How much should foundations spend ?

Marie Melikov - Senior Program Manager of Degroof Petercam Foundation

Traditionally, and sometimes even statutorily, a foundation organizes its donations on the basis of a redistribution of the income generated by its financial assets. How can a capitalized foundation meet its short- and long-term commitments? This question arises all the more when economic conditions are reflected in volatile financial markets, and social challenges are on the rise. These are precisely the times when philanthropy is most needed.

Disbursement quota

In some countries, foundations are required to distribute an annual minimum of their assets, also known as the "disbursement quota". In the USA and Canada (as of this year), this rate is set at 5% on assets of over $1 million (after expenses), with the remaining 95% to be invested. A high disbursement quota is estimated at around 10%. In Europe, there is no such custom, and we generally observe a rather conservative distribution rate of 1% to 2%.

Lifespan

Added to this is the question of a foundation's lifespan. This is a fundamental question with which many boards of directors are familiar: should we opt for a perpetual activity based on capital that will endure - or grow - indefinitely, thus justifying a low disbursement quota? Or should we opt for a fixed lifespan, which accepts the consumption of capital when markets underperform the set disbursement quota? This is a positioning issue that will depend on the philanthropic themes addressed, as well as on the initial underlying motivations. A family foundation set up to pass from one generation to the next is more likely to opt for the first option, while a foundation active in the field of climate change is more likely to deploy its financial resources on a fixed-term basis.

Investment strategy

It should also be borne in mind that foundations are institutional investors, with a role on the financial markets that can have a positive or negative impact on societal issues such as inequality, climate change and territorial vitality. A foundation's desire for "perpetuity" is therefore perfectly understandable (some very old foundations have and still play a crucial role), but this must be set against fundamental questions of sustainability, since by definition they are aimed at future generations. The importance of a sustainable investment strategy is therefore an important factor in the administration of a foundation to fulfill its public-interest objective.

A duty to commit

Some will say: the problems are there, now let's spend as much as we can to solve them. Others will say that foundations have that rare ability to project far into the future. That they must therefore remain active - and capitalized - ad vitam to meet the challenges of today and tomorrow. These strategic decisions are specific to each foundation, and one cannot take precedence over another.

The ultimate aim of a philanthropic foundation is to give, and therefore to spend. Capital and its investment are merely the means to this end. Capitalized foundations have a duty to commit to giving to the maximum of their capacity, according to their short-, medium- and long-term positioning.

In 2021, the Board of Directors of the Degroof Petercam Foundation decided to increase its disbursement quota from 3% to 5% of its assets.

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