Financing charity with for-profit enterprises | Managing Leadership

Doing well from doing good

Some time ago, Google’s founders made the news for a unique approach to philanthropy: they set up a for-profit charity. This is a very intersting idea, and warrants some comment.

First of all, public shareholder-owned companies have no business engaging in philanthropy at the direction of senior management alone. Management’s role is to maximize shareholder value; everything it does needs to serve that end, or it shouldn’t be doing it. The argument can be made that corporate philanthropy serves a vital public relations role, but this is pretty difficult, of course to quantify. That’s why Google’s idea of for-profit philanthropy is attractive. Doing good while recovering - and earning an economic rate of return on - your capital is probably a good compromise between the critics of “heartless” commercial capitalism and those of “mindless” compassionate capitalism.

But the executive director of the charity, Dr. Larry Brilliant, has commented that while it would be nice to see such enterprises (those funded by the charity) make a profit, he really doesn’t care if they do. If he doesn’t care, he can be assured that they won’t, so why opine that they should?

In general, the executive director of any organization should have a clear picture of its financial goals, and should communicate them clearly and with an awareness of the audience being addressed and the consequences of that communication. If, indeed, the emphasis is on social returns, the question becomes, who empowered the senior management to use shareholder money for that purpose?

If the founders want to do this, and retain sufficient control to cause the imperative to come from the board of directors, then management must follow the direction it is given. But shareholders who wish to see their money invested in philanthropic ventures would be well advised to invest it directly on their own; those who want a financial return on their investment would do well to place that investment in a firm that knows what sort of returns - financial or social - it wants, and cares what sort it gets.

Philanthropic institutions are not well served by management - whether originating in profit or non-profit organizations - that lack financial discipline. Both their intended beneficiaries and their donors tend to be disappointed by the waste resulting from such goal-less ill-discipline. Google would be well-advised to consider more carefully the consequences - including the PR consequences which they perhaps presume can only be good - of this venture. If it is a new for-profit model, then don’t apologize for it: celebrate it, and work to make it a model that works best for everyone from beneficiary to donor/investor.

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