Philanthrocapitalism on Trial

Will the collapse of the global financial system also bring down philanthrocapitalism?

After all, some of the most vocal advocates of taking a businesslike approach to giving made their money in the financial industry, and they are a lot less rich than they were. Meanwhile, the methods by which they made their money are being denounced as something between insanely risky and plain corrupt, hardly the sort of thing to put nonprofit groups on a sounder footing.

As Phil Buchanan observed in reviewing Philanthrocapitalism: How the Rich Can Save the World, the book I wrote with Michael Green (The Chronicle, October 16), at first glance it no longer seems like such a bright idea to apply the ways of Lehman Brothers et al. to the most important and difficult problems facing the world.

Yet this may prove to be philanthrocapitalism’s finest hour. Certainly, the need for effective philanthropy has only increased in recent weeks, while on closer inspection, the ability of philanthrocapitalism to improve the efficiency of giving has not been seriously harmed by the financial meltdown, and may ultimately emerge from it greatly enhanced.

The world is still trying to figure out the full implications of the global financial system falling on its face.

Yet it is probably safe to assume that no group will survive this crisis better than the very rich. Yes, a few Wall Street barons will be humbled, reduced to mere millionaires or perhaps even jailed, and investment portfolios will suffer for a while, but over all the rich are best placed to weather the storm, and even prosper from it by investing in that lucrative moment when, as the saying goes, “the blood is in the streets.”

This could be the greatest opportunity for acquiring assets in a generation — and that will help the rich to build even bigger fortunes. Warren Buffett is leading the way in this respect, and his investments in Goldman Sachs and General Electric may yet prove some of the best in his career, which, since he has promised to give away his fortune, bodes well for philanthrocapitalism.

The question is, will other members of the superrich follow Mr. Buffett’s example, not just by investing but by committing to give effectively?

They should, for with cash in their pockets while government and nonprofit budgets are squeezed, the rich have the greatest giving opportunity in a generation: the opportunity to bring about massive change in the nonprofit world.

Charities and foundations can learn a great deal from capitalism, imperfect as capitalism is. This will be as true during an economic downturn as it was in the boom years.

Certainly, despite the long history of philanthropy imitating capitalism, this argument has provoked a lot of hostility from grant makers who naturally dislike such a disruptive force. Even so, some of the more thoughtful among them have already learned many of those lessons and have even been showing some of the new philanthropists the way.

One of the strengths of capitalism is that it will respond to the economic crisis by seeking greater efficiency, such as restructuring through mergers, acquisitions, and bankruptcies. Sadly, the nonprofit world tends to lack those self-correcting mechanisms, which is why there tend to be too many organizations fighting over the same precious dollars and why nonprofit groups tend not to grow to anywhere near the scale of private companies.

The dynamic force in capitalism that drives this quest for efficiency is the shareholder. Over the past 30 years, shareholders have been increasingly effective in pushing corporate managers to maximize the returns on their capital.

Every now and again, the capitalist system takes a wrong turn, but effective capitalists do not give up: They learn, improve, push even harder, sometimes resulting in what the great economist Joseph Schumpeter called a “wave of creative destruction.”

Philanthropic donors, both individuals and foundations, now have an opportunity to seek similar change by becoming like “activist shareholders,” pushing for a greater focus on results, and on restructuring the nonprofit world to create institutions capable of delivering it. This is the logical next step for philanthrocapitalism: moving from venture philanthropy, which is largely about starting new nonprofit groups, to improving the workings of established charitable organizations.

This is a challenging, disruptive process that, understandably, will provoke even more hostility in some quarters. And, of course, there is much that is already done well at nonprofit groups, things that need to be cherished and even expanded, not washed away by the great wave.

Yet, as the management guru Jim Collins puts it, philanthrocapitalism is a “vital new force shaping the world today.” Will philanthrocapitalists, whether the newly rich or the professionals in established foundations who understand the potential of learning from the best (but not the worst) of capitalism, take this opportunity to drive a productivity revolution at nonprofit organizations?

Obviously there are risks to donor activism, particularly if it involves simplistic rather than well-thought-out attempts to apply businesslike thinking to philanthropy.

However, the new generation of philanthrocapitalists is increasingly aware of the dangers of arrogance and ignorance.

The venture-philanthropy pioneer Mario Morino says he has learned some humility — to “check in my ego” — and a different way of talking to be effective in his charitable giving.

The new rich, he says, “often got their money very fast, and they get intoxicated with their own brilliance. They expect to quickly achieve similar results in another sector. They forget that they have been very fortunate, and that other sectors may be more complex.”

But, like him, other leading philanthrocapitalists, from Bill Gates down, have been learning that lesson fast.

The recent crisis in the financial markets should not discredit the notion that effective capitalism is based on effective disclosure and accountability, and that the lack of openness in the nonprofit world is a formidable barrier to change.

After all, the clearest lesson of recent weeks is that financial markets are at their most vulnerable to bubbles and crashes in those parts that lack public visibility and accountability (securitized assets, complex derivatives, etc.).

In capitalism, activist shareholders are empowered by a vast quantity of market information and financial analysts willing to take on and challenge corporate managers.

The growing number of philanthrocapitalist advisory organizations, including consulting groups (such as the Center for Effective Philanthropy and Bridgespan), research firms (New Philanthropy Capital), and philanthropic investment banks (Sea Change Capital), will have a crucial role to play in helping activist donors drive the right sort of change, by helping them answer the most important question of all: “What works?”

Unfortunately, sometimes it can seem like nonprofit and foundation managers would rather close ranks and defend their old ways than look to see what they can learn from the new, business-driven donors.

One silver lining of the current financial crisis may be that tighter budgets, due to government spending cuts and smaller endowments, will cause those in charge of nonprofit organizations to be more open to constructive engagement with the new ideas of philanthrocapitalists, including the case for mergers and acquisitions.

The danger is that the philanthrocapitalists, many of whom feel poorer because their fortunes are smaller (though still large by any objective standard), will back off, deciding that now is a convenient moment to listen to their critics at nonprofit organizations and traditional foundations.

This would be a mistake for many reasons, not least of which is that to cut back their giving at this time would undermine the social contract that exists between the superrich and everybody else, and that would add fuel to a populist politics that could do even more damage to capitalism than it has already inflicted upon itself.

Far better that today’s philanthrocapitalists realize that what will be a tough time for charities in the next year or two is likely to be the philanthropic buying opportunity of a lifetime, because if they keep giving, they will find the potential to bring about huge improvements in the quality of grant making and the efficiency of the nonprofit world.

Matthew Bishop is the American business editor of The Economist and co-author, with Michael Green, of Philanthrocapitalism: How the Rich Can Save the World. Extra chapters on the way that philanthropy imitated capitalism during past golden ages of giving are available at http://www.philanthrocapitalism.net/?5-Golden-Ages