Legitimacy of Philanthropic Foundations: United States and European Perspectives

Chapter 10 Industrial Foundations: Foundation Ownership of Business Companies

Chapter 10 Industrial Foundations: Foundation Ownership of Business Companies Steen Thomsen In addition to serving as donors, foundations can own business companies . This was not uncommon in the United States until passage of the 1969 Tax Reform Act, which effectively prevented U.S. foundations from owning more than 20 percent of a corporate entity (Fleishman 2001). But in northern Europe, foundations continue to own and operate world-class companies such as Bertelsmann, Heineken, Robert Bosch, Carlsberg, and Ikea. In Denmark, particularly, foundations own and operate some 25 percent of the 100 largest Danish corporations and control close to 50 percent of the major Danish stock index (KFX). The question in this context is whether ownership of a business company is a legitimate role for a foundation. Apparently, U.S. regulators answer this question in the negative and European regulators in the affirmative. Legitimacy can be defined as the generalized perception that the actions and existence of an entity are desirable, proper or appropriate within a given social system of norms, values and beliefs (Suchman 1995). It therefore involves both normative (that is, moral) pragmatic and cognitive issues. The normative issues concern whether foundation ownership of business companies in and of itself is consistent with the values and norms of the society, in which the foundation operates. Pragmatic issues concern whether foundation ownership is regarded as a satisfactory institution by the actors involved (founders, governments , company managers, potential beneficiaries). Finally, cognitive issues concern whether foundation ownership is justified by its social performance (see chapter 1, this volume). Here I discuss the normative, pragmatic and cognitive legitimacy of foundation ownership comparing U.S. and European perspectives on the subject, particularly why the structure was not adopted in the United States and how it performs in Europe. In Europe, legislators and managers stand to benefit from recognizing that like other ownership structures there are disadvantages and advantages to foundation ownership. The advantages can be guarded by maintaining existing regulation allowing foundation ownership to coexist with other ownership structures. Disadvantages in terms of funding, conservatism , and entrepreneurial drive mean that a change of ownership structure may sometimes be called for. Flexible and pragmatic regulation of ownership changes seems likely to benefit the foundations , their companies and society in general. What Is Foundation Ownership? Formally, an industrial foundation is an organization created to administer a large ownership stake in a particular company, very often donated to the foundation by the company’s founder. The foundation itself is a nonprofit entity. It has no owners. Its board of directors is often self-elected, constrained only by the law and its charter, which frequently stipulate that the foundation should serve some broadly defined social purpose, for example, to act in the company ’s “best interest” and use excess revenue for charitable purposes. Often, but not always, the founder’s family continues to play a role in the management of the company. The institutional set up resembles what would have been the case if the Ford Foundation had maintained majority control of Ford Motor Company. As an example consider William Demant, a listed Danish company, one of the world’s largest producers of hearing aids and European company of the year in 2003. The company is majority-owned by the Oticon Foundation. Following Kronke (1988) an industrial foundation can be defined by: • creation by donation (“Endgültige Trennung von ausgesetzten Gütern”) • independence Industrial Foundations 237 • an altruistic purpose (“Stiftungszweck”) • a foundation endowment (Stiftungsvermögen) • a foundation organization and charter (Stiftungsorganisation und Stiftungsverfassung) • ownership of a majority of the shares or votes in a business company CREATION BY DONATION An industrial foundation is created when someone (the founder) entrusts the foundation with an endowment consisting of ownership rights to a business company. The existence of foundations therefore presupposes a gift, a renunciation on part of the donor or founder. This transaction is irreversible. INDEPENDENCE The foundation is a private (nongovernment) institution . It has no owners and no members. Industrial foundations are therefore sometimes referred to as self-owning institutions. The irreversibility of the decision to found a foundation is underlined by its legal personality. The decisive factor is a clear separation between the personal economic affairs of the founder and those of the foundation. The separation transforms the foundation into a nonprofit entity which as emphasized by Hansmann (1980, 1987) may earn profits but cannot redistribute...