Part 2 - Charities? Hardest game in the world that is

In our previous article, we looked at the increasingly crowded and competitive world that charities operate in.  This time, we think about one aspect in particular of charities which might help them – interaction with the private sector.

In its fairly lengthy recent report, the Law Family Commission on Civil Society set out various ways in which it felt that private sector, public sector, and civil society could work more effectively together, including a call for businesses to improve measurement of social impact and to reinstate the requirement for businesses to report their contributions to charities and civil society.

It is common for companies and firms to choose a charity of the year to support – often something of relevance to the type of company it is and perhaps what its employees and stakeholders care about.  Companies may also support charities which align with their values around anti-racism or social mobility.

As we have thought about these interactions between the private and third sectors, one area which is strikingly different between the position in England and various other countries is the extent to which charities have substantial and sometimes even controlling interests in large companies.  Charities in England having large endowments which no doubt contain shares as investments is not unusual (the Wellcome Trust has an endowment measured in tens of billions of pounds).  However, what is harder to find examples of in England are charities which own and run substantial companies.  Having a trading subsidiary which generates income is not unusual (charity shops might be an obvious example), but we have nothing on the scale of some examples from around Europe.  In Germany, the Robert Bosch Stiftung, a charitable institution, owns 92% of the shares in Bosch (albeit has no voting rights).

Across the border in Denmark, the Carlsberg Foundation has a controlling interest in Carlsberg A/S The funds generated are used to operate the Carlsberg Laboratory, the Museum of National History and to fund scientific research.  Down in Switzerland, the Hans Wilsdorf Foundation owns 100% of Rolex and is reported to donate much of its income to charity and social causes in Geneva.

Another recent example from the United States is the high profile decision by Yvon Chouinard to transfer the voting stock of Patagonia (a company said to be worth USD3 billion) company to a purpose trust (representing 2% of the value of the company) and the non-voting stock (representing 98% of the value of the company and which receives the annual profits of the company worth USD100 million) to a private foundation.

The natural inclination might be to assume these decisions are tax driven and no doubt there are often tax advantages.  However, these same advantages may have been achieved by selling the company and donating the proceeds to charity.  That way, the charity could also quickly diversify into a more varied portfolio rather than be heavily exposed (at least initially) to the financial performance of one company.  So, why do it?  Sometimes it is the founder's desire to keep the company in tact (and make it very difficult to takeover) and allow to take a long term principle based approach to business, supported by a consistent long term shareholder.  Equally, the founder might be convinced the company is as good (if not better) an investment as any other – operating in a sector they know, understand and believe in.  It may also be possible to use the corporate and its business to expressly promote the ethos and purposes of the charity.  Added to that, it may help promote the business and increase its profile and success if those dealing with the business want to support that particular charitable cause – business and purpose in one neat package.

This got us thinking as to why it is very hard to find similar examples in England.  There is no lack of philanthropy in England, just not of this type.  Some of it may be natural conservativism around investments and the desire to diversify.  We tend to work with a lot more very large private companies in Asia and Middle East than here in England because English family companies have often listed or sold part or all of the equity to third parties over time.  It could be that there is simply little tradition of it and thus it does not accord with the "received wisdom" (though for examples of how philanthropy and wealth stewardship is being reimagined in the UK, see the Good Ancestor Movement and Patriotic Millionaires UK).  Perhaps it is also the concern that Bartlett-style duties require some measure of understanding and insight into the workings of the underlying business (which we don't think can ever be truly excluded under English law) and that is a concern for trustees.

That said, Bartlett duties seem unlikely to be a complete answer given that trustees in other contexts are able to get comfortable holding considerable shareholdings in various companies.  The experience of charities like the Wolfson Foundation might suggest it could be driven more by diversification.

Picking up on some themes from the Law Family Commission on Civil Society, what is becoming increasingly prevalent in England is companies seeking to establish their "profit with purpose" credentials by attaining B Corp certification. There are more than 6,000 B Corps around the world, about 1,200 of which are based in the UK.  In England, the B Corp certification process requires a company to amend its articles to include an objects clause that ensures that the company seeks to create a material positive impact on society and the environment through its business and operations, and a confirmation that directors must act with consideration of ‘stakeholder interests’ (including employees, suppliers, society and the environment, in addition to shareholders). As the movement expands, it has attracted criticism in some quarters (see, for example, this recent FT article), but remains an attractive option for companies looking to use the certification to differentiate themselves from "traditional" businesses. There are even examples of some companies going one step further, with Faith In Nature giving "nature a voice and a vote" on its board.