Georgia Charities Risk Losing Millions to One Philanthropy’s Risky Investment Strategy

If a friend told you to put 85 percent of your retirement savings in the stock of one corporation, you would probably think he or she was crazy. It wouldn’t matter to you how well that stock had performed in the past or how fervently your friend believed in the future of the company. As good investment managers usually advise, smart diversification is the prudent strategy given the stock market’s volatility to ensure a safe and comfortable retirement.

Unfortunately, the charitable organizations of Georgia are going to lose out on millions of dollars in donations this year—and possibly every year for the foreseeable future—because the trustees of the region’s largest private foundation have chosen a foolhardy investment strategy. They have more than 85 percent of the foundation’s assets invested in Coca-Cola stock, according to the tax documents they file with the IRS every year.

The Robert W. Woodruff Foundation has a broad mission to improve the quality of life in Georgia. Tax records show that the foundation gave out $143 million in grants in 2015 to a range of deserving public charities. In many ways, the foundation is run in an exemplary fashion. But the trustees have a blind spot about their investments. They are irrationally committed to Coca-Cola, and that’s dangerous for the charities of Georgia and the people they serve.

Last week, Coca-Cola (NYSE: KO) announced that profits and sales declined again for a seventh straight quarter. According to Morningstar, investments in KO underperformed by 6.20 percent compared to the S&P 500 index over the past three years. During that time, Coca-Cola’s stock dividend paid to investors quarterly has produced an annualized return between 3 and 3.6 percent. Yes, the foundation’s assets continue to grow. But they are not growing as fast as they could be.

Woodruff Foundation had $2.6 billion invested in Coca-Cola stock three years ago. If, instead, the foundation had invested in a simple S&P index fund, the foundation’s stockholdings could have grown by as much as $161 million more than the return that was actually realized.

Private foundations are required by law to distribute five percent of assets, including administrative expenses, every year. The higher return from a more diversified portfolio would have meant $8 million more in grants to Georgia’s charities this year alone. Imagine what that extra $8 million could do for the many important causes and underserved communities that benefit from the work of local nonprofits.

The story doesn’t end with 2017. Those foregone contribution amounts will grow over time if Coca Cola stock never catches up to the S&P. It could mean as much as $200 million less in grants from Woodruff over the next 20 years if the trustees stick with their current investment approach. A worst-case scenario for Georgia charities is if Coke tanks at some point. This kind of disaster has happened to other private foundations whose trustees refused to diversify.

The National Committee for Responsive Philanthropy (NCRP), which I lead, alerted Woodruff Foundation of the tremendous risk posed by its investment strategy during a Philamplify assessment nearly three years ago. The foundation’s leaders disagreed with our recommendation to diversify. Hopefully, they are rethinking their investment strategy given the recent poor performance of Coca-Cola stock.

It’s understandable why Woodruff’s trustees have felt an attachment to the Coca-Cola corporation. Investments in the company have performed extremely well over time, and the donor to the foundation, Robert W. Woodruff, was the company’s first CEO. But no corporation performs well forever.

Under federal law, the assets of the foundation are to be used exclusively for the public good. The trustees should adopt a more prudent approach to investing those assets to ensure there will be a reliable revenue stream to benefit Georgia’s charities for decades to come.

  • Thank you for raising this important topic. Investment practices among foundations are still very diverse and whenever they fail to produce “good” results, we all regret the lost payout capacity. Probably no one regrets these outcomes more than board members who have the responsibility to oversee both endowment management and grantmaking. (Especially so because endowment performance is relatively easy to measure and compare ,while programmatic effectiveness is much less so.) And while there is lots of room for controversy in investment strategies (private equity? international exposure? BRIC? etc.) being overweight in the founding company is still very common and not much addressed, despite the recent examples of Hewlett and Packard when the tech bubble burst. In addition to Woodruff, RWJF, for example, still has over $1B of its $10B endowment in Johnson and Johnson stock according to its 2015 990s.
    As a former employee of a Foundation bearing the painful scars of a mono-stock endowment, (The John A. Hartford Foundation based on the fleeting wealth of the A&P grocery store chain) I understand these issues and have watched boards struggle with their duties. And I know that the Billions they should have had to work with, but don’t weighs on hearts and minds. However, I think that by emphasizing the hypothetical losses to potential grantees, you fail to capture the big picture of board member responsibilities and considerations.
    In addition to their focus on impact, board members feel keenly their responsibilities to the founder’s mission and vision and values. This makes it particularly hard to “divest” from the companies that were the major professional accomplishment of the original donor, especially in the good times when this seems like both the right thing to do financially and “morally.” Then when times turn tough, selling out, locks in losses and sends a signal of loss of confidence that may be impactful on the market and upon former colleagues and acquaintances. This is a kind of conflict of interest that is based on human relationships and is not easily covered by codes of conduct.
    It might be worthwhile to study the corporate and associated foundation histories of some of the foundations born from corporate ownership and make an empirical case for the issue of full diversification versus maintaining ties. I suspect this will be more impactful than what may come across as Monday morning quarterbacking of an investment strategy.

    • Aaron Dorfman

      Thanks for that very thoughtful comment, Christopher. I agree that an empirical case would be helpful. I also agree that it’s complicated and that trustees feel the sense of responsibility you explained so well. In our Philamplify assessment of Woodruff three years ago, we cited the John A. Hartford Foundation case as a cautionary tale. This particular op ed may be seen as Monday morning quarterbacking, but we tried to sound the alarm about the investment strategy three years ago. The recent poor performance of Coke stock just gave me another opportunity to raise this important issue — relevant for Woodruff and for other foundations. On the face of it, I think what RWJF has done is perfectly appropriate — they slowly divested over time, and they are down to about 10 percent of assets in Johnson & Johnson. That’s still a lot in one company, but it’s not 85 percent! If we ever do an empirical study, perhaps we can come up with a recommended maximum percent of corpus in any one company.

      • Vincent Vizachero

        I think that a detailed look at portfolio management would be helpful to foundations, and the good news is that most of the empirical work has been done and is readily available.

        For instance, it’s pretty easy to optimize a portfolio that presents the same expected return as one with 85% Coca-Cola stock has but with dramatically less risk. A portfolio with 11% KO, 18% bonds, and 71% S&P500 index funds would present the same expected return with 43% less volatility.

        Having analyzed thousands of portfolios over the years, I can say that it’d be nearly impossible to make a reasonable case for having a single stock account for more than 15% of the assets.

    • Vincent Vizachero

      One distinction I would draw is that while board members might feel a duty to the founder’s mission, their actual fiduciary duty is to the foundation not the founder.

      Nostalgia is no excuse for poor governance.