Heart of the family business

Cadbury, Guinness and Wellcome all made their fortune then gave something back. They're just a few examples of families who founded a successful business then used their wealth to do good work for the community. Today, the philanthropic tradition continues strongly, so why are so many charitable works - especially long-lived social welfare projects - funded by family-owned businesses?

Part of the answer lies in their relationship with the communities they serve, and from where their customers and workforce came. Many family business members are motivated to put something back, knowing that their wealth was generated with the cooperation and sometimes assistance of others.

It explains why the targets of a family's philanthropy are so often in the same geographic area as the business. Just as Victorian capitalists spent their riches on improving the towns that their workers had to live in, modern family business philanthropists often support charities working to improve their own local communities - whether providing sports facilities for young people, rehabilitation for ex-prisoners ?or drug users, or educational and heritage projects.

Building a lasting legacy is another influence on their charitable giving. As the older generation values the family's achievements and assumes a sense of stewardship, there's a desire to pass on the tradition and ensure the business continues. This often carries over into the approach to philanthropy: typically the family will support causes through which it can make an enduring difference.

The fact that the members of a family business are usually in it for life, rather than regarding their present position as a temporary career step, reinforces that tendency. Although some large public corporations do good philanthropic work, there are also many where charity (or corporate social responsibility) is something of a box-ticking exercise by the executives.

A study found that 55 per cent of family businesses say the ability to help others is one of their principal motivations, compared with 40 per cent for non-family businesses. So giving is regarded as a vital part of their community engagement, and not as an optional extra done for lip service, or to put on the executives' CVs. And research suggests they are more likely to keep up their giving during an economic downturn than corporates.

Not ideal

However, this does not necessarily make the family business every charity's dream donor. Its directors are usually short of spare time, and are reluctant to spend it analysing in great detail the many approaches they receive from hopeful charities. Rather, their modus operandi tends to be based on the personal, informal touch.

Entrepreneurs usually respect ?drive and success, and are more likely to support a charity with a confident leader who projects determination and the ability to achieve, than a charity ?with a good business case but unimpressive leadership.

Moreover, the ethos - especially for small- to medium-size businesses - usually means their directors take quick decisions based on trust and personal relationships, rather than endlessly consult boardrooms and committees. From the charity's point of view, it may be difficult to get 'in' with the company, but if they can get past that barrier, they are in for the long term.

And once a business has taken up philanthropy, it can find significant benefits for the family. Succession is a key preoccupation of the senior family members, yet they may have difficulty in getting the younger ones to participate in the business. Bringing the upcoming generation into the company's charitable activities can be a step towards this goal, helping to communicate the ethos, and teaching management, decision-making and budgeting skills.

A philanthropy programme can strengthen the bond between the generations by creating common interests and topics of conversation, beyond the pressurised world of the business itself. It can also help the younger members to appreciate the value of money - a problem commonly experienced by wealthier families.

Motivating staff

Corporate philanthropic commitment can also be a useful way to attract and motivate employees, especially younger and perhaps more idealistic types. Many people nowadays wish to work for companies that have wider goals than just the pursuit of profit. They want to work for a 'good' company, not just a successful one. So the family business' socially responsible activities can enthuse employees and contribute to successful recruitment and retention.

In particular, a family charitable trust, and making that existence known, can demonstrate to employees the wider social concerns of the owners and create a spirit of improved trust and cooperation, while helping to integrate non-family employees into the business. A third of family businesses cited keeping or bringing employees together as a main motivation for having a philanthropic programme, research has shown.

Many of these firms see their employees as members of an extended family, and those most committed to philanthropy may offer their non-family employees some say in donation distribution. Employees can also be encouraged to contribute to the corporate philanthropy effort themselves.

One way of doing this is through a payroll giving scheme by which donations are deducted from employees' salaries every month with income tax relief automatically applied. It is a tax-efficient way for employees, non-executive directors and those receiving a company pension to give a regular amount to charity, especially if they are on the higher 40 and 45 per cent rates of income tax, because full tax relief is applied immediately.

A lot of companies that operate payroll giving back it up with a matched-funding programme. It would be wise to set a ceiling to guard against unexpected generosity, though.

Any employer that uses PAYE can set up such a scheme at minimal cost. All modern payroll systems can handle payroll giving, and there are no extra tax forms for an employer to fill in. The admin is handled by one of the dedicated payroll giving agencies, which recoups its fees by taking a small cut from the donations passed on ?to charities.

Recent government proposals indicate that the system is soon to be improved further still, by cutting the time that agencies take between collecting donations and passing them on, and forcing them to keep to an agreed standard of service.

The UK's family business sector includes some three million businesses, representing more than 30 per cent of national output. It has huge resources to support charitable work, and many more such businesses would be willing to get involved if they had the time to find out how. There is a big opportunity here for professional advisers to help them.

Penny Lovell is head of private client services at Close Brothers Asset Management