First Avenue in New York City may not have the glamour of Fifth but the research that has emanated from a 14-storey, 50-year-old building located between 26th and 27th Street has done more for humanity than all the shopping spend between 49th and 60th Street on Fifth. That is where, against the backdrop of constant siren-wailing of ambulances streaming into Bellevue Hospital Center, the Aaron Diamond AIDS Research Center (ADARC), headed by scientific director and CEO David Ho, does its work.
Ho’s persistence in the laboratory helped him understand HIV replication and figure out a more effective way of halting its advance. It took him from 1989 to about 1995 to fully comprehend and then convince the world that the virus was highly dynamic. Since it mutated quickly and developed variants, one needed to attack it from multiple perspectives to try and prevent mutation. When the findings were applied in therapy, the outcome was unprecedented. The ‘cocktail therapy’ that Ho first advocated is now standard procedure.
Little wonder, then, Ho’s 7th floor office is littered with awards. Citations, trophies and medals jostle for space on adjoining shelves but there is one that holds pride of place: the Presidential Citizens Medal awarded to Ho by former president Bill Clinton on January 8, 2001. The citation notes, “His groundbreaking work using protease inhibitors in combination with standard therapies has ensured that thousands of people with AIDS live longer and healthier lives.”
Ho explains why this award is extra special, “Irene got many medals herself but she appreciated the ones that I received on behalf of the institute more, because it really impacted a lot of people throughout the world.” Ho is referring to Irene, wife of real estate magnate Aaron Diamond. While Ho’s accomplishment is truly exemplary, it would not have been possible but for the magnanimity of Aaron and Irene Diamond. Their story is not as well known as it should be. That narration will play out shortly, but first a look at how the very act of giving has evolved over the years.
Giving evolution
Modern-day America has successfully exported quite a few icons: cars, blue jeans, cola, sneakers, movies, retail and fast food chains. But one prominent edifice, personal philanthropy, is yet to be accepted with wide-open wallets in most other countries. Barring a few token individual and corporate gestures, philanthropy, even in this age of incessant social media chatter, continues largely to be an American bastion. And given that it has historically been so, one might think it has something to do with the air that they breathe. While some may want to argue that philanthropy is not an American monopoly (see: The outsider), the fact remains that institutionalised philanthropy in the form of foundations is an American construct.
“Give and it will be given to you” might have been said when the IRS was not around but even after it came into the picture, those who had made up their minds to give found an ingenious way out. Powered by tax exemptions, they created foundations that held private wealth for public good.
These institutions continue to hold huge assets that are invested either in the stock market or other avenues and the return on those investments is exempt from taxes as long as the institutions spend 5% of their assets for charitable purposes. That, in a nutshell, is the essence of how institutional philanthropy came into being in the United States. Like most things, it made good business sense.
In the US, institutionalised philanthropy began about 100 years ago with the Carnegie and Rockefeller Foundations, which pretty much dominated the first half of the 20th century. Some of their peers are not significant anymore — the Russell Sage Foundation, for instance, has turned into a think tank of resident scholars and does not participate in external grant-giving any more.
Even as recently as about 20 years ago, the usual suspects when it came to philanthropic foundations were Carnegie, Rockefeller and Ford. But now, new-age philanthropists such as the Bill & Melinda Gates Foundation, Open Society Foundations, Bloomberg Philanthropies and Omidyar Network are fast overshadowing the old guard.
Now, more than ever, there is a growing perception that with living donors such as Chuck Feeney, Bill Gates and George Soros, foundations are huge players in the public scene with rigorous metrics guiding them. But Gara LaMarche, who teaches a course on philanthropy and public policy at New York University, says the current situation is not dissimilar to what existed 100 years ago.
The Democracy Alliance, of which he is president, is a platform through which philanthropists and political donors support organisations they endorse and, as its name suggests, it leans towards Democrats. LaMarche has spent a good part of his career in the voluntary sector, the first half with non-profits and later with foundations. He worked with Soros’ Open Society Foundations for about 11 years and headed the Feeney-funded The Atlantic Philanthropies for over four years.
LaMarche says, “I don’t buy the view that it is a departure from the past because Carnegie and Rockefeller were alive and active when they started their foundations. They were people who wanted to address deep systemic issues and made very big bets on the medical profession, public health and social work. For many of the outlines of the discipline today, the templates were set 100 years ago by the investments of those foundations.”
What certainly has changed, however, is the source of the philanthropic fortunes (see: Fountainhead). Whereas the wealth of the early 20th century was made in extractive industries such as oil, steel and coal, the fortunes fuelling the late 20th and the 21st century are globally networked businesses such as technology and high finance. Like their wealth, most of the new-age philanthropists also have a global footprint.
The tricky part is that ensuring equity and social well-being has traditionally been the domain of governments, and when private money steps in to address inequities, it is difficult to avoid being looked upon as an attention-craving, credit-grabbing interloper. So, right from their inception, there’s been a beady eye on the objectives of institutional foundations.
This suspicion has led to a few interesting outcomes in the US. One is the Foundation Center, a think tank dedicated to transparency in philanthropy, which was created during the height of McCarthyism in the 1950s, when even philanthropic institutions were being investigated for their alleged support of the Reds.
Even now, although there are several organisations that monitor and analyse philanthropy, there is no single institution that collects and aggregates data on foundations on the scale of Foundation Center.
“Today, through the disclosure the foundations are required to make and the information systems built by us, the world at large knows how the US’ more than 90,000 grant-making foundations and 1.3 million non-profits work on everything from adoption to Zambia. We know who’s on their boards and staff, where the money comes from, to which organisations it goes, and what or whom it is destined to benefit,” says its president, Bradford Smith.
Different strokes
Through their activity-derived heft, the Carnegie and Rockefeller Foundations had an impact on public policy even in their earlier days. The fact also remains that some funders are proactively looking to change the status quo in many policy matters. Soros’ Open Society Foundations is among them, with the focus being less on infrastructure building and more on advocacy.
“Have money, will build. Can spend, will influence” seems to be the unwritten code for new-age philanthropists such as Feeney and Soros. Having worked with both, LaMarche says that there is a whole treatise to be written about individual styles of philanthropy. “Since I have worked with two of the three most active living philanthropists and between the two have presided over the disbursement of maybe $3 billion, my experience is that they tend to give out their money in the character that they made it.”
Soros made his fortune as a macro trader and hence is very comfortable with risk and moving rapidly to take advantage of opportunities. LaMarche cites an example to depict how Soros’ famed market agility is reflected in his philanthropy.
In 1996, president Clinton signed a welfare reform act that would significantly cut social security benefits to resident aliens. Soros had until then not planned to work on immigration or welfare reform; Open Society’s focus was on criminal reform and drug policy.
“One day, he came to us and said, ‘I am very unhappy about this welfare bill because I myself was an immigrant from Hungary to the UK in the 1950s. I broke my leg while I was working a menial job in the railway and the National Health System took care of me even though I was an immigrant. That was important to me and I think it is outrageous that benefits to resident aliens would be cut off in the US. I want to do something about it.’”
So, a programme was quickly devised to try and blunt the impact of this policy by helping people become naturalised citizens and receive benefits if they wished to. “We also decided to have some advocacy efforts by immigrants to overturn the policy and in a couple of years, something like $16 billion in benefits were restored.”
As for Feeney, the greatest philanthropist the world has almost never heard of, the source of his fortune was duty-free shops. He is hands-on, the kind of leader who would walk into the airport terminal and say, “That display should be here” and he’s transplanted his style to his philanthropy as well. Feeney is on a mission to spend his entire fortune by 2016 as he doesn’t want his philanthropy to calcify after he is gone. While much of his philanthropy in the US and other countries has been strategy and policy focused, he also likes to create and build a nurturing social environment, which means funding universities and health centres.
Extending that line of thought to the Bill & Melinda Gates Foundation, LaMarche adds, “If you look at Gates, he is a technologist and a big believer that all problems can be solved through technology.” Philanthropy on the scale that Gates is executing is uncharted territory because never before in history has so much been committed on so many fronts. There is an occupational hazard in wisely spending a large amount of capital and that applies equally to the management of a company as well as those committed to philanthropy. In addition, an unwritten rule in philanthropy is that doubling spend will not necessarily get you double the impact. Smith of Foundation Center says, “Andrew Carnegie said he found that giving away money was rather more difficult than making it.”
While there is no precedent on the scale that Gates is attempting, there is a successful precedent that sustained business funding can make a meaningful contribution in tackling a life-threatening disease.
This brings us back to the inspiring tale of Aaron and Irene Diamond, whose Aaron Diamond Foundation (later succeeded by the Irene Diamond Fund) is a striking example of how a determined benefactor and an equally driven bunch of scientists can beat the odds and triumph.
Irene, the diamond
Aaron Diamond made a fortune in New York City and decided to give it all back to the same city he had profited from. He and his wife Irene reactivated their foundation around 1984, to back their favourite causes such as medical research, minority education and arts and music.
Aaron died shortly after and the responsibility of overseeing the foundation fell on Irene. She was a lady in a hurry as the intent was to effectively spend out the fortune, an estimated $250 million, within 10 years.
A successful producer who made movies such as Casablanca, Irene was especially concerned about AIDS, which had appeared on the scene in New York and had rapidly reached epidemic proportions. She started supporting medical research at New York institutions but felt there wasn’t much impact in addressing the problem.
By the late 1980s, Irene wanted to do more as the epidemic had gone global. She was told she could do that by creating a basic research institute since the programmes that were being funded at the time were more on the clinical side. Initially, she decided to partner with other foundations, the city and universities to start the institute but realised it was becoming very bureaucratic.
Being an action-oriented person, recollects Ho, “She said, ‘Enough of this, I will do it alone. I will put down all the money but the NYU School of Medicine has to provide the academic environment and the city should provide the space’.”
Irene made a deal with the mayor and ADARC was born out of that process. Says Ho, “The city red tape was eliminated through Irene pestering the then-mayor, David Dinkins. She was already in her late-70s and had no patience for bureaucracy that would slow down the initiative by several years.”
Ho’s appointment as director of the proposed institute was itself a surprise — he was only 37 and had a track record of just five years of running his own operation. “When I came in, I thought I was being interviewed for a position in the new institute. Little did I realise I was being interviewed for the head position. Later I understood the decision — Irene’s philosophy was different from other folks. From her Hollywood days, her job was to discover young new talent and not just continue to use more established figures. That’s how I joined here in August 1990.”
When Ho first met Irene, he was told, “Pursue your vision. Whatever you guys need, the money will be there.” Naïvely, he didn’t ask for promises, commitments or contracts, but she kept her word. While the operational cost was funded by grants, since inception, ADARC has received cumulative funding to the tune of $100 million from the Irene Diamond Fund.
Over the years, the Diamonds’ $250 million grew to $400 million and instead of spending out in 10 years, it took twice as long. By the time Irene died in 2003 aged 92, the institute had gained repute for its major discoveries and she had seen how through its work an automatic death sentence had become a more manageable disease. Ho says ADARC became one of her treasured babies.
“Aside from my immediate family, she was the most important relationship that I have had in my life. She became my second mother, so to speak. We would meet on an every month or two month basis for dinner and just talk about our subject well into the night, till 2 to 3 am. Even at that age, she had that kind of mental energy. It got to a point where my wife, who used to come along for the meetings, started to bring her crochet and other things to keep herself busy.”
After Irene’s death, the foundation continued to support funding all her important causes and it was only a couple of years ago that the foundation spent itself out. An obituary in The New York Times stated, “Speaking about Casablanca and her charitable priorities, she liked to say that ‘philanthropy is a lot like Hollywood: you find a good script; you support it’.” Ho’s quest, though, is far from over. ADARC, while functioning independently, is affiliated to the Rockefeller University and, with support from the National Institutes of Health, Bill & Melinda Gates Foundation and Howard Hughes Medical Institute, continues to chase a vaccine that will eradicate AIDS.
Unwittingly, Irene also played a major role in how big philanthropy was to be practised in the future. Ho recalls, “When Bill and Melinda Gates were setting up their foundation, their leadership team talked to Irene and she urged them not to continue their foundation forever but spend itself out. Her influence is lasting through the organisation that she funded and influencing Gates in a certain way will also have a lasting impact.”
Perpetuity or spend-down
The spend-down approach followed by the Diamonds and Feeney has now become a movement in itself. The earliest example was the Rosenwald Fund, which supported African-American education and spent over $70 million during its existence from 1917 to 1948.
In 2016, The Atlantic Philanthropies will be the biggest since Rosenwald to outspend itself. Over its 34-year life, it would have given away nearly $7.5 billion. Even the Bill & Melinda Gates Foundation will spend itself out in 20 years after both the co-chairs are gone. So, is putting a termination date for the money to be spent a superior approach compared with perpetual foundations?
Overseeing a $4-billion endowment, LaMarche was an evangelist for spending down when he was at Atlantic, but he has his reservations, as an impending end-date might force you into thinking short term. He explains, “Spending down is the way to go, but it is not the way for everybody to go. The downside of a spend-down approach is that you have to spend a lot of money very quickly and if you are concerned with delivering results in the next eight years or 10 years, you are going to pick and define problems in a more narrow manner than if you were thinking long term.” In Atlantic’s case, as the end year is 2016 for all the things that it was trying to affect in public policy, it ideally wanted all the indicators to come into play by that date. For example, ‘End the death penalty in X number of states by 2016’.
On the philanthropist’s part, the urgency stems from wanting to see maximum impact. Foundations are also not immune to atrophy, decay or decomposition — usually, the foundation loses its dynamism when the prime donor is gone. Another occupational hazard of big philanthropy is the power dynamics involved.
Despite a foundation’s claim to humility or wanting to do good for the society, it is only answerable to itself. And when you are giving out grants, it is hard to get honest criticism. Those receiving your handouts will be the last people to tell you that your strategy, culture and leadership style is all screwed up.
Old envelope, new cheques
Bill Drayton, founder and CEO, Ashoka, thinks the perpetual versus spending-down debate is pointless as the entire edifice is in need of a drastic makeover. In elementary school, Drayton hated Latin and Math and felt that they were torture with no purpose and now he hates the ‘bureaucracy’ in foundations.
“Philanthropy is a very old word. We prefer the phrase ‘social investing’ because ‘philanthropy’ is associated with a set of organisational patterns and ways of behaviour that I think don’t work very well. There are some operating foundations that do really good work but that is almost always because the founder is still in charge and personally making those decisions. The moment they give up control to the bureaucracy, watch out,” he cautions.
Grantees, however, always talk about the foundation staff being busy. How does a ‘bureaucracy’ stay busy? “The founder goes away, the money doesn’t grow much but the staff size grows. What then happens is that the average grant size goes down and the staff is busy because now they have more grants but they are smaller and shorter,” explains Drayton.
Suffice to say that Drayton does not think highly of foundations. In fact, when eBay founder, Pierre Omidyar, called on him when he was working on setting up his foundation, Drayton advised Omidyar not to call it a foundation. He said the same to Google co-founders Sergey Brin and Larry Page, so they called it Google.org instead.
Drayton thinks conventional philanthropy may gradually be replaced by social entrepreneurs who are more clued in to ground reality than bureaucratic foundations. “There is a wave of entrepreneurship coming in social investment that is transforming the field,” he says, pointing to his favourite example of a flexible social entrepreneur, Sara Horowitz. “In the US, 40% of the workforce is now freelancers. We don’t have 30-year jobs anymore. Horowitz saw this and created the Freelancers Union, which has created a very profitable insurance programme for freelancers and has been approved in 38 states. I bet you in five to 10 years it will be the largest working association in the country,” he concludes confidently.
He is also gung-ho about an innovative model of education financing such as Lumni (see: Brave new world). Co-founded by Felipe Vergara and Miguel Palacios in 2002, it has till date raised about $50 million and financed around 5,000 students in five countries through its for-profit human capital funds. You can invest in a fund for Mexican students with disability going to college or group of students in Colombia going to veterinary school etc.
Each student commits to pay a fixed percentage of income for 120 months after graduation. Depending on the income earned, students pay between 2-3% and 15%, and nothing until they land a job. As an investor, you don’t know what each student is going to earn but you have a fair idea of what the group might earn on average. Drayton says once the model is proven, banks will end up pitching it to clients who want to earn a return while making a social investment.
Having worked for and monitored them, Smith says endowed foundations become isolated and insular as they are not selling anything in the market. He elaborates, “Think about what it means to be endowed: you are not running for office. You are not raising money. All they want to be is unique. They create their own names for all their programmes and their priorities. Their information system becomes almost impenetrable for persons who are trying to get support from them. It becomes impenetrable for the people who are trying to figure out how to partner with them and also for them to try and figure out whom to partner with.” Drayton agrees.
“Who judges the foundations? It is they. Who do they care about? The other foundations! They follow fashion. All of a sudden, they are here and then they are there.”
Ironically, the ‘there’ at this juncture is impact and social investing. Putting it crudely, earlier there only existed these large ATM machines called foundations. The do-gooders went there, withdrew money and spread the cheer.
Now there is a plethora of cash dispensers called impact investors, CSR programmes, B Corps… some of these institutional forms are for profit, some are non-profit and some are in between, but each promises its own brand of sunshine.
Smith calls this influx “the brand new world of good”. American foundations have about $680 billion in assets and spend about $52 billion a year in grants. The rest stays locked in investments until called for. Impact investing not only seeks to put this capital into play, it also wants a slice of the billions that are floating in the world’s capital markets.
In this brand new world, Smith says, “The idea is to use both non-profit and for-profit investment vehicles, particularly for-profit investment vehicles, to make a market return and have a social impact.” His biggest grouse about this marketisation of philanthropy: the lack of transparency around the whole set-up. Not only is there no information resource for impact investing and social entrepreneurship, reporting requirements also don’t require foundations to distinguish social purpose investments from their regular ones. “If, for example, a foundation takes from its investment assets a piece and makes a market-grade investment for a social purpose, we have no way of tracking that unless they or the organisation that got the investment told us.”
LaMarche says whenever he hears the term ‘impact investing’ mentioned in the context of the larger good of society, it makes him wonder what is it that everybody else has been doing for over 100 years. “One of the diseases of philanthropy is that when you get business people applying their approaches to philanthropy, there is the sense that somehow everything is new under the sun. If you go back to the roots of the big foundations you will find a lot more in common with the newer, hotter impact-focused philanthropists.”
He adds that Geoffrey Canada’s Harlem Children Zone is often held up as a new social venture model but going back to the turn of the last century, Jane Addams’ Hull House in Chicago was very much similar. Still, due to the huge interest in it, LaMarche says it has changed the nature of discussion and the more traditional foundations are under pressure to talk the language of impact investing.
Making a difference
The methodology may undergo tinkering from time to time but the end goal has not been forsaken. In fact, Gates is actively seeking to catalyse philanthropy. The interesting thing about Gates is that he is not only leading by example, but also doing all he can to ensure that other fellow billionaires follow his example. That was the genesis of the Giving Pledge, an initiative co-founded with fellow billionaire-philanthropist Warren Buffett in June 2010.
As of June 2014, about 127 billionaires — 110 from the US alone — have signed the pledge. For signatories, there is an annual event held in May and the activity to get more pledgers ranges from one-to-one conversations, to year-round discussions on philanthropy. Smith says that while leading by example pulls along many billionaires, there is no way of knowing everything that the other pledgers are doing. “A lot of the philanthropy of these people is private and the disclosure requirements around that are not as detailed as when they create foundations.”
So far, the annual sessions have covered social media and philanthropy, impact investing, technology innovation and K12 education, family and philanthropy and social entrepreneurship. Olivia Leland, director, Giving Partnerships, Bill & Melinda Gates Foundation, says, “Since there was more demand for learning besides the annual event, we launched the learning series, which is a half or full day session that is hosted by individual pledgers on specific topics of interest to their group. Some members bring along the partners or external experts that they are working with so that they can access that knowledge as well.”
Besides their prime intention, an important reason signatories take the pledge is to access the learning that comes from being part of a group where others are thinking and engaged in philanthropy on a significant scale. There is also a database through which pledgers can partner within the group for a particular cause. So, someone wanting to support health and nutrition can hook-up with a fellow billionaire doing the same and learn.
“If you look across the group there are people who are already deeply engaged and there are people who might be exploring what they can do. The former tend to talk about what has worked and what has not. There is genuine interest in knowing about what hasn’t worked as there is as much to learn from mistakes as from successes,” remarks Leland.
Not only is there much to learn, there is still much to do. Smith recalls explaining the US philanthropic scene to a group of French philanthropists, at the end of which one of them asked, “You have got over 90,000 foundations with $670 billion in assets. So why is it that the richest country in the world has such terrible basic education and problems of access to health care? Why do you have all these persistent problems?”
Why, indeed, does the world’s greatest economy need state funding or private benefactors for funding soup kitchens or shelters for the homeless? Why have problems that have been with us for millennia still not been addressed? Smith tackles that one philosophically, “If hunger, poverty and disease could have been solved easily by the markets, they wouldn’t exist. But they do exist and persist. The endowed private nature of philanthropy means that these highly individualised and idiosyncratic institutions are very much tied to the personalities and interests of their donors. The biggest challenge is in overcoming the individuality and sovereignty of your own institution to collaborate with other foundations and other sectors to achieve scale.”
Depending on the country being talked about, state welfare systems have turned out to be flawed, corrupt or both. All charitable spending in the world is a fraction of what the government spends on welfare, but as spendthrift governments around the world pull back from social spending, there is increasing expectation that philanthropy will pick up the slack. So far the bleeding hearts of the world have done their part but their fortunes are hostage to the vagaries of market upheavals.
For now, everybody is jumping in, wanting to do good. Is philanthropy, then, the new black? Smith says, “I get asked all the time about whether philanthropy is the new ‘in’ thing. And my response to that is, well, even if it is, it is going to do more to help the world than just buying Gucci bags. It is not a bad status symbol as far as status symbols go.”
