Originally published in The Economist in February 2006.
The leading new philanthropists see themselves as social investors
“RELATIVE to the corporate environment, we are in the 1870s. But philanthropy will increasingly come to resemble the capitalist economy,” predicts Uday Khemka, a young Indian philanthropist and a director of the SUN Group investment company owned by his family. Like many of the new generation of philanthropists, he has big but well-defined ambitions. “I want to help develop the infrastructure of philanthropy,” he says.
The need for philanthropy to become more like the for-profit capital markets is a common theme among the new philanthropists, especially those who have made their fortune in finance. As they see it, three things are needed for such a philanthropic marketplace to work.
First, there must be something for philanthropists to “invest” in—something that, ideally, will be created by “social entrepreneurs”, just as in the for-profit world entrepreneurs create companies that end up traded on the stockmarket.
Second, the market requires an infrastructure, the philanthropic equivalent of stockmarkets, investment banks, research houses, management consultants and so on. This is what Mr Khemka wants to concentrate on.
Third, philanthropists themselves need to behave more like investors. That means allocating their money to make the greatest possible difference to society’s problems: in other words, to maximise their “social return”. Some might operate as relatively hands-off, diversified “social investors” and some as hands-on, engaged “venture philanthropists”, the counterparts of mainstream venture capitalists.
All this may sound fine in theory. However, the history of philanthropy suggests that there are many potential pitfalls.
America’s early charitable foundations were built by entrepreneurs. Carnegie and Rockefeller would have understood the new investment-oriented model. “Having seen their own economic activity transform the world, they thought that the foundations they left behind would be transformative organisations,” says Carl Schramm, head of the Ewing Marion Kauffman Foundation. Those foundations did remarkable things. Set up as conduits for making grants as well as running the programmes that would benefit from the money, they thought big, concentrated on clear goals and were willing to invest heavily for long periods to achieve them, says Mr Schramm. The Rockefeller Foundation, for example, found a cure for yellow fever and drove the “green revolution” in agriculture. Carnegie, among other things, built thousands of public libraries.
Yet this long-term investment ethos has proved to be the exception, not the rule. In a landmark article, “Philanthropy’s New Agenda: Creating Value”, published in the Harvard Business Review in 1999, Michael Porter and Mark Kramer described widespread flaws in America’s foundations that mostly remain to this day. For instance, little effort is devoted to measuring results, and foundations have unjustifiably high administration costs.
Michael Bailin, head of the Edna McConnell Clark Foundation, has described the typical foundation as “autocratic, ineffective and wilful, elitist, cloistered, arrogant and pampered”. There are “chronic problems in the way foundations operate”, says Joel Fleischman, former head of the unusually impressive Atlantic Philanthropies, who is writing a book on the successes and failures of foundations. He says that most of them provide little information about what they do, and are particularly secretive about their failures. As a result, says Mr Fleischman, “foundations keep reinventing the wheel.”
As for foundation governance, it is a nightmare, says Robert Monks, a veteran campaigner for better corporate governance: “Perpetual existence, no need to conform to competitive standards, it is all too much for human nature. Hence the palatial offices, fancy conferences and increasingly lavish pay for the professional philanthrocrats.”
Arguably the biggest problem is the way that foundations make grants to organisations they support. Whereas Carnegie was willing to invest for the long term, more recently foundations have tended to chop and change, says Mr Fleischman. Melissa Berman of Rockefeller Philanthropy Advisors argues that there is too much emphasis on funding individual programmes and too little on the sustainability of the non-profit organisation running the programme. Overheads are seen as a bad thing, and grants tend to be short-term.
Should the new generation of philanthropists try something different from the traditional foundation? Ebay’s Mr Omidyar thinks so. He has folded his Omidyar Foundation into Omidyar Network, which is free to make for-profit investments as well as philanthropic donations to pursue its mission of “individual self-empowerment”. “After a few years trying to be a traditional philanthropist, I asked myself, if you are doing good, trying to make the world a better place, why limit yourself to non-profit?” he explains. Although there is a separate chequebook for the foundation, his “investment team” is free to put his money in either for-profit or non-profit projects. The team’s main criterion is whether the investment will further the social mission.
Similarly, the Google Foundation is part of Google.org, which can mix for-profit and non-profit investments. However, unlike Omidyar Network, Google.org is an arm of Google, so this is corporate philanthropy—which raises a further series of difficult questions (see article).
In principle, large foundations should be the most effective vehicle for philanthropy, argue Messrs Porter and Kramer. Not only are they free from both political and commercial pressures, they also employ professional staff that smaller outfits would not be able to afford. But the staff often become the biggest problem, especially in foundations whose founder has long been dead.
The new philanthropists are mostly young enough to be able to keep an eye on their foundations for many years to come. Nonetheless, says Mr Fleischman, they might consider setting a closing date for their foundation. For instance, the John M. Olin Foundation, a big source of finance for conservative organisations, recently shut itself down. As John Miller recounts in his new book, “A Gift of Freedom”, Olin had stipulated that all of his legacy should be spent within a generation of his death, a sunset model that kept it nimble, unbureaucratic and true to its founder’s ideas.
The new philanthropists also need to be clear what they want to do, and stick with it. That is one lesson from the Gates Foundation, which has already notched up some remarkable achievements—helped by its huge size, which allows it to do things that are beyond everyone else. Its clear mission is to tackle global health inequalities in six main areas: infectious disease, HIV/AIDS, tuberculosis, reproductive health, global health strategies and global health technologies.
Leverage is all
Crucially, it has found ways of using its money to the greatest effect. Mr Gates’s big idea is to overcome the market failure afflicting poor consumers of health care by deploying his money on behalf of the poor to generate the supply of drugs and treatments they need. For instance, the money provides market incentives for drug companies to put some of their resources to work for the needy.
The Gates Foundation also favours partnerships, even though it is big enough to pursue many projects on its own. Again, it is looking for maximum effectiveness. Other philanthropists are following similar strategies. For instance, Britain’s Dame Stephanie Shirley wanted to fund research into an autism gene, the total cost of which she reckoned would be £1 billion ($1.7 billion). She stumped up £50m herself and is raising similar sums from other donors around the world. Another “hot” idea at the moment, championed by the X-Prize Foundation, is to donate large cash prizes that will generate lots of further spending from those competing to win them.
Mr Omidyar recently donated $100m to Tufts University to invest profitably in providers of microfinance to the poor. He hopes to attract private capital to turn what has largely been a subsidised business into a profitable one, operating on a far bigger scale than today.
Other new philanthropists are piloting new models for welfare provision that, once they have proved themselves, can be taken up by governments and made available much more widely. Governments tend to be risk-averse, whereas philanthropists are free to take whatever risks they like with their money, so they can play a useful role as providers of start-up risk capital for government services.
Networks, too, are an increasingly popular way of leveraging money and experience. Peggy Rockefeller Dulany’s Global Philanthropists Circle brings together about 50 super-rich families from 20 countries to exchange ideas and experiences, mainly with a view to finding solutions to international poverty and inequality. Often this will involve the use of connections and influence as well as money.
However, there is still a lack of global giving consortiums that take on single issues, says Mr Khemka. He hopes to bring together philanthropists from around the world who want to tackle climate change.
Some foundations are now exploring new ways of funding organisations. Mr Salamon of Johns Hopkins University thinks that they should start to behave more like philanthropic banks, offering a range of financial products such as loans and loan guarantees as well as grants.
Some philanthropists are also beginning to think about how best to harness all their assets to the causes they support, rather than just concentrating on the money they are currently giving away. This point was brought home recently to Jeff Skoll, one of whose philanthropic missions is to make films with a social message. His latest film is based on the book “Fast-Food Nation”—yet he had not checked his investment portfolio to see if he owned shares in food companies such as McDonald’s that are attacked in the film.
Over the past year or so, many of the super-rich have started to ask themselves what exactly their assets are doing, says D.K. Matai, an Indian-born software entrepreneur who runs the Philanthropia Trinity, another international network of philanthropists. “What is the point of earning a high return in China if my money is helping to build Dickensian working conditions? If I have $5 billion, and am giving $4 billion away, do I really want a 17% return on activities that are wrecking the world?” To deal with that problem, the investment industry will need to improve on the strategies and products it currently offers for “ethical” or “socially responsible” investment, which often amount to little more than avoiding shares in, say, tobacco, arms manufacturing or oil.
The phrase most often used to describe the new approach to giving is “venture philanthropy”. This was first used in the 1960s by one of the Rockefellers, but is still practised relatively rarely. Perhaps the best example is a firm called Venture Philanthropy Partners. Run by Mario Morino, who made his fortune in software, it specialises in mid-sized non-profit organisations in the Washington, DC, area that work well enough, but lack the capital and talent to expand. With a $30m fund raised through a community foundation, Mr Morino behaves much like a venture capitalist. He is working intensively with 12 non-profit organisations, helping them to develop a business plan for growth and to recruit managers and board members.
Old dogs, new tricks
New foundations may be learning from the mistakes of the old ones; but what can be done to reform established foundations that are underperforming? With America’s Congress showing increased interest in foundations, Senator Charles Grassley has proposed tough new laws. His reforms would “dramatically transform the relationship between the federal government and foundations”, says Adam Meyerson of the Philanthropy Roundtable, an industry body. Among other things, Senator Grassley is proposing a five-yearly review of foundations’ charitable status and a formal government ratification regime. But Mr Meyerson thinks it would be far better for the government properly to enforce the laws that are already in place.
Better regulation is on the agenda in Britain, too, where charity is still governed by an act passed in 1601. “The governance of charities and non-profits is generally poor,” says Geraldine Peacock of Britain’s Charity Commission, which under new legislation due to take effect this year will become much more independent of government. Like Senator Grassley, Ms Peacock thinks that a charity should be licensed for a limited time—say five years—and then have to reapply.
Encouragingly, many of the older foundations themselves are becoming more concerned about effectiveness, and have started demanding more information on how the money they provide is spent, says Mr Fleischman. The recent transformation of the Edna McConnell Clark Foundation shows that an inefficient old organisation can turn itself into a cutting-edge operation. It used to hand out grants in the traditional manner for a wide range of good causes. But in the late 1990s, a new head, Mr Bailin, decided to concentrate its activities in a single field, youth development. Working closely with its chosen organisations, notably Harlem Children’s Zone, it has helped them become more effective and serve many more people.
The biggest question of all is how to measure the performance of a philanthropic organisation. A huge amount of work is going on in this field, but it is still more art than science—particularly when it comes to the fuzzier goals of some philanthropists, such as “empowering people”, “increasing the effectiveness of civil society” or “fighting climate change”.
Measures involving the so-called double bottom line (financial plus social performance) or triple bottom line (financial, social and environmental) are readily susceptible to statistical manipulation. So are popular concepts such as “changed life”—a combination of the number of people affected by an initiative and the extent to which it improves their lives.
One danger is to pay too much attention to managing inputs, which are easier to measure than output. Another is to concentrate donations on those activities that can be easily measured, such as the number of vaccinations given, even where that may not be the most effective way of tackling a problem.
Donors also need to strike the right balance, so that on one hand they ask for enough information to be able to monitor the effectiveness of the organisations they fund but on the other they do not bog them down in form-filling bureaucracy. The Gates Foundation has a good reputation for getting the mix right and tailoring it to individual circumstances.
“The risk with any metric is that people will come to see it as a description of reality, rather than a tool for a conversation about that reality,” says Rowena Young of the Skoll Foundation. “One metric or another can function well only when managers know why they are measuring and for whom…In the world of social value-creation, context is king.”