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Philanthropic choice and donor intent: Freedom, responsibility, and public interest
Abstract
Ensuring adherence to donor intention for philanthropic endowments over time requires substantial thought, careful planning, and significant effort by the donor, as well as fidelity of the trustees.
Founders make significant financial contributions in creating US private foundations. Therefore, we hypothesize that founders monitor foundation operations and predict a positive relation between founder participation and foundation efficiency. In contrast, we propose competing hypotheses in examining the relation between other family member participation and foundation efficiency. Other family member participation has the potential to enhance foundation efficiency if founders are able to transfer their philanthropic values to their progeny. However, other family participation also has the potential to diminish foundation efficiency if the founders’ withdrawal leaves their foundations without true principals to monitor managerial actions. We find that both founder and other family participation are positively associated with foundation efficiency. We also provide limited evidence that the positive association between founding family participation and foundation efficiency is transferred to second generation family members, but is not transferred to subsequent generations.
Under the traditional, limited relationship between philanthropy and government, voluntary organizations fulfill a critical role in realizing the promise of American pluralism. A fundamental change in this relationship could jeopardize the balance that voluntary organizations provide to our civil society.
Such an alteration in the role of voluntary organizations should not be accepted without first seriously examining the validity of the public-money argument that supports it and the attendant consequences. The aim of this monograph is to begin such an examination. The analysis is not a detailed discussion of current debates over specific policies. Instead, this monograph deals more narrowly but no less ambitiously with possible sources of government’s legal authority, in the name of “public money,” to limit the missions, governance, and decision-making of philanthropic organizations.
The analysis considers three chief arguments that are most commonly advanced, separately and in combination, for the claim that philanthropic assets are public money. Proponents have argued that philanthropies have public rather than private purposes and are subject to broad parens patriae oversight by state Attorneys General. A second argument asserts that, because philanthropies exist under state charters, they are government agencies, “state actors,” or quasi-public bodies subject to constitutional constraints or accountable to the public in the same way as is government. Finally and most commonly, “public money” advocates contend that funds held by nonprofit organizations are public money because governments forgo revenue by exempting such organizations from taxation and allowing tax deductions to donors.
Our review demonstrates that the applicable legal precedents recognize the importance of philanthropic independence, respect philanthropies as private entities, and accord them the right to autonomy without undue government or public direction and control. In sum, the public-money argument cannot justify overly prescriptive government regulation or public involvement because the rationale for the argument is largely mythical.
Our analysis does not defend philanthropies from government involvement by saying, “You can’t do this to us.” Instead, it says, more modestly, “You can’t do this to us on grounds that our assets or operations are public.” Stated differently, if philanthropic assets cannot fairly be characterized as public money, proponents of increased government or public mandates must put forth other grounds for imposing on the purposes, structure, and operations of foundations and other charities. If successful, this monograph makes that case and effectively challenges the term “public money” and its application.
This book explores how degrees of transparency in philanthropy currently fit with accountability under existing federal law, including applications of quid pro quo economic benefit arguments and stakeholder "rights" theories. The book also analyzes and ultimately rejects the most commonly asserted calls for changing the law to mandate more transparency from foundations, including broad notions of judging accountability and effectiveness, correcting "power asymmetry," foundations’ abilities to affect public good, and simply because doing so is good/moral/pure in its own right. Finally, it advocates that foundations do more to consider ways in which greater voluntary transparency can serve their individual strategic and operational objectives.
In recent years we have increasingly heard the claim that government should have a bigger role in directing philanthropies and their assets because the money held by charities is “public money.” This monograph presents a comprehensive analysis of the public money claim and concludes, on the basis of the numerous applicable legal precedents, that the public money assertion is largely myth. The authors examine the three major legal arguments made by the public money advocates. First, these advocates say philanthropic assets are public money because of the charitable tax exemption and deduction, which are subsidies to charities and thereby give government the right to direct charities’ governance and operations. However, the authors find no evidence that the charitable preferences arose from an agreement under which government would directly subsidize charities in exchange for control over them. Instead, the bargain between charities and government is the one stated in the Internal Revenue Code: Government indirectly supports charities with tax preferences in exchange for the charities’ promise to devote their assets to charitable purposes. Later authorities, interpreting the meaning of the charitable tax preferences, have endorsed the latter view of the original “bargain.” The authors also examine the argument that philanthropic assets are public money because charities are chartered by the states and, therefore, are public agencies, “state actors,” or at least public bodies subject to public access laws. However, the case law interpreting the relationship between a state and a state-charted private organization has rejected this argument except in very specialized circumstances. Finally, the authors examine the argument that philanthropic assets are public money because philanthropies serve public rather than private purposes and are subject to the exercise of parens patriae supervisory authority by state Attorneys General. The authors find, contrary to this argument, that the law has treated charities as private entities that devote their assets to public purposes established by the charities themselves, not as quasi-public entities that must devote their assets to purposes established by the government. The authors note that while advocates of more government control over charities may have other arguments to make for their position, these advocates cannot argue persuasively that government is entitled to more control over charities because charitable assets are “public money.” Moreover, the arguments of these advocates should be evaluated in light of both the immense contributions made by private philanthropy to the life of this country under the traditional, limited relationship between philanthropy and government and the fact that more government control could harm charities’ ability to make similar contributions in the future.
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