation has identified a number of qualities that typically characterize foundations that are more effective in improving the lives of children and families, including the following:

1. They focus on a pressing social need affecting children & families

2. The programs are results oriented and informed by a theory of change that reflects the need for long term involvement

3. They use data to set priorities, track results and advocate for change

4. They act as catalyst or convener to foster collaboration among community stakeholders

5. They recognize the role of community/neighborhood in a family’s success and partner with neighborhood residents

6. They use their unique standing in the community to leverage political, human and financial capital.

How can you connect? Are you currently involved in funding strategies like the ones described here? Are you interested in place-based giving and want to learn more about it? If you would like to learn more about this project and become connected to other funders who share these interests, please email Deborah Brody Hamilton at the National Center for Family Philanthropy (Deborah@ncfp.org)or Ellen Remmer at The Philanthropic Initiative (ERemmer@tpi.org).

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