Take It to the Limit

 In Culture, Family, Foundations, Fred's Blog, Fred's Blog, Giving, Money, People, Philanthropy, Technology, Young Givers

William Barstow was an enterprising partner and friend of Thomas Edison, as well as an inventor and highly successful entrepreneur in his own right. One night in 1931, Barstow and his wife, Francoise, sat around their table as usual, discussing new ideas. They had been wrestling awhile with how to structure a substantial gift that would allow them to make donations without setting up a trust or a private foundation – both of which were primarily reserved for only the wealthiest families in the country at the time.

The Barstows worked out an arrangement with the young New York Community Trust to create a vehicle that would give them most of the benefits of a private foundation and very few restrictions. As well, it had the added advantage of immediate tax relief but with an allowance for time to make decisions about when and where to place the gifts. The Barstows called it a Donor Advised Fund, and it was the first in the country.

The idea was so new and unusual – and probably not considered true philanthropy at that time – that it was another four years until a second donor advised fund was established at the same community trust. Today, less than a century later, there are almost 250,000 donor advised funds that last year received about $20 billion in contributions and paid out $13 billion. That one disruptive creation has over time been one of the most significant changes in philanthropy in America. While it was not understood – even disdained by other philanthropists at the time – it changed the game. It opened up giving to a much wider universe of donors.

You know where I am going with this, of course. Many traditional philanthropists and pundits are feeling the same about the decision of Mark Zuckerberg and his wife, Dr. Priscilla Chan. Many feel that if the couple truly wanted to make a genuine gift then they should have set up a private foundation or joined others in the Giving Pledge. But to structure their initiative (and that word is important) as an LLC has been met with disappointment, mistrust and even a sense of betrayal on the part of nonprofits who see an enormous windfall slipping away, as well as those who are afraid the couple have managed to evade legitimate taxes. I don’t think that is it at all. I think neither of them care much about the charitable deduction, and I seriously doubt they did this for tax objectives. There is something deeper here, and it is tied to the word “initiative.” Zuckerberg and Chan want to accomplish something, and they have used the example of Pierre and Pam Omidyar to set up the LLC as a way to get maximum control, flexibility, privacy and policy influence to do that.

In a sense, as radical as it seems, the Giving Pledge (founded in 2010 by Warren Buffett and Bill and Melinda Gates) is a way to convince people to leave something at the end of their lives. Yes, that is a step in the right direction even though many of those taking the Pledge have simply formed their own private foundations, which will only delay the bulk of the giving for decades. I think Buffett and Gates have encouraged people to make a moral decision about the proper uses of great wealth and I applaud them for that.

However, in spite of the backlash, I think Mark and Priscilla have opened a new way for those with great wealth to fund a mission that is more than redistributing wealth to another private foundation. It is a creative – even if surprising and to some disappointing – way to accomplish a mission. It is an initiative and not simply a tax strategy. It is not a true disruption ala Clayton Christensen, who describes disruption as “a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.”

That is what the the Barstows did in inventing the donor advised fund. I seriously doubt this innovation will make a dent in the larger philanthropy market, but it is another major innovation in a history of creative innovation and change in American philanthropy.

Walter Wriston, the former chairman and CEO of Citicorp, said, “Capital will always go where it’s welcome and stay where it is well treated. Capital is not just money. It’s also talent and ideas. They, too, will go where they’re welcome and stay where they are well treated.” That is true not only of investment capital but philanthropic capital as well. What we should be doing instead of dissecting the flaws and missteps of this initiative is thinking seriously about how we can create places and vehicles that will welcome money, talent and ideas. We can step out with creativity, initiative, and sense of designing to accomplish – not just looking for ways to increase the pool of traditional philanthropic dollars.

Will they make mistakes? Of course, and some may be similar to those made by the Annenberg Challenge that essentially wasted $1 billion on the failed Annenberg Challenge to reform public schools. The $100 million Gates Foundation-funded student data project failed and was closed down.

There is no shortage of illustrations of major failures. However, I think Russ Hall of Legacy Venture is right when he says, “It’s a pathway to philanthropy rather than philanthropy. It’s a wonderful tool for what he can do later with his philanthropy.” It is a pathway but also a pathmaker for those to follow. Let’s see where it goes.

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