Corporate foundations are an increasingly popular way for companies to concentrate their corporate responsibility efforts, and can also be a useful vehicle through which to run any social and philanthropic side of a company's business. They are often closely aligned with a company's brand, sharing a name, office space and staff. This close relationship can have considerable benefits for both sides, but can also cause problems. This article aims to highlight some of the pitfalls and how best to avoid them.

The starting point must be: what is a corporate foundation? 

A corporate foundation is essentially a charity that has been founded by a commercial company and will commonly receive most of its income from the company (for example by way of regular donations or money raised by the company's customers or employees). There are many out there, often with very recognisable names closely aligned to their corporate founder's brand - Virgin Unite and the Vodafone Foundation to name but two.

A key point to bear in mind is that, as a charity, a corporate foundation must be entirely independent from its corporate founder. It can only operate in furtherance of its charitable objects and not as a means of furthering its founder's commercial interests. A charity may undertake activities that link with its founder's business focus – for example the British Gas Energy Trust's activities include relieving fuel poverty among low income households in the UK – but they cannot simply act as an advertisement for their founder's commercial operations. Such activity is not charitable and the Charity Commission (regulator of charities in England and Wales) may well come down on corporate foundations heavily if they do not act in a manner that is charitable.

Independence is not just a matter of ensuring a foundation's activities solely further its charitable objects – the charity has to be independent from a governance point of view as well. While the founder may want to appoint trustees to the board, and have some of its own directors or executive staff as trustees, these should be in a minority. The Charity Commission will raise questions about independence during the registration process and, in our experience, have refused to register corporate foundations until a charity's independence in this regard can be clearly demonstrated. Being aware of the Charity Commission's requirements in advance of forming a foundation and ensuring that all documentation is drawn up in such a way to meet the Commission's expectations, will save time and cost.

Sharing a name can bring with it a number of issues to consider, not least intellectual property. Will the foundation use the founder's logo? Then a licence should be in place between the two. There are also brand protection issues to consider from both parties’ point of view – on the one hand the founder would want to make sure that its name is protected from misuse, and on the other hand the foundation would want to ensure that actions taken by the founder would not reflect badly on the foundation's good name.

Some corporate foundations will simply be grant making charities, giving money away to good causes, and this can often be done by a charity committee at board or executive level. However, when foundations become more active and undertake a wider range of activities, they may need staff of their own, or share staff with their founder. Arrangements should be put in place to govern this, as well as the use of any facilities or office space by the foundation. Consideration should also be given as to how this may impact on the job descriptions and employment rights of the staff involved.

Finally, a word of caution

Corporate foundations are clearly a very valuable way in which companies can concentrate their charitable activity. However, their independence can cause tensions, as Lloyds Banking Group found out to its cost when the Lloyds TSB Foundation for Scotland took it to court over the wording of a deed of covenant, under which the Group provided funding to the charity based on its pre-tax profits. The Foundation was expecting £3.54 million but ended up with £38,920. While the court found in the Group's favour, the publicity that ensued for both a parties was undoubtedly not welcome to either party and it is a salutary example of how the relationship between a charity and its founder (and indeed principal funder) can sour, particularly in the difficult economic times during which the dispute arose.