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Philanthropy - adding value

15-Jul-2008

There can be little doubt that philanthropy is in fashion for those who work in the private client world. High profile campaigns such as rock star Bono's one man mission to alleviate Third World debt for developed nations, Sir Tom Hunter (Scotland’s richest man) and his well-publicised philanthropic initiatives, the Gates Foundation's massive resources and ambitions (such as its programmes to eradicate malaria and river blindness), and billionaire investor and Berkshire Hathaway Chair Warren Buffett's donation in 2006 of USD30 billion to the Gates Foundation, have all ensured that philanthropy is top of the agenda for many of the world’s wealthy.

Young, rich, socially-conscious entrepreneurs such as eBay founder Pierre Omidyar and Google co-founders Larry Page and Sergey Brin are trying to change philanthropy through unique networks and new forms of giving. The concept of measurable life change, with direct investments and follow-up to track results, is gaining more recognition through the big names, but also through smaller organisations. Unsurprisingly, this high profile activity has also brought philanthropy sharply within the focus of financial services professionals.

A survey conducted in 2006 reported that 11% of high net worth individuals (HNWIs) worldwide contributed in excess of 7% of their wealth to philanthropic causes. Looking at ultra-HNWIs (those with assets of over USD30 million), the figures rose to 17% of that group donating 10% of their wealth. It is also reported that over USD285 billion annually is donated to philanthropic causes and indications are that this figure is still growing.

While high profile individuals have set an example to the rest of the world, a number of first time philanthropists are also emerging from the newly wealthy regions of Asia, Latin America and Eastern Europe, as well as the oil rich countries of the Middle East. This is in addition to those new philanthropists in the mature jurisdictions such as the United Kingdom and the rest of Europe. 

Education, elimination of poverty, health issues and combating global warming continue to be major beneficiaries of philanthropic giving. Whilst some philanthropists may not be in a position to devote a great deal of time to the management of their endowment, others are more closely involved. Increasingly, the next generation are being given the opportunity to get closer, giving them valuable experience in the responsibilities of wealth.

In pursuing his or her chosen objectives, the philanthropist will want to ensure that their generous endowments are well managed and that their desired objectives are met. Whilst this all sounds fairly straightforward, reaching the optimum solutions for the philanthropist and for those targeted to benefit requires expert advice and management.

The philanthropist is not always driven by a desire to mitigate tax obligations, and where this is not the case, the choice of how, where and by whom the endowment fund is located and managed becomes very much wider and some would argue, more straightforward with less bureaucracy.  With this in mind, the advice may well be to establish a trust or foundation in an offshore jurisdiction which has in place an appropriate and regulatory-friendly infrastructure. For example Switzerland, Jersey or Guernsey have all of these components but they (and of course others) have in common a wealth of experience and expertise in providing the management and administration services which are so vital to the philanthropic process.

The choice of trust or foundation to hold endowment funds will depend on a number of factors. Take for example a very wealthy individual, Mr X, who wishes to donate a significant proportion of his wealth to philanthropic causes. His prime motive is to alleviate poverty in Africa, having travelled extensively in that continent, where he has seen the ravages of hunger and disease first-hand. He has also noted the corruption which is endemic in some of the places he visited and suspects that not all of the charities working in the region operate as effectively as he, as a successful businessman, would expect. He would have liked his three children to have shared this experience with him, as he considers that this would have been an eye opener for them especially bearing in mind their cosseted life styles. He now feels that if he could involve them in some way in philanthropic causes, they might learn to have responsibility and eventually follow in his altruistic footsteps.

Whilst Mr X has heard about trusts, he has for most of his life lived and worked in a civil law jurisdiction but cannot come to terms with the trust concept and contemplate entrusting the many millions of dollars he wishes to donate to philanthropic causes to a corporate trustee whom he does not know. He particularly does not like this non-contractual arrangement which would mean that he would have little or no control over the management and distribution of the trust funds. Despite the explanations and reassurances of his legal adviser and the protections which he says can be put in place, Mr X is now considering creating a foundation which he will endow with very significant funds at the outset and in due course may add further monies.

His lawyer explains that the foundation may be established in any number of jurisdictions – for example Panama, Liechtenstein, Austria, Switzerland and shortly also the Channel Islands. The lawyer tells Mr X that a foundation has its own legal personality and therefore can hold assets and sue or be sued in its own name. It may enter agreements with third parties, like a company, but does not have shareholders. There may be beneficiaries if the foundation is established for charitable purposes.

The lawyer advises that Mr X will be the founder – the person who provides the assets to be administered by the foundation. The foundation will be established by a charter and run by a council which is responsible for fulfilling the foundation’s purpose, as defined in the charter. The charter itself will appear on a public register but the rules which govern its operation will be in a private document.  Council members will have duties akin to those of company directors and frequently one of the council members will be a corporate body, expert in providing the day-to-day administration and management services which will be required for an endowment of the size envisaged. As founder, Mr X, if he so wishes, will be able to have a very significant and influential role to play with the council and he, or a trusted and suitable individual, may also assume the role of a protector or guardian, with various powers such as hiring and firing members of council and/or supervising the activities of the foundation council.

It will be seen that a foundation will address many of the concerns which Mr X has:

  • It will give him the element of control which he wishes
  • His children can become involved and learn responsibility with money whilst they are still young. The family can adopt a collaborative approach as they work with other members of the foundation council in the management and distribution of the funds to philanthropic causes
  • The family, with other members of the foundation council, can also liaise with professional experts to ensure that the endowment funds are properly managed
  • It will ensure that the money invested in charitable causes, in this case to alleviate poverty in Africa is wisely spent. The council may well employ consultants to assist in this process

The global private banking community has been involved with providing wealth management services to charities for many years and competition between service providers is fierce which, in theory, should lead to more competitive pricing, better service provision and thus added value to the clients using those services.  Philanthropy is no exception to this principle and where one bank fails to deliver another will soon step in to take their place.

Make no mistake about it, the management of charitable assets is a profitable activity for the banks and more so when the investment of the trust (or foundation) funds are managed in-house.  It would not be unreasonable to expect that before making the decision to appoint a particular trustee, there is full disclosure of fee arrangements which should include any further fees and retrocessions to be derived from the activity of providing investment management services.

Whilst some private banks offer this in-house service and do make a success of providing a comprehensive service, others choose to be totally independent by selecting an investment manager from outside their own organisation. The selection process may be a complex one involving a close look at retrospective performance, interviews, qualitative and quantitative analysis. This careful and considered approach may result in added value to the trust fund and ultimately to those charities which benefit.

Many of today’s entrepreneurial philanthropists treat their charitable giving in the same way as their investment portfolios, expecting return on their investment and a demonstrable performance from their investment managers. In recent years, charities have been established which serve to match the philanthropist with the appropriate causes to which they could donate. Two such charities are the WISE Foundation, based in Switzerland, and New Philanthropy Capital in the UK. Both charities are run by finance experts who work to ensure that the money invested in the chosen charities is put to the best use and the success of that investment is reported back.

In some cases, benefactors will have clear cut ideas regarding which causes they want to benefit. This was probably the case when shipping magnate and philanthropist Sammy Ofer was inspired to donate GBP20 million to the National Maritime Museum at Greenwich.

Undoubtedly those institutions offering and providing services to the growing numbers of ultra high net worth people who donate to causes have a role to play. They can add real value in the ways described above and, like any other client, the philanthropist is entitled to receive value for money. When we are talking about huge sums of money so generously given there is arguably a case for even more professional expertise and moral responsibility on the part of those in the financial services industry who are involved in the process.