By Thabiso Mamabolo & Shamiema du Plessis, FNB Philanthropy Centre
Family philanthropy offers a powerful way to have an impact on the causes that matter most to you. It can also bring families closer throughout the year - by creating a forum for shared experiences and values, you may get to know one another on a deeper level and strengthen your bonds.
The governance of a family foundation involves several key practices to ensure it operates effectively and aligns with its mission.
Establishing a clear mission and vision helps to define the foundation's purpose and long-term goals, guides decision-making and helps maintain focus over generations. The formation of the board is important and requires members who bring diverse skills and perspectives.
The board is responsible for setting policies, overseeing the foundation's activities, and ensuring compliance with legal and ethical standards. More importantly, the board members must understand their fiduciary duties, which include managing the foundation's assets prudently, ensuring funds are used for their intended purposes, and ensuring compliance with all relevant laws and regulations. In 2023, South Africa suffered reputational damage when it was grey listed by the Financial Action Task Force (FATF) for not fully complying with international standards relating to the prevention of money laundering, terrorist financing and proliferation financing. With the world watching South Africa, it has become increasingly crucial for businesses, trusts, and especially non-profit organisations to ensure they have good governance in place to overcome the intense scrutiny experienced. In the realm of social impact and community development, most family foundations are approved by South Africa Receiver of Revenue (SARS) as Public Benefit Organisations (PBOs)and are exempted from income tax based on the pivotal role they play in society. They are rooted in the principles of altruism and a commitment to public welfare, with the intention of creating positive change and addressing societal needs. Let's take a closer look at how a family foundation approved as a public benefit Organisation can improve its governance.
Understanding the game
To have good governance, one must first understand what good governance is? What does it entail and what does it look like? South Africa has the King IV Code (which includes an NPO supplement) and the Non-Profit Independent Code of Governance for NPOs (Code). The King IV code sets out different philosophy, principles and practices that serves a benchmark for good corporate governance.
These values are integrity, conflict of interest, independence, impartiality, equality, altruism, fidelity to purpose the King IV reports provide guidance on matters relating to a balanced composition of governing bodies, independence of members of the governing body, delegation of management and where applicable, committees such as audit and risk committees, governance and performance evaluation and much more. It may be daunting to start incorporating new principles such as the ones noted in the report, and the application of the principles may be altered or varied where necessary and appropriate depending on The Organisation. The goal is to aid good governance.
With the grey listing, many of the reporting and regulatory requirements have changed and more oversight responsibilities have been placed on the trustees. The past year has seen SARS increasing their focus on information pertaining to tax submission, which includes, amongst others, the introduction of IT3(t) reporting, which relates to the reporting of information by trustees regarding distributions to beneficiaries.
The Trust Property Control Act has also introduced amendments to the Act, aimed at enhancing transparency, especially focusing on the disclosure and recordkeeping of the identities of the beneficial owners of trusts -which is also a mandatory declaration when submitting a trust's income tax return. Keeping informed of changes in regulatory requirements is fundamental in ensuring that the family foundation will remain compliant with both its PBO (Public Benefit Organisations) status and the requirements of the FIC Act and can take on the changes timeously and appropriately. It is important for the trustees to identify what they do to remain compliant and what can be outsourced to professional service providers.
Player vs Referee
A weakness relating to governance identified in many non-profit entities, particularly for those approved as PBOs, is that many of the founders have access and control throughout the entity, suggesting there is little to no segregation of duties. PBOs should ensure their governing body is the perfect mix of internal and independent trustees and that the roles of key members are made up of competent individuals. As noted above, the King IV report provides guidance for the establishment of an appropriate governing body of the PBO.A family foundation registered as a PBO, could consider outsourcing functions for which they currently don't possess the appropriate skillsets. For example, outsourcing the accounting and/or payroll function to an independent accounting firm. This will assist the PBO with appropriate accounting records being kept, financial statements prepared in accordance with the accounting standards and correct tax calculations and tax submissions. Personal relationships and family dynamics can complicate decision-making processes. There should be mechanisms in place to resolve any family issues that can impact the foundation's effectiveness. The PBO could also contact various institutions to seek professional services that will ensure impartiality when material decisions are made.
Playing a good game
Lastly, improving on the day-to-day operations and housekeeping of the organisation will positively impact the good governance of a PBO. As with any other organisation, family foundations are also exposed to risks ranging from operational, legal, regulatory compliance, financial, etc. Implementing internal controls, frameworks and policies increases the confidence of the foundation in executing functions and decreases the possibility offending going awry, unaccounted monies and limiting the opportunities for money laundering. The management of these risks is one of the Board's responsibilities. The failure to manage these risks could be detrimental to the reputation of the foundation and prevent it from achieving its objectives. These controls and policy documents do not need to be extensive or elaborate but moulded to the individual organisation's needs.
Did you know
Family philanthropy is the act of giving as a family, utilising the power of legacy to increase philanthropy's impact on both the impacted causes and the participating family members. Family foundations are vital to society as they help in communities being affected by adverse environmental conditions and continuous economic challenges. It has become increasingly evident that the effectiveness of creating sustainable impact is dependent on how well the foundation is managed and governed by the trustees. Incorporating the above makes PBOs more appealing to funders and encourages relationships built on shared promises, goals, and values.
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