Foundation payouts

Alliance magazine

Welcome to the inaugural Alliance Audio – new ground for Alliance magazine!

This is the first in a new series debating key issues in philanthropy with guests from across the foundation world.

In our first Alliance Audio, editor Charles Keidan hosts a roundtable discussion with Angela Kail (Head of the Funder Team, New Philanthropy Capital), Cathy Pharoah (Co-Director of the Centre for Giving and Philanthropy, Cass Business School, City University London), and Jake Hayman (CEO of Ten Years’ Time) on the topic of philanthropy sector payouts.

Following on from their pieces in Alliance over the last few months, these philanthropy experts and practitioners discuss the controversial topic of payouts; why they should be imposed, why they should not be imposed, and what they might mean for the sector as it stands at the moment.


Charles: Welcome to, I’m Charles Keidan, editor of Alliance, a magazine which specializes in philanthropy. This is the first in a new series of Alliance Audio, debating key issues in philanthropy with guests from around the foundation world.

Our first conversation today is on foundation payouts. Payouts, for those that don’t know, are the amount that a foundation spends as a proportion of their assets each year. In the United States, a minimum payout of 5 per cent is required by law, in Canada it’s 3.5 per cent, but in the United Kingdom and elsewhere foundations are free, within reason, to do what they choose and spend how they like.

The first Alliance Audio participants.

In recent years though, as austerity bites and more attention is focused on wealthy foundations and philanthropists, more people are asking the question: ‘should the UK and other countries follow the US example and impose a mandatory payout? What difference would it make?’.

To the UK’s Association of Charitable Foundations (its foundation umbrella body), they are strongly opposed. In written evidence to Parliament they said that only trustees can decide how they make their investments and how they use our resources and their independence must be preserved.

So, to discuss the topic I’m delighted to be joined by three guests, all philanthropy experts and practitioners who have written about the topic in the pages of Alliance magazine over the last few months.

First of all, we have professor Cathy Pharoah, director of the Centre for Giving and Charitable Giving in Philanthropy at the CAS Business School and author of Foundation Giving Trends. We have Jake Hayman, a philanthropy adviser and CEO of 10 Years’ Time and Angela Kail, head of donors at think tank and consultancy New Philanthropy Capital.

Well, we’ll start with Cathy, you wrote in the December issue of Alliance you argue that foundation payouts would lead to the worst of both worlds. No increase in spending overall, and an interference in foundations’ freedoms to decide their own priorities. Can we start with your thoughts about how you reached those conclusions?

Cathy: Yes, well the issue has been, you know, kicked around for quite some time and so I thought it would be a good idea to do some research just to find out exactly what payout looked like in the UK, and what I found was that across the board, payout was above 5 per cent. Now, that didn’t apply to all individual foundations but across the board payout is already above 5 percent. So, I’m not immediately persuaded of the need to introduce a rule and it would have some unintended consequences, but I think we’re going to discuss that later.

Charles: Thank you. Jake, you took a rather different view, can you tell our listeners about that?

Jake: Well I think that on the whole, if foundations believe in what they’re doing and have a plan to use the money that’s at their disposal for social good based on a strategy that they have in some way, shape, or form then they should be able to either justify a reason to not pay out and be able to apply for exemption, but the standard should be an expectation that if you’ve got money and it’s there for charitable purposes, it should be used as such. Ideally, as quickly and as efficiently as possible.

Charles: Which you don’t believe is the case, at the present.

Jake: I’m not sure anyone does.

Charles: Well, over to you Angela for that, you’re at NPC.  How do you kind of consider this question?

Angela: So, I think payouts are one of the most important things that a foundation can decide, actually. My main concern is that they’re not putting enough thought into it. Or, if they are, they’re certainly not showing us their workings. So there’s some cases which you expect a foundation to have a really high payout ratio, and some of the examples that Cathy was probably talking about will be those cases.

So things like the environment or early action where actually a lot of money spent now could perhaps prevent a future problem. There’s also other things where you’d expect the payout ratio to be quite low. If your foundation that’s about preserving arts culture, you’re probably going to be doing that forever. But you see cases where a foundation’s got a mission to help eradicate poverty. They don’t have a permanent endowment but they are spending like they have one and I just sort of think, if that’s your ambition, why aren’t your financials matching up to it?

Charles: Any thoughts on that? Are the financials, Cathy, just not matching up to the scale of the ambition in terms of the levels foundations are spending, you’ve highlighted some that are, but what about those that aren’t?

Cathy: I mean, if you want to go to the example of poverty, foundations could spend all the money they have tomorrow and it wouldn’t solve the problem of poverty. I mean that’s not what foundations are in the business of. They’re in the business of finding what they can usefully do with the amount of money they’ve got. And so I think it’s, you know, it’s not a good argument to say ‘well if they spent it all they could do more’ because I don’t actually think that’s the case.

Charles: So, do you think it misunderstands what foundations are for?

Cathy: And what they can do with their quite limited resources. I mean, foundation spending as a whole is only about 0.5 percent of what the government spends, so what are our expectations of what they can do? I think their concerns are to spend their money as effectively as possible.

Charles: Do you think they do that, at the moment?

Cathy: Well I would regard it as pretty presumptuous of me to judge, to be honest. These are very intractable problems we are discussing – climate, poverty.

Charles: Well, do you think foundations should be doing more to at least disclose or set out their reasoning for the choices they make in terms of where they spend the money, how much they spend, and how they reach the decisions they do? Or do you think they’re giving out enough information at the moment?

Are foundations warehousing assets that could better help people in need?

Cathy: They’re giving out a lot more information, and increasingly they do, but many give out very little information, as you well know. It would be very good to know more about how foundations choose what they want to spend on, but also thinking about it from the point of view of the donor, which I’m sure is an issue that you all at NPC will be interested in, particularly. I mean, this is private money, people can choose how to spend their money. We don’t criticize their consumption choices, why should we criticize what they do with their giving?

Charles: Jake, how would you respond to that?

Jake: I think once the money is in a charitable account, the money exists to serve public benefit and it stops being their private money, which is why I draw a difference between that money which is set in foundation bank accounts and that money which is used as private philanthropy. And, I think the problem is that there is a complete absence of ambition in the sector. And, if we’re talking about issues of poverty and we really don’t believe we can make any difference to them, what are we doing hanging around throwing some coins at poor people year after year, after year, or even worse hanging around throwing some coins at rich people year after year, after year.

I think that the foundation world could do a huge amount, actually, and if it were to raise its ambitions and believe in its mission statements and work hard on its strategies and bring experts to the table, then actually they have a huge amount of opportunity to use their independence, longevity, flexibility, to deliver real social change that the government’s in a terrible position to deliver. And I think that the problem here is one about purpose and accountability, rather than necessarily about spendouts.

Charles: And, my sense from your piece in Alliance was that you’re not confident that foundations, left to their own devices, will take those steps and therefore you think it’s appropriate and also necessary, that there should be a mandatory requirement to spend a certain amount. Otherwise, that the status quo will just continue, is that correct?

Jake:  Exactly, and you referred to the Association of Charitable Foundations giving evidence against the idea of spendouts, presumably to preserve something that’s better. You know, the idea of independence and flexibility being a better tool to deliver social change, except we never get to deliver social change, we just get to the defence of independence, of flexibility, the keeping people away from interfering. But, at the end of the day, half of the money in those accounts is taxpayer money because it’s there as tax relief that otherwise would have been spent, and there needs to be a justification and some rationale for why we are forfeiting that money going into the government’s pockets.

Charles: So, let’s just talk just a little bit about the amounts involved, so you’ve done some sums, looking at those amounts. What amounts do you think could ultimately be used for public goods if there was a mandatory pay out of, let’s say 5 per cent, that you think just isn’t being used at the moment?

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Jake: Well, the numbers in the research that we looked at for Alliance suggested that across the 20 biggest foundations, the £1 billion in one given year that could have been used for public benefit and, in my mind, unless there is a reason not to do so, should have been used for public benefit and that’s just the build up to the 5 per cent. Some people may argue that the 5 per cent should be higher but I think the point is not necessarily to look at any given year but to look at the rationale around that money and what does it exist for.

Charles: Well, just putting that to Cathy, Garfield Weston Foundation, one of the foundations listed in the Top 20, has assets of £10.5 billion in 2015 but only spent £53.5 million, that’s a payout rate of 0.5 percent. Surely Jake’s got a point that a foundation like that should be spending more today?

Cathy: Well, the assets are the assets of the company, they’re not the assets of the foundation and that’s a very big difference. And I think that £1 billion figure that you’ve calculated is a spurious figure because I think it includes the Wellcome Trust, which also has enormous commitments. Now I personally would want to have a pretty detailed conversation with them about their longer term responsibilities to the projects they fund before saying ‘I think you should spend much more of your money.’

Charles: But do you think Wellcome, for example, should be doing more to explain how they’re reaching the judgements they are about their spendout which, I understand, is about 2.5 per cent.

Cathy: Also, you can’t just use the giving figure. The way in which the total amount to spend is calculated in the States includes much more than that giving figure that’s in the ACF report because it includes programme-related spend, proper social investment from the balance sheet, and a lot of the trust expenses, so you have made a bit of an underestimate of what they’re spending, using those figures.

Charles: If we can just bring in Angela, I know Jake will want to come back in a moment, but Angela you’ve been sitting quietly listening to this debate between Cathy and Jake about the figures, what’s your thoughts?

Angela: Can I come in on Wellcome? Because I was looking at Wellcome’s annual report today, and as we all know, Wellcome have brilliant investment managers. So they’ve had an annualized return since 1995 of 13.8 per cent on their endowment so, they pay their investment managers a lot and they get a good return for it. If you look at what they say about their expenditure, they say they aim to spend 4.7 per cent of their 3 year running average.

When you’re getting 13 per cent, I need a better explanation of why you’re only spending 4.7. I think trustees should be made to say in their accounts what is the basis of which they’re making that decision. So, maybe it’s because they’ve got huge commitments in the future, or maybe it’s because they’ve got a much more sort of pessimistic view of what’s going to happen with investments, but it feels to me like they’re got a mission to improve public health, they could be doing an awful lot to prevent diseases if more money was coming out there. I think Wellcome is a brilliant example of why we need more information about how trustees are making these decisions.

Charles: What do you think, Angela, is a barrier to actually obtaining this information and this kind of level of disclosure?

Angela: I think there are two things going on here. I agree with Jake about accountability, so we know that most trustees or foundations really think that they’re accountable only to themselves and maybe slightly to the Charity Commission. When people look at studies about what foundations are thinking about, that’s one of the things. But I also think there’s a question here really about risk, so foundations very often describe themselves as the risk taking capital of the charity sector.

They’re the people that aren’t meant to be providing the state services they’re meant to be providing the new thing, the risky thing. But actually, we see that in foundations’ practices, they’re not always very clear what it means to take risk, what that actually means. And I think they’re often sort of missing some of the risks that they’re taking accidentally, basically the opportunity costs of the things they’re not funding because they’re trying to be risk averse in their investments.

Charles: And just coming back on that idea if I may, about accountability, reading the ACF (Association of Charitable Foundations in the UK), their evidence, they say that the UK has specialist charity regulators with the know-how to challenge endowed charities on spending rates based on a context specific judgement call. Is it your view that that just isn’t happening to the extent that it should?

Angela: Yeah, I absolutely don’t think that’s happening.

Cathy: I just want to say here, I think you’re quite wrong about Wellcome, I think they do take quite a lot of risks in their programme-related investments and in their new business developments and they do have to underpin all of that. So I think you’re underestimating what the Wellcome Trust does and also I’m not at all certain that the question, I mean I don’t think that foundations necessarily see themselves as risk taking bodies, and I don’t see why they should be because this is charitable money and they’ve got the least money of all three sectors.

The public sector and the private sector have much more money than the charities sector does. Many, many foundations have a strong sense of responsibility to the organisations they fund, they want to carry on funding them because they’re doing such good work. If they were to lose a higher proportion each year of their asset base so that there was a level of attrition, in the long term they’d be able to do less good.

Charles: Would that be the case though, Cathy, that more foundations or new foundations, new people who make money will come on to replace those that ultimately spend out?

Cathy: That is what’s happening all the time and my big worry is that if we start to introduce rules that don’t have a clear rationale, we’ll actually put donors off.

Charles: Isn’t that a good point, Jake, that actually some of the unintended consequences of introducing let’s say a mandatory payout of 5 per cent may be that people won’t set up foundations, or they’ll part their money in Donor Advised Funds which are even less transparent and less accountable and wouldn’t necessarily lead to the kinds of results that you hope for society where all of this money would ultimately flow to people, to beneficiaries.

Jake: I think we can get distracted by the amounts of money here, and I think whether it’s a billion pounds we’re missing out on or 100 million or 50 million, to be honest I’d make the same case that we should have some degree of accountability over that money and there’s a horrible marriage of convenience between the Charities Commission and the Association of Charitable Foundations where they claim that there’s accountability when there simply isn’t in the practical sense because no one has the staff and the investment and the bandwidth to actually deliver that.

Beximco pharma warehouse. Assets for distribution?

And so we have a situation where we are working, tooth and nail, for some reason to defend those foundations that have £10 million sat in the bank, invested in porn, arms, tobacco and anything else making annual donations to a private school, and we are for some reason in defence of that as opposed to in defence of the social causes that those foundations should be existing to serve and I do think that this is a question of ambition and I think that I would prefer money that was used ambitiously and whatever risk means in that, used ambitiously to create social change rather than to hang around, destined for perpetual poverty and destined never to make any progress on the basis that we’ll always have money to soften the blow of that poverty and that is the question here: are we a conservative industry that exists to soften the blow of gross inequality, or do we think we can achieve something?

Because, if we think we can achieve something, then we should either be spending money to achieve it or we should have a rationale for why we need to exist in perpetuity for community-based funding or one of the examples that Angela gave that can make a lot of sense.

Charles: That’s very compelling rhetoric, and I can see the points are powerful, but the question I asked was about DAFs (Donor Advised Funds), surely there are unintended consequences of introducing a payout that might not actually lead to the level of ambition that you seek?

Jake: Sure, but my ambition isn’t about cash and if you told me that we’d lose £1 billion a year by making the sector more ambitious and more accountable, then I’d rather that actually.

Cathy: Can I ask you something? How do you know we don’t?

Jake: How do I know we don’t lose £1 billion?

Cathy: Lose quite a lot of money through risky, not successful ventures that are funded. You’re saying you’d rather be lost £1 billion, I’m saying how do you know we don’t?

Jake: I’m not talking about the losing £1 billion on risky ventures, I’m talking about if we introduce a minimum payout and, by Charles’ example, less people set up foundations as a result of it, we’d bank half the money in taxes that we’re not giving tax relief on when the money is going into a foundation and there’s a case that you may well find that those people who are affected by issues of poverty and find out that there’s a foundation with 1 million, 10 million, 50 million, 100 million in the bank would rather have some of that money going straight into the taxes that pay for the services that affect them today rather than sat in the bank accumulating wealth for these people to distribute.

Charles: In which case, your view the solutions would be through the state rather than through philanthropy, which doesn’t suggest you’re optimistic about the ambition of philanthropy.

Jake: It’s not that the solutions would be through the state rather than philanthropy, I think philanthropy can provide solutions but we need to hold it to a higher bar that says that this is money that exists for public service, this is money that was discounted against tax bills and we should have some expectations against that cash.

Charles: Now, if I can just turn to Angela on that, you’re at New Philanthropy Capital where you’re sitting literally between donors and charities, do you have a sense that there’s a frustration at the pace of change and levels of accountabilities of foundations amongst some of your charity clients, or do you actually think they are quite grateful for what foundations provide them in the way that Cathy described, the services they do provide to society through the charities, what’s your sense of this? I’m asking this, because I’d really like to know whether there’s any possibility of change occurring or need for it?

Angela: I think there’s both. I think Cathy is right, obviously foundations do a lot of good and charities that they give money to are very grateful for that, but I also think that they are worried about the lack of accountability on foundations so whereas charities feel like they’re under quite a lot of scrutiny and these days they’re being scrutinized by their donors, in the press, by the Charity Commission, that light has not yet shone on the foundation space.

Charles: But just to pick up on that, foundations are, or the foundations that we’re talking about, are charities I mean they’re registered charities submitting their reports and returns to the Charity Commission, why would it be that that part of the charity sector that is maybe more grant-making would have less scrutiny?

Angela: Well, and there have been cases like with the cage funding where there has been an awful lot of scrutiny on a few grantmakers, but in general it feels like the Charity Commission is focusing much more on the operational charities which makes sense to me because that’s where the public is giving their money to and that’s really, if I had to pick one thing for an under-resourced Charity Commission to focus on it would be making sure that public trust in charities is there.

Behind the scenes: Setting up for the podcast recording.

Charles: That it’s necessary but not sufficient.

Angela: It’s necessary but not sufficient, no.

Jake: And operational charities are held accountable by their funders, foundations don’t have an upstream accountability in that way.

Charles: Well, Cathy, putting the views of these two young turks sitting beside you, one saying that there needs to be definitely more accountability and the other saying there needs to be more accountability plus a mandatory payout, surely this is a moment where foundations are maybe having to consider their roles and their spending a little bit more attentively than maybe they’ve done in the past, would you agree with that?

Cathy: I do agree that it would be great to have much more public debate about what foundations do and how they interpret their role, and how they set their priorities and so on and many major donors give through foundations so I’m really very comfortable with a higher level of public debate and discussion about what donors are doing with their money but I think you also have to remember, I mean Jake talks a lot about them not being accountable but foundations are highly accountable to their boards, they have diverse boards in terms of skills, I mean they’re not always diverse in every way, but they do have to meet the requirements of the Charity Commission and I’m a trustee of a trust, I feel extremely responsible for the way in which the money is spent and that it’s meeting our charitable objectives and when I look at the board papers – I’m like a hawk for stuff that lies outside the mission.

So, I find that you’re extremely dismissive of what foundations are doing and I would also like to say that I think many foundations are doing extremely thoughtful work, drawing on a terrific amount of expertise which I somehow feel you’re not doing justice to.

Jake: I think, if every foundation were lucky enough to have a trustee as engaged as you are in every position then maybe we wouldn’t be in the situation we’re in and yes there are tons of foundations doing incredible work all the time, but to use the word diversity and foundation boards in the same sentence is a little bit worrying for me because I think the problem we have is that they’re not just undiverse, they are totally disconnected from the communities they wish to serve which is why we get into these situations.

I’ve just been looking at the educational backgrounds of chairs and CEOs of charitable foundations and the reality is, through no fault of their own, they are not the people who are naturally recruited from the communities that they wish to serve and that creates a huge problem of disconnection and it leads to the kinds of behaviours around how do we keep ourselves in business, how do we make sure we have a role year after year, after year, as opposed to understanding A) the urgency of the communities they wish to serve in terms of challenges and B) wanting to think in a larger scale about how we deal with these issues as opposed to sticking plasters over the problems that exist and I think actually the solution to this, if we had greater diversity representation and service user voice, charity voice and just basic breadth of opinion on foundation boards, I think we’re less likely to get it.

And the real issue here is not that foundations are doing a bad job because some of them are doing an incredible job, it’s that for some reason the entire sector rallies around a complete barrier of defence against anything that says that there should be any degree of accountability which means that we end up defending the worst of the foundation world rather than supporting the best of it which I think is a great shame because there are brilliant foundations out there but there are some terrible ones as well.

Charles: Well, thank you. And thank you for mentioning diversity, it is another topic but one that Alliance will be returning to in September where we’ll be looking around questions of diversity and really looking at Cathy’s claims around the extent of the diversity in foundations. So I’d like to just give the final word to Angela, you’ve been reflecting on this exchange between Jake and Cathy and do you have any final observations about ‘where next’ do you think this debate will go, if anywhere, on payouts?

Angela: I think Cathy is right, this debate around payouts has been going on for a long time in this sector, I actually think that there is a bit of a movement for change, that foundations are less defensive than they once were and that we might get some sort of ruling about a payout ratio. Again, I’m more interested in the why and the how they’re making the decision than what level that is at and then if that’s the case, then we will have to  move on to the DAFs because you’re right, they then become the place that you can just store huge amounts of money.

Charles: So, diversity next and DAFs after that. Thank you Jake Hayman, Cathy Pharoah, and Angela Kail for joining me and for your contributions to Alliance magazine. If you’ve liked what you’ve heard from our guests, on you can read more from them. Thank you for listening to the first instalment of Alliance Audio. We will be back in June from the European Foundation Centre Conference in Warsaw to talk about philanthropy and solidarity, an issue of our times. Until then, I hope you enjoy reading Alliance magazine; in addition to the debate on payouts in our spring issue, we’re looking at bridging the divide between philanthropy scholarship and practice and looking at philanthropy advice in emerging economies. Until our next Alliance Audio, thank you and goodbye.

Production – Kathryn Murrell, Alliance’s Communications Officer
Transcription – Halie Dalton, Alliance’s editorial intern
Graphic design – Lauren Langdon, Alliance’s communications and marketing intern

For further reading on the debate, see Cathy Pharoah’s piece ‘Is there any value in imposing annual payouts?‘, Angela Kail’s piece ‘Why we need to talk about payouts‘, Jake Hayman’s piece ‘The inexcusable absence of foundation minimum payouts‘.

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