Discretionary Grants by Corporate Foundations

Question:May a corporate foundation allow corporate board members who do not sit on the foundation’s board to designate grants from the corporate foundation?

Answer:No. All grants from the corporate foundation must be approved by the corporate foundation’s board of directors. No individual—including a corporate board member—can require the foundation to make a grant without the foundation board’s oversight and approval.

While it is legally permissible to allow corporate board members to recommend grants from the corporate foundation, there are reasons to be cautious about allowing the practice. First, such recommendations blur the distinction between the corporation and the corporate foundation. Second, such a practice creates the potential for the corporate foundation to be used to fulfill the personal pledges of corporate board members. Corporate board members may be what the tax code calls “disqualified persons” in relation to the corporate foundation. If the foundation makes a grant that fulfills a personal pledge of a disqualified person, the grant would be an act of self-dealing and subject to excise taxes. Finally, a grant recommendation program for corporate board members may not play well in an era of close public scrutiny of companies’ and foundations’ behavior.

Some corporations permit corporate board members to recommend grants from the corporate giving program. Although allowing board members to recommend grants from the corporate giving program rather than the foundation eliminates some of the concerns outlined above, the potential for negative publicity remains.

Some foundations do permit members of the foundation’s board to recommend grants to charities under a “discretionary” grants program. However, the practice is not particularly common for corporate foundations, may attract unfavorable media attention, and creates the potential for self-dealing if the grant satisfies a director’s personal pledge. If the foundation decides to implement a discretionary grants program, it is important to outline the types of grants that will be permitted (for example, only to public charities and only to the types of charities that the foundation is organized to support), set limits on the amount of discretionary grants, and follow the foundation’s conflicts of interest policy when the foundation considers and approves such grants.

Bottom Line: To avoid legal and public relations problems, ensure that all grants made by the corporate foundation: