The May 10, 2005 Philanthropy Forum featured guest speakers from the Council on Foundations: Janne Gallagher, Vice President and General Counsel, and Diane Canova, Vice President, Government Relations and Public Policy.  The topic and a current Council initiative:  Building Strong and Ethical Foundations.

Ms. Gallagher opened by identifying the current issues that have set the stage for recent government scrutiny:  excessive compensation, lavish perks, costs exceeding grants, board conflicts and investment practices.  She emphasized that a private foundation should be none of the following:  employment vehicle, status symbol, tax dodge, or a vehicle to fund one’s social life.  Ms. Gallagher’s presentation focused on the key issues of conflicts of interest, compensation and investment management.

There are two types of conflicts:  economic and non-economic (the appearance of a conflict).  In addition, there are two legal structures of private foundations:  charitable trusts and nonprofit corporations.  Generally, there are two resolutions of conflicts:  prohibition and disclosure coupled with abstention.

Ms. Gallagher advised boards to have serious discussions about deciding whether to make grants to organizations with ties to a director or upper management.  She expressed that the Massachusetts Attorney General considers such arrangement an actual conflict of interest, cautioning, however, that such position may not hold.

With respect to compensation, Ms. Gallagher noted that federal law requires that the services for which compensation is paid must be reasonable and necessary and not excessive.  Factors in determining reasonable compensation are:  what similar persons get paid, doing similar work, under similar circumstances, in the same geographic area. It is critical for boards to document the process of determining compensation. 

For a private foundation, the service must also be "personal."  Personal services include foundation management and banking, legal, accounting and investment services.  Personal services may not include real estate management and most consulting.

With respect to investment management, Ms. Gallagher discussed federal law regarding self-dealing, limitation on business ownership, jeopardy investments, and unrelated business income tax.  She also mentioned that state laws may discuss portfolio theory, delegation, standards of care (prudent investor), diversification (required for trusts but not for corporations), and the duty of loyalty.

Ms. Gallagher recommended self-imposed rules because they:  (1) create trust by filling gaps in the law; (2) guide decisions in hard cases; (3) help ensure consistency; and (4) reflect the specific family’s or corporation’s principles.  She further recommended that boards adopt policies for conflicts of interest, compensation, investment and grantmaking.

Ms. Canova provided the "Washington Update."  She discussed the hearings of the Senate Finance Committee and the House Ways and Means Committee and the proposals of the Joint Committee on Taxation.  Among the recommendations of the Joint Committee, which sought to close the $400 billion budget gap, were:  (1) limiting the deduction to basis for gifts of qualified appraisal property; (2) increasing the amount of excise tax for self-dealing; (3) extending intermediate sanctions to private foundations; (4) limiting charitable deductions for contributions of clothing and household items; and (5) modifying the deduction for conservation and facade easements.