“Foundations” is a series of informal question-and-answer sessions with employees and others affiliated with The William and Flora Hewlett Foundation to give them an opportunity to explain their work.
Lawrence Mendenhall is general counsel and corporate secretary for the Hewlett Foundation. Before coming here last fall, Mendenhall was deputy director of legal affairs at The Pew Charitable Trusts, where he had worked since 1999. Earlier in his career, he practiced law in New York City with Cleary Gottlieb Steen & Hamilton, where he advised family foundations and public charities, as well as providing tax-planning advice to high-net worth individuals and privately held businesses.
A native of Colorado, Mendenhall earned his bachelor’s degree summa cum laude in political science from the University of Colorado at Boulder, and graduated cum laude from New York University School of Law, where he also served as executive editor of the New York University Law Review. He recently completed an MBA program at The Wharton School at the University of Pennsylvania. He plans to use the new degree to strengthen his work as a senior foundation employee.
What exactly is the job of a foundation’s general counsel?
Half the job is almost like running a small business, where new issues emerge daily and you need to be ready to provide quick solutions. It’s a very dynamic legal and regulatory environment, so you need to stay on top of what the IRS and state and federal lawmakers are doing. You also need to be comfortable working with a broad range of issues specific to different kinds of grants and with outside legal experts in different areas. And then there is the usual range of internal housekeeping issues, like interpreting evolving workplace rules.
The other half is building systems to simplify program officers’ grantmaking work. One way to make things easier is to create checklists and forms to help officers solicit the information they need to be sure the foundation and our grantees are in compliance with IRS regulations.
How does the Foundation help grantees understand what they legally can and can’t do?
We’re careful not to give grantees legal advice. In part that’s because we want to be sure they have their own legal resources. And we need to be mindful of any possible conflicts of interest. If we spell out things a grantee needs to do based on state and federal legal requirements, we want a person on that organization’s side of the table to assess that information and develop an independent perspective. We know our view and can share that, but legal opinions differ. And, of course, a grantee needs legal expertise to deal with other donors.
So our biggest advice to grant recipients is to try to build their capacity to understand the legal environment in which they operate and to have documents they don’t understand reviewed by legal counsel or someone in their organization who is responsible for legal review. We’re happy to help them find their way to counsel or other outside legal resources, and we can build funds for legal counsel into our grants so organizations have access to legal resources as they work on grant-funded activities.
How are foundations and their legal requirements different from those of operating public charities?
One recent focus has been the requirement that U.S. foundations must pay out 5 percent of their endowments annually, while charities have no such requirement. Charities typically spend much more than that, although there are some exceptions. Universities are charities, but some policymakers have expressed concerns that they may not be spending enough of their endowments.
One major difference between foundations and charities that drives a lot of regulation is that foundations typically are funded by one person or family. So the foundation rules are designed to ensure that their dollars are paid out to charities in a timely way and that there is no self-dealing between the foundation and the donor. Public charities typically rely on a large pool of donors, so from the government’s perspective, the rules don’t need to be as stringent. If a church or a hospital or a school somehow goes awry, many constituents will step forward to get that organization back on track. It needs to attract financial support in a way that a foundation doesn’t, and this need to raise funds from multiple sources makes public charities more accountable.
Are there any areas in which a lot of grantees tend to be uncertain about what they can and can’t do?
I think grantees have a hard time with lobbying rules. Some of the confusion stems from the fact that foundations can’t designate funds for lobbying, but charities can. Grantees whose work potentially includes legislative advocacy may not understand that a foundation can’t designate money for that purpose. We can give an organization general operating support, and it can use its discretion to use some of those funds for lobbying, but that must be its decision. If a grantee asks us to designate funding for lobbying, we have to say no.
Do large grantee organizations typically have different legal issues than do small ones in relationship to the Foundation?
At the Hewlett Foundation, this comes up frequently in the international context. A very large foreign university may have experts to deal with American foundations and the rules that apply to grants from them, but smaller grantees may not – and may not understand what they need to do to comply with IRS regulations. For example, take an organization trying to build schools in sub-Saharan Africa, working with the Foundation as its first international funder. We try to supply enough support so it can understand and meet the requirements to receive a grant from the Foundation in light of the regulations.
Within the United States, the differences aren’t as striking, partly because American charities don’t have as many reporting requirements as foreign grantees do. Overall, smaller grantees face similar legal issues, but they often lack the resources to fully address them.
Are any emerging areas of law currently affecting foundations or their grantees?
Congress is starting to discuss whether the differences in regulations for private foundations and public charities are justified. Should public charities start to look more like private foundations and perhaps have a mandatory payout? Or should private foundations start to look more like public charities? The potential implications are either tighter regulation of charities or looser regulation of foundations. Given what’s going on in Washington, it’s likely to be a long debate.
A change that’s already happening is a strong trend toward greater transparency – the idea that the public should be able to look at a charity’s tax return and other required documents and fully understand its activities and expenditures. The IRS has redesigned the tax forms for charities. There is more disclosure than ever, and this is a good thing for donors and others interested in the work of charities.
Has the economic downturn had any significant legal impact on us or our grantees?
From the grantee side, there’s a lot of talk about charitable organizations merging or forming strategic alliances to survive the current economic troubles. There are questions about whether foundations or the government should encourage that approach. I don’t know how much traction these ideas are gaining, but it’s being discussed out there.
One of the hardest questions these organizations face is managing for current needs versus future needs, and the discussion about this, too, is shaped to some extent by the legislative climate. There’s a tension between foundations, which often are intended to operate in perpetuity, and charities, which are asking funders to step up now because donations are down. Some foundations feel like grantees are basically saying, “We’d like you to dip into your seed corn to help us.” But that affects the funding of charities in the future. Hewlett is doing its best to navigate a prudent course between the alternatives.
In times like these, there are always issues about charitable deductions, which is another area to watch. One of the Obama administration’s proposals is to reduce the deductibility of charitable donations for high-income people, those making $250,000 and above. We’ll see if it goes anywhere and what the impact is on giving.
A debate about the federal estate tax may also reignite because it is slated to go away in 2010 and then come back in full force the following year. Whatever happens with this will have implications for philanthropy and charitable giving, changing incentives for donors. Without an estate tax, in my view there’s a good chance that fewer large foundations would be created.
Is there anything you’d like to say directly to grantees?
I’d say even if you don’t have in-house counsel, have someone in your organization tasked with keeping tabs on legal developments and reviewing your activities for legal concerns. Someone needs to own that function. That person doesn’t need to be an attorney; maybe she or he manages your relationship with outside counsel. That person is going to be invaluable.
My other message is for grantees doing advocacy work and working with government officials. In addition to the federal lobbying rules, there are Congressional ethics rules and state lobbying and ethics rules, many of them new, and we find that grantees aren’t necessarily aware of them. They’re important to know as part of being a good grantee and in order to succeed with their programs. Unfortunately we can’t always be the ones to flag these complex rules for grantees. Because they’re working on the ground every day, we need grantees to understand and sometimes flag new rules for us.
Are there Web sites or sources of support that nonprofits can use to educate themselves about these issues?
Sure: check the Council on Foundations Web site. It’s also good to get on Independent Sector’s email list. And the Alliance for Justice has a lot of information about advocacy online. Those are three of my favorites.
