Philanthropy and inter generational wealth transfer

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Philanthropy and inter-generational wealth transfer


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4 Philanthropy and inter-generational wealth transfer

Global Financial Institute

Philanthropy and inter-generational
wealth transfer

Written by

A Global Financial Institute research paper written by the Economist
Intelligence Unit
June 2014

A growing interest in giving

indications that there is a growing level of philanthropy

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

among the wealthy. One is an apparent increase in the

and nothing quite focuses the mind on this limitation quite

establishment of family foundations—a common vehicle

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

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

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

the Foundation Centre, an American organisation that

more acute in recent years, even with amid the economic

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

downturn. According to Cap Gemini’s World Wealth Report

dations “with measurable donor or donor-family involve-

the global number of millionaires has risen from 7.2m

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

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

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

with US$46.2trn in 2012.

foundations in several European countries, meanwhile,
found signs of a growing number of such organisations in

Much of this wealth will eventually be transferred to later

the UK and Italy.2 Entrepreneur-established foundations

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

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

notes Kelin Gersick—a US-based consultant and expert
on cross-generational change in family firms, as well as in

Such indications of growth are consistent with the impres-

family philanthropy—increasingly the focus of discussions

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

by the families of wealthy entrepreneurs has shifted from

past two decades the role of philanthropy in the planning

the creation and preservation of wealth to its appropriate

of transgenerational wealth transfer “has seemed to be

and meaningful use. This “brings philanthropy more into

increasing”. Moreover, despite inevitable cultural varia-

the centre of the conversation” about wealth management

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

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

of quality includes the issue of effective, well-managed

Bill Gates and Warren Buffett have given through the for-

philanthropy is becoming a global cultural phenomenon.”

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

Theresa Lloyd, a British philanthropy consultant and co-

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

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

isolated exceptions. Li Ka shing, a Hong Kong property

family philanthropy is “undoubtedly more prominent and

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

the number of people setting up foundations as a perma-

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

nent and strategic commitment to family philanthropy has

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

been increasing.”

investment assets had their own charitable foundations.1

Philanthropy as a tool in inter-generational wealth transfer
Such activity is not, in itself, new. Some well-endowed insti-

The drivers of philanthropy by wealthy individuals are

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

complex and vary widely by culture: personal experi-

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

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

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

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

BNP Paribas Individual Philanthropy Index: Measuring Commitment in Europe, Asia, Middle East. BNP Paribas, May 2013.
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.
1

2


5 Philanthropy and inter-generational wealth transfer

Global Financial Institute

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

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

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

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

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

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

ies, rather than looking for secondary benefits such as reduced

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

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

relatives in the running of family foundations, or in philanthropy

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

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

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

issues that frequently revolve around preparing children for the

some, wealth creation and giving back are inextricably inter-

substantial challenges of maintaining inherited wealth. The think-

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

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

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

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

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

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

has taught his family the importance of the local community in

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

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

time provide an opportunity for lessons in entrepreneurship, per-

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

sonal and civic responsibility as well as wealth management.

which it operates, and to create more opportunities for people
there to thrive.

One of the most common family purposes for structured philanthropy is, notes Mr Gordon, “to instil in the next generation the

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

family values—around the importance of community and the

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

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

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

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

much as the tax advantages found in many jurisdictions, explains

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

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

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

especially after the first generation produces substantial wealth,

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

often through an operating company, a family office or holding

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

company frequently emerges as the centre of family activity.

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

“Then philanthropy becomes one of the structural components

beliefs, engaged in substantial community-support and reli-

of the family enterprise system”, with a philanthropic foundation

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

often one of several significant entities.

past philanthropy, and religion—that is what drives older family
members to make sure values do transfer down to other genera-

This shift has had an important psychological impact for both

tions. Involving members of the next generation and giving them

current business decisions and planning for the future. Lord Rumi

responsibility helps to inculcate those values.”

Verjee is a successful British entrepreneur who established the
Rumi Foundation in 2006, which is chaired by his nephew, Jay

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

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

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

Lord Verjee, has integrated with family business activities and

is something the older generation is trying to make sure the

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

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

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

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

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

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

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

ing about projects.”

ally, “setting up a foundation has helped a lot to bring discipline
into entrepreneurial and business activities,” as philanthropic

In addition to educating members of younger generations

activity encourages a long-term vision.

on desired moral values, foundations and other forms of

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.
4


6 Philanthropy and inter-generational wealth transfer

Global Financial Institute

high-net-worth family philanthropy are sometimes expected to

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

serve as a financial, leadership and collaboration training ground.

different walks of life and not working in family business for

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

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

ficult decisions” and some families feel that such involvement will

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

mean that younger relatives are less likely to waste other parts

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

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

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

younger family members receive training in governance issues,

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

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

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

have the opportunity to work together, make decisions, manage

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

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

”more engaged in the broader family enterprise”. Philanthropy

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

can even have a strong impact across several generations. Jay

family members, which can then be applied elsewhere.

Verjee recalls the effect that seeing a mosque in Mombasa which
his great-grandfather had paid to erect in 1850 had on him. “The

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

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

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

family,” he says.

tions, or involvement in charitable work more generally, as ways
to give moral and management lessons. “To a point they can fulfil

This does not mean that families necessarily have to agree on

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

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

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

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

ment of a foundation is an isolated activity, inconsistent with

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

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

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

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

about their philanthropy, despite the fact that they supported

create—or repair—a family culture.”

very different causes. But formal philanthropic structures can also
help. The Rumi Foundation, for example, does so by providing a

Similarly, he adds, family foundations and companies are not

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

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

persal across geographies and even cultures—a common issue

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

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

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

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

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

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

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

you are all together.”

for its own intrinsic value and the lessons it can teach, the more
experience family members have of well-run, thoughtful philan-

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

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

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

tions for effective inter-generational wealth transfer in isolation.

in some cases, be a means of protecting heirs from the hazards
inherent in wealth transfer. From Andrew Carnegie to Mr Gates,

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

a number of very successful entrepreneurs have turned to phi-

thropy can provide a shared activity around which generations

lanthropy after setting aside what they consider to be sufficient

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

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

ing relationships that ease the broader process of wealth transfer.

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

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

found an interesting way to square the circle of philanthropy and

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

heirs by funding charitable foundations run by his three children


7 Philanthropy and inter-generational wealth transfer

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

Global Financial Institute

tends to be raised first by a younger family member. Nevertheless, especially where an entrepreneurial founder of a foundation

The changing face of philanthropy

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

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

investment” orientation that the senior leader used to build the

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

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

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

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

lanthropy is practised.

cess to philanthropy tends to enter discussion from the younger
generations.” Rather than a one-way transfer of knowledge, joint

In recent years several new philanthropic strategies have grown

philanthropy efforts can create an exchange between family

in popularity among those with the resources to pursue them.

members.

These typically involve active engagement with the charitable
enterprise rather than simply writing a cheque. The most well

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

known—philanthrocapitalism, also known as venture philan-

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

thropy—involves using business techniques, as well as investing

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

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

look at impact investment and social entrepreneurship. Rumi

which are best dealt with through charities rather than busi-

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

nesses. Further blurring the lines between business and philan-

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

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

ference. He believes that “philanthropy is changing dramatically

typically involves putting money into an organisation with a view

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

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

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

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

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

pany or a social enterprise—organisations using market-based

he did in his own youth, he says.

techniques that generate profits in pursuit of a specific social
goal.

In the coming years, an increasing number of high-net-worth
individuals will be considering the ultimate destinations of a

These developments are coming into family philanthropy largely

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

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

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

no question that there are generational differences. The older

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

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

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

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

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

spending more time, setting up their own operational organisa-

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

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

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

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

one generation to another.

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


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