There are two advantages to family philanthropy – the benefits that accrue to the community from the generosity of wealthy families and the value that accrues to the families themselves. No one would dispute that our hospitals, galleries, and social service programs could not provide the services that the public demands without significant donations from wealthy individuals and families. However, these organizations are not the only ones that benefit from the generosity of these donors. The donors are also beneficiaries, particularly when they are thoughtful and strategic in their approach to giving.
Why the emphasis on an effective granting strategy?
As Aristotle said; “To give away money is an easy matter and in any man’s power.” He went on to add, “But to decide to whom to give, and how large, and when, and for what purpose and how, is neither in every man’s power nor an easy matter.” Clearly Aristotle was talking about philanthropy as opposed to charitable giving. In other words, donations intended not just to provide relief to a situation, but to make a lasting difference, require thought and effort. As opposed to charitable giving, which can be characterized by ‘writing cheques to worthy causes,’ philanthropy entails setting goals that can be achieved through rational and thoughtful decision-making, along with diligent monitoring and assessment. It requires not just funds, but vision, effort, and a long-term perspective.
Developing an effective granting strategy
To be effective in the long-term and meaningful to family members, family philanthropy should be based on family members’ beliefs and values. These should be carefully identified and agreed upon, forming the basis for the mission statement of the foundation. The family’s values and philanthropic interests will set a course that will transcend generations and serve as a legacy within both the community and the family itself.
Having set goals for their foundation, a family should ask such questions as: “What are the most pressing issues in the sector that we have chosen to fund? Which organizations are best equipped to address these issues? Are there funding gaps that our foundation can address?” It is crucial to ask these kinds of questions and seek out answers in order to better understand the causes of an issue and apply the most appropriate solutions. Such research will also help to identify the pressure points of the issue and ways that the foundation could have the greatest impact. An analysis of the issues is essential to determining a strategy whereby the foundation can best meet its goals.
A case study: The Stephens family1
To illustrate, let’s consider the role that philanthropy has played in the lives of the Stephens family.
After their marriage and graduation from university in the early 1960s, Liz and Bill, both of whom had studied business and commerce, agreed to join Bill’s father’s small hardware company. Their aim was to apply their newly acquired knowledge to grow the company into a larger enterprise. Within a few years, Liz gave birth to a daughter, then a son and another daughter. With three children to raise, she was less involved in the business than Bill, who was consumed with growing it into a large multi-store operation. As teenagers, the children worked in the summers and weekends in the hardware stores, but none of them chose to make a career in the family company.
When Bill had a fatal heart attack in his 60s, Liz reluctantly accepted an attractive offer to sell the business to a large, international company. The family, which had always lived modestly, now found themselves with more money than they could have anticipated. Raised by Depression-era parents, Liz was concerned about the possible impact of this new wealth on her children and, particularly, on her grandchildren.
A few years before his death, Bill and Liz had established a small family foundation. Since Bill felt a need to give back to the community that had enabled him to prosper, the foundation supported a variety of community projects. It had no distinctive interest or focus to its funding.
After Bill’s death, Liz decided to use some of the funds from the sale of the business to increase the foundation’s endowment. She thought it was time to introduce her children and grandchildren to the foundation, and to give it a clearly defined mandate – one to which they could all relate. She saw the foundation as a means for keeping her now far-flung family more connected by having them work together to achieve common goals. She also thought the foundation would help the grandchildren to become more comfortable with wealth and learn to be good stewards of the wealth that they would inherit.
Liz recognized that she did not have the experience or skills to develop a clearly defined mission statement that everyone could support, nor to create a structure for strategic granting. She would need help bringing the family into this process. Also, she realized that a non-family member who was experienced in such work would be more credible to family members; by engaging the whole family in the process the outcome would be more easily accepted. She consulted with her existing professional advisors and located a consultant that would not only be able to help the family articulate their collective vision and values, but would also assist them in their grant making.
The consultant took the family through a process that involved the following:
- First she interviewed each family member individually about their experiences, values, aspirations and interests related to the charitable sector.
- The consultant also needed to know how the family worked together as a unit. For the foundation to function effectively, the family would need to be able to work together constructively. Therefore, as part of the interviews with each family member, she also posed probing questions about family dynamics to determine: “How they made decisions. Were there any barriers to communication in the family? How strong was the level of trust?“
- The family and the consultant then discussed the report arising from the individual interviews. The report summarized the consultant’s observations, conclusions and recommendations for developing a mission statement and granting strategy that would represent the core values and interests of family members. Together, they made the necessary adjustments.
- They also developed a governance structure to enable the family to administer the foundation in a professional manner, and thereby avoid unnecessary personal squabbles.
- Another important issue they addressed was how and when to involve the next generation of the family in the work of the foundation. To that end, they added some of the older cousins to the grants review committee.
- The consultant worked with the family over a few granting cycles to help them identify worthwhile projects, to coach them on how to review the projects, and to teach them how to monitor and evaluate their grants.
The impact of the foundation on family members While supporting innovative programs in Bill and Liz’s home city, the foundation also conferred many unexpected benefits on the family.
a) Creating a sense of identity and legacy
Through the facilitated process, the family identified the focus for their giving: to help disadvantaged youth who had not had the same opportunities as others to develop to their full potential. Although family members had many other interests, all shared a concern for disadvantaged youth, an issue that was particularly important to Bill. He was known for his generosity to young employees who were struggling financially and for his support of various local educational and recreational programs for youth.
The foundation’s granting program offered Bill’s children a way to honour their father and perpetuate his values. The process of searching for and funding innovative projects designed to help disadvantaged youth kept alive Bill’s memory, particularly when they would ask one another: ”Would Dad have supported this project?” For the grandchildren who had barely known Bill, listening to their parents’ discussions gave them insight into their grandfather’s character, as well as a sense of what their family valued and believed. Furthermore, the grandchildren saw these beliefs being put into action.
b) Developing greater family unity
While Bill and Liz’s children shared many characteristics and values while young, their academic interests and career paths diverged greatly: one became an accountant, another a teacher and the youngest became a physician. Two of them also moved away from the home city. With young families, as well as demanding careers, the siblings saw each other less with each passing year. Their gatherings were limited mostly to celebrating holidays and birthdays, as well as spending two weeks together at the family cottage.
As Liz correctly foresaw, the foundation provided a means for her adult children to become acquainted on a non-familial level, and to form new bonds by working on projects that were important and satisfying to them.
Similarly, the grandchildren, who spent most of their time together engaged in sports, began to recognize and identify with their common heritage and the values that defined their family. Their relationships evolved beyond talk of sports.
c) Gaining financial knowledge and analytical skills
Although the accountant in the family was able to read the financial statements and budgets of charitable organizations, neither of her siblings nor the grandchildren had that ability. Nor did they have any experience in reviewing proposals.
To make effective grants, they needed to ask, and be able to answer, such questions as: Is this project likely to succeed? What is needed to ensure its success? How much should the foundation grant and over what period of time?
Also, there was the matter of the foundation’s investments. While the foundation engaged professionals to manage the endowment, some family members had to have sufficient familiarity with investments to enable them to evaluate the performance of their fund managers.
For the third generation of the family, who would one day inherit considerable wealth and whose values and lifestyles were still being formed, the foundation provided the ideal training ground. They had an opportunity to become financially literate: to learn about the stock and bond markets, the importance of asset mix, the various indexes against which the foundation’s investment returns were measured, etc. In discussing the capabilities of various charitable organizations, they had to become familiar with the concepts of assets and liabilities on a financial statement, and the kinds of expenditures to look for in an operating budget. To prepare these family members for their responsibilities, the foundation arranged informal seminars. These were given by the investment counselor managing the foundation’s endowment and the accountant in the family. Some of the older grandchildren also began reading the business section of the paper to further their education. The grandchildren began to realize if they were to make informed decisions about their future personal wealth, they would need more than a passing familiarity with these concepts.
d) Learning about governance and decision-making
The foundation’s board of directors consisted of Liz, her children and their spouses; however, all family members above the age of 18 were members of the foundation. Although the grandchildren were not yet in a position to make decisions on behalf of the foundation, they had opportunities to contribute through their participation on the grants committee and attendance at the Annual General Meeting. They learned about the various steps involved in reaching consensus on a grant decision and the process for making well-informed decisions. They began to understand why the foundation applied certain conditions to the grants made and how the charitable organizations would be held accountable for the projects under funding. The experience helped them appreciate the importance of accountability in commitments that they made to others and generally in their relationships.
e) Ensuring greater success in passing on family wealth
For families with significant wealth, the passing of that wealth from one generation to the next is a matter of great concern. There are countless stories of disastrous wealth transitions – situations in which families lost most of their money and members became estranged from one another. In fact, it is commonly accepted that about 70 percent of wealth transfers will be unsuccessful;2 that is, the wealth is removed, involuntarily, from the control of the beneficiaries and/or family disharmony results.
One of the many studies2 on wealth succession has identified the factors that lead to successful transitions:
- Total family involvement in estate planning and preparation;
- A process that integrates family learning and development
- Articulated shared values; and
- Effective communication, trust, accountability and consensus building.
The study also noted that in the 30 percent of families with successful wealth succession, family philanthropy was a common element. This is not just a happy coincidence – three of the attributes listed for successful wealth transitions are also associated with effective philanthropy.
By developing an effective granting program based on stated familial values and learning about financial issues and governance, as well as building trust and accountability in their family, the Stephens were increasing their chances of being among the 30 percent of families who have successful wealth transitions.
Benefitting the family and the community
There are many reasons why families create foundations. Some do it out of religious conviction. Some want to celebrate their good fortune and ‘give back’ to the community. Others believe that they have more than enough money for their needs and should share with others less fortunate. Some have even stated that their main motivator was to create a means for passing on family values and developing a legacy within the family, as well as in the community.
Regardless of the initial motivation for creating the foundation, families who make the effort to create a meaningful and strategic approach to granting find that they get as much – some say even more – out of the act of giving than the organizations that they support.
They give life to the words of Winston Churchill; “We make a living by what we get, we make a life by what we give.”3
1 Based on an actual client case; however, the names have been changed to protect the family’s identity.
2 The Williams Group, Preparing Heirs, Roy Williams and Vic Preisser, 2011.
BMO Wealth Management provides this publication for informational purposes only and it is not and should not be construed as professional advice to any individual. The information contained in this publication is based on material believed to be reliable at the time of publication, but BMO Wealth Management cannot guarantee the information is accurate or complete. Individuals should contact their BMO representative for professional advice regarding their personal circumstances and/or financial position. The comments included in this publication are not intended to be a definitive analysis of tax applicability or trust and estates law. The comments are general in nature and professional advice regarding an individual’s particular tax position should be obtained in respect of any person’s specific circumstances.
BMO Wealth Management is a brand name that refers to Bank of Montreal and certain of its affiliates in providing wealth management products and services. Not all products and services are offered by all legal entities within BMO Wealth Management.
BMO Private Banking is part of BMO Wealth Management. Banking services are offered through Bank of Montreal. Investment management services are offered through BMO Private Investment Counsel Inc., an indirect subsidiary of Bank of Montreal. Estate, trust, planning and custodial services are offered through BMO Trust Company, a wholly owned subsidiary of Bank of Montreal.
BMO Nesbitt Burns Inc. provides comprehensive investment services and is a wholly owned subsidiary of Bank of Montreal. If you are already a client of BMO Nesbitt Burns Inc., please contact your Investment Advisor for more information. All insurance products and advice are offered through BMO Nesbitt Burns Financial Services Inc. by licensed life insurance agents, and, in Quebec, by financial security advisors.
BMO Nesbitt Burns Inc. is a Member-Canadian Investor Protection Fund. Member of the Investment Industry Regulatory Organization of Canada. ® “BMO (M-bar Roundel symbol)” is a registered trade-mark of Bank of Montreal, used under licence. ® “Nesbitt Burns” is a registered trade-mark of BMO Nesbitt Burns Inc. All rights are reserved. No part of this publication may be reproduced in any form, or referred to in any other publication, without the express written permission of BMO Wealth Management.