Creating External Safeguards to Protect Your Intent

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The focus of this guidebook so far has been on establishing internal safeguards for preserving your charitable intentions: choosing the right legal entity; crafting a mission statement and making it operational; selecting strong board members and codifying the means for perpetuating them; and setting up board policies for preserving your intent.

If you set up your foundation early, grow it over time, establish a giving history and an operational framework, and provide for a sunset provision, then your internal safeguards greatly improve the chances that your philanthropic purposes will be secured as you intended. Nevertheless, are there also external safeguards for protecting donor intent that you should consider?

Perpetual entities exist for a very long time—“perpetuity is a lot longer than you think,” as the old line goes—with limited safeguards for preserving the intent of a since-deceased donor. Indeed, grantmaking entities have even fewer external oversight controls than public charities. After all, public charities are accountable to the funders who support them. A grantmaking institution whose donor is no longer living lacks even this minimal external corrective mechanism. Who will hold your board members to account if they depart from the charitable mission of your foundation?

By law, a grantmaking entity is held accountable by the Attorney General in the state in which it is domiciled. A state Attorney General typically has the statutory duty to oversee all charitable organizations within his or her state. But the Attorney General may or may not intervene if your charitable entity departs from its mission. For one thing, states spend very little time and resources monitoring grantmakers. For another, they tend only to get involved when there are allegations of fraud or other criminal activity. In other words, while the Attorney General has statutory oversight, it is unlikely that he will intervene if the mission of a grantmaking entity begins to veer off course.

Furthermore, even when an Attorney General does act, there is no guarantee that his intervention will preserve the purpose of a foundation. The record is mixed. The Attorney General serves and acts on behalf of the public interest. It is not inconceivable, or even necessarily unlikely, that an Attorney General could interpret your donor intent restrictions to be contrary to the public interest.

For these reasons, some donors who establish perpetual giving entities have taken additional steps to protect their charitable intentions by creating external, third-party safeguards. A range of external safeguards may be contemplated. In some instances, donors have incorporated into their governing instrument provisions that give board members standing to bring suit for violations of donor intent. Others have given standing to disinterested third-party organizations that share the donor’s principles. Still others have stipulated that their boards include third-party representatives from sympathetic organizations. And finally, at least one major foundation has incorporated regular donor intent audits.

These third-party “watchdogs” assume responsibility to enforce future compliance with your charitable intentions. They can even go so far as to sue your board members, if necessary. For donors planning a perpetual entity, independent safeguards offer another layer of oversight. It is important to keep in mind that few independent safeguards have been put to the legal test. Still, there may be good reasons for creating such safeguards, even if ultimately they do not survive a legal challenge.

While recognizing that simply granting authority to a third party to enforce donor intent may not in itself meet the necessary legal threshold for standing, some foundations have pursued this strategy in conjunction with other measures as a way of protecting donor intent.

Giving Standing to Outside Parties

Thomas A. Roe was a South Carolinian businessman who used his philanthropy to help establish a movement of state-focused, free-market think tanks across the country. Attentive to donor intent, Roe carefully implemented a range of internal mechanisms to protect his intentions when he established the Roe Foundation. He clearly spelled out his foundation’s mission, his beliefs, and his general philosophical principles in his founding documents. He carefully chose board members who shared his beliefs and who subscribed in writing to the foundation’s mission and to the principles of donor intent. He required the same of his grantees, asking them to pledge in writing to uphold the mission of the foundation and his donor intent.

Finally, Roe named as watchdogs two organizations that he knew well and that shared his philosophical outlook. He granted these two organizations—the Mont Pelerin Society and the Philadelphia Society—and any of their directors standing to challenge the foundation in court, were it to violate donor intent or its announced principles.

Roe also insisted that these two organizations, in addition to being granted standing to sue, remain substantial beneficiaries of the foundation, receiving annual grants. This second provision—giving two organizations meaningful contributions each year—makes them, in effect, quasi-beneficiaries with a special interest in the conduct of the foundation.

There is no guarantee, were litigation ever to be brought by one or both of the two watchdog organizations, that they would be granted standing in court. In a strictly legal sense, neither organization is truly a “beneficiary.” Nevertheless, the example of the Roe Foundation is instructive for those seeking to establish third-party safeguards.

One important thing to remember is that Roe was active in both the Mont Pelerin Society and the Philadelphia Society during his lifetime. He had good reason to believe they share his philosophical outlook and, unlike a grantmaker, would be held accountable to their mission by their membership and other donors. If the foundation ever changed course, presumably the board members of either organization would step in to resolve the issue.

Whether or not a judge would give either organization standing is an open question. Regardless, there are good reasons for establishing third-party oversight. For one thing, their presence alone acts as a safeguard for donor intent, as they are a constant reminder to the board of what Roe meant to accomplish through his charitable giving. They constantly remind those associated with the Roe Foundation: These are the organizations that were meaningful to Roe. Finally, their inclusion in the foundation’s bylaws is a not-so-subtle reminder to the foundation’s board members that they can be held to account by outside parties.

Incorporating Sympathetic Organizations into Your Board

Another strategy for creating independent safeguards for a perpetual grantmaking entity is to make provision in the bylaws (or other establishing documents) for representation on the board by organizations that share the organization’s mission. Under this scenario, board representatives from third-party organizations are supposed to ensure that the grantmaker’s activities support the donor’s intentions as stated in the mission statement. As board members, they have standing to bring suit against the board if it takes a direction contrary to its stated purpose. Some observers have even suggested that donors stipulate that a majority of board members be drawn from one or more charitable organizations that share the foundation’s mission. At minimum, they would act as watchdogs for donor intent.

For example, upon her death, Clare Boothe Luce, the widow of Time and Fortune founder Henry R. Luce, established through a bequest the Clare Boothe Luce Program at the Luce Foundation. The program today is the single most significant source of private support for women in science, mathematics, and engineering. Knowing how foundations can veer in their missions once the founder is no longer involved, Luce stipulated that the governing body of the newly formed entity comprise individuals, at least in part, from organizations that she knew and trusted: people whom she knew would carry out her intentions as she wished. As such, she stipulated that three of the representatives on the board come from the Heritage Foundation, an organization in which she was actively involved and whose mission she eagerly supported.

An alternative to appointing a majority of board members from third-party organizations is to make a provision in your bylaws that requires a supermajority to amend the bylaws, particularly to make changes to the foundation’s mission or purpose. This would give the minority of board members from third-party organizations, the watchdog directors, the ability to effectively veto any changes in the foundation’s mission.

There are, however, serious potential drawbacks to consider in giving third-party organizations influence over your grantmaking entity. First, organizations sometimes drift from their mission in ways that cannot be anticipated. For this reason, it is important to consider carefully the organizations that you involve in your board, including their mission, their history, and their own provisions for ensuring that they pursue their stated purpose. Second, representatives from outside organizations, especially if only one such organization is represented on your board, may try to sway support to their organization. Finally, the representative organization may simply cease to exist. In this instance, a provision may require the foundation’s board to choose another representative organization or simply let the position sit vacant, eliminating the influence that you tried to create in setting aside the seat.

Instituting Donor Intent Audits

The John Templeton Foundation provides an additional example of innovative ways to create independent donor intent safeguards.

When John M. Templeton Sr. established the foundation, he took great care in creating internal safeguards to ensure that his intentions for the foundation would be carried out over time. Aside from crafting a well-wrought mission, he stipulated in the foundation’s charter and bylaws what the foundation would and would not fund. He required the foundation’s board of trustees to read the charter annually, knowing that once he was no longer involved in the foundation that the trustees would be the governing authority. Moreover, the trustees oversee each grant and program specifically to ensure that they comport with donor intent.

Sir John also reportedly stipulated that every five years the trustees must oversee an external audit process to evaluate whether or not the foundation’s grantmaking is in keeping with the provisions of the bylaws and charter. If the audit finds that less than 91 percent of all grants align with donor intent, the directors put the officers of the foundation on probation for one year. If the foundation again fails to meet the 91 percent threshold in a subsequent audit, the trustees are empowered to remove the officers.

The audit is exceptional in that it has actual consequences for those who run the foundation. The audit not only forces the foundation to independently assess its giving in terms of donor intent at regular intervals, it forces staff, officers, and trustees to perpetually ask how a given grant is fulfilling the mission of the foundation. It provides a prudential check on the organization by making donor intent central to its day-to-day grantmaking activities. In other words, it makes donor intent operational, not simply aspirational.

The foundation has yet to undergo a donor-intent audit, as the provision in the charter that stipulates the audit was not triggered until after Sir John’s death (in 2008). Like any audit, the outcome of a donor-intent audit is contingent, at least in part, upon the mandate given to, and the competency of, the auditors. Furthermore, assessing whether or not a grant fulfills donor intent is at least in part a subjective enterprise. Perhaps the most ambitious grants, the ones that would best suit the donor’s intentions, will prove the most difficult to assess. If an individual grant fulfills 90 percent of the donor’s intention, rather than 91 percent, will it be considered a failed grant? How difficult will it be to assign these percentages?

Meaningful Oversight, Not Ongoing Conflict

Creating external safeguards can be an effective way of holding directors and trustees accountable to donor intent in perpetual giving entities. It is important to keep in mind, however, that it is also possible to go too far in creating independent safeguards, undermining your board members or creating a perception that they are either not trusted or not ultimately responsible for the well-being of the foundation. It is probably best to seek a prudent balance between establishing independent safeguards and instilling your trustees with a sense of responsibility. As Paul Rhoads writes, “one wants to encourage future trustees, and establish an esprit de corps that develops loyalty to the foundation’s mission.”

It is also important to consider establishing external safeguards in conjunction with your tolerance for flexibility. The independent safeguards that you choose should reflect your views on how much or how little flexibility your trustees will have to adapt or modify the mission of the foundation to accommodate future change. Where there is little tolerance for trustee flexibility in this regard, the independent safeguards should be strong. If your trustees are given great flexibility in adapting the foundation to changing circumstances, the safeguards that you establish should reflect this fact.

Finally, there is a subjective aspect to donor intent which ought to be considered. While a clearly articulated mission statement can and ought to delineate clearly a donor’s purposes and goals, disagreement can and will arise among well-intentioned parties as to whether or not a specific grant or program fulfills a donor’s intent, even when that intent is made plain. Donors should take care in creating external safeguards to ensure that they are establishing meaningful oversight rather than ongoing conflict between trustees and third-party interests.

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Conclusion

When a donor’s wishes are compromised, it’s frequently the case that the donor did not make his charitable intent clear enough. No document, regardless of how well it is put together, will absolutely guarantee that donor intent will be maintained over time. Indeed, a trust instrument or corporate document that tries too hard to anticipate every future contingency can unwittingly undermine the ability of future directors and trustees to carry out the founder’s charitable intent by being too specific and inflexible. At the same time, donors often err by making their directives too open-ended, giving future trustees and directors little guidance in creating an operational strategy.

Beyond that, if you want to preserve your intentions, you will need to be proactive in planning your giving entity. Start early, even if that means starting small. Donors who play an active role in making their philanthropic mission operational in their lifetimes have a better track record in preserving their intentions over time.

As this guidebook explains, you can minimize the deleterious effects that time can have on your intentions by choosing the right giving vehicle for your philanthropy; by limiting the life of your giving entity; by memorializing your intentions through a carefully thought-through mission statement; by choosing and cultivating the right people to perpetuate your philanthropy; by adopting board policies crafted to instill donor intent; and by creating external safeguards to preserve your intentions.

By taking these steps, you can have a reasonable expectation that your philanthropy will serve the purposes that originally inspired you to give.