Dateline: January 8, 2007, Chicago
We read the L.A. Times story this past weekend about the investment policies of the Bill & Melinda Gates Foundation with a fair degree of ambivalence. Charles Piller, Edmund Sanders, and Robyn Dixon, Dark Cloud Over Good Works of Gates Foundation, L.A. Times, Jan. 7, 2007. We certainly understand where the critics of the Gates Foundation’s investment policies are coming from and welcome a spirited debate on this difficult and complex subject. Unlike many quoted in the article, we have never been big fans of reducing investment returns on endowment to meet...
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social objectives.
If a foundation wants to fund program-related investments, that is perfectly appropriate. For example, some charities provide low-interest micro cap loans to help low-income individuals start businesses. When it comes to endowment, however, we believe a foundation should first assess its risk tolerances and spending needs, and then seek to maximize investment returns with those parameters in mind.
The Times article is lengthy and straightforward. It begins with a discussion of Justice Eta, a 14-month old, who lives in Ebocha Nigeria. Thanks to the Gates Foundation, Eta has received his polio and measles vacination. As the Times points out, Eta is also subject to respiratory trouble because he lives near an oil plant which is spewing fumes and soot into the air. And guess who is financing that pollution? According to the Times, the Gates Foundation is because it has invested $423 million in Eni, Royal Dutch Shell, Exxon Mobil, Chevron, and Total of France, companies that operate facilities in Niger Delta, home to Eta. That $423 million is out of a $31 billion endowment.
This article also has an extensive discussion of the difficulty experienced by people in developing countries in paying for drugs that treat AIDS. It then notes that the Gates Foundation invests in Abbott Labs, one of the pharmaceutical companies that developed and profits from these drugs.
A second article reports on what it views as an apparent inconsistency between Gates Foundation donations to a Seattle nonprofit that counsels victims of predatory lenders while investing in financial institutions that make sub-prime loans. See Charles Piller, Money Clashes With Mission, The Gates Foundation Invests Heavily in Sub-Prime Lenders and Other Businesses that Undercut Its Good Works, L.A. Times, Jan 8, 2007.
The articles and the people quoted in them reflect the idealism of a college freshman. What is particularly disturbing about the two articles is the anecdotal treatment of a difficult and complex subject. Lone individuals are pitted against giant corporations and a foundation. In each case, the individual’s story is incredibly sympathetic. However, the stories don’t deal with the basic issues posed by a market-driven world. If Abbott Labs doesn’t provide its shareholders with an adequate return on the shareholders' considerable investment in financing the development of new drugs, there won’t be new drugs. The article notes that Abbott has cut the price from $8,000 a year to $500 a year in Nigeria and $2,200 in Guatemala and Thailand on one drug, but then quotes a Northwestern University professor asserting that the effect of the pricing structure is “pharmaceutical apartheid.”
The article does quote some advocates who focus on socially responsible investing. They argue that there are plenty of socially responsible investments, so any large foundation should be able to obtain market rate of returns without investing in the villians and dregs of the corporate world. We are highly skeptical about this reporting. Although we have not made a career out of reviewing social investment programs, we have looked at some of these funds in the past. The ones we have seen underperform benchmark returns. The Times statistics undercut our limited expereince, but in one case, the Times focused on a 12-month period at a time of a rising market. That is too short of time horizon to measure the results of what should be a long-term investment strategy. In anotherr case, the Times focused on the S & P 500's return. That, in itself, poses a slight problem because the S & P 500 includes some of the villians that the Times condemns. Moreover, the whole point of portfolio management is to beat a broad market index like the S & P 500. We would like a lot more detail regarding the review of the literature undertaken by the Times. Was that review independent, or was it guided by those who were critical of the Gates Foundation?
As we said at the outset, we are sympathetic with those arguing in favor of socially responsible investment. We certainly wouldn’t suggest that any director who voted in favor of a socially responsible investment program has breached his fiduciary duties. In fact, the National Conference of Commissioners on Uniform State Laws recently adopted the Uniform Prudent Management of Institional Funds Act. Although not specifically mentioned, Sections 3(a) and (e)(1)(H) contemplate and in our view sanction "socially responsible investing," assuming that such action is not inconsistent with the donor's intent. However, in our view, this is a sucker’s game that will lead to never ending debates, and demands by those who believe they are socially responsible and need to convince the world that they are right.
Exxon is an easy target. But should a U.S. foundation avoid investing in any company that outsources jobs to China or India? Should it avoid investing in chain restaurants because their portions are large and contain too much salt, sugar and fat, leading to obesity? Drug companies seem to be out of the question, as are defense contractors Companies that deal in basic materials seem to be out of the question because they rob the earth of its resources. REITS are also out of the question because they finance urban sprawl. In short, people with particular leanings can find fault with virtually any company. Meat packing? Aren’t the vegetarians unhappy about that? As for defense contractors, maybe not those who supply weapons for the war in Iraq, but what about those who supply weapons for the war in Afganhanstan?
This is a fool’s game.
We have been reading Peter Watson and Cecelia Todeschini’s excellent book, The Medici Conspiracy: The Illicit Journey of Looted Antiquities—From Italy’s Tomb Raiders to the World’s Greatest Museums (April 2006)--expect a full review when we complete it. The book condemns the tomb raiders and dealers in looted antiquities, but in the end, it lays the bulk of the blame on museums and collectors, the institutions and individuals who create the demand for the objects that the raiders and dealers are only trying to satisfy.
Exxon and other companies are clearly not heroes in the story the Times tells. However, the Times and those whom it quotes seem to have forgotten that it is the American public that creates the demand for Nigerian oil. Yet, no one acknowledges that dynamic. Nor do they recognize that the American public believes it has the god-given right to oil from developing nations at the lowest price possible. Remember last summer when gasoline was hitting $4 a gallon? Nobody in the United States was too worried about education or health care for the general population in the OPEC nations. The blame does not fall entirely on the Gates Foundation.
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