Philanthropy with purpose - charitable contributions by family businesses

Nation's Business, June, 1993 by John L. Ward, Craig E. Aronoff

The beneficial returns of giving away money; the importance of choosing the right lawyer.

The second-generation chief executive of a successful family business expressed dismay and surprise about part of his job experience. "I never believed giving away money would be so hard!" he said. "I feel hassled by the many requests for contributions from business associates and employees. The requests are usually for very worthwhile causes, but where do we draw the line? How do we make these decisions?"

While some argue that a corporation's only purpose is to make a profit, virtually every family business we know is quite generous. Family-business leaders are often very frustrated, however, about how to handle philanthropy. They have many questions: How much should we give? To what causes? Most of all, how can we make our giving a more positive experience?

The key, we think, is to have a focused family foundation. It can be small or large. It doesn't cost much to set up. And, we have found, it can bring many benefits to a business-owning family.

First, a foundation becomes the major conduit for corporate giving. Charitable requests can be directed to the foundation. The foundation's directors usually meet once or twice a year and determine what causes to fund. This means family executives don't need to respond on the spot to awkward situations such as requests from friends, customers, or a luncheon table mate at a trade meeting or civic event.

If the foundation is focused on one or a few purposes, there are other advantages. A focus--such as promoting literacy programs--provides a rationale for selecting among worthy causes.

More important, a focus gives the foundation a chance to make more of a difference. Directing scarce funds to a few predetermined purposes increases the results of such giving.

A focused family foundation can have great impact because business owners and their families often are skilled at identifying distinct needs and monitoring the performance of funds. Some families search for unique charitable needs where they can influence the results not just with their money but with their time and expertise as well.

One family we know directs its efforts toward entrepreneurship programs for young people in memory of their grandfather, the founder of the business. Another family gives its funds to research on workplace safety. Yet another family gives to alcohol and drug clincs because of past family problems with substance abuse.

Several families we know give their foundations' funds to scholarships for the children of employees as a sign of appreciation for those who have made the firms' success possible.

Consider directing family philanthropy toward the celebration of something special about the business--such as its founding, its customers, its industry, its employees, or its community. Then the philanthropy not only can make a focused difference but also can create side benefits for the business itself.

Establishing a foundation also can emphasize the importance of business profitability. The foundation can be funded by a formula based on profitability. Some businesses set the level at 5 percent of pretax profits; other companies choose lesser amounts.

We know several retired business owners who have become interested in focused philanthropy as a new vocation for themselves as they let go of the responsibilities of day-to-day business leadership.

We also find family members who are not active in the business appreciating the business more when they see the link between business success and family values. Their active involvement with the family foundation gives them a chance to work with other family members and to develop or apply their abilities. They can learn and practice decision-making and policy-setting skills.

Many families find that such activities reinforce relationships, build family pride, and even provide an element of pure enjoyment.

The central purpose of a family foundation, however, is not to make life easier on business executives or to provide family members with shared activities. Those are often nice side effects. The purpose, of course, is to reinforce the family's values--especially the value of giving back to the community what the family has received from it.

There are several beneficiaries: the recipients of philanthropy, the business itself, and in particular the family's younger members. When they observe the family working together, they can learn from it. They see that the family's entire identity isn't just the business, and then they feel more comfortable about their decision to join or not join the business when the time comes. They also gain some of the humility that we find serves future leaders of family businesses so well.