For businesses that are ambitious about their commitments to ESG, establishing a corporate foundation can offer a way for a company to use its expertise to contribute meaningfully and directly to issues it considers important. From working to address the cost of living crisis, to taking climate action, to raising the profile of work on diversity, equality and inclusion, to championing innovative tech in health systems, corporate foundations can be fantastically placed to tackle social issues in concert with business.
Traditionally, corporate foundations were often viewed as vehicles for corporate giving and employee volunteering. Today’s corporate foundations now often operate as hotbeds of innovation and action on key issues.
This article comments on trends we are currently seeing in corporate foundations, considers some of their pitfalls, and comments on alternative structures for businesses working alongside and in support of charities.
What is a corporate foundation?
There is no legal definition of a corporate foundation and businesses may choose to adopt differing structures through which to deliver impact.
The focus of this article is corporate foundations established as charities in England and Wales that are registered with the Charity Commission.
Such corporate foundations are established by businesses as a means of engaging in or supporting charitable activity. Typically, they are funded either mostly or exclusively by the founding business.
Like other charities, corporate foundations are independent of their founding businesses and are subject to charity law and regulation by the Charity Commission. There are two key principles of charity law that are particularly relevant when setting up and running a corporate foundation:
- A charity must have exclusively charitable purposes which should be pursued for the public benefit (and therefore cannot pursue any goals of the business), and
- The trustees of the charity must act in the best interests of the charity, rather than the business. In particular, this requires the corporate foundation to carefully manage any conflicts of interests.
Beyond this, corporate foundations have considerable flexibility in their choice of structural, operational and governance arrangements, depending on their needs and intentions.
Many companies have defined their purpose. A charity does not have untrammelled freedom to help a company find purpose as it exists to further exclusively the prescribed charitable objects contained in its governing document. But it can be, and often is, a highly effective focal point for companies for whom charitable action and social good is important.
While the corporate foundation model works well on a large scale (many of the most high-profile foundations have annual grants budgets in the tens of millions) size is not a bar. Many, established by small and medium size entities (SMEs), are equally viable and successful on a small scale, often operating with impact in the communities local to the founding business.
How can a corporate foundation be useful in the ESG context?
In an environment where businesses wish, and are often expected, to share their expertise to tackle challenging social and environmental issues, corporate foundations can be a vehicle to allow businesses to develop ideas and pursue social good, unfettered by the commercial goals and needs of the founding business.
Establishing a corporate foundation can bring reputational benefits through a demonstrable and ongoing commitment to the not-for-profit sector. It can also crystallise a sense of common purpose and company culture amongst employees and stakeholders. However, the trustees of the corporate foundation must ensure that they continue to act only in the best interests of the charity: the Charity Commission is clear that if a business wants to set up an organisation which has the purpose of promoting the interest of the business, then such organisation cannot be a charity.
Practically speaking, a corporate foundation offers a readily identifiable structure for corporate grant-making. Beyond financial giving, it can give a better platform for a company to leverage in-kind support including expert advice, sector know-how and volunteering. Of increasing importance in the ESG context, a corporate foundation can enable companies to measure their charitable impact more effectively: both financially and in terms of social impact.
When do businesses choose to set up foundations?
The establishment of a corporate foundation is likely to arise as a business scales, where it has (organically or by investment or acquisition) additional capital, or is producing revenues that can be utilised to set up a foundation.
Simon Ward, a partner in the corporate team, notes “where there is a corporate sale or investment, the company’s board or founders may well decide that some of the proceeds should be directed to its own corporate foundation which in turn will provide a benefit to both its internal and external stakeholders and the wider community.”
More and more businesses have charitable targets they are working towards, and corporate foundations can serve as an effective vehicle through which to deliver impact, while allowing a business to continue with its commercial goals.
Fundamentally, a company and a charity will have separate goals and therefore it is essential to ensure that the charity is independent of the founding company and to avoid conflicts of interest. As an independent entity, there is potential for things to go wrong including legal tangles, ethical clashes, and reputational issues, all of which may impact the founding company (particularly if the Charity Commission become involved).
There are also initial costs in establishing a corporate foundation, as well as ongoing operational costs. Charities operate in a highly regulated environment which can bring its own challenges where technical legal and financial advice is often necessary. Failure to run a corporate foundation can pose a major reputational risk to the business itself, where the foundation includes in its name the name of the business.
In addition to corporate foundations, there are other structures and certifications which are not charitable but that businesses may wish to utilise to channel positive impact and help achieve their ESG goals. Businesses may wish to consider:
Seeking B Corporation status: since 2015, businesses in the UK have been able to apply for B Corporation certification. “B Corps” are for-profit businesses that have been certified as demonstrating high standards in the areas of social sustainability, environmental performance and public accountability and transparency. In other words, they create value for a wider range of stakeholders (including employees, the local community and the environment) than just shareholders. B Corps are required to incorporate specific drafting into their governing documents to reflect their commitment to having a material positive impact on society and the environment. Certification can be time consuming, but there can be significant benefits to receiving it. B Corp status provides a public identity for the business as one committed to societal and environmental agendas which can be attractive to customers, investors, consumers, and current and prospective employees.
Becoming a Community Interest Company (CIC): CICs are a type of limited company which exist to benefit the community rather than its shareholders, and so are more purpose-led than commercial companies. Again, specific drafting must be incorporated into the company’s Articles of Association: in particular, the CIC is characterised by a feature known as an ‘asset lock’, which requires the company’s assets to be used only for its social objectives and sets limits on distributions to shareholders. CICs are subject to regulation by an independent regulator, but this is lighter-touch than regulation by the Charity Commission. Becoming a CIC is unlikely to suit most businesses that operate on a for-profit basis and is better suited to not-for-profit initiatives or social enterprises.
Alternative ways of pursuing ESG objectives
Establishing a corporate foundation or making constitutional changes to an existing business are significant steps, and organisations which are at an earlier stage of their ESG journey may wish to test the waters with other activities first.
There are numerous alternative ways in which a business may seek to deliver impact, including:
Giving money: for a more structured approach beyond simple giving, companies are increasingly considering “donor advised funds” which are philanthropic funds established under an umbrella charity that administers the fund on behalf of the donor. Many smaller companies might establish a named fund with a community foundation, perhaps one local to their area of operation. Additionally, payroll giving and employee fundraising schemes continue to be popular.
Giving in-kind: volunteering programmes are now widespread, and companies may leverage their sector know-how to provide intellectual capital to charity through expert advice. Companies may make direct in-kind donations of time, resources, facilities, stock or surplus materials or stock, often as part of a corporate social responsibility (CSR) programme.
Giving by investing: this could include setting up a social investment programme or investing (short or long term) either with individual charities and social enterprises or through a fund. Companies with local links might consider lending to community ventures with soft loans, sponsoring charitable activities and engaging in collaborative projects and partnerships.
These activities can of course provide valuable opportunities to established charities to partner with business in order to achieve common objectives. As with corporate foundations, however, care must always be taken to ensure that independence and clarity of purpose are maintained.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, May 2023