Advisors: Help protect precious nonprofits by avoiding these four mistakes
Why Warren Buffett is wrong about charitable giving
Benjamin Valore-Caplan, CIMA, is a registered investment advisor who broke away from UBS in 2008 to provide a higher level of counsel to his clients under Syntrinsic Investment Counsel LLC. His practice specializes in providing financial advice to foundations, endowments, philanthropic families and faith-based institutions.
In the 1970’s, the owner of a processing plant traditionally gave each employee a turkey for Thanksgiving as an expression of appreciation. One year, in the midst of contract negotiations, the union reps added the turkey into the total compensation package.
The plant owner insisted that the annual turkey was a personal expression of thanks— in short, a present — rather than an entitlement. The union dug in its heels. Realizing that his gift was no longer seen as an act of kindness, the insulted owner ceased providing the Thanksgiving turkeys altogether. In this case, only the turkeys won.
We are concerned that the nonprofit sector — one of America’s most dynamic sectors — is under attack by the very community it serves. There are at least four actual or potential policy shifts that have emerged that could potentially undermine if not dismantle the incentive system that has made charitable giving an indispensable part of American life.
Mistake 1: Reduce Tax Deductions for Charitable Giving
Early in 2009, the tax deduction on charitable giving was capped, reducing the tax benefit of charitable gifts for taxpayers in the highest tax brackets. At first, we thought it simply a misguided attempt to boost short-term tax receipts. But a flurry of white papers and articles lauded the change, claiming that tax deductions have no material impact on charitable giving. One think tank claimed that tax deductions for charitable giving are subsidies to the wealthy since they can take a larger deduction than others who give less or do not give at all. It takes a lot of intellectual gymnastics to view a tax deduction for a charitable gift as a subsidy in the pejorative sense, but clearly there are some policy wonks who are quite flexible.
Mistake 2: Force Foundations and Endowments to Increase Annual Spending
Senator Charles Grassley, Warren Buffet, and Pablo Eisenberg in last Saturday’s Wall Street Journal have all clamored for foundations (and in some cases endowments) to spend more money now rather than protecting their long-term spending power. For Grassley, Eisenberg and others who seem to advocate changing government policy after donors have made their gifts, we find their audacity rather shocking regardless of their intentions.
They, like Buffet, appear to be motivated at least in part by a genuine desire to see problems solved now, to see money spent on current needs rather than endowing the ability to address needs into the future. For Buffet, he is the donor of his money so it is his call; we would never step between him and his intent. But since he has been so public in his denunciation of perpetual time horizons for foundations, we’d like to call some of his thinking into question.
We find it most curious that Buffet would run his philanthropic business so differently than his commercial business, Berkshire Hathaway. Imagine Buffet buying Burlington Northern, then announcing to the public that he was giving the company 10-15 years to realize its full potential, then liquidating the businesses before he dies. How would shareholders feel about that business strategy? Would they be impressed by his business acumen? How likely is it that Burlington Northern would prove to be a winner?
Why, then, would it be reasonable to expect hunger, poverty , or other intractable problems to be solved simply by throwing tremendous dollars at the problem over a short time frame? What if the best way to address hunger proves to be crafting a multi-generational solution that requires constant funding? If so, then Buffet’s “spend it now” strategy seems short sighted.
Complex problems require a long-view. Managing a perpetual time horizon for philanthropic efforts is one of the few ways in America that we actually plan for the needs of future generations.
Mistake 3: Set racially and/or economically-based quotas for board membership of foundations.
Several groups believe that the boards of foundations should reflect the communities they serve in racial and economic composition. There are numerous permutations of the argument, but the bottom line is that some believe that there should be federal or state control of foundation board membership.
Wow. Imagine any other sector where government officials can mandate trusteeship. Even corporations in sectors that benefit significantly from government as funder/customer/protector (e.g. banking, agriculture, transportation, information technology, aerospace, health care, etc.) retain ultimate control over their boards. In what other industry would we formally reduce qualification for board leadership to anything less than the ability to serve as effective fiduciaries of the organization? Why don’t we mandate that the Senate and the House (let alone every government agency) take the exact same steps, subverting qualifications for demographics?
The biggest disconnect about this concept is the presumption that some people deserve the right to run organizations funded by someone else. How many families would fund foundations if they lost control of the ability to select the most appropriate board membership? What would happen to community foundations and other public charities if their leadership were set by demographic quotas rather than by sound judgment, technical expertise, and loyalty to the mission?
Mistake 4: Empower the government to determine how foundation monies should be spent.
We recently attended a nonprofit conference where some nonprofits expressed the argument that too much charitable giving goes to universities, museums, arts organizations and religious organizations rather than to organizations directly addressing poverty, hunger, homelessness and similar concerns. Some of these nonprofit leaders believe that if the government directed how foundation money could be spent, then their organizations and constituents would benefit. By extension, “less worthy” charities would receive less.
How presumptuous! Sure, we’d all be happy to decide where all of the country’s charitable giving should go. Oligarchy seems compelling when you are one of the oligarchs. That said, absolute power corrupts absolutely, so maybe having a few people set spending policy for the rest of us is not such a good idea. Charitable giving is such a large part of our economic and social system precisely because people can give to those causes that most resonate with their personal ideals and values. Take that freedom away and ask yourself, “Why should people give? How would government directed philanthropy be any different than what we already do through payment of taxes?”
Taking it a step further, we would strongly call into question the accuracy of “academic” papers that claim human services receives little funding. How do you classify a gift to a university that funds a scholarship to an otherwise disenfranchised student? Or funds a professorial chair for research into hunger or arms control or women’s rights? What about a church that funds a soup kitchen or provides economic assistance to unemployed congregants? The alleged research strives to organize infinitely complex social matters into simplistic boxes. Should we use this research to radically alter philanthropy, then bad social policy would be the result.
All four of these mistaken arguments assume that private donations should be controlled by the general public, and that the government is a better allocator of resources than the private sector. We strongly disagree. Sure, we have witnessed mismanagement and inefficiency in the philanthropic sector; yet at the end of the day, we believe that American philanthropy is generally innovative, thoughtful, and responsive to local, national and global needs. That character has arisen in large part because donors, trustees and philanthropists have a stake in making their gifts count.
We are in a state of economic crisis. Fear and scarcity can lead us to make poor policy decisions, some of which would cause irreversible harm. As we seek to stimulate genuine, sustainable economic growth, let’s protect the essential role that philanthropy plays in crafting a vibrant, compassionate society in which everyone has the opportunity to serve. Private generosity is the result of a system that rewards individual initiative and promotes collective responsibility. Stifle either one, and we will be the poorer for it.
Editor’s note: Some people might not consider the finer points of foundations and charitable giving to be a core issue for financial advisors. I asked Ben Valore-Caplan, the author of this article, to offer a few points of explanation to reinforce the idea that indeed members of the advisory community are well-served to be well-versed on this subject. Here are the points that he made:
1. Many private clients express their values through charitable giving to religious organizations, educational organizations, and human service and environmental organizations. Thus, it is important for advisors to speak with their clients about their charitable intent as a part of getting to know them. Also, some Advisors may choose to assist their clients in thinking through how they structure their charitable giving, becoming a resource for discussing the challenges and benefits for direct giving, donor advised funds, private foundations, charitable trusts and other giving instruments.
2. While most advisors do not seek out nonprofit institutional clients, it is important for them to understand the issues such organizations face in the event that they advise a few. Even small institutions can be profoundly impacted by the challenges outlined above; thus it is imperative to understand them.
3. Many advisors are asked to serve as board members or committee members of nonprofit organizations and are expected to bring a good level of financial acumen. When volunteering in this capacity, it is essential to understand the business risks that affect the nonprofit sector and to help the nonprofits one serves manage those risks.
Syntrinsic Investment Counsel, LLC
RIA Serving Endowments/Foundations
Top Executive: Ben Valore-Caplan, Managing Partner
You call demanding a turkey digging your heels in? What do you call demands for PT0, health care, and pensions? Those dirty workers with their unions and their need for security. How dare they resist the notion of working until the day they die? Benjamin, you are what’s wrong with our country. Taking power away from the government is the same as taking power away from the People. What makes you think there is anyone more fit to determine the fate of the People than the People themselves? Your capitalist propaganda is dangerous to democracy.
I think we are all best served by focusing on the facts rather than pointing fingers at each other as to whether our problems are due to “the capitalists” or “the liberal elite”. Let’s discuss, with open and strategic minds, the merits of the issues, the nature of the problems we are trying to solve, the intent of the solutions, and so on. I believe Buffet is simply saying that there is something fundamentally wrong with creating endowments with money today, and giving a tax break today (from tax payers collective wallet), but then allowing the money to be used in future generations when these future generations did not contribute to the endowment, nor experience the lost taxes offered as a tax credit. The money and the benefit should be experienced by the same generation that comprised the wealth and offered the tax credit. Furthermore, we have problems today, as a reflection of today’s shortcomings. Let’s fix them, and recognize that there will be future donors and philanthropists to help fix future problems. And to be clear, when we talk about acting “today”, it does not preclude a longer-term solution because we do not restrict the meaning of today to be literally a consideration of just a short term solution. Ben, I would be curious to hear some of your thinking about why holding money back for later generations is relevant to today’s society which comprises this wealth, and offers the current tax credits.
I agree that reducing tax credits is likely taking us in the wrong direction. Instead, I feel that we should have different classes of tax credits, with a higher tax credit for those charitable organizations which truly help those in need (and perhaps a lower tax credit for non-profits which are not addressing current social problems, such as 'the arts’, Ivy league universities, and so on).
I find it interesting that America, as the riches nation (per capita) with the greatest freedoms, is not one of the top ten most happiest countries in the world: http://www.thehappinessshow.com/HappiestCountries.htm . Why is this? There is something wrong in the assumption that wealth and capitalism leads to the best outcome in life (health and happiness). I also suggest an interesting read, “Civil Society” by Michael Edwards. He makes some good arguments about the role of government (not too much, and not too little). I think this starts to focus the discussion on possible solutions….for whatever political stripes we each wear.
Hilary – with all due respect, it’s not Benjamin but rather you and others who think like you that’s what’s wrong with this country. Our “citizen” sector of non-profits and philanthropists who support them is a unique and effective structure which has worked for decades to better our society (if you don’t think so take a look at the nascient non-profit sectors in China or much of socialized Europe) – - and Benjamin makes some excellent points that the current tide may well serve to significantly diminish the good this sector can deliver moving forward.
It’s not surprising given the current political environment that the liberal elite see the philanthropic sector as yet another that should be taken under the centralized control of the PEOPLE = = my only question is don’t we have enough to do already now that the PEOPLE control the banking and auto industries and will soon control the delivery of health care as well ??