Executive Director, John M. Olin Foundation and Philanthropy Roundtable board member
Manager of Philanthropic Advisory Services, U.S. Trust Company
Chairman and CEO, Blackwell International and chairman of the Foundation Management Institute
Mr. Piereson: When foundations were developed early in the twentieth century, they adopted the governing form of the public corporations, with management under the general supervision of a board of directors, even though there are manifest differences between the foundation and the business corporation.
The obvious difference is that corporations have a measurable responsibility to shareholders, who are often represented on boards of directors, while the charitable foundation has but a vague and indeterminate responsibility to the public (and obviously a responsibility to the donor).
Under these circumstances, a number of important questions arise. What role should board members play in overseeing the foundation’s financial portfolio? For whom is the board member supposed to be most effective? How do we know if a foundation is doing well? What management issues should receive particular attention from trustees?
To help with the question of the board member’s role in overseeing the financial portfolio is Linda Franciscovich.
Ms. Franciscovich: One of the most important ways that trustees carry out their duty of care is by overseeing the finances of the foundation. By overseeing finances, I mean overseeing investments, liquidity needs, and the tax and compliance aspects of private foundations.
In New York and in many other states, when one talks about finance, the standard for investment management of a foundation is the Prudent Investor Act, which requires a standard of conduct for fiduciaries. It does not expect board members to be experts in investments, but rather expects trustees to oversee an articulate investment plan.
The Prudent Investor Act has a specific delegation provision, which means that the law recognizes that sometimes the best way to manage the finances is to hire skilled and professional experts in the same way that you would hire a CPA for the tax return or a lawyer to help with the legal aspects.
I recently became one of four original members on the board of a small foundation. Among the first things we did was to look at the foundation’s finances. We needed to understand our cash flow, our pay-out requirement, and to set an asset allocation. Finally, we selected an investment manager, because we knew we needed an investment professional.
When hiring our portfolio manager, we understood that we were able to delegate investment responsibility, but we needed to oversee. So when we sat down with our portfolio manager, we created an investment policy that, articulated our goals and objectives. The portfolio manager was charged with the selecting securities and bonds within our asset range, and we established benchmarks for the manager’s performance.
Mr. Freeman: For whom is the board member supposed to be effective? For the person who created the wealth and sought to make his or her world a better place. For the person who hoped to transmit timeless values tempered in his own extraordinary experience. For the person to whom all of us should show both gratitude and deference, the person who in many cases, and ultimately in all cases, can no longer speak for himself-in other words, for the donor.
How can that objective be achieved? Let me give you four guidelines that have emerged from our work at FMI, where we have counseled more than 100 donors on setting up foundations. These guidelines have survived multiple live-ammunition tests. They may not apply in every case, but they have applied in every case that we have seen.
First, discard the corporate paradigm. In a corporate board, what you want is 360-degree visibility. You want to be able to spot new opportunities. You want to be able to detect new threats to the organization, and you want to pick them up early on the horizon. In other words, the corporation board profits from diversity-of opinion, background, skill, and perspective.
In a foundation, however, you don’t want diversity. You want uniformity. When it comes to the fundamental direction of the institution-the vision and values of the donor-you want no debate at all. You want utter agreement. The debate should be about how you implement that vision, not whether the vision ought to evolve due to changing circumstances.
Two, keep the technocrats off the board. Yes, hire good lawyers, good investment managers, good accountants, and other experts, but hire them by the hour. Don’t give them a leadership role in the foundation in return for, in effect, reduced-rate professional service, or as recompense for long-time family service. They may come in as resource people, but they stay as policy-makers; the trustees should be the policy-makers, not the resource people.
Three, screen corporate legacies carefully. I can’t tell you how many times we have talked with entrepreneurs setting up foundations who say something along the following lines about their executives, “Well, Tom is a whiz at marketing, and Dick is great at production. Harry isn’t as good, but he’s been with us a long time, so why don’t we put him in the foundation?”
The problem with that is, who knows what grudges Harry has been nursing against Tom, Dick, and the other successful business people? Who knows what ideological weeds have been growing in that garden? The answer is, put Harry on the board and you will find out at length, at leisure, and expensively. So our counsel is don’t find out. It has been almost invariably good advice to tell someone who has built a good company: Never put your least successful executive on the board of your only foundation.
Four, screen family legacies even more carefully. Don’t appoint the child who even now, 20 years later, can recite the soccer games unattended, the school plays unattended, the junior prom when you were in Houston on a business trip. The sad fact is that not all children share dad’s values, and the even sadder fact is that some children don’t share dad’s values because they are dad’s values.
Our advice to donors in this situation is: assuage your guilt the old-fashioned way. Pay cash. It is really too expensive to transfer your foundation, which is a perpetual organization, to a child who is settling old scores. You are trading away your good name in perpetuity. You will become known not for what you did in your life, but what your aggrieved child chose to do with your name after your life. We all know many foundations, big ones, that carry this burden today.
Finally, remember what is at stake. For donors, if you get the board right, all good things are possible. If you get the board wrong, no good things are possible, and in all likelihood a hijacking will soon be in progress. So take the time, pick the right people, pick them for the right reasons, and good things can happen.