A presumptuous (and presumably brave) Roman once took the Emperor Tiberius to task for drawing revenues from the public lavatories of Rome. The sensible potentate held a coin under his nose, sniffed and said, with eminent quotability, ‘Non let.’ Meaning, ‘It doesn’t smell.’
Two thousand years later the charities and foundations of Britain and America are much more advanced. They think their money comes up smelling of roses. At least they did until recently; and they were traditionally happy to leave the asset management to professionals.But that may change. Recent events have reminded people that the fiscally and politically privileged position of charitable foundations has attractions beyond the joys of philanthropy. For example, the Barings debacle focused attention on the little advertised detail that the bank was wholly-owned by a charity – and not for entirely charitable reasons. The Baring family had been scared of nationalisation and the possible introduction of a wealth tax under Harold Wilson, so they vested ownership of the bank in a perpetual charitable trust which they could control through a self-perpetuating board.
To be fair, it did eventually put truth in the rumours of its charity, which was putting $20 mn a year into innovative lines of philanthropy by the time its major asset evaporated on the derivatives markets. That did not, however, force the partners running the bank to stint themselves. Peter Baring’s last annual pay cheque alone approached $2 mn.
In the US, one of the main reasons the Ford Foundation was started was to keep the Ford Motor Company in the hands of the family. On the other hand, John D MacArthur left his billion dollar fortune to a foundation so that his heirs wouldn’t get any of it. This approach, which in the UK might be called the Battersea Dogs Home gambit, doesn’t always work. Comedian W C Fields left his money to found a home for orphan boys that would eschew all religious principles, but his estranged wife successfully contested the bequest because of its implied support for atheism. The church-state thing hadn’t quite been worked out in those days.
Although Barings may now be down to dogs home dimensions, thanks to Leeson’s charitable donations to currency speculators, there is still plenty of money in those collecting cans. In 1991, American not-for-profit organisations had an asset base of 11 per cent of GDP, or some $615 bn. The grant-making foundations – such as Ford and Rockefeller – had $180 bn worth of assets and gave away $38 bn.
Foundations are typically quiet investors, avoiding the activist example of the infamous Calpers and its brethren. Some do have certain scruples about investing in companies engaged in the vice business but most carry no particular charter for shareholder democracy so rarely rock the boat of corporate management. Rather, they tend to leave voting to the money managers, or in the case of incestuously tied foundations, to managements themselves. So, for example, the Nuffield Foundation loyally kept its holdings in the founder’s businesses right up to the bitter end when British Leyland’s valueless shares went off the road.
On the other hand, the more canny Wellcome Foundation accepted Glaxo’s offer for its shares in Wellcome despite the views of the company’s management (advised by Barings, incidentally) and in defiance of the terms of the founder’s will.
In practice, charitable organisations seem to have little brief for social activism and there are plenty of examples of foundations happily drawing dividends from tobacco companies only to give the proceeds to healthcare research. But the times are a-changing. Traditionally, supporters of good causes would divest themselves of an offending company’s stock, but a small band of activist foundations is now voting it instead.
For example, last year the Jessie Smith Noyes Foundation, subject of a Harvard Business School study, moved shareholder resolutions to get Intel to talk to local environmentalists about the consequences of expanding its New Mexico chip plant. Other organisations and churches joined in to give a 5 per cent vote – with a further 8 per cent abstentions – which forced the company to promise a code of conduct on information.
The usual objection to such policies is that they compromise the fiduciary duties of trustees to get the best returns from their investments. Steve Viederman, president of the Noyes foundation and the leader of the Intel proxy campaign, protests that the Domini 400 Social Index – which screens its portfolio – has consistently outperformed the S&P 500. Noyes has $55 mn in assets – looked after by money managers who know what it wants. Viederman says that in the course of the Intel proxy fight, he met foundations who were pleasantly surprised to discover that they could tell their managers how to vote their holdings.
On both sides of the Atlantic, there is growing disquiet at the burgeoning powers and perks of corporate managers, who sometimes reward themselves in inverse proportion to the success of their efforts, often with the help of loyally quiescent shareholders, like foundations. But as governments try to shift more of the state’s financial burden onto the not-for-profit sector, its need to maximise revenues will grow. Perhaps that will lead to charities and foundations joining mass upsurges of green activists at meetings and combining forces with Calpers and others to try to purge inefficient managements.
After all, bigger dividends are good news for any foundation; and charity does begin at home.
The Speculator
