Philanthropy cannot be expected to solve the problem of global inequity
We have managed as a global society to reduce extreme poverty among millions of people, primarily through an expansion of markets and commerce. But growing inequality is contracting markets, not expanding them. Simply put, markets need customers, and millions of people in the middle and working classes are seeing their incomes and fortunes sink in a way that is reducing or ending their buying power. We can no longer expect growth and prosperity to continue to reach large swaths of people without a reevaluation.
Big foundations such as Ford are taking on inequality, and we commend them for their ambition and also wholly support their work. Yet, like us, they realize that it is not enough to expect philanthropy to solve these problems along with a social sector which is traditionally meant to address issues at the margins non-market interventions or market failures. Ford and our other colleagues are beginning to realize that what ails the market must be solved in the market itself.
So what does that look like? Traditional foundations and philanthropists preserve and grow the funds intended for grant dollars in an endowment, typically by relying on gains from monies blindly invested in companies. The common framework of investments is set up like a black box, with walls that are something like risk, return, diversification and management fees. In goes the money, and out comes more, if all is well. From this income, grants are made to fund schools, shelter the homeless, and improve the health and environment for people all over the world, etc.
While this seems like a virtuous cycle, that is not necessarily the case. Inside that black box are workers being denied a living wage, lakes and rivers being polluted, the climate is being rapidly altered, debtors exploited by payday lenders, low income people preyed upon by a for-profit prison complex, and in general more and more people being denied the opportunity for economic mobility and stability. The black box is a money machine for a few at the long-term detriment of everyone else. Philanthropists aim to help as many as they can, but history shows that many more people are helped when the market is robust, inclusive and intentional about thriving over the long term.
So when Heron says we now hold ourselves accountable, it means we looked inside the holdings of our endowment and asked ourselves: What are these for-profit entities doing to make money? How are they supporting or harming their workers, communities, and suppliers? By what managerial and ethical standards do these companies hold themselves accountable? We asked, why should we require so much social impact reporting from grantees and nearly nothing from those in which we invest to make money for those grantees? Are our investments laying ever-greater burdens upon the backs of nonprofits and their stakeholders, and diminishing our ability to reach social goals?
Holding all the entities in which we invest to a similar standard means asking public and private companies to share material information on risks in their social practices, environmental practices and governance alongside their financial accounting. Such issues are financially, not just socially material--just ask the investors of BP, Volkswagen and DuPont what a difference poor performance makes on these issues. Moreover, we are hoping for the day when these enterprises report on their social performance with the aim to out-compete each other based on these standards--instead of competing in a race to the bottom for a financial return that hides long-term social costs.
This is no easy task, but when we look at the complex problems faced by our society, the current model of philanthropy seems to us woefully inadequate. Moreover, asking the nonprofit sector to be a cleanup crew for the failure of the entire market seems a laughable notion. The market has the brawn necessary to clean its own house. And as investors it behooves us to take this challenge head-on. All asset holders should look inside their own pockets and ask: what am I holding, how toxic or beneficial is it, what can I do and who can help me do it?
On this journey we have often been asked by nervous would-be joiners if they will lose out on financial gain by leaving prosperous-seeming companies on the table due to how they behave in society. This is the wrong question. What matters to us is not how much money we did or did not make as much as who was harmed or helped in its making. Shall we be the gluttons and leave scraps for the rest to be doled as philanthropy, or can we set a table in which all have a chance to be fed, be healthy and grow? The choice is ours and we hope to be part of an emerging new table-setting crew.