Donor accountability and innovation
In July, One World Trust published a report on the accountability of new institutions created to donate large sums for the long-term funding of post-conflict reconstruction and peace-building.18 These 'Multi-Donor Trust Funds' aim is to ensure coherent funding rather than piecemeal, ad hoc cherry-picking of projects by donors, smoothing out lumpy income streams and providing consistency. However, the report argues that as they are multi-million-dollar funds for the reconstruction of a country or region it is also essential that there are adequate accountability mechanisms in place, and provides recommendations for improvement. This was the latest report in an emerging trend to consider 'donor accountability'.
Earlier in the year the former director of a large charitable foundation, Joel Fleishman, published a book that called foundations a 'great American secret' and raised the concern that 'foundations are not, in effect, accountable to anyone'. They are required to file annual tax returns and to give away a mandated percentage of their assets each year, but there is no 'authority' that monitors what they fund, nor do they publish information on their failures. Only a tiny fraction even print an annual report.19
In a book edited by the Ford Foundation's Lisa Jordan and launched at the UN earlier in the year, an agenda for donor accountability was mapped out. This expanded the call made by the UN Non-governmental Liaison Service report on NGO accountability late last year for greater focus on donor accountability.20 Four principles were outlined for more accountable donors. First, donors should seek to make their generation of funds both transparent and more democratically accountable to those affected by the activities involved. This would mean that the assets of charitable foundations should be managed in the most responsible manner, ensuring companies invested in are accountable to their stakeholders. Second, donors should seek to make the administration of their activities both transparent and more democratically accountable. This involves issues such as the governance of the fund, the salaries of the officers and so on. The third principle suggests that donors should enhance the transparency and democratic accountability of their grant-making decisions and of the activities they fund. Therefore applicants and recipients could be given new ways for feeding back to grant-makers. Finally, donors should take steps to influence the regulatory environment in order to ensure support for democratic accountability, and thereby address the broader processes that give rise to the need for giving in the first place.21
As Fleishman's book illustrates, most donors are nowhere near this fourfold approach to their accountability, with many not recognising accountability issues of concern at all, and most not understanding how the way their funds are generated could have as much an impact on the mission they serve as the donations they then make with those funds. One foundation that has come under the spotlight is the Gates Foundation. According to the LA Times:
The Gates Foundation has poured $218 million into polio and measles immunization and research worldwide, including in the Niger Delta. At the same time the foundation is funding inoculations to protect health, it has invested $423 million in Eni, Royal Dutch Shell, Exxon Mobil Corp., Chevron Corp. and Total of France-the companies responsible for most of the flares blanketing the delta with pollution-beyond anything permitted in the United States or Europe.2222 Charles Piller, Edmund Sanders and Robyn Dixon, 'Dark Cloud over Good Works of Gates Foundation', LA Times, 7 January 2007; www.latimes.com/news/nationworld/nation/la-na-gatesx07jan07,0,6827615.story.
In response, the foundation first announced a systematic review of all of its investments to determine whether it should consider divestment from some companies.23 Later, it revoked this pledge and said it would continue its current practices.24 In May, the LA Times kept the Gates Foundation-gate story alive by focusing on Darfur and PetroChina, an oil company in which Gates trustee Warren Buffett owns a large stake via his Berkshire Hathaway company. PetroChina is heavily invested in oil extraction in the Sudan.25
The decision not to change investing practice was explained by the Gates Foundation as follows:
Many of the companies mentioned in the Los Angeles Times articles, such as Ford, Kraft, Fannie Mae, Nestlé, and General Electric, do a lot of work that some people like, as well as work that some people do not like. Some activities might even be viewed positively by some people and negatively by others . . . Shareholder activism is one factor that can influence corporate behavior. The foundation is a passive investor because we want to stay focused on our core issues.26
In other words, every year the Gates Foundation will put 5% of its money to good causes while 95% of its money continues to be asked to do whatever will deliver the returns. Or, simpler still, doing something good with more than 5% of its power is just too 'complex'. Speaking of the problems described in the LA Times as caused by corporate activities invested in by the Bill and Melinda Gates Foundation, its CEO Patty Stonesifer explained that 'it is naive to suggest that an individual stockholder can stop that suffering. Changes in our investment practices would have little or no impact on these issues'.27 Would it be naive for us to think that the CEO of the largest foundation in the world has not heard of the world's leading institutional investors in the UNPRI, accounting for $10 trillion of assets under management, engaging on precisely that agenda and to deliver long-term returns? Or would they be naive in doing this? One foundation that has joined the UNPRI is the Nathan Cummings Foundation. Yet most of the tens of thousands of foundations in the world, and mainstream human rights, development and environment charities, have their funds managed without any attention to responsible investing.28 It would make sense for them all to join the UNPRI as asset owners. If they are not managing their assets responsibly, why should private investors listen to what they have to say on the subject? In September, the UK Social Investment Forum (UKSIF) and Ethical Investment Research Service (EIRIS) teamed up to launch an online resource to help promote charities manage their assets more responsibly, assisting those that are beginning to address the issue.29
If large foundations such as Gates joined initiatives such as the UNPRI, they might learn more about modern finance and explore innovative approaches to creating change. As Fleishman notes, there is a whole field of mission-based investing in development, with venture philanthropy, funding social enterprise, corporate engagement, and using your assets to leverage other private finance into funding the right kinds of business. One project seeking to do this met in Geneva in September. A partnership between WWF and the UNEP Finance Initiative, it looks at how NGOs, donors and private financial institutions can work together to reduce the risk of investing in sustainable SMEs in emerging markets.30 One mechanism they are exploring is whether foundations could use their assets to write letters of guarantee to cover initial losses of private funds invested in social or sustainable enterprise, and thus reduce the risk profile sufficiently to drive more private finance into those businesses.
Once foundations become more engaged in mission-based investing, and using their assets in new ways, perhaps they might even stumble across a way of making leveraged buyouts or short-selling a progressive activity. Perhaps one day, when the necessary procedures and insurances are worked out, large philanthropic foundations could lend stock to activist not-for-profit hedge funds, charging no interest but requiring a percentage of profits, so the hedge fund could short-sell companies that don't help the achievement of the foundation's mission? Lessons could be learned from Karmabanque, which is currently running an ethical activist hedge fund.31