Zuck Rules: Rethinking Philanthropy in 2016

As we head toward 2016, there was perhaps no bigger story in the nonprofit world in the past year than the news that broke regarding Facebook founder and CEO Mark Zuckerberg. He and his wife Priscilla Chan announced their intent to donate nearly their entire fortune to charity.

Priscilla Chan and Mark Zuckerberg

This was notable, not only because of the end — an incremental $45 billion can have a significant impact on the nonprofit sector — but the proposed means. Chan and Zuck intend to drive social change in a manner that eschews traditional chartable giving and instead embraces impact investing. Its a whole new way of operating — call it “Zuck Rules” — that literally could reimagine how we donate to those in need just as Facebook reinvented how we interact with each other.

Oil tycoon John D. Rockefeller whose philanthropy continues to this day through his many charitable vehicles

In the last century, robber barons used philanthropy to reinvent their reputations at the tail end of the careers. Individuals such as Carnegie, Ford, and Rockefeller may have used some questionable tactics to secure their wealth, but charity gave them a free pass. Indeed, their foundations have contributed enormous public good in the generations since their passing. Society is stronger for their work.

So it’s a wonder that Zuckerberg and Chan have been criticized with such fervor for his extraordinary commitment to donate almost his entire personal fortune to charity. Some have lamented that his purported LLC structure could evade the responsibility of a classic 501-c-3. Others have critiqued him for not explaining his specific plans while earning massive PR boon. Some have wondered whether it is sensible that a single individual should direct the flows of such a fortune rather than others well versed in how to steward the public interest. And a few have used this moment to opine the consolidation of wealth and power in among a handful of Americans.

Talk about failing to see the forest through the trees.

To be clear, they may be playing by “Zuck Rules,” but the couple aren’t the first to use different models to make an impact. Pierre Omidyar, the founder and former CEO of eBay, together with his wife Pam, together pioneered the use of the LLC structure in this manner when he established the Omidyar Network 15 years ago.

ON is their financial vehicle that mixes classic for-profit investing alongside classic charitable giving. In order to keep two check books in the same desk, the Omidyars discovered the LLC was necessary to provide flexibility because the tax code is structured with assumptions about avoiding tax evasion rather than maximizing altruism. [Full Disclosure: ON invested in the company that I co-founded, Ethos Brands, which produced Ethos Water, sold to Starbucks Coffee Company in 2005]

Pam and Pierre Omidyar, founder of eBay, pioneered the use of the LLC structure to facilitate a hybrid model of achieving social impact, one that combines conventional charitable giving with for-profit investing, aka “impact investing”

Zuck clearly has learned this lesson. Yet even if they did not invent this idea per se, I think we cannot overstate what their decision represents. The Chan-Zuck gift is not conventional charity. Instead, its consistent with Millennial values — make an impact at an early stage in life even as you seek to make a living.

Let’s hope that this gesture at such an early stage in his life will motivate others in his demographic cohort to find inspiration. Sure, nearly every person on the planet has less money to give away, but they still can take inspiration from the Zuck-Chan gift. Each person can find ways to use his or her unique personal gifts or skills to make a dent in the universe at a young stage in their lives.

Contrast this to the prior generation. Warren Buffet eared tremendous admiration when, almost 10 years ago, he entrusted Bill and Melinda Gates to use their foundation to donate his fortune — but he did so in the twilight years, not its early innings like Zuckerberg. And this is consistent with the patterns of philanthropy that have prevailed for generations. Zuck’s statement reflects a sea change.

Some have derided Zuck for his prior $100m gift to the Newark school system that did not create lasting change. But his $100MM bet was not a capricious one. It was an experiment — and apparently he has learned from it. To read his letter, the insights gleaned from this experience seem to have informed his intent to apply a smarter management model and to use all the tools in his disposal to create the change he wants to see in the world. Failing fast and learning from the experience might not impress armchair quarterbacks and other critics, but its actually how effective entrepreneurs build better products and more successful businesses.

Indeed, perhaps more than anything, Zuck also made an incredibly important statement when he noted that he plans to use charity and investment to make his impact, joining the ranks of impact investors and social entrepreneurs who are reshaping markets and rewiring the planet. This is a titanic change whose importance cannot be overstated.

It is undeniable that markets can have a major impact on the complex challenges facing the planet. From addressing inequity to tackling bigotry to empowering youth, there are many issues whose solutions demand layered models that likely mix business and nonprofit. This is not about “slacktivism” or corporate social responsibility. This is about harnessing the forces of innovation and entrepreneurship that power our economy to tackle our most pressing problems.

Just a few years ago at Davos, Gates himself noted that he didn’t think you should mix the two disciplines. Yet even Gates has leaned into the reality that there are multiple models for maximizing impact: this week he announced a climate fund.

Microsoft founder Bill Gates and investor Warren Buffett have combined their resources to drive more philanthropic giving than any other foundation on the planet — and recently have modified the investment strategy around their endowment to ensure that all their financial resources are aligned with their stated social purpose.

And the Gates Foundation, itself a pioneering model of social good, has shifted its longstanding approach to managing its endowment by simply seeking to generate the highest rate of return. It quietly has re-calibrated its investment portfolio, shedding energy holdings that contribute to climate change that the foundation works to avert through its grant-making. This shift seems to reflect Gates’ intent to ensure that his investments complement rather than potentially contrast with its foundation values.

Yet Gates used his vast fortune to reinvigorate the existing philanthropic model. So it’s astounding to think that the Chan-Zuck LLC promises to bring even more capital to bear than the first incarnation of the Gates Foundation — but to do so through a very different model. Their embrace of market-based innovation literally could expand impact investing in an almost exponential manner.

The policy world is catching up. The Office of Social Innovation at the White House heralded a series of changes intended to facilitate this work. Recent regulatory changes by the Treasury Department will make it easier for philanthropic endowments to use their funds for good.

Labor Secretary Tom Perez has helped to augur change by reforming ERISA to facilitate the ability of pension fund managers to engage in “impact investing” that drives economic value and measurable social/environmental benefit

And the Labor Department recently announced that it would reform ERISA to allow fund managers to make investments that maximize social benefit along with economic return. This has enormous implications for more than private pension fund managers — all classes of asset managers watch ERISA carefully so this reform could unlock a tidal wave of new capital flows into the field.

Even the G8 and many of its member governments have applauded the rise of impact investing with its 2013 Summit wherein it committed to this emerging phenomenon. And the SEC’s implementation of the JOBS Act offers the promise of facilitating crowdfunding at scale by allowing ordinary people to invest in early-stage companies. If Millennials do so and track to their values, they could fund the next generation of social enterprises.

It will be fascinating to see how Zuck designs Philanthropy 2.0. Does he listen to his friend and the first president of Facebook, Sean Parker, who wrote about Hacking Philanthropy?

Entreprenuer and investor Sean Parker has advocated for “hacking” philanthropy

Parker’s philosophy is interesting — extracting learnings and lessons from Silicon Valley and applying them to the social sector is long overdue. We need to see an Uber or Airbnb or Facebook that can innovate old models and upend existing systems to create meaningful change. This could be very healthy — and there may be no one better positioned than Zuck to unleash those forces.

And those forces are real. Zuck’s legendary success has inspired legions of his fellow Millennials generation. His hoodie has become an emblem of the Hacker Generation — and now they may follow suit and learn from his desire to change the world. Imagine if even a few of his fellow founders from the so-called “Unicorn Club” adopted this approach. The infusion of energy and resources literally could reshape the social sector.

At the same time, these successful startups leverage existing infrastructure and harness long-standing platforms. So when we hack philanthropy, this should not imply solely a DIY culture. There are long-standing institutions in the social sector that are ripe for reinvention.

A handful of organizations have attained scale, a critical determinant of impact. Others have established a track record with a heritage of real accomplishments. And a few have amassed reservoirs of experience and insight. Finally, there are a rare handful of groups bring all these attributes together. Such institutions and their assets are highly hackable and could yield enormous upside. Indeed, if such firms can adapt and evolve to the Zuck world, there is an opportunity for truly transformational impact.

In his first act, Zuck demonstrated the power of imagination and the capacity for change. Despite the critics — and there were many — his relentless drive and extraordinary vision changed the world. As he now turns that same drive and vision toward the social sector, the hybrid structure and wide berth of his LLC could invert how we think about charity and restructure personal philanthropy as we know it.