This post originally appeared on Open Democracy blog. The original article can be found here>
In recent years, the Gates Foundation has given large amounts of money to some unusual suspects including Mastercard and Vodacom as part of a new philanthropic penchant for offering charitable grants to highly profitable corporations. It’s a move that diverts resources away from non-profit groups and hands them over to big business, on the assumption that business provides a more efficient route to social as well as economic change.
But a recent spate of high-profile scandals places a question-mark against this controversial practice, and against the ‘business-is-best’ philosophy that underpins it. In September 2015, for example, Martin Shkreli earned the title of‘most hated man in America’ after jacking up the price of Daraprim, a treatment for a parasitic infection named toxoplasmosis, by 5000 per cent.
In August 2015, Coca-Cola was criticized for donating tens of millions of dollars to scientists who promoted questionable research, suggesting that sugary drinks and excessive calorie consumption are not a cause of obesity.
Each of these controversies differs in scale, but they’re similar in outcome: reaping private profits at the expense of the public interest. As British economist and blogger Chris Dillow remarked on twitter, scandals at companies such as Volkswagen confirm a well-known economic adage, one reiterated in George Akerlof and Robert Shiller’s book, Phishing For Phools: whenever there are profits to be made, sellers will use manipulation and deliberate deception in order to exploit consumer ignorance and make a killing—sometimes literally so.
We tend to hear about only the most egregious cases—incidences like Volkswagen that have lethal repercussions. But the reality is that there’s nothing new or unusual about corporations purposefully deceiving regulators and the public in order to augment their bottom line.
Even when they do get caught, as GlaxoSmithKline did in 2013, the year itagreed to pay US regulators $3 billion for failing to report safety data and illegally marketing unapproved drugs, the financial penalty is typically far less than the profits that have been earned. As science writer Ben Goldacre has suggested, corporate fines in the pharma sector are like ‘parking tickets’—so negligible that they barely make a dent in the bottom line. When it comes to corporate malfeasance, crime often pays.
The fraud at Volkswagen smacks of terrible timing. “Herein lies perhaps the biggest tragedy,” suggested David Bach, an associate dean at the Yale School of Management in an article in the Financial Times, “Volkswagen has emboldened the cynics at a time when we need business efforts to save the planet more than ever.”
Bach’s assumption—the belief that multinationals are doing more than ever to improve social welfare across the world—has become commonplace, fueled in part by the rhetoric and grant-making practices of powerful philanthropic organizations like the Gates Foundation which argue that engaging the private sector is vital to poverty alleviation.
“As a businessman, I believe the free market fuels growth,” Bill Gates said inan address to G20 leaders in 2011, adding that “there are relatively simple things we can do to encourage private investment in development.”
One such incentive is the use of direct subsidies to business by philanthropic foundations. In recent years, the Gates Foundation has increased its direct charitable grants to for-profit entities, including recent donations to Vodacom and Mastercard. In both cases, the money was intended to expand financial services to the poor in low-income countries.
Vodacom received over $6 million to ‘grow the mobile banking sector’ in east Africa. Mastercard got $11 million to set up a ‘lab for financial inclusion’ in Kenya. Both grants could help bring welcome services to marginalized people in important ways. But Mastercard and Vodacom are also poised to profit handsomely from the markets created by these charitable offerings while assuming very little of the financial risk involved.
When a business venture has clear commercial as well as charitable objectives, it seems reasonable to insist that grants from foundations should be structured as program-related equity investments or as loans. But that’s not the case with either of these donations. Such grants raise an even bigger question: where’s the evidence that businesses are actually contributing more to improved social outcomes than in the past—and therefore deserve the Gates Foundation’s largesse?
Are companies themselves becoming more charitable? Are they investing more of their overheads in research and development in comparison to what they spend on marketing? Has increased executive pay heightened CEO vigilance when it comes to reining in dubious safety practices?
The answer to all these questions is no.
Let’s start with charity. US corporate profits are soaring. As the New York Times reported in 2014, profits are at their highest point in 85 years, while employee compensation has plummeted to its lowest level in 65 years. Despite this boost in profitability, corporate philanthropy has declined steadily ever since the mid-1980s. In fact as Ken Stern pointed out in Slate in 2013, US corporate philanthropy has sunk from a high of 2.1 per cent of pretax profits in 1986 to 0.8 per cent in 2012.
Then there’s the matter of expenditure on Research and Development (or R & D). Shkreli defended hiking the price for Daraprim by insisting that the high cost allowed his company to spend more on research for lethal diseases. He never provided figures for his R & D, but at comparable companies the picture isn’t great. In fact the proportion of revenues spent by private pharmaceutical companies on R & D has fallen in recent decades. In 2014, the BBC reportedthat nine out of ten of the world’s largest pharmaceutical companies spent far more on marketing efforts than on research and development.
US legislators are now demanding an end to price-gouging: new bills have been introduced in six different state legislatures calling for more transparency surrounding drug development costs. Hilary Clinton’s recent call to place federal controls on prescription drug prices—while obviously coming at an opportunistic time given her presidential election bid—builds on public support for these earlier bills. The state-led legislative effort has been spearheaded by physician and patient groups who insist that there’s an urgent need to cap the skyrocketing price of life-saving drugs.
Escalating CEO pay and a growing reliance on stock options are also contributing to lax safety standards. In a study published in 2014, academics at the University of Notre Dame studied the relationship between stock options and safety recalls and found a positive correlation between the two. An article in the New York Times suggests the Notre Dame study is simply the latest in a stream of research that indicates that increased CEO pay, especially when linked to stock incentives, can fuel dubious accounting practices, a cost often borne by shareholders and consumers.
There’s also mounting evidence that incomes among top earners play a direct role in escalating inequality, a problem that’s at best ignored and at worst exacerbated by the UN’s much-trumpeted Sustainable Development Goals (or SDGs). Although the SDGs pay lip service to the problem of inequality, they focus on the lowest-earning 40 percent of the world’s population. In an article published in the Guardian, Alex Cobham, Lukas Schlogl and Andy Sumner suggested that “By creating an inequality target that doesn’t involve the top end—the rich—the SDG target actually allows room for greater income concentration at the top.”
Development policymakers have expressed concern over the cost-effectiveness of increased partnerships with the private sector. Financing for development projects has shifted dramatically in recent years, with increased aid being channeled through public-private partnerships (or PPPs)—collaborations that have a poorer track record than is often conceded.
The biggest problem is cost. “PPPs are usually the most expensive method of delivering development projects,” development specialist María Romero reported in 2015. “For instance, a 2015 review by the UK’s National Audit Office finds that the cost of financing a PPP project can be twice as expensive for the public purse as if the government had borrowed from private banks or issued bonds directly.”
Private actors do have a welcome and important role to play in global development, but until more evidence of the cost-effectiveness of enrolling private players emerges, the eagerness to offer ever more charity to profitable corporations seems questionable to say the least.
As inequality widens in tandem with soaring corporate profits, philanthropic foundations should be calling for tighter tax oversight, not offering more corporate generosity. Companies should be exhorted to foot their own bills for expansion in new markets. They should not be on the philanthropic take.