June 2014

The Leyendecker View

Rethinking Philanthropy

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"Billions are wasted on ineffective philanthropy. Philanthropy is decades behind business in applying rigorous thinking to the use of money."
- Michael Porter

Publisher: Douglas Leyendecker
Managing Editor: Kelly Griego

Welcome to the Leyendecker View
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"Effective philanthropy requires a lot of time and creativity - the same kind of focus 
and skills that building a business requires."

- Bill Gates
In 1998, Avon partnered with a humanitarian organization to raise money for breast cancer research. Avon functioned as a sponsor, and the partner organization oversaw the planning and fundraising for their annual headline events: three-day walks in various American cities to raise money for breast cancer research. In 2002, Avon abruptly ended the relationship and pulled all sponsorship; the CEO of the partner organization was in hot water for his nearly $400k annual salary and for the fact that his company spent 40% of donated funds raised on overhead. They were being maligned in the press, and Avon felt it needed to distance itself from scandal.
Last decade, the Gates Foundation committed $700 million to wiping out polio. After much criticism, in 2010, Bill Gates and his team had to admit that their plan wasn't working. Their approach had been "vertical," with a sole focus on polio vaccination. They repeatedly ran into contextual circumstances that were impeding the impact of the vertical approach. Clinics in Nigeria weren't getting the vaccines because the government lacked a viable supply chain. In India, poor sanitation and other intestinal issues were impeding the vaccine's efficacy. With costs approaching $1 billion, many were beginning to ask if money had been wasted from a lack of preparedness and lost time.
Economist and author Dambisa Moyo, a native of Zambia, is among a chorus of outspoken critics of aid to Africa. Moyo believes that the stream of aid from foreign governments and celebrities enables African leaders and governments to evade accountability for solving the issues that affect their citizens. She argues that it also contributes to the breakdown in the relationship between the citizen and country by training African nationals to wait for handouts from outside sources. Moyo feels that Africans deserve more than a scenario where whole societies depend on celebrities for policy and the wellbeing of their children.
More and more, charities have come under scrutiny in recent years for various questionable issues and actions. Points of criticism range from high executive pay, to a lack of transparency over the use of donated funds, and failed initiatives that can cost in the hundreds of millions, criticized for their imperial, top-down approach without sufficient cultural sensitivity or respect for the entire socio-economic environment.
How can philanthropic donations - the generous fruits of capital markets and for-profit work - be put to better use? 
Consider this. Dan Pallotta is an entrepreneur in the humanitarian activist space. His company, Pallotta Teamworks, fundraised for health research. In 1998, he partnered with a large company to raise money for breast cancer research. Pallotta took a less traditional approach to fundraising. For example, he eschewed the typical philanthropic standard of seeking free advertising in low-reach outlets, and instead would spring for the full-page ad in The New York Times, believing that such an investment would generate an ROI far greater than the cost savings of asking for a free ad.
Using a more traditionally business-minded approach to investing in advertising, marketing and fundraising, Pallotta Teamworks was able to take an initial investment of $350k and in five years, multiply it 554-fold, raising $194 million after expenses for breast cancer research. In 2002, they had their best year, netting $71 million after expenses for research.
That same year, their partner - Avon - pulled the plug. Pallotta was in hot water for his nearly $400k annual salary and for the fact that his company spent 40% of donated funds raised on overhead - things like salaries to attract the talent he needed to generate such impressive returns on marketing and advertising. Pallotta Teamworks was being maligned in the press, so Avon felt it needed to distance itself from scandal.
Later that year, Avon attempted, on their own, to recreate the 3-day walks in various American cities. Avon's overhead went up, and the funds they raised dropped by $60 million, or 84%, in one year.
The "scandal" looks a bit different now.
This experience inspired Pallotta to take up arms for a new cause: Pushing for an entirely new way of thinking about philanthropy - in short, a for-profit way of thinking about it.

In his TED Talk, Pallotta suggests there are two rulebooks, one for the for-profit sector and one for the non-profit sector. He believes the non-profit sector is discriminated against in five ways:

  1. Compensation: As Pallotta points out, the idea of people making money off helping others is viscerally unsavory to us. This so-called system of ethics creates a mutually exclusive career choice between doing well for yourself and your family or doing good for the world. Most choose the private sector, as most are unwilling to make an economic decision that, under today's non-profit rules, will greatly diminish their lifelong earning power (a decision Pallotta deems pragmatic and smart).  
  2. Advertising and marketing: The private sector is encouraged to spend boatloads on advertising and marketing because we know it can generate a huge return. Yet the non-profit world can be accused of misuse of funds for pursuing the same ROI. 
  3. The taking of risk on new revenue ideas. For-profits are encouraged to experiment and take risks because it is accepted that finding successful revenue models is a process of trial and error. Follow that practice in the non-profit world and your character is called into question. This fear of failure prohibits innovation, which is necessary to solve large-scale problems. Non-profits categorically miss out on innovation in the name of self-preservation.       
  4. Time: Amazon operated for six years without returning any profit to investors, who waited patiently in the pursuit of Bezos' grand vision of market dominance. Non-profits must prove results rapidly or be accused of wasting time and funds, which squeezes out opportunities for grand visions in helping people.
  5. Profit to attract risk capital: The for-profit sector has access to the stock market and can offer dividends in the name of attracting capital for new ideas. Meanwhile, the non-profit sector is starved for growth and new idea capital.
As a composite situation, non-profits are greatly disadvantaged. Pallotta cites our Puritanical roots as the cause for the thinking that got us here. The Puritans were aggressive capitalists, but they were also Calvinists, indoctrinated to believe that self-interest was a surefire path to hell. To offset their guilt, Puritans turned to charity as an "economic sanctuary" where they could do penance for their profit-making. If charity was for penance, it had to be immoral to make money on it.
This ideology is policed by the question about how much charitable money goes to cause versus overhead. Pallotta takes two issues with this question:

  1. It assumes overhead, which is an accounting catchall term, is somehow inherently negative and separate from the cause. 
  2. It forces charities to forgo parts of overhead that are necessary for growth, and instead put a cap on funds and apply them directly and swiftly to the cause.
It's clear that philanthropy, as it is practiced today, is imperfectly executed to some degree. But perhaps most solution-seekers are searching within the current paradigm - the one entrenched in our 400-year-old Puritan beliefs about philanthropy and penance. Philanthropy productivity will remain stuck so long as the thinking remains stuck. Perhaps philanthropy is due for an evolution.
What if the Gates Foundation was allowed the same six-years afforded Bezos to experiment with various approaches to eradicating polio? What if there was an acceptance that some failures are inevitable on the road to solving really big humanitarian problems, and that some money might be lost along the way? As Pallotta asks, should the goal be to keep overhead low?
What if aid to Africa went not to direct handouts, but was invested in creating a market economic environment with the requirement that profits be directly invested into that country's economy? What if governments felt accountable to this process and nationals felt like they had some skin in the game and an incentive to keep a watch on their governments?
Thanks to the wealth creation that capitalism enables, there are trillions of dollars out there that could be donated to philanthropic causes. And despite the flaws of philanthropy, there's no doubt this money could greatly improve the lives of millions, maybe billions. Perhaps it's time for some outside-the-box thinking. Even philanthropy can use a shake-up now and then.
We don't know the answers here. So in this TLV, we'll look at philanthropy's current state and leave it to your sharp brains to ponder. 

"True philanthropy requires a disruptive mindset, innovative thinking and a philosophy 
driven by entrepreneurial insights and creative opportunities."

- Naveen Jain
General Economic Perspectives
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The United States has a new economic catalyst.
A Boston investor suggested to me not long ago, "Oil and gas is the new Internet." My initial reaction to this perspective was fear; "Oh my, when Boston thinks Houston is the place to be, then maybe the trend has peaked." But upon further reflection it seems obvious our energy infrastructure will require several years of private sector investment. It will continue to be needed to fund transportation and processing assets to support increased natural resource production.
Private sector investment is a much more powerful and productive economic catalyst than government stimulus, which has arguably been the engine of our economy since the 2001-2002 recession. Let's not forget that last decade's housing boom was not just government stimulated, but it also proved to be an exercise in economic alchemy.
Until today, we haven't seen productive private sector investment increase with such fervor since the 1990s when companies were building out the foundation to our current technology and telecommunications infrastructure. It may have taken over a decade, but we now have a new productive economic catalyst. Increased production of oil and gas provides the opportunity to decrease the cost of transportation and power for both businesses and consumers. This puts money into everyone's pockets, money that can go to higher wages, more consumption and further private sector investment.
It's quite possible the wealth redistribution trend in media and politics is about to wane. As more people benefit from today's natural economic catalyst, there will be fewer people with their hands held out. Self-esteem builds much more quickly when one experiences personal accomplishment over dependence on government support. And as confidence grows, so too does economy. 
We could quite possibly be in the middle innings of a longer positive economic trend in the US, a decade long boom inspired by this fortunate new natural resource bounty. Having more self-sustainability in energy, and the boom's waterfall economic effect, provides the US with an enormous advantage over our competitors in Europe, Japan, China, India and the better part of the world.
But we must not forget a very important perspective...no one is taking the word "cycle" out of the dictionary any time soon. This too will pass. How we put our new good fortune to use is likely where policy needs to focus today. 
The Hiring Market
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The overall job market keeps improving, not just in the new boom areas of shale energy, but also more broadly around the country. One might suggest the new oil and gas boom is having a significant waterfall effect all around the country.
Many recent economic projections make the case that since our last recession, household formations have significantly trailed the historical trend. A greater than average number of young people are still living at home, unable to find the sort of employment that will give them confidence in "settling down" to marriage and families. Should our current natural resource boom catalyst continue its positive influence, we could see household formations increase. This has historically increased the demand for home purchases, which is a catalyst for the production and consumption of all those things one puts in a home. Any increase in home purchases would lift employment even more, which should eventually lift wages, which would lift overall prosperity.
Economic trend is made at the margin. Today we have a catalyst improving the margin. What we may learn, which maybe we should have already known, is that both economic expansions and contractions tend to feed off themselves. Although many might object to the Federal Reserve's easy monetary policy, so far it has kept our economic engine alive long enough for a new natural catalyst to pull the train.
Managing the Modern Day
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A good friend of mine often talks about the "tyranny of good intentions." As an African native, he has an on-the-ground perspective of how charity can actually hinder the productivity that "necessity is the mother of invention" creates.
Data today suggests hundreds of millions of global citizens have been lifted out of poverty over the last couple of decades. This didn't happen because of philanthropy. It happened because technology and innovation, combined with a global market-based economic system, allowed the natural forces of economy to spread prosperity globally. 
If necessity is truly the mother of invention, then might philanthropy be an obstacle to prosperity? There are always the less fortunate, those at the wrong place, wrong time, or those with less than the perfect genes, upbringing, guidance and/or support. But isn't this the way Mother Nature works? It takes necessity, not charity, to be the mother of invention. Let's remember the adage that what doesn't kill us only makes us stronger.
As a contrast to this issue's look at philanthropy, maybe we also need to consider how charity can be a drag on productive change. Does Africa need charity, or does it need a more balanced market-based economic system? Do Africa and other "third world" countries need democracy, or do they need to build a foundation of economic opportunity? Does democracy create prosperity, or is it economic opportunity that creates prosperity, which leads to democracy?
When we consider the consequences of charity - the immediate, but often short-lived relief of individual burdens - might we also need to consider if we are holding back people's own natural instinct to improve the world around them? When considering charity, maybe we should focus more on the carrots that drive productive behavior rather than handouts that drive corruption, lethargy and dependency.
BLS Corner
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The Bureau of Labor Statistics just released their annual Time Use Survey. Some key findings:
  • Employed persons worked an average of 7.6 hours on the days they worked. More hours were worked, on average, on weekdays than on weekend days - 7.9 hours compared with 5.5 hours.
  • Many more people worked on weekdays than on weekend days: 83% of employed persons worked on an average weekday, compared with 34 percent on an average weekend day.
  • On the days they worked, 83% of employed persons did some or all of their work at their workplace and 23% did some or all of their work at home. People spent more time working at the workplace than at home - 7.9 hours compared with 3 hours.

Household Activities
  • On an average day, 83% of women and 65% of men spent some time doing household activities such as housework, cooking, lawn care, or financial and other household management.
  • On the days they did household activities, women spent an average of 2.6 hours on such activities, while men spent 2.1 hours.

Leisure Activities
  • On an average day, nearly everyone age 15 and over (95%) engaged in some sort of leisure activity, such as watching TV, socializing, or exercising. Of those who engaged in leisure activities, men spent more time in these activities (5.9 hours) than did women (5.2 hours).
  • Employed adults living in households with no children under age 18 engaged in leisure activities for 4.5 hours per day, about an hour more than employed adults living with a child under age 6.
  • Watching TV was the leisure activity that occupied the most time (2.8 hours per day), accounting for more than half of leisure time, on average, for those age 15 and over. Socializing, such as visiting with friends or attending or hosting social events, was the next most common leisure activity, accounting for 43 minutes per day.
  • Men were more likely than women to participate in sports, exercise, or recreation on any given day - 21% compared with 16%. On the days that they participated, men also spent more time in these activities than did women - 1.9 hours compared with 1.3 hours.
  • Time spent reading for personal interest and playing games or using a computer for leisure varied greatly by age. Individuals age 75 and over averaged 1 hour of reading per weekend day and 20 minutes playing games or using a computer for leisure. Conversely, individuals ages 15 to 19 read for an average of 4 minutes per weekend day and spent 52 minutes playing games or using a computer for leisure.
Chart of the Month
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Last month, we did a chart that showed the top ten most and least charitable states (including Washington DC), as measured by average individual charitable donations for 2011 (the most recent data available; charitable donation data is pulled from individual income tax filings and excludes political donations). May's chart follows for reference.

Thanks to a reader for a suggestion to make the chart more interesting - to look at how each state's (including Washington DC) 2011 per capita average charitable donation measured up to its per capita income. This chart shows the 10 most and least charitable states as a function of each state's per capita charitable donation as a percentage of its per capita income. The number before the states in the chart below refers to its per capita charitable income ranking (the ranking system used in the above chart).
Texas, which was 16th in 2011 per capita charitable giving, is 15th when charitable giving is measured as a percentage of income. (As noted later in this TLV issue, Houston ranked #2 as the most charitable city in the country for the second year in a row.)

Source: National Center for Charitable Statistics and Bureau of Business and Economic Research

Rethinking Philanthropy
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"Philanthropy is commendable, but it must not cause the philanthropist to overlook 
the circumstances of economic injustice, which make philanthropy necessary."

- Martin Luther King, Jr.
Is aid killing Africa?
Dambisa Moyo, a Zambian native, economist and author of the book Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa addresses the curious case of Africa - home to several countries that have been unable to pull themselves out of chronic poverty for decades. If China and India can do it, then why not Africa? According to Moyo, Africa's overall poverty rate has risen in tandem with what she calls the "aid industry," which she feels has way too many vested interests and constituents promoting the need for aid for their own self-preservation. Moyo sees aid as reducing the incentives for African governments and citizens to learn how to self-sustain. She also sees very little aid actually getting to people, but predominately lining the bank accounts of the African elite. Moyo proposes a five-year plan where aid is systematically reduced and governments turn to capitalist policies and markets to generate money for their countries.

The importance of criticizing philanthropy
As it turns out, Americans have always had a fraught relationship with philanthropy. In the early 1900s, John D. Rockefeller attempted to secure a federal charter for his foundation. Politicians and progressives joined forces in opposition, arguing that such foundations, unprecedented in their scale and scope, undermined federal authority. About 50 years later, foundations caught headwind from the right, arguing that they manipulated the public into paying attention to the causes they favored, abetted tax evasion and hurt small businesses. That philanthropy enjoyed the benefit of the doubt at the start of the 21st century - around the time Bill and Melinda Gates got in the game - was an anomaly. Suspicion quickly returned as the efficacy of philanthropic programs, and how giving could overlap with policy, began being questioned. People have always felt touchy about the gray area between philanthropy and policy, particularly how those with the money can affect policy. That there is an overlap is the reason, so the article argues, that philanthropy, even though an act of private citizens, warrants public discourse.
Exporting the American philanthropic model to other countries
In 2010, Bill Gates and Warren Buffett launched The Giving Pledge, the campaign to get billionaires to commit at least half of their fortunes to philanthropy (there are currently 125 signatories). Gates and Buffett now have their sights on billionaires in other countries, with the larger aim of encouraging more countries to adopt the American model of philanthropy. As with philanthropic giving itself, the effort has bumped up against some cultural differences (for example, in China, philanthropy is typically anonymous and localized). Many countries lack the economic incentives to donate that we have in the US, and several countries call the Gates/Buffett philanthropic push imperialistic. After a year with little progress, Gates' campaign recently had a big victory, having gotten buy-in from Jack Ma, the co-founder of Alibaba and one of China's most prominent, newly-minted billionaires. It seems reasonable to expect that with time, American-style philanthropy will become more globally commonplace. 
The mystery of Steve Jobs' public giving
Steve Jobs was often maligned for having no public record of charitable giving. He was also often quiet on the matter. This article, written before his death, mentions another tycoon maligned for a lack of charity: Sam Walton of Wal-Mart. In his biography, Walton wrote: "We have never been inclined to give any undeserving stranger a free ride...We feel very strongly that Wal-Mart really is not, and should not be, in the charity business." It does raise an interesting question, in a moment where Gates and Buffett could be accused of pressuring, perhaps even subtly shaming billionaires unwilling to commit to The Giving Pledge: What is the responsibility of the super rich to give? And what of the fact that the Steve Jobs and Sam Waltons of the world directly enabled the creation of massive wealth for others who in turn had the capacity to give?
A conversation with Bill Gates about philanthropy
Last fall, Bill Gates sat down for a conversation about philanthropy put on by Sequoia Capital. Gates discusses how and why certain problems are best handled by government, others by the private sector and the rest through philanthropy. Gates acknowledges that he and his team have had to learn a lot along the way, adjusting strategies to improve programs and overcome unanticipated setbacks. It's a 40-minute video, buts a fascinating look into the mind of the greatest living philanthropist.

The Charities Aid Foundation's World Giving Index 2013  
The World Giving Index 2013 includes data from 135 countries across the globe collected throughout the calendar year of 2012. The report looks at financial charitable donations, volunteerism and helping strangers in need. Click here to download the full report. A snapshot summary of data is below.

Houston a top metro for charities
Charity Navigator's annual report on charity in America's 30 largest cities put Houston in the #2 spot for the second year in a row. Houston ranked second for median charitable contributions at $4.4 million, behind Boston's $4.6 million. Houston also ranked second for accountability and transparency, as well as financial health.
"Philanthropy is not about giving money but about solving problems. While well-meaning, 
the idea of writing a check and calling it 'philanthropy' is extremely short-sighted 
and, unfortunately, extremely pervasive."

- Naveen Jain
News You Can Use: The Economy, Leadership & Management, The New America
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The Economy

How oil and natural gas flow throughout the world
BP recently released its Statistical Review of World Energy June 2014, a detailed look at the current global situation around all forms of energy. Click here to download the full report, chock full of interesting data. Two interesting charts below show how trade for oil and natural gas moved throughout the world in 2013.
Oil Trade: 2013
Liquefied Natural Gas & Pipeline Gas Trade: 2013

Leadership & Management 
4 unconventional ways to be a better leader
With 77% of workers open to or actively looking for new job opportunities and 70% of workers feeling disengaged from their jobs, leadership matters more than ever. Ideas that buck conventional wisdom that could make you a better leader:
  1. Refuse early meetings: Instead, use the morning to prioritize days and which meetings are actually necessary. 
  2. Demystify debate as something to be avoided and reframe it as something welcome and critical to success. Otherwise, leaders risk surrounding themselves with yes men and letting culture and strategy become inflexible and stuck.
  3. New York Jets' general manager, Mike Tannenbaum, implemented a professional improvement day, where everyone is required to spend a day with someone in a completely different role or profession as an antidote to rigid and myopic thinking.
  4. Volunteer. It's shown to improve overall confidence, which can transform leadership prowess at work.
Good managers look beyond their "usual suspects"
If you continually go to the same team of "usual suspects" to problem solve, you risk spreading them too thin and rendering their work less effective. If it is your tendency to consult the same trusted inner circle repeatedly and exclusively, consider that different and fresh perspectives can be powerful. Ask yourself if you see high performers not being challenged enough, or competent people with room to take on more. And keep in mind that those in the inner circle often suffer in silence - flattered by the attention, but overwhelmed, overburdened and afraid to disappoint.  
The New America
Americans are getting less and less of their money from their income
Americans get 51% of their income from wages, down from 59% in 1980. Economists cite three reasons: 1) Since people are living longer, a larger number of Americans are drawing social security, Medicare and their retirement savings; 2) Increased eligibility for social programs, e.g. unemployment benefits and Obamacare (called transfers); 3) More Americans are renting real estate to supplement income.

Gallup: The State of the American Workplace report
Gallup recently released its latest installment of the State of the American Workplace report. In short, the engaged employee is the new customer: "Organizations with an average of 9.3 engaged employees for every actively disengaged employee in 2010-2011 experienced 147% higher earnings per share (EPS) compared with their competition in 2011-2012. In contrast, those with an average of 2.6 engaged employees for every actively disengaged employee experienced 2% lower EPS compared with their competition during that same time period." Only 30% of employees report feeling engaged in their work - a huge opportunity cost for companies. (A CareerBuilder report found that a stunning 77% of employed workers are open to or actively looking for another job.) Click here to download the full Gallup report, which includes information about how companies can improve employee engagement.
Thanks for reading The Leyendecker View. We hope you find these perspectives unique, insightful and valuable.

We at Leyendecker & Associates are committed to the highest standards of value creation. 
Doug Leyendecker Jim Ford David Prodoehl Kelly Griego