February 22, 2007 | Read Time: 5 minutes
A century ago, Washington Gladden, a prominent Congregational minister from Columbus, Ohio, earned himself an enduring place in the history of philanthropy by denouncing a gift to his denomination from John D. Rockefeller as “tainted money.”
In Pastor Gladden’s eyes, since Mr. Rockefeller had amassed his wealth in ways that were less than “clean,” those who accepted his funds would inevitably dirty themselves as well. Since then, numerous organizations have spent time wrestling with the propriety of accepting grants from individuals or organizations whose personal or business activities seemed dubious.
That debate has taken on new luster in recent weeks as the issue of how foundations invest their endowments has attracted public attention.
As Jed Emerson and Mark Kramer noted in these pages (“Maximizing Our Missions,” January 25) proponents of social investing attracted new support after the Los Angeles Times published a two-part series accusing the Bill & Melinda Gates Foundation of hypocrisy because its endowment is invested in companies that cause many of the problems that the philanthropy seeks to ameliorate through its grant making.
But just as the criticisms of Mr. Rockefeller’s business behavior were exaggerated, the case against the Gates Foundation’s financial practices rests on flawed premises and wishful thinking.
No one has yet suggested that the foundation’s beneficiaries should give the money back or refuse to take it in the first place, as Pastor Gladden might have done.
But the foundation is being urged to change its investment strategy, selling its holdings in companies whose behavior is problematic and employing its assets (along with its grants) to advance its charitable objectives.
By thus blending its business and philanthropic activities, the foundation’s critics say, it could use its financial leverage to encourage corporations to behave more responsibly and accomplish more of its social objectives.
So far, the Gates Foundation has refused to take this step.
It has maintained that it wants to concentrate its efforts on its programs and leave investment decisions in the hands of its expert money managers.
But now that the famed investor Warren Buffett has joined the Gates board after pledging the bulk of his fortune to the foundation, this response is not likely to satisfy many of the philanthropy’s critics.
Moreover, it is unnecessarily defensive.
If the foundation’s money managers are doing their jobs well, the Gates fund should be investing in businesses that are prospering — and creating jobs and increased incomes for the cities and towns where they are based. They should also invest in companies that are developing new drugs and making more credit available for low-income families who want to own homes. Indeed, in the long run, with a $30-billion portfolio to invest, the foundation’s financial efforts could well produce greater social returns than its grant-making ones by backing successful companies throughout the world.
To be sure, the business practices of some of these companies might not always pass muster in the United States or other parts of the world.
But in developing countries, their activities may still improve living standards. And if the companies’ conduct becomes too objectionable, it would be more effective for government to pass new regulations or take additional steps that go well beyond encouraging investors, even large ones like the Gates Foundation, to sell their shares.
In fact, as Nicholas Kristof, a columnist for The New York Times, has written, stock divestment and economic sanctions rarely succeed. Even in South Africa, where a concerted effort was made to weaken the financial base for that nation’s racial policies, black people wound up suffering. (And in the post-apartheid era, unemployment has become a critical problem.)
Mr. Kristof favors taking such actions against Sudan, but he hopes that country will be an exception to the rule that curtailing investment generally strengthens those in power, leaving ordinary citizens worse off than they were before.
Investing in companies because they are socially responsible could also put a foundation’s endowment in jeopardy.
David Vogel, a business professor at the University of California at Berkeley and author of The Market for Virtue: The Potential and Limits of Corporate Social Responsibility, has studied the earnings of socially responsible businesses, and he says the case for purchasing shares in such companies is weak.
The problem: Such companies frequently are unprofitable and fall short of attaining their social objectives. At best, they may obtain a better reputation, but even that can be short-lived, as British Petroleum, a company that spent a small fortune promoting itself as environmentally friendly, learned when its refineries and pipelines caused damage to the regions where they were located.
The real problem with “tainted money” is not, as fund raisers often joke, that there “tain’t enough of it.”
To the contrary, there’s usually far too much. Successful companies often use methods that will strike high-minded observers as improper and unscrupulous, even if the approaches are well within the limits of the law. Sometimes, a business’s activities may actually be harmful to people or the environment, at least for a while.
If foundations and donors chose to have nothing to do with such businesses, they would quickly run out of places in which to invest, unless they were willing to ignore many transgressions. And the real losers would not be their grantees (who could always look for other sources of support), but rather, the people in places where those companies were operating and who were willing to tolerate them, warts and all, in the hope of eventually benefiting from increased prosperity.
This is what Barbara Undershaft, the Salvation Army officer who is the heroine of George Bernard Shaw’s play Major Barbara, finally understood when she discovered that her father, who was one of her charity’s largest benefactors, was an arms merchant. What matters most is not where philanthropic dollars come from, but what is done with them.
Leslie Lenkowsky is professor of public affairs and philanthropic studies at Indiana University and a regular contributor to these pages. His e-mail address is llenkows@iupui.edu.
