Philanthropy and Investment: The Distinctions Begin to Blur June 12, 2012

I grew up believing that ‘philanthropy’ and ‘investment’ were two distinct things and not to be confused. They both serve the public, but in different ways; investment in business by [hopefully] producing worthy products at enough profit to make a good living for employees, executives, and entrepreneurs. [Milton Friedman is wrong; “maximizing shareholder value” is not the main purpose of a business. The main purpose of a business is to fulfill its calling. The Widget Company’s calling is either to make widgets, or provide in some new form the service that the widget used to perform. But a business is not ‘sustainable’ {ah the chance to use a green word!} without profit.] And non-profits serve the public by doing those things that are good and useful but where a sustainable profit cannot be had, by totally or partly relying on donations.

There have been attempts to blur the distinction in the past. One example is Girl Scout Cookies. If you buy them, it helps the Girl Scouts. But I don’t think Girl Scout Cookies are all that great as cookies, and I don’t think they are actually baked by authentic Girl Scouts. If I like Girl Scouts, why shouldn’t I give tax deductible money to them, and go out and buy Mrs. Fields?

Another more complex example is called the Charitable Annuity. One gives a large sum of money to a charity and it does not spend it on itself, but manages it for you and gives you the income back. Why is a charity in that kind of business?! They’re supposed to be handing out blankets, upholding America’s founding principles, preaching the Word of God, or whatever. What are they doing in the trust company business? And, fixed income annuities are not the best investments in a democracy, in which, as my Dad used to say, inflation is inevitable. What is a charity doing assuming responsibility for this? There exists an alternative called the Charitable Remainder Trust – you can set up a fund with a trust company where you get the income but your favorite charity gets the lump when you’re dead. And your favorite charity doesn’t have to run it. But apparently the tax advantages are, or were, not so good as for the Charitable Annuity. I guess with the Charitable Annuity you get your tax deduction right away. And with the CRT the deduction waits until you die. Or something.

But now, increasingly, things are advanced to us that seem to fall somewhere in between; from microenterprise to cultural product, things are being marketed as ‘investments’ that are not likely to make much money. [Indeed, many people nowadays use the word ‘investment’ as much for a charitable donation as for a purchase of stock or of participation in a deal.] We buy “Fair Trade” coffee. Foundations are allowed under certain circumstances to make “Program Related Investments” [PRIs]. We can pick our own microlendees on the internet. There is now a thing called Kickstarter that enables us to give money to artists and creators – including designers of adventure video games, which it seems, is part of popular art nowadays. And the legal format of Kickstarter ‘investments’ is vague at best.

In the last couple of years, new legal forms have appeared to acknowledge the new situation. Maryland started with the L3C [Low-profit Limited Liability Corporation], and on January 1, 2012, two new forms of corporation came to California, both similar to the L3C: the Flexible Purpose Corporation, and the Benefit Corporation. [The latter sounds like an attempt to make a hybrid between business and the college fraternity or Elks Club.]

Of course, cynics might be disposed to say that at last an honest format for structuring Hollywood films has come along! Creative ‘Hollywood accounting’ has long seen to it that most involved in the actual work of making a movie live well, while only the greatest blockbusters return real cash to ‘investors.’ Developers often attempt to structure real estate deals the same way, but at least in real estate there is usually a piece of real dirt under all of it, which is not usually the case in Hollywood.

One of the reasons for these legal structures, if I read rightly, is to protect the leadership of these corporations from being sued for not following Milton Friedman’s maxim, as I referred to above, of “maximizing shareholder value” above all things. It would be nice if corporations could serve the public consciously. At the same time, one thing I do agree with Milton Friedman about is, why do the corporations, qua corporations, do philanthropy? Why cannot the shareholders of ever increasing value, and the outrageously compensated executives, do philanthropy with their own money that they got from the corporation? Is that not good enough?

I’m afraid I’m too old, myself, to get enthusiastic about the idea of hybridizing ‘philanthropy’ and ‘investment’ in a single company or ‘investment’ opportunity. I am not necessarily going to impose my philosophy on a younger ‘millennial’ generation that thinks differently. The one thing I would have to say to these ‘millennials’ is, be very sure about your expectations. Don’t ‘invest’ in one of these hybrid projects and spend your future anticipated income!

TenNapel 06/12/2012

Milt Friedman’s “Greed is good” was never about greed actually being good. Instead, it was about not forgetting that selfishness is at work in all aspects of our markets. I never thought Exxon helped ocean fishies because it cared a lot about the environment, but like people, businesses have a conscience.

If you think of a business as just another person, we can see why greed drives them to make product, but so does the love of making a good product, and like most people, they like to do good works with at least some of their skim.

Individuals also give for the same reason, but so does our state in their giving to state parks and charity programs. Even our country acts as a “person” and gives a certain amount of charity. 

dmcnally 06/17/2012

Well Howard this is a very interesting and touches many important issues.  If I might share from my personal experience, 20 years ago I was involved with donor who provided a very generous matching grant to a small liberal arts college for the purpose of developing a center for research and collaboration in the field of science and religion studies. My vision at the time was that the emerging opportunities for collaboration over the Internet would create opportunities to innovate and serve the Christian community in a much more effective manner. 
Unfortunately none of the parties involved knew about or understood the Internet.  The matching grant was absorbed in paying for administrative overheads and salaries for tenured faculty on research leaves, and ALL funding for “computer services and networking” was cut to zero.  I remember at the time that the young vice president of the college told me “nobody will be interested in the Internet.” Faced with this pervasive attitude, I had no choice but to go outside the institution and start my own Internet service company. My company was initially incorporated as a “not for profit” entity, but as some experienced business advisors pointed out, if you get the “service side of things right, the profits would follow.”
Taking their advice the company was re-oriented as a for profit organization.  Here things became interesting.  The original donor informed me that “they did not support for profit organizations.”  Furthermore, I was informed that it was not within their mandate to fund the purchase of computers and other technology related to the Internet.  Although there was much talk at the time about providing recipients “with fishing nets rather than just fish”, the application of this analogy to communications technology was not made.  The upstart of this was that while both the original host institution and the donor walked from the proposed project, those business people who saw the opportunity and invested in it, made $10 on every $1.00 invested. 
Much of the problem at the time was due to the newness of the Internet combined with institutional politics and personalities. That said, I think my own experience provides an example of how informed investing can be part of creative donor strategy. In my own case, a small amount invested at the right time, lead to the creation of a company that employs 25 people and is worth between 4 to 5 million and is positioned now to assist other Christian ministries.
My comments do not deal directly with the complex of issues you raise regarding what ought to be the relationship between corporations and philanthropy.  Here the scene is badly muddied by politics.  I would refer to the February 13th article in the American Thinker as a further context for continuing the discussion –
Your thoughts on the issues addressed in this article would be of interest.
Best regards,

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