The Role of Founder and Other Family Participation on US Private Foundation Efficiency
Published date | 01 February 2017 |
Author | Brian McAllister,Arthur Allen |
Date | 01 February 2017 |
DOI | http://doi.org/10.1111/faam.12114 |
Financial Accountability & Management, 33(1), February 2017, 0267-4424
The Role of Founder and Other
Family Participation on US Private
Foundation Efficiency
BRIAN MCALLISTER AND ARTHUR ALLEN∗
Abstract: Founders make significant financial contributions in creating US private
foundations. Therefore, we hypothesize that founders monitor foundation operations
and predict a positive relation between founder participation and foundation
efficiency. In contrast, we propose competing hypotheses in examining the relation
between other family member participation and foundation efficiency. Other family
member participation has the potential to enhance foundation efficiency if founders
are able to transfer their philanthropic values to their progeny. However, other
family participation also has the potential to diminish foundation efficiency if the
founders’ withdrawal leaves their foundations without true principals to monitor
managerial actions. We find that both founder and other family participation are
positively associated with foundation efficiency. We also provide limited evidence
that the positive association between founding family participation and foundation
efficiency is transferred to second generation family members, but is not transferred
to subsequent generations.
Keywords: private foundations, nonprofit, founder, efficiency
INTRODUCTION
Private foundations typically are established with substantial contributions
from a single set of donors (founders).1Foundations create a permanent
endowment by investing these founder contributions and then using the income
earned to distribute as grants to public charities. Public charities use the
∗The authors are respectively from the College of Business and Administration, University
of Colorado, Colorado Springs, USA; and the College of Business Administration, University
of Nebraska-Lincoln, Lincoln, USA. This paper has benefited from the capable research
assistance of Xiaoyan Cheng, Thomas Kubick, and Lynn Rottinghaus, and from helpful
comments by Brad Cripe, Paul Harrison, Greg Martin, John Perry, Christine Petrovits, Tim
Yoder, and session participants at the American Accounting Association Annual Meeting.
Address for correspondence: Brian McAllister, College of Business and Administration,
University of Colorado, Colorado Springs, CO 80918 719-255-4668, USA.
e-mail: bmcallis@uccs.edu
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2017 John Wiley & Sons Ltd 48
FOUNDER AND OTHER FAMILY PARTICIPATION 49
grant distributions received from foundations to support their philanthropic
missions. As of 2007, more than 75,000 private foundations existed in the
US; these foundations distributed $45.6 billion from $682.2 billion of total
assets (Foundation Center, 2009). In addition, more than 40,000 US private
foundations had at least one founder or other family member participating on
their board of directors (Foundation Center, 2009).2
Founders maintain influence over their donated assets through foundation
board participation, but over time, relinquish influence of foundation activities
to subsequent family generations and to nonfamily board members. Since
private foundations are subject to little or no oversight by private watchdog
agencies or federal and state regulators, founder and other family board
participation is likely to be instrumental in monitoring the efficiency of
private foundations. As such, our paper examines the association between
founder and other family member board participation and private foundation
efficiency.
We predict a positive relation between founder participation and efficiency.
Founders of private foundations are major donors motivated to provide monitor-
ing over their foundations, which in turn is likely to result in higher foundation
efficiency. In contrast, we propose competing hypotheses in examining the
relation between other family member participation and foundation efficiency.
Other family member participation has the potential to diminish foundation
efficiency because the founders’ withdrawal leaves their foundation without true
principals to monitor managerial actions. This is especially true because other
family members typically have little or no direct financial investment in their
foundations.3Given that founders sometimes fail to transfer their philanthropic
values to future generations, the potential arises that other family members are
more likely to behave as opportunistic agents who are unwilling or unable to
monitor foundation operations. Conversely, other family member participation
also has the potential to enhance foundation efficiency. Successive generations
have the potential to identify more strongly with the goals of founders who
are able to successfully transfer their philanthropic values to their progeny. In
these cases, other family members are more likely to behave like principals and
monitor foundation operations.
We draw our sample from the 200 largest US private foundations from
2001 through 2005. Our untabulated analysis indicates that these foundations
controlled about half of all US foundation assets in 2001. Our research design
controls for foundation size, age, governance quality, grantee type, and number
of grants. Our findings are consistent with founder participation being associated
with improved foundation efficiency, implying that founders provide monitoring
over foundations. We also provide limited evidence that other family members
behave similarly to founders in that other family member participation is
positively associated with one proxy for efficiency: grant expense as a proportion
of total assets. However, we find no evidence that other family participation
is associated with another proxy for efficiency: administrative expense as a
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2017 John Wiley & Sons Ltd
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