HAS MARK ZUCKERBERG JUST ANNOUNCED THE DEATH OF THE CHARITABLE FOUNDATION?

The dust is now beginning to settle a bit following Mark Zuckerberg and Priscilla Chan’s announcement that they are planning to give away $45bn of Facebook shares over the course of their lifetimes. There have been many who were quick to criticise the couple on various grounds, even whilst others were congratulating them on their generosity.

However, as details of plans for the “Chan-Zuckerberg Initiative” emerge, even those who are broadly positive about philanthropy have started to ask a few questions. One is around the awkward issue of tax. I’m not thinking here of those who question the very validity of charitable tax breaks, but rather of the criticisms that Facebook as a company has been called up on failing to pay what many would regard as its fair share of tax. This is obviously tax avoidance rather than evasion, as Facebook has almost certainly not broken any laws; but rather exploited loopholes in existing legislation in order to minimise the company’s tax bill.

Potential to undermine charity

The question of corporate tax avoidance is obviously a massive can of worms, and not directly anything to do with philanthropy. However, it obviously has a knock-on effect because it colours (and potentially undermines) the charitable activities of companies and the individual philanthropists who have made their fortunes through them. My take on it would be that companies have a responsibility to recognise that they exist as a part of society, and that it is this which enables them to exist and flourish. As such, they have a responsibility to contribute to the maintenance of that society in the same way that individuals do. Hence, highly artificial tax avoidance activities are morally indefensible even if they are technically legal.

However, I would always maintain that tax incentives for charitable donations should not be tarred with the same brush, as they serve a clear and important purpose in terms of supporting a vibrant civil society and there is a clear justification for governments offering them.

Signaling the end of traditional non-profits

Having temporarily opened that can of worms, I want to pop the lid back on it and come instead to what I think is the most interesting question for philanthropy that has been raised by the Zuckerberg/Chan announcement: does it signal the end of traditional non-profit structures? As most people have now twigged, Zuckerberg and Chan are not putting their money into a traditional charitable foundation – rather they are setting up a for-profit Limited Liability Company (LLC), into which they have pledged to pump 99% of their Facebook stock holdings (I’m not sure any actual money has moved anywhere so far).

So why is this important? Well, first of all I don’t really buy the arguments of those who say that it is just a way of avoiding tax. Some people seem to be arguing that by using an LLC, Zuckerberg is able to avoid Capital Gains Tax that he would otherwise have to pay. But surely he would be just as able to avoid this liability by transferring the shares to a traditional charitable foundation, and in fact would be in a better position that way as he would avoid liability if the shares were subsequently sold? Zuckerberg has come out and addressed precisely this point, maintaining that:

“If we transferred our shares to a traditional foundation, then we would have received an immediate tax benefit, but by using an L.L.C. we do not. And just like everyone else, we will pay capital gains taxes when our shares are sold by the L.L.C.,”

So I think the tax question (or at least this particular tax question) is a bit of a red herring.

influence public policy

Why else might Zuckerberg and Chan decide against a foundation structure? One clear answer, given in the original letter outlining their plans, is that they want to engage in significant efforts to influence public policy, and they felt that the rules governing such activities by non-profits were too restrictive. This is fascinating: it’s not often that you hear the complaint that the problem with charitable organisations is that they are not political enough – it tends very much to be the other way round. And given that one of the real (and valid) concerns that many people have about big philanthropy is the distorting effect that it can have on democracy and the direction of social progress; to hear a philanthropist overtly state that they want even more freedom to influence policy than has traditionally been the case may well set alarm bells ringing for some.

Furthermore, by using an LLC structure, not only will the Zuckerberg-Chan Initiative be able to conduct more political activity – it will also be far less accountable, as it won’t be subject to the reporting requirements placed on foundations. Again, given that foundations are already often heavily criticised for lacking transparency, choosing a different approach that may be even less transparent is likely to prove controversial.

LLC advantages

Another possible explanation for choosing the LLC structure is that it will enable far greater flexibility in the terms of the types of organisations that the Initiative can back and the methods it can use. Whilst charitable foundations are limited to grants and investments that are in line with their mission (programme related investments), an LLC can invest in pretty much whatever it likes, whether non-profit or for profit. And Silicon Valley philanthropists like Zuckerberg seem very keen on the idea that the solutions to long-standing challenges facing society are just as likely (or even more likely) to be found among innovative commercial start-ups as they are in charitable ventures.

Google founder Larry Page, for instance, stated last year that he was going to give all of his philanthropic money to Elon Musk’s commercial ventures rather than traditional charities because he saw this as a more effective way of achieving social good.

Quite a lot has been written about this trend, and whether the enthusiasm of these Silicon Valley philanthropists for innovative tech ventures simply reflects the view of the world they have inherited from their business life, or whether they might be on to something. It is definitely a question worth considering, as so much philanthropic money is now coming from these kinds of tech billionaires that if they all hold similar views about the relative merits of non-profit and for-profit models, that could really shift the emphasis of philanthropy overall. It is worth noting, however, that their viewpoint is not necessarily new: like so many things in philanthropy, it may simply be a rediscovery of something the donors of the past already knew.

Challenge to maintain a philanthropic purpose

A philanthropist like George Cadbury for instance (of chocolate fame), saw no real dividing lines between commercial, charitable and political when it came to addressing the issues he cared about. He instituted radical business practices in terms of the way he treated his employees; he gave vast sums to charity; and he also bought a newspaper in order to try to promote his political views about poverty and pacifism. Maybe Mark Zuckerberg’s “radical new approach to philanthropy” is actually part of something far older?

One potential issue for the future that might arise as a result of this desire to maintain the flexibility to move between the non-profit and for-profit world is that there is no guarantee that the underlying philanthropic purpose will be maintained. Unlike a foundation, which has a charitable mission enshrined in its governance, an LLC is merely a legal structure for holding assets.

Obviously whilst Chan and Zuckerberg are alive, the assumption must be that the LLC will reflect their ongoing interest in philanthropy. But the future is notoriously difficult to predict; people change and so do circumstance, and thus some might feel that this a shaky basis on which to try to address problems that will (as Chan and Zuckerberg acknowledge in their letter) require long-term solutions. (Perhaps this is where a structure like the “B-Corporation” could prove useful, as it enables the combination of a commercial approach with a social mission?)

A noteworthy choice

It is hard to know exactly how the ‘Great Chan/Zuckerberg Philanthropy Experiment’ is going to pan out, as so much of it is just conjecture and ambition at this point. However, the decision to opt for an LLC rather than a more traditional non-profit structure is noteworthy.

It might not spell the beginning of the end for foundations, as Chan and Zuckerberg might turn out to be the exception rather than the norm, but it raises interesting and important questions about the future of philanthropy.