This piece was first published in the 13 April 2011 (Vol.1,No.7) Inflection Points, the newsletter of Inflection Point Capital Management.
Philanthropic foundations are like old-fashioned slot machines. They have one arm and are known for their occasional payout. Their finance committees manage their endowments like investment bankers. Their portfolios give no hint that they are institutions whose purpose is the public benefit. Although it is twenty years since the term “mission-related investing” found its way into the lexicon of philanthropy, the practice is limited. There is a chasm between mission – grantmaking – and investment. The logic of a synergy between the two has yet to take hold.
For example…
A number of reports circulated in the U.S. and the U.K. in the last few years laid out ways that foundations can “win the war on climate.” The focus was entirely on grantmaking. None made any reference to the various ways that assets could be used to add value to their grantmaking. My op-ed in the Chronicle of Philanthropy in 2008 pointing out the ways that assets could help “win the war” went unanswered by the authors of the reports and by foundations.
Among the 25 biggest climate funders very few have climate investments, but one is an active shareowner on climate issues.
U.S. philanthropy is a big enterprise with over $500 billion in assets. Unfortunately share ownership is not taken seriously. Investing to avoid predictable and preventable surprises is smart investing. Voting proxies and filing resolutions is an ownership obligation rarely exercised.
Discussion of assets as an instrument of change seems to get swallowed up by a Bermuda Triangle of foundation investing.
On one side of the triangle is the board and investment committee; on the second side is the investment office; and on the third side is the consultant. Their views on finance, formed in the same business schools, see reality – the world as it is – as an externality, and intangible. Water availability and utilization, climate change, human rights, working conditions, and diversity on boards are all issues not factored into their investment decisions, which are made for the short-term, as if the future did not matter. In the foundation setting, as in their day jobs, their awareness is bounded by what they have learned with few incentives to change.
Little time is spent in meetings on new ideas, leading to what has been called “willful blindness.” And yet these same people – after work and on weekends – are often very eleemosynary, devoting their time and money to organizations seeking to remedy these issues. Vocation and avocation are split, as demonstrated by the philanthropy of Bill Gates and Warren Buffet.
Within the Bermuda Triangle outdated views of fiduciary duty prevail. The myth of under performance is pervasive. Maximizing alpha, the old-fashioned way, takes precedence over benefit to meet the public good, and to harmonizing investments and grantmaking. These are complementary not conflicting activities.
Michael Jensen and his colleagues at the Harvard Business School are studying organizational integrity – that is whether of not a group’s or organization’s word is whole and complete. The concept incorporates morality, ethics, and legality. Their model “reveals a causal link between integrity and increased performance, in whatever way one chooses to define performance (for example, quality of life, or value-creation for all entities).” Harmonizing mission and asset management, becoming whole, is an organizing concept to improve the practice of philanthropy.
For the moment business continues as usual. Though claiming integrity, foundations often fail the wholeness test. The pessimist sees the glass mostly empty, while the optimist sees it filling. The hopeful say change must occur, and it cannot come too soon.
Stephen Viederman ([email protected]) is the retired president of the Jessie Smith Noyes Foundation and presently a member of the finance committee of the Christopher Reynolds Foundation.
