THE GLOBAL OUTLOOK FROM INFLECTION POINT CAPITAL MANAGEMENT

Philanthrocapitalism:a new philanthropy
movement

inflection
points M
VOL 1 N° 7 • 13 APRIL 2011

INVESTMENT FUNDS

Philanthropy’s Bermuda Triangle
Inflection Points asked Stephen Viederman, retired president of the Jessie Smith
Noyes Foundation and presently a member of the finance committee of theChristopher Reynolds Foundation, for his views on the power of philanthropic
foundations to utilize their investment funds for change.
If you wPatthew Bishop and Michael Green produced
their influential book Philanthrocapitalism in2008. The book examined the emergence of a newphilanthropy movement based around the giving
pledges of Bill Gates, Warren Buffett and others.
Philanthrocapitalism proposes a new approach tosolving social problems, based on innovative
partnerships between business, nonprofits andgovernment. Rejecting the idea that business isabout short-term profits, philanthrocapitalists
think the economic winners should
give back and that business can“do well by doing good.”

ant to succee
avoid ‘business asd in business,usual.’(Fortune cookie accesshilanthropic foundations are like old-fashionedslot machines. They have one arm and are known for theiroccasional payout. Their finance committees manage theirendowments like investment bankers. Their portfolios give no hintthat they are institutions whose purpose is the public benefit.

ed March 26, 2011)

Although it is twenty years since the term “mission-related investing” foundits way into the lexicon of philanthropy, the practice is limited. There is achasm between mission – grantmaking – and investment. The logic of asynergy between the two has yet to take hold.
For example...
A number of reports circulated in the US and the UK in the last few years
laid out ways that foundations can “win the war on climate.” The focus wasentirely on grantmaking. None made any reference to the various ways thatassets could be used to add value to their grantmaking. My op-ed in theChronicle of Philanthropy, pointing out the ways that assets could help “winthe war” went unanswered by the authors of the reports and by foundations.
Among the 25 biggest climate funders very few have climate investments,
but one is an active shareowner on climate issues.
US philanthropy is a big enterprise with over $500 billion in assets.
Unfortunately share ownership is not taken seriously. Investing to avoid
predictable and preventable surprises is smart investing. Voting proxies andfiling resolutions is an ownership obligation rarely exercised.
The Bermuda Triangle of foundation investing seems to swallow up discussions of assets as an instrument of change. On one side of the triangle is theboard and investment committee; the second is the investment office; and thethird is the consultant. Their views on finance, formed in the same businessschools, see reality – the world as it is – as an externality, and intangible.
Water availability and utilization, climate change, human rights, working
conditions, diversity on boards are issues not factored into their investment
decisions, which are made for the short-term, as if the future did not matter.
In the foundation setting, as in their day jobs, their awareness is bounded bywhat they have learned with few incentives to change.
> continued overleaf

Bishop and Green propose a“Philanthrocapitalism Manifesto”
that includes a focus on the power ofinvestment. They state in their manifesto“Foundations should be leading the social
investment movement through active ‘missionrelated investment’ of their endowments. A few,
such as the Tudor Trust and Esmee Fairbairn
Foundation, are leading the way but mostfoundations still think of their endowments as asource of investment income to fund grant-making
rather than a strategic asset that can be used forsocial benefit. American foundations like FB Heronare showing the way.”
The authors recommend that a proposed 5%
payout rule for foundations being considered in theUK could also be structured to give credit for social
investments to encourage the use of endowments
as a pool of social investment capital.
They specifically call on government to use tax andother incentives to promote mission-related
investment by foundations.
IPCM will examine impact investment in our next
investor note. In the meantime we recommend thebook, which has recently been updated:
www.philanthrocapitalism.net
Matthew Bishop, who is
the New York editor of theEconomist, moderated thediscussion at IPCM’s annual“Club of Davos” dinner at theWorld Economic Forum in Davos,
Switzerland, in January 2011.Little time is spent in meetings on new ideas, leading to what has been called“willful blindness.” And yet these same people after work and on weekends
are often very eleemosynary, devoting their time and money to organizations
seeking to remedy these issues. Vocation and avocation are split, as demonstrated by the philanthropy of Bill Gates and Warren Buffet.
Within the triangle outdated views of fiduciary duty prevail. The myth ofunderperformance is pervasive. Maximizing alpha, the old-fashioned way,takes precedence over benefit to meet the public good, and to harmonizing
investments and grantmaking. These are complementary not conflicting
activities.
Michael Jensen and his colleagues at the Harvard Business School are studying organizational integrity, “that group’s or organization’s word being wholeand complete.” The concept incorporates morality, ethics, and legality. Their
model “reveals a causal link between integrity and increased performance,
in whatever way one chooses to define performance (for example, qualityof life, or value-creation for all entities).” Harmonizing mission and asset
management, becoming whole, is an organizing concept to improve thepractice of philanthropy.
For the moment business continues as usual. Though claiming integrity,
foundations often fail the wholeness test. The pessimist sees the glass mostly
empty, while the optimist sees it filling. The hopeful say change must occur,and it cannot come too soon.

ABOUT US
Inflection Point Capital Management is a new, sustainability-driven asset
management boutique. A research-driven organization, IPCM builds on the knowledge
base and networks of its predecessor company, Innovest Strategic Value Advisors.
Innovest was ranked by the Thomson Extel survey of institutional investors as the #1
research firm in the world in the sustainability space. IPCM has offices in London,New York, Toronto, and Melbourne. www.inflectionpointcm.com
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MAKING A DIFFERENCE

It can be doneby Stephen Viederman

As president of the Jessie Smith Noyes
Foundation in the early 90s I worked withmy board to “reduce the dissonance” between ourgrantmaking and our asset management. We
screened our portfolio, which was state-of-the-art
at the time; filed a shareowner resolution with Intelin support of our grantee, the South West
Organizing Project, as well as with other companies
on environmental issues; voted all our proxies; andhad our own social venture capital partnershipseeking to invest in companies that were providing
commercial solutions to the issues we were dealing
with in our grantmaking. Our performance matchedor exceeded the standard benchmarks we used tomeasure how were doing. And during the decade
our payout averaged 7 percent each year, well above
the IRS requirement.
I have also served on the Board and FinanceCommit tee of the Needmor fund and the financecommittee of the Christopher Reynolds Foundation
during the last decade. Both funders view theirportfolios through a sustainability lens and takeseriously their ownership obligations. Performancehas been competitive.
The F.B. Heron Foundation, whose mission is tobuild wealth in low- income communities, “seeks toacceler ate the level of its assets invested in efforts
with strong financial and social returns.” They too
have had competitive returns since initiating theirprogram in the late 90s.
Keith Johnson describes institutional investors aslemmings, following each other in more or less of alock step. Philanthropy needs a lead lemming thatwould be of fairly large scale with a good solid
reputation within the community to create a newmodel of investing for all. There are a few baby
lemmings that might grow up to be a leader, but it isstill too soon to be sure how they will mature.
The World Economic Forum observes in its report,
Accelerating the Transition towards Sustainable Investing:
Strategic Options for Investors, Corporations and other
Key Shareholders, the great transformational power offinancial markets to accelerate the transition to moresustainable business practices and value creation.
Foundation assets can make a difference.