If Gates Leads on Divestment, Who Will Follow?

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Not enough space is devoted to the investment practices and consequences of how foundations deploy their half-trillion dollars (actually, much more) of tax-exempt wealth in the markets. When the Los Angeles Times broke the story (actually, several stories) on the Gates Foundation’s investments in corporations that seemed opposed to the foundation’s philanthropic activities, many were shocked by the foundation’s rather cavalier dismissal of its critics.

Recalling the addition of Omaha investment wizard Warren Buffett to the foundation’s board of trustees after his well-publicized infusion of billions of dollars into the Gates Foundation, and the presence of Bill Gates himself on the board of Buffett’s Berkshire Hathaway firm, some of us weren’t surprised. Buffett has not been one to display much of a social consciousness in Berkshire Hathaway’s investment choices.

Remember Buffett’s famous explanation of his enthusiasm for tobacco investments? “I’ll tell you why I like the cigarette business,” he said. ”It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.”[1] (Buffett knew how to keep his eye on the prize, and it worked for his company, though not necessarily for the greater good. Berkshire Hathaway subsidiary General Re continues to hold a large stake in the Altria Group, née Philip Morris tobacco, which, despite class-action lawsuits and targeted tobacco taxes, has been the most productive New York Stock Exchange investment during the past half-century.)

The recent news from Burma (renamed Myanmar by the thug army junta that runs the country) harked back to the campaigns to get big corporations, pension funds, universities, and foundations to divest from nations like Burma and the Sudan, and conjured Buffett again. Buffett’s Berkshire Hathaway has long been a major investor in the Chinese firm PetroChina—to the tune of something like $3.3 billion. PetroChina accounts for two-thirds of China National Petroleum Corporation revenues, Petro’s parent company, which basically keeps Sudan’s oil business going. And 70% of Sudan’s oil revenues have been used for the genocidal activities of government and Janjaweed troops against the people of Darfur. As much as four-fifths of Sudanese oil production is exported to China.

This past spring, confronted by the likes of Nobel Peace Prize winner Jody Williams and actress Mia Farrow, Buffett said no to divesting in PetroChina and rejected shareholder action protesting the investments of the parent company in the Sudan. Although the Gates Foundation said it was evaluating the $22 million or so it invested in other Sudan-related corporations such as Petronas, Sinopec, and, it didn’t look at its investments in Berkshire Hathaway as part of that issue. Because Buffett’s transfers to the Gates Foundation were in Berkshire Hathaway stock, that made the Gates Foundation part and parcel of the Berkshire Hathaway investment in PetroChina.

Ultimately, the Gates Foundation did act on the Sudan divestment question.  On the Foundation’s Web site, an addition to the FAQ list made in September provides a partial answer to the divestment challenge: “After reviewing the situation, Bill and Melinda directed the investment team to be consistent with the approach taken on this issue by the endowment managers for Harvard, Yale, and Stanford universities. The foundation trust no longer has any holdings in the companies identified by these institutions in their investment policy statements on Sudan.” By all indications, there is a pretty reasonable consensus among the three universities regarding divestment in PetroChina and Sinopec, but it is not quite as clear whether these institutions have dumped their shares in the Malaysian government-owned Petronas or its subsidiaries and affiliates. Foundation and university divestment strategies in companies that bolster the criminal Sudanese government are still evolving.

Maybe it was because of discomfort from the Gates Foundation (which has made major commitments to help Sudanese refugees through grants to the International Rescue Committee and Lutheran World Relief and has supported health programs that provide clean water, sanitation, and measles immunization in Darfur), or maybe because, ironically, Omaha is home to one of the largest concentrations of Sudanese refugees and immigrants in the United States, Berkshire Hathaway appears to have reversed course—quietly—and shed most of its investment in PetroChina.[2] Of course, some analysts characterize Buffett’s move as a retreat from an overvalued Chinese stock rather than a humanitarian, if tardy, insight.

While Buffett didn’t agree or encourage it, last May he permitted a shareholder initiative on divesting in PetroChina to be discussed at a Berkshire Hathaway shareholders meeting [PDF]. After the decision to finally dump PetroChina, Marketwatch asked whether it was Buffett the capitalist or Buffett the philanthropist who had made the decision.[3]

Now comes Burma, with Sudan’s Omar al-Bashir undoubtedly thanking Burma’s senior general, Than Shwe, for shifting public attention away from Darfur.

Burma’s largest source of foreign investment is natural gas. The largest corporate investors recruited by Burma’s State Peace and Development Council, the Orwellian-named junta that rules the nation, include U.S.-based Chevron/Unocal, Nippon Oil of Japan, Daewoo of South Korea, Total S.A. of France, and, not surprisingly, Sinopec and the China National Petroleum Corporation. At the United Nations, China has taken the lead in stifling international actions against the ruling junta generals who have kept opposition leader and Nobel laureate Aung San Suu Kyi under house arrest for nearly two decades and, more recently, who have brutally attacked protesting students and Buddhist monks, conjuring shades of Tiananmen Square.

Will foundations and universities ditch shares of PetroChina and Sinopec, the latter having skyrocketed in the past couple of years, in favor of sending a hard message to the Burmese generals and their apologists in Beijing? Or will they adhere to the Gates Foundation’s general investment philosophy as articulated in response to the Los Angeles Times article, that divesting in individual companies—by employing social investment screens or actively pursuing shareholder activism– would require the foundation to consider “dozens of factors . . . almost all of which are outside the foundation’s areas of expertise . . . [and all of which] are quite complex” and not play to the foundation’s grantmaking strength (the Foundation did note, however, that it doesn’t own tobacco stocks, though it didn’t protest owning shares of Berkshire Hathaway, which holds substantial tobacco investments).

To be fair, the Gates Foundation is the largest in the game, but hardly the only one among 80,000 grantmakers that may not devote quite enough attention to their holdings in contemptible corporations, whether environmental destroyers, predatory lenders, or, in some cases, investors in rogue nations. Let’s see how many foundation and university endowment managers stand up to the thugocracies in the Sudan and Burma/Myanmar.

Endnotes

1. Quoted in Bryan Burrough and John Helyar, Barbarians at the Gate: The Fall of RJR Nabisco. Harper Collins, 2003, p. 218.

2. Karen Richardson, “Buffett Cuts China Profile: Fiscal or Social Move? Investors See Cash-Out and Activists See Victory,” the Wall Street Journal, October 12, 2007.

3. David Weidner, “Warren Buffett’s China Divestment” Greed or Good?,” Marketwatch, August 16, 2007.