Family business is the family’s business. It is well known that in the for-profit world, family businesses operate differently than non-family businesses do. The critical distinction is that family businesses are often not governed as strictly by orthodox business policies and can pursue unconventional strategies, according to John L. Ward, clinical professor of family enterprise at the Kellogg School of Management.
Now, Ward and Kellogg doctoral candidate Razvan Lungeanu have documented important differences between family-run and non-family-run philanthropic foundations as well. They found that family foundations are more focused in their grantmaking than non-family foundations are—although the larger the board, the more diversified the charitable activities. In addition, the researchers have shown that a family foundation’s grantmaking typically becomes more diversified once younger generations of the family start dominating a board, or once the proportion of family members on the board decreases.
Greater Focus of Grantmaking
Ward and Lungeanu used the Foundation Directory Online to obtain financial data on the 200 largest independent U.S. philanthropic foundations in 2007. Because the FDO considers a foundation to be a family foundation only when the word &lldquo;family” is used in its title, the researchers sifted through the database to find additional foundations in which at least one member of the originating family still served on the board.
“In the foundation world as well as in the corporate world, as an organization grows larger and gains experience, there is a temptation to become more diverse.” — John L. Ward
About 55 percent of the foundations in the sample were family foundations. In 2007, these 111 organizations held $166 billion in assets, received $23 billion in contributions, and distributed grants totaling $11 billion.
Grantmaking in the FDO is recorded in twenty-four categories, including agriculture/food, animals/wildlife, and arts/culture. The researchers found that family foundations were significantly more focused in their grantmaking than non-family foundations were—that is, they contributed to a smaller number of the twenty-four categories.
It is generally thought that the best-run foundations engage in focused philanthropy, Ward explains. “In the foundation world as well as in the corporate world, as an organization grows larger and gains experience, there is a temptation to become more diverse. The explanation is that bringing more people into a system generates internal governance pressures to become more diverse.” He considers it important to resist this temptation. “The idea is that the foundation should do fewer things better—by being more focused, the organization puts its energy and resources into things they are really good at.”
This finding confirmed previous research into for-profit family businesses, which are generally managed in such a way that protects the “familiness” or “socioemotional endowment” of the firm, Ward and Lungeanu say in a paper. They note that diversification of grantmaking requires foundations to create new procedures, and a family foundation may not wish to do that—departing from established ways of doing things may negatively affect family members’ identification with the organization. In addition, a family foundation that diversifies its grantmaking might need to hire managers “from outside,” which could be perceived as diluting family members’ control and influence over the foundation.
The Effect of Board Size
Ward and Lungeanu also studied how grantmaking diversification is affected by the number of board members, who oversee decisions about which charitable causes will receive money—and how much. As they expected, they found that in both family and non-family foundations, the larger the board, the more diversified the grantmaking. As in the corporate world, a larger board is inherently more diverse, with members contributing a larger variety of experiences, values, and interests.
The researchers also determined that as board size increased, the gap between family and non-family foundations with regard to diversification decreased (Figure 1). In fact, when the board had more than ten members, family foundations were just as diversified in their grantmaking as non-family foundations were—in fact, slightly more so (Figure 1). Ward and Lungeanu point out that in non-family foundations, new board members are typically recruited from disparate specialties (corporations, governments, academia), but they usually support the organization’s current goals. In a family foundation, additional board members are usually family members or friends of the family and may have divergent philanthropic preferences that need to be accommodated in order to keep peace in the family.
Figure 1. Board size by Foundation type versus measurement of grantmaking diversification. “Unique” means there is 1 board member; “small”, 2–5 board members; “medium”, 6–10 board members; “large”, more than 10 board members. Diversification was measured with the entropy measure of concentration, which is a weighted sum of the share in each grant category.
Influences on Family Foundations
In a first-of-its-kind investigation, Ward and Lungeanu examined how grantmaking in family foundations is affected by which generations of the family are serving on the board, and in what proportion. First, they categorized boards according to “generational stage”: in stage G1, the founder, or the founder and spouse, are on the board; in G1/G2, the founder(s) and some or all of their children are on the board; in G2, the majority of board members are siblings; and in G3, the majority of board members are cousins. In general, diversification increased over time, the researchers found (Figure 2). However, G1/G2 foundations were significantly more diversified than sibling foundations.
Figure 2. Diversification by family foundation generational stage
In addition, the researchers divided family foundations into three categories by board type: All Family Directors (family members made up 100 percent of the board); Majority Family Directors (family members made up at least 50 to 99 percent of the board, but less than 100 percent); and Minority Family Directors (family members made up less than 50 percent of the board). “We found that foundations with a lower number of outsiders on the board were more focused and family foundations with less family involvement in the board were more diversified,” Ward says.
In their paper, he and Lungeanu explain that generational stage and board composition are interdependent. As new generations of the family join the board and its work evolves, there is generally “an effort to professionalize and implement more effective administrative rules to deal with an increased volume of grant requests and grantmaking ideas.” The complexity of administration grows as grantmaking becomes more diverse “and professionalization of the foundation through inclusion of outsiders on the board begins,” they write. These non-family board members generally have new grantmaking ideas that may be accommodated by the foundation.
Ward and Lungeanu believe their research can be useful to those involved in running family foundations. “Understanding the changes that may come with turning the organization’s board over to successive generations can help them prepare for and meet the challenges of an evolving organization,” Ward says.
The findings also have implications for those applying for grants, he adds. The type of foundation (family or non-family) and the board size and composition may yield clues to how diversified the organization’s grantmaking will be. Even more important, the research suggests that if the foundation board’s composition is shifting—with regard to either family generation or inclusion of outsiders—grant applicants cannot assume that the foundation will continue to behave as it always has.
Further reading Pyramidal blind spots. Perils of international joint ventures
Lungeanu, Razvan, and John L. Ward. 2012. “A Governance-Based Typology of Family Foundations: The Effect of Generation Stage and Governance Structure on Family Philanthropic Activities.” Family Business Review, forthcoming.