Strangers in Family Foundations
Family charitable foundations are often equally about the family working together as they are about charity. While the purpose of a foundation must be exclusively charitable, the founders’ hope is that future generations of family will have a place to work together and act on their values. But how, particularly in an estate plan, do founders keep a family foundation on course? One strategy is an independent director or trustee.
The governance technique of an arm’s-length director is nothing new. In fact, the relationship among directors is how the Income Tax Act differentiates between between private and public foundations. Public foundations have more than 50% of arm’s-length directors and privates have less than 50%. The influence of unrelated parties in contributing to good governance is well accepted, but in family foundations it is often forgotten.
There are three main benefits of appointing a third-party director.
Moderating Influence Having a non-family member on the board helps all parties to act more like a governing body and less like a family. Family dynamics are powerful forces and sometimes the presence of a third-party contributes to constructive behaviour. Ideally, the outsiders embody wisdom and tact the helps the family function as a governing body.
Practical Assistance The third-party director often plays a practical role related to the operation of the foundation and the board. Assistance with agenda setting, committees and basic board functions often falls more heavily on the third-party director. Experience with other boards and organizations helps introduce best practices and make community connections.
Professional Knowledge The independent director often has a professional designation or knowledge base. Whether the person is a lawyer, trust officer, accountant or philanthropic advisor, they ideally have experience with the legal forms and compliance issues. Particularly for family members new to governance and the requirements of operating a charity, the independent director means that professional knowledge is present at all times.
My caveat is that all families are different. Some are highly collaborative, knowledgeable about philanthropy and excel at working together. Most, however, can benefit from the professional expertise, practical assistance and moderating influence of a third-party director. An outside perspective at the table is a helpful aid to keep the focus on the charitable purpose and away from negative family dynamics.