Endowed Charitable Foundations: Not Just Maximising Investment Returns

Gina Anderson, Philanthropy Fellow at the Centre for Social Impact, looks at the impact of endowed charitable foundations. This article is from the CSI blog. 

OPINION: Endowed charitable foundations such as Private Ancillary Funds (PAFs), Public Ancillary Funds and Charitable Trusts, differ from other fiduciary investors (those who have a legal responsibility for managing another person’s money, such as registered investment advisors) because they exist to deliver a public benefit. In addition, as their financial objectives are generally not based on the needs of specific recipients, foundations have a different relationship with their beneficiaries.

This means not just thinking of an endowment simply as an investment, but seeing it as part of a broader financial governance canvas with complex inter-relationships between spending, investing, accounting and a governance mechanism that supports long-term thinking. This often presents issues that are peculiar to endowed charitable foundations as opposed to other classes of investors. In addition the law and regulation on the various legal structures of endowed charitable foundations often seem more concerned with the protection of assets rather than the promotion of charity.

How then do foundation trustees manage the task of not just maximising investment returns on their endowments but also maximising financial distributions or grants to charities – in the face of the twin pressures of lower investment returns and high demands from their beneficiaries as public funding shrinks in a harsher economic environment?

Complementary to Philanthropy Australia’s suite of Trustee Handbooks for different philanthropic structures comes a publication from the Association of Charitable Foundations in the UK entitled The Governance & Financial Management of Endowed Charitable Foundations by Richard Jenkins.

This report considers the governance and management of endowed charitable foundations from the perspective of those who run them as opposed to those who regulate or advise them. Twenty five individuals were interviewed including trustees and executive staff currently engaged in a total of ten UK foundations of various sizes. In addition a number of investment advisers and legal experts, governance and investment specialists, and individuals with roles in umbrella bodies, were also interviewed.

The report examines the common principles for the management of endowed charitable foundations, covering topics such as acting prudently, deciding how much to spend and how much to keep, using the whole balance sheet, and seeking expertise and advice. The result is a thoughtful, provocative and insightful report that, while written for UK foundations, is a very relevant and useful resource for endowed charitable foundations in Australia.

Full of useful tips, the intention of the report is not to prescribe particular solutions but to ask questions, such as:

• Fiduciary obligations originate to protect the endowed funds from trustees who might act carelessly. Is there another risk? That foundations are not taking full advantage of the freedom they have?
• What might constitute failure for an endowed charitable foundation?
• Does the instinct not to lose the family silver prompt trustees to emphasise preservation of the endowed funds over distribution of grants to charities?

There is also a very useful chapter that examines the influence of founders and their memories which can exert a strong influence on foundations, together with the impact of family member trustees.

Through interviews and case studies, the report shows the ways different foundations consider questions such as these and how foundations have implemented different solutions to get the best value for their charitable aims.