With our book “Enterprise Foundation Law in Comparative Perspective”, published on March 7th 2023 by Intersentia, (also available open access) we wish to provide comparative insights into the economic importance (Steen Thomsen) and law of enterprise foundations in Austria (Susanne Kalss), Denmark (Rasmus Feldthusen), Germany (Anne Sanders), Italy (Eugenio Barcellona), Sweden (Katharina Olsson), Switzerland (Dominique Jakob), and USA (Ofer Eldar).
- Why are enterprise foundations important?
Enterprise Foundations – also known as industrial foundations – are foundations that own companies. This ownership structure is not widely known, but some well-known companies around the world turn out to be foundation-owned. For example, A. P. Møller-Mærsk is the world’s largest container shipping company. Anheuser Busch Inbev is the world’s largest brewer. Bertelsmann is one of the largest publishing companies in the world. Robert Bosch is one of the largest German manufacturing companies. Caixa in the largest retail bank in Spain. Investor AB is the holding company of the Swedish Wallenberg companies, the leading Swedish business Group. Tata Sons is the main holding company of the Tata Group, one of the largest and most admired Indian business groups. Inter IKEA is the franchisor of IKEA, while most IKEA stores are owned by the Ingka foundation. Brand names like Rolex, Carlsberg, Carl Zeiss or the Guardian need no further introduction.
These successful companies are not the only reason why enterprise foundations deserve attention. Foundations are commonly understood as entities with legal personality without members set up to pursue a purpose set by the founder with property donated for that purpose. Foundation ownership is an alternative mode of capitalism, not based on for profit but non-profit ownership., if “non-profit” is defined here in the sense given by Henry Hansmann to mean that foundations do not have owners or other residual claimants. This understanding of non-profit does not mean that foundations cannot make a profit. Foundations are governed by a purpose rather than private profit incentives, and in most cases the purpose directly or indirectly obligates the foundation to be a responsible long-term owner. This resonates with recent calls for reform of companies with a corporate purpose by authors like Alex Edmans, Rebecca Henderson and Colin Mayer, and initiatives like the Business Roundtable, 2019 and British Academy 2018 as well as calls for more long-term governance.
Research on enterprise foundations shows even more interesting features: foundation-owned companies cannot be taken over by hostile raiders. They tend to treat their employees better than normal companies with shareholders. They reduce economic inequality by transferring concentrated private wealth to foundations which in most cases have a charitable purpose. They contribute funding for R&D, education, social projects and culture. At the same time, the evidence is that foundation-owned firms perform no worse financially than other private firms.
Nevertheless, foundation ownership is a rarity accounting for only about 0.5% of listed company assets globally. In an international overview Schroeder found in 2021 that foundation ownership is particularly common in the Nordic countries (Denmark, Sweden, Norway and Finland), in the German speaking region of Germany, Austria and Switzerland and (somewhat surprisingly) in India. As a share of market capitalization, he found that foundation owned companies account for about 40% in Denmark, 30% in Austria, 20% in Sweden, 10% in Norway, 5% in Germany and Switzerland, and 5% in India.
The most obvious explanation for such national variations appears to be differences in regulation, for example differences in foundation law and taxation. However, such differences are not widely known. With our book, we wish to make a first step to contribute to a better understanding of the specificities of the law of enterprise foundation in different countries.
- The law of (enterprise) foundations
The European countries discussed in our book show the common legal understanding of the foundation already mentioned above: an entity with legal personality but without members or shareholders, which is independent from its founder and requires an irrevocable transfer of property to pursue a purpose established by the founder under some form of public supervision. Setting up a foundation requires some form of registration, even if special approval is not necessary anymore.
In both Germany and the USA, alternative legal entities outside classic foundation law such as limited companies may be used to construct foundation-like entities. For our book, we therefore use a broad, functional approach that looks beyond traditional foundation law.
- Admissibility
All countries discussed in this book allow enterprise foundations, even though the legal framework is nowhere as clear as in Denmark with its specialised legal regime for enterprise foundations. Both running the business directly by a foundation as well as serving as a holding with a controlling interest are possible, even though there are very few examples of the former. In Austria, the private foundation may not engage in entrepreneurial activities itself but may hold shares in companies. However, only the most important decisions concerning the business may be taken at the foundation level. In Italy, setting up enterprise foundations was not possible for a long time due to established hostility towards foundations in general and an understanding that owning and leading a business was impossible for a charity-oriented entity like a foundation. However, by now, after critical scholarly work since the 1960s, it is possible to form them, even if the legal environment can still not be described as welcoming. In the USA, where federal tax law is the most important legal source, it is highly unattractive taxwise for a foundation to own and control a business. There are, however developments such as the Newman’s Own Exception in the Philanthropic Enterprise Act 2017, which makes enterprise foundations possible in the US in a limited way and the Patagonia Case, where a foundation like structure was created to make “earth the only shareholder” of the business. .
- Purpose
In the past, legal systems including Italy, Austria and Germany demanded that foundations pursue a charitable goal. Today, however, only the Austrian federal foundation demands such a goal. Most countries now accept most purposes that are not harmful to the public. Pursuing charitable purposes may, however, ensure tax benefits, as in US-tax law.
In foundation law, there are limitations to selfish goals. A foundation may not be set up to support the founder. Supporting a family may, however, be a foundation’s purpose in most countries with some limitations. In this respect, there is in many countries a noticeable tension with rules against perpetuities and the longstanding rejection of the fideicommissum, which are – for example – forbidden in the Danish constitution. Fideicommissa were used to preserve noble property over generations and heavily critizised to preserve aristocratic privilege and remove property from the market.
In Germany, running an enterprise may not be stated as a foundation’s only purpose, so in practice, there is often a combination of purposes.
- Flexibility
Setting up a foundation requires the irrevocable donation of assets to the foundation. Nevertheless, retaining some flexibility can be of crucial importance to adjust a foundation to a changing environment. However, only the founder of an Austrian private foundation may preserve the right to revoke the foundation completely for the “price” of a tax burden. In Austria and Switzerland, the founder may change the foundation’s charter after the foundation has been set up. In most countries, the board of a foundation may adjust the charter in accordance with the foundation’ s purpose.
- Governance
Foundation governance is discussed among foundation lawyers across Europe. While shareholders or members of a corporation may go after their directors to not squander “their” money, the memberless foundations are in need of special protection. Traditionally, this protection is provided by supervisory authorities. These authorities are usually limited to legal supervision and do not question business decisions. In Austria and Germany, for private foundations (e.g. for the support of a family), such supervision has been reduced. In many countries, such as Germany, Switzerland, Sweden and Italy, the law is silent about foundation governance. In Austria and Denmark, there are more special governance rules. However, there is agreement across Europe that public supervision is not enough but that each foundation should have a governance structure designed specifically for its needs.
- Transparency
Another important topic of European foundation law is transparency and thus the question of the kind of information enterprise foundations should be obligated to disclose. In public corporations, this is an important task for shareholders. In foundations, which do not have shareholders or members, other actors must ensure that foundations are held accountable. In Denmark, there are special disclosure requirements; in other countries, there is still room for improvement. In Germany, a federal foundation register will be introduced in 2026.
- Taxes
The tax system may influence the formation of enterprise foundations in various ways. It can provide tax deductions which allow founders to make deductions in their taxable income. It can provide tax penalties by taxing foundations with business holdings as in the USA or it can require founders to pay inheritance taxes even though they donated their wealth to a foundation as in Denmark until recently. In most cases, however, foundation law has chosen a middle way in which founders neither get tax deduction nor are required to pay inheritance or capital gains taxes when establishing an enterprise foundation. There may also be tax benefits for charitable foundations.
- The way ahead
Policymakers wishing to encourage the formation of enterprise foundations in their country can use the material in this book as a tentative guide. They should first and foremost ensure the legality and legitimacy of the enterprise foundation. Secondly, policy makers should aim for a neutral tax treatment, where founders are neither punished financially nor encouraged to establish enterprise foundations for mere tax reasons but only when they believe that this has the benefits for their business. Thirdly, policy makers should put in place regulation to ensure good governance of enterprise foundations to ensure their efficiency and legitimacy, including their support by an efficient supervisory body.
This book is only a first step in our understanding of enterprise foundation law. We are very conscious that future research will be needed and that we have covered only a limited number of legal systems leaving out important foundation countries like the Netherlands, Norway, Liechtenstein, France and Belgium. Future work would do well to take their experience into consideration. Nevertheless, we are happy to present our book to a wider audience. After all, long-term oriented, purpose-driven businesses are discussed as promising contributors to the economy of the future. Enterprise foundations are uniquely qualified to play a major role in this endeavour.
Posted by Anne Sanders (University of Bielefeld, Germany) & Steen Thomsen (CBS, Denmark)
British Association of Comparative Law 