Philanthropy and Investment: The Distinctions Begin to Blur

I grew up believing that ‘philanthropy’ and ‘investment’ were two distinct things and not to be confused. They both serve the public, but in different ways; investment in business by [hopefully] producing worthy products at enough profit to make a good living for employees, executives, and entrepreneurs. [Milton Friedman is wrong; “maximizing shareholder value” is not the main purpose of a business. The main purpose of a business is to fulfill its calling. The Widget Company’s calling is either to make widgets, or provide in some new form the service that the widget used to perform. But a business is not ‘sustainable’ {ah the chance to use a green word!} without profit.] And non-profits serve the public by doing those things that are good and useful but where a sustainable profit cannot be had, by totally or partly relying on donations.

There have been attempts to blur the distinction in the past. One example is Girl Scout Cookies. If you buy them, it helps the Girl Scouts. But I don’t think Girl Scout Cookies are all that great as cookies, and I don’t think they are actually baked by authentic Girl Scouts. If I like Girl Scouts, why shouldn’t I give tax deductible money to them, and go out and buy Mrs. Fields?

Another more complex example is called the Charitable Annuity. One gives a large sum of money to a charity and it does not spend it on itself, but manages it for you and gives you the income back. Why is a charity in that kind of business?! They’re supposed to be handing out blankets, upholding America’s founding principles, preaching the Word of God, or whatever. What are they doing in the trust company business? And, fixed income annuities are not the best investments in a democracy, in which, as my Dad used to say, inflation is inevitable. What is a charity doing assuming responsibility for this? There exists an alternative called the Charitable Remainder Trust – you can set up a fund with a trust company where you get the income but your favorite charity gets the lump when you’re dead. And your favorite charity doesn’t have to run it. But apparently the tax advantages are, or were, not so good as for the Charitable Annuity. I guess with the Charitable Annuity you get your tax deduction right away. And with the CRT the deduction waits until you die. Or something.

But now, increasingly, things are advanced to us that seem to fall somewhere in between; from microenterprise to cultural product, things are being marketed as ‘investments’ that are not likely to make much money. [Indeed, many people nowadays use the word ‘investment’ as much for a charitable donation as for a purchase of stock or of participation in a deal.] We buy “Fair Trade” coffee. Foundations are allowed under certain circumstances to make “Program Related Investments” [PRIs]. We can pick our own microlendees on the internet. There is now a thing called Kickstarter that enables us to give money to artists and creators – including designers of adventure video games, which it seems, is part of popular art nowadays. And the legal format of Kickstarter ‘investments’ is vague at best.

In the last couple of years, new legal forms have appeared to acknowledge the new situation. Maryland started with the L3C [Low-profit Limited Liability Corporation], and on January 1, 2012, two new forms of corporation came to California, both similar to the L3C: the Flexible Purpose Corporation, and the Benefit Corporation. [The latter sounds like an attempt to make a hybrid between business and the college fraternity or Elks Club.]

Of course, cynics might be disposed to say that at last an honest format for structuring Hollywood films has come along! Creative ‘Hollywood accounting’ has long seen to it that most involved in the actual work of making a movie live well, while only the greatest blockbusters return real cash to ‘investors.’ Developers often attempt to structure real estate deals the same way, but at least in real estate there is usually a piece of real dirt under all of it, which is not usually the case in Hollywood.

One of the reasons for these legal structures, if I read rightly, is to protect the leadership of these corporations from being sued for not following Milton Friedman’s maxim, as I referred to above, of “maximizing shareholder value” above all things. It would be nice if corporations could serve the public consciously. At the same time, one thing I do agree with Milton Friedman about is, why do the corporations, qua corporations, do philanthropy? Why cannot the shareholders of ever increasing value, and the outrageously compensated executives, do philanthropy with their own money that they got from the corporation? Is that not good enough?

I’m afraid I’m too old, myself, to get enthusiastic about the idea of hybridizing ‘philanthropy’ and ‘investment’ in a single company or ‘investment’ opportunity. I am not necessarily going to impose my philosophy on a younger ‘millennial’ generation that thinks differently. The one thing I would have to say to these ‘millennials’ is, be very sure about your expectations. Don’t ‘invest’ in one of these hybrid projects and spend your future anticipated income!

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