From Charity to Change: A Dynamic Approach to Building a Better World
By Joe Dougherty
On the first day of December, Mark Zuckerberg and Priscilla Chan celebrated the birth of their daughter, by announcing their intention to direct 99% of their Facebook shares to a new philanthropic venture, the Chan Zuckerberg Initiative, which will seek to “advance human potential and promote equality.” The announcement was met with a fair amount of criticism, mostly centered on the couple’s decision to make the Initiative a (potentially profit-making) corporation rather than a private foundation, like the Bill & Melinda Gates Foundation. Critics like ProPublica’s Jesse Eisenger point out that Zuckerberg and Chan did not donate to charity but rather, “created an investment vehicle” which is subject to fewer legal restrictions than a nonprofit or a foundation and thus leaves Zuckerberg “completely free to do as he wishes with his money,” including investing it in profit-making ventures. This observation is certainly true… and it was certainly a good move for Zuckerberg and Chan, if they truly wish to advance human potential and promote equality.
Here’s why: Charity, traditionally, is how the social sector helps meet a need that government or private companies don’t address — like sheltering the homeless or helping former prisoners find jobs, for example. This type of direct charity is important and, unfortunately, still very necessary. But most foundations — even well-established ones like the Rockefeller and MacArthur Foundations — have long since moved beyond traditional charity to seek lasting social change. Instead of just feeding the homeless or helping former prisoners, they are also addressing the root causes of homelessness and asking why so many people are in prison in the first place. Rather than perpetually filling the gaps left by government and markets, modern philanthropists are exploring whether governments and/or the private sector can permanently close those gaps. This is old news, and most people would agree that it makes more sense to look for sustainable solutions rather than stop-gap measures — in other words, philanthropy should not simply apply band-aids to society’s wounds but rather, help create a healthier society.
Matters get more challenging when the approaches to social change move away from making grants — the traditional activity of foundations — to creating new business models or lobbying for changes in government policies. Foundations are prohibited both from generating profits and from lobbying governments. Specifically, private foundations in the US are barred from holding more than 20% ownership in any for-profit enterprise, made to pay a special excise tax on any investment income they happen to earn, and prohibited from making ‘risky’ investments, including in promising new social enterprises. They are also not allowed to fund political action committees (PACs) or even to publicly express their views on a specific piece of legislation.
There are valid reasons for these restrictions, and private foundations undoubtedly do much good in the world through their traditional grant making. But many of the most important changes in our society have come about, not because a foundation made a grant, but either because a government adopted more enlightened policies or because someone found a way to make money by addressing an unmet need. Disabled persons enjoy much greater access to society than they did before 1990, when the Americans with Disabilities Act was passed. The Community Reinvestment Act has mobilized $620 billion in loans to lower-income communities since it was passed in 1977 — far more than any foundation could have done on its own. Both of these laws were passed as a result of intense lobbying efforts. The rapid and widespread adoption of cellphones among the poor in developing countries, which has improved the quality of millions of lives, was not a result of grant making. It happened because profit-seeking companies provided a service that people found valuable.
In fact, no improvement in social welfare can ever really be sustainable if it depends solely on charity. Lasting solutions must involve either markets, government, or both. So anyone who is serious about effecting large-scale and lasting social change — as Chan and Zuckerberg seem to be — would be wise to employ a flexible, multi-sector approach, which the Chan-Zuckerberg Initiative represents. Making big changes also means taking risks and courting controversy, which Chan and Zuckerberg have also clearly done. Launching a foundation to fund traditional charities would have been a much safer bet for them, both in terms of positive press and lower taxes, but safe bets rarely achieve big impact.
Joe Dougherty is a Lecturer at the Haas School of Business and a Partner at Dalberg Global Development Advisors, based in San Francisco
