June 25, 2018

Philanthrocapitalism in the Age of Charitable Billionaires

Philanthrocapitalism in the Age of Charitable Billionaires

Recently, Carl Rhodes and Peter Bloom asked the question of whether “philanthrocapitalism” was really “corporate hypocrisy” in disguise. In the resulting article for The Guardian, “The trouble with charitable billionaires,” they discussed the “CEO society:” a society where the values associated with corporate leadership are applied to all dimensions of human endeavor.

It is a thought-provoking read and an interesting perspective. Still, having spent almost my entire career in the social versus profit-maximizing sector, I am inclined to view entry of the super wealthy into “our” space—many of whom came by their fortunes honestly as opposed to entitlement—as a positive development, and one that, given their vast resources, holds out enormous potential. There is one caveat: those resources must be deployed to the end of improving life on the planet for everyone, especially the disadvantaged. As such, I view philanthrocapitalism as a new way of approaching philanthropy writ large: one that involves making investments with the intention of maximizing social return.

A response to this might well be: “Well, that sounds a hell of a lot like impact investing.” Perhaps, but there is an important difference. Impact investing involves making investments with the intention of generating a financial return while creating social impact. Impact investing is not philanthrocapitalism and I believe the conflation of the two ideas is the mistake that Carl Rhodes and Peter Bloom make in their article in The Guardian.

This is best illustrated in the way we increasingly see impact investors pour money only into investments that offer good value for money. In 2015, a J. P. Morgan impact investor survey found that most private investors (55 percent) seek to earn “competitive, market rate returns.” Another 27 percent aim a little lower but hope nonetheless to receive returns “closer to market rate.” Philanthrocapitalism, on the other hand, means investors must subject their potential beneficiaries to the same rigorous vetting process as an impact investor seeking to make profit, but with the sole difference that there is no expectation of a return. This is absolutely crucial. And it is why I believe philanthrocapitalism to be something far more ideological than Rhodes and Bloom describe.

One may well ask, how then does philanthrocapitalism fit with the idea of “market-based” solutions to poverty? The idea behind a market-based solution to poverty is that it endeavors to harness the power of market forces to drive delivery of products and services in all the sectors critical to improving the standard of living of the poor, namely energy, water and sanitation, education and healthcare, to cite the most obvious. The key approach here is to deliver products and services that are both highly effective and affordable to those at the bottom of the pyramid. Hundreds of new social enterprises are springing up in this space. These companies have much higher odds of scaling-up and reaching larger numbers of beneficiaries since at some point in their life cycle they can access capital markets. If a social enterprise is not yet financially sustainable but shows potential for achieving at least break even, philanthrocapitalism can serve as the “angel” to provide zero-cost equity during the early phase. In other words, grants. Clever social enterprises will provide “right of first investment” to the philanthrocapitalists fearless and generous enough to back an idea before it has a clear roadmap to profitability, so that when that day dawns they will be financially rewarded for what began as a strictly social investment.

Similarly, subjecting a non-governmental organization to the kind of rigorous risk-reward testing that is done to a potential business investment can provide greater assurance to a donor that their funds will be deployed in the most effective way. Equally, by offering no guarantee of financial return, the money is more likely to be directed to the neediest causes without the danger of misallocation in the chase for profit.

While more and more capital is moving towards sustainable investment, the “new” “sustainable” investors are really the same players that we have always seen in financial markets. For these investors to consider themselves philanthrocapitalists, a change in approach is required: rather than seek short-term gains, they must look to create long-term impact while conscious that they may see no returns at all. The best kind of social investments are end-to-end, and the best kind of social investors stay committed until they are no longer needed. Over my 33 years at FINCA, I have learned that pulling the financial rug out from under the feet of those who still need help can leave them worse off than when they started.

The philanthrocapitalist mindset is one that “charitable billionaires” must adopt. Applying business acumen to charitable activity is not a sin unless the desire for greater profit starts to creep in at the expense of the social good. Though we have seen free market capitalism act as a catalyst to the widespread alleviation of poverty around the world (indeed, we are currently living in an age when levels of poverty are the lowest the world has ever seen), there will always be a need for socially conscious investors to enter the world of development and use the tools of business while leaving their notions of profit at the door.

All this is not to say that Rhodes and Bloom completely miss the point. There is no doubt it is highly dangerous to allow the wealthy and influential to monetize the charitable sector, and there are certainly initiatives that are not as “charitable” as they might at first appear. But this is a question of encouraging proper scrutiny. If we allow the idea that philanthrocapitalism is inherently cynical to set in and spread, then we are not bringing to bear all our possible resources, including our creativity and our analytical thinking, in the search for sustainability in the war against poverty.

Originally posted on LinkedIn.