There was a mood of reverence in the New York Public Library on Monday as the world’s two wealthiest men met to announce a landmark development in charitable giving. It will soon need to be converted into much more down to earth action.
Bill Gates, whose “new economy” software business has generated him a personal fortune currently estimated at $50bn, may not appear to have much in common with Warren Buffett, the “sage of Omaha” whose focus on “old economy” investment has made him $44bn.
But the two friends, who confirm their reputation for parsimony by placing bets of just $1 when they meet for poker games, have made a common exception in defining a new version of philanthropy that is both generous and rigorous. In bringing corporate values to the sector, they are refining charity in a way that is being closely watched by a new class of wealthy entrepreneurs.
Mr Buffett’s decision to donate shares in his company, now worth $31bn, will almost double the value of the $35bn-strong Bill & Melinda Gates Foundation. Add to that Mr Gates’s pledge of most of his outstanding $50bn, and their total gifts will in real terms far outstrip any other endowment in history.
But the pressure is on. Mr Buffett, famous for his hands-on style, is taking a seat on the Foundation board and requires it to double its current annual $1.4bn spending within two years to reflect the size of his annual bequests.
Mr Buffett’s contribution is all the more remarkable because it marks a shift away from the traditional desire of philanthropists to leave a personal imprint through the creation of a foundation in their own name.
“I know what I want to do, and it makes sense to get going,” he told Fortune magazine last weekend. “I came to realise that there was a terrific foundation that was already scaled up . . . and that could productively use my money now.”
Although he will also donate significant sums to other foundations controlled by his children, his surprise decision to place the bulk of his fortune in Mr Gates’s hands hints at what might be a second trend in the philanthropy of the future: a move towards consolidation.
Despite a handful of large endowments such as Mr Gates’s, most charitable giving around the world still takes place through thousands of small charities set up with far more modest means, and managed on whim and a shoestring by volunteers or tiny staffs.
The diversity of approaches that this creates is central to the innovation and range of interests in the non-profit sector. Yet it is also in many ways an inefficient means to achieving any stated goals.
Mr Buffett’s donation is important in a third way. It suggests an endorsement of an alternative approach taken by the Gates Foundation towards what some have dubbed “venture” or “strategic” philanthropy. The practice is designed to bring some of the skills of business – or specifically venture capital – to charitable giving.
Venture philanthropists actively seek out – and even create – organisations to receive funding in areas they judge useful, instead of passively processing requests for donations. They place large “bets” on those projects regarded as effective, introduce performance measurement techniques to assess their success, work with project managers to help them achieve their aims, and stop funding when failure or even long-term success results.
“The Gates Foundation has decided to take on some of the largest challenges known to mankind,” says Trevor Neilson, a former Gates Foundation staffer and now a partner in the Endeavor Group, a firm representing the philanthropic interests of a number of wealthy individuals.
“Will some of their strategies fail? Of course, but if one or two of them work they will change the course of history. They understand that risk and reward are inextricably linked and the reason they are so powerful is not the size of their bank account. It’s that they aren’t afraid to fail.”
Several of Mr Neilson’s clients, and those of similar consultancies, are embracing venture philanthropy. So is Google.org, the foundation being established by the founders of the search company and endowed with $1bn in funding.
While they do not explicitly use the “venture philanthropy” label, Mr Gates and his wife Melinda have also over the past decade built their foundation into a large organisation to put these ideas into practice. It now employs 250 staff and works with a large number of advisers, consultants and intermediary organisations.
As the only trustees, the couple have always been closely involved in key decisions, including large grants. They have brought with them a pragmatic business approach and a personal belief in the power of science and technology to change lives and reduce inequality of opportunity.
“We do have a privilege over established older foundations,” says Patty Stonesifer, their friend and the former senior Microsoft executive who runs the foundation. “Just a few years ago we were given a blank sheet to answer the question ‘what would you do today?’. We only started in this century in a big way, so we are very much of this moment.”
But in philanthropy, business methods also have their limits. As Bruce Sievers, an academic specialising in the subject, has argued, “performance” is much more difficult to measure in the non-profit world, while the hands-on approach of venture capitalists can threaten the independence of grant recipients.
Some of the Gates Foundation recipients make just such complaints, and question in particular the dominant role played by McKinsey, the strategy consultancy. The head of McKinsey’s India practice, for example, was recruited as one of its top executives to run the foundation’s HIV/Aids work from New Delhi.
While philanthropic “returns” are longer term and more complex, there is little data publicly available to judge the Foundation’s effectiveness to date in its main areas, whether in education reform or global health.
The Gates Foundation last month announced that it would create a division focused on global development. This hints at the broader social, economic and political issues that need to be tackled in order to deliver returns in global health.
Mr Buffett’s contribution raises the stakes. He will become a trustee of the Gates Foundation, bringing greater external accountability, although he stresses that his contribution will be modest, largely limited to custody if its original benefactors were to die in an accident.
Crucially, he suggests that he does not have the patience to await the longer- term returns required in philanthropy, and he is even sceptical about mixing the genres, dismissing a question on Monday about the need for ethical investment. “You need to seek out people with a talent to distribute money in the same way as you do for those to accumulate it,” he said.
As Mr Gates gears up to devote most of his time to philanthropy by 2008, he must also consider how to try to maintain the political leverage he can bring to bear in getting governments to make his pilot projects sustainable. Once no longer at Microsoft, that may prove more difficult.
It will take several years yet to determine if the Gates have been able to bridge the two worlds of business and philanthropic success. In the process, they will see how far they can deliver for Mr Buffett, themselves, other philanthropists seeking effective approaches, and above all their intended beneficiaries.