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Should the Family Council Handle Philanthropy?

Dear Advisor: Our recently formed family council has proposed taking over our family business’s philanthropic activities. We are meeting some resistance from top management. Can you offer some guidance?

Philanthropy is often an important dimension as a family business progress from generation to generation. The shared sense of supporting meaningful causes and initiatives can reinforce family values and build motivation and cohesiveness among family owners.

Effective philanthropy, however, can be a complicated and demanding task---both in terms of its funding and in terms of determining appropriate beneficiaries of your largess.

Charitable contributions by a business may actually take two or more forms. Businesses are constantly solicited for donations by all sorts of organizations for donations. Generally speaking, some of these requests are honored to build business relationships and support business goals. Often budgeted under community relations, such donations are a cost of doing business rightfully under the direction of management. While it might help management to say no by referring some requests to a donations committee, the family council typically would not be in a better position than management to allocate such funds.

A second type of business donation really is more akin to true philanthropy. These donations go to causes top management believes are supported by the shareholders . Business leaders in family business often feel that it is their prerogative to make such decisions because it has always been done that way. Indeed, since the ability to make sizable donations can confer social status and community power or because he or she may have pet causes, the business leaders may be reluctant to let go of philanthropic decision making.

More fundamentally, however, funds for a business philanthropic donations can come from only one source---the business s profits which might otherwise be paid out as distributions or dividends. In effect, shareholders are giving up potential income for the sake of a charitable cause---something they may or may not wish to do. Particularly if your family council represents a large number of family shareholders, you must make sure your philanthropic initiative enjoys broad support---both for tapping into their dividend income and for the causes chosen.

When setting out to do philanthropy in the name of family owners, family councils often start taking a responsibility for a portion of the funds traditionally donated by the business, perhaps increasing the amount over time. Others start with funds provided from personal wealth by one or more family members. Family foundations are often initiated from family members gifts rather than direct business funding.

Readers of The Family Business Advisor know that we are great advocates of family philanthropy, but appropriate boundaries related to business management and ownership must still be respected.





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