Why Privately-Held Companies Establish DAFsSubmitted by American Endowment Foundation on August 7th, 2023
By Ken Nopar, VP-Senior Philanthropic Advisor
Surprisingly, though many business owners and executives are among the 1,000,000 donors who have established their own personal donor advised fund (DAF) accounts, relatively few companies they own or manage have set up corporate DAFs. Businesses have often been generous in supporting various charities and causes over the years, especially in the past few years during the many recent crises. Giving USA recently reported that corporate giving in 2021 increased by 23.8% to $21 billion, yet a good number of companies have not established a strategic giving plan.
Establishing a corporate DAF is simple and very similar to creating a personal or family DAF, though the initial contributions to create accounts are typically larger. Some firms have established company foundations over the years, but like personal private foundations, these are often cumbersome to operate and are more expensive than a corporate DAF. Some company foundations have closed, while others have converted to DAFs so they can still enjoy the benefits of having a charitable vehicle without the complexity and administrative burdens of the foundation.
Corporate DAFs have not been heavily promoted, as some of the largest DAF sponsors do not offer them or instead charge significant additional fees to administer them. However, since companies recognize the importance of giving back, want to demonstrate their commitment to their communities and employees, and personal DAFs have become so widespread, the interest in them has been growing over the past few years.
Much of this interest has come from privately-owned companies, especially those which have been very successful in recent years while seeing the ongoing challenges and issues in society.
Creating a corporate donor advised fund can provide the following benefits:
- They enable companies to provide some structure around their giving.
- Firms or their owners can donate substantial amounts to the DAF during profitable years which will allow them to continue to make grants even when profits decline in some years.
- Companies can develop a mission so their DAF account can focus on certain causes or charities that the firms, management, and employees can support.
- The mission of the DAF makes it easier to politely decline requests for support because a soliciting charity’s (or employee’s) mission may not be aligned with that of the firm’s.
- Corporate DAFs enable companies to have a greater impact on the causes and charities they support rather than making many small donations to many types of organizations.
- The DAF will more easily enable the firm’s leaders to structure and determine a budget for giving for the firm and any offices.
- The DAF structure can provide opportunities for staff to be part of philanthropy committee, identify and vet potential charitable grantees, determine which ones are most deserving, and decide how much to grant to them
- Employee engagement and volunteerism will increase when partnering with specific charities the corporate DAF supports
- All employees, but especially younger or newer ones, will have more pride in their work and the company. This can be a differentiator in a tight job market in which potential employees have numerous job offers.
- The name of the corporate DAF (i.e. “Jones Real Estate Giving Fund”) can more easily enable firms to receive PR benefits and positive recognition for grants or sponsorships (However, corporate DAFs cannot receive any impermissible benefits like event tickets or golf foursomes)
The following broad guidelines have been helpful for firms who have already established corporate DAFs and for those that are considering one:
- Develop one mission for all of the companies’ offices. The mission does not have to benefit only one cause, but it should be somewhat narrow in scope so employees and charities do not ask for donations that are outside what the company is comfortable supporting
- Establish a committee in each office or have a representative from each office on the philanthropy committee. The committee should have term limits so everyone who wants to participate can do so.
- Provide an annual giving budget to the committee or offices.
- The executive team can decide upon all or the bulk of the dollars to be granted; however, allowing employee participation for some grants will engender employee satisfaction and pride.
- Select only one or two executives or employees to submit the grant recommendations to the DAF sponsor, and if there is only one, select someone else to be the successor advisor in case that one person leaves.
- If grants will be small, do not send out Requests for Proposals to different charities since this can place a burden upon the charities that would need to respond.
- Determine the source(s) of the funding for the DAF. Will the company or a limited group of executives provide the funding?
- Corporate DAFs are not designed to be fundraisers in which numerous employees or outside partners would be asked to contribute.
- Grant recommendations should be submitted to the DAF sponsor only several times per year, and not in November and December since charities are extremely busy then and they need grants throughout the year. Limiting the granting periods enables firms to be much more efficient with their giving.
- Minimum grant sizes should be larger from corporate DAFs than from an individual’s DAF. Charities welcome all contributions from individual donors, but some may question why they would only receive $250 from a firm.
- Corporate DAFs are not used as pass-through accounts in which all contributions to the accounts are immediately re-granted to charities. Companies will want to make some grants relatively soon after opening the account, but DAFs are typically designed for both short-term and long-term granting purposes.
- They are not used to match employee contributions to charities
Advisors also benefit from helping their clients create corporate DAFs as these can enable the advisors to meet C-Suite executives at the companies and manage additional assets. The main benefits, however, are to the companies and to the charities they support, as well as to the company’s employees who will appreciate the company’s efforts to support charities in their communities and around the country and world.