Fundraising Foundations: Important Nonprofit Tools for the 21st Century?

By: Eugene Fram

Nonprofits for decades have established – or want to establish their own own fundraising foundations. However many have backed away from them because of the complexity involved, the potential loss of control and the feeling they have a proactive board fundraising committee. In terms of board fundraising effectiveness, a 2012 BoardSource study shows that only 24% of CEO respondents gave their boards and “A” or “B” grade for fundraising, the lowest evaluation among ten board responsibilities listed by the study. *

Considering the huge financial pressures facing nonprofits, can a connected nonprofit organization, a foundation, possibly help to raise more funds? One writer refers to them as “Parallel Foundations (PFFs)” since they are connected to the founding organization and not considered a subsidiary group. **

This discussion focuses on three questions about PFFs: ***

1. Why are PFFs developed?
• The parent nonprofit wants a different group to manage private funds to keep them separate from government funds. Health care organizations need to separate these funds from Medicare payments. PFFs allow donors to target their gifts to specific causes.
• The parallel foundation is a pledge to contributors that the nonprofit will have longevity. Some embryo nonprofits use the foundation to assure donors the PFFs and their parents are available for the long-term.
• Directors of the parent board don’t view fundraising as a priority. Members of the board and management can’t develop the partnership needed for fundraising. A few charters even don’t allow board members to do fundraising.
• The nonprofit wants to launch a capital campaign and the foundation can recruit volunteers experienced in developing capital funds and assets.
• Also sometimes local chapters are asked by their national organizations to establish PFFs because such foundations can more easily promote community involvement. In another instance a nonprofit wanted to establish a planned-giving campaign and felt they needed a foundation to attract planned-giving professionals.
• Assets of the parent nonprofit can be protected if a legal suit is brought against the parent organization.
• Parent board members don’t have the time, interest or expertise to raise and manage funds, although this is a major board responsibility. The foundation can manage financial resources better than the parent board.
• The parent nonprofit is capable of raising operating funds but not capital or endowment funds.
2. What challenges do PFFs face?
• Recruiting a diverse board for the foundation. Need a mix of contacts, wealth, wisdom, representation and fundraising skills.
• Lack of congruency between parent board and the foundation board. Translating decisions from the parent can be difficult.
• Keeping a high level of morale for both boards.
• Foundation accounting procedures. It is necessary to keep abreast of changing foundation regulations, especially those issued by the Financial Accounting Standards Board.
3. What are the future challenges?
• Locating new donors. In some cases, parent boards may have “exhausted” their donor lists. There are always more projects needing money than can be funded.
• Creating public awareness of both the parent and the foundation.
• Can the PFF survive a faltering economy?
Summary
Establishing a PFF is a “20 year decision” for a nonprofit organization. The move requires a complex legal process. Abandoning a PFF can lead to interpersonal conflicts between the parent and PFF boards, possibly causing loss of funding. While there can be many benefits from establishing a PFF, the “Achilles heel” to the arrangement centers on two independent boards that may develop different viewpoints on how funds should be deployed to achieve the parent organization’s mission. A viable conflict resolution process needs to be established at the outset.

Evidently, some healthcare nonprofits have been successful in establishing PFFs because they need to separate private funding from Medicare funding. Other types of nonprofits should review these healthcare PFF models before embarking on their own ventures.

*BoardSource, “Nonprofit Governance Index 2012,” Data Report 1, CEO Survey of BoardSource Members.
** Allan Arlett, “Parallel Foundations – Too Many, Too Trendy and Too Hasty, “ The Canadian Fundraiser, November 27, 1996. Note: Some material in section 1 has been adapted from this publication.
***Eugene Fram, “Fundraising Foundation: What Are They. & How Are Nonprofits Using Them?” Nonprofit World, Vol. 20, No. 5, pp.10-14.