The Rise and (Potential) Fall of Philanthrocapitalism

Billionaires brought their business sense and ambition to charitable giving. Now what?

Talk about unfortunate timing. With the global economy reeling from the excesses of Wall Street, Mathew Bishop and Michael Green give us the incredulously titled Philanthrocapitalism: How the Rich Can Save the World. Bishop, the chief business editor at the Economist, first described how the barons of the new economy were revolutionizing philanthropy by applying their business principles—and sweeping ambition—to their charitable endeavors in 2006. Now he has teamed up with Green, an international development expert, to chronicle how this “movement” of philanthropists has “set out to change the world.” The world is indeed changed: This gilded age has come to an abrupt and hard stop, and with it, perhaps, has come a tempering of irrational exuberance about the potential of outsized philanthropists to be, in Bishop’s words, “superheroes for solving some of society’s problems.”

Bishop and Green offer an exceptional synthesis of the influence of the private sector on the field of philanthropy, and this book should be required reading in any MBA or public policy program. But the authors fail to probe some hard questions thoroughly enough: Is the “new” philanthropy really even “new”? And is the private sector the best exemplar of corporate governance, accountability, or long-term investment savvy—particularly when it comes to complex and persistent social and economic problems? With the pillars of global capitalism quaking and government bailouts that will, inevitably, limit public spending for social needs, these are more than academic questions.

In their engaging—if incomplete—history of philanthropy, the authors cite the influence of Andrew Carnegie’s Gospel of Wealth, in which he described the rich as merely stewards of their economic surplus and advocated giving wealth away in one’s lifetime, rather than leaving it to heirs. The Gospel has inspired tycoons from John D. Rockefeller, the world’s first billionaire, to philanthrocapitalist par excellence Bill Gates, who received a copy from Warren Buffett. So, what, exactly, is philanthrocapitalism, and how does it differ from the philanthropy of those earlier titans of industry? First, the scale is unprecedented. The wealth creation of the last quarter-century—adjusted for historical inflation and the recent collapse—dwarfs any other period in history. At the start of 2008, the United States claimed 1,000 billionaires and the world 2,500. And charitable giving in the United States has increased accordingly, more than doubling from $13 billion in 1996 to nearly $32 billion in 2006. Second, this wealth has been created by entrepreneurs in tech, finance, and other industries who now channel their energy, drive, and principles to philanthropic endeavors. According to Bishop and Green,

philanthrocapitalists are developing a new (if familiar-sounding) language to describe their business like approach. Their philanthropy is “strategic,” “market conscious,” “impact oriented,” “knowledge based,” often “high engagement,” and always driven by the goal of maximizing leverage of the donor’s money. Seeing themselves as social investors, not traditional donors, some of them engage in “venture philanthropy.” As entrepreneurial “philanthropreneurs,” they love to back social entrepreneurs who offer innovative solutions to society’s problems.

Bill and Melinda Gates are the most obvious example of philanthrocapitalism—huge wealth, strategic investing, risk-taking, leverage. The Gates Foundation is the world’s largest, with approximately $60 billion in assets (as of early 2008). It is on track to grant $3 billion a year—improving education in the United States and fighting poverty and diseases like malaria, tuberculosis, and HIV/AIDS around the world. According to the authors, Gates applies the “systems” approach of his Microsoft success to “strategic” funding choices of the foundation. New York City Schools Chancellor Joel Klein notes that Gates supported experiments in the reform of the city’s school system that were initially too risky to fund with public dollars (e.g., piloting new small schools). Gates also understands markets—when they work and when they fail. He funds research into vaccines for diseases that disproportionately affect the world’s poor since pharmaceutical R & D dollars will not flow without the prospect of a return on investment. To help create the Global Alliance for Vaccines and Immunization, Gates convened a number of corporate, philanthropic, and government agencies, then leveraged their funds to guarantee demand for vaccines for diseases like malaria.

Though the Gateses may personify philanthrocapitalism, Bishop and Green illustrate that Bill and Melinda are not alone: The tenets of philanthrocapitalism now suffuse the entire charitable sector. Venture philanthropy, for example, which draws on the lexicon and principles of venture capitalism, has grown beyond Silicon Valley to charities national (New Profit Inc., Robin Hood) and international (Absolute Return for Kids Foundation, Children’s Investment Fund Foundation in the United Kingdom). Social enterprise, which once typically referred to organizations “non profit in nature, entrepreneurial in spirit,” now increasingly emphasizes commercial activity and “the role of profit.” According to this logic, revenue generation allows social enterprises to be “self-sustaining,” and profits will attract additional capital to solve social ills. Pierre Omidyar, who founded eBay with Jeff Skoll and who describes himself as “pro-market, anti-big government, skeptical of traditional philanthropy,” has created the Omidyar Network to support both nonprofit and for-profit social enterprises. Google’s own hybrid approach to philanthropy allows it, in Executive Director Larry Brilliant’s words, to “play with every key on the keyboard.”

The influence of the private sector is not limited to new philanthropic entities like Gates and Google. Many established philanthropies have undertaken significant introspection, examining what they fund and how they fund it. Perhaps the most radical “shakeup” of traditional philanthropy has come at Rockefeller, under the leadership of Judith Rodin. Since taking the helm in 2005, Rodin has embraced the language and methods of philanthrocapitalism: Program areas are now “strategic initiatives,” grants are made in “portfolio,” and Rodin “leverages” private and public resources from “strategic partnerships.” The Rockefeller Revolutionary, as she was called by the Economist, has been a controversial figure in the philanthropic world, particularly with those skeptical of the private sector sway.

Although they mention this controversy, Bishop and Green fail to explore it fully. The debate in philanthropy between “old” and “new” is not simply a case of the ancient regime resisting change. Rather, some of the field’s veterans are asking more fundamental questions about the nature of philanthrocapitalism—just how revolutionary is it? How valuable are all its business prescriptions? And might philanthropy in fact hold some lessons for the private sector?

In his Gospel of Wealth, Carnegie championed systemic change for social ills and helping “those who will help themselves,” a mantra consciously echoed today by his philanthrocapitalist successors. Rodin characterizes her own revolution as a return to the “scientific philanthropy” of John D. Rockefeller, who created his foundation to “go to the root ofindividual or social ill-being and misery.” In 2006, Rodin teamed up with the Gates Foundation in support of a “green revolution” in Africa to enhance agricultural productivity and reduce hunger. The model for this initiative was the first Green Revolution, which was launched with funds and direction from the Rockefeller Foundation between the 1940s and 1960 and which dramatically improved farming and food production in Latin America and Asia.

Susan Berresford, who spent 37 years at the Ford Foundation, including the last 10 at its head, oversaw similar visionary and risk-taking initiatives. She has cautioned against a false and “dangerous” dichotomy between “old and new philanthropy.” In 2007 Berresford told the Financial Times, “I don’t think there is anything more ambitious about new philanthropy than old philanthropy. … Hundreds of foundations for decades worked to address apartheid, hundreds of foundations worked to support the civil rights movement in this country, there is nothing more ambitious than those noble aims. They were extremely results-oriented—they wanted the end of apartheid, they wanted fairness for minorities—and the use of business principles has been in the foundation world for a long time.”

In Just Another Emperor: The Myths and Realities of Philanthrocapitalism, Michael Edwards makes a critical distinction between the tools of business—many of which can and have helped improve the effectiveness of nonprofit organizations—and a wholesale adoption of free-market ideology. Some private sector principles, he contends, simply do not translate. Long-term “social transformation,” for example, is neither easy to measure nor always cost-effective in profit-maximizing terms.

Bishop and Green dismiss Edwards in one page in their epilogue. Both his dissent and their hasty dispatch reveal a clash of cultures between the philanthrocapitalists and the charitable-world lifers that is the subtext of the philanthrocapitalism debate. Many of the early philanthrocapitalists—successful in one sphere and new to another—saw inefficiencies and opportunities in philanthropy but overlooked the knowledge and experience residing there. According to Omidyar: “[E]very business person who first engages in the nonprofit sector goes through a lot of growing pains, disappointments. It is a very different kind of sector, a different cultural environment.”

Some of the more vexing assaults came not from philanthropists themselves but from members of the business management establishment. Writing in the Harvard Business Review in 1999, Michael Porter and Mark Kramer claimed “billions are wasted on ineffective philanthropy. … [T]he real scandal is how much money is pissed away on activities that have no real impact.” Three years later, McKinsey consultants Les Silverman, Paul Jansen, and former Sen. Bill Bradley wrote in HBR of a “$100 billion dollar opportunity” if nonprofits could only fundraise more efficiently, streamline how they provided services, and distribute money more quickly. “Perhaps,” they admonished in the New York Times, “non-profit executives can learn some lessons from their counterparts in the private sector.”

While there are merits to many of these claims, they were also a product of a heady economic era. Some (including Jansen, et al.) have advocated for foundations to spend down, or “pay out,” their endowments faster than the 5 percent per year required by law. The choice of pace (which, in economic terms, is a discount rate) effectively represents a choice between spending on the needs of present vs. future generations. Many in the philanthropic world counter that capital preservation in certain instances may be vital to the health of the social sector. Reiterating this case in the Sept. 5 Chronicle of Philanthropy, Susan Berresford and Lorie Slutsky, the president of the New York Community Trust, argued, “[D]onors who set up endowments in perpetuity understand the value of a constant resource, available in good times and bad, for causes popular and unpopular. … Many have bold ambitions and seek solutions to problems such as poverty and injustice that they know will take many lifetimes of effort. Others want to ensure that future generations can deal with the inevitable—and now unimaginable—challenges that will arise.”

The unimaginable just might be a meltdown of the financial system. Since that op-ed ran, the S&P 500 has lost more than 25 percent (50 percent over the year), destroying billions of dollars at the most diversified endowed philanthropies, eviscerating Wall Street corporate and family foundations, and making charitable donations difficult for all Americans. Giving for 2009 will plummet across the country and the world. This comes at a time when enormous government bailouts leave fewer public resources for greater public need. Perhaps experience in the philanthropic sector will be better-heeded. Writes Michael Edwards, “It’s time for more humility.”

Evidence suggests that humility—or some common ground—had arrived before the crash. In June 2007, the Wall Street Journal and others touted a Seedco report, “The Limits to Social Enterprise,” which found that many nonprofits, pressured to launch commercial enterprises, had their work derailed by the distractions of running businesses. Since this spring, the Stanford Social Innovation Review, an intellectual weathervane for the social sector, has featured articles calling for a more realistic assessment of the achievements of venture philanthropy and for the use of “social innovation” (rather than “social enterprise”) as the lens for “understanding and creating social change in all of its manifestations.” Accordingly, “social innovation” recognizes the “cross fertilization” that occurs between the “nonprofit, government, and business sectors” rather than the unidirectional business-influence-on-philanthropy thesis of philanthrocapitalism.

“Cross fertilization” may have found its most articulate advocate in Luis Ubiñas, who in January succeeded Susan Berresford as the head of the Ford Foundation. Ubiñas, who came to Ford from McKinsey’s Silicon Valley office, seemed to many the quintessential “philanthrocapitalist” choice. Yet in one of his first public interviews with Alliance Magazine in September, Ubiñas sounds refreshingly humble:

I’m new enough to be cautious about making pronouncements across the foundation world. I think that learning across sectors is inherently valuable. I think that there are things that foundations do that would be very interesting to businesses—taking a long-term approach, taking a more holistic approach, attacking problems from multiple angles, learning about qualitative measurement. At the same time, I think there are things from business that philanthropy can learn: thinking about grants as investments, thinking about the possibility of expecting returns, thinking about grantees as partners instead of grantees, people we work with on an ongoing basis, closely, in a shared, open dialogue. I think the question isn’t what can philanthropy learn from business, it’s what can philanthropy learn from itself, from business, from government? Establishing a learning environment is what matters, who we learn from is secondary. …

Let’s hope cross-fertilization bears fruit. Ubiñas has his work cut for him.