Foundation accountability: an operational necessity?

Anthony Tomei

‘It’s a truism that foundations lack accountability – unlike (democratic) governments and companies, which are at least in theory accountable to voters and shareholders.’ (Alliance editorial, September 2011)

Caroline Hartnell goes on to say that ‘The justification … in the eyes of the philanthropy world, and presumably the wider world – is the assumption that foundations probably do quite a lot of good, and almost certainly don’t do any harm.’ This softens things slightly, but however you put it, ‘lack of accountability’ sounds like a serious accusation. Does it apply to all foundations or only to some? Does it apply to everything that foundations do, or only to certain kinds of actions? And if we agree there’s a problem, what should we do?

In this article I take a close look at accountability. I argue that once legal requirements have been met, it is for organizations themselves to decide what accounts they should give. Giving an account of actions involves both costs and potential benefits.  As such it is an operational matter as well as a legal and moral one. This reasoning applies to foundations as much as to anyone else; in that sense the way foundations think about accountability need not be so very different from that of the organizations they support.

Accountability and charities – a closer look
Let me begin by acknowledging that foundations undoubtedly do have a problem of accountability. A foundation is an organization that (a) has its own funds, usually in the form of an endowment, and (b) exists for public benefit, in return receiving public subsidy in the form of tax relief.[1] There is a tension between the independence implied by (a) and the accountability required by (b). This tension is structural and therefore inescapable. My contention is that we will handle it better if we understand why accountability is necessary; why we are giving accounts, who we should give them to and how they should be given.

According to my dictionary, accountability means a ‘requirement or expectation to justify actions or decisions’. In practice for any charitable organization there may be many parties to whom different actions or decisions have to be justified, and they may require different forms of justification.

As the definition implies, this justification may be compulsory or voluntary. In the UK, it is a legal requirement for charities[2] to submit an annual account to the regulator, the Charity Commission, but accounting to other stakeholders such as beneficiaries, partners, casual donors or the public at large is a different matter: beyond the statutory requirement charities can decide for themselves to whom they will give an account and how.

Also implicit in the definition is the idea that those to whom the account is given have available some kind of sanction if the account is unsatisfactory, or possibly a reward if it is good. (This implies, incidentally, that there are agreed criteria against which performance can be measured. Accountability requires agreed accounting methods.) Regulators have legal sanctions; donors can reduce or increase support; partners can strengthen or withdraw collaboration, and so on.

A charity may not be under a formal obligation to report to a major donor or a partner, but it would be foolish not to if it wants a repeat donation or a successful partnership. On the other hand, providing bespoke reports to small donors would be costly and likely to achieve less. In short, accounting to a stakeholder involves costs and possibly risks as well as opportunities. Legal requirements apart, charities have to decide for themselves how much time and money to spend on accounting for their actions, who they should account to, and how those accounts should be given.

The fundamental point is that accounting to others is not simply a matter of legal or moral obligation; it has an operational value.

Accountability and foundations
How much of this reasoning about accountability applies to foundations? Foundations differ from other charities in important respects, most obviously in that they have their own resources. How does this affect their accountability, and what implications does it have for the way they operate?

In the UK, foundations are legally no different from any registered charity. As such, they are required to submit an annual report to the regulator detailing their activities, finances and governance, plans for the future and so forth. However, while the rules are rigorous, they are also limited. They cover how charities are to go about their business, not the substance of what they do. This is governed by the objects (ie the fundamental purposes) in their governing documents, which, in the case of foundations, are often very broad.

Once these objects have been accepted by the regulator as being for public benefit, it is the responsibility of the trustees of the charity alone to determine what they do. Provided the actions they take are for public benefit and within the charity’s objects, neither the Charity Commission nor anyone else has the power to intervene.

This means that a foundation that has its own funds is under no obligation to give further accounts to anyone else. To illustrate the implications of this, consider the hypothetical example of a foundation that has for many years been supporting organizations that provide services to poor elderly people in a particular town. The charities involved have come to depend on the foundation, as have, indirectly, the elderly people they help. Suppose now that the foundation trustees decide that they wish to change policy and support something different, and that they are going to do this immediately, with no warning.

The consequences for the organizations concerned would be severe, but there would be nothing that they or anyone else could do about it. Beyond the formal requirements of their annual report, the trustees would not be required to justify the change. While there are no published cases of foundations behaving so capriciously, less dramatic versions of this scenario do happen, and no redress is available to those affected.

The conclusion one might draw is that formal reporting apart, the financial independence of foundations does indeed mean that they are unaccountable. However, this is not the whole story.

Foundations and legitimacy: the operational value of accountability
The pages of Alliance amply illustrate that many foundations do much more than dispense largesse; they see their mission as being to influence policies and practice and to help bring about long-term change. These foundations are likely to use grantmaking as their main weapon, but they need to do more. If they are to succeed in their wider ambitions, they need to act strategically, focusing on well-defined areas, and to use all their resources, including their expertise, experience, contacts, reputation and independence.

If it is a truism that foundations are not accountable, it is also a truism that a foundation that wants to achieve change in policy or practice cannot work alone. It needs to work in partnership with beneficiaries, practitioners, researchers, policymakers and other private and government funders and it is here that accountability re-enters the story. Successful partnership will be possible only if the foundation has legitimacy in the eyes of those it wants to work with, and if it has their trust and respect.

Legitimacy derives from the substance of the work that foundations do, not from some abstract quality that applies to the organization in and of itself. To achieve that legitimacy, a foundation must behave in ways that earn trust and respect – listening carefully, being receptive, explaining its decisions, showing long-term commitment, having its own expertise, being respectful of the expertise and experience of others, and so on.

All this suggests that foundations need to think about accountability in a way that is not so different from that of the charities they support. In the UK at least, the formal demands are the same. Beyond that, decisions about to whom and in what way they should be accountable are a matter for judgement. Giving an account may bring benefits but it has costs and possibly risks attached. It is for the organization to judge the balance between the two.

Of course foundations can choose simply to give grants to good causes without engaging in issues of social change. Many do. As a reductio ad absurdum, imagine a foundation that has wide charitable objectives and £500,000 a year to spend. Suppose it decides to do this by making anonymous grants of £5,000 to 100 charities chosen at random (after due diligence) from the Charity Commission’s register. This foundation is not trying to achieve social change; legitimacy is of no interest to it, so when it comes to accountability why should it do more than the minimum?

This foundation would fit Caroline Hartnell’s description. It would be only minimally accountable but it would almost certainly do no harm and would probably do some good. Its trustees would probably not be avid readers of Alliance. But a foundation that wants to play a part in social change needs to take legitimacy, and hence accountability, seriously. For such a foundation accountability is an operational necessity, just as it is for any charitable organization.

In this article, I refer to foundations in the UK. Different rules apply in other countries, but the fundamentals are common.

In the UK the term ‘charity’ refers to not-for-profit organizations that are registered with the regulator (the Charity Commission) and eligible for tax reliefs.

Anthony Tomei is a trustee of the Bell Foundation. He was director of the Nuffield Foundation from 1995 to 2012. Email
This article is based on a paper that appeared in Voluntary Sector Review (Vol 4, No 3, November 2013, pp403–13).

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