Philanthropic foundations cost taxpayers – and so should be made accountable

There are varying levels of understanding about philanthropy’s role and accountability requirements – particularly in Australia.

Since organised philanthropy plays a significant role in democratic societies, answering the philosophical and ethical questions it raises is vital. Public policy acknowledges this significance by giving tax benefits to philanthropic donors. Essentially, this is money that is forgone from the public purse.

First, however, it is important to understand that philanthropy assumes several forms. This includes individuals giving their time, money and/or expertise, as well as wealthy individuals or families presenting large philanthropic gifts. Corporate giving also falls under this spectrum.

There are also private philanthropic foundations, or perpetual, charitable, grant-making foundations and trusts. So what are these? And why is philanthropy viewed as a solely private activity in Australia?

Private wealth for public purposes

Philanthropic foundations are usually established by individuals, families or businesses. They are a means of providing long-term growth of, and support to, the common good. Foundations therefore provide private wealth for public purposes.

Like their international counterparts, Australian foundations share a unique set of characteristics:

• they are perpetual entities;

• they have a permanent endowment; and

• their trustees are self-appointed.

These foundations have minimal legal or regulatory requirements for full public accountability.

Unlike government and business, however, foundations have no voters, customers or shareholders. And philanthropy is relatively immune from media criticism, particularly in Australia. Any questioning can prompt hurt and outrage, as if the questioner is seeking to discredit these generous people.

This is true no matter how general the query may be. For example, the answer to the question “How many foundations are there in Australia today?” remains unknown outside the Australian Taxation Office.

How are philanthropic foundations different from charities?

Although legally defined as charitable entities, foundations are unlike other charities and not-for-profit organisations.

Charities operate within a regulatory framework and constantly need to raise funds. Most importantly, charities are required to be fully publicly accountable.

A board of trustees governs philanthropic trusts and foundations. Initially, these are usually named in the trust deed. Their successors are thereafter appointed by the remaining trustees. As most foundations do not publish annual reports, little information is available about who these people are.

While trustees have fiduciary responsibilities, their foundation’s perpetual endowment generally relieves them of the need to raise supplementary funds.

Scholars claim that public knowledge of foundation boards, via public accountability, could improve board diversity, and thereby help trustees gain a better understanding of community problems their foundations are trying to solve.

Public accountability and philanthropy

It is often argued there is a contradiction at the heart of the issue of public accountability. This is the difficulty of balancing two diametrically opposed ideas: the privacy of foundations and the public interest.

Privacy advocates argue foundations are created by private individuals and/or families using private money. This means, they say, foundations should not have to report publicly. Public accountability would also increase government regulation over foundations. They argue this lessens a foundation’s independence and individuality, and ultimately jeopardises its freedom.

The first counter-argument is that foundations receive generous subsidies in the form of tax benefits. In 2008, the Australian Treasury estimated this to be at least 45 cents in every philanthropic dollar.

Second, foundations are genuinely both private and public bodies. They are private because they receive their funds from private individuals. Yet they are also public – foundations devote funds via grants to non-profit bodies approved by the Australian Taxation Office.

The power of philanthropists in public life

The American Congress recognised these arguments when it passed the Taxation Reform Act. The act declared that foundations are not solely private and mandated public accountability. It echoed the Carnegie Foundation’s plea that it was incumbent upon foundations to have glass pockets.

A further argument, rarely acknowledged, is that foundations are economically powerful and influential. They should therefore tell the community how they are applying these funds. This is pertinent in light of Jane Mayer’s examination of wealthy American philanthropists and their political manoeuvring.

Scholars such as Peter Frumkin claim power imbalances between grant-maker and recipient make public reporting imperative. Disclosing information would make foundations more accountable. It would also, Frumkin argues, make them more effective and have greater impact.

Given the above, are the needs of the not-for-profit sector best served by the absence of publicly available information? The lack of requirements for public accountability of trusts and foundations in Australia is arguably an ethical issue.