This chapter is dedicated to Peter Karoff, founder of the Philanthropic Initiative; Peggy Dulaney, founder of Synergos; Tracy Gary, founder of The Women Donors Network and of Resourceful Women; and Robert and Wendy Graham, founders of Kataysis and Namaste. Each, in a special way, opened my eyes.
In this chapter I discuss the role of philanthropy in a family governance structure. I will demonstrate how philanthropy can powerfully assist a family in shaping its values and how, through its organization and practice, philanthropy can teach a family how to govern itself.
Philanthropy is first, perhaps, the fundamental parent expression of personal and family values. If the family mission statement is an expression of these values, philanthropy is often the best way to move them into practice. Philanthropy can often be a means for family members who are isolated from society by their wealth to connect with the larger issues of the world and to find an active and meaningful place in it. Philanthropy, or in the original Greek philos anthropos, means love of my fellow man. The practice of philanthropy by a family offers its members the opportunity to give to the outside world a portion of their time (human capital), talent (intellectual capital), and money (financial capital). Giving, as all of us know, feels good. Every spiritual tradition has a proverb to remind us of how good it feels. The one I like best is "The world loves a cheerful giver." Every spiritual tradition requires of its adherents that those with more give to those with less. As examples, tithing is a principal responsibility in the Jewish, Islamic, and Christian traditions, and taking care of the poor a principal obligation of most Eastern religions. Regardless of responsibility, philanthropy is fun.
American society has been blessed by the willingness of American families of privilege to give back substantial parts of their wealth for the betterment of mankind. The Astors, Carnegies, Fords, S. C. Johnsons, Kelloggs, Mellons, Morgans, Pews, and Rockefellers are some of the best-known philanthropic names of fortunes founded in the nineteenth and early twentieth centuries. All have generously and thoughtfully given away, in infinitely varied ways, vast portions of their wealth out of love for their fellow man. In the more recent past, the Annenbergs, Feeneys, Gettys, Hugheses (not relatives), MacArthurs, Milkens, Olins, Packards, and Sacklers have all given enormous sums to endow new philanthropies. Looking toward the future, the Gateses and Buffetts have said they will leave their fortunes to philanthropy. These families understand that philanthropy improves the lives of all of us and, more important, improves the lives of their family members.
These philanthropists were and are wealth preservers to the core. I am always impressed, when I speak to later-generation members of the old families, by the pride expressed when they discuss the extraordinary philanthropic work done by their ancestors. These family members also express great pride in the financial acumen of their forbears and appreciation for the financial benefits that have accrued to them as a result. There is, however, a special lilt to their voices when philanthropy is discussed. Many of the later-generation family members have continued the philanthropic work of their ancestors, albeit in fields of activity that their ancestors could not have imagined and, in some cases, would not have approved. The important thing is that family values of stewardship and giving back were inculcated in the family value system. Even more important, they are active values, calling for family members to participate in the world by sharing their human and intellectual capital and, where appropriate, their financial capital.
While gifts of financial and intellectual capital are important, it is the gift of human capital that is key to the use of philanthropy as a tool for long-term family wealth preservation. It is the sharing of self that makes philanthropy a critical contributor to the preservation of the human assets on the family balance sheet. Work, whether or not for wages, is an important part of feeling useful. In many European and Asian cultures, society is seen as having an obligation to provide useful work to all of its members. American culture, unfortunately, has never subscribed to this ancient humane social and business ethic. These older cultures understand that work is an important element in achieving a healthy life. All families understand how important it is that each of their members work. Philanthropic work meets this need for many family members. Unfortunately, our society at its most mercenary often fails to value philanthropic work at the same level as work for profit. Whenever I encounter this opinion, I refer to Andrew Carnegie's famous essay on philanthropy, or to the writings on philanthropy of the Jewish mystic Maimonides. Anyone who has read these two sources finds that giving, done well, is extraordinarily difficult work. Families must resist the market's short-term view of the value of different kinds of work in favor of the long-term proof of the value of their ancestors' philanthropic work.
Where does philanthropy fit in a family governance structure?
1) Every family mission statement should have a section dealing with the family's responsibility to the outside world and a section on how it will interact with the outside world. How can a family derive a statement of family values that does not include the importance of giving to others less fortunate than itself, or that does not define philanthropy as one of the values the family will project into the world as a symbol of its strength, its "differentness"?
2) Every family balance sheet should reflect the portion of the family's human assets, intellectual assets, and financial assets devoted to philanthropy. How can a family measure the growth of its overall wealth without also showing the growth of the portion of its wealth dedicated to philanthropy?
3) Every family with financial assets in excess of $2 million should create a formal organization to support its philanthropy. The form of organization should be determined in consultation with skilled advisers but, at a minimum, should include a broad structure that will allow participation in decision making by all family members. Families with less than $2 million in financial assets can organize themselves to do philanthropy together without incurring the administrative costs of a formal organization by using a form of philanthropic organization called a donor advised fund. Families of substantial wealth also frequently select this form of organization. A donor advised fund permits many unrelated donors to use the same core organization for the administration and investment of the philanthropic portion of their financial assets while permitting each donor to determine the philanthropic purposes to which her or his individual fund will be dedicated. The sharing of costs that a donor advised fund affords permits each family in the fund to do more with its philanthropic dollars than it could if it had to support the full costs of its own individual organization. A donor advised fund makes it possible for every family in America to increase the strength of its family balance sheet by sharing the values of giving and learning that flow from philanthropy.
Regardless of the type of philanthropy a family selects, the decision to organize the family to do its philanthropic work together contains within it the same issues of governance as arise in all other joint family decisions. A philanthropy must be as carefully organized as every other entity within the family governance structure if it is to carry out, with excellence, its special role in wealth preservation and if it is to be integrated properly into the family's overall structure.
Many families use the organization of a philanthropic entity as the first step in the construction of their wealth-preservation structures, recognizing that it offers the family a mechanism for learning together about the following issues:
Objective business issues
Different forms of legal entities and the purposes for which each is used
The investment of assets
Modern portfolio theory
Asset allocation
The administration of assets
Taxation
The supervisory role of the courts and other governmental organizations
Accounting
The role of management in an organization
The role of a board of directors in an organization
Classes of directors
Family members
Outside directors
Terms of directors
The role of the shareholders in an organization
Distribution of assets through grant making
Peer review (see Chapter 14)
Subjective business issues
L. Each family member's passion expressed through his or her grant making
M. Each family member's values in the creation of a mission statement for the family's philanthropic goals
N. The values the family wishes to express to others
O. Learning about other people and their values through grant making
P. Holding people within and outside of the family accountable for how they carry out their assigned tasks
Q. The extraordinary fun of being together and learning together
R. The strengths and weaknesses of each family member and how to enhance the strengths and buffer the weaknesses
S. The experience of making mistakes together and why every great organization wants its members to make mistakes: because we all learn more from our mistakes than from our successes
T. The ability to forgive each other
U. How to be a leader and how to choose one
V. How to be a representative and how to choose representatives
W. How to hold a meeting
As you will appreciate by now, the organization and operation of a philanthropic entity is a microcosm of all the issues present in the organization and operation of every entity on the family balance sheet. The positive family dynamic of starting a long-term wealth preservation plan with a philanthropic organization uses the family's desire to help others as its first forum for learning to work together. Starting with philanthropy does not reduce the complex and difficult emotions each family member faces in any discussions on becoming a partner in a joint family undertaking. Each family member will have to determine her or his willingness to invest a part of her or his human, intellectual, and financial capital in such a joint enterprise. When difficult issues arise in the formation of a family philanthropy, and they will, they must be acknowledged as family risks of doing business together, just as in the organization of every other joint family enterprise.
I am a great believer in starting hard work, especially work that requires an individual to give up some freedom for a larger group goal, with small steps that are likely to be successful. If a family is organizing itself for long-term wealth preservation, all kinds of individual issues will arise as each individual decides whether to be a member of the family for this purpose. Philanthropy offers family members a chance to "test the water" of family business membership through the pooling of some part of their philanthropic activities, rather than plunging into what may turn out to be a very cold bath by contributing all of their individual financial assets to the long-term family wealth preservation business only.
Philanthropy is an extremely important part of every family governance system. It offers every family the chance to experience the joy of rediscovering its most important values and offers a family a way to share the thrill of successfully helping others. Most important, it tightens family bonds—the family glue—by recognizing and acknowledging the creativity and passions of each member. Successful philanthropy creates new family stories of family heroes and heroines. These are the stories that will teach later generations that family wealth preservation lies in the successful pursuit of happiness of each individual family member.[21]
[21] For readers who are interested in the story of how a family used philanthropy as a step in creating family, I strongly recommend a book titled Building Family Unity Through Giving: The Story of the Namaste Foundation, by Deanne Stone, self published by The Whitman Institute, 1992.