Philanthropy and inter generational wealth transfer

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Philanthropy and inter-genera-tional wealth transfer June 2014 Dr. Paul Kielstra

Deutsche Asset & Wealth Management

S4 SPECIAL ISSUE

Philanthropy and inter-generational wealth transfer 2

Deutsche Asset & Wealth Management’s Global

Financial Institute asked the Economist Intelli-

gence Unit to produce a series of white papers,

custom articles, and info-graphics focused spe-

cifically on global capital market trends in 2030.

While overall growth has resumed, and the

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particularly in Asia, are driving capital-raising; in

many places debt markets are fragile due to the

large component of government debt; and stock


Introduction to “Global Capital Markets in 2030“

markets face weakening demand in many mature

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This article was written by Dr. Paul Kielstra and

edited by Brian Gardner.

Dr. Paul Kielstra is a Contributing Editor at the

Economist Intelligence Unit. He has written on

a wide range of topics, from the implications of

political violence for business, through the eco-

nomic costs of diabetes. HIs work has included

a variety of pieces covering the financial services

industry including the changing role relationship

between the risk and finance function in banks,

preparing for the future bank customer, sanctions

compliance in the financial services industry, and

the future of insurance. A published historian, Dr.

Kielstra has degrees in history from the Universi-

ties of Toronto and Oxford, and a graduate diploma

in Economics from the London School of Econom-

ics. He has worked in business, academia, and

the charitable sector.

Brian Gardner is a Senior Editor with the EIU’s

Thought Leadership Team. His work has covered a

breadth of business strategy issues across indus-

tries ranging from energy and information tech-

nology to manufacturing and financial services. In

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role. Prior work included leading investigations

into energy systems, governance and regulatory

regimes. Before that he consulted for the Commit-

tee on Global Thought and the Joint US-China Col-

laboration on Clean Energy. He holds a master’s

degree from Columbia University in New York City

and a bachelor’s degree from American University

in Washington, DC. He also contributes to The

Economist Group’s management thinking portal.


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4

A growing interest in giving

Capital is ultimately only a tool rather than an end in itself

and nothing quite focuses the mind on this limitation quite

like mortality. For those of high net worth, the problem of

not being able to take it with you has, if anything, grown

more acute in recent years, even with amid the economic

downturn. According to Cap Gemini’s World Wealth Report

the global number of millionaires has risen from 7.2m

holding US$26.7trn in investable wealth in 2002 to 12m

with US$46.2trn in 2012.

Much of this wealth will eventually be transferred to later

generations of the same family. In recent years, however,

notes Kelin Gersick—a US-based consultant and expert

on cross-generational change in family firms, as well as in

family philanthropy—increasingly the focus of discussions

by the families of wealthy entrepreneurs has shifted from

the creation and preservation of wealth to its appropriate

and meaningful use. This “brings philanthropy more into

the centre of the conversation” about wealth management

and its transfer, Mr Gersick says. The billions of dollars that

Bill Gates and Warren Buffett have given through the for-

mer’s foundation are the most prominent and largest high-

profile donations. They are not unique, however, or even

isolated exceptions. Li Ka shing, a Hong Kong property

tycoon, and India’s Azim Premji have both also given away

billions, while a recent global survey of high-net-worth

individuals found that 17% of those with over US$20m in

investment assets had their own charitable foundations.1

Such activity is not, in itself, new. Some well-endowed insti-

tutions that were created in this way, such as the Rocke-

feller Foundation in the US and the Rowntree Trusts in Brit-

ain, have existed for over a century. However, there are also

indications that there is a growing level of philanthropy

among the wealthy. One is an apparent increase in the

establishment of family foundations—a common vehicle

for high-net-worth families to channel their giving. In 2000

the Foundation Centre, an American organisation that

studies philanthropy, found 24,434 grant-making foun-

dations “with measurable donor or donor-family involve-

ment” in the US. By 2010 the number had risen to 38,671,

representing an increase of 58%. A 2009 study of family

foundations in several European countries, meanwhile,

found signs of a growing number of such organisations in

the UK and Italy.2 Entrepreneur-established foundations

have even begun to appear in Asia’s emerging markets.3

Such indications of growth are consistent with the impres-

sions of those in the field. Mr Gersick notes that over the

past two decades the role of philanthropy in the planning

of transgenerational wealth transfer “has seemed to be

increasing”. Moreover, despite inevitable cultural varia-

tions, he believes that the idea that “the mark of a family

of quality includes the issue of effective, well-managed

philanthropy is becoming a global cultural phenomenon.”

Theresa Lloyd, a British philanthropy consultant and co-

author of Richer Lives: Why rich people give, also says that

family philanthropy is “undoubtedly more prominent and

the number of people setting up foundations as a perma-

nent and strategic commitment to family philanthropy has

been increasing.”

Philanthropy as a tool in inter-generational wealth transferThe drivers of philanthropy by wealthy individuals are

complex and vary widely by culture: personal experi-

ence with an area of need or religion tend to be a leading

motivators in the Middle East, while a desire to give back

Philanthropy and inter-generational wealth transfer A Global Financial Institute research paper written by the Economist Intelligence UnitJune 2014

Philanthropy and inter-generational wealth transfer Global Financial Institute

1 BNP Paribas Individual Philanthropy Index: Measuring Commitment in Europe, Asia, Middle East. BNP Paribas, May 2013.2 Pharoah, C. (2009). Family Foundation Philanthropy 2009: UK, Germany, Italy, US. London: Alliance Publishing Trust.3 UBS-INSEAD Study on Family Philanthropy in Asia. UBS-INSEAD, 2011, “Rich more willing to set up family foundations,” People’s Daily Online, May 16th 2011.

Written by

5 Philanthropy and inter-generational wealth transfer

and general feelings of altruism are the main factors in Asia and

Europe respectively.4 Linking all of these motivations is the idea

that rich donors are genuinely seeking to help their wider societ-

ies, rather than looking for secondary benefits such as reduced

taxes. Mr Gersick notes, “most families that have philanthropy as

part of their family system want to be responsible to their com-

munities. They see it as one mark of an honourable lifestyle.” For

some, wealth creation and giving back are inextricably inter-

twined. Grant Gordon is a philanthropist and a member of the

fifth generation to work in the family business, William Grant &

Sons, a Scottish distiller. He explains that the company’s success

has taught his family the importance of the local community in

which it operates and has instilled a sense of responsibility for it.

One form this awareness takes is a desire to support the areas in

which it operates, and to create more opportunities for people

there to thrive.

Within this context of a genuine desire to do good, the way that

philanthropy is structured by high-net-worth families plays a vari-

ety of strategic roles in inter-generational wealth transfer. This, as

much as the tax advantages found in many jurisdictions, explains

the increasing use of family foundations. Mr Gersick states that,

especially after the first generation produces substantial wealth,

often through an operating company, a family office or holding

company frequently emerges as the centre of family activity.

“Then philanthropy becomes one of the structural components

of the family enterprise system”, with a philanthropic foundation

often one of several significant entities.

This shift has had an important psychological impact for both

current business decisions and planning for the future. Lord Rumi

Verjee is a successful British entrepreneur who established the

Rumi Foundation in 2006, which is chaired by his nephew, Jay

Verjee, a Canadian businessman. The foundation’s work, says

Lord Verjee, has integrated with family business activities and

succession-planning in several ways.” It gives a rigour in thinking

about wealth-transfer issues, looking at questions like, ‘When is

enough, enough?’ and ‘How much do you give?’ It really drives

you to question those sorts of issues.” He adds that, more gener-

ally, “setting up a foundation has helped a lot to bring discipline

into entrepreneurial and business activities,” as philanthropic

activity encourages a long-term vision.

Once they are wrestling with such questions, parents in high-

net-worth families, according to Ms Lloyd, will “see the creation

of a foundation as not just something good for their own giving

but as a solution” for other issues. In particular, involving younger

relatives in the running of family foundations, or in philanthropy

more generally, can help to address a range of inter-related family

issues that frequently revolve around preparing children for the

substantial challenges of maintaining inherited wealth. The think-

ing behind such use of philanthropy by families, says Ms Lloyd,

is “almost a paradox. If you give some away, your family is more

likely to hold onto the rest through more generations.” In other

words, the money being given to good causes can at the same

time provide an opportunity for lessons in entrepreneurship, per-

sonal and civic responsibility as well as wealth management.

One of the most common family purposes for structured philan-

thropy is, notes Mr Gordon, “to instil in the next generation the

family values—around the importance of community and the

responsibilities of beneficiaries [of wealth]—that you may have

received and which you have tried to build on and maintain.” The

Rumi Foundation is a case in point. Rumi Verjee made his own

wealth after his family’s forced exit from Idi Amin-ruled Uganda.

Before the dictator confiscated most of its assets, however, sev-

eral generations in Africa and in the family’s native home of India

had been very well-off and, consistent with their Ismaili Muslim

beliefs, engaged in substantial community-support and reli-

gious giving. As Rumi puts it, “history, culture within the family,

past philanthropy, and religion—that is what drives older family

members to make sure values do transfer down to other genera-

tions. Involving members of the next generation and giving them

responsibility helps to inculcate those values.”

Jay Verjee agrees. He sees his appointment as part of an effort

to instil “a culture of giving back and thinking of others, which

is something the older generation is trying to make sure the

younger one understands and prioritises. [In this way, the founda-

tion acts] as a place to put cultural values in. I love that my cousins

are interested in getting involved and, from the age of 16, think-

ing about projects.”

In addition to educating members of younger generations

on desired moral values, foundations and other forms of

4 2014 BNP Paribas Individual Philanthropy Index: Philanthropic Journeys :The Importance of Timing. BNP Paribas, February 2014. For a more nuanced examination of giving by high-net-worth individuals in one country see Breeze, B. and Lloyd, T. (2013) Richer Livers: Why rich people give. London: Directory of Social Change.



high-net-worth family philanthropy are sometimes expected to

serve as a financial, leadership and collaboration training ground.

Ms Lloyd explains that “running a family foundation requires dif-

ficult decisions” and some families feel that such involvement will

mean that younger relatives are less likely to waste other parts

of the family fortune. Mr Gersick adds that, given how rarely

younger family members receive training in governance issues,

“for the members of all generations in an extended family to

have the opportunity to work together, make decisions, manage

money, and argue over policies, [the experience] has value.” More-

over, he says, this work can reveal hidden human capital among

family members, which can then be applied elsewhere.

Mr Gersick warns, however, that foundations are not panaceas.

Senior generations of high-net-worth families often see founda-

tions, or involvement in charitable work more generally, as ways

to give moral and management lessons. “To a point they can fulfil

those functions,” he believes, “but not as much as seniors believe.”

With regard to ethical values, he notes that when the establish-

ment of a foundation is an isolated activity, inconsistent with

other family behaviour, “the kids don’t believe [the supposed

moral lesson] anyway. Creating a foundation by itself does not

create—or repair—a family culture.”

Similarly, he adds, family foundations and companies are not

identical, and so running the former does not in itself create the

capacity to run the latter well. Mr Gordon agrees. Although he

believes that involvement in a family’s charitable activities pro-

vides good experience and “a solid training ground for gover-

nance,” he notes that “it is not a career development move”. Both

for its own intrinsic value and the lessons it can teach, the more

experience family members have of well-run, thoughtful philan-

thropy the better. Doing so does not, however, create the condi-

tions for effective inter-generational wealth transfer in isolation.

Nevertheless, if done well, many families also find that philan-

thropy can provide a shared activity around which generations

can coalesce—an important good in itself and an aid in build-

ing relationships that ease the broader process of wealth transfer.

Although “it doesn’t work every time,” Mr Gordon calls philan-

thropy a “potentially powerful way of engaging family members”.

Of his own generation, he notes a number of cousins “from quite

different walks of life and not working in family business for

whom giving is the one part of the family enterprise that they

care most deeply about.” The younger generation of some 30

cousins, meanwhile, get together once a year to decide what to

do with a defined pot of charitable money “as a team exercise”.

He notes that these philanthropic activities, as well as the distinct

ones in which his nuclear family engages, have made his own

children—who are not interested in a career in the business—

”more engaged in the broader family enterprise”. Philanthropy

can even have a strong impact across several generations. Jay

Verjee recalls the effect that seeing a mosque in Mombasa which

his great-grandfather had paid to erect in 1850 had on him. “The

culture of giving is what makes me most proud to be part of our

family,” he says.

This does not mean that families necessarily have to agree on

a specific cause to support. Rather, the process of philanthropy

itself has an impact. Ms Lloyd recalls one family she worked with:

the parents said that during the adolescence of their four chil-

dren, the only time everyone seemed willing to talk together was

about their philanthropy, despite the fact that they supported

very different causes. But formal philanthropic structures can also

help. The Rumi Foundation, for example, does so by providing a

focus for family action. Both Verjees note, for example, that dis-

persal across geographies and even cultures—a common issue

for high-net-worth families—can impede a group’s focus on giv-

ing. As Jay Verjee puts it, “The most difficult thing for my genera-

tion is that we are all over the place. Philanthropy is easier when

you are all together.”

Finally, especially for those of very high net worth looking to

secure the welfare of future generations, giving money away can,

in some cases, be a means of protecting heirs from the hazards

inherent in wealth transfer. From Andrew Carnegie to Mr Gates,

a number of very successful entrepreneurs have turned to phi-

lanthropy after setting aside what they consider to be sufficient

resources for the next generation. For them, the legacy is the

example, not simply the income. Mr Buffett, for example, has even

found an interesting way to square the circle of philanthropy and

heirs by funding charitable foundations run by his three children



through gifts worth well over US$1bn to each.

The changing face of philanthropy

Even as one of the secondary goals of high-net-worth family phi-

lanthropy is to have a positive impact on younger family mem-

bers, the newer generation is having its own impact on how phi-

lanthropy is practised.

In recent years several new philanthropic strategies have grown

in popularity among those with the resources to pursue them.

These typically involve active engagement with the charitable

enterprise rather than simply writing a cheque. The most well

known—philanthrocapitalism, also known as venture philan-

thropy—involves using business techniques, as well as investing

time and energy, in order to bring to scale solutions to problems

which are best dealt with through charities rather than busi-

nesses. Further blurring the lines between business and philan-

thropy has been the growth of social or impact investment, which

typically involves putting money into an organisation with a view

to a social return as well as an economic one. The vehicle in this

case can be a non-governmental organisation, a traditional com-

pany or a social enterprise—organisations using market-based

techniques that generate profits in pursuit of a specific social

goal.

These developments are coming into family philanthropy largely

through younger individuals. According to Ms Lloyd, “[there is]

no question that there are generational differences. The older

generation tended to be more traditional grant-makers. Emerg-

ing donors are more interested in social and impact investing, in

spending more time, setting up their own operational organisa-

tions, rolling up their sleeves.” The difference, however, is one of

exposure to new ideas rather than a fixed strategic vision. Mr Ger-

sick notes that, in his experience, the idea of venture philanthropy

tends to be raised first by a younger family member. Neverthe-

less, especially where an entrepreneurial founder of a foundation

is still alive, such strategies quickly resonate with the “return on

investment” orientation that the senior leader used to build the

enterprise. “I wouldn’t say there is a lot of resistance [from older

individuals],” he adds, “it is more the idea [that] this business pro-

cess to philanthropy tends to enter discussion from the younger

generations.” Rather than a one-way transfer of knowledge, joint

philanthropy efforts can create an exchange between family

members.

This is consistent with the experience of the Verjees. Jay Verjee

says that he and Lord Verjee rarely disagree on particular causes,

but differ only in keeping up with philanthropic trends. “I try to

look at impact investment and social entrepreneurship. Rumi

has a more traditional view,” which has shaped the foundation’s

approach to date. His uncle is not even sure that this is such a dif-

ference. He believes that “philanthropy is changing dramatically

and the world is changing.” He sees a broader shift of attitude

in which older individuals share. Like the younger generation, “I

now think more about the social impact of a lot of what I do” than

he did in his own youth, he says.

In the coming years, an increasing number of high-net-worth

individuals will be considering the ultimate destinations of a

growing amount of capital. Part of this money will go to philan-

thropy. Although the main driver will be a charitable impulse, it

will make sense to donate these funds in a way that helps to incul-

cate important values and skills in the family’s younger genera-

tion. If done well, this will not only help the latter to manage their

entire inheritance better in future, but it can also widen perspec-

tives on giving in the present—a greatly enhanced legacy from

one generation to another.


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Philanthropy and inter generational wealth transfer

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