Being charitable by what you spend, not by what you save

September 4, 2012 at 10:59

Being charitable by what you spend, not by what you save

Becoming a trustee of an endowed charitable foundation could appear intimidating to anyone that doesn’t have investment and finance expertise. In addition to general trustee duties, the ‘endowment’ aspect often cloaks the role in an air of mystery, complexity and technicality, where the focus is more on the performance of assets than charitable mission. However, a recent report by ACF ‘The governance and financial management of endowed foundations’, is a helpful reminder of the benefits of going ‘back to basics’ and keeping a clear focus on what the foundation was set up to achieve.  Taking this approach can allow foundations to take a more comprehensive view of how they use their assets to achieve their aims.

Endowed charitable foundations are usually set up when property or cash is gifted to trustees to use to fulfil certain charitable objectives. In England and Wales, there are around 900 endowed foundations with an annual income exceeding £500k (from an estimated total of 12,000 UK grant making foundations). They account for over half of the sector’s assets at £48.5bn and spend roughly 4.8% of this each year, meaning their contributions to civil society are not to be dismissed.  With a challenging environment – cuts in public services, low investment returns and greater demand from beneficiaries, the pressure on foundations is greater than ever, leading many to question whether their assets could be used more boldly.  With this in mind, earlier this summer we hosted a fascinating discussion together with ACF and Charity Investors Group to tackle the issues head on. The Report’s author, Richard Jenkins, drew on the findings of the report to dispel some of the common misconceptions about endowment management:

  • MYTH #1:  Endowments are permanent. This is often the default position for many in the sector where, sometimes without reference to the original legal documents, trustees and staff assume that the founders would want their charity to exist in perpetuity. This means that, by law, boards must preserve the capital asset for future generations and only use income or investment return on the foundation’s aims. But this assumption is wrong. Unless it says otherwise in a charity’s governing documents, an endowment is expendable at the trustee’s discretion. That doesn’t mean expendable foundations must spend out, but it does give trustees more freedom to spend than they may at first assume.
  • MYTH #2:  The investment of charitable endowments requires the same treatment as pension funds and private trusts.  Again, this is not the case. Endowed charitable foundations have charitable aims instead of known beneficiaries.  In that sense, the trustees are not driven by future specific liabilities, such as pension fund. They can be much more flexible in shaping the scope of their activity to meet the charities’ aims, carry greater risk and spend more, should they wish to do so.
  • MYTH #3:  Trustees must invest to achieve the maximum risk-adjusted return, in keeping with the Trustee Act 2000. While this is often read to mean the best return, in reality, the ‘risk-adjusted’ element means trustees should have targets that are right for their situation and long term goals, conferring greater potential to shape the scope of activities.
  • MYTH #4:  Trustees are obliged to follow any advice on investment matters. However, while there is a duty to take advice, where appropriate, in fact, it is only trustees that can decide what is in the best interests of the charity.

Endowed foundations often find themselves lumped together with pension funds and private trusts targeting market-beating return and seeking advice geared towards different players. In the midst of this, the focus on the charitable aims can get lost. Dispelling these myths can help refocus trustees on what is distinctive for them.

The overarching message, according to Richard Jenkins is that trustees are not there to maximise the value of the assets but to embody the charitable objectives and represent the interests of eventual beneficiaries. If trustees then can look beyond the immediacy of perceived regulatory constraints and focus clearly on identifying the right activates to delivery their charitable aims, this then frees them up to think more holistically about how they use their resources to achieve those aims.

At the meeting we also heard from the Tubney Trust, a foundation with broad charitable objectives whose founders had specified that it should not exist in perpetuity. Following a challenging strategic review where the trustee revisited their charitable aims and how they could best be achieved, they decided to take a narrower focus on some defined areas: biodiversity and farm animal welfare.  They also moved from being a reactive grantmaker to being proactive in the areas they felt they could make a tangible difference, by working really closely with a more limited pool of applicants. Sarah Ridley, former Executive Director of the trust, said that the requirement to spend out and the discipline that instilled was helpful in creating an environment where trustees focussed in on what decisions would best enable them to meet their charitable aims.

Nuffield Foundation are another example of a trust that has looked at ways it could better use its balance sheet to achieve its aims, such as  negative screening, positive engagement, social investment, venture capital and borrowing. According to James Brooke-Turner, looking after the charity’s investment is a necessary evil and often seen as the least interesting part of the job for some trustees, but nonetheless one that is vital to achieving its aims.

The message from the debate was clear – focussing on charitable purposes must come first for endowed foundations, as much as for operational charities.  Remember this and you’ll be smarter and bolder in how you use your assets.