Private Entities, Autonomous Decisions, Charitable Purposes

John Tyler
Vice President and Corporate Secretary, Ewing Marion Kauffman Foundation

Foundations are generally private, autonomous, and independent enterprises. Among other characteristics, they can operate with flexibility and purpose that governments cannot; they can take risks and undertake activities that the market-oriented business sector rightly will not; and they can manifest freedoms inherent in democracy. As such, they have opportunities to contribute uniquely to the fabric of our nation's social and economic systems.

However, in recent years, this balance has been threatened by a notion that foundation assets are somehow "public money."

There was a time when referring to foundation assets as "public money" was seen as shorthand for recognizing that those assets had been irrevocably committed to furthering charitable purposes consistent with donor intent and the law. Many still hold this view. But imprecise language has allowed too many to invoke or suggest a public-money rationale to justify demanding that foundations meet quotas for making grants to specific types of organizations or for purposes deemed appropriate by people other than the donors and fiduciaries. Or, to mandate that boards and senior staff meet ratios for their demographic composition. Or, to force foundations to exert time and incur expense collecting and reporting data and information that are not relevant to ensuring charitable uses of resources.

This, unfortunately, is only a short list of efforts that are dangerous in their own right but are particularly threatening when based on "fallacious reasoning" and a "dangerous disavowal of one of the basic tenets of the American system" (Alan Pifer, Carnegie Corporation, 1968).

Most often, the mischaracterization of foundation assets as "public" is based on the charitable deduction that donors receive and the exemption from various taxes, including income, property, and sales taxes. There are at least four reasons why this rationale fails.

Law Respects Independent Operation

First, the tax-favored treatment afforded by government is premised generally on the commitment and use of assets to further charitable purposes and not for private benefit. Beyond ensuring accountability to the charitable ends specifically chosen by private parties, applicable statutes and regulations do not—and should not—encroach on the operations, decision-making, governance choices, or other internal aspects of foundations that receive donations or are tax exempt. The law rightly respects such matters as committed to autonomous discretion.

"Public" Benefit, Not Public Control

Second, as noted above, the tax-favored covenant includes the important prohibition on private benefit. That is sometimes recast as requiring that funds be used for "public" purposes or benefits. However, even a "public" benefit does not mean that all members of the public or a particular geography or demographic are beneficiaries. Nor does a "public" purpose displace decision-making responsibility from the donor and the foundation's fiduciaries, who have a duty not to abdicate that obligation to some "public" authority. As a private matter, the donor and fiduciaries still decide the purposes to pursue, how to pursue them, how to evaluate effectiveness, and what information to disclose beyond that which must be disclosed by law.

Tax Benefits Do Not Compromise Autonomy

Third, tax policy allows individuals and businesses to enjoy various deductions, credits, and other forms of tax-favored treatment without a corresponding loss of privacy, autonomy, or independence. A home mortgage deduction does not give government the right to dictate house color. A clean energy R&D tax credit does not give government the right to dictate that a business conduct a specific test in a particular way. There may be other elements of government that might impose restrictions or mandates on such matters, but the basis for doing so is not grounded in tax treatment.

Government Should Be Consistent

Fourth, even those organizations that contract with or receive grants from government are not subject to the types of restrictions or mandates discussed above. To the extent that contracting parties compromise independence or privacy, they have made a decision to do so in exchange for the benefits of the relationship. It does not follow that greater intrusion on foundation autonomy can be justified in the context of general tax benefits and in the absence of a direct decision by government and an intentional compromise by that entity.

For these and other reasons, private foundation assets are not "public money" but, instead, are the responsibility of private, independent entities charged with the stewardship of resources for charitable purposes consistent with donor intent and the law. This status is fundamental to the unique role of foundations in our society. It is essential that this status be preserved and that those who value it—donors, policymakers, grantees, and others—be vigilant in protecting it.

This essay is an excerpt from the Kauffman Thoughtbook 2011