German Fund Is Making Its Mark

Bertelsmann shakes up thinking on both sides of the Atlantic

The German media conglomerate Bertelsmann A.G. shook up the business world this spring when it took over Random House and became the largest publisher of English-language books anywhere.

The $14-billion company, owned primarily by a charitable foundation based in this small town about 100 miles northeast of Dusseldorf, is also shaking up the way philanthropy works here in Germany.

And through its efforts to encourage an exchange of ideas across the Atlantic, Bertelsmann could help bring about a rethinking of the interplay between philanthropy and business, both in Europe and in the United States — a rethinking that has the potential to trigger an explosion in foundation assets well into the 21st century.

Reinhard Mohn, the 77-year-old World War II veteran who built Bertelsmann into a far-flung corporate empire of 300 companies operating in 50 countries, is a fervent believer that successful business entrepreneurs should plow their assets into foundations and use them to bring about social changes that governments have failed to achieve. His views are beginning to pick up momentum as Europeans have become increasingly disenchanted with the abilities of governments to meet a wide range of societal needs.

In America, where Mr. Mohn picked up many of the management practices that he says were keys to building an effective business, Bertelsmann would be prohibited from operating as it does. Nearly 30 years ago, the United States banned foundations from controlling corporations after federal investigations found evidence that many wealthy business owners were using their philanthropies simply to perpetuate control of their business interests and were providing relatively few charitable benefits to society.

However strong the justification for such rules may have seemed to American lawmakers, European parliaments have not echoed their concerns — at least not yet. Many European countries have a long tradition of encouraging foundations to control big companies, and the practice only seems to be growing more widespread.

One of the most recent examples: The founders of the German software giant SAP, which earned $3.5-billion in revenue last year, created foundations that hold a controlling interest in their company. But many others also exist throughout Europe. Among them:

* In Denmark, the Carlsberg Foundation owns a majority of shares in the Carlsberg Group, a conglomerate that includes breweries, porcelain manufacturers, and glassworks, which last year had $2.9-billion in revenues.

* In the Netherlands, the Bernard Van Leer Foundation, with more than $600-million in assets, owns a majority of shares in Royal Packaging Industries Van Leer, which operates in 40 countries.

* In England, the Wellcome Trust was for 50 years the sole owner of the pharmaceutical company that is now a part of the merged Glaxo-Wellcome. After selling off most of its stock in the drug company, between 1986 and 1995, Wellcome is today widely regarded to be the world’s largest foundation, with assets worth over $16-billion last year.

The potential for far more of the assets of Europe’s corporate giants to be transferred to foundations seems great, especially as the World War II generation passes on its fortunes.

With so much money pouring into foundation coffers, some observers say European policy makers would be foolish not to place restrictions on their operations to guarantee that the money is used to carry out substantial charitable efforts. Based on the American experience, they say, it seems inevitable that problems will soon occur in Europe because the interests of foundation managers are so closely intertwined with those of the businesses they run.

At the same time, some people are beginning to wonder whether America went too far in preventing foundations from holding a majority interest in any company, and whether the United States should relax its restrictions. That view is being privately advocated by some of America’s wealthiest business leaders, who say such a change would lead them to put more of the assets from their companies into charitable entities. But it has not been considered seriously in the U.S. Congress.

To encourage a global exchange of thinking on such matters, the Bertelsmann Foundation sponsored a symposium here this spring. Attended by prominent leaders and scholars from both sides of the Atlantic, the gathering was the latest sign of how the foundation is positioning itself to become a major force in both German and international philanthropy circles.

“If you go back 10 years, most German foundations were heavily focused on supporting academic research and maybe cultural affairs, and were very conservative by American standards,” says Craig Kennedy, president of the German Marshall Fund of the United States, in Washington. “But starting with the emergence of Bertelsmann, and the personality of Mr. Mohn, German foundations have become much more prominent players in public policy.”

Although its expenditures are not large by American standards, the fund, which was created by Mr. Mohn in 1977, ranks in the top tier of German philanthropies. In 1997, it spent $28.2-million, and this year it expects to spend close to $42-million.

The figures are low because German law requires only that foundations devote most of their income, not any particular portion of their assets, to charitable activities. And since the foundation owns the company, it can keep its income down simply by limiting the dividends the company pays its stockholders — and by using the rest of the profits to expand the business.

By comparison, if the Bertelsmann Foundation were required to distribute 5 per cent of its investment assets, as American foundations must, it would probably have to spend in excess of $500-million per year. Currently, its spending represents roughly 0.4 per cent of its assets. That approach, however, is common among German foundations that own companies.

What is not typical is the way the Bertelsmann fund is set up. While most other German funds are grant-making organizations, Bertelsmann operates its own programs.

Many of the Bertelsmann Foundation’s programs deal with such central issues as economic and social policy, and many also seek to change practices that are deeply rooted in German institutions. Yet the fund has somehow managed to gain the support of a wide range of political and economic players.

At a Bertelsmann symposium on foundations held here in 1996, Roman Herzog, Germany’s President, endorsed the notion of operating foundations in general and Bertelsmann’s approach in particular.

Said Mr. Herzog: “There has never been a better chance for foundations to take up the enormous challenge presented to them to become concept designers for problem-solving in our society — to become the driving force behind change.”

The acceptance of Bertelsmann’s programs by people with a wide range of views is a sign of the growing legitimacy of charitable foundations in German society. That coincides with two important trends in Europe’s largest economy and most-populous country: a growing consensus that the state needs to be reined in as the dominant institution in German society, and the rapid increase in the number and size of German foundations.

Indeed, recognition is growing that the German welfare state needs a fundamental overhaul. As a result of severe fiscal pressures resulting, in part, from the cost of absorbing East Germany after the collapse of the Soviet Union, the central government is unable to continue to provide the social benefits to which the country has become accustomed. As a result, political leaders of all stripes are seeking new ways to meet social needs.

Even the left-leaning Green Party, which historically has favored a strong federal government to deliver most public goods, is proposing new laws to encourage people to create foundations. The Green Party’s proposal on philanthropy suggests a new consensus in Germany that the state cannot do everything.

“It is not enough to defend welfare-state programs, but also to encourage all forms of civil action toward social responsibility,” says Ralf Fucks, executive director of the Green-affiliated Heinrich Boll Foundation. “The question is not state or private, but increasing public private partnership.”

But if charitable foundations are to become more prominent players in German society, they are certain to come under much closer scrutiny.

In papers commissioned for the spring symposium here, Joel Fleishman, a prominent American tax scholar, urged German lawmakers to consider new rules to require foundations that own companies to report their business interests accurately, to pay out a reasonable share of their assets annually to charitable causes, and to appoint governing boards that are truly independent of the companies they control.

Mr. Fleishman, a law professor at Duke University and a philanthropic adviser to the secretive billionaire Charles F. Feeney, wrote that such changes would prevent business leaders in Germany from abusing foundations and using them to pursue purely personal interests.

His other suggestion — that Congress change U.S. law to allow foundations to own companies — intrigues some philanthropy leaders but may receive a cool reception among others.

“I think it is worthwhile to examine it again to see if it is a real barrier to creating foundations and to see what the real impact would be if the law were changed,” says Elizabeth T. Boris, director of the Center on Nonprofits and Philanthropy at the Urban Institute.

But for now there is no groundswell among foundation leaders to change the law. Reopening a debate on foundation law might lead to adverse changes, says Dorothy Ridings, president of the Council on Foundations.

“We would have to give hard thought to anything that would undercut the basic regulatory structure of the 1969 tax act,” says Ms. Ridings. “It seems to still be working well.”