Government aid and charity cannot solve all of society’s problems, leaving openings for family philanthropies to step in and fill the gaps. That is among the findings from a 2016 survey conducted by EY in collaboration with the Center for Family Business at the University of St. Gallen, Switzerland, which found that more than a third of all family business owners report they are “highly engaged in social impact investing”—with that proportion at 35 percent for small firms and 47 percent for large firms.
The survey report, “Family Business Philanthropy: Creating lasting impact through values and legacy,” paints a picture of an activity that, according to the authors, “is of crucial importance to social goods such as education, health and humanitarian aid around the world.” In the United States, for instance, corporations and foundations, many of which are family-owned, donate at least $67 billion annually to various causes, according to sources cited in the report.
The findings paint a picture of some of the decisions faced by family philanthropy, especially as generational values shift with time. And the report shows that introducing a new form of philanthropy into a family organization can breed difficulties. Beyond that, the research highlights how families engaged in philanthropic efforts can keep the flame alive as younger members take over.
According to the report, “Social impact investing involves investments made into companies, organizations or funds with the intention of generating a social or environmental impact alongside a financial return. Such investment constitutes a new form of philanthropy that has recently become very popular.”
With 525 responses from the largest family businesses in 21 countries, the survey found that globally family business philanthropies on average invest 3.1 percent of their wealth with organizations whose work focuses on “social impact,” with the highest investment rates coming from the Middle East, Europe and Asia. The North American rate stands at 3.1 percent.
Digging deeper, the EY/St. Gallen survey found that:
60 percent of respondents in large firms—companies employing more than 500 people—report “high engagement in monetary contributions to charities.” That compares to 40 percent of respondents from smaller firms who said the same thing.
64 percent of respondents from larger firms said they maintain a high engagement in community services, compared to 47 percent of respondents from smaller firms who said the same thing.
These findings are “surprising because small and medium-sized family businesses are often believed to be highly engaged in their local communities, and they should therefore score higher on service to community as a category of philanthropy,” the report says.
Social impact investing is not without difficulties, however. The paper finds that 76 percent of family business owners feel that there is some degree of trade-off between social impact investing and traditional philanthropy (for instance, simply giving to charities). “This trade-off might arise because many projects supported by traditional forms of philanthropy do not generate a financial return for the family and therefore would not be suited to social impact investing,” the paper says. “This implies that many family business owners seem to be torn between engaging in traditional forms of giving, for instance through charitable contributions, and the new form of social impact investing.”
That’s not to say that every family business philanthropic venture is equally concerned about financial returns. In general, family business owners in Japan, France and South Korea emphasized the importance of financial returns on philanthropic investments, while those in Switzerland, China, Italy, and Germany were the least concerned about financial returns.
Beyond social impact investing, the EY/St. Gallen survey indicates “that family business owners with strong trans-generational intentions are particularly concerned for the well-being of future generations and are therefore more motivated to address long-term social and environmental issues by engaging in philanthropy. Such engagement also helps to create a positive family legacy that is likely to encourage next-generation family members to take over the business.”
The key, according to this report, is having family members in management positions. The survey finds that the likelihood of using philanthropic projects to engage younger members of the family increase significantly if four or five members of that family are actively involved in managing the business. That finding contrasts, however, with a 2008 Family Business Review study, “Family Involvement in Ownership and Management,” which found that “family involvement in management produces a negative effect” on philanthropy.
Even so, the EY/St. Gallen report argues that engagement is a value that every family should respect, even in the face of reluctant relatives. “In a family business, there’s a tricky balancing act between business and family objectives,” says Marnix Van Rij, a Dutch politician quoted in the report who leads the Ernst & Young Global Family Business Center of Excellence. “Not all family members are interested in joining the business, but it’s important to keep them feeling connected. Philanthropy is one way to express the family’s core values—it demonstrates that the business cares about the long-term future of the world. In philanthropic endeavors, everyone can contribute and everyone’s welcome.”
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