Foundations are booming in Germany and they are frequently cherished as the ideal way to harness private wealth for the common good. I'm critical about the efficiency, equity and legitimacy of civil society, and I think foundations are a case in point. This tax-exempt, free-roaming and supposedly benevolent capital is subjected to only minimal public accountability and may sometimes reflect a troublingly elitist vision of the common good.
Bertelsmann Stiftung / AG Berlin, via Flickr, originally uploaded by Gertrud K.
Kommandantenhaus, Unter den Linden 1, 10117 Berlin: charity?
Foundations exist for many purposes, in many forms and in many (though not all!) legislations. I concentrate here on the charitable foundation, established by private sponsors.
Eternal tax privilege, minimal public accountability
The concept of a charitable foundation is quite extraordinary: it's a capital stock, exempt from taxes, eternally devoted to a specified charitable cause, ideally discharging only the interest gained. Everyone can establish such a foundation, and many do. State authorities then check the charitable cause according to some set of (rather broad) criteria, and your foundation is good to go. Foundations are then regularly audited by supervising bodies. Is that enough in terms of accountability? I think not. The test for a charitable cause, similar to that for a tax-exempt association, is necessarily and by definition a minimal criterion: a foundation is either charitable, nor not. And how exactly that earmarked capital could best serve the common good is not subject of the test. It's simply a test of whether it will serve some charitable cause, in Germany broadly defined to include things like local history, education and tradition. The democratic deficit of foundations becomes more dire in the long run: no one, neither within, let alone outside the foundation has the right to change the cause to which it was originally committed. Whether it's the foundation to honor the memory of Konrad Zuse (yes, according to Brömmling 2005: 49, that does exist) or the Deutsche Bundesstiftung Umwelt, their goals are carved into stone, irrespective of what the polity wants. And the polity should have a say, because it exempts both the turnover, and income of as well as donations to foundations from taxation. If you add the interest and compound on the Hertie Foundation's EUR 799 million endowment, that's a lot of tax money foregone.
Hertie fellow's annual meeting 2009. Who agreed to co-fund this class trip with public money? (I benefited greatly, see below)
Ambiguity: civic virtue/elitist nepotism
Foundations have been described as both the epitome of civic virtue and as harbor of elitist nepotism. The Bertelsmann Foundation study suggests that above all, people want to give back, they want to feel effectual and they want to meet with people. Francie Ostrower (1997), on the other hand, has shown that philanthropy can serve to represent high status and elite membership. The Bertelsmann Foundation itself adds to suspicions about conflicts of interest by holding large amounts of shares in the Bertelsmann AG.
Hertie fellow's annual meeting 2009. Dining with the former President, Roman Herzog. Status games or genuine exchange? (I enjoyed myself, see below)
This is an irresolvable ambiguity: where does civic virtue end, and where does elitist nepotism begin? I have recently had a chance to experience this ambiguity at an event with the Friends of the Hertie Foundation. I know next to nothing about their work, but their dinner party, set in a good Frankfurt restaurant, gave me a sense of this blurry line between virtue and nepotism. Some of the guests seemed genuinely excited about the Foundation's projects, were eager to learn more, get involved and bring their own ideas. For others, the whole thing seemed more like a good occasion to meet friends or do business in a protected environment with what must be a fairly sizeable entrance fee. This ambiguity is a good price to pay for a liberal society with constitutionally guaranteed freedom of association. Yet, foundations, with their affinity to big money, "closed shop" internal governance (boards of trustees recruit themselves), limited openness and public accountablity, all the same with full tax privileges, are probably not the best institutional set-up to face that ambiguity.
Taxation and e.V. should do
Foundations aren't an ideal instrument to harness private wealth, as Prof. Meffert, ex-CEO of the Bertelsmann Foundation said in his foreword to the Foundation's own study. Taxes are. If for no other reason, because private wealth is never truly our own business to begin with. Still, it's a little hard to argue against foundations when you speak to committed donors, who want to give back to their communities and know their causes. Also, this is not to say that foundations in Germany or elsewhere may not be doing excellent work. They may, or they may not. Some of them may, some of them may not. My point is this: eternal tax exemptions with minimal public accountability make for a lousy governance mechanism to maximize the common good. There is one organization already which decides on and provides public goods: the democratic state, ideally involving everyone, taxing everyone. There are also organizations already that harness that civic virtue, local knowledge and commitment: charitable associations. They are more open, and they go with the times, as their membership changes. Let's stick to these two. Or, at least, let's strengthen strengthen public (parliamentary?) oversight over foundations. The Hertie School of Governance, itself a foundation project, may be a good place to think about how foundation governance and accountability could be improved. Full disclosure: this author has been a fellow of the Berlin Studies Centre and has received a partial tuition waiver from the Hertie School of Governance, both of which are co-funded projects of the Hertie Foundation, one of the leading foundations in Germany.
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This post is also on my blog, and on Hertie's SP3 blog.