Tax within the context of philanthropic giving
“Giving can save the World” – or not?
Since the late 1990s, there’s been a growing sense that we are in the midst of a “new” era of muscular, proactive and aspirational philanthropy that could yield benefits for society of a type and scale not known for a century. The most compelling statement of this case was made in late 2008 by Matthew Bishop and Michael Green, in an influential book called “Philanthrocapitalism”1.
The argument is that the philanthropy-fueled engine of large scale social change, embodied by the aspirations of the Gates Foundation and Google.org, exhibits features that set it apart from the philanthropy practised post World War II. Most important is the common desire of this “new” cadre of philanthropists to secure visible, measurable results from their “giving”, a goal they frequently choose to pursue via bespoke funding vehicles or social change entities under their control2.
In parallel, their entrepreneurial (rather than their entitled) background leads them to bring business perspective to bear on the challenge of delivering social good, and a particular interest in the potential of social enterprise and social finance to do this much better than grant funded charities. Finally, most new philanthropists almost instinctively lean towards proactively tackling the really BIG problems faced by society; an inclination they believe they share with the great Victorian philanthropists.3
This view constitutes a “grand narrative” that now frames most thinking about and the doing of philanthropy globally and certainly in the UK and US.4 The “Giving Can Save the World” narrative has positioned philanthropists in the minds of many in the role of white knights coming to the aid of a world beset on all sides by problems it doesn’t know how to fix.
Why narratives matter in general but especially in philanthropy.
Narratives (externally generated, normative descriptions of current reality and routes to change that reality which “fit” with the observer’s view of the world) influence how many of us allocate our time and disposable income and orient our careers and private lives.5 But narratives have always played a key role in the way philanthropists allocate their charitable spending. In this guise they perform many of the same signalling and allocative functions as those carried out by organised capital markets.6 I flagged this important role for individual issue-narratives in my first essay. I’m making the “Giving Can Save the World” grand narrative the focal point of this essay because of its exceptionally pervasive influence, manifest through a variety of “knock-on” effects.
For example, much social change funding is already being made available via social finance and impact investment, perhaps $7-$9bn in the US and UK alone in 2011. More importantly, a significant share of the $40-44 trillion allegedly heading toward the US charity sector over the next few decades will be informed by the proactive, outcome oriented principles of the new philanthropists. Likewise, the “Giving” narrative inspired notions of “risk and return” and “impact assessment” now influence the behaviour of many sector players including government. Moreover, a willing influx of large numbers of talented people have been galvanized, many consciously seeking to work within civil society as their first primary career choice.7 And most importantly, the “Giving” narrative has led to significant growth in public expectation (albeit not universally shared) that major philanthropists have a legitimate and indeed critical role to play in helping society deal with its problems.
The scale of the cumulative impact of all these knock-on effects means that it really matters to society (and its most vulnerable) whether or not the architects and proponents of the “Giving” narrative can actually deliver what they promise. As a consequence, there is an overarching societal imperative in place that somebody representing society’s interests conduct “reality checks” on how the “Giving” narrative is playing out in practice in order to determine what more we need to do going forward to help maximize its future social contribution.
Such iteration between research, analysis and remedial action is common in other sectors, of course, when fundamentals are being transformed. Historically, for example, UK and US car manufacturers used insights from government and industry funded research to understand and then take advantage of the Japanese “Just-in-Time” assembly and “Total Quality” manufacturing and productivity revolution.8
The “Giving” narrative is based on an inference that a similar paradigmatic transformation is happening in the way philanthropy works to generate social value. But we cannot answer the “what’s happening” and “how do we capture the greatest benefits” questions because our philanthropists, charities, sector advisers and the government have not put in place the knowledge generation and analytical infrastructure necessary to do so. Consequently, in the remainder of this essay, I will dwell primarily on the experience of microcredit to selectively flag key areas where new philanthropists’ practice has diverged from the grand narrative expectation in ways that raise some important issues for the sector leadership to consider going forward.
The cautionary tale of microfinance.
There are numerous studies documenting how social change narratives have influenced large scale interventions by institutional philanthropies (aka established foundations) and led to both success and failure, sometimes on a grand scale.9 There are far fewer of these with reference to the philanthrocapitalists and hardly any that step back and take a sectoral perspective. However, there is one particularly compelling sector-level story of narrative success and failure involving new philanthropists worthwhile highlighting because it has immediate relevance to the current mania in the sector for social enterprise, impact investment and social finance. This story is about the fall from grace of microcredit.
The persuasive core of the microcredit “narrative”, which attracted many hundreds of millions of dollars of funding from new philanthropists over the last fifteen years, including a single $100 million throw of the dice by Pierre Omidyar, tell us that small amounts of debt funding would help very poor people, especially women, start up businesses whose success would lift them (and their families) permanently out of poverty. Unfortunately the link between this narrative and reality has now been pretty comprehensively disproved.10 Microcredit does yield some important economic and non-economic benefits, such as sustaining consumption levels of poor families and sometimes empowering women beneficiaries. Yet, as the rather blunt quote below indicates, the direct extension of microcredit to the poor (about 120 million families have now received microloans) has not translated into the escape from poverty that its grand narrative implied.
“Microcredit and other ways to help tiny businesses still have an important role to play in the lives of the poor, because these tiny businesses remain the only way many poor can manage to survive. But we are kidding ourselves if we think that they can pave the way for a mass exit from poverty”.
A.Banerjee and E.Duflo (2012), Poor Economics 11
Support for microcredit has been one of the biggest single issue bets made by the global community of new philanthropists so far. It has proved to be a massive misjudgment. The full story has many elements: the obviously persuasive power of the original narrative and its unintended consequences; the reasons why it did not work as promised and why the pro-microcredit community failed to spot this; and, why new philanthropists and others have continued since 2008 to provide significant funding despite the disappointing reality.12 For those who have signed up to the grand “Giving” narrative and are supportive of the thrust of social finance (this author included), the microcredit story is a hugely cautionary tale with much to absorb, reflect and act on.
Pulling the “Giving” narrative and reality further together.
I want to finish by looking at the nature of the overlap and/or gap between the aspirations and expectations of the grand “Giving” narrative and the performance of new philanthropists in practice.13 They all reveal different ways that the prisoner’s dilemma, in which the new philanthropists are ensnared, leads them to take well-intentioned actions that are socially sub-optimal.
New philanthropists can collectively move large amounts of money to tackle big problems.
The microcredit story powerfully demonstrates that it is, in fact, possible for the community of new philanthropists to collectively bring a significant amount of resources to bear on tackling a single big issue. This is an important dimension of the “Giving” narrative.
But are they getting and listening to good advice or not?
The new philanthropists’ support for microcredit gives rise to questions about how they decide where to allocate their resources. There has long been evidence and expertise, which, if tapped properly, would have sent a clear, objective signal to the new philanthropists to stop supporting microcredit and concentrate their efforts elsewhere. So either the new philanthropists chose to ignore this counter advice, preferring instead to “follow their hearts”, or they did not “hear” the counter advice in the first place (either because they did not source a sufficiently broad range of perspectives before making their mind up14, or because the professional advice they were receiving was conflicted, or wasn’t sufficiently challenging or broadly enough considered.
A critical focus for early debate, independent research and remedial action by key stakeholders in the sector should be about how (not why) new philanthropists decide what to do with their resources and the influence, quality and objectivity (from society’s perspective) of the professional advice and training they are offered and seek out.
The Giving narrative commits new philanthropists to tackling and solving big social issues. The simple reality is that this involves a significant amount of resources (finance, staff, skill, the bandwidth of the new philanthropists’ themselves), time and the collective effort of numerous expert partners. What we have observed, and the data on average grant size reveals that most individual philanthropists have relatively modest annual budgets to work with (compared to the mega players like Bill Gates and the Walton family) and they typically allocate most of this spend to a portfolio of their personally selected concerns. This means that the hugely valuable pool of social risk capital controlled by new philanthropists and allocated, understandably, to the low risk, follow-your-heart projects they can afford, is not being deployed effectively to tackle society’s biggest problems.
It is possible to be more strategic with small amounts of resources, by pursuing a systemic or supply chain development strategy or seeking to intervene in the policy process to cause change at a systems level and affect very large numbers. But these comprise a tiny minority of the sorts of projects that new philanthropists are most keen to support if left to their own devices.
Equally, it is the in-principle ability of social finance to unlock larger capital flows for doing good that makes social finance such a welcome innovation. Yet it is still the case that the dominant tendency to date of those providing social finance – even via pooling mechanisms – has been to channel it through to cherry picked individual initiatives and social enterprises. Unless the criteria for allocating social finance expands to allow the systematic development of the whole supply chain and the facilitation of important infrastructural elements, once again the potential of the “Giving narrative” to make a difference at scale could remain unfulfilled.
No one is in charge.
The new philanthropists prefer to work in relative and confidential isolation. There are some good privacy and expectation management reasons for this. But there are all manner of opportunity costs as well, the most significant of which are to do with the consequent very limited support new philanthropists feel obliged or inspired to give to the collective strengthening of their ability as an “asset class” to generate maximum social good. The result is very limited support by the UK philanthropic community in general for:
- sector-wide, comparative and benchmarking, performance-related data collection, analysis and communication and the related maintenance of an organised lobbying/policy engagement capacity;
- peer to peer learning forums that are also open to external challenge and expert engagement;
- professional training that imparts the sort of genuinely substantive competence simply not accessible via short courses focused on “strategic philanthropy”;
- rigorous certification for the advisory community;
- pooled funding platforms of a scale and risk orientation capable of genuine leverage of other sources of capital, backing initiatives that catalyse systemic change and perhaps offering an alternative route to doing good to small scale, go-it-alone philanthropists now supporting well intended projects of little strategic value.
Most important, new philanthropists’ typical inward orientation inhibits the emergence of a commonly endorsed leadership group; one that would be capable of helping the sector pursue an agreed agenda to get the basic performance enhancing infrastructure in place and bring the collective weight, vision and resources of the sector to fulfil the driving aspiration of the “Giving” narrative to tackle and solve the big social issues that confront us now and in future.
How can we create an incentive structure and/or perhaps design a portfolio of sector-specific infrastructure facilities and funding/issue platforms that allow new philanthropists to “follow their heart” and generate badly needed Schumpeterian-style innovations and at the same time allow us to achieve critical mass necessary to deliver maximum societal benefit? This is a topic I would like to explore online (in my live webchat on 12th June noon-2pm) and offline with Philanthropy Impact readers and will be discussing in detail in my next essay.
1. See analyses by Paul Brest, ex-US President Bill Clinton, Prof.Michael Porter and Charles Handy, and Professor Robert Reich’s article in March 2013 special issue of The Boston Review dedicated to philanthropy.
2. This characteristic was termed “Hyperagency” for the way in which new philanthropists are inclined towards forming new institutions to achieve their goals on a large scale. See Paul G. Schervish, Mary A. O'Herlihy and John J. Havens (2001). Agent Animated Wealth and Philanthropy: The Dynamics of Accumulation and Allocation Among High-Tech Donors Social Welfare Research Institute, Boston.
3. See M.Maclean et al (2012), “World‑making’ and major philanthropy” in Philanthropy and a better society. ESRC Research Centre for Charitable Giving and Philanthropy, Cass Business School, 2012.
4. The persuasive influence of the grand “Giving” narrative is being felt in many countries outside North America and the UK. See articles in Alliance Magazine; Virginia Seghiers La Nouvell Philanthropie; Bulletin No 15, 20 July 2011 of the Asociacion Espanola de Fundraising that focused on “ La Nueva Filantropia”; B.Ibrahim and D Sherif (eds) (2008) From Charity to Social Change: Trends in Arab Philanthropy (American University Press); and Bain & Co (2012), India Philanthropy Report 2012, Bain & Co.
5. Narratives have a big impact for example on decisions in commercial markets – not always positively. For example, narrative-based beliefs that hedge fund managers can always secure investment returns that defy normal economic cycles, however, a recent study on the hedge fund sector’s performance since 1990 revealed that investors would have been better off putting their money into US Treasury bills…and that roughly 98% of all hedge fund returns have been eaten by fees. (see Jonathan Ford (2012), “The masters of the universe are playing a loser’s game” Financial Times 25 August).
6. This quote from David Roodman describes well how narratives work their magic on potential investors in microfinance. “I offer stories to demonstrate the power of and limitations of knowledge and narrative ....It is easy to imagine that if you encountered either (story) alone, you would accept the implied lesson of microcredit as saviour or snare....A stack of statistical studies would not leave as strong an imprint”. See the David Roodman (2012), Due Diligence: An Impertinent Enquiry into MicroFinance, Brookings Institution, Washington DC.
7. This can only be a positive trend from society’s perspective. But the prisoner’s dilemma the charity sector operates within imposes severe performance constraints on enthusiastic professional staff – low pay, limited incentives, uncertain survival prospects, etc, etc – and means this valuable social resource is being vastly underutilized.
8. K.Hoffman and R.Kaplinsky (1988) Driving force: the global restructuring of technology, labour, and investment in the automobile and components industries (Westview Press, London); meanwhile (re)designers of the mature country financial systems have benefitted enormously from rigorous, data based comparative time series analyses of the causes, consequences and character of past financial crises by Carmen Reinhart and Kenneth Rogoff, “This Time Its Different: Eight Centuries of Financial Folly” (Princeton University Press 2009) – though more recently there is debate over whether these authors have gone too far in claiming a causative link between debt reduction and austerity.
9. For example, the Carnegie United Kingdom Trust’s Third Age Programme was strongly informed by a narrative that promoted active inclusion of the older population in the productive economy and led to landmark age-discrimination legislation in the 1990s. On the spectacular failure side of the ledger, the US philanthropist Walter Annenberg and other public and private donors infused by a particular narrative about how to improve schools performance, wasted $1 billion+ and 10 years on failed efforts to transform urban school districts in the US.
10. For an early, devastating literature review and critique of microfinance see Aneel Karnani (2007) “Microfinance Misses Its Mark”, SSIR, Summer 2007; for the latest journalistic critique see Floyd Whaley (2012) “Hard questions for microfinance” in Devex Business and Development Blog, 10 October and for the final empirical nail in the coffin see Roodman (2012).
11. For a more nuanced interpretation of the same evidence that nevertheless does not succeed in refuting the core conclusions of “Poor Economics” see also “Grameen Bank and the Public Good” by David Bornstein New York Times March 24, 2011 and Bauhet et al 2011 , Access to Finance Forum Reports by CGAP and Its Partners No. 2, December 2011.
12. The total global investment in microfinance reached $24 billion by December 2010, according the Consultative Group to Assist the Poor (CGAP), a research center dedicated to advancing financial access for the world’s poor. In recent years, during the height of criticism about microfinance, the growth rates of global investment in microfinance dropped from an estimated 30% in 2008 to an estimated 13% in 2010.
13. Explicitly excluded from consideration here are corporate pathbreakers in CSR and the coterie of mostly US based, mega and proactive family/institutional philanthropies like the Gates and Walton family foundations flagged by Bishop and Green as leading lights of “Giving” phenomenon back in 2008. This still leaves approximately 90% of all foundations in our sights.
14. See the insightful observation by Roodman (2012) that he was able to reach a full appreciation of the complexities of the microfinance story only after consulting very widely.