This article is part of our special issue on New Trends in Philanthropy and Civil Society in China (Summer, 2011). It details some of the important issues and debates raised at the second session of the Private Foundation Forum about the role of private foundations, and the private entrepreneurs behind them.
Some of those issues are discussed in several research reports released at the Forum highlighting deficiencies in foundation governance and transparency. Strengthening board governance and information disclosure are two major challenges facing many private foundations. Other issues that stimulated discussion at the Forum included; whether Chinese philanthropists should follow the Gates model of “naked donations” that involves giving all your money to charity and leaving nothing to your family; whether charity is a pursuit only for the wealthy and whether China’s entrepreneurs are part of the wealthy class; and whether Western approaches to “intelligent philanthropy” can be replicated in China due to a different regulatory environment. One other important issue discussed concerned whether private foundations will support NGOs. That discussion is dealt with in a separate article in this issue: “Develop Philanthropy Together Through Debate and Cooperation.”
The second session of the China Private Foundation Development Forum (hereafter, the Forum) was held in Beijing on Oct. 28 and 29, 2010. The large crowds showed that many from the government, private business and nonprofit sectors were paying attention to the rise of private foundations. The participants engaged in informative and interesting debates over the role of private foundations in the development of philanthropy in China.
With the emergence of private foundations five year ago, Chinese philanthropy witnessed a period of rapid growth, leading people in the industry to wonder whether China’s private foundations could continue to grow in a sustainable manner. To address these concerns, seven foundations got together to organize the first session of the Forum was held on July 2, 2009. More than a year later, 13 foundations followed up by organizing the second session.
Xu Xiaodong, Chairman of Vantone Foundation (万通公益基金会) and the Forum’s Chair, declared that: “Private foundations are no longer in their infancy and have begun to mature.” At the meeting, Yang Yue, the deputy director of the NGO Management bureau of the Ministry of Civil Affairs (MCA), predicted that the total number of foundations would exceed 2000 by the end of 2010, and half of these would be private foundations ((Editor’s Note: To put these figures into some context, as of 2004, there were 892 registered public foundations, and no private foundations. In 2005, there were 721 public foundations and 253 private ones. This year (2011), both public and private foundations will exceed the 1,000 mark.)). Yang however was not optimistic about the overall situation of private foundations. At the Forum, she mentioned various problems facing the private foundations. The overwhelming majority of private foundations sufferinternally from various governance problems, such as poor management, low organizational efficiency, and lack of effectiveness in providing services. Externally, private foundations lack social influence and have difficulty gaining the trust of donors, the public and the government, and mobilizing social resources.
Research Report Findings
Clearly, the Forum sponsors and organizers did not avoid the problems that exist in the industry. At the second session, three research reports were released that provided an in-depth and comprehensive study of internal governance, information disclosure, and public welfare projects in the foundation sector. The reports provided a snapshot of the sector’s current situation, and paid particular attention to the problems in the industry.
The “Report on the Internal Governance of Private Foundations” was written by Professor Kang Xiaoguang of Renmin University. The report focused on decision-making mechanisms within the Council and the financial distribution made by the Council and the Secretariat’. The report showed that currently private foundations are mainly governed by the funders themselves. According to international practice and China’s “Regulations for Foundation Management”, the foundation’s board of directors should be the highest decision-making body, and rely on a democratic process, with each board member having one vote. Yet decision-making in most foundations is dominated by one individual.
According to Professor Kang, the core problem has to do with unclear ownership structures in most private foundations. Legally these organizations belong to the society, but there is no mechanism for society to manage them. Because the funds of private foundations come from major gifts made by a family or corporation, the foundation’s existence relies heavily on the family or corporate funder. As a result, the funders of private foundations tend to dominate the decision-making process, with the lack of a public oversight mechanism constituting the major problem.
Of course, the saying that “whoever has the money is in charge” does not necessarily mean that the wealthy have the final say. Scholars with social prestige can influence people’s thinking on donations, artists can raise funds by selling their creative works, and those in power or with political background can make deals with the entrepreneurs to raise money. All these people can have a voice in the decision-making process.
To deal with this problem, Professor Kang believes it is important to strengthen the board’s internal governance and to enhance external oversight by the public. Because private foundations often have self-sustaining boards that decide the makeup of the next board, relying solely on board governance is insufficient. It is also important to introduce external competition, accountability, and oversight, if public welfare organizations are to improve their governance.
However, having a sound governance structure does not necessarily result in high operating efficiency. This argument was put forth by Professor Kang, supported by more than ten years of experience and observation in the field. He concluded that the best foundations tend to be the ones where there is one decision-maker, but that person must be capable. In terms of which governance mechanism would most benefit the long-term development of private foundations, he concluded that it was still too early to tell.
Professor Kang’s conclusion that efficacy does not necessarily correlate with the governance structure was not directly negated in later discussions. However, Yang Peng of Alxa SEE Ecological Association ( 但是阿拉善SEE生态协会) Chair of the Experts Committee, believes that value orientations are important in shaping the governance structure. He made the analogy to corporate governance structures, where even though private companies, family-owned companies, and joint-stock companies co-exist, he argues that throughout human history there is still a mainstream governance structure that has been proven to win people’s trust. He cites the joint-stock company structure as one where some principles must be upheld. He summed them up as “three powers” and “three characteristics”. The “three powers” are: decision-making, enforcement, and supervision powers. These powers must be separated. In addition, private foundations must possess “three characteristics”: serving the public interest, openness, and serving the social interest (e.g. being subject to public and donors’ constraints). If these principles can be upheld, then the influence of capital or government on foundation governance may not be a problem. However, the existence of private foundations dominated by the funder, as mentioned in Professor Kang’s report, is precisely a departure from these principles.
Subsequently, Duan Defeng, the CEO of Beijing Ruisende Management Consultants Limited (北京瑞森德管理顾问有限公司), released the “China Private Foundation Disclosure Guidelines.” He estimated that about half of current private foundations are “three-nos” Foundations. The so-called “three-nos”” are “no full-time staff”, “no fixed location” and “no budget”. “No budget” does not mean no money, but money is spent with no budget constraint. This conclusion was based on 65 completed questionnaires (the original intention was to study 200 foundations, but only 65 completed questionnaires were returned) ((Editor’s Note: Duan Defeng worked for Oxfam Hong Kong for many years and served as Secretary-General of the HaiCang Charitable Foundation (海仓慈善基金会).)).
In collecting information for 40 foundations, the report’s research team got most of their information from the MCA’s website, not from the foundations’ own websites or other information platforms. Although private foundations stressed self-governance and self-discipline, they have not become a self-regulating group. Therefore when social pressure is insufficient to encourage information disclosure, the major motive for information disclosure came mainly from government authorities.
In addition, the team found that the information disclosure situation for private foundations registered with the MCA is quite good. Duan thinks this may be the result of the government’s lengthy review and approval process. In terms of the content and timeliness of the disclosed information, the 35 individual- or jointly-sponsored private foundations tended to perform better than the 30 private foundations sponsored by schools or enterprises. The main reason is that individual-and jointly-sponsored organizations are under more pressure to raise funds, and disclosing information is one way for them to attract donations.
Dr. Dong Qiang of China Agricultural University released the third report, “Case Studies ofChina’s Private Foundation Projects.” Of the 18 cases, 7 projects were focused on education, indicating that private foundations projects lack diversity. Dr. Dong gave several reasons for the relatively narrow focus of foundation projects. First of all, private foundations have only been around a few years and lack an understanding of the different sectors needing funding. Secondly, the foundation founder decides the areas to be funded based on two considerations: one is the project’s effectiveness and the other is continuity with previous projects. The founder may have been engaged in charitable projects before setting up the foundation, and may prefer to continue carrying out conventional charity projects. The report also finds that private foundations are good at integrating resources across sectors and developing partnerships with research institutions, grassroots organizations, government agencies, local governments, and enterprises.
The Controversy over “Naked donations”
Many of the speakers at the Forum were the focus of media attention, and some handled it well. One of them, Xu Yongguang chaired the Forum’s last panel on “Industry Responsibility and Society’s Role”. This topic produced both attention-catching stories and heated debates.
Feng Lun, the Chairman of Vantone Real Estate Company and a noted thinker in the real estate industry, spoke at the forum regarding “naked donations” and elicited a strong response from Professor Kang ((Editor’s Note: Vantone Real Estate is the corporate funder of Vantone Foundation, and Feng Lun also serves on Vantone’s board. The term “naked donation” is used to describe philanthropists like Bill Gates who left all of his fortune to philanthropy and nothing to his children.)). Feng said: “Every person has a right to distribute his or her own wealth. It’s unfortunate if the society requests, expects or even induces all entrepreneurs to take a naked donation stand.” Feng argued that, as early as 1956, business owners made “naked donations” to the Public-Private Joint-Enterprise movement. It resulted in a great famine and the Cultural Revolution. In promoting public welfare and charitable activities, we should not impede the basic system for creating wealth, namely, the property ownership structure, the free market economy and normal enterprise management. If public welfare and charity activity harms private property ownership, the long-term development of private enterprise, the existing pattern of private wealth and the motivation for wealth creation, then we’ll be cutting off the funding source for charity and public welfare. He issued two warnings: first, as charity grows more popular, we should be careful to protect the property ownership structure in order to promote an effective free market economy and enterprise ownership system; second, we should be very careful about how donations are made. The charitable and public welfare cause will only grow in the right direction when money is donated to society, rather than to the government. If we all make “naked donations” and 90 percent of our donations go to the government, then all money and assets will eventually come under state ownership ((Editor’s Note: the Public-Private Joint-Enterprise movement in 1956 was initiated with the ultimate aim of bringing private enterprises in the PRC under state ownership. The “great famine” is a reference to the famine following the Great Leap Forward (1958-1961) that resulted in an official death toll of 8 million, but unofficial estimates ranging from 14 million to over 30 million deaths. Feng’s statement reflects a neoliberal, more right-wing, view that sees private ownership and enterprise, and the free market, as essential to China’s economic development. It also espouses a belief in the importance of placing significant and clear constraints on government authority and power.)).
Feng’s remarks provoked a strong response from Professor Kang who said: “I agree with many things that Mr. Feng Lun just said, but I disagree with his connection of ‘naked donations’ to socialist nation-building in 1956 as the two are not related.” Kang explained that in 1956 many people were force to donate their property to the government. In contrast, today’s entrepreneurs who choose to make “naked donations” do so voluntarily and under the condition of private property protection guaranteed by the government. To say that “naked donation” led to the Great Leap Forward, the Great Famine, and the Cultural Revolution is ridiculous as there is no direct connection between them. We cannot logically argue that China will experience a great famine if some people make naked donations; this is clearly nonsense.
Professor Kang later emphasized that our society should not force people to donate, especially to make a “naked donation”, nor should we oppose or criticize people who make donations, especially “naked donations”. Our society should have some basic moral standards. We can have different opinions about “naked donations”, but those willing to make a charitable donation should be respected by everyone. We may differ as to how donations should be made, but that is an entirely different matter.
Xu Yongguang raised the “naked donation” topic again at the last panel. He said: “when I saw the news on August 5, 2010 about two American tycoons coming to China to discuss their model of donation, I started to write an article entitled ‘Wealthy Chinese are not in a hurry to learn about philanthropy from wealthy Americans.’ He worried that this event would lead to comparisons of the wealthy based solely on their donations, thinking that it is very easy for Chinese society to go in that direction ((Editor’s Note: Xu here is referring to the September 2010 visit by Bill Gates and Warren Buffet to China to speak to China’s tycoons about the value of philanthropy.)).
Controversy over the Term “Charity by the Wealthy”
Wang Shi, CEO of the Vanke Group (万科集团) ((Editor’s Note: Wang Shi is also one of the founders of Alxa SEE Ecological Association, a noted environmental NGO whose sponsoring members are entrepreneurs.)), does not agree with the term “charity by the wealthy”. He said, “We ourselves are entrepreneurs. Entrepreneurs are not necessarily rich. Some years ago, SEE asked [their members] to donate 100,000 RMB a year, but it wasn’t easy for some entrepreneurs from small and medium-size companies to contribute this much. Entrepreneurs are not necessarily a group of wealthy people, but rather a group of people with training and management experience. In fact, after 30 years of reform and opening up, China’s private enterprises have become quite powerful, not in terms of wealth but in terms of their management experience and their knowledge about how to utilize financial tools and train employees. Therefore, one cannot simply say entrepreneurs are rich and vice versa. Wang’s remarks were similar to concerns expressed by Xu Yongguang who noted that the term “charity by the wealthy” was likely to give rise to resentment, and was not conducive to encouraging entrepreneurs to participate in charitable work.
Wang also spoke of the advantages for entrepreneurs who wanted to participate in philanthropy. Entrepreneurs can bring critical financial and management resources to assist grassroots NGOs, which generally lack both funding and management experience.
Zhai Yan of Huizeren Advisory Services Centre (惠泽人咨询服务中心) mentioned that most private foundations are not clear on questions such as, who am I ? What do I want to do? What community do I represent? Where are my roots? Many foundations also think that the management skills they gain in the corporate world will work for them in the public welfare world. Actually people with high IQs in running a company can still be a student in public welfare work. So it is very important to interact with grassroots NGOs, and learn from each other, because it seems that kind of experience is lacking in many foundations.
In the last panel, Wang Shi implicitly criticized the way Chinese entrepreneurs engage in philanthropy by praising Warren Buffett for using “intelligent philanthropy” techniques. As the world’s second richest man, he teamed up with the world’s richest man and was able to tap into the energy and resources of Bill and Melinda Gates. As a result, his philanthropic activities do not take too much time from his business activities. By comparison, Chinese entrepreneurs are engaging in philanthropy by involving themselves personally in public welfare activities. For example, some entrepreneurs gain satisfaction from doing charitable work by personally handing out cash. If they keep doing this, they’ll exhaust themselves in no time. Fortunately, Chinese entrepreneurs have not yet made a lot of money. If they were to become as rich as Bill Gates, how would they find the time to hand out all that cash personally ((Editor’s Note: Wang Shi here issues a veiled criticism of entrepreneurs-philanthropists such as Chen Guangbiao who has made the news for his own controversial brand of charity that involves him personally handing out 100 RMB bills to poor farmers and other disadvantaged groups.))?
Unwilling to engage in “intelligent philanthropy”
Lu Dezhi is the chairman of the board of the Huamin Charity Foundation (华民慈善基金会). When it was founded in 2008, Huamin had registered capital of 200 million RMB, the highest registered endowment among private foundations. At the opening ceremony, Lu announced he would increase the fund to 500 million in two years, 2 billion in five years and 10 billion in 10 years. After two years had passed, Huamin’s fund had not increased as promised.
Lu explained that “a 10 billion RMB foundation really is our goal, but this goal is very difficult to realize under the current policy, especially the tax system. According to the original plan, in 2009, we should have increased the fund to 500 million, but later after discussing various aspects of the plan, we found it difficult to implement because, after all the calculations and accounting for the foundation’s various tax exemptions, we still ended up paying an extra three percent tax. Under the current tax policy, it is very hard to make a ‘naked donation’. We found that Feng Lun is particularly smart because he reduced his foundation’s registered fund from 4 million to 2 million, but continued to make a contribution every year. ”
At the salon held on the first night of the Forum, Tang Jun, the Director of Policy Research at the Chinese Academy of Social Sciences (CASS) said that China’s private foundations need to meet a new requirement. National-level foundations need to exceed 20 million RMB in registered funds, while local-level foundations need to exceed 2 million RMB. In this regard, Lu explained that the foundation’s registered funds can be reduced to meet the minimum level for registered funds. After that, further contributions can be made every year depending on how much money is spent. Because donations are made in order to get a tax deduction, foundations do not benefit if they have to pay an enterprise income tax. This is what Wang Shi calls ‘intelligent philanthropy’, but something private foundations are not willing to do ((Editor’s Note: Tang Jun’s reference to the minimum amount of registered funds required for private foundations to register comes from the 2004 Regulations on Foundation Management. Lu here is saying under current tax laws, private foundations have an incentive to contribute money every year to maintain their registered funds at the minimum allowed by law, rather than make a large one-time donation. In the latter case, foundations need to pay a three percent income tax on any gains made from the foundation’s unspent surplus.)).
Given that private foundations have only been around for a few years, and growing rapidly, it is understandable to hear the debates and misunderstandings voiced at the Forum. Their discussions also reflect the Forum’s principle of promoting “communication, cooperation, and development.” Although NGOs and private foundations face the same grand social goal, and differ only in their roles and responsibilities, they still have a long way to go in establishing an equal partnership in the philanthropy chain ((Editor’s Note: On the dialogue between NGOs and private foundations at the Forum, see the article in this issue, “Develop Philanthropy Together Through Debate and Cooperation.”)).
