Needed: healthy competition in the global philanthropy market

Matthew Bishop

As the Italian Marxist Antonio Gramsci told his fellow revolutionaries, to understand capitalism you need to look at its most advanced form, which in his time was the America of Henry Ford. This edition of Alliance applies this lesson to philanthropy and looks at philanthrocapitalism – which, like today’s capitalism, is a truly global phenomenon.

Philanthrocapitalism may be what Bruce Sievers calls a ‘rather unlovely term’ and Rohini Nilekani finds uncomfortable, but it is a real, revolutionary phenomenon none the less. While a number of contributors to this special issue give a nod to the leadership of the Bill and Melinda Gates Foundation, the articles about the ‘emerging economies’ of India, Brazil, Turkey and Russia show that, increasingly, the principles of philanthrocapitalism are being applied globally.

These principles include:

  • Results orientation Bina Rani cites Bangalore IT billionaire Azim Premji as an example of the new wave of philanthrocapitalists in India who ‘are results-oriented’ and ‘see their philanthropy as social investment rather than charity’.
  • New tools Carla Duprat reports that ‘many shareholders in Brazilian companies make donations to company foundations, recognizing that their own private social investment can be leveraged n-fold if their companies are mobilized’. In Turkey, philanthrocapitalist Aydin Dogan is emulating Omidyar Network – established by the founder of eBay – in deciding that ‘a combination of both profit and non-profit social investments is critical for sustainable development’.
  • Strategic partnership Vadim Samorodov points to Vladimir Potanin as a pioneer Russian philanthrocapitalist, going beyond grantmaking and looking to influence government policy to create a more favourable environment for philanthropy. This tide of change is even reaching slow-to-change Europe, as Felicitas von Peter reports. Inspired by Warren Buffett’s $30 billion donation to the Gates Foundation, ‘the “new” philanthropists seem to be much more open to cooperation than “traditional” philanthropists.’


Is philanthrocapitalism really different?

Melissa Berman rightly points out that ‘there are legions of entrepreneurs who cannot manage, work in partnership, or take their idea to scale’ – and, by implication, that the same may be true of some of today’s philanthropic entrepreneurs. Moreover, she goes on to argue, the speed at which new approaches are being adopted may owe less to the fact that donors today are very different from their predecessors – they aren’t – than to the fact that there have been fundamental changes to ‘the world, its tools, and our beliefs about them’.

What sort of changes? Well, for example, the unprecedented amounts of wealth now concentrated in the hands of philanthropists and the sorts of problems that they are addressing – such as global public health, one of the main interests of the Gates Foundation – demand efficiency and demonstrable impact, not least because of the extensive use of partnerships with governmental and multilateral institutions, which bring with them a greater burden of accountability to the public than philanthropists past ever faced.

This reflects a wider trend where governments are increasingly looking to private donations to supplement taxpayers’ money in certain sectors. For instance, the UK government is offering match funding to promote gifts to build up the endowments of British universities to help them compete in the global higher education marketplace.

And is it a good thing?

Some of the articles cast doubt on whether the emergence of philanthrocapitalism is entirely good news for philanthropy and its intended beneficiaries. Olga Alexeeva cautions that the desire to exercise control means that ‘new’ philanthropists ‘may lock their money away from the traditional but still very important non-profit sector and create their own micro-world of social entrepreneurs, with limited impact’. She calls on donors to be willing to learn. Bruce Sievers and Salvatore LaSpada have a similar message, reminding us of the need for donor humility, which is clearly not a virtue of many philanthrocapitalists.

Less convincing is Sievers’ likening of philanthrocapitalism to the ‘failed social engineering schemes of the past’ because, he claims, it is ‘narrowly one-dimensional’ and ‘seeks to impose a model of one part of a social system onto another’. This is like asking water to flow uphill. He seems to be more comfortable with a sort of consumption approach to philanthropy, which is all about how it makes the donor feel, than with the investment approach of the philanthrocapitalists, which is primarily concerned with achieving demonstrable impact. While there may be a role for the former ‘expressive philanthropy’, society – which often offers a significant tax subsidy to giving – may feel that the ‘instrumental philanthropy’ of philanthrocapitalism provides better value for its money.

Alexeeva provides an excellent summary of the ways in which capitalism is growing and changing globally. Capitalism adapts to local circumstances and develops through the pressure of competition – not through someone’s desire to impose a model. The same is true of philanthrocapitalism.

My view, which I will expand on in a forthcoming book with Michael F Green, is that the techniques of the new donors offer an enormous potential benefit. And the best way to fulfil that potential is through open, transparent competition between philanthropists, so that the good ideas and approaches drive out the bad. The question is how to ensure that healthy competition drives the global philanthropic market. This is no easy task, as there has been precious little competition in philanthropy in the past – or rather, little competition as regards having impact. Who gives most has often been an area of fierce competition between tycoons.

The principal-agent problem

Successful businesspeople and investors face what is known in economics as a principal-agent problem: they, as the principal, have money to invest but must rely on agents, the managers of the firms they lead or invest in, to maximize the value of that investment. But agents may not share the principal’s goals.

The same problem applies to donors and their agents (foundations, charities, social entrepreneurs, etc). Scandals in the US about luxurious living by foundation employees are a good example of how agents can maximize the personal benefits to themselves at the expense of the goal of the organization. More fundamentally, this raises questions about foundation effectiveness, particularly where the original donor has died, thereby removing the principal and leaving the agents with largely unchecked freedom to do their own thing.

In The Foundation: A Great American Secret, his remarkably frank insider’s guide to the world of the American foundation, Joel Fleishman concludes that ‘donor influence is the most powerful of all determinants of the impact of a foundation’. That is why it is clearly a positive development that so many of the new philanthropists – including Bill Gates – intend to give away all their money by, or within a pre-specified number of years of, their death. Equally, the fact that so many of them are starting to give at a young age – in their thirties, in the case of eBay’s Pierre Omidyar and Google’s Larry Page and Sergey Brin – means that the commitment to spend down need not mean giving their fortunes away with undue haste.

The Buffett endowment to the Gates Foundation, and the condition that he has attached that at least one of Bill and Melinda Gates be actively involved in the foundation for his money to keep flowing, is an example of a different but equally innovative way of a philanthrocapitalist solving the principal-agent problem.

Active, engaged principals matter. Those who have succeeded in business have found techniques to address the principal-agent problem through high engagement, a focus on effectiveness, and so on. Applying these approaches to philanthropy will make life more difficult for agents, whether foundation managers or grantees. Alexeeva describes how the new philanthropists in Russia ‘expect managers of their projects and the NGOs they support to behave like the experienced business managers they are used to working with in their companies’. That is the point. The dislike many NGO workers have of being treated that way is one reason why the new philanthropists are often proud that they avoid hiring ‘traditional charity workers’.

Lack of an agreed bottom line

Managing the principal-agent problem, however, is more difficult in the world of philanthropy. That is why, for all its promise, the success of philanthrocapitalism cannot be taken for granted. The first problem is the absence of an agreed bottom line, a yardstick with which to measure success or failure – the philanthropic equivalent of profit in the capitalist world. What is social impact? How can it be measured? Is there a risk that the search for concrete results will push donors away from more useful but softer and more intangible initiatives?

A great deal of effort has gone into devising measures of double- and triple-bottom lines, or ‘blended value’, but so far these fail to meet the standards of objectivity and difficulty of being manipulated that business analysts usually require.

A second issue is how to ensure that philanthropists set the right goals. This is a familiar problem in the developed world where donors often favour softer issues like education or the arts, rather than more difficult areas like drugs or alcohol addiction. Bina Rani tells us that even new Indian philanthropists seem to be ignoring some of the country’s most important social issues.

The growing focus on ‘all asset philanthropy’ is also causing some difficulties for the new philanthropists, many – but not all – of whom regard so-called ‘socially responsible’ or ‘mission-related’ investing as hopelessly woolly. The recent attack on the Gates Foundation’s investment policy by the Los Angeles Times, which felt that its shareholdings in Cadbury Schweppes, Nestle, various oil companies, and so on were at odds with its mission, aroused only the contempt of its founder. However, it will be interesting to see if the public outcry forces Gates to change its tune. Indeed, one of the skills many of the new philanthropists will have to bring from the business world, but have so far done only in the most superficial ‘aren’t we great’ way, is effective public relations.

The value of information

Though there is no simple answer to the question of measuring impact, the experience of the for-profit business world suggests that the best hope lies in improved access to information. Financial markets recognize that short-term profits are not the sole measure of corporate success – share prices reflect the complex factors that can affect a company’s long-term success. Successful investors are those who can most effectively assess all the factors that will influence this outcome.

Cathy Pharaoh’s fascinating article on one of the most important innovations of philanthrocapitalism, the emergence of philanthropy intermediaries, provides a useful survey of how these questions are being addressed. Intermediaries are competing to offer donors the best information and advice on where their money is best spent. Philanthrocapitalists will be looking for advisers whose assessments offer the objectivity and reliability that they need to properly assess the impact of their investments. This can only be a positive development – notwithstanding Pharoah’s cited example of a successful venture capitalist whose most reliable means of assessing social impact is ‘gut instinct’.

Looking ahead

Pharoah’s article also suggests that the risk of donors herding around a crudely empirical approach is mitigated by the willingness of philanthropists to engage with their work. Equally, if donors can have more impact by choosing neglected or ignored issues, avoiding the congested philanthropic marketplace of traditional sectors, then philanthrocapitalism may generate the dynamism that Bina Rani does not yet see in India. Or, as Rohini Nilekani puts it, ‘if you put a little money in a place that has a huge market or social need, it reaps huge rewards.’ A good example is George Soros, whose billions have been earned by often taking a contrarian approach to investment, and who has committed large sums to difficult areas such as ‘harm reduction’ schemes for intravenous drug users (eg needle exchanges) and radically new areas like promoting political change in the Former Soviet Union.

Charities rightly resent crude performance measures such as the percentage of revenue spent on administration. To be freed from these, there needs to be a step change in the quantity and quality of information available to donors. That in turn would help to bring the traditional philanthropy and NGO sector and the new philanthropists and those they invest in closer together, as information produces a greater consensus about what does and doesn’t work.

The worry is that, so far, one of the things most new philanthropists share with their older peers is an ambivalence about transparency. If philanthrocapitalists are as serious about impact as they say they are, they need to commit to report on their failures as much as their successes. This is not humility. It is the only way for donors to learn and thereby to improve their performance. That is something any true philanthrocapitalist should understand and appreciate.

Matthew Bishop is Chief Business Writer/American Business Editor of The Economist, based in New York. Email

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