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Philanthropication thru Privatization Project Lester M. Salamon, Director

WORKING PAPER NO. 3

The Structure of Philanthropic Institutions Resulting from Privatization Deals:

Commonalities and Differences, Developments, Lessons To Be Learnt

By Rupert Graf Strachwitz

Based on case studies prepared by Gian Paolo Barbetta, Charles Bell, Peter McKinlay, Lucas Meijs, Amelie Mernier,

Bartek Pielinski, Nigel Siederer, Rupert Graf Strachwitz, and Boris Strecansky

This working paper is one of a series of interim products of the Philanthropication thru Privatization (PtP) Project. No attempt has been made to subject the paper to editing or rigorous fact-checking by the original case-study authors. Readers interested in the final interpretation of particular case study details are therefore referred to the final report on this project identified in the attached Preface. However, access to these interim products may still be of interest to illustrate the richness of the underlying material, the process involved in making coherent sense of it, and some additional analytical perspectives on the findings. For a full list of PtP p roject working papers and documents, see p-t-p.org.

The views and interpretations presented here represent those of the author alone and do not necessarily represent the views or interpretations of the Project Director; the East-West Management Institute, which has served as the administrative home of the PtP Project; or the funders of this project identified at the end of this report.

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

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PREFACE

This is one in a series of Working Papers produced as part of the Philanthropication thru Privatization (PtP) Initia-tive. The PtP Initiative is directed by Lester M. Salamon of the Johns Hopkins Center for Civil Society Studies. This initiative has sought to bring to light an innovative approach to fostering the creation or enlargement of phil-anthropic endowments around the world by tapping into the proceeds of privatization transactions of various sorts. Numerous such "philanthropication thru privatization," or "PtP," transactions were thought to have oc-curred around the world but they had never before been systematically identified or analyzed. To fill this gap in knowledge, a global team of Discovery Associates was recruited, a comprehensive definition of the PtP phenomenon was created, and a systematic search process undertaken. Ultimately, an initial set of 539 such foundations were identified with assets totaling close to US$140 billion. Included were foundations that emerged or were expanded as a result of one of five types of "privatization" transactions: (a) the sale or other transformation of a state-owned enterprise; (b) the transfer of some other state asset (e.g. land, a building, a cul-tural institution) to a charitable institution; (c) the distribution of some or all of the proceeds of an asset under state control (e.g. a lottery, mineral rights payments) to a charitable institution; (d) a debt swap in which a founda-tion emerged from the forgiveness of a loan by a creditor nation to a debtor nation; or (e) the transformation of a quasi-public institution into a for-profit one in the course of which the assets of the nonprofit are preserved for charitable purposes. To understand more fully how this PtP process unfolded, a team of Case Study Associates was recruited to investi-gate 22 of these foundations in greater depth, focusing particularly on four key aspects of the PtP phenomenon: first, the nature of the "deal" involved; second, the circumstances that led to the PtP outcome; third, the govern-ance structure of the resulting institutions; and fourth, the substantive and procedural performance of these insti-tutions. A full report on the results of this effort, entitled Philanthropication thru Privatization: Building Permanent Assets for the Common Good, is available through il Mulino, and can also be downloaded at p-t-p.org. The present Working Paper represents one of several interim products of this project. In particular, four of the Case Study Associates was asked to prepare an interim summary of one of the sections of the case study reports to help in the process of compiling the final report. The Working Papers were compiled by researchers with differ-ing perspectives and no attempt has been made here to subject them to rigorous editing or fact-checking by the original case study authors. Several of the resulting summaries made useful analytical contributions that seemed worth preserving in their original form even though some of the details of the cases were further refined through discussions with the original case study authors in the process of preparing the final report. Readers interested in the final interpretation of the case studies are therefore referred to the final published report of this project. However, access to these interim products may still be of interest to illustrate the richness of the underlying mate-rial and the process involved in making coherent sense of it. Lester M. Salamon PtP Project Director

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Philanthropication thru Privatization Initiative | 1

PHILANTHROPICATION

thru PRIVATIZATION Working Paper no. 3: The Structure of Philanthropic Institutions Resulting from Privatization Deals Commonalities and Differences, Developments, Lessons To Be Learnt by Rupert Graf Strachwitz

INTRODUCTION It is not surprising that the philanthropic institutions created in the course of privatization efforts, while commonly described as foundations, take different legal forms, adopt different traditions and customs in regard to their governance structure and perform their tasks in different ways. Given the variety of available models, no uniform pattern for the establishment of entities as a result of a PtP process could be shown to exist. The founding bodies may adopt the standard foundation model in their country, may look at other models of incorporation and governance structure or indeed create new specific models. The important question to ask is whether a common denominator exists at all. A very broad definition of a foundation in general may be seen as applying to all cases analyzed. Philanthropication through Privatization in this sense spells the establishment of a stable philanthropic institution, rather than a short-term dispersement of funds. Since this paper will look at the legal and governance structures of such institutions in a comparative perspective, to attempt to make a legal definition the basis of the analysis would neither be reasonable nor produce any viable practical results. On the contrary, a transcultural, historical and sociological definition is the only way to agree on a common denominator. This definition contrasts the foundation as an entity dependent on the framework laid down by its original deed, to associational entities defined by an inbuilt ongoing process of reassessment, conducted by its members.1 In this sense, while no involvement in a foundation entails full ownership, an associational entity may be defined as being fully owned by its members. While the US foundation model habitually allows for a wide range of amendments to the original deed and more often than not leaves a wider range of decisions to its administrators than the European model, it is still the founder’s will that enables them to take these decisions rather than an original right resulting from their membership as would be the case in a membership organisation. And while hybrids of several kinds exist, it would seem important to acknowledge the fundamental principle in order to be in a position to assess the entities examined here in a relevant comparative fashion.

1 The same division may be used in defining types of business entities (owner-managed business-es vs. public corporations) and types of government (monarchical vs. democratic)!

2 | STRACHWITZ | Working Paper no. 3: The Structure of PtP Foundations

Indeed, all cases rely on an overall concept of an entity governed by:

The will of its founder(s); A formal governance mechanism; A public benefit purpose, laid down at establishment; and

A long term licence to operate.

Furthermore, they are commonly equipped with either assets or a reasonable expectation of a revenue. The concept drawn from a general historical foundation concept does in many cases of philanthropication through privatization raise the issue of mandate. Other than in cases of a private citizen acting as founder, foundations created in the process of privatization lack a clearly defined founder entitled to impress his or her will on the foundation in perpetuity. On the contrary, democratic decision making bodies habitually and legitimately adapt to changing circumstances and will not necessarily understand the principle of a foundation required to observe the intentions laid down at its creation. This dichotomy will be less problematic if, as in the case oft he New Zealand community foundations, the purposes laid down in the statutes are very wide and the governance is designed to adapt to changes. It may, on the other hand, become a real problem, if as in the case of continental European foundations, the purposes are clearly defined and comparatively narrow. Who, one may ask, is then entitled to suggest changes?

LEGAL FORMS AND GOVERNANCE IN HISTORICAL PERSPECTIVE It is obvious that the theoretical model described above entails that foundations are embedded in their history to a far greater degree than membership organizations. They exist in an ongoing close relationship with their own establishment and derive their licence to operate from an adherence to the founder’s will. This goes for private founders as much as for public bodies. Therefore, assessing the legal and governance issues connected to PtP foundations must necessarily assess these issues in relationship with the historical frame under which the entities were originally established. In this context, it is noteworthy that around 1960, when the Volkswagen Foundation was formed, the government in charge of the privatization issue was not financially troubled, but was under pressure to provide more resources for research, to solve a very specific ownership problem, and to look at new ways in broadening the ownership in producing enterprises. In the 1980s and 1990s, pressure was brought on governments from a very different angle. There was an increasing dissatisfaction with the state in general and the performance of state agencies in particular, and privatization was seen as a way to modernize the government structure. By the 2000s, popular dissatisfaction had reached the market so that privatization deals needed an added reasoning. On the other hand, up to the 1980s, most people, especially in Europe, failed to see the difference between the state and civil society, while after the 1990s, the emergence of civil society as a distinct arena of public action became apparent. These circumstances can be seen to have influenced the structure of the various institutions.


Table 1: Year of establishment of the entities included in the case studies Volkswagen Stiftung 1961 Deutsche Bundesstiftung Umwelt 1990 Baden-Wuerttemberg Stiftung 2000 Stiftung Rheinland-Pfalz fuer Innovation 1991 Czech Foundation Investment Fund 1993 Foundation for Polish Science 1990 Nadacia Slovenskej Sporitelne 2004 Fondazione Teatro della Scala di Milano 1996 Fondazione Lombardia per l’Ambiente 1986 Oranje Fonds 2002 (1948) Fondation Roi Baudouin 1976 Stiftung für Deutsch-Polnische Zusammenarbeit 1991 Compagnia di San Paolo 2000 (1991) (1563) Fondazione Cariplo 1998 (1991) (1823) Fondazione Cassa di Risparmio di Torino 2000 (1991) (1827) Erste Stiftung 2003 (1819) ASB Community Trust 1988 Community Trust of Southland 1988 California Health Care Foundation 1996 The California Endowment 1996 Lloyds TSB Foundation for England and Wales 1986

The Volkswagen Foundation, established in 1961, naturally has a longer life-span to look at, while having had to adapt to circumstances more often than younger ones. In addition, it may be said that foundations established before around 1990 had considerably less expertise to draw on. The enormous increase in civil society and philanthropic activities, followed by a much broader research base, has rendered a development of a state of the art possible, which did not exist up till then. In particular, new establishments in post-communist countries were able to profit from international expertise not only in devising an adequate legal framework, but also in designing statutes, bye-laws, governance structures based on know-how acquired else-where. In this respect, the (German) Deutsche Bundesstiftung Umwelt is an interesting case in that the Volkswagen Foundation model was copied entirely, although foundation experts at the time voiced several concerns relating to the very large board and the absence of a formalized two-tiers structure. In turn, the Volkswagen Foundation was established at a time, when expertise was rare due to a near-total absence of new creations for nearly half a century. Besides, this happened when US foundation experts were actively encouraging Germans to adopt a positive outlook on foundations. The adoption of the one-board-model, rather than the traditional two-board model customary in Germany, by the government officials who designed the governance structure may therefore be put down to an American influence. The structure of the cases in Belgium and The Netherlands, as will be seen, follow a very different role model. In both cases, national identity, epitomized in the position of the Monarch, was a driving force in establishing the existing foundations. So, although the two countries differed widely in that a vibrant philanthropic tradition existed in The


Netherlands, while in Belgium, like in France, this tradition had been interrupted, both cases sought a similiar pattern of governance. Party politics were kept out, while the established society and the Monarch himself were involved. On the other hand, the governance structure of the US cases reflects the political debate on the legitimacy of foundations leading up to the 1969 Tax Reform Bill, the development of standardized governance procedures in the aftermath of 1969 and the practical issues discussed in connection with the many new establishments in the 1980s. Undoubtedly, the theory and practice of modern not-for-profit organizations evolved primarily in the United States and was supported both earlier and more intensely by a body of research into issues of legitimity, legal frameworks, and governance. Also, American based economic theory advocated privatization of public services, while the rest oft he world, and notably Western Europe was still inclined to a near-complete welfare state. It is therefore not surprising that European PtP cases were comparatively late in adopting areas of activity that were deemed to belong to the core business of the welfare state and to adopt areas that were high up on the political agenda at the time (like promoting research in the 1960s, and caring for the environment in the late 1980s) rather than interfering with the provision of social services. The special case of Italy echoes a very different popular sentiment—the disaffection with government in general, and a firm conviction that civil society would be able to solve a whole range of issues more efficiently, provided there existed a transparent, pro-active, non-corrupt, efficient, and potent funding system. The cases of the three (out of 90) Italian foundations established in 1991 as legal owners of banks and savings banks and later of the proceeds of the divestment of these assets and of the Austrian foundation with a similiar history are also of particular interest in that a point was made to reflect the centuries-old governance tradition of the financial institutions—all of which had had a strong not-for-profit side to their activities—in the new governance structure of the foundations. Savings banks in particular had been conceived in the 19th century primarily as a public service, and the accrued surplus was felt to be owned by or at any rate owed to the citizens living in the area. It therefore seemed natural that the newly created foundations should concentrate their activities on the same region and aim at benefitting these citizens, and that the governance structure should reflect its breadth of political life and civil society. In the case of Die Erste Foundation, this is underpinned by the inclusion of the still existing membership organization, Die Erste Österreichische Sparkasse, that had founded the savings bank in 1819, in the governance structure of the foundation. The England and Wales case is different again—and it is proper to say Engand and Wales rather than United Kingdom. It reflects, as does the New Zealand case, the traditional and unbroken charity tradition of England and Wales charity law since at least 1601—incidentally the legal base of charity law in all Anglo-Saxon countries world-wide (e.g. the United States and new Zealand)—in all respects of its legal and governance structure, while using the term foundation which at the time of establishment was still somewhat unusual, but does not imply any legal peculiarity. Despite this tradition however, in New Zealand, tax law has had to be adapted to the necessities of modern community foundations. Interestingly, while some jurisdictions, notably England and Wales, rely heavily on general legislation passed centuries ago, others have created special legislation for the


purpose of privatization, and in some cases have amended it more than once in a short span of years. Finally, the cases from Central and Eastern Europe echo the development of these countries after the fall oft he communist regimes. While the establishment of the Foundation for Polish-German Cooperation was due to an extraordinarily complicated relationship between these two countries and was actively used to install a mechanism of cooperation, the other examples may be seen as a result of the popularity that foundations as such acquired in the 1990s, a wish to be part of a positive trend—with regards both to privatization and to philanthropic institutions—and a device to copy and promote activities deemed tob e integral parts of a modern democracy. Hence, the legal framework more often than not was created to this end, and the governance structure was modeled on private foundations rather than on objectives like government influence or broad representation. This aim at political correctness is reflected in the Czech and similiarily in the New Zealand provisions that i.a. nobody with a penal record is eligible as a board member, and no close relations of board members may be employed by the foundation. Unsurprisingly, while the overall concept of philanthropication through privatization reflects the global tendency to privatize business activities, the individual cases strongly represent attitudes towards the state and relations between citizens, civil society, the business community and the state that were culturally embedded in individual societies at the time of their establishment. Also, as will be shown, in some cases changes in this relationship have effected changes in the legal framework and the governance structure of the entities involved. Yet, the crucial question that remains, cannot easily be answered: are these institutions really private?

LEGAL STRUCTURE It is important to realize that while in most legislative systems, the term foundation is used predominantly to describe a legal structure, in some it is not. Correspondingly, the term either allows for a variety of ways in which a foundation may achieve its statutory goals or is very specific. E.g., in England and Wales, a foundation is not a legal term so that the entities in legal terms are charities, taking one of 13 possible legal forms of a charity (most commonly an association (membership organization), a charitable trust, or a company limited by guarantee). By contrast, in Germany, foundation is a legal term, divided into several divisions (broadly speaking: foundations under civil law, foundations under public law, foundations under church law, in either case with or without legal personality), further complicated by the fact that it is also a general term, rendering it perfectly legal and customary to call an institution with a different legal form (e.g. a limited company) a foundation. On the other side, by custom, most but not all bodies in England which use the term "foundation" are wholly or mainly grant-making bodies, while in Germany, foundations may be operating, grant-making, benevolent (i.e. supplying aid to individuals), or merely legal owners (of assets destined to serve a particular purpose, e.g. church buildings, collections of art). In the U.S., foundations tend to be grant-making, but are not necessarily so. A further complication arises from the fact that while some relevant legislative structures, notably those of England and Wales and Germany, have developed over centuries, others were created fairly recently or have been considerably amended in recent years:


Table 2: Origin of relevant legal structures (by country of cases examined)

Austria 1811 Belgium 1921 – 2002 Czech Republic 1997 – 2002 - 2010 England and Wales 1601 Germany 1794 – 1900 – 2002 Italy 1942 – 1990 – 1996 - 1998 Netherlands 1811 New Zealand 1908 - 1956 Poland 1964 - 1984 Slovakia 1996 - 2002 United States 1969

This is particularly noteworthy for Italy, where different legal forms were created over time that all contain the word foundation (e.g. fondazione di origine bancaria, fondazione di partecipazione) and indeed obey the same basic principles but differ widely as to regulation on governance structures etc. Given these differences, it is not only difficult to establish a legal pattern; it also evolves that the traditional legal differentiation between Roman law and common law is hardly applicable. It may however be said that countries with long-standing and uninterrupted legal and philanthropic traditions have tended to make use of the width and breadth of options (e.g. England and Wales: 13 legal forms for a charity, Germany and Italy: a variety of foundation forms), while countries with an interrupted legal history have tended to adopt a uniform foundation model and use this model for their PtP cases. In addition, while some legislatures confine their relevant regulation to few very general principles in the civil code (e.g. The Netherlands), and some regulate foundations primarily through fiscal legislation (e.g. the United States), others have put detailed and specific legislation on foundations in place (e.g. Italy, Poland, and Germany). In the case of Germany, the picture is further distorted by the fact that private foundations with legal personality are subject to specific government supervision executed by the states (Laender) who have all passed relevant – and differing – legislation. This analysis shows that while all cases examined describe themselves as foundations (fondazione, Stiftung, fondation, Fonds etc.), and while the majority were established under civil law in their espective countries, their legal bases are in fact very diverse:


Table 3: Legal status of cases examined

Volkswagen Stiftung Civil Law Foundation Deutsche Bundesstiftung Umwelt Civil Law Foundation Baden-Wuerttemberg Stiftung Limited Company Stiftung Rheinland-Pfalz fuer Innovation Public Law Foundation Czech Foundation Investment Fund Public and Civil Law Foundation Foundation for Polish Science Civil Law Foundation Nadacia Slovenskej Sporitelne Civil Law Foundation Fondazione Teatro della Scala di Milano Specific legal form Fondazione Lombardia per l’Ambiente Civil Law Foundation Oranje fonds Civil Law Foundation Fondation Roi Baudouin Foundation under Foundation Law Stiftung für Deutsch-Polnische Zusammenarbeit Polish Civil Law Foundation Compagnia di San Paolo Specific legal form Fondazione Cariplo Specific legal form Fondazione Cassa di Risparmio di Torino Specific legal form Erste Stiftung Civil Law Foundation ASB Community Trust Private Trust (Trustee Act) Community Trust of Southland Private Trust (Trustee Act) California Health Care Foundation Corporation / 501(c)(4) The California Endowment Corporation / 501(c)(3) Lloyds TSB Foundation for England and Wales Charitable company

In Belgium, a legal status was created for all foundations in 2002, specifying public benefeit and private foundations. The Czech case is particularly intrigueing, in that the Czech Foundation Investment Fund enjoys public law foundation status as an instrument of secondary philanthropy, while remaining a civil law foundation in relation to its primary philanthropies. In England, a foundation acquires legal status by registration as a company. The liabilities of its members are limited to the amount of their guarantee, normally £1 per member. In addition, the foundation may register as a charity, provided it has a public purpose. With the exception of Erste Stiftung, all cases enjoy tax-exempt status. However, this status is awarded separately by the relevant fiscal authorities, and does not affect the entities’ status as foundations. In the US however, tax status is definitory for the foundation’s status and regulates foundation activities in different ways. The case of the Stiftung Rheinland-Pfalz fuer Innovation emerges from this analysis as singular in that it is questionable whether it actually contains a privatization case at all. Legal theory in Germany has it that foundations under public law are considered in a wide sense to belong to the sphere of government. I.a., while the dissolution of a private foundation with legal personality is a complicated procedure and may only happen under very distinct conditions, public law foundations, establishable only through federal or state legislation or government decree, may be terminated at any time follwing the same procedure. On the other hand, notwithstanding government


influence, some public law foundations, by their statute and policy, do act independently, and are not generally regarded as part of the government machine. Stiftung Rheinland-Pfalz fuer Innovation is certainly a borderline case, but given the strong influence of governments in many cases where formally and legally, the entity certainly is private, the differences are not great enough to be able to treat this case separately from the others. Furthermore, while in some countries the principle of perpetuity is definitory for a foundation, in others it is not.

Table 4: Foundations created in perpetuity

Volkswagen Stiftung yes Deutsche Bundesstiftung Umwelt yes Baden-Wuerttemberg Stiftung no Stiftung Rheinland-Pfalz fuer Innovation no Czech Foundation Investment Fund yes Foundation for Polish Science yes Nadacia Slovenskej Sporitelne yes Fondazione Teatro della Scala di Milano no Fondazione Lombardia per l’Ambiente yes Oranje Fonds no Fondation Roi Baudouin yes Stiftung für Deutsch-Polnische Zusammenarbeit yes Compagnia di San Paolo yes Fondazione Cariplo yes Fondazione Cassa di Risparmio di Torino yes Erste Stiftung yes ASB Community Trust yes Community Trust of Southland yes California Health Care Foundation yes The California Endowment yes Lloyds TSB Foundationfor England and Wales yes

By contrast, while assets that yield a revenue are definitory in some countries, in others they are not. As a result, some of the foundations examined pursue their purposes with the revenue of a one-off endowment provided at establishment, while others have various arrangements as to the influx of funds (national lottery, annual payments from the government etc.)


Table 5: Foundations pursue their purpose with the revenue from their assets

(by country of cases examined) Austria yes Belgium partly Czech Republic yes (assets augmented annually) England and Wales yes Germany yes Italy - Foundations of banking origin yes - others no Netherlands no New Zealand yes Poland no Slovakia partly United States yes

In this context, the case of the Lloyds TSB Foundation for England and Wales is special in that while the income does result from the assets, it does not constitute a dividend. The foundation receives a guaranteed income in lieu of dividends. If the guarantee breaks down, the position would revert to a conventional endowment. This analysis leads to one other interesting issue: In some countries, legal or even constitutional restrictions exist in relation to the disposal of state-owned assets. In particular, governments, while entitled to dispose of assets as such, may not use the proceeds for the budget. Resulting from this restriction, various ways have been found to overcome the ensuing difficulties. In an age when a controlling share in for-profit businesses and most particularly in certain types of services is—or was, until the effects of the 2007 financial crisis led to a reassessment of market activities in general—no longer held to be politically and economically viable, thus triggering privatization moves, it could not be an option to acquire other assets of more or less the same type. Also, the state in most countries, is already by far the largest owner of real estate and had no interest in acquiring additional forrests or urban estates. Under these circumstances, legal support was sought to establish whether the creation of a foundation might be seen as preserving the assets in the sense of public interest. In some cases, this was deemed legal on condition that a certain degree of government control be preserved. In other cases, ongoing state ownership was declared conditional, while in others again, no such restrictions applied. When they did apply, they diminished the options of legal forms. E.g., if ongoing ownership was required, the German form of a private law foundation with legal personality was unapplicable, since this legal form is defined by the fact of no outside ownership. The creation of the foundation as a limited company or as a public law foundation in name would remain as sole options. On the other hand, if government control was sufficient, the options would be different. If however, the asset base was not the prime consideration in creating these entities in the first place, while a legal body was to be created to collect and disperse of funds at arms length from government and governed by its own rules and a governing body distinct from government, the priority of legal forms and governance structures would be different again.


GOVERNANCE While most of the PtP cases examined were established as grant-making bodies, some were not, and indeed some have undergone changes in this respect. These changes have to do with a general trend in foundation governance. Where legally possibly, foundations in recent years have tended to move from pure grantmaking to pro-active grantmaking and in some cases to operating projects. This trend is reflected in the PtP foundations, especially, as some have adopted a more pro-active role or become partly operational in recent years. In the case of the Volkswagen Foundation, this was made possible by an amendment to the statutes in 2009.

Table 6: Grantmaking and Operational Foundations

Volkswagen Stiftung grantmaking operating Deutsche Bundesstiftung Umwelt grantmaking --- Baden-Wuerttemberg Stiftung grantmaking --- Stiftung Rheinland-Pfalz fuer Innovation grantmaking --- Czech Foundation Investment Fund grantmaking --- Foundation for Polish Science --- operating Nadacia Slovenskej Sporitelne grantmaking --- Fondazione Teatro della Scala di Milano --- operating Fondazione Lombardia per l’Ambiente grantmaking operating Oranje fonds grantmaking operating Fondation Roi Baudouin grantmaking operating Stiftung für Deutsch-Polnische Zusammenarbeit grantmaking operating Compagnia di San Paolo grantmaking operating Fondazione Cariplo grantmaking operating Fondazione Cassa di Risparmio di Torino grantmaking operating Erste Stiftung grantmaking --- ASB Community Trust grantmaking --- Community Trust of Southland grantmaking --- California Health Care Foundation grantmaking --- The California Endowment grantmaking --- Lloyds TSB Foundation for England and Wales grantmaking ---

Unsurprisingly, given that all states adhere in some way to a welfare state model, none of the cases is shown as benevolent in the sense that the foundation supports individuals, while it is noteworthy that no case was analyzed that has adopted an ownership model, although such foundations do exist. (N.B.: The largest museum owner and operator in Germany, Stiftung Preußischer Kulturbesitz, was established in the 1950s to become the legal owner of the art treasures, archives and libraries as well as the respective buildings that had belonged to the State of Prussia, which was formally declared extinct in 1947.) The classification as grantmaking vs. operational used here is a formal one and does not disclose the varying degree of involvement with projects and institutions supported by the individual foundation. E.g., the Italian foundations of banking origin are predominantly grantmaking. However, grantmaking may, as in the case of New Zealand, involve a considerable degree of research and development into the activities the foundation supports on occasion being virtually the initiator of major


social transformation projects, or on the other hand a mere formal review of grant applications. Unlike other cases, where the grantmaking and/or operational function is prescribed by the statutes or by law, the Llodys TSB Foundation for England and Wales is not restricted by its statutes or by law, but merely by choice of its Board. The governance structure depends on the method by which the foundation executes its programme. The Foundation for Polish Science is a good case in point. While its main task is described as "providing ... funding," the approach is so pro-active, underpinned by the award of scolarships and prizes, and by "taking part in projects ...," that the Foundation describes itself as an operating foundation. This has considerable implications regarding the composition of the governing council as well as the staff employed. While in a purely grantmaking foundation that restricts its activities to taking decisions on applications received, common sense and an overview may suffice to be able to take the necessary decisions, "taking part in projects" obviously implies a more detailed knowledge and experience in the specific field of activities. This is certainly reflected in the only other case that is entirely operating, the Teatro alla Scala di Milano, where the sovrintende (general manager), recruited as an expert in theatre management, enjoys a large degree of autonomy. Whether however those foundations who may be classified as grantmaking and operating, can muster sufficient expertise to manage not-for-profit operations, remains unclear. A possible indicator for the expertise assembled within the foundation is the size of their staff in relation to their average expenditure.

Table 7: No. of Staff and Expenditure per annum (in EURO)

p.a. staff expenditure x Volkswagen Stiftung 90 20,000,000 Deutsche Bundesstiftung Umwelt 147 47,000,000 Baden-Wuerttemberg Stiftung 32 32,000,000 Stiftung Rheinland-Pfalz fuer Innovation 4 5,600,000 Czech Foundation Investment Fund 20 1,300,000 Foundation for Polish Science 45 n.a. Nadacia Slovenskej Sporitelne 0 1,000,000 Fondazione Teatro della Scala di Milano 899 123,500,000 Fondazione Lombardia per l’Ambiente n.a. 6,000,000 Oranje fonds 10 32,000,000 Fondation Roi Baudouin 80 22,000,000 Stiftung für Deutsch-Polnische Zusammenarbeit 25 4,000,000 Compagnia di San Paolo 89 127,600,000 Fondazione Cariplo 61 140,500,000 Fondazione Cassa di Risparmio di Torino 46 43,500,000 Erste Stiftung 35 7,600,000 ASB Community Trust 25 30,000,000 Community Trust of Southland 7 6,000,000 California Health Care Foundation n.a. 158,000,000 The California Endowment n.a. n.a. Lloyds TSB Foundation for England and Wales 24 27.000.000


The available data are incomplete and any comparison necessitates extreme caution, as it is impossible to ascertain how the annual expenditure and indeed even how the no. staff is defined (as head or as full-time equivalent). Furthermore, the number of external experts is not included. (E.g., all grant applications to the Volkswagen Foundation are reviewed by external reviewers, while the Cariplo Foundation has an internal reviewing process in place, and only rarely turns to external reviewers for an additional opinion.) Also, it makes a big difference what proportion of funds available is handed out in grants, and what proportion is used for operating projects. Obviously, the Teatro della Scalla di Milano that fully operates an important opera, is in a very different position than a grantmaking foundation. Finally, the differences in policy are not accounted for: Are grants made in large portions to large professional grantees who will submit near-to-perfect grant applications and file comprehensive reports? Or does the foundation work with a plethora of small organisations whose skills in grant management are not so developed? It is therefore risky to compare the available figures. Yet, a comparison of the relationship between expenditure and staff can at least show that great differences exist. In comparing annual reports, the differences in expenditure over time are noticeable. E.g. The King Baudouin Foundation published expenditures of over 50 Million Euro for 2005, and of 20 Million Euro for 2011. This has to do with decreasing levels of revenue since 2007, as well as with varying sucesses of fundraising efforts and other factors.

Table 8: Expenditure per staff member per annum (EURO)

Volkswagen Stiftung 222,000 Deutsche Bundesstiftung Umwelt 319,728 Baden-Wuerttemberg Stiftung 1,000,000 Stiftung Rheinland-Pfalz fuer Innovation 1,400,000 Czech Foundation Investment Fund 65,000 Foundation for Polish Science n.a. Nadacia Slovenskej Sporitelne n.a. Fondazione Teatro della Scala di Milano 137,349 Fondazione Lombardia per l’Ambiente n.a. Oranje fonds 3,200,000 Fondation Roi Baudouin 275,000 Stiftung für Deutsch-Polnische Zusammenarbeit 160,000 Compagnia di San Paolo 1,433,708 Fondazione Cariplo 2,302,787 Fondazione Cassa di Risparmio di Torino 945,652 Erste Stiftung 217,143 ASB Community Trust n.a. Community Trust of Southland 857,143 California Health Care Foundation n.a. The California Endowment n.a. Lloyds TSB Foundation for England and Wales 1,125,000


The numbers, although impressive in that they show differences of up to a 1:20 ratio (the Foundation for Polish-German Cooperation only handling €160,000 per staff member, while the Oranje Fonds handles €3,200,000), certainly cannot and should not attempt to demonstrate that some foundations are managed more efficiently than others. They only serve to illustrate that staff and management issues differ widely according tot he type of activity and the relevant method of executing it and that there is no uniform pattern of governance as regards the day-to-day management and the depth of expertise and know-how retained within the foundation. It does evolve however that beside the strategic intention of the establishment, and potential vested interests, the type of activities determines the governance structure. The case studies show that PtP foundations habitually have comparatively large governing bodies, and that the division of powers and tasks between various governing bodies varies widely. In some cases, only one governing body exists that may or may not include the CEO of the foundation. In Europe, a supervisory and an executive body are common practice, and some foundations, notably the Italian foundations of banking origin, have an auditing body prescribed by law. This said, the history of the respective foundations shows that some of these differences may be ascribed to the interest of the political bodies involved in the original transaction to continue to have an influence in the entity they created. Accordingly, more seats than is common practice were devised to accomodate political influence.

Table 9: Governance structure and # of members of governance bodies (2010) Supervisory Executive

Volkswagen Stiftung --- 14 Deutsche Bundesstiftung Umwelt --- 14 Baden-Wuerttemberg Stiftung 18 1 Stiftung Rheinland-Pfalz fuer Innovation <15 4 Czech Foundation Investment Fund yes >3 Foundation for Polish Science 5 – 7 2 – 3 Nadacia Slovenskej Sporitelne 5 3 Fondazione Teatro della Scala die Milano 3 9 Fondazione Lombardia per l’Ambiente 5 12 Oranje Fonds --- 7 – 15 Fondation Roi Baudouin --- 12 – 24 Stiftung für Deutsch-Polnische Zusammenarbeit --- 6 Compagnia di San Paolo 21 5 – 7 Fondazione Cariplo 40 9 Fondazione Cassa di Risparmio di Torino 24 11 Erste Stiftung 9 7 ASB Community Trust 15 1 Community Trust of Southland 10 1 California Health Care Foundation --- 3 – 12 The California Endowment --- 3 – 20 Lloyds TSB Foundation for England and Wales --- 5 – 12


Major differences exist concerning the formal influence of the governments originally involved. The influence exerted is three-fold:

a) By appointing board members and/or officers of the foundation; b) By occupying seats on the board; and c) By keeping special powers relating to strategic decisions, changes of by-laws etc.

To pick two examples, governments appoint representatives and/or sit on the governing boards in the following cases:

Table 10: Government Appointment and Representation

Appointment Representation Volkswagen Stiftung yes yes Deutsche Bundesstiftung Umwelt yes yes Baden-Wuerttemberg Stiftung yes yes Stiftung Rheinland-Pfalz fuer Innovation yes yes Czech Foundation Investment Fund no no Foundation for Polish Science yes no Nadacia Slovenskej Sporitelne no yes Fondazione Teatro della Scala di Milano yes yes Fondazione Lombardia per l’Ambiente yes yes Oranje Fonds no no Fondation Roi Baudouin no no Stiftung für Deutsch-Polnische Zusammenarbeit yes yes Compagnia di San Paolo yes no Fondazione Cariplo yes no Fondazione Cassa di Risparmio di Torino yes no Erste Stiftung no no ASB Community Trust yes no Community Trust of Southland yes no California Health Care Foundation no no The California Endowment yes no Lloyds TSB Foundation for England and Wales no no

Again, there are a number of borderline cases. The King Baudouin Foundation’s board includes to representatives appointed by the Sovereign. Interestingly, while no clear cut pattern evolves, central and Southern European societies seem to retain goverment control over the entities in some way or another more than anglo-saxon and post-communist societies do. In Poland and Italy, government control differs among the case studies due to the particular history (in Poland) and to differing legal frameworks (in Italy).


A comparison of countries looks like this:

Table 11: Government influence in the governance of PtP foundations Strong Medium Weak None

Germany New Zealand Slovakia Czech R. Poland Belgium Italy Austria England Netherlands USA

Interestingly, and contrary to popular belief, as the example of New Zealand may show, an Anglo-Saxon outlook on arms’ length as a viable proposition does not necessarily lead to abstaining from government influence, while other circumstances may do even in a country which traditionally believes in government involvement, like Austria. Thus, this comparison would also be incomplete without taking into account the diverse histories of the various entities. E.g., while the Volkswagen Foundation evolved from a complicated and highly political strategy that involved the federal government and a state government as well as the respective parliaments, and while the Foundation for Polish-German Cooperation was a result of an intergovernmental deal struck between Poland and Germany, both the King Baudouin Foundation and the Oranje Fonds (previously the Juliana Welzejn Fonds) were established in honour of the respective heads of state by public subscription with no political interests involved. In these cases, the government neither saw a need nor had any ambition to stay involved with the governance oft he foundation, while in the case of Volkswagen, political interests were so dominant that to this day a state and a federal government minister act as chair and vice-chair of the board. In other cases, notably the Stiftung Rheinland-Pfalz fuer Innovation, political leaders over time lost interest, so that the chair of the board eventually passed from the Minister President of Rhineland Palatinate to a Minister and then to the head oft he civil service in the Minister President’s chancery. However, political dominance, and indeed a large board in practice further a development that was certainly not intended at the outset. Since neither government ministers nor members of parliament and other high-ranking public figures can afford to devote much time to their duties as board members, their activity is in most cases reduced to attending board members and taking strategic decisions which in fact have been discussed and quasi-decided beforehand. Accordingly, it is the director who in many cases is not formally part of the governance structure at all, who in practice not only manages the foundation but also represents it, is seen as representing it, and takes most decisions as well as initiating and steering the necessary strategy debates. The case studies show that the larger the board and the more not entirely committed members on it, the more the practice of governance diverts from the statutory theory, despite the fact that many more rules and regulkations governing board procedures were put in place than in those cases where the boards were smaller and more homogeneous.


On the other hand, some case studies, notably the Landestiftung Baden-Wuerttemberg, show that in foundations closely aligned to the government bureaucracy, decisions may be taken outside the foundation governance system altogether. Not only are areas like asset management dealt with in government departments, but even grant and project decisions are taken under pressure from the government. This has in some cases led to political arguments. Opposition parties have argued that the foundation model as such was a means of evading parliamentary control over government spending. Also government audit offices have criticized that government employees perform services or provide office space for a foundation without the foundation being billed for these services. It is all the more surprising that some foundations apparently survive with boards composed of politicians, legislators, members of the establishment and of influential societal organisations like trade unions, churches etc. Only comparatively few have statutory requirements and/or established practices regarding the expertise of board members. The most interesting cases are those of the Italian foundations of banking origin, 88 in all, represented in this study by the Fondazione Cariplo, the Compagnia di San Paolo, and the Fondazione Cassa di Risparmio di Torino. The boards are carefully designed to represent the regional and local political establishment, other major public institutions, such as the Catholic Church, and representatives of civil society with expert knowledge in the fields of action of the foundation. Interestingly, in those cases where the privatization of a government corporation triggered the establishment of the entity, the case studies show big differences regarding the involvement of the privatized businesses involved.

Table 12: Involvement of Privatized Corporations in Ensuing Foundations

Volkswagen Stiftung no Deutsche Bundesstiftung Umwelt no Baden-Wuerttemberg Stiftung no Stiftung Rheinland-Pfalz fuer Innovation no Czech Foundation Investment Fund not applicable Foundation for Polish Science not applicable Nadacia Slovenskej Sporitelne yes Fondazione Teatro della Scala di Milano not applicable Fondazione Lombardia per l’Ambiente not applicable Oranje Fonds not applicable Fondation Roi Baudouin not applicable Stiftung für Deutsch-Polnische Zusammenarbeit ot applicable Compagnia di San Paolo no Fondazione Cariplo no Fondazione Cassa di Risparmio di Torino no Erste Stiftung yes ASB Community Trust no Community Trust of Southland no California Health Care Foundation originally yes, now no The California Endowment originally yes, now no Lloyds TSB Foundation for England and Wales originally yes, now no


In fact, only a minority of cases involves the previously owned corporations. In some cases, notably the Lloyds TSB Foundation for England and Wales, while the bank retains the legal right to appoint the Board members, they are in fact all appointed on recommendation of the Foundation itself after a public search. The fact that it does is in all cases closely connected to the history of the corporation. In many cases, ties between the foundation and the corporations remain strong beyond formal involvement. E.g., ASB Bank pays a fee of NZ$ 500,000 p.a. tot he ASB Community Trust for the right to continue using the name ASB, while on the other hand, the Trust banks with the ASB bank. Finally, the overall impression remains that the governance structure of the foundations was in most cases primarily designed to suit the wishes and notions of the founding bodies so that established rules of governance that followed needs and priorities of function would habitually take second place or, in some cases, not merit consideration at all.

CONCLUSIONS The analysis of the cases clearly shows that the privatization process as such does not result in a uniform governance structure oft he ensueing philanthropic institution. On the contrary, even within the same jurisdiction, a wide range of options has been explored. Furthermore, the challenge for the initial decision makers is very different depending on whether the philanthropication was in a sense adaptive, as in many western European and North American cases, or whether it involved very novel thinking, as in the case of the Central and Eastern European examples. Whereas in most private foundations there is a clear division of responsibilities between the governing body, the director/managing body, the staff, and possibly other stakeholders including grantees, the case studies show that this clear division does not exist in many of the PtP entities, due to deficiencies in the original deed. It should be remembered that this deed is of particular importance for the whole life of a foundation. Political interference both at a formal and at an informal level, is a problem with many of the cases, albeit to a different degree. And although none oft he cases analyzed reported disputes arisen over the governance structure of the organization or the functions of the governing authorities, it may be supposed that such disputes have indeed existed and have been solved discreetly without them becoming public knowledge. At a theoretical level, while the foundations as non-governmental and not-for-profit entities must exist as autonomous bodies in the context of civil society, a case may be made for ensuring that some form of public control is desirable, given that the endowment was (in nearly all cases) publicly owned. Whether public control must necessarily be exerted through representatives within the foundation, is a very different matter, as these representatives will automatically have a conflict of interests. In nearly every jurisdiction, members of governing bodies of an organisation are compelled to unreservedly observe the interests oft he organisation. To act otherwise is a criminal offence. In practice however, this rule is observed very differently in various countries. While New Zealand law specifies that Trustees, once appointed, have a legal obligation to act in the interest of the trust and not in the interests of the appointer, German board members of foundations are seen clearly to act in the interests of the government agency that appointed them.


One lesson emerges very clearly from the case studies: The closer a foundation is to the political and administrative government machine,the more likely it is to come under pressure from opposing political parties and public opinion on several charges:

1. The establishment of the foundation is seen as a means of circumventing parliamentary control over public funds.

2. Foundation policy is seen as hands-in-glove to the ruling parties intentions, and or the vested interests oft he government bureaucracy or other interested parties.

3. Foundations (in some countries) take advantage of the fact that private foundations are not required to publish reports on their activities and finances. Thus, public assets become private in the sense that they are no longer publicly accountable.

4. Positions on the board are taken by senior politicians and civil servants, although there is no legal or statutory requirement, for personal financial reasons as well as to increase their personal sphere of influence.

5. Boards are a closed shop, to which civil society and/or politicians outside the government have no access.

These charges, notably in the case of the Foundation for Polish Science, have led to a revision of the original model and the adoption of an arms’ length position. In this case, it was the Polish Supreme Audit Office that prompted these changes, while in other cases, the auditors demanded the right to audit the foundations’ accounts on the grounds that these were entrusted with public funds. The Volkswagen Foundation actually took the auditors to court on this issue and lost the case. The Italian foundations of banking origin, being subject to very specific legislation, have undergone several phases of development since they were originally set up following their instalment in 1991. A major legislative attempt to interfere with their governance structure with the aim of increasing government influence was struck down by the constitutional court of Italy in 2003 on the grounds that as a result of the 1990 and 1998 legislation that had expressly designed these foundations as foundations under civil law, and since this act of parliament had undoubtedly been within the framework of the constitution, these foundations now enjoyed equal rights and could not be subject to specific infringements on these rights. Foundations not close to government have proved to be more flexible in relation to societal changes. E.g. the composition of the board of the Oranje Fonds has changed over time to represent a larger section of Dutch society without this having to be effected through formal changes in the statutes. In the King Baudoiun Foundation, this point is an ongoing topic for discussion. The case of the Foundation for Polish-German Cooperation highlights another problem that may arise from too much government involvement. Since the Polish and the German government each appoint half of the members of the Board, these appointments reflect the different political cultures in each country. The German


members (except the German executive board member) have tended to be retired politicians and high-ranking civil servants who have held office for a very long time, while gradually losing touch both with political life and societal changes. The Polish members (including the Polish executive board member) have tended to be active politicians with a better insight into the necessities of the time, but with interests of their own, and whose appointments were cancelled after each of the frequent changes of government. Due to the fact that any change would have required to be negotiated between the two governments, virtually no changes to this practice have been made. Finally, one may ask whether the existing legal frameworks and governance structures provide for a long term effective governance in the various cases examined. The answer is difficult to provide, for while in all cases the entities have managed to put a stable governance system in place, in many cases this has been achieved at comparatively high cost. In no case, with the possible exception of the New Zealand cases, have the entities become agents of social change. The governance structure and indeed the legal frameworks have rather made them act as agents of a political establishment. However, what this means, is again, very diverse. Undoubtedly, the Italian foundations of banking origin have contributed to the emergence of a vibrant civil society which in turn does act as an agent of social change. In all cases, the relationship with government is the key issue in defining the role of the entities. While in some countries, notably England, this relationship has been marginal, in others, notably Germany and Poland, it has been crucial. There can certainly be no uniform pattern, and it would be unrealistic to suppose that governments would voluntarily waive any control if they are legally and politically in a position to retain it. But the lesson to be learnt is that government control over the governance structure should be exercised with restraint, and that the involvement of civil society and of experts in the relevant fields of activity should be strongly encouraged. While it remains difficult to measure the effectiveness of foundation activities, it may certainly be said that their contribution to social change and their flexible approach to changes in outlook is what gives them a viable and unique advantage over direct state action. It would therefore seem good politics to instal foundations of this type with this in mind and possibly, as the cases from the Czech Republic and Poland may show, with the aim of encouraging private philanthropy, rather than in an attempt to create para-governmental agencies that do not befit the principles of a democratic society. In reviewing the cases, differences in approach are obvious. While some were intended to promote the development of civil society, others reflect the intention of supporting government tasks by an alternative method. Of those not intentionally created for the development of an independent civil society, some however have in practice adopted this role.

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