The LA Times article on The Gates Foundation investment policy makes a big assumption. It assumes that The Gates Foundation, by owning shares in certain companies, is encouraging whatever misdeeds those companies might be committing. This seems logical at first glance, but I don’t believe it is really that simple.
If you were able to control a foundation with $1 billion in assets, and your goal was to promote a more diverse array of public-spirited media, what tools might you use to achieve that end? And which might be most effective?
- Grants at 5% a year of corpus to start up alternative media
- Buying stock in big media companies and voting the proxies
- Selling stock in big media companies and shunning them
- Studies that might influence regulatory policy
- Lobbying (within legal limits) regulatory officials
- Honors and prizes for good reporting
- Funding education for journalists
- Investing corpus itself via loan and equity in alternative media.
Phil ends by saying:
Buying or selling Viacom, say, or ClearChannel, by contrast seems pretty trivial, or ameliorative at best.
I agree. Let’s create a simplified case study to examine the situation further. Let’s assume that you are operating a private foundation with the mission of encouraging alternative energy use. Let’s further assume that there are only three assets for you to invest in:
- The stock of a fossil fuel company
- The stock of an alternative energy company
- The stock in a neutral company
When you buy stock in a company, you are not paying the company for that stock. Instead, you are buying the stock from another investor. The ownership of the stock only determines who receives the profits of the company, not how much profit the company produces. If you were invested 100% in the stock of the neutral company, the profits of the company (in the form of dividends and higher shares prices) would flow into your foundation and be available for you to use to encourage alternative energy use.
However, if the foundation owned fossil fuel company stock, they would effectively be recycling the profits of the fossil fuel stock into encouraging alternative energy. This seems like an interesting strategy. Except, what happens if some of the foundation’s actions actually undermine the fossil fuel company’s ability to make a profit? What if the foundation helps make alternative fuels more competitive from a cost standpoint and hurts the fossil fuel company’s profit margin? Perversely, the success of the foundation would undermine its ability to continue its work (ie. success=lower profits from fossil fuel=less assets to pursue foundation’s mission).
Investing in the alternative energy stock presents the same problem in reverse. Lack of success by the foundation would lead to less alternative energy use, lower profits for alternative energy companies and lower assets for the foundation (ie. lack of success=lower profits from alternative energy=less assets to pursue foundation’s mission).
In this simplified world, if the foundation invests in a fossil fuel company, then any temporary setbacks to the foundation is met with additional resources provided by the fossil fuel company. Likewise, if the foundation invests in an alternative energy stock, it will only receive additional assets if it succeeds in its mission and any setbacks will be amplified by less and less assets flowing into the foundation.
In addition to receiving the profits, ownership in a stock also gives the owner voting rights over the company’s decisions. If I were running a foundation like the one in our example, I might prefer to obtain voting rights over the conduct of the fossil fuel company than over the alternative energy company with the idea that the alternative energy company are already being run by people who agree with my worldview.
So what’s the right decision? I don’t know. I don’t think there is a right answer. I think that just as every foundation makes grant-making decisions based on what they believe will be most effective in advancing their mission, each foundation should examine their investment policy in the same light.
I think that the mistake The Gates Foundation has made is found in what appears to be their lack of understanding of the impact of their investment policy. I would think that a foundation of their size would realize that the investment decisions they make have ramifications beyond simple risk adjusted return analysis. I agree with the critics who have argued that The Gates Foundation’s suggestion that they don’t have the expertise to evaluate which companies to invest in or avoid doesn’t make sense. The investment of a foundation’s endowment and the disbursement of grants are the core competency of every foundation.
I don’t think that simple “socially responsible investment screens” should be applied to every foundation. SRI investing without any kind of thoughtful strategy by the foundation does more to make the board feel warm and fuzzy than it does to support the foundation’s mission. But I do think that foundations need to realize that their investment policy (both as it relates to company selection and risk/return decisions) is an integral issues that affects their ability to achieve their mission.