Three Key Benefits of Establishing a Corporate Foundation

Provides Consistent Funding for Charitable Programs
A corporate foundation can be a vehicle to build up a charitable reserve in years of higher profits, allowing for a steady flow of charitable grants to organizations in leaner years.[1]  Companies can donate appreciated assets or make a large infusion of cash to establish an endowment. Corporate foundations can be used to fund grants to public charities, pay employee matching grants, or administer scholarship programs for employees’ family members.

When grants are made directly out of a corporate giving department, the funds may be required to be expended during the period for which they are budgeted.  This reduces the control the corporation has over the strategic timing of grants, including support of larger charitable projects.  It should be noted, however, that many companies simply fund their foundation with the same amount as they grant out each year. When considering the compliance obligations that come with the operation of a tax-exempt entity (see below), a company with this type of funding and grant-making strategy may not find that a corporate foundation provides sufficient value vis-à-vis the regulatory burdens.

Accomplishes Strategic Programmatic Objectives
Companies are increasing their focus on issues that align with the companies’ brand(s) and the philanthropic concerns of their customer base.  Financial institutions, for example, may emphasize financial literacy and inclusion issues, while athletic and outdoor gear companies may align their charitable giving towards healthy living and environmental protection initiatives.  In many instances, companies want to not only make strategic grants, but also to operate their own programs that further their charitable objectives. Having a dedicated charitable entity through which the program will operate can help the business maintain its charitable mission focus.

Companies that decide to establish corporate foundations must ensure that they do not use charitable assets to improperly benefit the business.  Companies should review any such initiatives with legal counsel to safeguard against violations of the IRS’s rules prohibiting self-dealing.[2]

Allows One Charitable Entity to Receive Steady Contributions Triggered by All or a Portion of Sales of the Company’s Goods or Services
A number of companies have formed corporate foundations that receive donations triggered by customer sales. Through this structure, the charitable cause becomes part of the brand identity. The IRS, recognizing that payments to charities can, in fact, benefit a business’s bottom line, issued a General Information Letter in 2016, stating that a new group of socially conscious companies formed as “benefit corporations” may treat payments to charitable organizations as a business expense rather than as a charitable donation so long as the payments “bear a direct relationship to the taxpayer’s business and are made with a reasonable expectation of a commensurate financial return.” The General Information Letter therefore clarifies that benefit corporations can take unlimited business expense deductions on their charitable contributions as opposed to limiting such deductions to the standard 10% cap for corporate donations to charitable organizations.

While IRS regulations do provide other advantages that come with the operation of a corporate foundation, such as facilitating employee matching grants and scholarship programs, today, a number of independent public charities exist that manage such programs for companies, obviating the need to form a separate foundation for this purpose.  As such, these charitable programs no longer seem to be key drivers for companies to form corporate foundations.

Three Reasons Companies May Not Want to Establish a Corporate Foundation

Meeting the Compliance Obligations of Corporate Foundations Can Be Costly and Time-Consuming
A corporate foundation is a separate legal entity, whose board members owe a fiduciary duty to act in the best interest of the foundation.  In addition, a separate annual financial report must be filed with the IRS.  Corporate foundations that fundraise, either by being the beneficiary of charitable sales promotions conducted by their founding company, or by soliciting customer donations, may need to register to solicit charitable contributions in up to 38 states, each requiring annual renewal.  The state registration process also requires the foundation to prepare and file audited financial statements, adding to the compliance burden.

Companies should evaluate whether the anticipated annual donations and the sought-after social impact outcomes are significant enough to warrant taking on the cost of compliance.  In many cases, the same results could be achieved through a direct relationship with one or more existing charities, wherein the partner charities are responsible for their own compliance.

The Self-Dealing Rules Can Be Challenging
The IRS prohibits private foundations from engaging in certain financial transactions with certain “disqualified persons,” a category which includes the founding company.  For example, the company’s provision of goods or services to the foundation at a significant discount would be a violation of the self-dealing rules (although donating such goods or services is permitted).  Companies must carefully navigate any financial transactions, including shared expenses, to ensure that the corporate foundation’s charitable assets are not used in a manner that violates the self-dealing rules.

Certain Grants Require Burdensome Oversight Obligations
International grants and grants to non-charitable entities to support charitable activities may be undertaken by corporate foundations, but the federal tax code requires the foundation to follow special grant oversight procedures.  Foreign grants also require additional oversight.  Today, a number of charities serve as charitable giving vehicles through which donors (including corporations) can make such grants, and will undertake the required grant oversight, while the corporation can receive the full tax-deductible benefits. The fees charged by these third party charities to provide grant administration and oversight services may be less than the costs of operating an affiliated foundation, and come with the benefit of staff trained in the IRS’s requirements and best practices for grantmaking.

Companies Can Achieve Their Social Impact Objectives Using Strategies That Work Alongside, or in Place Of, a Corporate Foundation

Direct Corporate Giving
Companies can make direct tax-deductible donations to 501(c)(3) tax-exempt charities, either in the form of restricted gifts (documented through a grant agreement) to support a specific charitable purpose or program, or unrestricted grants. Companies are also uniquely positioned to donate significant volumes of in-kind goods to organizations that will distribute them to individuals, families, or organizations in furtherance of charitable purposes.  Sponsorship agreements allow the company to connect its brand to the brand of a charitable partner and its programs. Many longstanding businesses strategically utilize direct corporate giving alongside the work of their corporate foundation. Walmart recently rebranded the collective corporate giving efforts of the company and its foundation under the new philanthropic name, Walmart.org.

Cause Marketing
Cause marketing campaigns, whereby the company advertises that the sale of its goods or services will result in a donation to a charitable organization or cause, or otherwise engages its customers to take actions to support a cause, can be conducted to benefit an unrelated charity or a company’s own corporate foundation.  Partnering with a reputable independent charity allows the company to benefit from a charity’s strong reputation and proven record of making a real impact on a charitable issue. During the last decade Subaru of America achieved success by donating $140 million to four national charities and hundreds of local nonprofits as part of its annual Share the Love cause marketing campaign.

While less common, a few companies have made their own corporate foundations the beneficiary of cause marketing campaigns, and either fund the foundation’s own charitable program or support other charities addressing specific causes through strategic grants. Since 2000, the Ralph Lauren Corporation has sold a line of pink products to benefit the Pink Pony Fund, a program of the Polo Ralph Lauren Foundation focused on fighting cancer.

Collaborations and Joint Ventures with Established Nonprofits
Companies can collaborate with existing nonprofits to generate social good without forming their own nonprofit entity. This collaborative strategy is increasingly evident in companies’ corporate social responsibility (CSR) reports, which often highlight partnerships with nonprofits as a core strategy for fulfilling their CSR objectives.  Given that nonprofits often have expertise and on-the-ground implementation capabilities on social and environmental issues, this strategy makes sense. In 2015, American Diabetes Association launched a joint marketing and communications initiative with the Hispanic television network Telemundo, aimed at improving overall health and wellness for Latinos in the United States. These types of collaborations are particularly successful because they leverage each partner’s core strengths in order to achieve their shared charitable and social impact objectives.  Companies have also made strategic grants to fund research that will hopefully lead to more sustainable and responsible business practices.

Determining whether a corporate foundation will provide good value for a company ultimately depends on the company’s overall objectives, and should take into account the benefits and challenges of, and alternatives to, operating a corporate foundation.  For this reason, performing a strategic assessment on whether to form a corporate foundation is a worthy upfront investment.

[1] Corporate foundations classified as private foundations under the Internal Revenue Code must distribute a minimum amount annually, equal to approximately 5% of their net investment assets each year, which must be used for charitable purposes, typically in the form of charitable grants.

[2] The IRS has carved out benefits to the company that are “incidental and tenuous” from the self-dealing prohibition, such as through positive goodwill and recognition received by the company arising from the shared name, but how that rule applies in various contexts should be carefully reviewed with legal counsel.

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Layered on top of these market drivers are journalists and the media, who investigate and report on specific instances of harmful business practices by companies and entire industries. Athletic gear company, Nike, experienced a major public scandal in the 1990s when media reports revealed abusive labor practices at factories contracted to produce Nike apparel. Nike began conducting factory audits in the early 2000s, and published a detailed report of its findings. Nike has publicly acknowledged its past failures and now publicizes their ongoing commitments, standards, and audit data as part of the company’s CSR reports.

But do CSR efforts actually pay off?  A recent research study looked at the impact of linking executive compensation to CSR criteria (known as “CSR contracting”) among all S&P 500 companies and found that this practice led to an increased long-term orientation, an increase in firm value[1], and an increase in social and environmental initiatives. On average, CSR contracting also led to companies cutting emissions by nearly nine percent, increasing green patents by three percent, and receiving a five percent higher CSR rating. These findings demonstrate that CSR efforts do, in fact, benefit society while strengthening firm value.

A company’s CSR strategy should not be equated with its corporate philanthropy or giving program. Corporate philanthropy focuses on charitable contributions, through donations of money, goods and services, as well as employee volunteer time, however, it does not generally change how a company — at its core — does business. CSR, by contrast, affects a broader group of stakeholders through the actual operation of the business, including customers, employees, shareholders, communities, and the environment. Yet it’s not just for-profit businesses that drive CSR; the nonprofit sector plays a vital role in CSR implementation. Given that nonprofits are, by their nature, exclusively dedicated to promoting and supporting charitable and educational objectives, including publicly beneficial social, economic, and environmental objectives, it should come as no surprise that nonprofits often play an integral role in driving CSR strategies.  At the same time, the tax-exempt status of nonprofits creates certain constraints on how they can support businesses as they move towards practices that are more socially and environmentally responsible. As such, knowledgeable legal counsel can help ensure a successful collaboration. This article highlights three different roles nonprofits play in helping companies achieve their CSR goals, and highlights the legal structures and parameters in which they operate.

1. Advancement of Ethical and Responsible Business Practices

The most recognized CSR strategy involves the advancement of ethical and sustainable business practices. This includes a company’s business practices with respect to the environment, labor practices and human rights, business ethics, and supply chain management. A few legislative efforts have been undertaken to push companies towards more socially responsible business practices, including the United Kingdom Modern Slavery Act 2015 and the California Transparency in Supply Chains Act of 2010 (and similar laws are being considered in Australia and Hong Kong). These laws require large retailers and manufacturers to disclose on their website their voluntary efforts taken to eradicate slavery and human trafficking in their supply chains. Unfortunately, companies can comply with these laws by simply stating that they do not undertake any verification, audits, certification, internal accountability, and training in order to mitigate the risk of human trafficking and slavery. As such, many believe these legislative efforts are insufficient to achieve their otherwise laudable goals.

By contrast, nonprofits are helping companies improve their business practices by articulating clear, objective standards for ethical and sustainable business practices, and conducting independent assessments of company practices against those standards. Consider the well-established LEED (Leadership in Energy and Environmental Design) green building rating system for building design, construction, operations and maintenance. The LEED certification standards were established, and are maintained, by the U.S. Green Building Council, a 501(c)(3) tax-exempt organization. A separate but related entity, Green Business Certification, Inc., a 501(c)(6) tax-exempt organization, administers the LEED certification program, performing third-party technical reviews and verification of LEED-registered projects.  Other well-known certification or verification programs operated by nonprofits include Fair Trade Certified, CDP (carbon footprint disclosure); The Non-GMO Project (non-GMO food supply), and Marine Stewardship Council (sustainable seafood certification). Another nonprofit, Verité, whose mission is to provide the knowledge and tools to eliminate serious labor and human rights abuses in global supply chains, provides assessments and training that focus on safe, fair, and legal working conditions for workers within business supply chains.

501(c)(3) tax-exempt nonprofits are viewed as trustworthy administrators of third party standards for ethical and sustainable business practices thanks to their legal DNA – U.S. tax-exempt nonprofits are organized (and must be operated) to further charitable and educational  purposes, not for private benefit. As such, they are prohibited from using their income or earnings to benefit private interests. Nonprofits can advocate for business practices that minimize harm to people or the environment, but only within the constraints imposed by IRS regulations.

2. Sustainability Reporting and Company-Wide Assessments

As companies work to advance ethical and responsible business practices, they also want to share successes publicly with their stakeholders, but because CSR reporting is purely voluntary, how do we know if companies are truly being good corporate citizens? A global nonprofit, Global Reporting Initiative (“GRI”), pioneered sustainability reporting in 1997, and today, they are the most widely adopted global standards for sustainability reporting.  Sustainability reporting is critical to providing transparency, and therefore public accountability. Sustainability reporting helps companies measure, understand, and communicate their economic, environmental, social and governance (“ESG”) performance. The reports also help companies set goals to continue improving their sustainability practices across economic, environmental, and social impact standards.

While organizations like GRI are creating uniform standards for reporting across ESG standards, other organizations like U.S.-based nonprofit B Lab, require a business to undergo an actual assessment of how significant a company’s current impact is across social impact areas.  Certified B Corporations must achieve a minimum verified score on B Labs’ B Impact Assessment—a rigorous evaluation of a company’s impact on its workers, customers, community, and environment—and make their assessment transparent on bcorporation.net.  [Disclosure: Perlman & Perlman, LLP is a Certified B Corp.] Athleta, a wholly-owned subsidiary of Gap, recently obtained B Corp certification.  According to Athleta’s press release announcing its B Corp certification, 40% of Athleta apparel is made of recycled and sustainable materials, and they are on track to meet their goal of 80% by 2020.

Some nonprofits are not waiting for companies to opt in to being assessed against their standards, and are instead publishing reports based on publicly available information. Environmental Working Group has been doing this for years at the product level through its Skin Deep Cosmetics Database, which combines product ingredient lists with information from more than 60 toxicity and regulatory databases to provide safety ratings for tens of thousands of personal care products. At the company-wide level, Know the Chain is helping companies and investors to understand and address forced labor risks within their global supply chains. Formed in 2013 by nonprofit, Humanity United (which is part of the Omidyar Group), Know the Chain was originally established with the goal of documenting compliance with the California Supply Chain Transparency Act. Today, Know the Chain focuses on benchmarking current corporate practices across key sectors where forced labor is particularly acute, including information & communications technology, food & beverage, and apparel and footwear, with the goal of driving corporate action while also informing investor decisions. The benchmarks are based on the disclosures of policies and practices used by select large companies. Know the Chain aims to use data and market forces to drive a “race to the top” that creates “brand reward for leaders and brand risk for laggards,” and ultimately encourages companies to adopt standards and practices that protect worker’s well-being.

3. Building Charitable Giving Into the Business Model

While sustainability reporting and assessments focus primarily on business operations, a growing number of companies have built corporate citizenship directly into their core retail sales and marketing strategy. TOMS became popular because of its “Buy One, Give One” business model, donating a pair of shoes to a person in need for every pair sold, distributed through its partnerships with global humanitarian organizations. On May 7th, TOMS announced a major overhaul of its giving model.  Based on the premise that the problems facing our world today are more complex than ever, TOMs has decided that, in addition to providing for basic human needs including shoes and clean water, TOMS is asking customers to join them in “taking a stand” on critical issues. As such, when you purchase a TOMS product, you can also pick an issue area that you stand for, such as ending gun violence, equality, mental health, or homelessness, and your purchase helps direct TOM’s giving (carried out in the form of impact grants that support sustainable and innovative strategies and solutions on leading social issues).

Food product company, Newman’s Own, recognized by its tagline, “All Profits to Charity,” has charitable giving embedded into its ownership structure — 100% of the business is owned by Newman’s Own Foundation. Newman’s Own Foundation, whose mission is “to use the power of giving to help transform lives and nourish the common good,” uses the profits to support a variety of charitable organizations. Newman’s Own’s ownership structure is supported by legislation enacted in February 2018 that allows 501(c)(3) tax-exempt private foundations to own 100% of a business under certain conditions. The foundation is now working to promote the “all profits to charity” concept by providing resources and support to other companies that have committed to donating all of their profits to charity.

A more widely adopted model of giving, albeit less deeply embedded in a company’s business structure or strategy, involves entering into a formal commitment to give a portion of company profits to charitable causes. One of the biggest advocates of this model is 1% for the Planet, a 501(c)(3) tax-exempt public charity that encourages businesses to commit to donating 1% of total sales across the company’s operations to support environmental causes.  The organization’s 1200+ members, which includes environmentally conscious brands like Patagonia, give directly to approved nonprofits, and 1% for the Planet provides third party certification of their fulfillment of this giving commitment. They also help companies identify environmental organizations that will make the greatest impact and align with corporate giving goals.  In exchange for upholding this giving commitment, members receive the right to use the 1% for the Planet logo in their marketing.

Companies looking to push their CSR efforts to the next level should be aware of the unique resources available through the nonprofit sector to help them establish and achieve corporate social impact goals. Similarly, nonprofits cannot ignore the significant effect that businesses have on the social and environmental issues they were created to address, and should consider ways they can help companies improve their impact on those issues. Given the strong consumer, investor, and employee demand for corporate social responsibility, there is no better time for companies and nonprofits to work together to help businesses operate more sustainably and responsibly.

[1] The study uses Tobin’s Q to determine firm value, and is a ratio of the market value of total assets to the book value of total assets.

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