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The businessof givingA survey of wealth and philanthropyFebruary 25th 2006

Philanthropy is �ourishing as the number of super-rich people keepsgrowing. But the new donors are becoming much more businesslikeabout the way their money is used, says Matthew Bishop

turning to philanthropy�and of those thatdo, many continue to give in unimagina-tive ways, say to support an institutionsuch as their alma mater. But the extrawealth is creating huge new opportunities.�This is a historic moment in the evolutionof philanthropy,� says Katherine Fulton,co-author of a recent report on the indus-try, �Looking out for the Future�. �If only5-10% of the new billionaires are imagina-tive in their giving, they will transform phi-lanthropy over the next 20 years.�

For now, it does look as though every-one, from Michael Bloomberg, the billion-aire mayor of New York, to hedge-fund ty-coons and �lm stars, is opening theirwallet for a good cause. In Manhattanthese days, a table for ten at the best chari-table fund-raising dinners can cost $1m.Celebrities are increasingly putting theirown money into good works, as well asplaying their time-honoured role of usingtheir fame to raise money from others. The�lm star Angelina Jolie, for example, hasbacked up her public advocacy of thecause of refugees with substantial gifts torefugee organisations.

The media, which used to take little no-tice of charitable donations, now eagerlyrank the super-rich by their muni�cenceand berate those they regard as tight-�sted.The latest Business Week list, which ranksgiving in the latest �ve years, is topped byIntel’s co-founder, Gordon Moore, and hiswife Betty, pushing Mr and Mrs Gates into

To have, not to holdThe rise of the new philanthropist. Page 3

The birth of philanthrocapitalismThe leading new philanthropists see them-selves as social investors. Page 6

The good companyIs corporate philanthropy worthwhile? Page 7

The rise of the social entrepreneurWhatever he may be. Page 9

Virtue’s intermediariesA host of new businesses is trying to make thephilanthropic market work better. Page 12

Faith, hope and philanthropyWhat the new breed of donors can do�andwhat it can’t. Page 14

The Economist February 25th 2006 A survey of wealth and philanthropy 1

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The business of giving

GIVING away money has never been sofashionable among the rich and fam-

ous. Bill Gates, today’s pre-eminent phi-lanthropist, has already handed over anunprecedented $31 billion to the Bill andMelinda Gates Foundation, mostly totackle the health problems of the world’spoor. Its generosity has earned the coupleTime magazine’s nomination as 2005’s�people of the year�, along with Bono, anactivist rock star.

The next generation of technologyleaders are already embracing the sameethos. Pierre Omidyar, the founder ofeBay, and Je� Skoll, the auction site’s �rstchief executive, are each putting their bil-lions to work to �make the world a betterplace�. And when the founders of Google,Sergey Brin and Larry Page, took their com-pany public, they announced that a slice ofthe search engine’s equity and pro�tswould go to Google.org, a philanthropicarm that they hope will one day �eclipseGoogle itself in overall world impact byambitiously applying innovation and sig-ni�cant resources to the largest of theworld’s problems�.

The new enthusiasm for philanthropyis in large part a consequence of the rapidwealth-creation of recent years, and of itsuneven distribution. The world nowboasts 691 billionaires, 388 of them �self-made�, compared with 423 in 1996, accord-ing to Forbes magazine’s �rich list� for 2005.Not all of these newly wealthy people are

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AcknowledgmentsIn addition to those mentioned in the survey, the authorwould like to thank, in no particular order, Emily Stonor,Adam Waldman, Lynn Taliento, Alex Nicholls, FrancesCairncross, Pamela Hartigan, Jamie Drummond, DambisaMoyo, Jamie Cooper-Hohn, Luc Tayart de Borms, JimBarker, Mike Green, Caroline Hartnell, Alliance magazine,Mark Evans, Lord Bhatia, Martina Gmur, David Giunta,Doug Bauer, Sylvia Mathews, Mark Campanale and Felicityvon Peter.

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2 A survey of wealth and philanthropy The Economist February 25th 2006

2 second place. Among America’s super-wealthy, it seems that only Warren Bu�ett,the world’s second-richest man, still dedi-cates all his energies to making moremoney rather than giving away some ofwhat he already has. But even he says itwill all go to charity when he dies.

Nor is the fashion for giving limited toAmerica, where philanthropists have longplayed a particularly prominent role. InEurope, too, entrepreneurs who havemade a lot of money are starting to handsome of it to charitable causes. Examplesinclude Britain’s Dame Anita Roddick,founder of the Body Shop, and Arpad Bus-son, a colourful French hedge-fund boss.India’s new wealthy, such as Azim Premjiand Nandan Nilekani, two Bangalore tech-nology-�rm bosses, are also becomingkeen philanthropists; and even the newrich of China and Russia are catching thebug. Roman Abramovich, a Russian oili-garch who became famous for buyingChelsea Football Club, has given awaymany millions to improve living condi-tions in the Kamchatka region of Russia.And so the list goes on.

The whys and whereforesWhy are they doing it? Many people arewary of rich folk bearing gifts, suspectingthem of having hidden business or politi-cal motives, or feeling guilty about howthey have made their pile, or simply enjoy-ing an ego trip fuelled by generous taxbreaks. But there could also be plenty of in-nocent and admirable reasons why therich have become so much more open-handed. Never mind the motives: the im-portant thing is to ensure that this largesseis put to good use.

Done well, philanthropy can have ahugely bene�cial e�ect�witness theachievements of past giants such as An-

drew Carnegie, John D. Rockefeller, JosephRowntree and William Wilberforce. Thissurvey will argue that if the new genera-tion of philanthropists get it right, they toocan make a real di�erence to the world. Butfor that to happen, philanthropy will haveto shed the amateurism that still pervadesmuch of it and become a modern, e�cient,global industry.

For much of the past half-century,America seemed exceptional in its enthu-siasm for philanthropy. Claire Gaudiani,in her book, �The Greater Good: How Phi-lanthropy Drives the American Economyand Can Save Capitalism�, makes a dis-tinction between charity, which is abouteasing symptoms of distress, and philan-thropy, which is about investing in solu-tions to the underlying problems. The �in-vestment approach distinguishes the mostsigni�cant kind of American generosityfrom the ‘poorhouse and soup line’method and expresses our values of free-dom, the individual, and entrepreneurial-ism,� she says. In practice, though, the bor-derline between the two is often blurred.

Over the years, many wealthy Ameri-cans have broadly followed the blueprintlaid out by Andrew Carnegie in his 1889 es-say, �Wealth�. The steel tycoon believedthat growing inequality was the inescap-able price of the wealth-creation thatmade social progress possible. To preventthis inequality undoing the �ties of broth-erhood� that �bind together the rich andpoor in harmonious relationship�, he ar-gued that the wealthy had a duty to devotetheir fortunes to philanthropy. Not to do sowas the worst sort of personal failure: �Theman who dies thus rich dies disgraced.�

As a result, a far higher proportion ofhospitals, libraries, universities and wel-fare services in America is funded by priv-ate donations than in other rich countries,where governments are spending propor-tionately more yet are still struggling tomeet growing public expectations. Still,the di�erences can be exaggerated. Amer-ica’s basic health research is largely fundedby the government, whereas in Britainmuch of it is paid for by the WellcomeTrust, a charitable foundation based inLondon, albeit set up by an American.

Britain’s government has recently beentrying to foster the philanthropic spirit,and other European countries are startingto follow suit. Even in China, the govern-ment seems keen to build up a non-pro�tsector that caters to social needs, and ap-pears to be relaxing some of its rules to al-low philanthropy to play a bigger role. Theexception is Russia, where President Vladi-

mir Putin, averse to concentrations ofpower outside his government, hascracked down on non-governmental orga-nisations (NGOs) and their backers. Mikh-ail Khodorkovsky, the former boss of Yu-kos, a big oil company, was reportedlyRussia’s leading philanthropist before hewas jailed after a show trial.

But just as the world’s wealthy andpowerful are discovering the joys of giv-ing, students of the American model ofphilanthropy are becoming increasinglycritical of its �aws. This is not just a privateconcern for the donors: because of Amer-ica’s huge tax breaks for charitable dona-tions, it is a matter for public scrutiny too.The cover story of a recent issue of Stan-ford University’s Social Innovation Reviewis entitled �A Failure of Philanthropy�. Itargues that those American tax breaks areof most bene�t to things like elite schools,concert halls and religious groups. �Weshould stop kidding ourselves that charityand philanthropy do much to help thepoor,� says the author, Rob Reich.

A series of scandals at charitable foun-dations�mostly over excessive pay, jobsfor family members and other extrava-gances�has attracted the ire of Congress,which is threatening tough new legisla-tion. State attorneys-general are taking agreater interest, too.

Mainstream charities that rely largelyon donations from the general public havealso come under �re. The American RedCross was exposed for diverting moneyraised for the families of victims of theSeptember 11th 2001 terrorist attacks toother purposes. And after the Asian tsu-nami and Hurricane Katrina, two fund-raising former presidents, Bill Clinton andGeorge Bush senior, found themselveshaving to reassure the public that theywould monitor how the money was used.

One of the many things exposed by thecollapse of Enron was that corporate phi-lanthropy is often pretty sleazy too. A�rm’s executives can ingratiate themselveswith business partners, and even withtheir own board members, by supportingtheir pet causes with funds from the com-pany’s charitable foundation, withoutbreaking the law.

Wasting a fortuneBut the problem lies far deeper. �Founda-tion scandals tend to be about pay andperks, but the real scandal is how muchmoney is pissed away on activities thathave no impact. Billions are wasted on in-e�ective philanthropy,� says Michael Por-ter, a management guru at the Harvard

1

*Cash and other material gifts

It’s a giftPhilanthropic giving* as % of GDP, 1995-2002

Source: Johns Hopkins Comparative Nonprofit Sector Project

0 0.5 1.0 1.5 2.0

United States

Canada

Britain

Netherlands

Sweden

France

Japan

Germany

Italy

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2 Business School. �Philanthropy is decadesbehind business in applying rigorousthinking to the use of money.� Mr Porterbelieves that the world of giving can betransformed by learning from the world ofbusiness. Many of the leaders of the newgeneration of philanthropists agree withhim, so �there is a big opportunity over thenext 20 years to �gure out how to makephilanthropy e�ective.�

Many of the new philanthropists arewell aware that traditional philanthropy isnot su�ciently businesslike. They want tobring about a productivity revolution inthe industry by applying the best elementsof the for-pro�t business world theyknow. That has prompted the industry toadopt (and adapt) some of the jargon fa-miliar from the world of business. Philan-thropists now talk about �social invest-ing�, �venture philanthropy�, �socialentrepreneurship� and the �triple bottomline�. The new approach to philanthropyis �strategic�, �market-conscious�, �know-ledge-based� and often �high-engage-ment�, and always involves maximisingthe �leverage� of the donor’s money.

Leverage is particularly important tothe new philanthropists. They know thathowever large their personal fortunes,they are dwarfed by the �nancial resourcesat the disposal of governments and in thefor-pro�t marketplace. So to make a realdi�erence, they need to concentrate theirresources on problems that are not beingdealt with by governments or for-pro�torganisations. Being constrained by nei-ther voters nor shareholders, they can takerisks to �nd pioneering new solutions thatcan then be adopted on a larger scale bygovernments or for-pro�t �rms.

But not everyone is convinced that phi-lanthropists must become more business-minded. �We must reject the idea�well-in-tentioned, but dead wrong�that the prim-ary path to greatness in the social sectors isto become ‘more like a business’,� wroteJim Collins, a bestselling management au-thor, in a recent monograph, �Good toGreat and the Social Sectors�. His reason isdisarmingly simple: �Most businesses aremediocre.�

Still, even Mr Collins agrees that theway in which money passes from philan-thropists to the organisations that put it towork leaves much to be desired. Here thereis some reason for hope. In recent years, ahost of new �rms and institutions havebeen created that, with luck and goodmanagement, will provide the infrastruc-ture and intermediaries of a philanthropiccapital market, an e�cient way for philan-thropists to get their money to those �so-cial entrepreneurs� and others who needit. These newcomers include managementconsultants, research �rms and a philan-thropic investment bank of sorts.

Plenty can still go wrong. There is nomarket discipline to force philanthropiststo adopt innovations, however desirable.And the new philanthropists, along withthe innovators who are trying to help thembecome more e�cient, may �nd the goingharder than expected. �The new rich haveoften made their money very fast, and getintoxicated with their own brilliance intothinking they can quickly achieve resultsin the non-pro�t sector. They forget thattheir success may have been due to luck,and that the non-pro�t sector may be farmore complex than where they have comefrom,� says Mario Morino of Venture Phi-

lanthropy Partners, one of America’s lead-ing venture philanthropists.

One obvious risk is of a political reac-tion against the philanthropic rich. Thenew philanthropists are not just intospending money. According to Greg Deesof Duke University, today’s philanthropyis best de�ned as �mobilising and deploy-ing private resources, including money,time, social capital and expertise, to im-prove the world in which we live.�

Peggy Rockefeller Dulany, who runsthe Global Philanthropists Circle, makes asimilar point. �With wealth comes educa-tion, decision-making power, links toelites in other countries and enormousconvening power,� she says. �We are help-ing philanthropists to make use of all theseadvantages. It is using money and connec-tions�whether personal, family or busi-ness�to create public bene�t.�

A global elite, seeking to change theworld by combining lots of money withnew ideas, cutting-edge business tech-niques, media and marketing savvy, themobilisation of citizens and helpful politi-cal connections: all this is bound to setalarm bells ringing in some quarters evenas it spreads hope in others. AlreadyGeorge Soros, a famous hedge-fund phi-lanthropist, has become embroiled in con-troversy over the role of some of the orga-nisations he funds in various formercommunist countries as well as in Amer-ica itself. And last year Bob Geldof, Bono’sphilanthropist partner in rock activism,provoked demonstrations in Ugandawhen he suggested that the country’s pres-ident should not stand for re-election. Phi-lanthropy seems sure to become anincreasingly hot political potato. 7

BILL GATES is much the most generousphilanthropist since records began.

The $31 billion he has donated so far is al-ready many times the $6 billion (in 2005dollars) given away by a previous giant ofAmerican philanthropy, John D. Rockefel-ler. And Microsoft’s founder is only justgetting started. By the end of his life, he in-tends to have handed over most of the restof his fortune�put at $46.5 billion in Forbesmagazine’s latest �rich list��to the Bill andMelinda Gates Foundation.

Mr Gates is given much of the credit forthe rise in giving among today’s super-rich. He seems to have discovered his gen-erous streak relatively recently: in 1998,The Economist was still criticising him forsitting on his fortune. But since then �BillGates has made philanthropy the norm�among the super-rich of the world, saysVartan Gregorian, who runs the charitablefoundation set up by Carnegie. �Giving isnow what you are expected to do.�

The power of Mr Gates’s example is

one reason why Mr Gregorian�who is amentor to many of the new philanthro-pists around the world�is no fan of the se-cretive approach to giving. �I like people tobe public about their philanthropy; itmakes it more competitive if we can seewho is doing what.�

In order to give money away, you �rsthave to have it. The past two decades haveseen vast global wealth-creation, but the�winner-takes-all� aspect of many of to-day’s fastest-growing markets, and the

To have, not to hold

The rise of the new philanthropist

1


2 sharp reductions in top marginal income-tax rates and pro�t and capital taxes al-most everywhere, have caused a rapid in-crease in inequality between the very richand the rest. The number of billionaires isgrowing fast, and not just in America: ofthe 691 billionaires listed by Forbes, 350live outside America, with Lakshmi Mittal,an Anglo-Indian steel tycoon, comingthird overall. According to the latest an-nual survey by Cap Gemini and MerrillLynch, the number of families with over$30m in investable assets has also risenrapidly, to 77,500, as has that of million-aires (de�ned as people with investable as-sets of at least $1m, not including theirmain home), now 8.3m worldwide against7m in 1997.

In the technology industry, there arenow several generations of newly wealthypeople who are actively giving�the Hew-lett and Packard families, Intel’s Mr Moore,

Mr Gates, eBay’s Messrs Omidyar andSkoll and the newest billionaires on theblock, Google’s Messrs Page and Brin. Like-wise, in the �nancial industry newly su-per-rich hedge-fund stars are following inthe philanthropic footsteps of Mr Soros.Performance-based donations to charityare now sometimes built into a hedgefund’s structure. For example, one-third ofall the fees earned by the Children’s Invest-ment Fund, one of Europe’s leading hedgefunds, goes to a foundation that helps chil-dren in the developing world.

In Europe, following in America’s foot-steps, the gradual emergence of an equityculture has generated serious wealth forowners selling their business in an initialpublic o�ering. A fair amount of thismoney is going into charitable founda-tions. In Germany, for instance, their num-ber has increased from 4,000 in 1997 toover 13,000 now. Germany’s best-knowncharitable foundation, Bertelsmann,which is now mentoring some of thesenewcomers, says that half the founders areactively involved in their foundations,which for many have become a second ca-reer. In America, the number of privatecharitable foundations has soared fromabout 22,000 in the early 1980s to over65,000 today, according to the Centre onPhilanthropy at Indiana University.

In India, where traditional charitablegiving within communities has dwindledbecause of urbanisation, those newly en-riched by the country’s technology boomare starting to �ll the void. The wealthybosses of Infosys, Wipro and Dr Reddy arebecoming big philanthropists, joiningmore established Indian business philan-thropists such as the Tata, Birla and Bajasfamilies.

In Latin America and Asia, �whoeverhas got wealthy�has now got an agendato give,� says Martin Liechti of UBS, a Swissbank. He points out that a generationalshift is under way from the old wealthy,who tended to practise traditional charity,to the new wealthy, who are open to moreentrepreneurial approaches.

Although in many countries the poorgive away a higher proportion of their totalincome than do the rich, it is the wealthywho dominate charitable giving. In Amer-ica, for instance, families with a net worthof $1m or more accounted for 4.9% of thetotal number of all donations to charitableorganisations in 1997, but as much as 42%of the value, according to a study by PaulSchervish of Boston College. The con-centration in bequests is also striking: es-tates worth $20m or more made up 0.4% oftheir total number but 58% of their value.

In most countries, total giving has beenrising slowly, although the outpouring ofpublic sympathy after a series of naturaldisasters made 2005 a bumper year for do-nations. Surveys show that in many coun-tries the public’s trust in charitable orga-nisations is falling, and there are growingworries that donations will not be put togood use.

According to an annual survey, GivingUSA, total charitable giving in America in2004 rose by 5% to a record $249 billion,over 2% of GDP. That was more than in anyother big country, both in absolute termsand as a proportion of GDP. And even ifyou ignore donations to religious congre-gations and add in the value of volunteer-ing, America is still a global leader in giv-ing. A study led by Lester Salamon ofJohns Hopkins University of charitablegiving in 36 countries, excluding donationsto religious congregations, showed that inthe seven years to 2002 such giving in de-veloped countries ranged from around1.85% of GDP in America to 0.11% in Italy.

Mr Salamon also notes that measuredagainst state spending on welfare, chari-table spending is tiny everywhere. InAmerica, such welfare spending equals18% of GDP; in Britain, 28%. This shows justhow hard it will be for the new philanthro-pists to ensure that their money makes areal impact, especially in rich countries.

According to an adviser to a leadingSwiss private bank, around one-quarter ofits super-rich clients are already commit-ted to philanthropy. A further 40% are ac-

2Generosity writ largeAmerica’s top 20 philanthropists

Amount,Background $bn*

Gordon & Intel co-founder 7.05Betty Moore

Bill & Melinda Microsoft 5.46Gates co-founder

Warren Buffett Berkshire Hathaway 2.62†

CEO

George Soros Investor 2.37

Eli & Edythe SunAmerica, KB 1.48Broad Home founder

James & Virginia American Century 1.21Stowers founder

Walton family Family of Wal-Mart 1.10founder

Alfred Mann Medical devices 0.99

Michael & Dell founder 0.93Susan Dell

George Kaiser Oil & gas, banking, 0.62real estate

John Templeton Investor 0.56

Ruth Lilly Eli Lilly heiress 0.56

Michael Bloomberg founder, 0.53Bloomberg NYC mayor

Veronica Atkins Widow of 0.50Robert Atkins

Jeff Skoll Founding president 0.49of eBay

Ted Turner CNN founder 0.46

Kirk Kerkorian Investor 0.45

Donald Bren Real estate 0.45

Pierre & Pam EBay chairman, 0.43Omidyar founder

Patrick & Lore IDG founder 0.37Harp McGovern

Source: Business Week

*Given or pledged during 2001-05†Includes a $2.5bn bequest by his deceased wife Susan Buffett

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2 tively thinking about it, and another 15%are just starting to put it on their agenda.What motivates them?

Religion has always played a big part ingiving (Christians, Jews, Muslims andSikhs all traditionally aim to give away aset proportion of their income). In Amer-ica, religious giving accounts for a stagger-ing 62% of total donations, according to In-diana University’s Centre on PhilanthropyPanel Study, and donations to religiouscauses outweigh those to non-religiousones in every income group. In Europe, re-ligious giving is generally lower. In Britain,a recent study by the Charities Aid Foun-dation, a non-pro�t body, found that faith-based organisations accounted for 10% ofthe 500 largest charities’ income. Amongthe super-rich of the Muslim world, the Is-lamic prohibition of things such as alco-hol, pork, gambling and conventional �-nancial services has opened up a role forphilanthropy: those whose portfolios in-clude such activities can �purify� them bygiving the resulting pro�ts away.

�The rich are trying to �gure out a moralbiography of wealth, and philanthropycan provide part of the purpose side of liv-ing the good life,� even if you are not reli-gious, reckons Mr Schervish. Becomingvery rich can rob you of your old ambi-tions and give you a need for new ones.Why did Sir Tom Hunter, a Scottish retailentrepreneur, become a philanthropist?�Aged 37, I got a massive cheque. I hadachieved all my goals at that time. So Istarted to think, what shall I do now?�

�There is a search for a narrative, aboutmaking a di�erence with your life, whichis vaguely religious and gives you a buzz,�says Charles Handy, a management guruwho is putting the �nishing touches to abook about philanthropy in Britain, �Be-yond Success: The New Philanthropists�.Mr Handy points to Abraham Maslow’s

hierarchy of needs, and suggests that now-adays more people are getting to the stageMaslow described as �the highest need,for a purpose beyond ourselves. Theywant to make a di�erence�it used to hap-pen in their 60s and 70s, now it is in their30s and 40s.�

Faced with the world’s many and ur-gent problems, a lot of wealthy people areasking themselves: if I can help, why not?Mr Gates read a World Bank World De-velopment Report and realised he could dosomething to improve public health in theworld’s poorest countries. That made itseem absurd to leave his philanthropy un-til old age, as he had previously intended.

A lot of giving is stimulated by personalexperience. Wealthy people often want toshow gratitude for something that helpedthem succeed, such as a school or a sup-portive community. Similarly, they maywant to support a life-saving hospital orplay a part in �nding a cure for a diseasethat has aicted someone close to them,or help a poor country they have visited.Indeed, newly wealthy Americans oftengive to causes abroad, says Mary Duke ofHSBC, a bank. Promoting education and�ghting disease and poverty in Africa arenow high priorities. The Middle East too isrising up the agenda, in hopes of improv-ing America’s battered image in much ofthe region. So-called �diaspora philan-thropy��where people from, say, Mexicoor India who have prospered abroad, sendgifts home�is also increasingly popular.

Many rich people feel that they havebeen fortunate and want to �give some-thing back�. But eBay’s founder, Mr Omi-dyar, dislikes the phrase. �The classic busi-ness executive reaches his late 40s andsays I want to give back. But what does thatmean he has been doing? Taking away?What a sorry way to think about your ca-reer,� he says. It is hard to tell whethersome of the new wealthy feel guilty, butcertainly many of them think, like Carne-gie, that philanthropy is part of a socialcontract: both a duty and an insurance pol-icy against populist redistribution.

Social norms and peer pressure clearlyplay a part. The fund-raising events in Lon-don laid on by Mr Busson for his charitablefoundation, Absolute Return for Kids(ARK), seem to be prising open the walletsof many people in hedge funds whowould not have contributed otherwise.And not everybody’s motives are lofty: MsFulton, the co-author of a new report onphilanthropy, argues that �a lot of philan-thropy is motivated by pleasure�ego grati-�cation and reputation enhancement.�

Good examples can help to stimulatelargesse. In Britain, the Beacon Prize,launched in 2003 to celebrate philanthro-pists, was an attempt to reverse a long stag-nation in giving. There are signs that,slowly, British culture may be changing.�There is a mood now in Britain that thereare niches that the government doesn’t �ll,and that if you have talent, money andtime you should get into these gaps. Thirtyyears ago, a businessman would havesaid, ‘I pay my taxes, the governmentshould do it’,� says Mr Handy, the manage-ment guru. �It is getting like America�ifyou are wealthy, you want to be on the giv-ing list as well as the rich list.�

In continental Europe, a tradition ofgiving anonymously (not least to avoid thetaxman’s attention) has meant there is lesspeer pressure to give, and few role modelsfor would-be new philanthropists. To helpchange that, Ise Bosch, a member of thefamily behind the eponymous electronicscompany, is now writing a �how-to� bookon philanthropy. She has also formed anetwork called Pecunia for wealthy Ger-man women interested in giving.

Transcendental meditationMany baby-boomers, with their childrenthrough college, their houses paid for andplenty of money tucked away for retire-ment, are now beginning to think abouttheir legacy, which often involves philan-thropy. �In an age where everything is upfor sale, transcendence can be boughtthrough philanthropic giving,� argued aworking paper, �Strategic Legacy Creation:Toward a Novel Private Banking Proposi-tion�, published by the University of StGallen, Switzerland, in 2004. �While abank cannot make people literally immor-tal, it can�create legacies for its clients thatsatisfy their need for transcendence,� ac-

A fashion for giving

Sources: Giving USA Foundation; The Foundation Centre

*By individuals, bequests, foundations and corporations

Total giving* in the US, $bn2004 prices

0

50

100

150

200

250

1964 70 75 80 85 90 95 2000 04

3

4International benefactorsThe largest foundations in America and Europe

Assets, $bn*

Bill & Melinda Gates Foundation (US) 28.80

The Wellcome Trust (Britain) 18.82

The Ford Foundation (US) 10.69

J. Paul Getty Trust (US) 9.64

The Robert Wood Johnson Foundation (US) 8.98

Lilly Endowment (US) 8.59

Fondazione Cariplo (Italy) 8.27

Fondazione Monte dei Paschi di Siena (Italy) 7.13

W.K. Kellogg Foundation (US) 6.80

The William & Flora Hewlett Foundation (US) 6.49

Sources: The Foundation Centre; foundation reports*Financial years ending 2004

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2 cording to the author, Maximilian Martin,now a philanthropy adviser at UBS.

Certainly, people tend to become moregenerous as they grow richer, both in lifeand in death. Mr Schervish points out thatbetween 1992 and 1997 the value of �nalestates in America rose by 65%, but chari-table bequests went up by 110%. For thelargest estates, the shift was even greater.One possible explanation is the growingconcern of wealthy parents that if theyleave too much to their kids, they will givethem a nasty dose of �auenza�, alsoknown as �trust-fund baby syndrome�. �Alot of people say they are not going to passon much of their wealth to their kids, forfear of spoiling them,� says Joe Toce ofHSBC. �But as they get older, and grand-children come along, they often end uppassing on a lot to their descendants.�

Nevertheless, when the baby-boomgeneration dies, vast amounts of moneywill be passed on, and a large chunk of thatseems destined for philanthropic pur-poses�not least because involving chil-dren and grandchildren in the running of afoundation is increasingly seen as a way togive them a sense of purpose and to passon family values.

Self-interestA secondary motive may be the desire totake advantage of the many tax incentivesand other �xes that can make a wealthyperson look virtuous at an appealinglylow cost. America has the most generoustreatment of charitable giving, allowing

taxpayers to deduct their donations fromtheir taxable income.

In Britain, too, the tax system has be-come much more philanthropy-friendly.Other parts of Europe are followingslowly. The European Foundation Centreis lobbying for better tax treatmentthroughout the European Union. A par-ticular concern is the harsh tax regime thatsome countries apply to giving abroad.

The recent tax reforms in Britain havenot changed the tendency to give out of in-come rather than assets, in sharp contrastto the Americans, says Les Hems of the In-stitute for Philanthropy in London. Thereis currently no British version of America’spopular �charitable remainder trust��adevice that allows a donor, say, to giveaway his house, claim an immediate tax

break and then continue to live in it untilhis death, when the remaining value of theasset goes to the designated charity.

One of the strongest trends in Ameri-can philanthropy in recent years has beenthe rapid growth of donor-advised funds,o�ered by money management compa-nies such as Fidelity, whose fund is nowAmerica’s �fth-biggest charity. Thesefunds allow individuals to commit them-selves to a donation and claim their tax de-duction, but defer nominating a bene�-ciary and actually paying out the moneyuntil a later date. This has led Congress tosuspect foul play�though not by Fidelity,which has a decent average pay-out rate of25% of donated money each year.

Would scrapping inheritance tax, asPresident George Bush wants to do, hitcharitable giving in America by removingone of the main penalties for not giving?Judging by how vigorously charities havebeen lobbying against the move, theyclearly fear that they would lose out. ButJohn Whitehead, a former boss of Gold-man Sachs and now the eminence grise ofNew York philanthropy, believes that evenif giving carried fewer tax advantages, itwould not fall by as much as people fear,for �most of it is from the heart, not thepocketbook.�

At any rate, many people reckon thatphilanthropists’ motives are beside thepoint. As Mr Gregorian of the CarnegieCorporation says, �Why they give is notimportant; the act of giving, and how e�ec-tively they give, is what matters.� 7

�RELATIVE to the corporate environ-ment, we are in the 1870s. But phi-

lanthropy will increasingly come to resem-ble the capitalist economy,� predicts UdayKhemka, a young Indian philanthropistand a director of the SUN Group invest-ment company owned by his family. Likemany of the new generation of philan-thropists, he has big but well-de�ned am-bitions. �I want to help develop the infra-structure of philanthropy,� he says.

The need for philanthropy to becomemore like the for-pro�t capital markets is acommon theme among the new philan-thropists, especially those who have madetheir fortune in �nance. As they see it,

three things are needed for such a philan-thropic marketplace to work.

First, there must be something for phi-lanthropists to �invest� in�somethingthat, ideally, will be created by �social en-trepreneurs�, just as in the for-pro�t worldentrepreneurs create companies that endup traded on the stockmarket.

Second, the market requires an infra-structure, the philanthropic equivalent ofstockmarkets, investment banks, researchhouses, management consultants and soon. This is what Mr Khemka wants to con-centrate on.

Third, philanthropists themselves needto behave more like investors. That means

allocating their money to make the great-est possible di�erence to society’s pro-blems: in other words, to maximise their�social return�. Some might operate as rel-atively hands-o�, diversi�ed �social inves-tors� and some as hands-on, engaged�venture philanthropists�, the counter-parts of mainstream venture capitalists.

All this may sound �ne in theory. How-ever, the history of philanthropy suggeststhat there are many potential pitfalls.

America’s early charitable foundationswere built by entrepreneurs. Carnegie andRockefeller would have understood thenew investment-oriented model. �Havingseen their own economic activity trans-

The birth of philanthrocapitalism

The leading new philanthropists see themselves as social investors

CORPORATE giving has long had areputation as the sleaziest corner of

philanthropy. Although usually nomi-nally independent of the companieswhose names they take, corporate foun-dations in practice are often treated as asort of slush fund into which the chief ex-ecutive can dip to help a pet cause, en-hance his status in the community oreven cement a business relationship witha donation to a cause close to a businesspartner’s heart. Corporate philanthropyhas been coming under greater scrutinysince the collapse of Enron, becausemany people believed that donations tovarious Enron board members’ goodcauses may have made them less willingto hold the �rm’s top executives to ac-count. Companies are now having towork harder to justify their philanthropyon strategic grounds.

The best justi�cation, and perhaps theonly intellectually rigorous one, is thatphilanthropy is in the enlightened long-term interest of shareholders. This is a keyargument in a new book, �Compassion-ate Capitalists: How the Leading CEOs areDoing Well by Doing Good�, by Marc Be-nio�, the boss of salesforce.com. Thebook contains two dozen articles by cap-tains of industry, including Alan Hassen-feld of Hasbro, Je�rey Swartz of Timber-land, Steve Case of AOL, Michael Dell of

the eponymous computer-maker andJean-Pierre Garnier of GlaxoSmithKline.All of them argue�some more convinc-ingly than others�that their philanthropyis good for shareholders, at least in thelong run. Mr Benio� argues that givinghis sta� time to volunteer in the commu-nity improves his company’s ability to re-cruit top talent.

Corporate philanthropy is also be-coming more important in developingcountries, where �rms may feel the needto support local communities by contrib-uting through their foundations to healthcare, education and so on. In an article ina new book, �The Accountable Corpora-

tion�, Messrs Porter and Kramer note thatNestlé, for example, now invests a lot inwhat it calls �milk-production systems�in developing countries, realising that adecent infrastructure is needed to ensurea reliable supply.

�The dominant trend in corporate phi-lanthropy is to do giving that reinforces a�rm’s core strategy,� argues Trevor Neil-son of the Global Business Coalition onHIV/AIDS. Thanks to shareholder pres-sure, increasingly the only acceptable phi-lanthropy is the sort that enhancespro�ts. Mr Neilson is a keen advocate of�cause-related government relations�,which means that a �rm will help a gov-ernment to deal with a social problem inthe hope of getting favourable treatmentin the future. For example, 26 companiesso far have made commitments to helpthe Chinese government with its AIDS

strategy, which Mr Neilson says will al-low them to form a valuable relationshipwith the government. Perhaps.

Some of the new philanthropists be-lieve that they are doing good simply byrunning their business. Thus, Mr Omi-dyar argues that eBay does its bit by em-powering people and promoting trustbetween strangers. Most importantly, it iscreating wealth to be shared around.After all, without wealth-creation therewould be no chance of philanthropy.

Is corporate philanthropyworthwhile? The good company

1


2 form the world, they thought that thefoundations they left behind would betransformative organisations,� says CarlSchramm, head of the Ewing MarionKau�man Foundation. Those foundationsdid remarkable things. Set up as conduitsfor making grants as well as running theprogrammes that would bene�t from themoney, they thought big, concentrated onclear goals and were willing to investheavily for long periods to achieve them,says Mr Schramm. The Rockefeller Foun-dation, for example, found a cure for yel-low fever and drove the �green revolution�in agriculture. Carnegie, among otherthings, built thousands of public libraries.

Yet this long-term investment ethos hasproved to be the exception, not the rule. Ina landmark article, �Philanthropy’s New

Agenda: Creating Value�, published in theHarvard Business Review in 1999, MichaelPorter and Mark Kramer described wide-spread �aws in America’s foundationsthat mostly remain to this day. For in-stance, little e�ort is devoted to measuringresults, and foundations have unjusti�-ably high administration costs.

Michael Bailin, head of the EdnaMcConnell Clark Foundation, has de-scribed the typical foundation as �auto-cratic, ine�ective and wilful, elitist, clois-tered, arrogant and pampered�. There are�chronic problems in the way foundationsoperate�, says Joel Fleischman, formerhead of the unusually impressive AtlanticPhilanthropies, who is writing a book onthe successes and failures of foundations.He says that most of them provide little in-

formation about what they do, and areparticularly secretive about their failures.As a result, says Mr Fleischman, �founda-tions keep reinventing the wheel.�

As for foundation governance, it is anightmare, says Robert Monks, a veterancampaigner for better corporate gover-nance: �Perpetual existence, no need toconform to competitive standards, it is alltoo much for human nature. Hence the pa-latial o�ces, fancy conferences andincreasingly lavish pay for the professionalphilanthrocrats.�

Arguably the biggest problem is theway that foundations make grants to orga-nisations they support. Whereas Carnegiewas willing to invest for the long term,more recently foundations have tended tochop and change, says Mr Fleischman. Me-

1


2 lissa Berman of Rockefeller PhilanthropyAdvisors argues that there is too much em-phasis on funding individual programmesand too little on the sustainability of thenon-pro�t organisation running the pro-gramme. Overheads are seen as a badthing, and grants tend to be short-term.

Should the new generation of philan-thropists try something di�erent from thetraditional foundation? Ebay’s Mr Omi-dyar thinks so. He has folded his OmidyarFoundation into Omidyar Network, whichis free to make for-pro�t investments aswell as philanthropic donations to pursueits mission of �individual self-empower-ment�. �After a few years trying to be a tra-ditional philanthropist, I asked myself, ifyou are doing good, trying to make theworld a better place, why limit yourself tonon-pro�t?� he explains. Although there isa separate chequebook for the foundation,his �investment team� is free to put hismoney in either for-pro�t or non-pro�tprojects. The team’s main criterion iswhether the investment will further thesocial mission.

Similarly, the Google Foundation ispart of Google.org, which can mix for-pro-�t and non-pro�t investments. However,unlike Omidyar Network, Google.org is anarm of Google, so this is corporate philan-thropy�which raises a further series of dif-�cult questions (see box, previous page).

In principle, large foundations shouldbe the most e�ective vehicle for philan-thropy, argue Messrs Porter and Kramer.Not only are they free from both politicaland commercial pressures, they also em-ploy professional sta� that smaller out�tswould not be able to a�ord. But the sta� of-ten become the biggest problem, espe-cially in foundations whose founder haslong been dead.

The new philanthropists are mostlyyoung enough to be able to keep an eye ontheir foundations for many years to come.Nonetheless, says Mr Fleischman, theymight consider setting a closing date fortheir foundation. For instance, the John M.Olin Foundation, a big source of �nancefor conservative organisations, recentlyshut itself down. As John Miller recountsin his new book, �A Gift of Freedom�, Olinhad stipulated that all of his legacy shouldbe spent within a generation of his death, asunset model that kept it nimble, unbu-reaucratic and true to its founder’s ideas.

The new philanthropists also need tobe clear what they want to do, and stickwith it. That is one lesson from the GatesFoundation, which has already notchedup some remarkable achievements�

helped by its huge size, which allows it todo things that are beyond everyone else.Its clear mission is to tackle global healthinequalities in six main areas: infectiousdisease, HIV/AIDS, tuberculosis, reproduc-tive health, global health strategies andglobal health technologies.

Leverage is allCrucially, it has found ways of using itsmoney to the greatest e�ect. Mr Gates’s bigidea is to overcome the market failure af-�icting poor consumers of health care bydeploying his money on behalf of thepoor to generate the supply of drugs andtreatments they need. For instance, themoney provides market incentives fordrug companies to put some of their re-sources to work for the needy.

The Gates Foundation also favourspartnerships, even though it is big enoughto pursue many projects on its own. Again,it is looking for maximum e�ectiveness.Other philanthropists are following simi-lar strategies. For instance, Britain’s DameStephanie Shirley wanted to fund researchinto an autism gene, the total cost of whichshe reckoned would be £1 billion ($1.7 bil-lion). She stumped up £50m herself and israising similar sums from other donorsaround the world. Another �hot� idea atthe moment, championed by the X-PrizeFoundation, is to donate large cash prizesthat will generate lots of further spendingfrom those competing to win them.

Mr Omidyar recently donated $100mto Tufts University to invest pro�tably inproviders of micro�nance to the poor. Hehopes to attract private capital to turn whathas largely been a subsidised business intoa pro�table one, operating on a far biggerscale than today.

Other new philanthropists are pilotingnew models for welfare provision that,once they have proved themselves, can betaken up by governments and made avail-able much more widely. Governmentstend to be risk-averse, whereas philanthro-pists are free to take whatever risks they

like with their money, so they can play auseful role as providers of start-up risk cap-ital for government services.

Networks, too, are an increasingly pop-ular way of leveraging money and experi-ence. Peggy Rockefeller Dulany’s GlobalPhilanthropists Circle brings togetherabout 50 super-rich families from 20 coun-tries to exchange ideas and experiences,mainly with a view to �nding solutions tointernational poverty and inequality. Of-ten this will involve the use of connectionsand in�uence as well as money.

However, there is still a lack of globalgiving consortiums that take on single is-sues, says Mr Khemka. He hopes to bringtogether philanthropists from around theworld who want to tackle climate change.

Some foundations are now exploringnew ways of funding organisations. Mr Sa-lamon of Johns Hopkins University thinksthat they should start to behave more likephilanthropic banks, o�ering a range of �-nancial products such as loans and loanguarantees as well as grants.

Some philanthropists are also begin-ning to think about how best to harness alltheir assets to the causes they support,rather than just concentrating on themoney they are currently giving away.This point was brought home recently toJe� Skoll, one of whose philanthropic mis-sions is to make �lms with a social mes-sage. His latest �lm is based on the book�Fast-Food Nation��yet he had notchecked his investment portfolio to see ifhe owned shares in food companies suchas McDonald’s that are attacked in the �lm.

Over the past year or so, many of thesuper-rich have started to ask themselveswhat exactly their assets are doing, saysD.K. Matai, an Indian-born software entre-preneur who runs the Philanthropia Trin-ity, another international network of phi-lanthropists. �What is the point of earninga high return in China if my money is help-ing to build Dickensian working condi-tions? If I have $5 billion, and am giving $4billion away, do I really want a 17% return

1


2 on activities that are wrecking the world?�To deal with that problem, the investmentindustry will need to improve on the strat-egies and products it currently o�ers for�ethical� or �socially responsible� invest-ment, which often amount to little morethan avoiding shares in, say, tobacco, armsmanufacturing or oil.

The phrase most often used to describethe new approach to giving is �venturephilanthropy�. This was �rst used in the1960s by one of the Rockefellers, but is stillpractised relatively rarely. Perhaps the bestexample is a �rm called Venture Philan-thropy Partners. Run by Mario Morino,who made his fortune in software, it spe-cialises in mid-sized non-pro�t organisa-tions in the Washington, DC, area thatwork well enough, but lack the capital andtalent to expand. With a $30m fund raisedthrough a community foundation, Mr Mo-rino behaves much like a venture capital-ist. He is working intensively with 12 non-pro�t organisations, helping them to de-velop a business plan for growth and torecruit managers and board members.

Old dogs, new tricksNew foundations may be learning fromthe mistakes of the old ones; but what canbe done to reform established foundationsthat are underperforming? With Amer-ica’s Congress showing increased interestin foundations, Senator Charles Grassleyhas proposed tough new laws. His reformswould �dramatically transform the rela-tionship between the federal governmentand foundations�, says Adam Meyersonof the Philanthropy Roundtable, an indus-try body. Among other things, Senator

Grassley is proposing a �ve-yearly reviewof foundations’ charitable status and a for-mal government rati�cation regime. ButMr Meyerson thinks it would be far betterfor the government properly to enforce thelaws that are already in place.

Better regulation is on the agenda inBritain, too, where charity is still governedby an act passed in 1601. �The governanceof charities and non-pro�ts is generallypoor,� says Geraldine Peacock of Britain’sCharity Commission, which under newlegislation due to take e�ect this year willbecome much more independent of gov-ernment. Like Senator Grassley, Ms Pea-cock thinks that a charity should be li-censed for a limited time�say �veyears�and then have to reapply.

Encouragingly, many of the older foun-dations themselves are becoming moreconcerned about e�ectiveness, and havestarted demanding more information onhow the money they provide is spent, saysMr Fleischman. The recent transformationof the Edna McConnell Clark Foundationshows that an ine�cient old organisationcan turn itself into a cutting-edge opera-tion. It used to hand out grants in the tradi-tional manner for a wide range of goodcauses. But in the late 1990s, a new head,Mr Bailin, decided to concentrate its activi-ties in a single �eld, youth development.Working closely with its chosen organisa-tions, notably Harlem Children’s Zone, ithas helped them become more e�ectiveand serve many more people.

The biggest question of all is how tomeasure the performance of a philan-thropic organisation. A huge amount ofwork is going on in this �eld, but it is still

more art than science�particularly whenit comes to the fuzzier goals of some phi-lanthropists, such as �empowering peo-ple�, �increasing the e�ectiveness of civilsociety� or ��ghting climate change�.

Measures involving the so-called dou-ble bottom line (�nancial plus social per-formance) or triple bottom line (�nancial,social and environmental) are readily sus-ceptible to statistical manipulation. So arepopular concepts such as �changed life��acombination of the number of people af-fected by an initiative and the extent towhich it improves their lives.

One danger is to pay too much atten-tion to managing inputs, which are easierto measure than output. Another is to con-centrate donations on those activities thatcan be easily measured, such as the num-ber of vaccinations given, even where thatmay not be the most e�ective way of tack-ling a problem.

Donors also need to strike the right bal-ance, so that on one hand they ask forenough information to be able to monitorthe e�ectiveness of the organisations theyfund but on the other they do not bog themdown in form-�lling bureaucracy. TheGates Foundation has a good reputationfor getting the mix right and tailoring it toindividual circumstances.

�The risk with any metric is that peoplewill come to see it as a description of real-ity, rather than a tool for a conversationabout that reality,� says Rowena Young ofthe Skoll Foundation. �One metric or an-other can function well only when manag-ers know why they are measuring and forwhom�In the world of social value-cre-ation, context is king.� 7

UBS, a Swiss private bank that countsmany of the world’s richest people

among its clients, is conducting an interest-ing experiment in Brazil, Mexico and Ar-gentina. It has formed an alliance withAshoka, a global organisation that identi-�es and invests in leading �social entrepre-neurs�. The alliance is o�ering a new prizefor social entrepreneurship, which UBS’sMartin Liechti admits is an excuse to bringtogether two groups of people who mightotherwise never meet. �As the biggestwealth manager in the region, we are at the

crossroads between capital and ideas�sowhy not bring the people with capital to-gether with the people who have ideas?�

The social entrepreneurs that are short-listed must have been working success-fully with Ashoka for at least three years.Winning the prize is not really the point.Simply being selected to be in the roomwith a bunch of wealthy people gives thesocial entrepreneurs great credibility withpotential donors, and even runners-uphave a good chance of coming away with anew �nancial backer or some other form

of help. Héctor Castillo Berthier, who runsan innovative project for troubled Mexi-can teenagers, came third in last year’sMexican prize, but still got a crucial dona-tion and free use of o�ce space.

Ashoka is not alone in bringing socialentrepreneurs together with the wealthyand powerful. Social entrepreneurs nowrub shoulders with the world’s businessand political elite at the World EconomicForum in Davos, under the auspices of asister organisation to WEF, the SchwabFoundation for Social Entrepreneurship.

The rise of the social entrepreneur

Whatever he may be

1


2 This year, the people selected includedRory Stear, founder of Freeplay, a com-pany dedicated to the spread of cheap, sus-tainable energy for all; Jim Fruchterman ofthe Benetech Initiative, a non-pro�t orga-nisation that makes technology availableto disadvantaged communities; and Victo-ria Hale, founder of OneWorld Health,which works with the Gates Foundation(among others) to make low-cost drugsavailable in poor countries.

Waiting for a productivity miracleAshoka was founded in 1980 by Bill Dray-ton, a former McKinsey consultant, whoexpects the rise of social entrepreneurshipto generate huge bene�ts. He says it is nowhelping to bring about a productivity mir-acle in what he calls the �citizen half of theworld� (education, welfare and so on), asector that for three centuries has laggedbehind the �business half of the world�,where productivity has soared and vastamounts of wealth have been createdthanks to its competitive, entrepreneurialculture. The emergence of more social en-trepreneurs, and their improved access togrowth capital as they get better connectedto philanthropists, is creating enormousproductivity opportunities for the citizensector, argues Mr Drayton.

The citizen sector is de�ned somewhatloosely, but is largely made up of govern-ment plus the non-pro�t sector. Both gov-ernment and non-pro�ts have tradition-ally been run ine�ciently. The product-ivity miracle detected by Mr Drayton isdue both to a shift from government provi-sion to more e�cient private provision (byboth for-pro�t and non-pro�t organisa-tions) and by an increase in the e�ciencyof the non-pro�t sector.

The improvement in non-pro�t orga-nisations’ e�ciency may still have some

way to go. In 2004, Bill Bradley, a formerpresidential hopeful for the Democrats,and two McKinsey consultants claimed inan article in the Harvard Business Reviewthat, in America alone, there was a �$100billion opportunity� for the non-pro�t sec-tor to improve its e�ciency through bettermanagement. But is social entrepreneur-ship the best way to achieve that?

There is no easy answer, not least be-cause nobody is sure what exactly the termmeans. In a book charting the rise of socialentrepreneurship, �How to Change theWorld: Social Entrepreneurs and thePower of New Ideas�, David Bornsteinnotes that most discussion of social entre-preneurship tends to revolve around �howbusiness and management skills can beapplied to achieve social ends�. He him-self sees social entrepreneurs as �transfor-mative forces: people with new ideas toaddress major problems who are relent-less in the pursuit of their visions�. The latemanagement guru Peter Drucker, typicallyquick to spot the trend, de�ned social en-trepreneurs as people who raise the �per-formance capacity of society�.

Mr Schramm of the Kau�man Founda-tion, which promotes a better understand-ing of entrepreneurship, says that being anentrepreneur means being a risk-taker, but a high risk of failure may be thelast thing that many non-pro�ts need.And, surely, �every entrepreneur is a socialentrepreneur,� says Mr Schramm. �A suc-cessful entrepreneur�creates wealth�and without wealth there is no surpluscapital to turn over to charitable activity.�

Mr Omidyar, too, is uncomfortablewith the label, which he feels implies a dis-approval of pro�ts that he does not share.�I think of myself as an entrepreneur, and Ihave a social view, but I don’t call myself asocial entrepreneur,� he says. But his fel-

low philanthropist from eBay, Mr Skoll,thinks social entrepreneurship has some-thing going for it. The mission of hiseponymous foundation is �to advance sys-temic change to bene�t communitiesaround the world by investing in, connect-ing and celebrating social entrepreneurs�.

Among other things, Mr Skoll has en-dowed the Skoll Centre for Social Entrepre-neurship at Oxford University’s Saïd Busi-ness School. This is part of a growing trendfor academic institutions, including nowa-days most business schools, to take thephenomenon seriously. Harvard BusinessSchool started teaching a course on socialenterprise 12 years ago.

Mr Schramm worries that some ofthese courses are more likely to turn stu-dents against capitalism. But Mr White-head, a former Goldman Sachs boss whois the driving force behind the HBS course,sees it as part of a trend among the elite inmany countries who increasingly want tomake not just money but �a di�erence�.The money may not be as good as in busi-ness, but �a bright young person can havemore of an impact on any non-pro�t in his�rst �ve years than on Goldman Sachs,which is full of bright young people. Intheir �rst year they could make ten sugges-tions that would improve the non-pro�toperation because they have been trainedin practical business ways of thinking.�

People like you and meCertainly the number of business-schoolgraduates going into the non-pro�t sectorhas increased. That appeals to the new phi-lanthropists, who want to see people likethemselves in charge of the non-pro�torganisations they support. But these newprofessionals may achieve as much by us-ing the latest management techniques toimprove the performance of existing non-pro�t organisations than by creating newones through social entrepreneurship.

Mr Collins, the management guru, saysgetting the right people is arguably evenmore important in the non-pro�t worldthan it is in business, because it is oftenharder for non-pro�ts to get rid of employ-ees once they are �on the bus�. Businessleaders can �re people more easily and canspend money on buying talent. But somesocial entrepreneurs have found their ownways of securing top talent. Wendy Kopp,who in 1989 founded Teach for America�anon-pro�t organisation that gets graduatesfrom top universities to spend the �rst twoyears of their careers teaching childrenfrom low-income families�made it clearfrom the start that only the best would do.

Shining examplesLeading social entrepreneurs

Organisation Nationality Background

Jeroo Billimoria ChildLine India Foundation India Children’s rights

Somsook Boonyabancha Community Development Institution Thailand Land rights

Peter Eigen Transparency International Germany Anti-corruption

Oded Grajew Instituto Ethos Brazil Citizen sector

David Green Project Impact United States Public health

Alice Tepper Marlin Social Accountability International United States Labour

Pearl Nwashili StopAIDS Organisation Nigeria Public health

Fabio Rosa IDEAAS Brazil Renewable energy

Orri Vigfusson North Atlantic Salmon Fund Iceland Environment

Muhammad Yunus Grameen Bank Bangladesh Microfinance

Source: Ashoka

5


2 By last year, over 97,000 people had ap-plied to work for her organisation, but only14,000 had been accepted. Ms Kopp’s abil-ity to pick and choose boosted her credibil-ity with her philanthropic backers and en-abled her to raise more money.

A growing number of non-pro�ts nowhave state-of-the-art marketing depart-ments. Indeed, it can sometimes seem thatthe marketing has become more impor-tant than the mission. One technique is touse �charity muggers� on commission tocollar people in the street and get them tosign a standing order. For a while this wasused in Britain by Oxfam, but the develop-ment charity now thinks that raisingmoney this way does not pay. Far better totap into the public’s concern about whereits charitable donations are going, as Ox-fam has done with its hugely successfulChristmas gift catalogue, o�ering giftssuch as sponsoring a goat in an African vil-lage for £24 or providing safe water for1,000 people for £720. �The public want tobe transactional, to have a more direct rela-tionship with where their money is go-ing,� says Barbara Stocking, Oxfam’s boss.

Many non-pro�t organisations havebeen wary of working with big donors be-cause their money can come with toomany strings attached. But that is startingto change. Oxfam now wants to raise moremoney from the sort of wealthy philan-thropists it has not targeted in the past�ifonly because in Britain there haven’t beenmany of them, says Ms Stocking. �I’m notsure we have been asking for enoughmoney,� she muses.

But the main problem for many non-pro�t organisations is how to get bigger.�One of the problems is that well-run non-pro�ts don’t necessarily grow,� says NigelMorris, the co-founder of Capital One, acredit-card company. True, growth isn’teverything. Indeed, Mr Collins worriesthat non-pro�ts will put scale before genu-ine e�ectiveness: �One of the markers ofmediocre companies is that they becomeobsessed with scale and growth,� he says.But donors need to decide if they simplywant to buy services from a non-pro�t, orwhether they want to invest in helping theorganisation grow. If growth is importantto them, they need to become a lot lesssqueamish about overheads.

The virtue of overheads�In the business sector, people are verycomfortable with the idea of investing inan organisation, and the need to build upits infrastructure. In the social sector, thetendency is to invest only in a programme;there is very little investment in buildingorganisations,� says Mr Collins. Yet often,in yielding to public pressure to keepdown overheads, �non-pro�ts sacri�ce ef-�ciency for virtue,� says Carnegie’s MrGregorian.

There is no merger-and-acquisitionmarket in the non-pro�t world. And for allsorts of reasons, there are far too manynon-pro�ts. Philanthropists could help byencouraging consolidation, says JohnStudzinski, co-head of HSBC’s investmentbank and an active philanthropist. �Inhomelessness work, I’m a great advocate

of consolidation. There are about 40homelessness projects in London; onlyeight are any good,� he says.

There is also a role to be played by phi-lanthropists in encouraging non-pro�ts todevelop other sources of �nance, to reducetheir dependence on the goodwill of do-nors. Providing fee-generating services isone strategy. Doing work for the govern-ment is another. Many non-pro�ts havelong generated revenues in this way.

Philanthropists can even encouragenon-pro�ts to move towards becomingfor-pro�ts, able to stand entirely on theirown feet. This is what Mr Omidyar hopesto achieve with his $100m donation toTufts University to invest pro�tably in mi-cro�nance. But the idea may face a lot ofcultural resistance. �How do you get thecitizen sector to change its attitudes so thatit allows institutions to have incomes thatare at least equal to outgoings?� asks Ash-oka’s Mr Drayton.

He is now trying to promote for-pro�tpartnerships between big companies andcommunity groups in some of the mostimpoverished parts of the world. �Work-ing with both sides, we map a new value-added chain, ranging from product designto production to distribution to servicing;that delivers a far better service to the ulti-mate customer faster, better and more eco-nomically. Ending centuries of non-com-munication brings so much value thatboth business and citizen groups emergeas huge winners as well,� he says.

For example, community groups inMexico’s slums now work with Cemex, ahuge cement �rm, to create a market for itscement among the slum dwellers, greatlyreducing the cost of adding extra rooms totheir dwellings, providing funds for thenon-pro�t groups and turning a (stillsmall) pro�t for Cemex. The social entre-preneurs running the community grouphave the trust of the locals without whichthe big company would never be able toenter the market, says Mr Drayton. Othersimilar �hybrid value-added chains� thatcombine business and social purposes arebeing developed between groups of for-est-dwellers and forestry �rms, and smallfarmers and irrigation companies.

Meanwhile, Ashoka hopes that its rela-tionship with UBS will �ourish, and thatprizes will soon be awarded across LatinAmerica and Asia. But as well as highlight-ing the growing role of social entrepre-neurs, this experiment also points to an-other new trend: a more active role forintermediaries in the emerging philan-thropic capital market. 7

1


LEGEND has it that New PhilanthropyCapital (NPC) was founded in the Gold-

man Sachs canteen in London in 2001.After Goldman went public, Gavyn Da-vies, then its chief economist, and anothertop banker, Peter Wheeler, had pocketedenough money to enable them to do someserious giving. But when they tried to pindown the best place for their money tocreate maximum impact, �We found therewasn’t enough information produced in ahard-headed, independent, high-qualityway, made available to all,� recalls Mr Da-vies. So they decided to create NPC as theequivalent of an equity-research �rm forthe philanthropic marketplace.

It had the added attraction of providingleverage, the holy grail of the new givers.�We wanted our own charitable dona-tions to be the foundation of a much biggeredi�ce. This was an investment designedto have a levered e�ect on other people’sgiving,� says Mr Davies. �We wanted to in-crease giving by enabling donors to bemore con�dent that they were having animpact on people’s lives.�

For now, the research e�ort, headed byMartin Brookes, a former senior economistat Goldman Sachs, is con�ned to the char-ity sector in Britain. NPC is not providingratings at present, but the equivalent of�buy� recommendations through sectorreports such as �Grey Matters, GrowingOlder in Deprived Areas�. In preparingthese reports, NPC asks the charities seek-ing funds four simple questions: What is ityou do? Why? What is success? And whatis evidence of success? The �rm also doessome secondary research, such as summa-rising and translating academic work andmaking it more widely available.

�When you come into this world fromGoldman, you realise how screwed up it isas a market,� says Mr Brookes. �We are try-ing to �x the plumbing.� They are notalone. E�orts are under way to developphilanthropic versions of most of themain sectors of the capitalist marketplace:social-investment banking, social-invest-ment management, private banking, con-sulting, data services and research.Though currently the organisations pro-viding these services are relatively small,there appears to be enough demand to en-

able a successful operation to grow fast. �The biggest constraint on our growth

has been the ability to recruit top talent,�says Mr Davies. �Only a few people arewilling to come out of a career in bankingto do this.� An analyst at NPC can expect toearn £22,000-48,000 ($38,000-84,000), asmall fraction of what they would make atGoldman.

In any marketplace, knowledge ispower. NPC is attracting interest in Amer-ica, which currently has no direct equiva-lent. The big foundations, in particular, dolots of research, but they tend to keep it tothemselves. The nearest counterpart toNPC in America is Geneva Global (GG),but it covers only giving opportunities out-side America. GG’s 140 employees workwith a network of over 500 voluntary as-sociates in over 100 countries. It mostlyconcentrates on small projects, which itthinks have a greater impact.

Famous brands�In philanthropy, the stu� that will delivermost often gets least,� says GG’s boss, EricThurman. Brands count for a lot in theworld of giving, and many people like togive to familiar organisations. For instance,the Red Cross, despite heavy criticism of itshandling of donations after September11th 2001, collected almost 70% of themoney given for relief work after Hurri-cane Katrina wrecked New Orleans.

GG challenges the big charities by �nd-ing a small, local group that is doing some-thing well and is ready to scale up its oper-ations. It sends potential donors a monthlycatalogue with a choice of evaluated pro-jects, and later provides feedback on whattheir money has achieved. �We want to beknown for making a direct connection be-tween the money you raise and liveschanged,� says Mr Thurman.

For more comprehensive informationabout who is doing what in the philan-thropic world, there is GuideStar. Nick-named the �Bloomberg screen of philan-thropy�, it was founded in America in 1994by Buzz Schmidt and makes available on-line, free of charge, the tax-return data �ledby 1.5m charitable organisations, togetherwith additional information. It has morethan 400,000 registered users, and for a

fee it o�ers detailed analysis of the data�such as which organisations do what in aparticular area, how much a charity paysits chief executive relative to the average,and so on.

Mr Schmidt is now busy setting up sim-ilar services abroad. Last year GuideStarwas launched in Britain, putting data on-line that had been sitting on paper in Char-ities Commission and tax-o�ce cabinets,largely unlooked at, says Les Hems of theInstitute for Philanthropy, the parent orga-nisation of the British end of GuideStar.The institute was founded in 2000 to helpfoster charitable giving in Britain, not leastby starting, and then spinning o�, neworganisations that solve particular pro-blems. Britain’s Treasury gave it £2.9m, top-ping up £1m raised from donors. NowGuideStar is trying to secure continuingpublic funding, as well as fees from licens-ing data to organisations such as NPC.Other versions of GuideStar are plannedin India, South Africa and Australia.

Not everyone is impressed. Mr Porter,the Harvard strategy guru, thinks thatGuideStar’s �gures are too super�cial to bemuch use in judging, say, the performanceof foundations. He helped establish theCentre for E�ective Philanthropy, whichamong other things produces donor per-ception reports based on con�dential sur-veys of organisations that receive moneyfrom foundations. Initially foundationswere reluctant to publish the reports, espe-cially the critical ones, but that is starting tochange. �Smart non-pro�ts are realisingthat they can do well by being more trans-parent, and talking about their successesand failures,� says Tony Knerr, a philan-thropy consultant.

�The social sectors do not have rationalcapital markets to channel resources tothose who deliver the best results,� saysMr Collins. According to a recent article inStanford’s Social Innovation Review, inAmerica raising $100 can eat up anythingfrom $22 to $43. In Britain, the average costof �nance to charities is around 25%,which is very high relative to other indus-tries, notes NPC’s Mr Brookes.

The traditional grant-making process isa large part of the problem. Donors wouldgenerally rather fund a project than invest

Virtue’s intermediaries

A host of new businesses is trying to make the philanthropic market work better


2 in building an organisation. If a charity hasmoney in the bank, they will ask why theyshould provide any more, and what ex-actly their donation will be used for.

Not everybody is so short-sighted. Forexample, the Ford Foundation is encourag-ing the greater use of debt and debt-like in-struments because �there is a growingnumber of income-generating activities,and donors want to help borrowers to get acredit rating so they can go to the commer-cial market,� says Susan Berresford, thefoundation’s boss.

In Britain, Venturesome has been ar-ranging unsecured loans for charities, typi-cally bridging �nance for those waiting tobe paid a promised grant. And in AmericaCollege Summit, which aims to raise theproportion of young people going to col-lege in low-income areas, recently secured$15m in growth capital to fund its ambi-tious expansion plans for the followingthree years. Previously, it had to raise �-nance for expansion one project at a time,a costly, time-consuming process.

The man responsible for the capital in-jection, George Overholser of Non-Pro�tFinance Fund Capital Partners, reckonsthis is only the �rst of many private place-ments of donor capital for non-pro�ts. NFF

Capital helps non-pro�ts to raise capitalfor the organisation as a whole, rather thanfor an individual project. Mr Overholserclaims to have a pipeline of ten charities heconsiders suitable for similar �nancing.

A confusion of capitalThe inadequate accounts of non-pro�tshave proved a big complication. In Amer-ica at least, all in�ows of money are treatedas revenue, even if it is really investmentcapital. Yet to raise growth capital, as Col-lege Summit has done, it is crucial to distin-guish between money a non-pro�t re-ceives for services rendered and money itis given to build its organisation. Mr Over-holser has devised a common reportingmethod to track how the money is beingspent, to be used both by donors and forinternal management purposes. This willintroduce concepts from the for-pro�tworld, such as �burn rate� (the rate atwhich capital is being used), giving all con-cerned a better idea of how well the ex-pansion is going. Now non-pro�ts canwork backwards from their expected long-term sustainable sources of �nance towork out their current need for capital, andhow to structure it, says Mr Overholser.

In the capital markets, there has been aproliferation of investment opportunities,from mutual funds to complex derivatives.

Something similar may be under way inthe philanthropic world, ranging from in-vestments that pay a decent return onmoney put to worthy uses to structuresthat allow donors to give their moneyaway more e�ectively. In America, Goo-gle.org has just invested $5m in the Acu-men Fund, which channels donors’money to a portfolio of entrepreneurialpoverty-�ghting organisations.

In Britain, NPC and the Charities AidFoundation recently launched a couple offunds that will allocate money to a portfo-lio of charities, monitor its impact andkeep the donors informed about progress.The �rst two funds concentrate on chari-ties in particular sectors, as their namessuggest: the Engaging Young Lives Fundand the Ful�lling Older Lives Fund.

A host of new tax-favoured opportuni-ties have been coming on stream at thesame time, guided by Sir Ronald Cohen, aprivate-equity grandee, philanthropistand chairman of the British government’sSocial Investment Taskforce. For example,Bridges Community Ventures, which in-vests in businesses in deprived areas ofBritain, has done well with its �rst fundand is raising another. Charity Bank��thecompassion of a charity and strength of abank��has been set up to provide bankingservices exclusively to charities. Last year,the government launched the CommunityInterest Company, which engages in com-mercial activities for community purposesthat are not primarily driven by pro�t.They can pay dividends and borrow, butcan be sold for full value only if the moneyremains in the charitable sector.

Driven by growing demand fromwealthy clients, private banks such asGoldman Sachs, HSBC, Coutts and UBS are

now scaling up philanthropy advisory ser-vices way beyond traditional tax and in-heritance advice and asset management. Agrowing amount of consulting advice, too,is available to philanthropists and thosethey fund. Rockefeller Family Advisors isprobably the leading consultancy con-centrating solely on the giving side.

Advise and consultSome of the big management consultantsare also expanding their non-pro�t busi-nesses. In 1999, McKinsey created a sepa-rate non-pro�t practice specialising inthree main areas: global public health,foundations, and international aid and de-velopment. In general, it charges half itsregular fee for such work, though for a par-ticularly deserving cause it may drop iteven further or forgo it altogether. Its cli-ents include the Gates Foundation andBono’s campaigning organisation, DATA

(Debt, AIDS, Trade, Africa).Bain adopted an even more ambitious

strategy. In 2000, it launched Bridgespan,a stand-alone consultancy and executive-search business for non-pro�ts. Run by theformer head of Bain, Tom Tierney, Bridge-span aims lower than McKinsey, at mid-sized non-pro�ts. It now employs 75 peo-ple who typically earn 30-40% less over a�ve-year period than they would at Bain.Even so, last year it had 1,700 applicationsfor 18 jobs. Bain would like Bridgespan tospread to other countries, but there isplenty left to do at home, says Mr Tierney:�We are serving only 10% of our demandright now, and turning down the vast ma-jority of approaches from serious clients.�

Perhaps the boldest, or craziest, idea isto launch a social stockmarket. Mr Skollthinks it may happen one day, though noone has any idea what sort of securitymight trade on the exchange. �Perhapsthere could be some sort of system involv-ing social merit points,� he muses; some-thing akin to the recent development ofcarbon-emissions trading.

�The proliferation of market services isgoing to be very good for philanthropy,�says Mr Myerson of the PhilanthropyRoundtable. �There will be more services,more choice, more information, moreopportunities to capture people’s philan-thropic imagination.� But in the end, thosewho are trying to produce a philanthropicversion of the capital markets must an-swer a billion-dollar question: how do youmeasure success? The original sort has anincontrovertible answer: pro�ts. But a phil-anthropic equivalent will be nothing likeas straightforward. 7

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THE growing enthusiasm of the rich forphilanthropy, together with their

determination to see their money used tobetter e�ect, has prompted talk of a new�golden age of philanthropy�. But muchremains to be done before today’s bene�-cent billionaires can claim to follow in thefootsteps of such giants of giving as Carne-gie, Rockefeller and Rowntree.

The willingness of so many of the newwealthy to apply part of their fortune to�making the world a better place� is cer-tainly welcome. True, there are questionsto be asked about what exactly is motivat-ing them, and whether they are doing theright things to tackle society’s problems.Yet philanthropy, free of the short-termpressures from voters and shareholdersthat constrain governments and for-pro�tcompanies, may be one of the best hopesfor solving problems such as the spread ofAIDS, poverty and climate change.

The new philanthropists rightly insiston making their money go further, be-cause in the past a lot of donors’ cash hasbeen wasted. One way of introducingmore leverage is to adapt elements of thecapital markets for use in this sector. Manyinnovative businesses have sprung up toprovide some of the infrastructure of thisnew philanthrocapitalism. But in the ab-sence of market forces, much giving re-mains less e�ective than it should be.

To-do listTo improve matters, the �rst thing that isneeded is better measurement of the im-pact of philanthropy. When Carnegie builtlibraries, or the Rowntrees and Cadburysbuilt social housing, it was easy to see thebene�ts with your own eyes. But how doyou know whether Omidyar Network isachieving its goal of helping �more andmore people discover their own power tomake good things happen�? Mr Davies,the co-founder of New Philanthropy Capi-tal, concedes that measurement is di�cult,but insists it is not impossible: �Some ofthese things from an economic point ofview are unmeasurable, but no more sothan measuring GDP in the service sector,which we do, though it is very hard.�

The second requirement is greatertransparency. There are still far too many

philanthropists trying to do the samething, often unaware that they are dupli-cating each other’s good works. Moretransparency would help to avoid wastingscarce resources and promote consolida-tion in parts of the sector. Failures alsoneed to be more frankly acknowledged, sothat philanthropists can learn from eachother’s mistakes.

Compared with the resources of gov-ernments and businesses, philanthropiccapital is still tiny, so it needs to be usedwith the utmost care to ensure that it willmake a real di�erence. Yet many of the ac-tivities funded by philanthropy do not addmuch value and could be funded by morerisk-averse investors, such as the state.

That said, some of the new philanthro-pists are doing their best to use theirmoney in innovative ways which, if suc-cessful, could then quickly be scaled up bygovernment or business. Indeed, a grow-ing number of them recognise that the bestway to attract the capital needed toachieve scale quickly is to �nd potentiallypro�table ways of solving problems.

The third thing that is needed to makephilanthropy better is greater accountabil-ity. Democracy and plutocracy do not sitcomfortably together, and even when do-nors’ money is being spent in non-democ-racies, the democratic world is likely totake a growing interest in what is being

done. The new philanthropists will haveto get used to public scrutiny, cynicismand even active hostility�together with agood dose of Schadenfreude if and whentheir schemes fail.

This should not surprise them. Theyare, after all, making increasing use ofmass-marketing and public campaigns tosupport their causes, as Bono did with hisinitiatives �Make Poverty History� and�One� around last year’s G8 summit, seed-�nanced by Mr Gates and Mr Soros. The�ip side of that is the risk of an equallyhigh-pro�le public backlash if they do notdeliver. But they should persevere, notleast because they are far likelier to makean impact if they can get the public on theirside. And even if some of their projects donot come o�, many will.

One way in which these new philan-thropists are already making a di�erence isby improving the running of a big chunkof society�charities, non-pro�ts, non-gov-ernmental organisations and the socialsector�where amateurishness and ine�-ciency used to be the norm. They are intro-ducing the best techniques from businessand ensuring that market forces are beinggiven a much bigger role. This amounts toan industrial revolution in what Rockefel-ler called the �business of bene�cence�. Ithas only just started, but rich and pooralike should hope that it succeeds. 7

Faith, hope and philanthropy

What the new breed of donors can do�and what it can’t

Future surveys

Countries and regionsChicago March 18th China March 25th South Africa April 8thPoland May 6th

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