The Gates Foundation & Policy Coherence

January 10, 2007

The ongoing series of reports in the LA Times about whether the investment practices of the Bill & Melinda Gates Foundation conflict with its grantmaking goals rings some familiar bells: It is the private philanthropy version of the “policy coherence” debates that regularly make an appearance at the OECD/DAC, among development advocacy groups and – yes – in our own research and analysis here at the Center for Global Development. CGD’s Commitment to Development Index is, at its heart, a means to capture the indisputable fact that the impacts of wealthy countries (and, by extension, wealthy individuals) come not just from development aid and philanthropic good works, but also from their economic policies, with trade and investment being among the most important.

In the public policy sphere, the incoherence – doing lots of good with the one hand, and not so much good with the other – is relatively easily explained by the effects of politics: Many constituencies wield influence and so when their interests do not align, politicians and political institutions often respond with a set of policies that can act at cross purposes. The push for greater public policy coherence is a noble one where progress can be made, but it will always be an uphill battle. In the private domain, however, where only a few individuals are responsible for decisionmaking, the potential for genuine coherence is far greater.

Is it too much to expect that foundations, which exist to promote public well-being, would think as carefully about the impact of their investments as they do about their gifts? In response to the LA Times investigation, the Gates Foundation has issued a public statement on their investment strategy, and it is certainly not alone in separating its philanthropy from the management of its endowment; this is standard practice for many foundations. But as the biggest and richest of the lot, the Gates Foundation is a natural target for special scrutiny. What they decide to do, if anything, will likely have important implications for others.

UPDATE: According to an interview with the Seattle Times, the Gates Foundation is planning to systematically review the social impact of its investments, with the LA Times weighing in on the broader significance of this decision. The Gates Foundation subsequently revised its original public statement (linked to above) to reflect these plans.

Full disclosure: The Center for Global Development receives financial support from the Bill & Melinda Gates Foundation, as well as other foundations, governments, corporations and individuals.

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1. Ben Elberger Says:
   January 11th, 2007 at 9:25 am

   Ruth’s point on policy coherence is an important one and it is entirely reasonable to expect a private foundation such as Gates to be able to centralize their policy better between investments and programmatic activities. Even at the state level, states such as California have moved towards policy coherence by committing themselves to environmental sustainability through hybrid car incentives and investments in green buildings (through CalPERS, the biggest public pension fund in the US).
   However, it may not be entirely obvious what the most appropriate strategy Gates should take to achieve policy coherence. Is it appropriate to have disinvestment or divestment policies to prohibit investments in certain companies causing social harm? Should sectorwide screens be used? What constitutes social harm and how direct must it be (see the recent Sudan divestment campaign around the Darfur genocide as case in point of grassroots and investor mobilization against companies with important, though indirect, ties to the genocide)?
   It is not clear to me that the Gates Foundation would be creating the most social good by screening their investments and removing all companies that produce social harm (i.e. polluters). In fact, there may be a better role for them as leaders in proxy voting and/or proposing shareholder resolutions to effect change in company behavior. History has strongly suggested that even relatively small minority support for shareholder resolutions (2%-10% of all voting shares) can greatly impact a company’s behavior.
   Should Gates be investing in Altria (Phillip Morris)? Probably not. Smoking is a major public health problem and it will be hard to convince Altria to shut down their tobacco operations via shareholder resolution. But, there may be a role for the Gates Foundation as an active shareholder of companies such as BP (already one of the more socially conscious companies in petroleum) and Royal Dutch Shell in pushing stronger environmental standards that protect developing country communities.
   I imagine there will always be debate on what is too heinous a social harm for a socially responsible investor to have their funds in (pushing shareholder resolutions, proxy voting, speaking with management about concerns) vs. disinvestment and divestment policies. But, the counterfactual of Gates investment may not be much better. If Gates did not invest in oil companies, would these companies fold for lack of capital? Probably not. Would their share prices fall? To some degree, the answer is probably yes. But investors will fill the gap and it may just be better to have a socially responsible Gates Foundation voting poxies, pushing shareholder resolutions, and talking with management about their social harms than screening all of these companies out in the first place.

2. Josh Busby Says:
   January 11th, 2007 at 8:58 pm

   I agree with Ben’s comments above, though the LA TIMES suggested that the Gates Foundation has not been an especially active investor through proxy resolutions. As I posted on our blog http://blogs.law.harvard.edu/politicshiv/, I think the LA TIMES stories were written with an agenda to make the Gates Foundation look bad by cherry-picking instances of questionable behavior by firms in which the Gates Foundation had invested.

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