The Business of Giving

February 23, 2006 – GIVING away money has never been so fashionable among the rich and famous. Bill Gates, today’s pre-eminent philanthropist, has already handed over an unprecedented $31 billion to the Bill and Melinda Gates Foundation, mostly to tackle the health problems of the world’s poor. Its generosity has earned the couple Time magazine’s nomination as 2005’s “people of the year”, along with Bono, an activist rock star.

The next generation of technology leaders are already embracing the same ethos. Pierre Omidyar, the founder of eBay, and Jeff Skoll, the auction site’s first chief executive, are each putting their billions to work to “make the world a better place”. And when the founders of Google, Sergey Brin and Larry Page, took their company public, they announced that a slice of the search engine’s equity and profits would go to, a philanthropic arm that they hope will one day “eclipse Google itself in overall world impact by ambitiously applying innovation and significant resources to the largest of the world’s problems”.

The new enthusiasm for philanthropy is in large part a consequence of the rapid wealth-creation of recent years, and of its uneven distribution. The world now boasts 691 billionaires, 388 of them “self-made”, compared with 423 in 1996, according to Forbes magazine’s “rich list” for 2005. Not all of these newly wealthy people are turning to philanthropy—and of those that do, many continue to give in unimaginative ways, say to support an institution such as their alma mater. But the extra wealth is creating huge new opportunities. “This is a historic moment in the evolution of philanthropy,” says Katherine Fulton, co-author of a recent report on the industry, “Looking out for the Future”. “If only 5-10% of the new billionaires are imaginative in their giving, they will transform philanthropy over the next 20 years.”

For now, it does look as though everyone, from Michael Bloomberg, the billionaire mayor of New York, to hedge-fund tycoons and film stars, is opening their wallet for a good cause. In Manhattan these days, a table for ten at the best charitable fund-raising dinners can cost $1m. Celebrities are increasingly putting their own money into good works, as well as playing their time-honoured role of using their fame to raise money from others. The film star Angelina Jolie, for example, has backed up her public advocacy of the cause of refugees with substantial gifts to refugee organisations.

The media, which used to take little notice of charitable donations, now eagerly rank the super-rich by their munificence and berate those they regard as tight-fisted. The latest Business Week list, which ranks giving in the latest five years, is topped by Intel’s co-founder, Gordon Moore, and his wife Betty, pushing Mr and Mrs Gates into second place. Among America’s super-wealthy, it seems that only Warren Buffett, the world’s second-richest man, still dedicates all his energies to making more money rather than giving away some of what he already has. But even he says it will all go to charity when he dies.

Nor is the fashion for giving limited to America, where philanthropists have long played a particularly prominent role. In Europe, too, entrepreneurs who have made a lot of money are starting to hand some of it to charitable causes. Examples include Britain’s Dame Anita Roddick, founder of the Body Shop, and Arpad Busson, a colourful French hedge-fund boss. India’s new wealthy, such as Azim Premji and Nandan Nilekani, two Bangalore technology-firm bosses, are also becoming keen philanthropists; and even the new rich of China and Russia are catching the bug. Roman Abramovich, a Russian oiligarch who became famous for buying Chelsea Football Club, has given away many millions to improve living conditions in the Chukotka region of Russia. And so the list goes on.

The Whys and Wherefores
Why are they doing it? Many people are wary of rich folk bearing gifts, suspecting them of having hidden business or political motives, or feeling guilty about how they have made their pile, or simply enjoying an ego trip fuelled by generous tax breaks. But there could also be plenty of innocent and admirable reasons why the rich have become so much more open-handed. Never mind the motives: the important thing is to ensure that this largesse is put to good use.

Done well, philanthropy can have a hugely beneficial effect—witness the achievements of past giants such as Andrew Carnegie, John D. Rockefeller, Joseph Rowntree and William Wilberforce. This survey will argue that if the new generation of philanthropists get it right, they too can make a real difference to the world. But for that to happen, philanthropy will have to shed the amateurism that still pervades much of it and become a modern, efficient, global industry.

For much of the past half-century, America seemed exceptional in its enthusiasm for philanthropy. Claire Gaudiani, in her book, “The Greater Good: How Philanthropy Drives the American Economy and Can Save Capitalism”, makes a distinction between charity, which is about easing symptoms of distress, and philanthropy, which is about investing in solutions to the underlying problems. The “investment approach distinguishes the most significant kind of American generosity from the ‘poorhouse and soup line’ method and expresses our values of freedom, the individual, and entrepreneurialism,” she says. In practice, though, the borderline between the two is often blurred.

Over the years, many wealthy Americans have broadly followed the blueprint laid out by Andrew Carnegie in his 1889 essay, “Wealth”. The steel tycoon believed that growing inequality was the inescapable price of the wealth-creation that made social progress possible. To prevent this inequality undoing the “ties of brotherhood” that “bind together the rich and poor in harmonious relationship”, he argued that the wealthy had a duty to devote their fortunes to philanthropy. Not to do so was the worst sort of personal failure: “The man who dies thus rich dies disgraced.”

As a result, a far higher proportion of hospitals, libraries, universities and welfare services in America is funded by private donations than in other rich countries, where governments are spending proportionately more yet are still struggling to meet growing public expectations. Still, the differences can be exaggerated. America’s basic health research is largely funded by the government, whereas in Britain much of it is paid for by the Wellcome Trust, a charitable foundation based in London, albeit set up by an American.

Britain’s government has recently been trying to foster the philanthropic spirit, and other European countries are starting to follow suit. Even in China, the government seems keen to build up a non-profit sector that caters to social needs, and appears to be relaxing some of its rules to allow philanthropy to play a bigger role. The exception is Russia, where President Vladimir Putin, averse to concentrations of power outside his government, has cracked down on non-governmental organisations (NGOs) and their backers. Mikhail Khodorkovsky, the former boss of Yukos, a big oil company, was reportedly Russia’s leading philanthropist before he was jailed after a show trial.

But just as the world’s wealthy and powerful are discovering the joys of giving, students of the American model of philanthropy are becoming increasingly critical of its flaws. This is not just a private concern for the donors: because of America’s huge tax breaks for charitable donations, it is a matter for public scrutiny too. The cover story of a recent issue of Stanford University’s Social Innovation Review is entitled “A Failure of Philanthropy”. It argues that those American tax breaks are of most benefit to things like elite schools, concert halls and religious groups. “We should stop kidding ourselves that charity and philanthropy do much to help the poor,” says the author, Rob Reich.

A series of scandals at charitable foundations—mostly over excessive pay, jobs for family members and other extravagances—has attracted the ire of Congress, which is threatening tough new legislation. State attorneys-general are taking a greater interest, too.

Mainstream charities that rely largely on donations from the general public have also come under fire. The American Red Cross was exposed for diverting money raised for the families of victims of the September 11th 2001 terrorist attacks to other purposes. And after the Asian tsunami and Hurricane Katrina, two fund-raising former presidents, Bill Clinton and George Bush senior, found themselves having to reassure the public that they would monitor how the money was used.

One of the many things exposed by the collapse of Enron was that corporate philanthropy is often pretty sleazy too. A firm’s executives can ingratiate themselves with business partners, and even with their own board members, by supporting their pet causes with funds from the company’s charitable foundation, without breaking the law.

Wasting a Fortune
But the problem lies far deeper. “Foundation scandals tend to be about pay and perks, but the real scandal is how much money is pissed away on activities that have no impact. Billions are wasted on ineffective philanthropy,” says Michael Porter, a management guru at the Harvard Business School. “Philanthropy is decades behind business in applying rigorous thinking to the use of money.” Mr Porter believes that the world of giving can be transformed by learning from the world of business. Many of the leaders of the new generation of philanthropists agree with him, so “there is a big opportunity over the next 20 years to figure out how to make philanthropy effective.”

Many of the new philanthropists are well aware that traditional philanthropy is not sufficiently businesslike. They want to bring about a productivity revolution in the industry by applying the best elements of the for-profit business world they know. That has prompted the industry to adopt (and adapt) some of the jargon familiar from the world of business. Philanthropists now talk about “social investing”, “venture philanthropy”, “social entrepreneurship” and the “triple bottom line”. The new approach to philanthropy is “strategic”, “market-conscious”, “knowledge-based” and often “high-engagement”, and always involves maximising the “leverage” of the donor’s money.

Leverage is particularly important to the new philanthropists. They know that however large their personal fortunes, they are dwarfed by the financial resources at the disposal of governments and in the for-profit marketplace. So to make a real difference, they need to concentrate their resources on problems that are not being dealt with by governments or for-profit organisations. Being constrained by neither voters nor shareholders, they can take risks to find pioneering new solutions that can then be adopted on a larger scale by governments or for-profit firms.

But not everyone is convinced that philanthropists must become more business-minded. “We must reject the idea—well-intentioned, but dead wrong—that the primary path to greatness in the social sectors is to become ‘more like a business’,” wrote Jim Collins, a bestselling management author, in a recent monograph, “Good to Great and the Social Sectors”. His reason is disarmingly simple: “Most businesses are mediocre.”

Still, even Mr Collins agrees that the way in which money passes from philanthropists to the organisations that put it to work leaves much to be desired. Here there is some reason for hope. In recent years, a host of new firms and institutions have been created that, with luck and good management, will provide the infrastructure and intermediaries of a philanthropic capital market, an efficient way for philanthropists to get their money to those “social entrepreneurs” and others who need it. These newcomers include management consultants, research firms and a philanthropic investment bank of sorts.

Plenty can still go wrong. There is no market discipline to force philanthropists to adopt innovations, however desirable. And the new philanthropists, along with the innovators who are trying to help them become more efficient, may find the going harder than expected. “The new rich have often made their money very fast, and get intoxicated with their own brilliance into thinking they can quickly achieve results in the non-profit sector. They forget that their success may have been due to luck, and that the non-profit sector may be far more complex than where they have come from,” says Mario Morino of Venture Philanthropy Partners, one of America’s leading venture philanthropists.

One obvious risk is of a political reaction against the philanthropic rich. The new philanthropists are not just into spending money. According to Greg Dees of Duke University, today’s philanthropy is best defined as “mobilising and deploying private resources, including money, time, social capital and expertise, to improve the world in which we live.”

Peggy Rockefeller Dulany, who runs the Global Philanthropists Circle, makes a similar point. “With wealth comes education, decision-making power, links to elites in other countries and enormous convening power,” she says. “We are helping philanthropists to make use of all these advantages. It is using money and connections—whether personal, family or business—to create public benefit.”

A global elite, seeking to change the world by combining lots of money with new ideas, cutting-edge business techniques, media and marketing savvy, the mobilisation of citizens and helpful political connections: all this is bound to set alarm bells ringing in some quarters even as it spreads hope in others. Already George Soros, a famous hedge-fund philanthropist, has become embroiled in controversy over the role of some of the organisations he funds in various former communist countries as well as in America itself. And last year Bob Geldof, Bono’s philanthropist partner in rock activism, provoked demonstrations in Uganda when he suggested that the country’s president should not stand for re-election. Philanthropy seems sure to become an increasingly hot political potato.