Law outside the Market: The Social Utility of the Private Foundation

By Schramm, Carl J. | Harvard Journal of Law & Public Policy, Fall 2006 | Go to article overview

Law outside the Market: The Social Utility of the Private Foundation


Schramm, Carl J., Harvard Journal of Law & Public Policy


INTRODUCTION
  I. A THEORY OF THE PRIVATE FOUNDATION
     A. The Theory
     B. Two Primary Functions of Foundations
 II. THE EVOLUTION OF OPPORTUNITY IN AMERICA
III. THE PRIVATE FOUNDATION
     A. Development of the Private Foundation
     B. The Importance of Donor Intent
     C. Foundations as Independent and
        "Out-Market" Institutions
        1. Education
        2. Scientific Research
        3. Social Policy
     D. External Threats to Foundation
        Independence
        1. The Danger of Vested Interests
        2. Political Threats
        3. Claiming Foundation Assets for the
           Public Purse
 IV. WHY A THEORY OF THE PRIVATE FOUNDATION?
     A. Rising Foundation Assets and Numbers
     B. Evolving Problems and Criticism
  V. UNIQUE ASSETS OF FOUNDATIONS
     A. Purposefulness
     B. Non-Financial Foundation Assets
        1. Institutional Innovation
        2. Ideas
        3. People
        4. Leverage
  VI CONCLUSION

INTRODUCTION

As the American private foundation moves into its second century of existence, the question of what theory guides its social utility looms as vitally important. At present, however, the foundation appears to lack any coherent theory of its role in society and the economy. (1)

The regulatory environment in which foundations operate, roughly circumscribed by the Internal Revenue Code and state "charity" statutes, offers the barest of precedent and understanding. The law is clear about the raison d'etre of foundations, namely, to pursue "charitable purposes," (2) but offers little else. Faced with an array of insistent demands, the foundation lacks a clear sense of its normative standing in relation to other institutions. Moreover, its own conception of relevance is muddled and often defined by those who solicit its funds. In the absence of a coherent thesis, government, too, can impose expectations that may destroy the foundation's ability to achieve the purposes for which it was conceived.

This Article argues that the private foundation, an institution of democratic capitalism, exists to strengthen and facilitate the mutually supporting American systems of democratic pluralism and a free-market economy. In this, foundations are circumscribed by donor intent and donor aspirations that they be purposeful, even as the objects of their efforts change through time.

Part One sets forth a theoretical framework to guide private foundations. Part Two recounts the evolution of the American economy and society over the past two centuries, connecting the vision of the entrepreneurial founders to their ongoing foundations. Part Three discusses the historical development of the private foundation, its nature as an institution, and presents illustrative examples of foundations supporting economic growth and human welfare. Part Three then concludes with a discussion of external threats facing the foundation today. Part Four explores the utility of a theoretical framework for foundations, and Part Five discusses the unique assets foundations bring to this task. The conclusion sets forth a new rule of presumptive continued private action for foundations based on an informal treaty among founders, trustees, and governmental oversight authority.

I. A THEORY OF THE PRIVATE FOUNDATION

Existing theories about the social utility of the private foundation inadequately explain its role in society, and previous attempts to promulgate a guiding theory have fallen short. Perhaps the two most prominent efforts to lay out visions of foundation philanthropy were the Peterson and Filer Commissions.

In 1969, John D. Rockefeller III formed the Commission on Foundations and Private Philanthropy, chaired by Pete Peterson, in response to a "gathering storm" in Congress regarding foundation regulation. (3) The Commission's report, however, was published after passage of the relevant legislation, blunting its impact. …

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