Spain's "La Caixa" Banking Foundation: a Global Ptp Model

Spain’s "la Caixa" Banking Foundation: A Global PtP Model

Lester M. Salamon & Juan-Cruz Alli Turrillas SPAIN’S "LA CAIXA" BANKING FOUNDATION: A Global PtP Model

Lester M. Salamon Juan-Cruz Alli Turrillas

Suggested Citation: Lester M. Salamon and Juan-Cruz Alli Turrillas, “Spain’s 'la Caixa' Banking Foundation: A Global PtP Model,” A Philanthropication thru Privatization Case Study. (Baltimore, MD: Johns Hopkins Center for Civil Society Studies, 2020).

Opinions expressed herein are solely the responsibility of the authors and may not necessarily be shared by "la Caixa" Banking Foundation, CaixaBank, Johns Hopkins University, National University of Distance Education, East-West Management Institute, or any other institutions with which the authors are associated, or that have supported their work.

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Cover photo captions Top—Opening of the first la Caixa office, Igualada, 14th March 1909 (© Historical Archive of “la Caixa” Banking Foundation). Bottom (left to right)—“la Caixa” Banking Foundation Programme for the Elderly: Users doing a computing workshop at EspaiCaixa Girona Center, 2018 (Juan Ventura © "la Caixa" Banking Foundation); “la Caixa” Banking Foundation International Programme: Vaccination campaign in Mozambique, as a part of the Vaccine Alliance for Child Vaccination between “la Caixa” Banking Foundation and Gavi, The Vaccine Alliance, 2017 (© Gavi/2017/Guido Dingemans); “la Caixa” Banking Foundation Culture Programme: Toulouse- Lautrec and the Spirit of Montmartre Exhibition at CaixaForum Barcelona, 2018 (Pepo Segura © "la Caixa" Banking Foundation).

Report design by Chelsea Newhouse, PtP Project

TABLE OF CONTENTS

Preface by Lester M. Salamon iv List of abbreviations & note on terminology v

INTRODUCTION 1

PART I: The Deal 9 Introduction 10 The Transferred Asset 11 The PtP Transaction 13 The Resulting Asset 13

PART II: The Background & Context of the Deal 15 Introduction 16 The “Privatization Decision” 17 The “Philanthropication Decision” 21 Conclusion 26

PART III: Governance & Organizational Structure 27 Introduction 28 Legal Form 28 Overall Governance Structure 30 Management Structure 35 Conclusion 36

PART VI: Foundation Performance 37 Introduction 38 Operational Performance 39 Programmatic Performance 50 Conclusion 56

PART V: Conclusions & Implications 58 Conclusion 1: A PtP Success 59 Conclusion 2: A Successful Transition 59 Conclusion 3: The Power of Models 59 Conclusion 4: The Importance of External Oversight 60 Conclusion 5: Unwinding the Old 60

References 61 About the authors 65

This report represents one in a series of case studies undertaken under the umbrella of the Philanthropication thru Privatization (or PtP) Project. The aim of this Project is to document and bring to broad public attention a largely overlooked “third route” to the creation of substantial, endowed, private charitable foundations around the world. This “third route” involves the preservation for the common good of all or a portion of the resources resulting from the transformation or sale of public (i.e., government-owned or –controlled) or quasi-public (i.e. nonprofit or co-operative) institutions or resources around the world by capturing these resources in independent charitable endowments. With trillions of dollars, euros, lira, rubles, and other currencies in play as a result of such transactions globally, PtP offers a potential route to the transformation of the charitable landscape of the world, especially in less developed or transitional areas. At a time of crisis resulting from a global pandemic of the sort under way as this report goes to press, the capture of such resources in charitable endowments is more urgent than ever to address the many glaring challenges and inequalities that this pandemic has exposed. It is this promise that this report and other materials generated by the PtP Project seek to highlight and encourage.

The focus of this case study is on Spain’s “la Caixa” Banking Foundation, the second or third largest charitable foundation in the world, with an estimated Gross Asset Value approaching 26 billion euros (or nearly 31 billion U.S. dollars as of August 2020).

As this case study shows, this foundation emerged from the transformation during the 2009-12 global financial crisis of Spain’s network of trustee savings banks into for-profit institutions, in the course of which the charitable arms and accumulated assets of the previous savings banks were transferred to free-standing, private charitable foundations. “La Caixa” Banking Foundation emerged from the transformation of the most successful of these Spanish savings banks, which had established a separate investment fund in possession of a sizable pool of investment assets that became the property of the new charitable foundation in the course of this PtP transformation.

The case study explains how the “PtP route” involving the creation of a free-standing charitable endowment came to be adopted, what governance structures and transparency provisions were put in place to ensure the independence and accountability of the resulting institution, and what programmatic achievements this PtP institution has produced.

As director of the PtP Project, I want to express my appreciation to “la Caixa” Banking Foundation for the financial support that made this report possible and for the access the foundation provided to various materials and to senior staff who reviewed the final product and confirmed its basic accuracy. Throughout, however, the Foundation respected the integrity and independence of the analytical process. I can therefore assure readers that the opinions and interpretations expressed here are those of the authors only and do not necessarily reflect those of the foundation or any other institution with which they are affiliated or that may have supported their work.

Finally, I want to acknowledge the enormous contribution to this work provided by Dr. Juan-Cruz Alli, a noted expert on Spanish foundations, who had the difficult task of poring through the records of the complex series of transactions and debates that led to the PtP outcome that is recorded here. We are all in his debt as a consequence.

Lester M. Salamon Emeritus Professor, Johns Hopkins University & Director, Philanthropication thru Privatization Project, East-West Management Institute

LIST OF ABBREVIATIONS

CCH: CriteriaCaixa Holding, the investment company managing the assets of "la Caixa" Banking Foundation

CNMV: Comisión Nacional del Mercado de Valores (National Commission for Regulation of Market Institutions)

COI: Conflict of Interest

CXB: CaixaBank (post-transformation)

ECB: European Central Bank

ECC: Ministry of Economy and Competition, Government of Spain

EU: European Union

GRI: Global Reporting Initiative

IMF: International Monetary Fund

LC: la Caixa, the original savings bank prior to the transformation of 2013-14

LCF: la Caixa Foundation—the foundation created within the original savings bank holding company prior to the transformation

LCBF: "la Caixa" Banking Foundation (post-transformation PtP foundation)

NBS: National Bank of Spain

PtP: Philanthropication thru Privatization

A note on terminology Throughout their long history, the set of institutions that ultimately ended up known as CaixaBank, “la Caixa” Banking Foundation, and CriteriaCaixa Holdings went by a variety of other names. To reduce the confusion that this multitude of names might create for readers, we have imposed some order on this profusion of terminology by relying on the following usage: • la Caixa: During the long period from its founding in 1904 up to the time of its transformation in 2013-14, we refer to the core savings bank institution that ultimately underwent the significant PtP transformation that is the subject of this case study as la Caixa, its popular name during most of this period.

• CaixaBank: Following the 2013-14 transformation, which changed its structure significantly from that of a trustee savings bank to that of a regular for-profit bank stock company, we refer to this banking institution by the name it has taken post- transformation, i.e., CaixaBank, abbreviated as CXB.

• “la Caixa” Banking Foundation: So far as the foundation spun off from la Caixa in 2013-2014, we refer to it by its current name, "la Caixa" Banking Foundation, abbreviated as LCBF. (The earlier corporate foundation created by la Caixa prior to the 2013-14 transformation is referred to as la Caixa Foundation, abbreviated as LCF).

• CriteriaCaixa Holding: The third institution in this complex, the investment management company initially created by la Caixa, and ultimately transferred to the ownership of “la Caixa” Banking Foundation during the 2013-14 transformation, we refer to it throughout as Criteria Caixa Holding, abbreviated as CCH.

INTRODUCTION

RESEARCHERS OF THE PARPiPRED PROJECT: A COMPANION DIAGNOSTIC TEST FOR TARGETED THERAPY WITH PARP INHIBITORS IN BREAST AND OVARIAN CANCER (VHIO), 3RD EDITION OF THE CAIXAIMPULSE PROGRAMME (2018)

Marc Guillen © "la Caixa" Banking Foundation Salamon and Alli Turrillas • Spain’s "la Caixa" Banking Foundation • INTRODUCTION • Page 2 INTRODUCTION The PtP Project and the Preservation of Social-Purpose Assets

On December 27, 2013, two days after Christmas, the Spanish Parliament made an enormous post-Christmas gift to the people of Spain, and ultimately, to the world. In the course of transforming Spain’s century-old network of cooperative savings banks into for-profit institutions in the wake of the global financial crisis, the Parliament essentially unleashed an enormous, private charitable foundation that transformed the philanthropic landscape of Spain and took its place as the second or third largest foundation in the world.

This was not the first time that the transformation of a public (i.e., government- owned or regulated) or quasi-public (i.e., nonprofit or cooperative) asset has led to the creation of a charitable foundation. To the contrary, some of the largest and most reputable foundations in the world, such as Germany’s Volkswagen Foundation, Italy’s foundations of banking origin, New Zealand’s network of “community trusts,” Belgium’s King Baudouin Foundation, Mozambique’s Community Development Foundation, and Japan’s Nippon Foundation, have all resulted from, or been enlarged through, precisely such a process, which we have termed “Philanthropication thru Privatization,” or PtP, for short.

Indeed, through the PtP Project, we have so far identified well over 600 charitable foundations around the world that have resulted from one or another type of such transactions (Salamon, 2014).1 Nine identifiable asset classes have so far been involved in such transactions, including:

I. Government-owned enterprises or facilities: The sale or transfer of a government-owned business enterprise such as a steel mill, bank, or airline, to a private entity; II. Transfer of other state property: The gift of a state-owned physical asset or resource, such as a building or cultural institution; III. Royalties or concessions: Income from a national lottery or other resource controlled by government, such as mineral extraction, airports, or other public infrastructure; IV. Debt swaps: An agreement in which debt is forgiven in exchange for the debtor nation agreeing to vest an equivalent amount of local currency into a foundation or nonprofit; V. De-mutualization: The sale or conversion of a quasi-public or nonprofit entity that has benefited from government assistance and/or serves a public purpose into a for-profit; VI. Stolen assets: Assets resulting from bribes or embezzlement by politically- connected persons;

1 For further detail, see: p-t-p.org.

VII. Penalty-based assets: Assets arising from penalties levied by governments for corporate malfeasance, such as money-laundering, bribery, and environmental or other violations; VIII. Stranded or dormant assets: Assets remaining in bank or other accounts that have been abandoned or that lack legitimate claimants; and IX. Broadband spectrum: Assets from broadband auction sales or from set-asides of free broadband licenses for priority uses.

This report represents one in a series of case studies undertaken under the umbrella of the PtP Project. The aim of this Project is to document and bring to broad public attention this largely overlooked route to the preservation for the common good of resources resulting from the transformation of public or quasi-public institutions through the creation or expansion of independent charitable foundations or other charitable institutions. With trillions worth of assets in play as a result of such transactions around the world, PtP offers a potential route to the transformation of the global charitable landscape, especially in less developed or transitional areas. It is this promise that this report and other materials generated by the PtP Project seek to explore and encourage.

As the largest of these PtP foundations,"la Caixa" Banking Foundation is especially important as a demonstration of the potentials of the PtP option.

The present report examines one of the most recent—and also one of the largest— foundations to have emerged from such a “PtP transaction,” Spain’s "la Caixa" Banking Foundation. This foundation emerged from what has turned out to be perhaps the most common type of these PtP transactions, the “de-mutualization” or transformation into for-profit status, of previously quasi-public institutions in the course of which charitable foundations emerge in possession of all or a portion of the assets of the preexisting entities. Numerous other examples of significant charitable institutions resulting from such de-mutualization transactions exist around the world, including the Italian foundations of banking origin, Austria’s Erste Foundation, New Zealand’s network of community trusts, and the 240 health conversion foundations in the United States. While each of these cases has its own peculiarities, they share a fundamental commonality that has long been ignored, but that the PtP Project is devoted to bringing to widespread attention: namely, the opportunity to establish sizable, private, charitable endowments in the course of such transactions. As the largest of these foundations, "la Caixa" Banking Foundation is especially important as a demonstration of the potentials the PtP option can bring to such transactions. In this Foreword, we seek to put this case into its broader PtP context.

WHY FOUNDATIONS? Since the PtP Project essentially begins with the premise that it makes sense to channel into private charitable foundations all or a significant portion of the proceeds of transactions transforming essentially public or quasi-public organizations into for- profit ones, it is reasonable to begin by explaining the circumstances and conditions under which this option makes sense. This is especially important in view of the fact that charitable foundations are not very familiar institutions and can have their own

limitations. But there are clearly circumstances where this option makes far more sense than the available alternatives, and where it offers outcomes that solve dilemmas that would otherwise be unresolvable. Such circumstances are present: (a) where issues exist about the ownership of the affected assets; (b) where the privatization transaction itself is controversial; (c) where the placement of the resulting assets into governmental hands involves important dangers of misappropriation or insufficient transparency; or (d) where other issues are involved. In such circumstances, properly structured, independent charitable foundations clearly dedicated to public-purpose objectives can offer win-win outcomes for all stakeholders, including particularly the citizens of the affected countries or communities.

Properly structured charitable foundations offer important advantages: pluralism, flexibility, commitment to public purpose, permanence, visibility, social trust, and empowerment.

Among the most salient of these advantages are the following:

Î Pluralism. The existence of charitable foundations ensures an important degree of pluralism in efforts to solve public problems. Foundations can respond to issues that may not yet have attracted government attention and can promote innovations that governments can subsequently adopt. Nobel Prize laureate Vaclav Havel expressed this issue well when he defended the idea of creating a Czech Foundation Investment Fund to absorb 1% of the proceeds of that country’s privatization transactions in the early 1990s by noting:

“The state should not be based on the idea that it, and it alone, knows best what society needs and that it alone should finance that area from centrally levied taxes. Centralized financing leads inevitably to centralized management. In this area, too, we should trust the citizens more and enable them to take on more responsibility. This means nothing less than delegating to other subjects, in a properly thought-out way, part of the function of redistributing resources.” (Havel, 1994)

Î Flexibility. Foundations can be shaped in a variety of ways to accommodate the circumstances that lead to their creation. Such flexibility can apply to their governance, their geographic focus, their programmatic objectives, their beneficiaries, their modes of operation, and the time period over which they are allowed to exist. The geographic boundaries of foundation operations can be designed to encompass a particular problem, such as the impact of mining operations on an entire region; focus on a particular local community; or can be broadened to accommodate new challenges as they arise over time.

Î Public Purpose. By law in virtually all countries, foundations must serve a valid and legitimate public purpose. Over time, a solid body of common practice has emerged to ensure that foundations adhere to such purposes. These include provisions for transparency, protections against conflicts of interest, and procedures for grant- making and other means of distributing foundation benefits. Properly structured, foundations can thus instill trust among citizens and ensure that assets built up through the sweat and toil of a country’s people or forming part of a country’s or

region’s birth-right of natural resources, are used for the benefit of these people or regions.2

Î Permanence. Foundations can ensure that important resources are dedicated to particular problems over time. They thus offset one of the significant disadvantages of government budgets, which often shift from policy area to policy area in response to short-term shifts in political priorities instead of remaining dedicated to issues requiring long-term commitments, such as the promotion of science, investments in human capital, or environmental protection. As Wilhelm Krull, Secretary-General of the Volkswagen Foundation, has noted: “Compared to the still prevailing practice of dumping…proceeds [from privatization transactions] into regular state budgets, [the PtP] option has the advantage of permanently preserving such assets for priority common-good purposes on a long-term basis” (Salamon, 2014: 51-52).

Î Visibility. Assets involved in privatization-type transactions are significantly imbued with a public character. They result from government-owned enterprises in which citizens have invested their sweat and toil, from debts that governments have taken on, from revenues resulting from a country’s birthright of natural resources, and from money taken through bribes or other illegal activity. Visibility about what happens to these resources when they are transformed through various privatization transactions is thus crucial to the retention of public trust. When such proceeds are simply dumped into government budgets, this visibility is put in jeopardy. Even when special government funds are created, experience has shown that governments can simply divert existing resources dedicated to the fund’s purpose to other uses, defeating the objective of creating a special dedicated fund. This may be one of the reasons that privatization transactions have increasingly encountered citizen resistance.3

Equipped with transparency provisions that are now the norm in the global foundation community, foundations can offer significantly enhanced evidence of the “social reuse” of confiscated assets (Nicolae, Răuţă, & Chiriac, 2015).And the record of existing PtP foundations suggests that these institutions have been especially effective in providing this evidence (Salamon, 2014: 118-119).

Î Social trust. Because of the visibility that can be achieved, by channeling all or a portion of the proceeds of privatization transactions, broadly conceived, into social reuses through charitable foundations, “social justice is done” (Nicolae, Răuţă, & Chiriac, 2015, p. 8). By contrast, when government-owned businesses or public infrastructure is sold to insiders and the proceeds mysteriously absorbed into government coffers, public distrust is created. The same distrust occurs when

2 Writing specifically about foundations established in the mining industry, the World Bank thus noted that: “Foundations, trusts, and funds (ETFs) can be good instruments for companies and governments to use to share the benefits of mining operations with communities.”

3 Recent surveys in Central and Eastern Europe and Latin America demonstrate the political unpopularity of the way privatization has been carried out. One recent survey in Central and Eastern Europe, for example, revealed that 80% of respondents opposed the status quo achieved through privatization and wanted to change it in some way. Interestingly, only 29% favored returning the assets to government control, suggesting that respondents favor private ownership if they can see some more tangible benefit from the transactions that lead to it. In LatinAmerica, Latinobarometer surveys have consistently found sizable majorities seriously doubting the benefits privatization of state-owned enterprises have brought to their countries. See: Frye & Zhuravskaya (2007); Corporación Latinobarometer (2010); and Graham & Sukhtankar (2004).

royalties from extractive industries flow into the overseas bank accounts of leading politicians or when the proceeds of bribes are returned to institutions controlled by the same government officials that acquired them in the first place.

Î Partnerships and empowerment. Foundations can also help build partnerships among key stakeholders in a region or field of activity and foster the empowerment of disadvantaged communities. Foundations have the flexibility to be thought-leaders in a field, to build connections with other institutions, both public and private, and to rally added resources and bring them to bear on their chosen region or issue. Foundations can also be established with governance structures that give citizens a direct voice in the uses of the resulting assets. This can, in turn, have multiplier effects, encouraging citizens to support transformation processes or take an active role in spotting corrupt practices in the first place.

In short, whether the transaction in question is the sale of a government enterprise, the capture of the proceeds of mineral extraction, the execution of a debt swap, the restitution of stolen assets, or the transformation into for-profit status of a nonprofit or cooperative that has been helped by government subsidies, PtP offers a way to ensure that a nation’s people directly receive some of the benefits that result. To do so, however, care must obviously be taken to ensure that the foundations so created are equipped with reliable transparency and conflict of interest protections, as well as open and accessible governance structures, and are dedicated to improving the quality of life of citizens, particularly citizens most directly affected by the transactions. In the process, PtP can reduce citizen opposition to legitimate transactions by ensuring citizens they will share in the benefits that can flow from the sale, extraction, or restitution of assets that are their birthright or the product of their sweat and toil. In other words, properly designed and executed, PtP can, and already has, revolutionized the charitable landscape of countries while producing “win-win” outcomes for citizens, governments, and investors alike.

THE "LA CAIXA" CASE AND THE DE-MUTUALIZATION OF COOPERATIVE ASSETS The present document reports on one of the largest and most dramatic of what has so far surfaced as the most common type of PtP transaction: the sale or other transformation of quasi-governmental institutions, such as nonprofit organizations, cooperatives, or other mutualistic entities. A common feature of such institutions is that they are “non- owner” institutions that are managed by trustees and designed to function over the long- term to promote eleemosynary or “public” purposes for which they often receive various governmental subsidies, such as tax incentives or exemptions from regulations applicable to other entities.

When conditions arise requiring the sale of such entities, or their conversion into for-profit enterprises—a process sometimes referred to as “de-mutualization”—important questions arise over who should receive title to the assets the institutions have accumulated. Since these are essentially private entities, absorbing these assets into government coffers understandably encounters legitimate opposition. On the other hand, vesting ownership of the assets into the hands of the formerly voluntary trustees of the nonprofit or cooperative organizations or the stockholders of the newly reconstituted private, for-profit enterprises

seems to violate the public trust and is often a violation of “capital lock” laws requiring that the assets of such institutions be dedicated to similar charitable purposes in the event the entities are converted or sold.

In a wide assortment of cases, therefore, a common pattern has spontaneously emerged in countries around the world, though without much apparent cross-country sharing of experiences. That pattern has involved vesting the assets emerging from such transactions into private, public-benefit-oriented charitable foundations.

Thus, when for-profit companies began buying up nonprofit hospitals and health insurance programs in the U.S. in the 1970s, consumer groups rebelled and insisted on what we have termed a PtP solution involving the creation of what have become 240 so-called “health conversion foundations” across the country. Similarly, the transformation of Italy’s network of “trustee savings banks” into for-profit stock companies in 1991 led to the creation of 88 “foundations of banking origin” in this country.

The transformation of the former savings bank la Caixa into CaixaBank and "la Caixa" Banking Foundation is the latest, and one of the largest, examples of this phenomenon. As in the Italian case, the preexisting savings institution was, like the other original nearly 100 Spanish cajas, or trustee-run savings banks, a quasi-public/quasi-private institution—private in structure, but not “owned” by its trustee managers, and dedicated in significant part to public or charitable purposes in return for which it received various regulatory and tax privileges.

When the 2008 financial crisis finally hit Spain in 2011 and 2012, however, the network of Spanish cajas experienced a particularly severe shock, triggering a frantic search for solutions. Since the Italian PtP solution was already well-known in Spain by this time, it became the default solution towards which policies evolved, though it took several years for this process to take its final shape. Why this was so, how the process unfolded, what shape PtP took in its Spanish context, and how well the resulting PtP institution has operated are the topics that this case study seeks to unveil. Hopefully, the results will hold useful lessons for those engaged in similar, if not wholly identical, transactions under way in many other parts of the world as a result of debt swaps, capture of stolen assets, privatization of state-owned enterprises, and transformations of other quasi-public institutions.

THE "LA CAIXA" BANKING FOUNDATION FIELD GUIDE To prepare this case study, the PtP Project enlisted the aid of Dr. Juan-Cruz Alli Turrillas, an Administrative Law Professor at Madrid’s Universidad Nacional de Educación a Distancia (UNED). Dr. Alli is the author of a well-known book on Spanish nonprofit and foundation law, and a close student of the Spanish cajas. To ensure the objectivity of this account, moreover, the draft has been submitted for review by personnel from "la Caixa" Banking Foundation as well as other Spanish experts.

The work on this case study, as on 23 others that the PtP Project has undertaken, was structured by means of a Field Guide developed by the PtP Project Director and used to understand key features of each PtP case.4 The Field Guide called for the investigation of five central features of the "la Caixa" Banking Foundation case:

4 For a report drawing on the results of 22 of these case studies, see Salamon (2014). See also: Bornstein (2016).

1) The asset at stake in the PtP transaction and the nature of the transaction that transferred all or a portion of this asset into a charitable endowment; 2) The background and context of the transaction, to assess how and why a PtP outcome came to pass; 3) The governance and management of the resulting institution; 4) The operational and programmatic performance of the resulting foundation; and 5) The implications or lessons the case holds for existing or future PtP cases.

Hopefully, this case study, like other PtP Project products, will encourage key stakeholders to recognize the benefits that the PtP concept holds for protecting public or quasi-public assets for long-term public benefit purposes.

The result, in this case as in the others examined, is a comprehensive picture of how this important institution came to be, how it is governed, how it has operated, what it has achieved, and what implications it holds for future situations where important governmental or quasi-governmental assets are being transformed into for-profit entities, posing significant risks that assets that should be dedicated to public-benefit purposes can be lost. Our hope is that this case study, like other products of this project, will encourage key stakeholders to recognize the potentials that the PtP concept holds for preserving such assets for long-term public benefit purposes not only in this case, but also in the many others that could follow.

"LA CAIXA" BANKING FOUNDATION & CAIXABANK HEADQUARTERS, BARCELONA (2017)

Gemma Miralda © "la Caixa" Banking Foundation Salamon and Alli Turrillas • Spain’s "la Caixa" Banking Foundation • PART I: THE DEAL • Page 10 PART I: The Deal

INTRODUCTION The huge Spanish charitable entity now known as "la Caixa" Banking Foundation, or LCBF, for short, is a leading example of a phenomenon that we call “Philanthropication thru Privatization,” or PtP, which involves the funneling into private, independent charitable foundations of assets that result from the transformation of public, or quasi-public, entities into for-profit enterprises. As outlined in the Introduction to this report, "la Caixa" Banking Foundation is a particularly noteworthy example of one of eight types of assets that have been involved in such transformations: namely a quasi-public institution (in its case a trustees-run savings bank with a strong social mission) that was transformed into a for- profit stock company. Similar such transformations of quasi-public institutions leading to the creation of significant charitable foundations have occurred in other countries as well, including Italy, Austria, New Zealand, the U.K., and the U.S., although the identification of these examples as embodiments of a distinctive class of transactions has only just recently come to be recognized (Salamon, 2014).

What sets the "la Caixa" Banking Foundation story apart is the huge charitable institution that resulted from this transformation—namely a foundation with an estimated Gross Asset Value of Euro (€) 25.8 billion (roughly US$29 billion) at its founding, and an annual cash budget for its philanthropic action approaching €500 million—making it one of the largest charitable foundations in the world.1 The "la Caixa" Banking Foundation story also stands out because of its unusual complexity—the culmination of a five-year, financial crisis-induced process of largely unsuccessful mergers and bailouts of an entire network of similar socially- oriented trustee savings banks in Spain.

This case study shows how the existence of the PtP concept and its prior applications can reveal possibilities that might otherwise be overlooked.

But if this PtP case is unusually complex it is also unusually important since it illustrates how the PtP option can prove to be a solution to a wide assortment of complex challenges and ultimately appeal to a wide assortment of potentially competing interests. What is more, since this case arose after several other similar transformations leading to major foundations occurred, the case shows how the existence of the PtP concept and knowledge of prior applications of the concept can reveal possibilities that might otherwise have been overlooked. This makes case studies of this sort especially important to undertake.

1 This includes the “book value” of the assets attributed to the social programs of the former la Caixa savings bank as of 2014, plus the GAV of €20.4 billion attributed to CriteriaCaixa Holding, the investment company of CaixaBank, ownership of which was transferred to "la Caixa" Banking Foundation as part of the PtP transaction completed in 2014.

To set the stage for this discussion, this first chapter describes how the entity that ultimately gave rise to "la Caixa" Banking Foundation began its life, what it looked like at the time of the transformation that converted it from a quasi-public, trustee-operated savings bank into a private, for-profit stock company, and what the nature of the transaction was that also produced an enormous charitable foundation as its outcome. In the subsequent chapter, we will then turn to the question of how this somewhat remarkable outcome came to be.

THE TRANSFERRED ASSET: THE SPANISH CAJAS AND LA CAIXA SAVINGS BANK, PRE-2008 The institution that ultimately led to the creation of "la Caixa" Banking Foundation started its life in 1904 as a small, trustee-operated savings institution chartered as Caixa de Pensions per a la Vellesa i d’Estalvis (Old Age Pension and Savings Bank; hereafter referred to as la Caixa or LC for short). As such it was one of over 100 such institutions that emerged during the late 19th and early 20th centuries in response to Catholic religious doctrines forbidding usury and encouraging wealthy individuals, often with local governmental support, to create community-based savings institutions that would promote thrift among the poorer classes, offer low-cost loans to workers to purchase homes, and thereby promote greater social integration.

The legal nature of these saving banks was always “confusing.”2 The savings banks were neither listed companies that issued ownership shares, nor were they strictly governmental entities, though they were often established or promoted by public authorities and often supported public endeavors and local governmental policies. They could therefore be said to be “non-owner structures” (Alli Turrillas, 2010) run by trustees for the benefit of their communities, but often in close coordination with local political authorities. In addition to their banking functions, the cajas were also committed to an obra social, or social mandate, using whatever profits arising from the limited spread between what they paid as interest to depositors and what they received as income on their loans to support various philanthropic activities.

Over time, these communal institutions grew in size and acquired a variety of exemptions from tax and legal provisions that set them apart from other, mostly for-profit, banking institutions. For example:

Î Although they had no tax exemptions on their strictly banking activities, they were exempt from taxation on the resources they devoted to fulfillment of their “social mandate”; Î They were exempted from restrictions on risky investments and capital requirements that faced for-profit banks, allowing them to support often socially worthwhile but commercially questionable initiatives of governmental authorities; and Î They generally enjoyed support from regional authorities, giving them a favored position in fending off limitations on their operations and encouraging customer loyalty.

2 They were considered “business foundations”—part private charitable foundation, part business bank enterprise—in the German sense of the term (Unternehmensstiftung), but without the legal nature that they have there, since in the Spanish legal system this institution does not exist. See: Embid Irujo (2010 and 2015).

© Lester M. Salamon, 2020 Salamon and Alli Turrillas • Spain’s "la Caixa" Banking Foundation • PART I: THE DEAL • Page 12 la Caixa acquired a solid reputation as one of the most professional and seriously managed of the Spanish cajas.

Thanks in part to the hands-off management style of the Catalonian regional government and the unusual competence and social commitment of the la Caixa management, la Caixa acquired a solid reputation as one of the most professional and seriously managed of the Spanish cajas, with a solid record of both financial and philanthropic achievements. Because of this, la Caixa was in position to launch an ambitious regional, national, and even international expansion in the 1980s. In particular:

Î Together with its retail banking activities, la Caixa launched a separate real estate structure (Servihabitat) in 1989; a modernized affiliated life and health insurance business (VidaCaixa) in 1992; and a credit facility for small and medium-sized enterprises (Caixa Microbank) in 2007; Î In 2006 it launched an independent investment holding company (CriteriaCaixa Corp) through which to manage and acquire shares of publicly traded companies. This company, in turn, was listed on the Spanish stock exchange, allowing la Caixa to generate additional capital for its investment activities. Through this vehicle, la Caixa was able to acquire a huge set of shares in numerous solvent and strategic Spanish and global companies (Repsol, Natural Gas, Abertis, Telefónica) and to invest in a variety of new start-ups; Î In addition, la Caixa began a merger-absorption policy with other savings and for- profit banks, including: Caixa de Barcelona (1990); Morgan Stanley Group in Spain (2008); Caixa Girona (2010); and Î La Caixa also bought 15% of the Bank of East Asia, and 9% of Mexico’s Grupo Financiero Inbursa in 2008.

As a result, by the first decade of the 21st century, la Caixa had become the largest savings bank in Spain and the third largest banking “business” in the country after the for-profit Banco de Santander and Banco Bilbao-Vizcaya Argentaria (BBVA) institutions. What is more, it was not only the largest in general size in each of the typical variables used to measure banking activity, but also the most diversified in its business model and the most solid in practically all measures of banking strength, with a sizable presence in its home catchment area of Barcelona and the rest of Catalonia, a substantial footprint in Madrid, Valencia, Andalusia, and other Spanish regions, and branches or representative offices in such places as Brussels, Warsaw, London, Morocco, Colombia, and Mexico. In a country with 40 million inhabitants, la Caixa had about 10.5 million customers.

While pursuing its business objectives, moreover, la Caixa remained true to its origins as an institution with a strong social-purpose tradition. Its “social mandate” budget exceeded its closest caja competitor by nearly 3:1 and accounted by itself for a quarter of the social mandate expenditures of all 45 of the remaining cajas as of the early 2000s (CECA, 2008, pp. 20-25).

THE PtP TRANSACTION Despite its notable strengths, however, la Caixa was swept up in a radical process of change triggered by the global economic crisis, which began as a financial crisis in the U.S. in late 2008, but reached the Spanish banking system, and the cajas that comprised a substantial component of it, in 2010. As the economic effects of the global crisis hit Spain, producing unemployment, lowered economic activity, and consequent widespread defaults on mortgage loans, the impact on the Spanish cajas was especially catastrophic. This was so because, with the partial exception of la Caixa, these institutions were under-capitalized, especially heavily invested in mortgage loans, and saddled with questionable investments pressed upon them by local political authorities. The upshot was a frantic search on the part of the Bank of Spain and the European Central Bank for ways to shore up this set of institutions, leading, ultimately, in December of 2013, to the passage of Law 26.

Under this law, all of the Spanish cajas were obliged to reconstitute themselves as private, for-profit stock companies, able to issue stock, but leaving behind their non-banking activities in their preexisting legal entities. These preexisting entities were simultaneously re-constituted as “banking foundations” subject to Spain’s general foundation law as well as some special provisions laid out in Law 26/2013.

In the case of la Caixa, this transformation was especially noteworthy because this caja had built up a substantial array of non-banking assets that became the assets of the resulting "la Caixa" Banking Foundation (LCBF). Included here were not only the assets built up in what had been a formerly bank-owned corporate foundation, called la Caixa Foundation (LCF), with a book value of €5.8 billion, but also full ownership of the former bank’s investment company with gross assets worth €20.4 billion, including Figure 1 • Organizational structure of "la Caixa" Banking Foundation 60% of the stock of the new for-profit CaixaBank (CXB). In short, through a process of almost “immaculate conception,” Spain found itself in possession of a massive, €26 billion charitable foundation, very likely the second largest charitable foundation in the world.

This was not quite the final chapter in this transformation process, however, since having the management of a bank in the hands of a charitable foundation, or vice versa, was viewed by both European and Spanish authorities as unwise because it could cause the bank to neglect its responsibilities to its investors or—perhaps worse—tempt it to treat the foundation as a convenient “piggy bank” from which to finance unwise investments. Accordingly, in 2017, the authorities insisted on a “Prudential Deconsolidation” agreement among all the parties to separate the management of LCBF from the management of CXB. This was achieved by severely limiting the representation of the "la Caixa" Banking Foundation board on the board of CaixaBank; by prohibiting CXB directors from serving on the LCBF’s board; by reducing the LCBF’s ownership of CXB’s stock from 60% to 40%; and by taking other steps to separate the banking functions from the charitable functions of these institutions—all steps that, significantly, mirrored those taken in the cases of the PtP transactions of this type in other countries (Salamon, 2014, p. 44).

THE RESULTING ASSET The ultimate result of this process was thus a classic PtP institution—a charitable foundation similar to those created in the course of equivalent transformations of cooperative banks into for-profit institutions in Italy, Austria, New Zealand, and the UK. More than that, with assets conservatively estimated at over €26 billion (US$29.6 billion) of Gross Asset Value as of 2014, the resulting "la Caixa" Banking Foundation is the

largest such PtP institution of this type so far identified—and one of the largest charitable foundations of any type in the world. What is more, a similar sequence of steps was taken with six other consortia of Spanish savings institutions created during the same period, yielding an additional 34 banking foundations, though none of them approaching the scale embodied in LCBF.

In addition to its size, "la Caixa" Banking Foundation is also exceptionally complex, a by-product of the complex institutional structure already achieved by the preexisting savings institution prior to the PtP transaction, with a separate holding company in possession of stock in a rich array of other enterprises and institutions not only in Spain but around the world. As shown in Figure 1 below, the transformation of the previous trustee savings bank, la Caixa, has thus given rise to three distinct financial entities: "la Caixa" Banking Foundation; CriteriaCaixa Holding; and CaixaBank. The first of these, "la Caixa" Banking Foundation, the resulting PtP institution, holds 100% of the ownership of the second, CriteriaCaixa Holding; and the second initially held 60%, but ultimately holds 40%, of the third, CaixaBank.

Clearly, such a complex array of institutions, in possession of such substantial assets, requires an equally complex governance structure and meaningful protections for the public purposes to which the assets are supposed to be directed. In Part III of this case study we examine this structure in some detail. Before turning to this topic, however, we look a bit more closely in Part II at the factors that led to a PtP outcome in this particular case.

Figure 1 • Organizational structure of "la Caixa" Banking Foundation

“LA CAIXA” BANKING FOUNDATION

100%

Obra GAV: €21.6bn / US$24.6bn Social NAV: €16.8bn / US$19.1bn (charitable activities) (investment activities)

SOCIAL BANKING INDUSTRY AND REAL ESTATE OTHER FINANCIAL PORTFOLIO SERVICES PORTFOLIO BUSINESS ASSETS €8.1bn / US$9.2bn €9.2bn / US$10.5bn €2.7bn / US$3.1bn €1.6bn / US$1.8bn CULTURE

40.0% 24.0% 99.5% 100% EDUCATION

17.5% 6.0% 1.2% RESEARCH, Other KNOWLEDGE, AND holdings FELLOWSHIPS 9.1% 6.0% Figures as of 30 June 2019

ECONOMIC CRISIS-INDUCED DEMONSTRATION, BARCELONA, SPAIN, MAY 2011

Photo by Marcello Vicidomini via Wikimedia Commons (CC BY-2.0) Salamon and Alli Turrillas • Spain’s "la Caixa" Banking Foundation • PART II: BACKGROUND & CONTEXT OF THE DEAL • Page 16 PART II: Background & Context of the Deal

INTRODUCTION That a radical transformation was in the offing for a network of trustee-operated savings banks—the cajas—that controlled 50% of the banking assets in Spain (Cals Güell, 2001) and boasted a rich history of charitable activity resulting from the “public-purpose mandate” under which they were founded might have seemed unimaginable as late as the mid-2000s. Indeed, a November 2005 national survey of citizen satisfaction1 with the country’s savings banks found 34% of Spanish citizens “completely satisfied” with these financial institutions, 45% “remarkably satisfied,” and only 1.5% “totally dissatisfied” (CIS, 2005). Yet, as noted inPart I above, a mere 5 years later a process was put in motion that would find these savings institutions, prominent among them la Caixa, converted into for-profit stock companies with a set of charitable foundations that were given ownership of the vast majority of the assets of the preexisting institutions. That the transformation of la Caixa into a for-profit enterprise led to the simultaneous creation of a massively-endowed independent foundation in possession of the savings bank’s entire investment portfolio was a product of two related, but separately identifiable, processes.

How did this transformation occur? And most importantly, how and why did it eventuate in what we would term a particularly noteworthy “PtP outcome,” i.e., the emergence of a huge, massively-endowed, independent private foundation dwarfing all but a handful of the largest charitable foundations in the world?

Fundamentally, two related, but separately identifiable, issues have to be addressed in order to unravel this puzzle:

Î First, how and why were Spain’s generally popular, quasi-public savings banks transformed into for-profit stock companies early in the second decade of the 21st century? We will refer to this as the “privatization decision,” where privatization refers to the conversion of previously public or “quasi-public” institutions into for-profit commercial ones. Î Second, how and why were the assets owned by these quasi-public savings banks ultimately vested in a set of charitable foundations that became, effectively, major owners not only of the new banks, but also—particularly in the case of "la Caixa" Banking Foundation— the full owner of an investment company that held the assets that the former savings bank had amassed? We will refer to this as the “philanthropication decision,” i.e., the creation of a series of endowed charitable foundations as a byproduct of the transformation of the preexisting banks, with particular reference to the one emerging from the transformation of la Caixa.

1 See: cis.es/cis/opencm/ES/2_bancodatos/estudios/ver.jsp?estudio=5518&cuestionario=6171&muestra=10504

The discussion that follows takes up each of these issues in turn while recognizing the interrelationships between the two.

THE “PRIVATIZATION DECISION” As detailed in Part I of this case study, the Spanish cajas enjoyed a number of tax and regulatory advantages that allowed them to prosper and sustain a significant social- purpose mission despite the arrival of some significant for-profit competitors in their areas of operation. What, then, led to the dramatic restructuring of these fairly popular institutions in the second decade of the 21st century?

Fundamentally, three major drivers seem to have been at work: (a) certain structural weaknesses of the Spanish cajas that had developed over a period of years; (b) the global financial crisis of 2008-2010 that illuminated and seriously intensified these structural weaknesses; and (c) external pressures from the EU, the European Central Bank (ECB), and international financial institutions such as the International Monetary Fund (IMF), transmitted to Spain through the National Bank of Spain. Let us examine each of these in turn.

Despite their significant tax and regulatory advantages, the Spanish cajas suffered from a number of limitations that had evolved over the previous 30 or more years.

Structural Weaknesses of the Spanish Cajas Despite their significant tax and regulatory advantages, the Spanish cajas suffered from a number of limitations that had evolved over the previous 30 or more years. Among these limitations were the following (Cristóbal, 2012):

a) An unclear legal identity as “non-owner institutions” expected to function as regular banks in an increasingly competitive financial market yet, at the same time, expected to serve essentially charitable ends. This unclear ownership structure and competing objectives left these institutions unable to access capital by issuing ownership shares. As a result, they were seriously under-capitalized.

b) Limited economies of scale. The bylaws of most of these institutions, coupled with regional rivalries, restricted their activities to their original localities, making it very difficult for them to merge in order to achieve economies of scale.

c) Heavy reliance on mortgage investments. By design, the portfolios of these institutions were heavily weighted towards mortgage lending to limited-income workers—hardly the most profitable potential line of business. This became especially dangerous given the bubble in Spanish real estate markets that preceded the 2010 economic crisis. By the late 2000s, the cajas accounted for at least 60% of the country’s outstanding mortgage credit.

d) Excessive dependence on local and regional political authorities. By the latter 1970s, the shortcomings of the cajas were becoming obvious, leading to efforts to restructure the institutions. Because this restructuring took place during

the same epoch in which Spain was being transformed from its Franco-dominated authoritarianism into a democratic, market-oriented society and economy, the direction of this restructuring was toward transforming the cajas into institutions that resembled regular banking enterprises and that simultaneously vested more control over them in the increasingly autonomous regional governments newly empowered by the democratic Constitution of 1978 (Carr, 2001; Payne, 1998). Thus, for example, a 1977 law replaced the somewhat amorphous, historically diverse pattern of control of the cajas by self-perpetuating committees of well-intentioned local notables who functioned as “trustees” with more formal governance structures overseen by Boards of Directors and enterprise managers selected by formal committees.2 Because the cajas did not have shareholders, however, in place of the shareholder assemblies typical of for-profit enterprises, control of the institutions was formally vested in assemblies of stakeholders—founders, employees, depositors, and public officials, such as local and regional authorities from the territory where each caja was located (Martín & Sevillano, 2011).

In practice, the newly empowered regional political authorities came to dominate these assemblies (Aragón Reyes et. al., 1991, pp. 192-194; Casares Marcos, 2003, p. 625 and following; Ureña Salcedo, 2004, pp. 106-107; Esteban Velasco, 2007; Fernández Farreres, 2007). In many regions, government officials comprised upwards of 75% of the boards of the local cajas, giving rise to widespread concerns that local officials were “occupying” or “colonizing” the cajas (Fernández Farreres, 2007; Pérez Fernández et. al., 2007; Mai, 2004). One consequence was the reorienting of the investment decisions of the cajas toward financing projects that were supportive of the policies of the political parties in power in the region, transforming the charitable activities of the cajas as well to serve the interests and priorities of regional authorities. This, in turn, intensified the over-emphasis on real estate and questionable local development investments and limited diversification of the cajas’ investment portfolios (Cuñat & Garicano, 2010).

e) A resulting lack of meaningful control and supervision. Gradually, each self- governing territory gained control of the regulation of its caja as part of the mid-1970s reforms. As national banking authorities surrendered regulatory responsibilities to regional authorities, a relaxation of regulatory requirements and a patchwork of regulatory provisions resulted.3

The Global Financial Crisis of 2007-2012 Whether the radical transformation of the Spanish cajas that occurred in the period between 2010 and 2013 would have happened in the absence of the global economic crisis that hit the Western world beginning in late 2007 is an open question. To be sure, the challenges facing the Spanish financial system because of its reliance on a sizable network of small savings banks might have provoked further consolidations and reforms at some point even in the absence of this economic crisis. Indeed, some critics have turned this argument on its head, suggesting that it is not the economic crisis that caused the need to transform the cajas but rather the transformation of the historically-grounded

2 Royal Decree 2290/1977 was approved on 27 December 1977, establishing a specially designed governance structure for all the cajas (called “Decreto Fuentes-Quintana,” for the Economy Minister in office at the time).

3 This is a main conclusion of the 11 November 2018 report made by the Research Committee of the Congress of Deputies on the public management of the crisis and, in particular, the transformation of the savings banks.

cajas that caused the economic crisis, at least as it manifested itself in Spain.4 But the preponderance of the evidence suggests strongly that the economic crisis certainly affected the timing of the transformation of the cajas, if not the ultimate direction or inevitability of it.

What is clear is that the impact of the 2008 global financial crisis did not really hit Spain until 2010, though its effects were already being felt in 2009. These effects fell particularly sharply on the country’s banking sector. This was so because, by weakening the Euro, reducing the demand for Spanish products, limiting Spain’s ability to finance its debt, and thereby forcing the country to reduce government spending, the growing global economic crisis pushed Spain into an economic recession. Indeed, by 2010, Spain was falling into a serious economic downturn, with unemployment rising to almost a quarter of the working population, GDP falling, and workers unable to meet the payments on their mortgages, many of which had become grossly inflated as a consequence of the real estate bubble that had greatly over-valued the Spanish real estate sector during the previous decade or more.

Given their heavy concentrations in mortgage lending, these developments hit the cajas especially hard. And given the prominent role of the cajas in the Spanish banking sector, they produced a crisis for the banking system as a whole. With workers thrown out of work and unable to meet the payments on their mortgages, and the value of the mortgages depressed by the bursting of the real estate bubble, sizable proportions of the cajas faced a very real bankruptcy threat. Complicating this situation further was the uncovering by federal authorities of collusion between public officials serving on the boards of several of the largest cajas and the supervisory organs of the government supposed to regulate these institutions (El Pais, 2017). More than 100 directors and administrators were prosecuted for crimes resulting from this collusion, damaging the image of the entire caja sector and reducing its ability to resist calls for reform (Marco, 2014; Noceda, 2018).

Despite its reputation for resisting the structural weaknesses affecting other Spanish cajas, la Caixa, too, was swept up in the reform process triggered by the international crisis.

Pressures for Reform—Internal and External As noted previously, almost alone among all the Spanish cajas, la Caixa was renowned for having resisted these pressures and retaining a strong, independent, business-like identity along with a deep commitment to its social mission. Nevertheless, it, too, was swept up in the reform process triggered by these broader economic developments. That reform process began in 2009. La Caixa’s role in at least the early part of this process was somewhat different from the other cajas, however, as it functioned as one of the rare sources of strength against which the government sought to lean some of the weaker cajas. In particular, with many of the cajas needing government assistance in order to remain solvent, the Spanish government, through the Bank of Spain, took a first step in 2009 by creating an Ordered Banking Reorganization Fund (FROB) to capitalize the least solvent cajas. But, as a condition of receiving the bail-out funds, these banks had to submit to an Institutional Protection System (SIP) involving what has been called a “cold merger,” i.e., the grouping of most of the remaining cajas into a series of bank holding companies. Altogether, 40 savings banks were grouped into seven such

4 For information on a parliamentary body that pursued this theme, see: Congreso de los Deputados, July 2018.

holding companies and equipped with emergency influxes of capital.5 La Caixa ultimately participated in this restructuring process by purchasing—and ultimately fully absorbing— one of these holding companies, the Banca Civica group.

Within a year, however, it became apparent, that this FROB-SIP response merely put a fig leaf over the serious structural problems facing the Spanish cajas. In particular, it failed to address the challenge of cleaning up the toxic assets that were pushing the cajas toward insolvency, let alone the underlying structural problems that led to the over-reliance on such assets—the non-owner structures, the political “occupation” of their governing bodies, and the resulting lax regulatory arrangements under which they operated (Martínez Rosado, 2010; Carbó Valverde & Maudos, 2010). Unable to finance additional bailouts, Spanish authorities were forced to approach the European Central Bank, other EU entities, and the International Monetary Fund (IMF) for help.

These external actors had their own ideas about the conditionality that would need to be attached to any EU or IMF assistance, however (Otero-Iglesias et. al., 2016). In fact, the IMF had already elaborated a plan of action for the reform of the Spanish cajas in a Financial Sector Assessment Program developed in 2006, well before the financial crisis even hit. With the cajas and the Spanish government “on the ropes,” the IMF and its European partners were quick to resurrect this earlier proposal and reintroduce it in 2010 as the “Road Map” for the reorganization of the Spanish banking system, with particular emphasis on the reorganization of the failing cajas.

The centerpiece of this road map was a proposal to “privatize” the Spanish cajas—i.e., to transform them into true stock companies that could issue shares on the European stock markets and function as full, for-profit, corporate enterprises. Given the Spanish public’s hostility to the concept of “privatization,” this term was not mentioned in public documents or discussions. Rather, the cajas would have to be “transformed,” their charitable functions separated from their purely banking functions, and the banking functions reconstituted as separate for-profit legal entities free to pursue their banking functions under the same regulatory structures as other for-profit financial institutions.

This process of transformation was codified in a July 12, 2012, Memorandum of Understanding on Financial Sector Conditionality6 agreed to by the IMF, the EU, the European Central Bank (ECB), the Bank of Spain, and the Spanish authorities. After acknowledging that: “[t]he Spanish banking sector has been adversely affected by the burst of the Spanish real estate and construction bubble and the economic recession that followed,” the memorandum emphasized that the resulting “concerns about the viability of some of these banks” had become a “source of volatility” for the Spanish economy more generally.

To deal with this problem, the MOU committed Spanish authorities to carry out a series of “stress tests” to establish the viability of individual Spanish banks, and, where shortfalls that could not be met from internal sources were identified, to formulate plans for what were euphemistically referred to as “recapitalization, restructuring, or resolution actions.” Interestingly, this Memorandum never mentioned the Spanish cajas, nor “privatization,” but it must have been clear to all involved that the cajas were the principal targets and that “restructuring” meant conversion of these non-owner savings bank into regular market-

5 Several other cajas were “cold merged” into other holding groups during the same time.

6 See: ec.europa.eu/economy_finance/eu_borrower/mou/2012-07-20-spain-mou_en.pdf

oriented financial institutions subject to the same basic regulations as regular commercial banks. From the evidence at hand, there was no fundamental push-back against this basic restructuring of the caja system. Certainly, the traditional for-profit banking institutions did not resist. They had always viewed the activity of the savings banks with suspicion as competitors with notable privileges in the form of permissive regulation, lack of responsibility to shareholders, and excessive linkage to, and protection by, public authorities. Once the cajas were released from the obligation to focus exclusively on their original territories—a move that occurred in the late 1980s and brought them into more extensive competition with the for-profit institutions—the resulting concerns about their privileged status merely intensified. Particularly bothersome to the for-profit banks was that the legal system allowed cajas to acquire for-profit banks, but the for-profit banks could not acquire cajas. The restructuring would put both sets of institutions on a more level playing field.

Nor, apparently, was there resistance from the cajas.7 Certainly, la Caixa’s directors did not resist this “restructuring” (a.k.a. privatization). To the contrary, they seemed to welcome it. In fact, the Board of Directors of la Caixa in January 2011—i.e., a full year and a half ahead of the July 20, 2012 Memorandum of Understanding that set in motion the restructuring of the rest of the caja network—made a complete restructuring of its own organization along precisely the lines that the troika would ultimately encourage. In particular, the trustees established a holding company, called "la Caixa," which transferred its entire banking business to a wholly-owned subsidiary called CaixaBank. Into this new "la Caixa" holding company as well went the previous investment company that the savings bank had created, now called CriteriaCaixa Holding, along with the entity, called la Caixa Foundation, that had previously been formed to handle the savings bank’s charitable activities. In short, while transforming the original trustee savings bank into a for-profit company, la Caixa’s directors created a legal structure through which to maintain ownership and control not only of this “new” for-profit bank, but also of the investment management company that the savings bank had created to hold and manage its accumulated investment assets as well as the foundation the savings bank had created to distribute some of its profits.

That the decision to convert la Caixa into a for-profit enterprise led to the creation of a sizable, independent foundation was by no means inevitable.

THE “PHILANTHROPICATION DECISION” Viewed retrospectively, it is easy to perceive what we have here termed the “philanthropication decision,”—i.e., not just the hiving off of a for-profit bank from the charitable activities of the former savings institution, but the vesting of the resulting charitable institution with the full assets of the former savings bank—as an undifferentiated, inevitable part of the privatization decision. However, two signal realities argue against such an assumption and therefore make it imperative to understand the additional factors that led to this dramatic PtP-type outcome:

Î The first of these is the action taken by the board of la Caixa noted above.This major restructuring, carried out well before the infamous July 2012 Memorandum of Understanding between the Spanish authorities and the troika of international actors, did

7 CECA, the trade association of the cajas, did push to maintain the obra social (social mandate) of the original savings banks and resisted later plans to limit almost completely joint memberships between the boards of the new commercial banks and the newly reconstituted banking foundations. See: Barrón (2010).

not involve the vesting of the assets of the previous savings bank into the hands of the separately constituted la Caixa Foundation (LCF). Rather, LCF remained just one of several entities brought under the umbrella of the newly constituted "la Caixa" holding company run by essentially the same trustees as the previous savings bank.

Î The second is the fact that the Memorandum of Understanding between Spanish and international officials did not utter a peep about the disposition of the charitable arm of la Caixa or the other Spanish cajas, or about what assets, if any, of la Caixa or the other savings banks the newly reconstituted "la Caixa" Banking Foundation or its sister institutions should acquire. Indeed, this Memorandum never explicitly singled out the cajas as a particular focus of the restructuring that ultimately occurred, though it is clear from other sources that this was a primary focus of concern.

It was thus not until more than a year later that a fundamental new law (Law 26/2013 of 28 December8) was passed making it mandatory not only to transform the savings banks into for-profit banking institutions, but also to separate these for-profit banks from their former charitable arms and leave to these newly transformed independent foundations the vast majority of the assets of the former savings banks. In short, it mandated a “philanthropication thru privatization” outcome.

In compliance with this mandate, in May of 2014, the General Assembly of "la Caixa" holding company (essentially the board of the prior savings bank) basically voted itself out of existence, established CaixaBank as a wholly separate legal entity, and left the newly independent "la Caixa" Banking Foundation in control of the separately constituted management company, CriteriaCaixa Holding, through which it also came into control of the investment assets of the former savings bank as well as 60% of the shares of the new for-profit CaixaBank. Even so, this did not fully clarify all the interlocking legal and financial arrangements among the new "la Caixa" Banking Foundation (LCBF), CaixaBank (CXB), and CriteriaCaixa Holding (CCH), though it clearly set in motion a process of negotiation that by 2017 led to the “prudential deconsolidation” agreement among these parties and Spanish regulatory authorities that decisively separated the CXB from LCBF and its newly acquired investment company and thus firmly completed the PtP process.

What factors ultimately led to this PtP outcome? Why did the transformation of this once quasi-public savings bank into a private, for-profit company lead ultimately to the emergence of the full-fledged, endowed, independent PtP "la Caixa" Banking Foundation that now exists?

Fundamentally, two sets of factors seem to have been involved in this process: first, a set of background factors that conditioned this outcome; and second, a set of more proximate factors that may ultimately have been crucial in causing this transformation/ privatization of a savings bank to lead as well to the creation of a substantial new PtP foundation. Let us look briefly at each of these two sets of factors.

Background Factors Historical origins. Among the background factors driving the decision to pursue a PtP outcome in the case of the la Caixa transformation was the clear historical background of the entire network of Spanish cajas as dual-purpose institutions functioning as credit

8 Available at: boe.es/buscar/doc.php?id=BOE-A-2013-13723

entities serving the social purpose of integrating working class individuals into the financial system and using whatever surplus this produced to pursue a “social mandate” aimed at general interest purposes (Velarde Fuertes, 2018). To be sure, there was no legal requirement that assets generated through such operations be dedicated to social benefit purposes. Although, like many countries, Spain’s Law 49/2002 on foundations did require that, upon the dissolution of a foundation, all the assets resulting from the liquidation process must remain committed to general interest purposes, the Spanish cajas were not foundations in strictly legal terms. Since they were not public entities either, they were not subject to the solid doctrine of “public property” (public domain) that applies to entities of a strictly public nature. Nevertheless, a strong social expectation historically developed that these entities differed from regular commercial banks precisely because of their public-benefit objectives. The social mandate, or obra social, thus became a kind of social obligation akin to the concept of corporate social responsibility—not legally required but socially expected (Biox Palop & Salcedo, 2006; Martínez-Campillo et. al., 2013). This expectation historically figured prominently in how the cajas presented themselves and likely helped them attract customers. In addition, numerous regional laws reinforced this sense of social obligation by committing cajas to invest in local public-purpose endeavors, often of an economic development nature.

The question of what would become of this public-benefit function of the cajas as they went through the crisis-induced transformation process, while not a central concern of the IMF and EU, surfaced as a matter of some concern among the Spanish authorities and the Confederación Española de Cajas de Ahorro (CECA), the main association representing the cajas as a group. CECA’s President from 2010 on, Isidro Fainé, who also happened to be President of la Caixa and a main counselor of LCF, argued that preserving a visible “social work” component for the transformed cajas—even if only in the form of a kind of “corporate social responsibility”—was crucial for the continued marketing of the transformed caja institutions to avoid their further deterioration as their banking operations were split off as essentially commercial enterprises. The fact that the "la Caixa" holding company structure created in 2011 included a foundation as the institutional embodiment of this commitment certainly seemed to reflect this line of argument.

Popular aversion to privatization. Reinforcing the pressures to find a way to preserve the social function of the cajas in the process of privatization/restructuring, however, was the longstanding popular Spanish aversion to the privatization of public or quasi-public entities. This reflected the French legal-administrative doctrine of the “service publique,” which took root in Spain as well, and which viewed the state as the provider of crucial public services and looked with suspicion at any process threatening to undermine such public ownership or provision (Chevallier, 2012; Brillet, 2004). Reflecting this, prior to the economic crisis of 2008-2012 there was not a big trend toward privatization in the “general public services” in Spain. While there was some privatization of former public industries and utilities, in the social service fields the most that occurred was some form of “outsourcing.” But this did not entail the loss of public ownership either of the services or the assets mobilized to provide them (Arocena, 2004; Warner & Bel, 2008).

In a sense, therefore, the process of transforming the old cajas into new for-profit, commercial institutions without making provision for the retention of their previous charitable functions in some capacity might have provoked significant popular push-back.This may help explain why this whole process was not characterized as “privatization,” but rather euphemistically as “transformation” or “restructuring,” or even more mysteriously as “bancarization.” Rather than delivering these new banks to the totally open market, they were thus enjoined to create

visible “foundations” to make clear the continuity of their charitable functions—though it was not until later in the process that these foundations were endowed with the substantial assets of the preexisting savings banks.

Proximate Factors As important as the background factors of historical heritage and popular anti-privatization philosophical convictions were to the PtP outcome of the Spanish savings bank transformation, they did not quite dictate the form that the preservation of the charitable function of the old cajas, including particularly la Caixa, would take. Indeed, as already noted, the solution initially adopted by la Caixa in 2011 could have sufficed. That solution involved the creation of a holding company that in turn “owned” three distinct entities—the new Caixabank, the CriteriaCaixa investment company, and the new la Caixa Foundation. In this structure, the previous la Caixa board retained control of all three entities, almost as it had before through the whole, simpler structure of the former savings bank.

But this is not the solution that survived. Rather, in a process that took six years to evolve, a much more complex arrangement took shape that more closely resembles the one that the PtP concept has found operating in over 600 other cases—namely, the formation of a largely independent foundation in possession of all or a substantial portion of the assets of the previous public or quasi-public entity and sharply separated from that former entity. Essentially, two factors seem to have been at work to produce this outcome in the la Caixa case.

The Italian example. The first of these was the example of the similar process of transformation that the network of Italian savings banks underwent in the early 1990s, more than two decades earlier (Salamon, 2014, pp. 1-6). In the Italian case, EU authorities, with support from the IMF, urged the Italian government to transform its network of 88 relatively small, under-capitalized “trustee savings banks” into for-profit stock companies to avoid bankruptcies as a result of financial downturns or growing competition from better-financed European banks. The Italian Parliament acceded to this EU pressure in 1990, provided significant financial incentives for the savings banks to undergo such transformations into stock companies, but then placed all of the initial stock of the resulting joint-stock banks into the charitable arms of the previous trustee savings banks—creating, almost overnight, 88 foundations owning 88 banks.

From all indications, the Italian example was well-known in Spain at the time of the transformation of the Spanish cajas. In fact, the authors of the 2006 IMF Financial Sector Assessment Program (FSAP), which became the basis of the troika’s 2012 MOU, were Italians, though, as IMF economists, their focus was on the privatization dimension of the Italian experience rather than its “philanthropication” dimension. Nevertheless, the “Italian model” became a kind of template for the recession-induced transformation of the similar Spanish institutions, demonstrating the power of such previous examples for stimulating copy-cat transformations in other settings.9 In the process, this model helped to legitimize the parallel creation of joint stock banks and charitable endowments as understandable byproducts of the conversion of dual-purpose savings institutions into for-profit enterprises.

9 The Philanthropication thru Privatization Project is fundamentally built around this realization. Accordingly, the Project began by documenting what turns out to be an even larger scale of such PtP transactions around the world, as well as the considerable diversity of asset classes that have led to such endowed charitable foundations. In addition, the Project has generated a variety of case studies of other PtP institutions as well as a series of “how-to” booklets discussing how the PtP concept can be applied to other asset classes. These materials are available at p-t-p.org. For further information, contact the Center for Civil Society Studies at Johns Hopkins University at [email protected].

EU intervention. An important difference between the Italian and Spanish cases—at least so far as "la Caixa" Banking Foundation is concerned—was that the ownership shares left in the hands of the charitable arms of the new Italian “foundations of banking origin” were not very valuable at the time of the transformation. Rather, it took a decades-long process of combinations, mergers, and financial institution growth for the new foundations to see their bank shares transformed into massive foundation endowments, outdistancing some of the major global charitable foundations.

By contrast, in the case of la Caixa, by the time of the transformation it had already absorbed the resources and marketing power of numerous other cajas both before and during the transformation process and was the owner as well of a substantial investment company— CriteriaCaixa Holding—in possession of billions of Euros of Spanish and global investments. Understandably, the trustees who had been responsible for building up this impressive asset base were reluctant to surrender control of it, or of the banking enterprise responsible for generating it. This may be why the original 2011 la Caixa “privatization” process did not just hive off the savings bank as a separate institution. Rather, it kept the new commercial banking institution, CaixaBank, as part of a new holding company arrangement along with the investment company and the newly reconstituted la Caixa Foundation, all of this under the control of the existing board chaired by the influential Isidro Fainé.

Whether this arrangement could survive given EU rules prohibiting foundation ownership of banks was far from clear, however. But it took another six years to resolve the issue of who would ultimately own the newly formed, commercial CaixaBank, and who would ultimately own its substantial assets. As a first step toward resolving these questions, following the passage of the Law of Savings Banks and Banking Foundations (Law 26/2013), which stipulated greater institutional separation between the restructured cajas and the foundations into which they were obliged to place their assets, than was evident in the "la Caixa" holding company arrangement provided, la Caixa's Board came up with another ingenious solution designed to retain its control of the entire complex of institutions and associated assets. In particular, in 2014 it made CriteriaCaixa Holding (CCH), the investment company, the owner of 60% of CaixaBank (CXB) stock, and simultaneously put it under the control of "la Caixa" Banking Foundation (LCBF)—which gained 100% ownership of CCH along with all of its investments. This meant that the entity that controlled LCBF also controlled the investment company, and through this control also effectively controlled CaixaBank.

As part of this rearrangement, however, in June of 2014 the president of CaixaBank, Sr. Fainé, was elected chairman of the Board of Trustees of LCBF (Salvador Armendáriz, 2014). This new position essentially left him, and his fellow CaixaBank board members, in charge of the entire "la Caixa" ensemble. In other words, the governing board of CXB essentially became the governing board of LCBF, and from this new institutional perch were poised to maintain their supervision of the entire "la Caixa" complex. This outcome was fully consistent with the opposition that CECA, the trade association representing the cajas, raised throughout the restructuring debates to any measure forbidding board members of the foundations from participating in the boards of the banks.

As a further indulgence to these former owners, Law 26/2013 reduced the mandatory payout requirements imposed on the banking foundations below those applied to ordinary Spanish foundations, thereby allowing the banking foundations to conserve a greater percentage of their endowments rather than using them in their philanthropic programs.

But this was not the last chapter in this saga. Although the initial board of LCBF might have preferred to maintain control of CaixaBank through its ownership of CriteriaCaixa Holding,

the Bank of Spain and the European authorities had other ideas. In particular, within three years of this fortuitous realignment that left the original board of la Caixa in charge of all three of the resulting institutions—CXB, CCH, and LCBF—the ECB and the Bank of Spain intervened to undertake a fuller “deconsolidation” of these entities to bring them in line with EU rules prohibiting ownership of banks by foundations or other business groups. In particular, this required full separation of the management of the banking business (CXB) from the management of either the foundation (LCBF) or the investment company (CCH) by prohibiting overlapping memberships on the boards of these different institutions. In addition, LCBF’s stake in CXB through its ownership of CCH had to be unwound by reducing CCH’s ownership of bank shares from 60% to less than 40% (Lamas, 2014).10

CONCLUSION Out of the chaos of the Spanish economic and financial crisis of the second decade of the 21st century has thus emerged an impressive structure consisting of a highly successful “new” commercial bank with a decided commitment to social responsibility and a loosely affiliated, but legally separated, massively endowed, charitable foundation. Both CaixaBank and "la Caixa" Banking Foundation have grown economically and in territorial scope and taken their places as first-in-class institutions. CXB has become the second largest bank in Spain, and LCBF has become the largest foundation in Spain—and at least the third largest in Europe and perhaps the world. CXB has not only grown, but has outdistanced other Spanish banks in reputation (Ruiz Sánchez et. al., 2014)—a feat that very likely has something to do with its strong association with its former “social mandate,” now institutionalized in a major charitable foundation in control of a sizable endowment invested not only in CaixaBank but also in a host of national and international enterprises through its own investment company. As if to symbolize this connection, the two institutions, though legally and organizationally separate, occupy connected twin towers that dominate the skyline of Barcelona’s business district and share a common entryway and underground cafeteria.

It cannot be said that there was a clear strategic program that led unwaveringly to this result. The international authorities had one set of goals and the local operators of the cajas had another. In particular, in the case of la Caixa, given its solvency and good reputation, it was in a position from the very beginning to take advantage of the fluid situation to reinvent itself and to improve its business and solidify its social identity in the process. At the same time, it was ultimately obliged to accept a PtP outcome that not only “privatized” the original quasi-public savings bank and turned it into a for-profit enterprise, but also left most of its assets in an independent, private, nonprofit charitable foundation while severing the cords linking control of this foundation and control of the new commercial bank.

But the mere creation of a sizable independent charitable foundation out of the transformation of a previously quasi-public institution is not a sufficient validation of the PtP concept either in the case of "la Caixa" Banking Foundation or more generally. Equally important is an assessment of the governance of the resulting charitable institution and the uses to which it puts its considerable resources. It is these two topics that we therefore take up in the next two parts.

10 See also: "CriteriaCaixa crea una Comisión de Estrategia para el seguimiento de sus inversiones" (CriteriaCaixa creates a Strategy Commission to track your investments).

LA CAIXA FOUNDER AND GENERAL MANAGER, MR. FRANCESC MORAGAS, WITH BANK EMPLOYEES (CIRCA 1930).

© Historical Archive of “la Caixa” Banking Foundation Salamon and Alli Turrillas • Spain’s "la Caixa" Banking Foundation • PART II: GOVERNANCE & ORGANIZATIONAL STRUCTURE • Page 28 PART III: Governance & Organizational Structure

INTRODUCTION A key premise of the PtP concept is that the charitable institutions that emerge from transactions involving the transformation of public or quasi-public assets into commercial enterprises must be held to the highest standards of transparency, avoidance of conflicts of interest, independent governance, and sound programming. How well does "la Caixa" Banking Foundation reflect adherence to these standards? This section and the one that follows explore the answers to this crucial question, with the present section focusing on the issue of governance and management and the one that follows on issues of transparency, conflict of interest, and programmatic substance.

LEGAL FORM The entities that come into possession of formerly state-owned or quasi-public assets through PtP transactions can take a number of different forms. They can be:

Î Private, grant-making foundations. These are organizations that are set up chiefly or exclusively to make grants to other nonprofit organizations.

Î Operating nonprofit organizations(e.g. schools, hospitals, museums, human rights groups, NGOs). These are organizations that are prevented by law from distributing any profits they may earn to their directors, managers, investors, or other stakeholders and that operate programs and deliver services but generally do not make grants. PtP only covers cases where these organizations acquire “endowments,” i.e., permanent assets the earnings from which are used to finance their programs.

Î Operating foundations. These are private foundations that use the bulk of their resources to provide charitable services or run charitable programs of their own, but that also make grants. In some places they finance their activities in part from their endowments and in part from resources they raise from outside sources.

Î Cooperatives, mutuals, or social enterprises. These are organizations that are owned by their “members” or that serve social purposes and that operate under some limitation on their distribution of profits (UNSD, 2018).

In the case of the assets secured through the transformation of la Caixa into a for-profit commercial bank, the entity that received the assets generated by this transformation was a grant-making foundation, legally registered as such according to the Spanish law on foundations, Law 50/2002. However, this was an unusual such foundation not only for

Spain, but even among other global PtP foundations. This was so for a variety of reasons. For one, the charitable arm of la Caixa—which formed the base for the ultimate "la Caixa" Banking Foundation—traced its origins back to the founding of the la Caixa institution in 1904 and evolved substantially before the transformation that established it as an independent foundation when its former parent bank was hived off and set up as a separate, for-profit institution. Reflecting this, the foundation that emerged from this long and complex history, "la Caixa" Banking Foundation (LCBF), is much more than a typical grant-making foundation. In addition to its grant-making activities, which are substantial, LCBF operates its own programs, manages its own nonprofit organizations (e.g., museums and conference venues), and attracts funds from other institutions to finance joint undertakings. This reflects the historical nature of savings banks in Spain, which, as part of their being, carried out a substantial quantity and range of philanthropic activities (the obra social or “social mandate”) (Calvo Bernardino & Vidales- Carrasco, 2017; Ituarriaga et. al., 2007). In a word, despite its relatively recent creation as a separate, free-standing institution, LCBF functions as a highly complex “operating foundation,” merging substantial grant-making with a host of direct philanthropic engagements.

In addition to this, a second factor contributing to the special character of "la Caixa" Banking Foundation is the fact that the la Caixa savings bank from which this foundation emerged had, in 1990, created a separate corporate foundation as a philanthropic arm of the savings bank to organize and manage what had by then already become a considerable array of philanthropic activities. This meant that a distinct governance and management structure was already in place at the time of the PtP transaction.

In the third place, as noted previously, in the course of the transformation that led to its establishment as a separate institution, LCBF acquired a sizable investment company, CriteriaCaixa Holding (CCH), which had been created earlier to manage la Caixa’s sizable investment portfolio. This has naturally added other complexities to its operations and management.

Finally, like the other foundations created as a byproduct of the restructuring of the Spanish cajas, LCBF found itself subject not only to Spain’s general law on foundations, Law 50/2002, but also to Law 26/2013, which, as noted in the previous section, spelled out the legal framework for the entire transformation of the Spanish cajas and imposed requirements on the newly-created banking foundations that took precedence over those embodied in the general foundation law. Of special concern to us here are the limitations that Law 26/2013, and its subsequent amendments, placed on the presence of public officials in the governance structures of the resulting foundations and the absolute separation that was ultimately mandated between the governing boards of the foundations and those of the transformed parent banks. These provisions were put in place to avoid the problems that helped cause the downfall of the prior cajas, many of which were effectively captured by local and regional political authorities who used them to promote pet projects of dubious financial promise. But the new structures sought as well to avoid any other “organic contamination” between the banking business and the philanthropic action, regardless of the source (Quintás-Seoane, 2018).

How has "la Caixa" Banking Foundation navigated these complexities? Overall, the record is quite positive, although the process of implementing the mandate to separate the governance of LCBF from the governance of the newly-created CaixaBank (CXB) remained a “work in progress” through the first several years after the legal transformation.As of this writing, however, even this process seems to have been resolved. To see this, the present section examines more closely the governance structure and management of this PtP foundation.

A key premise of the PtP concept is that the charitable institutions that emerge from PtP transactions must be held to the highest standards of transparency, accountability, independent governance, and sound programming. Overall, the record of "la Caixa" Banking Foundation here is quite positive.

OVERALL GOVERNANCE STRUCTURE According to Spanish Law 50/2002, the central governing body of a foundation is its Board of Directors, or Patronato, which is to include a minimum of three and a maximum of fifteen members. The Law gives the governing board broad authority and great independence to set the goals and programs of the foundation within an expansive conception of what is “philanthropic,” and holds it responsible for diligently pursuing the foundation’s purposes and administering its assets. Under the general Spanish law on foundations, such organizations are required to devote 70% of the income they secure from their assets on their charitable activities within four years of earning this income. The board is obliged to meet regularly but can appoint and empower an Executive Committee from its members and such other committees it deems useful. The board can also name a foundation Executive Director and has the responsibility for reporting periodically to official oversight bodies, which, in the case of the foundations created out of the transformation of the previous cajas, includes the Bank of Spain and the Ministry of Economy and Finance.

"La Caixa" Banking Foundation fundamentally adheres to this basic Spanish law on foundations though, as noted earlier, it is also subject to the somewhat more demanding provisions of Law 26/2013. Three aspects of the LCBF governance structure are of particular interest in this connection: (a) board composition; (b) decoupling of bank and foundation governance structures; and (c) board operations.

Board Composition Both the Spanish foundation law and Law 26/2013 impose restrictions on the composition of "la Caixa" Banking Foundation’s board, and these have been elaborated in the LCBF’s bylaws. Two sets of provisions are applicable here relating both to mandatory inclusions and mandatory exclusions:

a) Mandatory inclusions. Article 11 of "la Caixa" Banking Foundation’s bylaws1 (estatutos fundacionales) specifies certain categories of patronotos to be included on the LCBF’s board. These mandatory inclusions relate only to four of the potential 15 permissible board positions, leaving ample room for board discretion in filling other board positions. In particular, board members must:

z Be relevant people in the scope of action of LCBF’s philanthropic ends, who meet the requirements of commercial and professional honesty, and have the specific knowledge and experience required for the exercise of their functions; z Include at least one member appointed directly by the entities that founded

1 See: obrasociallacaixa.org/documents/10280/931731/estatutos_de_la_fundacion_bancaria_la_caixa_2018_en.pdf

the original la Caixa institution (the “Founding Entities”2), in accordance with a rotating shift provided for in the bylaws; z Include at least one person representing “collective interests” in LCBF’s field of action to be appointed directly by the representative entities identified by the board; z Include at least one independent person with recognized professional prestige related to the social purposes of LCBF or in the sectors, other than financial, in which LCBF has relevant investments; and z Include at least one person of good experience and reputation who has specific knowledge and experience in financial matters.

b) Mandatory exclusions. At the same time, and consistent with the prohibitions written into Law 26/2013 to avoid political contamination of the foundations resulting from the transformation of the Spanish cajas, "la Caixa" Banking Foundation’s bylaws bar certain categories of people from board seats. In particular, forbidden from such participation are:

z Representatives of public authorities in any of its forms (national, regional, or local), or anyone who has served in such a capacity during the previous two years. This restriction is quite a bit stronger than required by Law 26/2013, which allows up to 25% of the members of the boards of the PtP foundations emerging from the transformation of the Spanish cajas to be government officials. This reflects the longstanding avoidance of governmental interference in the board of the predecessor savings bank; z The Presidents of the Founding Entities; and z Officials of political parties, business associations, or unions.3

De-Coupling Requirements As noted previously, Law 26/2013 setting the conditions of the PtP transaction stipulated a strict formal separation between the governance of the newly-established "la Caixa" Banking Foundation and that of the newly-transformed CaixaBank. This provision was further elaborated in a later Memorandum of Understanding calling for the “prudential deconsolidation” of the governance structures of LCBF and the re-constituted CXB. In practice, this process of deconsolidation did not happen immediately. Indeed:

Î When the transformation of the original la Caixa into three derivative institutions— CaixaBank, la Caixa Foundation, and CriteriaCaixa Holding—took place between 2011 and 2013, the governing parties in control of the former savings bank maintained their control of the three resulting structures through interlocking board memberships.

Î Following passage of Law 26/2013, a partial sorting out of board responsibilities

2 These “founding entities” were: Ateneo Barcelonés; the Catalan Agricultural Institute of San Isidro; the Barcelonian Economic Society of Friends of the Country; the Chamber of Commerce, Industry and Navigation of Barcelona; and the Promotion of National Work.

3 Now with very tight regulation regarding the limits in the position of public offices/officials: Law 3/2015, of 30 March, regulating the exercise of the high position of the General State Administration.

among these institutions took place. Thus, of the 21 board members that formed the highest governing body of the previous savings bank: six went on the 19-member board of CXB, the new for-profit bank; five went to the board of LCBF, the new foundation, making up a third of the foundation’s patronos; and nine went on the 17-member board of CCH, which had become the wholly-owned subsidiary of LCBF.

Î In several cases, moreover, a number of individuals from the governing board of the old savings bank ended up on the boards of more than one of the three resulting institutions. Thus:

z Isidro Fainé, the former President of la Caixa, along with two other senior savings bank officials, took board seats up through 2016 in the governing bodies of all three institutions. z Two of these former savings bank directors were on the boards of two of the resulting institutions, and six went to just one of them. z Through 2014, moreover, Sr. Fainé simultaneously retained the position of President of all three of the resulting entities, and one other prior board member remained Vice President of both CCH and LCBF.

Î As of this writing, after several clarifications of the original law, four persons who were on the board of the old savings bank in 2013 are still on the boards of two of the institutions that emerged from its transformation and three of these hold leadership positions. In addition, four other members of the previous savings bank board serve on the governing board of at least one of the three resulting entities that emerged from the la Caixa transformation, typically CCH. And three new LCBF board members also serve simultaneously on the board of at least one of the other resulting institutions, again typically CCH.

Î In at least two respects, however, the prudential deconsolidation mandate has been achieved:

z In the first place, where LCBF, through its ownership of CCH, initially owned 60% of the shares of CaixaBank, that ownership share has been reduced to 40% to limit the foundation’s influence on CXB. z Secondly, and perhaps most importantly, there is now no overlap between membership on the board of LCBF and membership on the board of CXB. The situation is somewhat different with respect to connections between the boards of CXB and CCH. One CXB board member simultaneously sits on the board of CCH—but this likely makes some sense since CCH owns 40% of the stock in CaixaBank. What is more, this is hardly a controlling position since the overall President of CCH is the President of LCBF, and 6 of the 15 LCBF board members are also members of the 15-member CCH board.

In short, the structural connections between CaixaBank and "la Caixa" Banking Foundation prohibited by Law 26/2013 and further elaborated in the deconsolidation agreement have been severed, though interlocking relationships do exist between LCBF and CCH. At the same time, the shared origins of CXB and LCBF have been carefully preserved in the branding of the two institutions and given physical embodiment in the neighboring and interconnected twin towers that the two institutions occupy in central Barcelona. Whether this intentionally undercuts somewhat the required "deconsolidation"

between these two sets of institutions in the minds of the Spanish population remains an open question. What seems clear, however, is that the authorities have been willing to substitute for the complete separation of these institutions a set of protocols that both CXB’s and LCBF’s boards were required to sign outlining in some detail the permissible relationships among these institutions.4 Covered by this protocol, in addition to a reduction in the share of stock in CaixaBank controlled by "la Caixa" Banking Foundation, were detailed clarifications of such permissible linked intergroup operations as whether CXB could use LCBF to carry out its own corporate social responsibility programs (it can), and whether LCBF can utilize CaixaBank’s branch network to publicize the foundation’s philanthropic programs (it can). In this way, the leadership team that had performed so admirably in fending off local political control, building a highly successful banking institution, amassing an impressive asset base, and still pursuing a large and impressive set of charitable endeavors could pilot this set of institutions through the potentially disruptive PtP transformation process in a way that, as detailed more fully in Part IV below, retained many of the most positive features of the preexisting structure while putting them on a more sustainable and understandable foundation.

Board Operations Not only do "la Caixa" Baking Foundation's bylaws establish the composition of the board, but they also outline in some detail all the capacities, organization, duration, and election of the patronos. Based on these bylaws and other sources, several key characteristics of the governance of this foundation can be discerned:

Î A working board. In the first place, the bylaws make clear that LCBF’s 15-member board is a “working board.” According to the bylaws, the board is obligated to meet at least six times a year, and records for 2018 confirm that this number of meetings took place. There is also a recently-established (2019) Executive Committee composed of the President and Vice President of LCBF, the Secretary of the Board (with no vote), and five other patronos. This Committee is empowered to take decisions between meetings of the full board. Finally, the governance structure includes an Audit Committee that also involves board members and is charged with reviewing the accounts and external auditing of the foundation’s budget.

Î A largely volunteer board. According to both the general Spanish foundation law and Law 26/2013, the position of patrono of a foundation is voluntary and without salary. Board members can, however, receive compensation for expenses in the exercise of their duties (e.g. trips, meeting costs) as well as for the performance of specific tasks (e.g. the preparation of reports, special trips, delegated special tasks).5

While board service per se is voluntary, however, the six board members who also serve as directors of CCH, the investment company owned by LCBF, do receive salaries for their service on the CCH Board.6

4 Circular 6/2015 of the Bank of Spain, Section 2.3.

5 Foundation records for 2018 indicate that various board members received a total of €290,000 in compensation for such service expenses.

6 The President of the CCH board, who is also the President of LCBF, received more than €2.65 million in compensation for this service, though this probably pales in comparison with occupants of similar positions in for-profit investment companies in Spain and elsewhere in Europe. For instance, the Chairman of CXB received €3.8 million in 2018, and the Chair of CCH received €4.1 million in 2019.

One of the few criticisms of the governance structure of LCBF by external reviewers concerns the limited clarity that exists about the criteria for selection of replacement board members.

Î A self-perpetuating board. Law 26/2013 on banking foundations, like the general foundation law, leaves to each foundation’s bylaws—and hence to each foundation’s board—the determination of the duration of the term of board members, with just one exception: the appointed patronos who are “independent persons of recognized professional prestige in matters related to the fulfillment of the social purposes of the banking foundation, or in sectors, other than financial, in which the banking foundation has relevant investments” cannot be on the board for more than two terms of four years each (or 8 years).

In the case of "la Caixa" Banking Foundation, the board is empowered to choose who serves on the board. Board members are appointed to four-year terms, but these terms are renewable for as many times as the board determines. The one exception is the member serving on the board as a representative of one of the historical founding entities, each of whom serves only for two years and must be replaced on a rotating basis by a representative of one of the other founding entities. Clearly, the rules are designed to preserve the governance team that was largely responsible for the development of the assets and social programs that were built up by the former savings bank in the years that preceded the transformation of the entire set of Spanish cajas. While some turnover of membership has occurred, one of the few criticisms of the LCBF governance structure by external reviewers concerns the limited clarity that exists about the criteria for selection of replacement board members.

Î A powerful board. The law governing the Spanish banking foundations vests considerable power and discretion in the patronos of these foundations. Building on these provisions, the bylaws of LCBF identify no fewer than 23 separate functions that the foundation’s board is responsible for carrying out. Included here are the following:

z Appointing board members; z Appointing and empowering a Managing Director; z Approving regular action plans; z Preparing financial plans and approving budgets, annual accounts, and other financial dealings; z Approving the acquisition or disposal of assets; z Preparing annual corporate governance reports; and, perhaps most importantly, z Terminating the foundation if necessary.

Law 26/2013 also defers to the provisions of the general foundation law in giving the boards of these foundations wide discretion to set the programs and areas of their work so long as the programs are lawful and consistent with a very broad and inclusive conception of “philanthropy” (Alli Turrillas, 2010, p. 237).

LCBF has clearly embraced this discretion, noting in its bylaws that:

The foundation, with full respect for the law, within the fulfillment of its purposes in the circumstances of each time period, will have full freedom to manage the Obra Social [i.e. the philanthropic purpose] according to the specific objectives that, in the opinion of its board, are priorities.

Clearly, the laws and practice of "la Caixa" Banking Foundation establish this institution as an independent private philanthropic foundation with its own endowment, and with substantial control of its activities without governmental or other interference. This builds on a long tradition of independence and responsible governance that set la Caixa apart from some of the other Spanish cajas. Along with the origins of its endowment, these features easily make it a clear example of a well-functioning PtP foundation.

MANAGEMENT STRUCTURE Unlike many PtP foundations, which have had to build administrative structures and recruit competent staff largely from scratch, like Athene, who is said to have sprung full-grown from the head of Zeus, "la Caixa" Banking Foundation was already a nearly fully-staffed institution when it sprang full-blown from the bosom of its parent savings bank.

In particular, LCBF came equipped with a staff of over 400 people managing a wide array of social, educational, cultural, and scientific research programs and an array of wholly-owned other institutions, including: cultural centers (CaixaForum) in eight Spanish cities; a Science Museum (CosmoCaixa); an educational Garden (Cap Roig); and a center for dialogue and reflection (Palau Macaya). All of this put the employment base of this “fledgling” foundation ahead of most other PtP foundations and well ahead as well of a number of other charitable institutions. Thus, the Cariplo Foundation, a similar PtP foundation emerging from the transformation of Italy’s comparable savings banks in 1991, with an asset base of US$9 billion, employed only 61 people as of 2014. Compagnia di San Paolo, another Italian savings-bank-originated PtP foundation with nearly US$9 billion of assets, employed 89. Even the much older Rockefeller Foundation in the U.S., with US$3.5 billion in assets, employs only about 150 people in its broad array of domestic and international programs. The unusually sizable employment base of LCBF reflects the fact that LCBF is an operating—as opposed to only a grant-making—foundation. Indeed, an estimated 70% of LCBF’s programmatic initiatives are operated by the foundation's own staff rather than through grants to external organizations.7

Organizationally, LCBF structures its activities around three major programmatic divisions and several support units. The three programmatic divisions focus, respectively, on the LCBF’s three major philanthropic priorities: social affairs; scientific research and scholarships; and culture and education. Supporting these divisions are administrative units devoted to finance, information technology, communications, human resources, and general management. Taken together, the programmatic divisions account for 70% of LCBF’s employees, and the support units for roughly 30%. Among the program areas, however, there is considerable variation in the extent to which LCBF relies on its own staff as opposed to grants to external organizations. Thus, the Culture and Education division, which absorbs 25% of the foundation’s budget, accounts for 60% of LCBF’s employees. This reflects LCBF’s direct operation of the CaixaForums and other cultural institutions. By

7 Much of the information on internal staffing reported here is based on communication provided by "la Caixa" Banking Foundation Director of Strategic Planning, Mr. Angel Font, in an email dated 23 July 2019.

contrast, the Social division absorbs 57% of LCBF’s programmatic budget but relies more heavily on external organizations for program implementation and therefore employs only 30% of the foundation’s staff.

Because of its long, prior existence as an identifiable charitable arm of la Caixa, moreover, the newly autonomous PtP "la Caixa" Banking Foundation already was in possession at its emergence as an autonomous institution of the required systems for the formulation, implementation, and management of grant programs as well as the operation of an array of wholly-owned cultural and educational institutions.

Overseeing this complex organizational structure is a Managing Director, who is chosen by the board and responsible to it. The Managing Director functions like the CEO of a commercial business corporation except that while this individual can attend board meetings, he or she cannot be a voting member of the board. In addition, the board, and not the Managing Director, may appoint one or more Deputy Directors General and a General Secretary. Altogether, the management team makes up 11% of LCBF’s staff, or some 40 individuals.

All of this has allowed this newly independent institution to take its place quickly as a capable and effective charitable foundation.

CONCLUSION Built as it has been on the base of one of the most successful of the Spanish cajas— and the one that came through the financial crisis of 2008-12 in the strongest position— "la Caixa" Banking Foundation has taken its place as one of the largest charitable foundations in the world and has moved substantially down the road of establishing an independent governance structure and effective management system. Before reaching a final judgment on its record, however, it is necessary to look in Part IV at its programmatic achievements and the extent to which it adheres to the principles of transparency and accountability desired of effective PtP foundations. It is to this task that we therefore now turn.

CAIXAFORUM BUILDING, BARCELONA

Photo by Ricardo Gómez via Flickr (CC BY-SA 2.0) Salamon and Alli Turrillas • Spain’s "la Caixa" Banking Foundation • PART IV: FOUNDATION PERFORMANCE • Page 38 PART IV: "la Caixa" Banking Foundation Performance

INTRODUCTION Ultimately, the value of the PtP strategy must be judged not on the basis of the structure of the deals or the governance arrangements of the resulting foundations, but on the performance that these institutions achieve. Evaluating that performance is no small task, however. Systematic evaluation of the performance of charitable foundations is still very much in its infancy (Brest & Harvey, 2008). Even assessing the outcomes of individual programs is fraught with difficulties due to the intervention of external developments, the limited time frames over which such assessments are undertaken, and the cost of true controlled experiments. These challenges are especially significant in a case such as "la Caixa" Banking Foundation (LCBF), which is still a fledging among PtP foundations, but also an institution with a robust 100-year prior life as a charitable institution operating within the bosom of a highly successful and socially committed financial institution. Where should an assessment of the performance of such an institution start?

Ultimately, the value of the PtP strategy depends on the performance PtP institutions achieve. Here we examine two key performance dimensions: operational and programmatic. Overall, "la Caixa" Banking Foundation performs in the upper quadrant of foundations globally on both dimensions.

Despite these challenges, it is possible to reach some provisional judgments about how this institution is currently performing and how the resulting patterns compare to those previously in force. Broadly speaking, two primary areas of performance can usefully be examined: first, operational performance—i.e., the extent to which this institution is utilizing operational procedures consistent with best practice in the foundation field internationally; and second, programmatic performance—i.e., the extent to which this institution has given evidence of developing a systematic, proactive approach to the problems it is addressing rather than adhering to the more traditional, reactive, “whatever- the-postman-brings” approach to philanthropy that has too often characterized foundation operations. To be sure, such assessments are particularly hard to undertake in the case of LCBF because it is hard to differentiate the programmatic and operational features of this institution as they appear to us now as a newly-minted PtP institution from the accumulation of commitments and operational styles it inherited from its prior life as the charitable arm of a parent savings bank. Nevertheless, it is possible to make some judgments on these matters. In this chapter we therefore review the record of performance along both of these dimensions, looking first at the operational performance and then turning, in a subsequent section, to LCBF’s programmatic performance.

"LA CAIXA" BANKING FOUNDATION OPERATIONAL PERFORMANCE

Background In recent years a variety of “best practice” standards have developed within the foundation community to ensure that foundations operate in a fair and responsible manner and thereby retain the public’s trust. The most recent version of such standards, formulated by the European Foundation Center (EFC) in its EFC Principles of Good Practice1, for example, identifies four core “principles” of foundation operations: (1) independent governance; (2) sound management; (3) transparency; and (4) accountability. More specifically, the following summarizes some of the key attributes of well-functioning foundations that the EFC identifies as flowing from these principles:

Î The foundation has an identifiable and independent decision-making body which acts with high ethical standards and whose members are nominated in accordance with established principles and procedures.

Î The board sets out its strategic objectives and ensures that programs, operations and finances are in line with these objectives.

Î The foundation holds transparency at the core of all activities and makes its statutes, bylaws, guidelines for funding activities, as well as board and staff lists, annual reports, grant lists, and finances publicly and readily available. Information on grant programs and application procedures are publicly available and user-friendly.

Î Clear policies to address conflicts of interest exist for both board members and staff.

Î The foundation promotes effective and sustainable investment strategies.

Î Regular monitoring and evaluation of activities are a key part of the foundation’s operations.

How well does "la Caixa" Banking Foundation adhere to these principles and practices? To answer this question, we review six features of the current operational performance of this PtP institution:

1) The independence of its governance; 2) The presence and clarity of its mission and program statements; 3) The transparency of its operations; 4) Its conflict of interest policies and procedures; 5) The professionalization of its management; and 6) Its handling of its investment responsibilities.

Overall, in terms of adherence to accepted norms of foundation operational performance, we generally find that LCBF performs at what is likely the upper quadrant of charitable foundations globally, and among the best-in-class PtP such institutions, which themselves are leading institutions in terms of operational performance (Salamon 2014, pp. 94-110).

1 See: efc.be/about-the-efc/principles-of-good-practice

Independent Governance As noted in Part III above, independent, or at least “meaningfully autonomous,” operation is a core criterion for PtP foundations. For many PtP foundations, however, this has been a complicated criterion to achieve since many of these foundations have sprung to life from a base of state-owned assets and state entities have often retained significant influence.

In the case of the Spanish cajas, however, the transformation that gave rise to the PtP foundations was largely motivated by a desire to rescue the savings banks and their charitable arms from the undue influence that local and regional political authorities had acquired over their operations, often with disastrous consequences (Ureña Salcedo, 2005). Law 26/2013 therefore set a limit of 25% on the involvement of governmental officials on the boards of both the for-profit savings banks and the foundations that emerged from the transformation of the cajas. Since la Caixa had already distinguished itself from the other cajas by steadfastly resisting such political influences through its long history, it was natural for "la Caixa" Banking Foundation to go above and beyond the legal limitations on political involvement in its board by completely forbidding from service on its board not only all sitting government officials, but also all those who had served in a government position during the previous two years.

Somewhat more complicated in the LCBF case, however, has been to sever the close link between the foundation and the two other entities that emerged from the complex transformation process for this institution—CaixaBank (CXB) and CriteriaCaixa Holding (CCH), the investment company. As noted in Part III, a significant number of directors of the former savings bank, who secured seats on the new CXB board, also ended up with seats on the board of LCBF. As it turned out, as noted in the previous chapter, it took several years, and the intervention of the Bank of Spain, for these interlocking directorships between LCBF and CXB to be severed. Significant interlocking directorships and managerial roles persist, however, between LCBF and CCH, its wholly-owned investment house. While this makes sense since CCH is an institution in which LCBF holds a 100% ownership stake, it nevertheless raises the awkward possibility that CCH investments can become vulnerable to undue influence from LCBF charitable priorities, or that LCBF charitable endeavors can be circumscribed or influenced in response to CCH investment interests (AFI, 2018, pp. 56-67). What is more, personal conflicts of interest can arise. Fortunately, protocols to limit these risks have been established, and care has been taken to keep the LCBF presence on the board of CCH well below the share of seats that its 100% ownership share might entitle it. What is more, transparency and conflict-of- interest requirements have been established to provide further protections against undue interference between the two institutions, a point to which we return below. Nevertheless, considerable diligence will be required to ensure that these risks do not materialize. Like the other PtP case-study foundations examined by the PtP Project, "la Caixa" Banking Foundation is a mission-focused organization, with a compelling sense of mission, and one with a substantial pedigree.

Mission Statement Spanish foundation law requires every Spanish foundation to articulate a legally binding goal or purpose in order to be appropriately registered and thus enabled to operate. In the case of LCBF, as with the other Spanish cajas, such mission statements evolved from the historic concept of an obra social, or social purpose, that has been the driving

rationale for the caja saving bank institutions as a whole from their earliest origins. Meeting the legal requirement for the formal articulation of a mission statement was thus an easy task for the newly-formed "la Caixa" Banking Foundation. Indeed, the officials charged with the transformation of the la Caixa group spelled out this mission early in the 2013 transformation process and it was then ratified by the new LCBF board once this entity was registered as a foundation in 2014.

Consistent with the historic mission of the savings bank, this mission statement identifies the object of the foundation to be “the promotion and development of social, charitable, welfare, teaching and/or cultural works….” More succinctly, LCBF describes its mission somewhat grandly as: “To build a better and more just society, which gives more opportunities to people who need them most.” Like many of the other PtP foundations, "la Caixa" Banking Foundation has recognized the need to supplement its broad statement of mission with a more structured statement of institutional strategy.

Operating as it did within a highly dispersed institution with over 6,000 widely-scattered branches as of 2012, the charitable arm of la Caixa early established a pattern combining “reactive grant-making”—responding to proposals submitted to it by local groups in a variety of social areas—with a sizable set of core programs, many of which were operated directly by the bank’s charitable arm itself. In the process, 30 different programs, including several wholly-owned institutions, were established in the fields of social action, arts and culture, research, environment, education, and international cooperation.

In the wake of the 2013-14 transformation that set "la Caixa" Banking Foundation loose as a separate institution in possession of an investment management company with close to €26 billion in assets, it became clear that this institution needed a more formal strategic planning process.

Accordingly, "la Caixa" Banking Foundation’s management, within a year of LCBF’s formal establishment as an independent institution, secured the services of a professional strategic advisory organization with a background in assisting foundations to help it formulate a strategy that would allow it, as its CEO noted, to “become more efficient in [its] founding purpose.” The resulting 2016-2019 Strategic Plan2 identified ten main challenges facing LCBF, chief among which was “the need to carry out fewer programs so as to guarantee a better transformative impact.”

While this strategic planning process generated an initial strategy, however, it was conducted in a heavily top-down manner that failed to engage what was already a substantial professional staff and set of stakeholders, and therefore not easily integrated into the operational activities of LCBF. As a result, while the plan was distributed in hard copy it was never heavily disseminated, incorporated into LCBF’s website, or, except for its emphasis on the need for the new foundation to improve its visibility, explicitly implemented.

2 See: obrasociallacaixa.org/documents/10280/581852/guia_rapida_generica_en.pdf/f45d6b8c-fa10-4c9c-98dd-e3d- 0a8c91c0e

As the end of this plan’s timetable approached in 2019, therefore, a more elaborate and deliberate in-house strategic planning process was put into operation. This was kicked off by a survey sent to 150 international foundations that confirmed the utility of an in-house process that combined top-down activities to determine main strategic lines of action and bottom-up processes to identify concrete programmatic initiatives and mechanisms to measure progress towards them. Just as this plan was nearing completion, however, the naming of a new Executive Director, coupled with the onset of the COVID-19 pandemic and its attendant health, economic, and social implications, made it necessary to rethink this plan from top to bottom. That process is still under way as of this writing.

In short, though still under way, far more quickly than many established foundations, LCBF has taken steps to transform itself from a somewhat scattered set of programs and institutions operating as the charitable face of a savings bank into a more strategic social change organization operating according to more clearly articulated social objectives.

The original la Caixa distinguished itself from other Spanish institutions in the emphasis it placed on the transparency of its activities...and this tradition has continued in the new "la Caixa" Banking Foundation.

Transparency As the EFC Principles of Good Practice demonstrate, transparency has become an important norm in the foundation world. But it is also a controversial one. Many foundations believe that their work is private and therefore need not be divulged publicly. But this causes suspicions and charges of misuse of power, particularly since foundations typically enjoy a variety of tax advantages that imbue them with some public character.

Opaqueness and hostility to transparency have long been traditional features of Spanish public and private institutions (Transparency International, 2015). The original la Caixa distinguished itself from other Spanish institutions, however, in the emphasis it placed on the transparency of its activities, publishing each year a full budget of all its activities (banking and social) and an annual record of its “social mandate” activities that it made available in brochure form at the bank’s retail branches throughout the country.

Within a year of its transformation into an independent entity, LCBF was thus able to earn a “translucent” rating from the leading Spanish transparency watch-dog organization, well above the rating as “opaque leaders” assigned to the rest of the newly formed banking foundations (Martín Cavanna & Rodríguez, 2015, p. 35). This improved further with the issuance in 2015 of a special order by the Ministry of Economy and Competition (ECC Order 2575 of 2015), which imposed very strong additional transparency obligations on the Spanish banking foundations as well as a requirement to submit detailed annual corporate governance reports. Although LCBF continued to fall somewhat short of watchdog expectations with regard to the transparency of its selection process for board members, like other banking foundations it is required to submit records of its annual accounts, audit reports, and action plans to its oversight authorities, and to publish in an accessible place—typically on its website—regular corporate governance reports and management protocols recording its financial activity with its former parent bank and other linked entities, including its wholly-owned subsidiary, CCH.

Reflecting this, the "la Caixa" Banking Foundation website3 is replete with an extraordinary array of materials that easily exceeds that available on the websites of most European foundations. Included here are:

Î The mission statement outlining the LCBF’s vision and values;

Î Complete annual reports recording the LCBF’s activity, its governance structure (including board composition, appointments, and dismissals), an abbreviated summary of accounts, and a summary of all social purpose activity;

Î Grant guidelines for each program area, for example:

z In the Social Program area embracing 7 fields of activity—including poverty alleviation, social cohesion, and health—details are provided on 25 separate programs, such as childhood protection, employment insertion, and help and care for very sick and immobilized elderly people. z In the Research and Scholarship area, details are provided on 15 programs in such fields as health and life sciences, technology, and innovation.

Î Legal documents, such as statutes, bylaws, articles of incorporation, and PtP transformation documents;

Î Annual reports of corporate governance, covering the composition and operation of the governing body, investment actions, remuneration policy and remunerations received by Board members, financial activities carried out with the former banking entity and other related entities such as CCH, and the conflict of interest policy;

Î Annual financial statements;

Î Annual Plans of Action, which state each year’s planned philanthropic and programmatic activities, the expenses foreseen for each of those programs, and the investment and resources plan of the foundation for the coming year, as required by the Foundations Law; and

Î The market value of CCH assets and the record of CCH market transactions.

In addition, the LCBF’s wholly-owned subsidiarity, CriteriaCaixa Holding, maintains its own website4 on which it is obliged to provide similar detail on its governance and operations.

Not covered on the website are the names of grant program beneficiaries due to stipulations in Spanish law restricting such information without the express written authorization of the affected persons. But the total number of participants in each action and program, as well as the number of visitors to each of LCBF’s conference and cultural facilities, are all prominently noted.

In addition to its website, moreover, LCBF has established an active media presence. Indeed, one of the key priorities established in the 2016-2019 strategic plan was to boost this facet

3 See: fundacionlacaixa.org

4 See: criteriacaixa.com/home/home_en.html

of the foundation’s operations. Accordingly, a specific public information office was created and staffed with personnel with professional experience in a wide assortment of media (written press, web, social media, TV, and radio). Through these outlets LCBF maintains an active presence in Spanish society, emphasizing its commitment to public purposes and documenting this commitment through publicity about its varied social programs. Not only does it publicize its own activities, moreover, but also LCBF operates a kind of Spanish “social observatory” that documents key facets of Spanish society, such as social and demographic trends, economic developments, and educational progress.

In short, aside from detailed information on the selection process for board members and the names of beneficiaries of its activities, LCBF is an extraordinarily transparent institution, providing a broad array of information about its internal and external operations in a variety of accessible formats and through a variety of traditional and electronic media. The PtP foundations we have examined generally have robust policies and procedures to avoid conflicts of interest, and here as well "la Caixa" Banking Foundation exceeds even other PtP foundations.

Conflict of Interest (COI) Provisions In addition to an ambitious set of transparency provisions, "la Caixa" Banking Foundation also operates under a set of conflict of interest provisions that exceed even those applicable to most other PtP foundations. Indeed, it is subject to two different sets of such provisions— one typical of the COI provisions applicable to the directors or managers of any public or philanthropic institution, and another peculiar to PtP institutions, which manage assets originating from the transformation of public or quasi-public institutions.

With regard to the first of these, Law 26/2013, which covered the PtP transformation of the Spanish cajas, requires the resulting foundations to establish concrete COI systems in their Statutes for the members of the boards of directors and high executive officers. Reflecting this, Article 14 of the LCBF bylaws stipulates that in any transaction of this foundation in which any patrono or member of the managerial staff, or any person linked to them by “bonds of affection,” may have an interest, the patrono or manager must declare this interest to the board through the Secretary and, in the case of board members, abstain from voting. In addition, board approval of any such transactions must gain the favorable vote of at least two-thirds of the board. Similar requirements apply to regular employees of LCBF, who must also inform the board through the Director of Finance and Management about any possible conflicts of interest. Under the law, the LCBF board must carry out an annual review of possible conflict of interest issues and describe in its required annual corporate governance report how the issues were handled.

With regard to the second of these potential conflict provisions—those relating to interactions between the foundations and the institutions from which they drew their endowments—Law 26/2013 requires the foundations to abstain from undue or potentially harmful interactions between these institutions and to develop concrete protocols stipulating permissible such interactions (operaciones vinculadas). In the case of "la Caixa" Banking Foundation, the resulting protocol of relations was especially complex because it had to cover relationships among all three of the institutions that resulted from the 2013 PtP transaction—LCBF,

CaixaBank (CXB), and CCH. This protocol therefore had to take into account and protect: (i) the obra social of LCBF; (ii) LCBF’s endowment, which is managed by CCH but includes a substantial 40% share of CXB; and (iii) the commercial interests of CXB.

Responsibility for enforcing these protocols and relationships is vested ultimately in the Bank of Spain and two other institutions—the Ministry of Economics and the National Commission for Regulation of Market Institutions (CNMV). To ensure compliance, the three institutions that comprise the "la Caixa" family are treated as a bloc for oversight purposes and each is obliged to report to their respective oversight agencies on all intra-group relationships, with a consolidated Annual Report and a full sequence of accounts submitted to the Bank of Spain. It is then up to the Bank of Spain, with the aid of the two other institutions, to verify the provided information, force any updating required, and impose any sanctions considered necessary.5

Indicative of the seriousness of these provisions have been the steps required to be taken to avoid the possibility of "la Caixa" Banking Foundation dominance over CaixaBank. Thus, as already noted, LCBF’s wholly-owned management company, CCH, has been required to reduce its ownership of CXB shares from the original 60% at the time of the PtP transformation to no more than 40% in order to avoid a controlling interest in this commercial enterprise. At the same time, LCBF’s appointment of members of the board of CXB was cut from six persons right after the transformation to zero following the “prudential deconsolidation” forced by the European Central Bank in 2017-2018.

Nor is there any evidence in the record or in press or online accounts of any serious violations of these COI provisions. Thus, no fines have been levied by the CNMV or the Bank of Spain on any of the three "la Caixa" family institutions, including specifically "la Caixa" Banking Foundation. Nor has there been any known evidence of violations of the personal COI provisions. To the contrary, there is evidence of adherence to these provisions. Thus, in accordance with the COI provisions several instances of potential conflicts have been duly reported to the authorities and described in the Corporate Governance Report. These include: abstentions from voting by various board members on their own appointments to the LCBF board; decisions by the board of LCBF to sell shares of CXB and replace them with shares in several other commercial companies; and a decision by the LCBF Board President on the acquisition by CXB of the assets and liabilities of a foundation in which he was also a board member. Similarly, as required by the regulations, the annual LCBF Corporate Governance Reports as of the latest available years have identified all the “intra-group related transactions” among the "la Caixa" family institutions along with the steps taken to avoid self-dealing or undue risk.

In short, while interlocking board relationships still exist, it appears that an effective set of conflict of interest provisions is in place, and that "la Caixa" Banking Foundation and its sister institutions are effectively complying with them.

Unlike most other PtP foundations, "la Caixa" Banking Foundation came equipped with a sizable workforce, but has still undertaken steps to further professionalize it.

5 Both the COI policies and everything related to their enforcement is framed in a complex legal regime, including: Law 26/2013 on banking foundations, Law 50/2002 on foundations, and Law 10/2014 on formation, supervision, and solvency of credit institutions.

Professionalization As previously noted, "la Caixa" Banking Foundation came equipped with a staff of over 400 people managing a wide array of social, educational, cultural, and research programs and an array of wholly owned separate institutions.6 Taken together, this translates into an annual payroll of close to €25 million, with high-level managers earning approximately €90,000 on average, and other employees earning in the neighborhood of €60,000 on average, per the 2018 LCBF Corporate Governance Report.7 This suggests that LCBF is a fairly generous employer and thus able to attract well-qualified staff. A substantial portion of the approximately 400 employees of LCBF work in the wholly-owned and operated museums, conference facilities, exhibition centers, and arts centers through which this operating foundation extensively functions. In addition, the LCBF regularly mobilizes close to 5,000 volunteers.

Given LCBF’s origins as a component of a savings bank, it was not uncommon to fill vacant managerial positions in the philanthropic arena of the bank with senior employees of the savings bank, including personnel approaching retirement age. While such individuals were skilled in financial affairs, they were not particularly expert in social programs, grant-making, or foundation operations generally.

The consequence of this common practice is still embodied in the leadership of some of the current "la Caixa" Banking Foundation divisions. However, this practice has stopped with the institutional separation of LCBF from CXB. Instead, LCBF is increasingly professionalizing its operational staff and managerial ranks, either by adhering to an institutional culture of promoting in-house talent familiar with the foundation’s programs and culture, or, especially in recent years, by attracting external staff that hold university degrees and exhibit a high level of English fluency. LCBF has also taken steps to institutionalize evaluation methods, including adoption of the “Global Reporting Initiative” (GRI), which measures organizational performance in achieving sound governance, environmental, and broader social responsibility objectives and mandates public reporting on these in regular Social Responsibility Reports. All of this has signaled this newly independent institution’s intention to take its place quickly as one of the world’s most capable and effective charitable foundations. "la Caixa" Banking Foundation is well served by a wholly-owned, professional investment management company.

Investment Management Unlike most PtP foundations, which came to life with assets but no investment structure through which to manage them, LCBF inherited not only substantial assets but also the professional investment company, CCH, that had been created to manage them. LCBF has therefore seen little need to enlist outside investment managers to oversee these assets but has relied instead on the CCH management team already in place.

From the evidence available, it appears that this arrangement has worked reasonably well. Clearly, CCH has internalized its dual function as an investment company tied to, and owned by, a charitable foundation. Thus, CCH articulates its twin missions as:8

6 Much of the information on internal staffing reported here is based on communication provided by "la Caixa" Banking Foundation Director of Strategic Planning, Mr. Angel Font, in an email dated 23 July 2019.

7 See: obrasociallacaixa.org/documents/10280/931731/informe_anual_de_gobierno_corporativo_2018.pdf

8 See: criteriacaixa.com/deployedfiles/CriteriaCaixa/Estaticos/pdf/ENG_DossierCriteriaC-WEB.pdf

Î “Generating the funds needed to finance the Welfare Projects undertaken by “la Caixa" Banking Foundation;" and

Î “Preserving and growing the Foundation’s assets by creating value.”

In pursuit of this dual mission, CCH has developed an investment philosophy that it describes as “based on value creation, with a quality portfolio that is well diversified…largely stable and ensures dividends or recurring returns.”9 This latter point is especially important in light of the fact that the dividends and recurring returns on investments are the chief source of income of CCH’s parent institution, "la Caixa" Banking Foundation, although part of this income reaches LCBF indirectly through tax rebates.10 Also working in this direction is CCH’s emphasis on liquid investments such as shares in listed companies and cash or cash substitutes so that CCH can regularly meet its obligations to sustain LCBF’s charitable program even if returns on investments slip and asset liquidation becomes necessary.

Reflecting these priorities, a substantial portion of CCH’s portfolio comprises significant stakes in world-renowned companies in the banking, broader industry and services sectors, and real estate. Perhaps not surprisingly, 43% of CCH’s portfolio is in the banking sector, reflecting chiefly its 40% share in CXB, but also its nearly 18% share in the Bank of East Asia, and its 9% share in Mexico’s Inbursa financial conglomerate. Another 35% of the portfolio’s value is invested in a broader set of industrial and service industries, some of them with a strong environmental character, such as the natural gas supplier, Naturgy, and the water-focused environmental service company, Suez; but also including Cellnex, a telecommunications network provider, Telefonica, and Saba, an international parking garage developer and manager. In several of these companies, CCH exercises significant influence, though not outright control, by holding seats on their governance bodies.

While most of these investments predated the transformation process, CCH initiated a new investment process in 2018 that saw it committing €1.357 billion to adding new names, regions, and sectors to its portfolio with the aim of achieving greater portfolio diversification.These investments were mainly in listed companies operating within Europe with potential for growth and/or dividend yield, but without any CCH presence on their governing bodies, thus ensuring the generation of liquidity while allowing for more flexible management of the portfolio. Of the €1.357 billion devoted to this broadening initiative, 37% went into infrastructure investments, primarily into Saba; 32% went for telecoms and technology; and 12% went into automotive industries.

Through it all, CCH has managed to achieve a reasonable record of growth and contribution to the operation of LCBF, though this record is somewhat obscured by Spanish custom of reporting foundation assets at “book value,”11 and the inevitable transition process required to integrate CCH fully into the operation of LCBF.

9 See: criteriacaixa.com/informacioncorporativa/principiosinversion_en.html

10 Under the tax laws established at the time of the transformation of the la Caixa complex, the three institutions emerging from this transformation were treated as a single entity for tax purposes and taxes levied on the income of the entire complex. Since this complex included a charitable foundation that received tax exempt income from the other two entities, CCH and CXB, a somewhat complicated rebate system was established to return to LCBF the taxes paid on the revenues supplied to it by the other two entities.

11 “Book value” is the purchase price of assets at the time of purchase. It thus takes no account of changes in the value of assets over time. “Market value,” by contrast, is the actual market value of assets at a point in time, typically at the end of each calen- dar year (EOY). Two other investment concepts are important to bear in mind: “Gross Asset Value (GAV),” which is the market value of a set of assets without taking account of any outstanding debt associated with those assets; and “Net Asset Value (NAV),” which is the market value of a set of assets after deducting outstanding debts.

Table 1 reports on this record. As shown, CCH actually experienced a 12% reduction in its Gross Asset Value (GAV) between the end of 2013, when the transformation took place, and the end of 2018, the latest year for which data are available. However, this largely reflected the inclusion in CCH's recorded GAV as of 2013 of the heavily indebted €5.9 billion book value of the predecessor la Caixa Foundation, which had been heavily encumbered to cover the charitable commitments of the new LCBF during the transition period. At the same time, additional steps were taken by CCH management to reduce CCH other indebtedness. As a result of these actions, although CCH's Gross Asset Value declined by 12.1% between 2012 and 2018, its Net Asset Value (NAV) grew by 9% between 2013 and 2018, and by nearly 14% from 2015 to 2018. As the financial crisis eased, moreover, CCH investment income also grew, by 120% between its financial-crisis low in 2013 and 2018, and by 13% during the post-crisis period of 2015 to 2018.

Despite this growth in CCH NAV and investment income, however, CCH's direct contributions to LCBF’s income lagged throughout this 2015-2018 post-transformation period, rising by only 1.3% compared to the 13% growth in CCH investment income. One reason for this may have been the unevenness of CCH’s investment income during this period, which may have caused LCBF’s management, which also manages CCH, to take

Table 1 • "la Caixa" Banking Foundation assets, finances, and payout, 2013-2018 (EOY,* in millions of Euros)

% Change, EOY* Item 2013 2014 2015 2016 2017 2018 2013-18 2015-18 CCH ASSETS, INCOME CCH Gross Asset Value (GAV) 25,886 29,485 24,163 23,681 24,644 22,746 -12.1% -5.9% CCH Net Asset Value (NAV) 16,070 20,040 15,375 14,913 18,335 17,511 9.0% 13.9% CCH Investment Income~ 570 714 1,112 991 1,559 1,257 120.5% 13.0% LCBF INCOME From CCH income 75 395 375 400 400 433.3% 1.3% From tax rebates† 106 137 142 149 40.6% 40.6% From various activities 18 18 18 21 37 33 83.3% 83.3% Total income 18 93 519 533 579 582 525.8% 12.1% LCBF EXPENDITURES^ 407 446 460 467 506 526 29.2% 14.8% As % of CCH income 62.5% 41.4% 47.1% 33.1% 41.8% -33.0% 1.2% LCBF PAYOUT RATE° As % of CCH GAV 1.7% 1.8% 2.1% 2.2% n/a 28.0% As % of CCH NAV 2.7% 2.8% 3.1% 3.1% n/a 16.0%

* EOY=End of year; Time period covered varies based on data availability. ~ Includes earnings from banking, industrial, and service portfolios. † Represents rebates from income taxes paid by CCH and CXB on funds paid to LCBF. ^ Includes philanthropic and related administrative expenditures of LCBF. ° Computed on average of 3 prior year assets.

Sources: CCH Annual Report, 2018; Email Message, Victor Ramos, "la Caixa" Banking Foundation Finance Department, 2 August 2019.

a conservative approach to tapping into CCH’s income to fund the foundation’s already substantial philanthropic budget. Reflecting this, however, LCBF’s income from its CCH endowment remained well below half of CCH’s annual earnings. LCBF’s overall income did grow, however, by 12.1%, thanks largely to the rebates the foundation received from taxes paid by the other entities in the "la Caixa" family. In other words, while CCH maintained a conservative approach to funding LCBF, the State extracted revenues from the for-profit entities in the "la Caixa" family and delivered them to LCBF indirectly. As a result, "la Caixa" Banking Foundation was able to support a philanthropic program that delivered an average of nearly €500 million per year to social, educational, scientific, and cultural causes.

Behind this generally impressive, if somewhat conservative, performance is an 88-person staff of investment professionals—including 6 executives, 11 managers, 55 technicians, and 16 back-office personnel—all held in check by a rigorous regulatory regimen overseen by the Spanish Stock Market Commission (CNMV-Comisión Nacional del Mercado de Valores) and the Mercantile Registry, and reinforced by detailed disclosure statements and external audits.12 Also at work in keeping this investment company attuned to the charitable mission of its parent foundation are several other safeguards:

Î First, an elaborate set of procedures for monitoring four different categories of risk:

z Strategic risks, i.e., those associated with achievement of the corporation’s “dual mission” targets; z Financial risks, i.e. risks associated with key financial variables, such as debt levels, liquidity, and impairment in the value of assets; z Operational risks, i.e., risks arising from mistakes or inadequate or inappropriate uses of assets or operating infrastructure; and z Legal and compliance risks, i.e., risks related to compliance with laws, reporting requirements, or market standards, such as “socially responsible investment procedures.”

Î Second, a clear institutional commitment to environmental protection—a commitment that its Financial Statement explicitly notes “goes beyond its legal obligations to embrace an environmental management system under ISO 14001 that is fully integrated within its business and extends to all its projects,” including use of its presence on the governing boards of its investees to ensure that these enterprises control their own “social and environmental risks” and “work in a responsible and ethical manner.” In this, LCBF joins the elite 30% of other PtP case study foundations that have adopted the use of Environmental, Social, or Governance (ESG) screens in their investments—a share that stands well above the 1/10th of 1% of U.S. foundations that reported applying ESG criteria to their investments as of 2012 (US SIF, 2012, p. 11).

Î Finally, the fact that LCBF maintains a substantial five-person presence on the 15-member CCH board, with LCBF’s Board President holding the pivotal position of President of the governing board of CCH as well.

In short, "la Caixa" Banking Foundation is well served by a wholly-owned, professional

12 See: criteriacaixa.com/deployedfiles/CriteriaCaixa/Estaticos/pdf/CCAA_2018_ENG.pdf

investment management company that effectively combines attention to the charitable objectives of its parent institution and the skill to find and manage market options that generate the needed resources for these objectives in a socially and environmentally responsible fashion.

"LA CAIXA" BANKING FOUNDATION PROGRAMMATIC PERFORMANCE Ultimately, the most significant thing we would like to know about "la Caixa" Banking Foundation, as with other foundations that have resulted from PtP transactions, is whether they have been good stewards of the resources put in their hands, whether they have effectively promoted the public good, and whether they have done so better than would have occurred if the same resources had simply been dumped into government budgets or kept with the for-profit institutions from which the foundations were separated. But if this is the most significant question to answer, it is also the most difficult, though not because of any doubt about the existence of positive contributions. The problem, rather, is that the measurement of the benefits of foundation activity is extremely complicated due to the complexity of social interventions and the resulting costliness of truly scientific assessment methodologies (Trelstad, 2014). What is more, developing a methodology to compare the contributions of a foundation such as LCBF to that of some other entity that might have secured its assets as a product of the transformation that the Spanish cajas underwent is too speculative to imagine, and at any rate well beyond the resources available for this project.

What is possible, however, is to identify at least the scale and content of the main lines of work that this Foundation has undertaken and the imagination and energy it has brought to the task. More specifically, we believe the evidence supports four general observations about the programmatic performance of "la Caixa" Banking Foundation during its recent life as an independent, private, charitable foundation.

1 • "la Caixa" Banking Foundation has brought important resources to the accomplishment of its core mission “to create a better and fairer society, providing more opportunities to those who need them most” As shown in Table 1 introduced earlier, "la Caixa" Banking Foundation has delivered between €400 and €500 million per year over the five years since its reconstitution as an independent entity. These resources flow to a wide variety of causes and organizations supportive of its ambitious mission of creating a “better and fairer society” for all people.

In 2018, LCBF devoted €498.4 million to these efforts, of which: 57% (€284.7 million) went for a broad set of social initiatives; 25% (€123.9 million) toward culture and education; and 18% (€89.6 million) to research and knowledge dissemination. According to LCBF’s estimates, in 2018 these resources supported over 50,000 activities engaging a total of 14.9 million beneficiaries. In the process, LCBF has created a network of educational and cultural institutions that now stretches across Spain and has forged important partnerships with numbers of nonprofit organizations, businesses, and scientific research institutions.

While enormous in absolute terms, as shown in Table 2 below, "la Caixa" Banking Foundation’s philanthropic budget is at the low end of foundations globally when viewed

against its asset base. As previously shown in Table 1, in 2018 LCBF made philanthropic contributions that represented 2.2% of its 3-year average GAV and 3.1% of its 3-year average NAV. U.S. foundations, by contrast, are required to pay out 5% of the 3-year average of their assets each year in so-called “qualifying distributions,” which include the equivalent combination of philanthropic outlays and operating costs. This is well above the 3% registered by LCBF. And some major foundations go well beyond this 5% benchmark. Thus, as shown in Table 2, the U.S.-based Ford Foundation made philanthropic outlays in 2018 that represented 6.1% of its 3-year average asset base, generating philanthropic resources in 2018 that were nearly 30% larger than those generated by LCBF with an asset base that was 40% smaller. The Volkswagen Foundation in Germany, a PtP foundation, exceeded even this, generating grants in 2018 that were equal to 6.4% of the foundation’s €3.2 billion endowment.

Much closer to the "la Caixa" Banking Foundation record, however, is the payout experience of the next-of-kin Italian PtP foundations of banking origin. The largest of these, the Cariplo Foundation, thus recorded a philanthropic payout rate on a par with the rate computed against the GAV base of LCBF, but below the rate computed against the LCBF NAV base—though this was in 2012 in the wake of the financial crisis. Compagnia di Sao Paolo, the second largest Italian foundation of banking origin, achieved a 2.9% rate of philanthropic payout as of 2018, somewhat closer to the LCBF range, but also well below U.S. foundation experience and that of some other European foundations. What this may suggest is that the somewhat lower philanthropic payout of LCBF compared to other major foundations may be a function of its investment base, and in particular the significant presence of banks in its portfolio, an investment feature that the Italian institutions also exhibit. In the wake of the financial crisis and continued depressed interest rates, returns achieved by banks have been tepid at best. The relatively low philanthropic payout rate of LCBF and its sister institutions may therefore have more to do with the limited returns their assets are generating than with any reluctance to use these returns for philanthropic purposes, a point that gains some credence from the data in Table 1 above.

Table 2 • "la Caixa" Banking Foundation philanthropic payout rate compared to that of other foundations

Philanthropic Philanthropic Assets expenditures payout rate Foundation Year (€ millions) (€ millions) (%)

“la Caixa” Banking Foundation (GAV) 2018 22,746 498.4 2.2%

“la Caixa” Banking Foundation (NAV) 2018 17,511 498.4 3.1%

Ford Foundation (United States) 2018 10,700 652.7 6.1%

Volkswagen Foundation (Germany) 2018 3,200 207.2 6.4%

Cariplo Founadtion (Italy) 2012 6,500 140.5 2.2%

Compagnia di Sao Paolo (Italy) 2018 6,300 179.7 2.9%

Sources: Latest Annual Financial Statements of the respective foundations: Cariplo Foundation; Compagnia di Sao Paolo; Ford Foundation; Volkswagen Foundation

Payout rates aside, moreover, it is well to remember that the adoption of the PtP concept led to the placement of the assets generated by the former savings bank under the control of a charitable foundation rather than that of the newly-formed CaixaBank commercial enterprise, which has meant that the proceeds of these assets, however big or small, have gone into activities directly benefiting the Spanish people rather than into the pockets of investors in a commercial enterprise. What is more, in addition to the financial resources it is generating, LCBF has been instrumental in mobilizing a small army of corporate volunteers, whose numbers reached close to 5,000 in 2018 alone. LCBF has also continued to support a robust set of affiliated institutions, including cultural centers in seven major Spanish cities, a Science Museum (CosmoCaixa) in Barcelona, and a center for social dialogue (Palau Macaya).

Finally, "la Caixa" Banking Foundation has available to it a potent resource in the PtP concept that it embodies. Though it has not taken full advantage of this resource to date, it could potentially prove to be one of LCBF’s most important assets in improving society on a global scale by helping to foster the growth of similar endowed charitable institutions dedicated to “building a better and fairer society” elsewhere in the world, and at a much lower cost than traditional philanthropic programs.

2 • A regional behemoth now extending its operations nationally and internationally The importance of the sizable scale of the resources that "la Caixa" Banking Foundation produces is magnified, moreover, by the relatively limited geographical area to which they are applied. Throughout much of its 116-year history, the original la Caixa out of which LCBF emerged focused both its commercial and philanthropic activities in the Catalonia region, the second most populous region in Spain but still only the 6th largest in land area. This historic focus remains evident in the philanthropic activities of the newly-formed "la Caixa" Banking Foundation. However, unlike other Spanish cajas, the regional authorities in Catalonia allowed la Caixa to extend its reach to other Spanish regions, and this, along with the absorption of several other Spanish cajas during the 2010-2012 crisis, broadened the footprint of la Caixa’s charitable activities—though still within the contours of a single country.13 More recently, as CCH, now the wholly-owned subsidiary of the newly reconstituted "la Caixa" Banking Foundation, began acquiring multinational assets, LCBF has ventured into international activities as well, creating a separate International Department to handle them.

As of 2018, therefore, the lion’s share (76.5%) of the LCBF’s 50,000 beneficiaries are still in Spain, but the foundation has opened itself to applications for assistance throughout the country and has established branches of its distinctive institution, the CaixaForum, not only in Barcelona, its headquarters location, but also in cities like Madrid, Zaragoza, Tarragona, Lleida, Girona, Palma, and distant Seville. At the same time, almost a quarter of LCBF’s beneficiaries now live outside of Spain—many in neighboring Portugal, but also in Mexico, Africa, and elsewhere in Europe—as befits a foundation of its scale and potential global reach.

13 As part of the transformation of the Spanish cajas in 2012-2013, la Caixa was asked by Spanish authorities to absorb the five savings banks that had been brought together in the Banca Cívica group, giving it a presence in the Canary Islands, Andalucía Occidental, Guadalajara, Burgos, and Navarra.

Box 4.1 • Why do we need foundations?

Foundations provide funding and other forms of support that is independent of government or commerce and is managed and directed by independent trustees.

This gives foundations special advantages to fill needs that governments and market enterprises are less well equipped to address despite the superior resources they often command. Among the special contributions that foundations can make to building a better and fairer society are therefore these:

Î Helping those in greatest need because they are overlooked by large government programs, lack power and influence, or encounter new needs; Î Promotion of scientific knowledge and research, particularly ‘blue skies’ research that often requires freedom from short-term political and commercial constraints. Î Identifying innovative approaches to long-standing problems often requiring risk-taking and long gestation periods to prove results. Î Cultural activity and institutions that contribute to the vitality of community life. Î Promoting citizen engagement and advocacy that nourishes democracy and gives voice to the voiceless. Î A vibrant third sector that keeps alive the special importance of volunteering and charitable giving, fosters bonds of trust, and nourishes the important value of private initiative for the common good.

Adapted with permission from a summary prepared for the PtP Project by Nigel Siederer, Good Foundations Consultancy

3 • LCBF operates in areas, and in ways, that reflect the special contributions that make foundations valuable and justify their existence As noted previously, LCBF has established a sizable array of flagship programs, many of which were undertaken prior to the PtP transaction, but others of which have been added since the transformation into an independent institution with its own sizable endowment. Many of these reflect powerfully the special contributions that scholars and researchers have attributed to foundations in general, as noted in Box 4.1. In particular:

Î Helping those in greatest need through innovative programming. Improving personal wellbeing, especially for those who need it most, has long been a central priority of "la Caixa" Banking Foundation and the charitable programs of the former savings bank. In 2018, LCBF devoted nearly 60% of its charitable resources to this goal. What is more, LCBF has met the expectation of formulating innovative approaches to its activities in this pivotal area, focusing particularly on children, the aged and those suffering from terminal diseases, disadvantages in the search for jobs, and lack of housing and shelter. Examples here include the following:

z CaixaProinfancia. This is a program that has been up and running for 10 years and aims to break the vicious cycle of poverty affecting vulnerable families by championing the social and educational development of children aged 0 to 18. Over the course of 2018, this program engaged 62,343 boys and girls from households at risk of exclusion.

z Aging. Support for elderly people has been a priority concern for la Caixa since its inception. To respond to the isolation and inactivity that aging often brings, LCBF has developed interventions that promote active and healthy aging and overcome isolation. In 2018, a total of 781,573 people took part in the 16,151 activities organized under this initiative.

z End-of-life care. To deal with the problems faced by persons stricken with terminal illnesses and the families caring for them, LCBF has rolled out a truly unique "Comprehensive Care for People with Advanced Diseases" program that has mobilized 52 teams deployed across 138 hospitals to provide psychological and social care and spiritual support to such individuals. In 2018, a total of 25,726 patients and 31,197 family members received such support.

z Job creation. Another innovative program of "la Caixa" Banking Foundation, and one given added priority in LCBF’s 2016-2019 Strategic Plan, is the labor market integration program it created in 2006 to help people facing barriers to employment find jobs. To deal with this problem, LCBF has forged partnerships with a number of Spanish companies that have agreed to accept such workers into their workforces. In 2018 this program partnered with over 12,000 companies to generate a total of 38,106 new employment contracts for vulnerable people.

z Housing. Providing easier access to housing is another priority under LCBF’s 2016-2019 Strategic Plan. LCBF’s housing program has made some 12,000 social housing units available across Spain to low-income young people, elderly citizens, and families. Together with CXB’s own housing program, both entities have offered a combined total of over 28,000 social housing units.

Î Promoting scientific knowledge. Because of its long lead times, basic scientific research is often difficult for governments, highly attuned as they are to electoral cycles, to finance. In addition, governments are often reluctant to evaluate their own programs or undertake research to highlight persistent social or economic problems. These are therefore often important gaps that charitable foundations can usefully fill, and LCBF has moved into this arena actively. In particular:

z Medical research. LCBF has been particularly active in promoting basic scientific research in the field of health and medicine. It currently organizes the largest private call for health-related funding proposals in Spain and Portugal. In 2018, a total of €37 million were invested in research into oncology, neuroscience, infectious diseases, and cardiovascular diseases alone. In the process, LCBF provides crucial support to a number of the country’s premier scientific research centers.

z Medical talent development. LCBF also invests heavily in the education and training of new scientific talent through a series of fellowship programs at leading research centers and universities both in Spain and abroad.

z Social science research. In addition to the development of medical science, LCBF also invests in, and propagates, social science. It does this through support of a Social Observatory that trains a microscope on important social trends and reports back to society on social inclusion, income inequality, educational progress, and quality of life.

z Turning discoveries into innovations. As part of its commitment to scientific advancement, LCBF also provides support to translate scientific knowledge into innovations of benefit to society through support for start-ups based on research. In 2018 alone LCBF invested a total of €7 million in 20 technological innovation projects.

Î Culture and education

z Cultural and scientific outreach is another key priority under "la Caixa" Banking Foundation’s 2016-2019 Strategic Plan. This priority is pursued through a unique set of LCBF-operated cultural outreach institutions—the eight CaixaForum cultural centers; the CosmoCaixa science museum (Barcelona); the Cap Roig Gardens; the talks and seminars organized through the Palau Macaya Center for dialogues; and the sequence of exhibitions that LCBF sponsors to travel throughout Spain to promote cultural and scientific topics. The CaixaForum and CosmoCaixa centers organized more than 20,000 activities in 2018, which attracted nearly four million visitors between them. Territorial proximity, alliances with major institutions such as the British Museum, and staging a selection of events and social transformation dialogues are just some of the levers that LCBF relies on in bringing knowledge closer to society.

z Education. LCBF also pursues initiatives to respond to the educational needs of the 21st century through a program called EduCaixa. In 2018, this program reached out to 2.1 million pupils through a total of 8,223 schools and educational centers and also invested in the professional development of teachers.

z Inter-cultural understanding. LCBF is also engaged in efforts to foster intercultural harmony and social cohesion among citizens in cooperation with 32 Spanish municipalities.

Î Citizen engagement, advocacy, and civil society development. LCBF also plays a significant role in another classic foundation function—the promotion of citizen engagement and support of advocacy. In particular:

z Promotion of volunteering. As previously noted, LCBF is actively involved in encouraging people to become more committed and engaged with society through the sponsorship of a robust volunteer program, which engaged close to 5,000 current and retired volunteers in 2008.

z Advocacy and social action. Through another sponsored entity, Fundación de la Esperanza, LCBF is encouraging local social action to combat poverty and social exclusion.

Less evident in the priorities of "la Caixa" Banking Foundation, however, has been an explicit focus on promoting the development of the nonprofit sector per se—a gap that it shares with many other foundations.

Î International cooperation. In addition to its domestic activities, "la Caixa" Banking Foundation has joined a number of international initiatives that mirror its domestic priorities for improving the health and development of vulnerable people. Included here are the following:

z Joining GAVI, the Global Alliance for Vaccines and Immunization created by the Bill and Melinda Gates Foundation with the assistance of several international organizations, to assist in the global fight against malaria, pneumonia, and malnutrition;

z Helping to create jobs for women and young people in the developing world through the Work4Progress Program; and

z Promoting digital education of vulnerable children in Latin America, Africa, and Asia in cooperation with the Telefonica Foundation.

Though still a young organization in its current incarnation, "la Caixa" Banking Foundation can already lay claim to an impressive track record of operational and programmatic achievement.

CONCLUSION "La Caixa" Banking Foundation, one of the most recent—and certainly the largest—heir to what we have here termed a “PtP transaction,” already exhibits an impressive track record of achievement. Thanks in important part to its earlier incarnation as a favored component of a quasi-public savings bank imbued with a commitment to social purposes, LCBF emerged from the transformation of la Caixa as an already fairly mature institution—with a sizable staff, a substantial array of operating programs, and established procedures for grant-making. Thanks to the care with which the Bank of Spain and the European Central Bank managed the PtP process involved in separating the charitable functions and the resources to support them from the commercial banking operations to which they were formerly attached, the resulting "la Caixa" Banking Foundation has been carefully protected from undue interference either from public authorities or the commercial requirements of its former banking parent. By the same token, LCBF has been prevented from interfering unduly in the business priorities of CaixaBank.

As a result, "la Caixa" Banking Foundation has been set on a course that has allowed— indeed required—it to incorporate most of the leading-edge concepts about how to operate a modern foundation. Thus, it has developed respectable transparency procedures, solid conflict of interest protections, and internal guidance systems organized around a coherent mission statement and regularly updated strategic planning processes. In its investment activities as well, LCBF has had the benefit of absorbing a highly professional investment company committed to the foundation’s support, though heavily reliant on assets that have so far partly constrained the scale of philanthropic resources it can reliably generate. Even so, LCBF, because of the scale of its endowment, has been able to contribute significant resources not only to its original target region, but increasingly to Spain as a whole, and even, on a selective basis, to international programs supportive of its overall mission.

Set against widespread academic conceptions of the distinctive contributions that charitable foundations can make, moreover, LCBF can be judged to have positioned itself remarkably well, finding ways to fill gaps in important areas that other institutions

"la Caixa" Banking Foundation has incorporated most of the leading-edge concepts about how to operate a modern foundation.

are neglecting, with the one exception of explicit support to nonprofit sector development. What is more, it has often done so in innovative and proactive ways. While it is impossible to say whether the decision to vest the assets of the former savings bank into this PtP foundation produced more or less social impact than might have been gained from leaving these assets in the hands of the new commercial bank that emerged from the transformation or dumping them into the government, the record to date seems clearly to validate the PtP option that was adopted.

A PARTICIPANT IN “LA CAIXA” BANKING FOUNDATION’S JOB CREATION PROGRAM, INCORPORA.

Juan Ventura © "la Caixa" Banking Foundation Salamon and Alli Turrillas • Spain’s "la Caixa" Banking Foundation • PART V: CONCLUSIONS & IMPLICATIONS • Page 59 PART V: Conclusions & Implications

At least five major conclusions flow from the "la Caixa" Banking Foundation (LCBF) experience both for this case and for the PtP concept more generally.

CONCLUSION 1 • A PtP Success In the first place, the "la Caixa" Banking Foundation case provides powerful support to the PtP concept as a strategy for handling the assets involved in significant transformations into for-profit enterprises of previously government-owned or mutual institutions, as well as other quasi-governmental assets. Thanks to the use of this concept, assets that might have ended up in a commercial bank owned by stockholders who might not have shared the social commitments of the former savings bank were saved in perpetuity for the benefit of the people of Spain, and increasingly other parts of the world, in an independent charitable foundation. In the process, effective safeguards were put in place to preserve the independence of the resulting charitable institution and avoid undue interference by LCBF in the business operations of the resulting commercial bank.

CONCLUSION 2 • A successful transition Secondly, thanks in important part to its prehistory as the charitable arm of a socially conscious savings bank, "la Caixa" Banking Foundation had in place grant-making and other procedures as well as a robust array of programmatic initiatives that aligned well with the widely acknowledged unique strengths of charitable foundations. Since its establishment as an independent entity, LCBF has creatively built upon this base, establishing a precedent of periodic strategic plans and further strengthening its commitment to transparency. This makes clear that such “spin-offs” can be managed effectively, and that the resulting institutions can adapt quickly to the new realities without significant disruption.

CONCLUSION 3 • The power of models Third, that the PtP option was taken in this case was due in important part to the knowledge among Spanish authorities and savings bank officials of the virtually identical transformation of the network of Italian savings banks a decade earlier, during which the charitable arms and assets of these banks were similarly placed into independent, private, charitable foundations. This highlights the value of case studies such as the present one to disseminate the PtP concept to persons involved in transformations both of other cooperative or mutual institutions, and of other public or quasi-public assets—such as debt swaps, stolen assets, corporate penalties, sales of state-owned enterprises, and royalties from state-regulated businesses. This can alert such actors not only to the advantages of the PtP option, but also to the pitfalls that must be avoided.

CONCLUSION 4 • The importance of external oversight Fourth, central to the success of the LCBF case was the involvement of the European Central Bank and the National Bank of Spain, which intervened in the process and imposed regulatory requirements that ensured that the links between the newly-independent foundation and the former parent bank were completely severed, that the governance of LCBF was insulated from political influence, and that the resulting foundation established strong governance, transparency, and conflict of interest provisions that ensured it would operate above reproach. These requirements helped to produce a far more complete separation between CaixaBank (CXB) and LCBF than seems likely to have occurred without this. The presence of such outside actors willing to enforce such above-board operations seems both necessary and feasible to ensure positive outcomes in PtP transactions.

CONCLUSION 5 • Unwinding the old Finally, PtP processes are complex. This means that they frequently take some time to unwind the old and establish the new. In the case of LCBF, it took several years, and several missteps, to arrive at the need for a complete separation of the governance of the LCBF from the governance of what became CXB. What is more, further time was needed to separate the assets of the new CXB from the charitable assets that came under the ownership and control of the new "la Caixa" Banking Foundation. It took two further years, however, and pressure from the Bank of Spain, for CCH—and hence its parent institution, LCBF—to reduce its ownership stake in CXB from 60% to 40%. However, this is still a quite substantial share. More to the point, as noted in Part IV of this case study, this heavy concentration of CCH assets in CaixaBank may be holding back the charitable dividend that CCH may be able to share with its parent foundation due to the low return that bank shares are generating under present market conditions. In other countries, lower limits are set on the shares of formerly parent companies a foundation can own. In the U.S., for example, this limit is set at 20% of outstanding shares. As LCBF and CXB mature, it may prove prudent for both partners for the LCBF ownership of CaixaBank shares to be be unwound further.

In short, thanks to the PtP concept, Spain, and the world more broadly, have gained further support for a powerful new route to the creation of charitable endowments. Despite its many peculiarities, "la Caixa" Banking Foundation validates the PtP model as a promising avenue for the creation of substantial charitable foundations equipped with enormous assets and meeting advanced standards of transparency and programmatically effective operation. It is a model that applies not only to the asset class of trustee savings bank transformations, but to a wide assortment of other asset classes as well—such as royalties from extractive industries, debt swaps, sales of state-owned enterprises, broadband auctions, recovered stolen assets, and penalties for money-laundering, environmental disasters, and other corporate misdeeds. It is therefore a model that other countries can usefully follow in their own efforts to build permanent endowments for the common good.

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About the Authors

Lester M. Salamon | [email protected] Dr. Lester Salamon is a Professor Emeritus at The Johns Hopkins University and Director of the Johns Hopkins Center for Civil Society Studies. He previously served as Director of the Center for Governance and Management Research at the Urban Institute in Washington, D.C. and as Deputy Associate Director of the U.S. Office of Management and Budget in the Executive Office of the President. Dr. Salamon pioneered the empirical study of the nonprofit sector in the United States and has extended this work to other parts of the world. Author or editor of more than 20 books, his most recent include: Explaining Civil Society Development: A Social Origins Approach (2017); The Resilient Sector Revisited: The New Challenge to Nonprofit America (2015); The New Frontiers of Philanthropy: A Guide to the New Tools and Actors Reshaping Global Philanthropy and Social Investing (2014), Philanthropication thru Privatization: Building Permanent Endowments for the Common Good (2014); America’s Nonprofit Sector: A Primer, 3rd Ed. (2012); and The State of Nonprofit America, Vol. 2 (2012).

Juan-Cruz Alli Turrillas | [email protected] Juan-Cruz Alli Turrillas, is a Doctor of law and tenured Professor at the National University of Distance Education (UNED), where he teaches administrative and environmental law. Since 2005, he has focused his research on the comparative legal regime of foundations in Spain and other countries such as Germany, France, the UK, and the U.S. and has published more than fifteen studies on this topic (in particular, La fundación, ¿una casa sin dueño?, with a foreword by James. J. Fishman and Fundaciones y Derecho Administrativo, 2010). He has been a visiting researcher at NYU, Hümboldt Universitat (Berlin); and Fondation de France and served as a visiting Professor at Fordham Law School, Elizabeth Haub Law School at Pace University and UDLA and BUAP, both in Mexico. His latest book is “The legal protection of biodiversity” (2016) and he is currently studying the legal and ethical value of biodiversity and migratory species.

About the PtP Project Directed by Lester M. Salamon | p-t-p.org

The Philanthropication thru Privatization (PtP) Project seeks to promote an option for the creation of independent charitable foundations around the world by capturing all or a portion of an assortment of “privatization” transactions involving the transformation of publicly-owned or -controlled assets into private wealth. The Project has thus far identified over 630 foundations with assets over US$200 billion that have emerged from such transactions, including some of the largest foundations in the world, such as the Volkswagen Foundation, the King Baudouin Foundation, the Nippon Foundation, the 200 U.S. health conversion foundations, and the enormous Italian foundations of banking origin. The PtP Project is directed by Dr. Lester M. Salamon, a professor at the Johns Hopkins University and Director of the Johns Hopkins Center for Civil Society Studies. Administrative and technical support for the Project is provided by the East-West Management Institute (EWMI). For more information about the PtP Project, visit p-t-p.org.

A product of the PtP Project | Lester M. Salamon, Director