Early Days: The Heisley Family Foundation

Note: This case study was written and released in 2001 as part of NCFP’s Living the Legacy guide; current circumstances at the foundation may be different than described here.

With these goals in mind, Heisley, in December 1996, incorporated the Heisley Family Foundation, which he hoped would be “a vehicle which I could use to help bring my family together and would somewhat offset some of the pressures that you get when you inherit tremendous wealth.” But Heisley took an unusual tack in incorporating the new foundation. He deliberately chose not to make key decisions about its purpose, funding and operation. Instead, he left these to his wife and children. Neither the incorporation papers nor the bylaws specified a purpose for the foundation. Nor, his billions notwithstanding, did Heisley endow it initially with a large gift. Its assets, in fact, were less than a million dollars. To the extent that he was legally specific about anything, Heisley was only specific about who the foundation’s decision-makers—its trustees/directors—should be: his wife and five children. Although the bylaws did not prohibit the board of trustees from naming other members or even replacing members upon the expiration of their one-year terms, it would, at the outset, fall to his wife and children—all of whom were adults and four of whom were married—to decide the purpose of the foundation and establish if they chose, additional governance policies. They would have an unspecified amount of time to set the foundation’s course before Heisley further endowed it, as he had made clear he intended to do.

Beginning with the first, informal meeting of the foundation board of directors in April, 1998, the siblings/directors would struggle with these tasks assigned them, in effect, by Mike Heisley. Led by his youngest daughter, Judy Heisley—an experienced non-profit manager whom her father designated to take the then-unpaid position of foundation director (chief executive)—the board would consider such questions as the mission of foundation, whether its management should be limited to family members, whether spouses could participate, and whether individuals could use the foundation as a vehicle for their own personal philanthropy. Although he would ultimately agree to provide some guidance as to the purposes of the foundation, Heisley himself, although a founding member of the board of directors, was so determined to give responsibility to others, that he would go so far as to resign soon after the incorporation of the foundation, legally leaving key decisions to his wife and heirs.

“He created the (business) empire,” observes his daughter Emily. “But he wants us to create the foundation.”

Rejecting Other Options

The establishment of the Heisley Family Foundation was not Michael Heisley’s first foray into philanthropy. Previously, however, his philanthropy had been focused on established institutions: church and university. “I have,” says Heisley, “been heavily involved with Georgetown University.” He had served both as a member of the school’s board of regents and as chairman of a major fundraising campaign for its business school, as well as having endowed the Heisley Family Chair for Manufacturing at the business school. He had served, as well, on the board of the non-profit Cabrini Hospital Group, a group of Catholic hospitals managed, in part, by nuns from the Order of the Mission of the Sacred Heart. And he had been generous in supporting a number of Catholic churches.

But the idea of a family foundation appealed deeply to him. Says his daughter Judy: “My dad cares deeply about his children and the generations of children to come that will be related to him. This is a man who, in dungarees at age 8, was working several paper routes because he was determined to be rich some day. And he did it. But he did it so his children and grandchildren could have an easier life, and so they could sit on the boards of museums or schools and do things like raise money so less fortunate kids could visit those museums. He wanted to give his children and grandchildren a way to be responsible philanthropically and civically, to make the Heisley name an important one in history.”

Nonetheless, the possibility that Heisley might be a highly effective philanthropist without setting up his own foundation, and that a family foundation might not be easy to get off the ground, was not lost on his daughter Judy when she began, at her father’s request, to take the reins of the new foundation.

“I told my Dad that there were a number of family foundations with which I was familiar that had had a number of problems,” recalls Judy. Judy Heisley had had extensive experience of her own in the non-profit world, both before and during the time (in 1993) since she’d joined Heico as national marketing manager for one of its acquired firms, Nutri/System. (She had previously served as director of public affairs and marketing for Washington’s Corcoran Gallery of Art and was also involved in the Aspen (Colorado) Art Museum and the National Outdoor Leadership School in Lander, Wyoming.) Through her own experience she had become familiar with family foundations in which there were frequent disputes as to where grants should be directed, as well as personality clashes. “I asked my Dad whether he was really sure he wanted to go through with it,” recalls Judy Heisley. To test his resolve, Judy briefly described other potential philanthropic approaches her father might consider. (These included the Chicago Community Trust which relied on a board of directors representing a broad range of community, business and political leaders to make decisions as to where grants would be directed.) Any discussion of other approaches was brief, at best, however. Mike Heisley was adamant in wanting to stick with his plan for a family foundation. Such a foundation, he felt, did not rule out continued personal giving on this part; he expected to remain active in Georgetown University affairs, for instance. Further, he believed that, were he to direct his giving exclusively toward existing institutions, he would set an example that would lead his children to make individual gifts, rather than pooling resources. Not only might pooled resources have a greater impact but individual giving would not help him realize the goal of preserving, through a common task, what he remembered fondly as a “tight-knit” family.

His preference for pooling reflected, in part, the fact that, in a crucial way, “the horse was already out of the barn” as regards the joint nature of Heisley family wealth. In part for tax-related reasons, Heisley had already structured the family holding company—which controlled the privately-owned firms acquired and managed by Heisley—so as to include his children as limited partners, with himself as general partner. Heisley knew that funds for the foundation would in all likelihood have to come from profits of the family businesses. The structure of the family business, too, strengthened Heisley’s resolve that his wife and children should make key decision about the foundation, because the course of the business and foundation were likely intertwined.

Determining the Donor’s Vision

The fact that her father was adamant about establishing a family foundation did not, however, end his daughter Judy’s interaction with him on the subject. It was one thing to start a foundation, another not to specify, formally, its purpose. Judy Heisley began to review literature on family foundations and quickly became concerned that the Heisley Family Foundation Articles of Incorporation did not include a stated mission. To try to set a course for the family foundation, she would work on two parallel tracks—trying both to learn more from her father about his wishes and trying to pin down her siblings on their own preferences. It would be a slow process.

After the first, informal meeting of the foundation board in April 1998—little more, really, than a brief discussion called to order at the end of a quarterly meeting of her siblings in their role as directors of the family business—Judy moved gradually in both directions. Armed with questions from her siblings, her first effort to formalize the mission of the foundation involved her father. Based in part on conversations with his attorneys (and with a consultant who had helped advise Michael Heisley on the establishment of the foundation in the first place), and in part on the results of a questionnaire she sent to other family foundations in the Chicago area, Judy became convinced that a foundation not only needed a mission but that the most obvious way to determine one was through a statement of “donor intent.” It was just such a statement, of course, which her father had not initially provided. But, based on conversations with Judy and others, Mike Heisley became convinced that, absent at least some guidance, there was the potential for a family foundation to “rip a family apart, just the way a family business can.” He and wife Agnes agreed to a spring 1998 interview, to be videotaped, in which he would lay out his vision for the foundation. Highlights, selected by Judy Heisley, were shared with the foundation board in December 1998.

Michael Heisley had strong feelings about the type of giving in which the foundation should engage. It was his view that the Heisley family wealth be directed, broadly, toward “philanthropy, not charity.” Charity, he felt, was defined as helping individuals one-by-one—and was more properly a role for government, because of the likelihood that individual hardship would overwhelm private donors. Philanthropy, in contrast, offered the prospect of solving problems and thus providing long-term improvement in the lives of thousands or millions. Thus, says Heisley, he would, for example, rather support medical research than make a major commitment to a hospital, notwithstanding his service on the board of the Cabrini Hospitals.

Apart from this general direction for the foundation’s prospective grants, Heisley also had strong feelings about the purposes to which the foundation’s assets should be directed. There were some things he felt should be ruled out—such as grants to religious institutions other than the Catholic Church. But, in the main, his vision was a positive one, focused on providing education for future leaders. “My father feels strongly that education was the key for him,” explains Judy Heisley. Her father envisioned something akin to the Rhodes or Fulbright Scholarships—a new brand name, high-profile source of support for those showing potential as leaders—“those who can make the greatest contribution to society,” as he put it—no matter their background.

Although the highlights of the so-called “donor intent” interview were featured at the December 1998 meeting of the board, no vote as to mission of the foundation was yet taken. Instead, Judy Heisley began operating on a parallel track, distributing a survey to her brother and sisters as to their own philanthropic interests and preferences. The surveys revealed that the siblings generally shared their father’s interest in education—and that one, in fact, had already begun making donations to those institutions where they attended college and graduate school. But the siblings also had a range of more idiosyncratic, personal interests, including horticulture, equestrian training, the arts and the outdoors.

By the June 1999 meeting of the board, a wide range of information, then, about the views of both Michael Heisley and his children was on the record. Still—more than a year after the first informal meeting of the board, and more than two years after the legal incorporation of the foundation, no vote on mission was taken. “It seemed that the sense of motivation was slipping away,” recalls Judy Heisley. Observes her sister Emily: “My father is usually a swift decision-maker. He has no problem expressing his feelings and opinions. Now, all of a sudden, he’s saying by the way, I want you guys to go out and do this all by yourselves. That was one of the problems. A lot of people were nervous about making a decision and then just having it all ripped out from underneath them and having something else imposed on top of it. ‘Why should we bother?’ was kind of the attitude. But that wasn’t what he wanted. He wanted to give us something that we would be able to work together on that would show us that we do have something very much in common, despite our different careers and our own families and so forth. That we do share some core values that are very similar.” Mike Heisley, having freely given his advice, continued to avoid playing any formal role in the foundation—staying off the board; not proposing any specific votes.

Finally, in a pivotal September 1999 meeting attended by three of the siblings, the board decided to take a “proactive” stance regarding the foundation’s mission. “We realized that if this was going to get done, we would have to do it,” recalls Emily. The group gave Judy the task of simply drafting a mission statement—with the goal of its being voted on by the full board at its December 1999 meeting. At that meeting, there was lengthy discussion, later recounted by Judy Heisley in her master’s thesis toward her degree in arts administration from the Art Institute of Chicago: “One sibling suggested that the foundation focus on ‘developing’ people. The board agreed that ‘potential’ would be a key idea that could describe the recipients’ characteristics. There was some feeling that developing those with potential might be the foundation’s opportunity to make a more distinct and unique impact. Others felt that reaching those who had already demonstrated leadership would achieve the foundation’s goals more effectively.”

Ultimately, the board voted the following mission statement: “The Heisley Family Foundation is a private foundation established to provide unique educational opportunities for individuals or organizations who demonstrate leadership (potential), academic excellence, community service and strong moral character.”

Two years after its legal incorporation, the foundation had a mission statement—though it was included neither in the organization’s Articles of Incorporation nor its bylaws. Other than Mike Heisley’s donations to Georgetown—in effect, “passed through” the foundation—it had made no grants. Observes Emily Heisley Stoeckel: “Judy was able to cull from all the information she was given the fact that our values are so similar and that our interests are similar. The question is whether or not we can develop something that is uniquely our own, and that we really want to support.”

In addition to such unanswered questions, the foundation’s mission was not the only open question before the board.

Governance Questions

During the period in which it was seeking to define itself, the foundation would consider issues ranging from “next generation” questions—at what point should Mike Heisley’s grandchildren become involved—to the question of whether so-called outside directors (non-family members) should be included and what sorts of members might they be?

Mike Heisley himself was the first to address such questions, both in the same video interview arranged by Judy Heisley to establish “donor intent” and, later, in remarks to the June 1999 meeting of the foundation board. Heisley envisioned such matters as the foundation mission and its operating procedures would ultimately be enshrined in something he called the Constitution—because he admired the longevity and flexibility of the United States Constitution. He made clear his preference that his own blood relatives serve as directors—but did not rule out the possibility that others would be invited to join, so long as they were approved by the board. “It’s often harder,” he observed to attract good, competent, interested trustees than it is to regulate the number.” The Constitution, he imagined, would be amendable but not easily so. Change in basic principles might, he suggested, require a 5/6 vote of the board plus the majority of a foundation advisory council which might include representatives of the law firm Heisley retained, as well as the Arthur Andersen accounting firm and representatives of Georgetown University. Lesser changes, he suggested, might require only a majority vote. Heisley also gave thought to “next generation” issues, suggesting that the foundation have an “auxiliary” board which children who were his direct descendants might join at age 15, in order to be trained—perhaps through a small, discretionary pool of grant money of their own—until joining the adult board at age 21 or perhaps 25.

The wide range of discussion of ideas concerning both board structure and succession issues culminated with a series of votes at the June 2000 meeting of the board. The votes, while not instituting radical change, would have to be called significant.

The potential for more non-family directors was increased: when the existing bylaw regulating the composition of the board was changed to increase the number of potential board members from seven to 9 (the minimum of five was retained). Nonetheless, the notion of family control was enshrined when a new bylaw was added affirming that “a majority of Directors shall be family members, as defined by the board. Until the 2010 Annual Meeting, family members are defined to be (Heisley’s wife and five children).” Thus, the door was left open for Mike Heisley to join the board, at the discretion of the other members. By virtue of the same vote, spouses were implicitly kept off and none of Mike Heisley’s grandchildren—the oldest of whom was 15—would be able to join the board until they were adults. Implicitly, however, it was clear that this was no short-term foundation which would quickly spend down its assets and “sunset.”

The potential for outside directors, moreover, was formalized by virtue of the board’s formally approving set criteria for independent directors. In keeping with the foundation’s mission statement, the criteria emphasized a background in education—including “head of a private Catholic school in Chicago; head of a Catholic High School; experts in the field of education; a Dean of a university’s School of Education”—but also included “someone that manages a non-profit organization unconnected with our mission” and, anticipating a need perhaps for someone with specialized mediation skills, “someone that serves on a foundation with an all-sibling board.”

The board appeared to be adjusting to the fact that it was truly in charge of the foundation—and had decisions to make.

A Trial Period

The quickened pace of management decisions at the foundation did not, however, alter the fact that, apart from Mike Heisley’s grants to Georgetown—a formality, really, in order to fulfill the foundation’s legal requirements—it had yet to disburse any funds. In effect, says Judy Heisley, her father had created a sort of trial period, a time in which the foundation could make key policy decisions without the pressure of awarding a multitude of grants. Observes Judy Heisley: “We’ve had a pilot phase. I think my dad deliberately kept it small to give us a chance to develop it, to see how it goes, to see how involved we get and to see how much we like it.” Still, neither she nor her sister Emily had any doubts about their father’s long-term intentions. “My father,” says Emily Heisely Stoeckel, “has made it very clear that he expects the foundation to grow to at least $100 million in ten years.”

Personal Giving

With major endowment still in the offing, and the foundation’s mission only recently defined, some of the directors, in an effort they viewed as intended to give vitality to the organization, considered the possibility of making personal “pass-through” donations via the foundation. In part, they were inspired by the model of Mike Heisley, who had used the foundation as a vehicle for gifts to Georgetown. The foundation offered advantages, it was thought, as regarded personal giving. If the foundation, rather than individuals, appeared to be the main source of Heisley family donations, individual family members might be less likely to come under pressure from those seeking their support. Moreover, in Emily Heisley Stoeckel’s view, pass-through gifts—that is, gifts of the same amount donated by an individual board members and passed through to a grantee designated by that board member—could have the effect of jump-starting the foundation and raising its public profile.

But at the board’s June 2000 meeting, there was concern expressed that pass-through gifts might unduly influence the future direction of the foundation, by setting precedent. Observes Emily Heisley Stoeckel: “We decided we weren’t going to do pass-throughs, because the pass throughs might influence the board. Those of us who were concerned about this agreed wholeheartedly that we should allow the foundation time to develop its own identify before we crushed it with our own, just because we have been the most involved in philanthropy.” The board adopted a moratorium on pass-through gifts—at least until March 2001, when it would revisit the issue.

Establishing Initial Guidelines

As it worked to resolve its structure and governance issues, the Heisley Family Foundation Directors had also reached the point of wanting, at long last, to get started with actual grantmaking. So it was that, at the June 2000 meeting the board informally authorized president Judy Heisley to begin to seek out worthy recipients for a first round of grants. There would, as of yet, be no grand gesture, no Heisley version of the Rhodes or Fulbright scholarships. Instead, there was a consensus that Judy should, without seeking applications, identify schools or students who would make the best use of small grants—in the $15,000 to $20,000 range. Such small grants would allow the foundation to get its feet wet but to avoid big mistakes by avoiding big grants, at least to start. Judy Heisley presented a “matrix” of attributes which the first round of grantees should have. All grants were to be in some way related to education. Beyond that, however, there were a variety of other categories: a Catholic school; a secondary school with an outstanding summer program for disadvantaged students; a program focused on arts and cultural education; and, a civic organization engaged in education-related activities. Potential grant recipients would need to fit only one of the matrix categories. It was expected there would be a geographic focus on the Chicago area—but that the reach of a program need not be limited to Chicago.

BEGINNING WITH A FAMILY LEGACY

Though Michael Heisley was philanthropically active, he chose to establish a family foundation to help meet several goals:

• It would help the family focus on a particular program area where the foundation could become known for their expertise and accomplishments.
• A family foundation was a way to pool the various charitable efforts of the family.
• A family foundation would bring the family together: spouse, children, and eventually grandchildren and succeeding generations.
• A family foundation would help to offset some of the pressures that come with inherited wealth.

The Heisley Family Foundation was begun with the intent to establish a family foundation in perpetuity. In order to develop a family legacy, the Heisley Family Foundation went through a slow process over several years. Elements of that process included:

• The initial endowment was small so there was less pressure to make major grants immediately before the family was ready.
• The family – and especially the children – took the time to discuss their charitable goals and to get used to the idea of a family foundation.
• They took the time to agree on a mission, purposes, operations, and on initial projects.

Without the guidance of a statement of donor intent, even a new family foundation has the potential to tear a family apart, just the way a family business can. The founder of the Heisley Family Foundation initially stepped back after its formation and wasn’t even on the board so that the other family members would make decisions and get used to the idea of a family foundation. Even so:

• The children were initially somewhat hesitant to make decisions.
• The children sought a statement of donor intent and did the work to elicit the founder’s wishes and guidance.
• The ongoing leadership of one or more family members is usually needed to make this work.
• The ideas and preferences of the children were also elicited as the family developed a mission statement for the foundation.

On September 22, 2000, the board of the Heisley Family Foundation voted to make its first round of grants. Judy Heisley, in her role as staff to the board as well as a member of it, presented information about eight potential grantees, seven which she had identified and one which had been suggested by another board member. Having decided to award only three grants, board members ranked their preferences. When the first choices of some members failed to gain majority support, their lower preference votes were transferred to other proposals. Ultimately, the board voted to provide funds for the following:

• The summer program for the Providence St. Mel’s School, a private (formerly Archdiocesan) school serving many students from disadvantaged backgrounds. The summer program, already well-established, was set up to send students to a wide variety of destinations (ranging from Paris to Phillips Exeter Academy to an outdoors program in the West) for the summer ($15,000).
• Junior Achievement: The board voted $15,000, as well, for the well-known program to encourage entrepreneurship among the young.
• Elgin Academy: This $8000 gift went to the alma mater of two of the Heisley siblings.

For Judy Heisley, the vote was gratifying. The foundation had officially gotten off the ground, even if its first steps were small ones. “I feel fortunate,” she reflected, “that as we develop our endowment has been manageable and we’ve been able to run at a reasonable pace.”