The ‘business of beneficence’

In the tradition of philanthropist Andrew Carnegie, who famously said, “The man who dies rich, dies disgraced,” under the dome of the Celeste Bartos Forum in the New York Public Library Warren Buffett recently signed five commitment letters.

These letters were addressed, one each to the foundations run by his three children, one to the foundation in his late wife's name and perhaps most significantly one to the foundation run by Bill Gates, and his wife, Melinda. With a stroke of his pen, the world’s second-wealthiest man, Warren Buffett, gave away the bulk of his $44 billion fortune in an extraordinary charity deal with Bill Gates, the founder of Microsoft.

This is the largest philanthropic gift in history. And if Buffett is right in thinking that Berkshire's price will trend upward, the eventual amount given could far exceed estimations. Even in inflation-adjusted dollars, Buffett gave more money than John D. Rockefeller or Andrew Carnegie in what must count as one of the most momentous days in philanthropy.

Known as “The Sage of Omaha”, Buffet’s first job was writing up stock prices on a chalkboard at his father’s brokerage. Today he is considered the most successful investor of all time. He lives a famously unpretentious life and still lives in the $31,000 house he brought in Nebraska in 1958.

Buffett, has for decades said his wealth would go to philanthropy but has just as consistently indicated the bequest would be made at his death. Typical of Buffett’ original thinking, he broke the mould and pledged to gradually give 85 per cent of his Berkshire stock to five foundations in his lifetime.

A dominant five-sixths of the shares will go to the world's largest philanthropic organisation, the $30 billion Bill & Melinda Gates Foundation. Between Buffet and Gates they have given new meaning to the word philanthropy, and not only by virtue of the magnitude of the funds they are jointly dispensing, but also because Buffett has given huge impetus to what is being called "venture philanthropy" or "philanthro-capitalism".

Philanthropy on this scale dwarfs the investments made by the big philanthropists of old, and rivals the funds that governments and international organisations spend on addressing global ills. The US Agency for International Development (USAID) spent $1.5 billion last year on health programs, approximately the amount spent that year by the Bill and Melinda Gates Foundation.

A bit of competition from a private philanthropist who knows how to get value for money might just provide a yardstick of efficiency. Stanley Katz, say that “the sheer size of the foundation allows it to take risks and suffer losses, and the Gateses’ management skills allow the charity to be flexible enough to correct its giving patterns as experience dictates. By becoming more efficient and businesslike, private foundations can achieve what official aid cannot; innovativeness. It would in deed be a new era in philanthropy if the Gates-Buffett merger triggered a business of creative global “giving”.

Another advantage of the Gates-Buffett arrangement is that it has sent a signal to other potential donors that it is no shame in admitting that knowing how to make money involves a different skill set, from knowing how to give it away. “You need to seek out people with a talent to distribute money in the same way as you do for those to accumulate it,” Buffett told the press corps.

“What can be more logical, in whatever you want done, than finding someone better equipped than you are to do it?” Mr Buffett said. In fact he makes no secret of the fact that he is better making money than dispersing it. So he sought out what he says is, "the talent to distribute the money" in an "effective manner".

Gates on the other hand has a polymath's mind that revels in the complexity of the challenge of solving global health issues. Gates has the mental agility to piece together the necessary components in order to create low-cost delivery systems for vaccines, as if he were designing Microsoft software.

The creative aspect of this merger is that it is not trying to reinvent the wheel, but rather channel funds through avenues which are already established, tried and proven. Buffett’s joining the Gates as a trustee, with this injection of funds will allow the Foundation to “both deepen and accelerate” its work. Now it will be Buffett and the Gateses building up the foundation together.

To date the Foundation works heavily through partners (nongovernmental organisations, usually) and has focused on big causes. The foundation can now broadened its efforts to global health, on which it now spends around 60 per cent of its funds. (Much of that is targeted at diseases regarded to be “the big three major killers: malaria, HIV-AIDS, and tuberculosis).

Also the Gates Foundation is moving beyond the pure medicine dimensions of health into agriculture and micro-financing and will inevitably find itself in the business of promoting social infrastructure, open markets, the rule of law and transparent and corruption-free administration.

Yet, if this were an industry merger, the antitrust authorities would be quick to raise the alarm and investigate the effect of the deal on competition. Fortunately, in terms of charitable entities, even with the enhanced contributions of Buffett, the Gates Foundation is not a substantial competitor. This is because the approximate $3 billion a year that the Foundation is intended to spend is only 1 per cent of the $260 billion of annual charitable giving in the United States.

Not withstanding the fact that this sizable gift is still only a fraction of the total, the Bill & Melinda Gates Foundation is nevertheless, by far the largest foundation in the world, even before Warren Buffett's historic gifts. It is more than five times the size of the $11 billion Ford Foundation. In size terms the $1.36 billion spent by the Gates Foundation last year, came pretty close to the entire $1.66 billion budgeted by the World Health Organization for this year.

Naturally the gifts have had US tax lawyers working over time to assess what is the benefit of the merger to the two richest men in America. Undoubtedly while the money is given away, the trustees still maintain control over how it is spent. Hugh Freund, a leading New York estate tax lawyer and planner, points out that although the foundations are required to dispose of 5 per cent of their assets every year, they will not fade away, as they generally earn enough to refresh their balance sheets and have a perpetual life.

So too the gifts have had policy analysts assessing what this means in terms of political influence and the capacity of the Foundation to set the aid agenda. There is always the concern, and the possibility that charities on this scale might eventually throw their weight behind causes primarily appealing to one or another side in policy disputes that are essentially political in nature.

Also not all sectors of the community, or for that matter cultural and interest groups, will be comfortable with philanthropic foundations promoting western values of freedom, technological progress and entrepreneurship to solve the world's underlying problems. This highlights the fact that private foundations are answerable only to themselves and what is politically expedient.

Taxation and policy considerations aside, Warren Buffett and Bill Gates are contributing to the net global benefit, in the grand tradition of American private philanthropy. They will undoubtedly do much good and improve the lives of millions of people.

Let face it - there should be more of it. The tradition of philanthropy in the United States deserves emulation in other countries. In the UK only one person in the top 30 richest persons, (Lord Sainsbury), is also in the top 30 givers list. Most philanthropists would still rather donate to elite schools, concert halls or religious groups than help the poor or sick and this needs to change.

The marriage of Buffett and Gates fortunes was a truly a momentous event, and marks a serious coming of age of entrepreneurial philanthropy. A new breed of philanthropists are seeking to maximise the social impact of their actions, and applying their skills in business - to the work of doing good. Even though it leaves the world hanging on the question whether there will be offspring remotely tall enough to do their parents proud.

Yet as the Gates Foundation grows in size and ambition, it will raise questions about how it and others like it will fit into the world of policy making and address problems that have hither too been the reserve of multilateral institutions, non-governmental organisations and governments themselves. With this greater role will come demands for greater accountability.

While no philanthropist has solved a worldwide problem since Carnegie brought universal access for the poor to books via libraries, and Rockefeller used his billions to fund the research that would lead to the eradication of polio, the tantalising prospect is that entrepreneurial philanthropy, by investing in social change can bring about innovation, efficiency in the redistribution of resources to solve intractable global problems.

It is a welcome development, that may well herald a global trend towards modernising the concept of philanthropy or what Rockefeller called the “business of beneficence.”