Episode 260: When to Start a Support Foundation: Rationale and Implications
I'm honored that you take a few moments of your day to join me, Randall, on this edition of around with Randall. Today, we jump into the conversation around a support organization. Do you create your own foundation even though you are nonprofit? Credit out to Katie in San Luis Obispo for sending in this question, and you can send me a question or a comment or a subject matter that's of interest to you at podcast@hallettphilanthropy.com.
But today Katie asks the question about when do we set up our own foundation? And so we'll jump right in. I think it's important to note that they're probably a little less tactical today and more rationale, because that's really the framework of the question posed to me. When do you do this? I want to begin at the top, work our way down, because there's really only one question that needs to govern all other parts of the discussion, debate, conversation that might occur when making this decision and that is will a creation or will the creation of a foundation raise more money?
If the answer is no, then you can stop right here, turn me off and stop the conversation. Maybe at your local nonprofit and say we don't have to go any further. The only purpose of creating a foundation is, and we'll get into the kind of parts of the equation of why this works, really, is to raise more money.
If we're not raising more money, then it's just more work and more paperwork, more legal work, and it's not worth it. But there are justifications and reasons why foundation might be advisable, might be supportive of the idea of raising more money. So think about your organization. If you already have a foundation, then some of this is going to make sense.
But if you don't, another legal entity with a board that is supporting the organization, maybe a way of saying this is, is that one organization is built to make things happen or to execute on the nonprofit mission. That's the mean nonprofit. The foundation's role is to fund it, and so there is this premise that when we build out another entity, the foundation, it's there for really only one purpose to find resources, revenue, to support the overall efforts of the main nonprofit.
So, when we think about this, there probably are some trigger some questions to be asked that get us into the discussion of whether or not it's appropriate. All of this is kind of what I'm hoping is a roadmap that will allow you to. If you need this, think about and ask the right questions, primarily of your board, because they're the ones that have to kind of execute this and build this out.
So, let's start with some bigger questions around why a nonprofit would create a foundation. Well, it might be lots of different reasons. The first is that the complexity of the main nonprofit is such that the attention of the board, the attention of most of the executive function is on operations. And I'll give you an example. Most hospitals in health and health care organizations have a standalone foundation.
The complexity of the financing, and also because of the size of the organizational nonprofit hospital, let's say in this case are such that a CEO and an executive team is going to want that board to focus, support the organization in its operations. The details involving finance with reimbursement rates and complex negotiations of contracts, which are executive functions but come up to a board for decision or approval.
The idea of size and scope, meaning you could have a health care organization that is billions and billions of dollars with tens of thousands employees. That the nature of health care is just complicated in terms of how things are executed and, and the liabilities involved and the just the mass structure that goes along that it makes a lot of sense because a board's time in health care.
I would throw a university into that. Most universities or other organizations that are very large, very complex. It makes a lot of sense around building out a foundation because the foundation or excuse me, the organizational board and the executive team of the organization, not the foundation, not the fundraising group, are probably focused on operational issues. One way to think about it, maybe in terms of size and scope.
So is it too early? Well, probably when we talk about I was mentioning hospitals and billions of dollars. Most are much smaller. If your organization's exceeding 15 to 25 million, maybe raising thought 2 to 5 million. And I think the other thing is has stability, i.e. it's more than ten years, 15, 20 years old. There's a really great conversation around why this is viable, why this issue needs to maybe be discussed.
But there are also some ancillary reasons. More technical. So one of the things that comes out, particularly in the university setting, is the need for privacy. When you are a public institution, there are in every state, but they vary a little bit. The idea of responsibility of having open records, meaning very little, is considered private because you're a public Kennedy.
It's the public's domain. The public funds that support you if you're a public university. Now, if you're a private school, different conversation, but that privacy may be important. And I'll give you a couple of examples, one of which is maybe there are some donors who don't want their names out in the public domain. We know that we have to fill out 1990s and 1990s, provide a great deal of information to the general public.
But there's a difference between having to sell out. A 990 is a private foundation and an open records request from the media or an individual to a university asking for copies of gift agreements. Now, in some states, they may be able to preclude those based upon state law, but generally most information non-salary non-H.R is in terms of records, not salary per se, in terms of dollars or amount, which we'll get to in a moment.
Our public can be restricted somewhat, but there's too much public access. Universities figure this out. And that's although they're incredibly complex. Another reason that a foundation made sense. The second is salaries. And I use the context of larger nonprofits as an example. The number of clients that in the university setting or in the health care setting have matrices that indicate salary levels based upon HR's assessment of the job responsibility.
And that process I don't have any problem with. It's actually a good thing. The challenge becomes when you're in health care, most of them are built around nursing or clinical care, and then they try to stick the fundraisers into certain categories. And then there's a top line and a bottom line, or a top amount in the bottom amount that the salary range is a lot that's allowed.
And I've run into a number of circumstances where all of a sudden gift officers, based upon data from AP, HP, others, a gift officers salary norms are higher than the range, which causes all kinds of problems. So maybe it's H.R. That gets an opportunity that may include things like bonus structure where the organization says, you know, we don't do that in that kind of way, but in philanthropy, that's not abnormal based on performance.
So, HR is another reason that it could be done. So think about this idea of the rationale around complexity. Size could be things like privacy HR all driving rationale reasons to do so. But what comes out of this creation. Well what we know is, is that the foundation's going to have a distinct mission to drive philanthropic revenue, and its governance is going to be focused on that.
So, part of this conversation is as if it's something to be thought of and done. We need to focus around donor confidence. And most importantly, this alignment that goes along with the right with the organization or the operating organization. I've seen situations where in particular in earlier in my career, particularly with some of my doctoral work and writings that we had public education school districts starting foundations made a lot of sense for the reasons we've stated.
Donor confidence, not a lot of donor confidence in school districts per se. And complicated organizations that really aren't doing philanthropy. Setting a foundation makes sense, but the alignment becomes critically important. And this is true not just in education, but in health care and other things. Because what I would find is, is that the foundation board would be in a situation where they believed they should have influence on the decisions of the school district and on a number of occasions.
And by the way, this would apply to a couple of health care organizations. I've had the great privilege of working with. But having to say to the Foundation board, that's not your job. Which brings us all the way back to donor conference governance focus and Mission Foundation Board's job is to drive philanthropic opportunity is not to make the decisions on behalf of the organization.
They have a board, most likely. That's what I've run into a number of times, and it's a really hard discussion. There are hurt feelings. Well, I think they should be doing this. And my answer is, well then you go should be on the governing board for the organization, not the foundation board. That's what they do. What this board does is open doors, creates opportunities and talks about the value of philanthropy and the value of the organization, the operating organization, in a meaningful way in the community.
And so that's why we have to align these things around all of these aspects. There is one last reason I don't see it discussed all that often, but I think it's important to mention is, is that depending on the organism, the governing organization, the operating organization and their function and the complexity of philanthropy, there may be a legal reason to create a foundation which might be thought of as a liability firewall, meaning that we're trying to keep funds separate.
And really, unfortunately, the best example of that has been some news over the past 15 or 20 years around churches and behavior abhorrent and beyond. Illegal immoral behavior of epic proportions of the not the foundation, but the governing organization and putting into peril a lot of philanthropic dollars. And so the more complex the operating organization, the more liability that it possibly could have.
One way to protect philanthropic assets is to have them in a separate organization. And so that's another way of looking at the rationale as to why. If you wanted to put, again, hard numbers, if you're raising 2 to 5 million, it's probably worth a discussion if the organization governing is 25 to 20, you know, 15, 25 million, probably worth of discussion.
And obviously, there's some long term standing. It's not an organization that started 20, 20 minutes ago. What we find though is, is that if we don't do this correctly, there are pitfalls because you're creating a second organization with a second set of opinions. So things like duplication either now two boards, two audits, two filings, there might be two sets of policies.
One of the things that I tend to do, probably 3 or 4 clients per year, is draft policies. Thank you for my legal education and leading organizations. It's something I kind of actually enjoy doing. Sure, what that says about me, but I kind of like it. In helping organizations build out the policies are required. I've got a client that I'm currently working with that the governing organizations has been around for a long time, really fabulous or, you know, mission.
But they're building on a foundation, and the foundation is creating policies. And I'm on all these conversations with corporate counsel because they're like, we'll just copy all of our policies. I'm like, yeah, you don't have a gift acceptance policy per se, because you're not accepting gifts anymore. And by the way, the one you had was one page is not only good, your document retention is different because we're going to hold on to things much longer, like gift agreements and the recording of what we do in the CRM, the ability to have extra things like our CRM policies.
What is it that we maintain in the CRM, which we know is donor records and actions and connections and things of that nature and obviously finance. All these things are completely different. And so policies may be added into this. It also builds into the discussion or thought process of how we staff most of the time. And this is what I actually would recommend, unless there's something strange, is that the governing organization employees everybody and the foundation is a landing spot for the money, basically philanthropic dollars.
And that's because we don't want to duplicate what we don't have to HR policies, insurance issues, you know, like health insurance, life insurance, things of that nature, vacation policies. The corporate organization probably has that. Let's just roll into it. But this creates sometimes some confusion. There has to be a lot of questions to make sure that we understand all of the aspects that go along.
So pitfalls of starting too early is it creates too much complexity, too many duplications that really aren't necessary.
Again, if you start from the premise almost like a litmus test, if we want to do this, is it going to help us raise more money? That becomes the key component. And if the answer is yes, then that gets us into more of the least of what we're going to talk about today, which is the tactical, is the idea of how do we align these two.
So, the first part I would ask or comment is, is the foundation's branding, its mission, its commentary on the website or whatever is set out in public aligns perfectly with the corporate organization. We're not here to deviate from, in most cases, what the corporate entity is trying to accomplish. The organizational nonprofit, which means we need to make sure what we're doing makes sense, what we say makes sense to the easiest way to do that is to have what I call cross representation.
Are there a couple of organizational board members who are also a member of the Foundation board? This can work in lots of really positive ways. The first is, that in places where there are two boards, one foundation, one governing organization, the governing organization boards, probably anywhere from 9 to 15 people. And there is a sense amongst most executives in particular, if the organization large enough having some type of compliance officer or some type of relational person to the board as to I don't want and the CEO in particular, I don't want this to be big because it gets too unwieldy.
I would argue in a foundation board we want representation into as many cultural places in our community where there's people with resources that are philanthropic. So the bigger your catchment basin, the bigger your geographic area, the bigger the number of places that you have or want representation, the bigger your board. You may want your foundation board to be in the 30s, your 40s, because they don't have the governing responsibilities.
There are relationship board. And so that becomes an important aspect of figuring out how do we manage all of this. This cross representation can be also important because maybe it's a great place for the governing board to either put someone or have someone go out there out of terms that maybe they've served two terms, 2 or 3 year terms on the governing board, but you don't want to lose them as a connector, or you don't want to lose their engagement, put them on the foundation board, or what a great training ground for future corporate board members, as they could get their feet wet with a lot of activity when it comes to the foundation board.
This means that we have to make sure that our processes, policies, and directional things are all in place. This can't become a burden. The foundation or the foundation board for the organization. We're back to that question. It's going to help us raise more money. All this to say is, is that if you choose to go in this direction, there are some important steps you have to go through.
You're going to have to do a legal formation in the state. You're going to have to apply for a 501c3, type of status, maybe C3, but most likely C3. You're going to have a great pile of bylaws. You're going to have to create those policies. You're going to have to have the proper accounting set up. You're gonna have to interlock or, and or link that probably with finance over in the governing organization.
Most likely these are all manageable things, but they're not trivial, which means we're putting a lot of effort into this particular endeavor. We have extra auditing, filing board meetings, coordination with the chairman. This is something that has to be taken with, you know, grain, salt. But I come back to the major reasons why it can work. Number one is complexity of the organization.
If your board members in the governing organization, the corporate nonprofit, are not focused at all on philanthropy, do not have philanthropy in their job description, are not talking about it at every meeting because the size, the scope, the complexity of the governing organization is so complex. That is an enormous reason to have a foundation, board or foundation support.
There's also the privacy and also the idea of what I would call HR issues, if that's important.
My final takeaway on all of this is a personal experience. When I was at the Nebraska medical center, we did not have a foundation board, and about a year and a half in, I brought this to the attention of the CEO, who said, well, why don't you bring it to the executive team? I think it's interesting conversation and I kind of went through maybe not as much detail as they did here, but why this would be important.
What would it mean in all of this? And several members of the executive team said, well, just sounds like you want more power and a title change. And I was flustered by this. Here's my piece of advice if this is something you're considering, I assume the other executives and maybe other members or members of the corporate board who would probably have to approve of this do not have any understanding of philanthropy and do not understand any of the values.
Do not understand that board members in a foundation that support another nonprofit, the governing organization, are there to open doors. They have very specific job responsibilities. It gets us access to philanthropic conversations that we can't get currently, that the amount of time that a nonprofit board, if there's not a foundation board, should spend in philanthropy, 30, 40, 50%, but they're not able to do that because the complexity of the in my case, the hospital, medical center, academic medical center was such that they couldn't spend that much time when the pushback came in that meeting, I didn't react very well because I didn't that they knew nothing and got flustered by it, and it eventually got
shut down pretty quickly. And so when you go into these discussions, assume everybody in the room isn't against you, but sees this conversation as something that's going to be too complex, too difficult, too much work, not worth it. Position yourself in the positives and most importantly, the outcomes. The impact of doing this. Talk about how many more relationships this could open the door to, that it would allow our staff to be more engaged in the community and the right philanthropic conversations, that it would shorten the ability for us, from a pipeline perspective, to get into the right doors, into the right discussions, with the right philanthropists would elevate the brand of why philanthropy is so
important for the governing organization, will drive additional revenue into that organization in a meaningful way. I really didn't handle the meeting as well as I should have. I was too young and too dumb. The probably a little intimidated. To be quite candid today. I would handle it much differently, but be much more prepared. Have benchmarks and examples of other places I assume they all understood.
And you know what assumption does? And this time it did it to me. Learn from that lesson and learn from today that having great rationale and great reason as to why to do this is more important than the actual execution of it. I can help someone in 15 minutes put together a foundation. It takes much longer to build the credibility from the fundraising perspective, the rationale as to why this is important, finding the right political allies, it can help you accomplish it, and having the eye, the understanding, the idea, the connection to what we're trying to accomplish.
The reason you do a foundation that is in support of a governing organization is to drive more revenue. Nothing else matters. There may be other benefits, but if you don't cover number one more money, then it isn't worth it. And everybody's going to end up saying, just like they said to me, yeah, no. Hopefully today gives you some of at least some tools, some thoughts, some direction on how to do this more effectively than I did some 20 years ago.
And if you need it to find the people that can help you open doors and raise more money. So the organization you work for and the organization you believe in, that is a good reason to think about doing this at the highest and even the most tactical levels. Don't forget check out the blogs at philanthropy two per week.
Throw them out there. Things I read, see interesting thoughts, takes 90s to read, and if you'd like to reach out to me. As I said at the top, it's podcast Health lanctme.com. As we move toward a new year in 2026, I keep seeing, believing, cheering in my core. Just connect to the concept that nonprofit work philanthropy is going to become more and more important in our community to take care of and work with the people, the things that are in need of assistance.
Which brings me to my all time favorite saying. Some people make things happen. Some people watch things happen. Then there are those who wondered what happened. We are people. We are or we work for organizations who make things happen. We partner with others, donors, board members, other people in our in our staff, some in executive leaders in the organization who make things happen for the people, the things in our community.
They're wondering what happened. Pretty cool and needed and hope you feel a little bit of that need and value and impact today and every day. Take a moment and realize the value you deliver in making your community a better place, and in doing so, know how important you are today, tomorrow, into the future. For a lot of people who are wondering what happened, I'll look forward to seeing you the next time.
Right back here on the next edition of Around with Randall. And don't forget, make it a great day.