When Investments Conflict with Philanthropy

PhilanthropyThe John D. and Catherine T. MacArthur Foundation last month made headlines around the nation for unveiling the latest winners of its ?genius? grants.

Weeks earlier, the Chicago-based philanthropic institution, one of the nation?s 10 largest private foundations, also was in the news, but this time the story wasn?t so flattering. Bloomberg News reported that the MacArthur Foundation was one of several institutional investors in a private-equity fund that bought into a company that had a network of payday-lending websites.

Payday lenders have been restricted or banned in most states, accused of preying on working people who struggle to make ends meet. The investment was more than just an embarrassment for MacArthur. It represented a conflict for the foundation that has a history of supporting programs that help people living in poverty.

MacArthur?s investment highlights a striking paradox in the philanthropic community. Charities give away money to improve the world but sometimes make investments that harm it.

The controversy was magnified in 2007 when the Los Angeles Times reported that the Bill and Melinda Gates Foundation owned stock in several oil companies with plants in Nigeria whose pollution was linked to respiratory disease and cancer. At the same time, the Gates Foundation had spent $218 million on polio and measles immunizations in Africa and other countries.

The contradiction between mission and money doesn?t make sense to people inside and outside philanthropy circles. Why would a foundation fighting global warming own stock in oil companies? Why would a charity that supports health organizations also invest in tobacco stocks?

The answers lie in the fiduciary duty foundations have. Many foundations like MacArthur focus on maximizing financial returns to increase grant-making dollars. To achieve the best returns possible, foundations often put up firewalls to make sure investment managers are independent from the grant-making side of the organization.

In a statement, the MacArthur Foundation said it maintains a diversified investment portfolio designed to achieve ?strong risk-adjusted returns.? The foundation, which has a $6.3 billion endowment, awarded $228.4 million in grants last year to address issues ranging from juvenile justice to housing to economic development.

The foundation said its investment approach ?maximizes the philanthropic support we can provide to hundreds of creative and effective organizations addressing critical challenges in Chicago, across the nation, and around the world.?

But as issues of climate change, corporate governance and social responsibility become more acute, the investment strategies of philanthropic organizations are under more scrutiny. Critics of the maximizing-returns philosophy argue that philanthropic foundations should consider the total consequences of their investment activities.

Clara Miller, president of the F.B. Heron Foundation in New York, asserts that foundations ?have a duty that goes beyond the typical investor.?

About 14 years ago, the F.B. Heron Foundation began to invest its $300 million endowment in securities that would advance its mission of helping people escape poverty. For example, the foundation invested in a private equity fund that provides capital to growing companies that are either located in or hire a large percentage of their workforces from low-income communities in California.

?We serve the public, and we have a fiduciary duty of obedience to our mission to make sure all of our assets are doing the best job they can in service to the mission,? Miller said.

Source: MCT Information Services