Philanthropy

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Philanthropy is near-universal among the wealthy. A 2010 report from Barclays, entitled Barriers to Giving, found that 97% of high net worth individuals made at least some contribution to charity, although it also found that only one-third will donate more than USD$15,000/ GBP£10,000 a year - or less than 1% of their net worth. Numerous pieces of research have shown that wealthy individuals are in fact less generous than those with lower incomes and wealth. One study from the U.S. found that those with earnings in the top 20% donated on average 1.3% of their income, whereas those in the bottom 20% donated 3.2%.

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Of course, many of the world’s wealthiest people are very actively engaged in philanthropy and, for Ms. Wolhuter, this is in fact one of the defining features of real wealth. “There are so many wealthy people today and the numbers are increasing so rapidly that monetary value is almost no longer a determinant of wealth,” she says. “Particularly in the U.S., what defines the really wealthy is less about how much they have and more about how much they can afford to give away.”

Regardless of the source of their wealth, high net worth individuals largely approach philanthropy for a number of key reasons. The most important, say respondents, are that they consider it their duty and responsibility and that it also brings them personal fulfilment. This is consistent with findings from Barriers to Giving, which found that familial duty, religious beliefs and societal duty are the key factors that motivate donors to give large sums of money to charity.

There are however, significant differences depending on the source of wealth. Entrepreneurs are less likely to give to charity out of a sense of duty and responsibility than those who have inherited their wealth or acquired it over time through earnings and savings (see chart 9). This may in part stem from the fact that inheritors feel a greater obligation to share their wealth on the grounds that they have not earned it. They may also worry more about antipathy toward the wealthy, particularly in the wake of debates around wealth inequality, than those who have earned money themselves.

“Inheritors often find themselves in a precarious position where they didn’t make the money themselves and they worry about ambivalence toward them,” says Dr. Traeger-Muney. “At the same time, many of them are genuinely worried about growing disparity and really want to use their wealth to help make the world a better place.”

This also extends into the broader family, with many inheritors, in particular, considering philanthropy to be a powerful tool for embedding a set of values in their children and giving a broader purpose that may otherwise be lacking in the presence of substantial wealth. “A growing number of wealthy individuals want to involve their children in philanthropy because they want them to grow up with a conscience, values and an understanding of how the majority of people live, says Ms. Wolhuter. “Inheritors tend to get involved at a young age in philanthropy because it forms part of how they see their role in the family as the custodians and stewards of wealth.”

Chart 9 - Why wealthy individuals are giving to charity (by source of wealth)

Entrepreneurs and philanthropy

The rise of entrepreneurship as a source of wealth is having a profound effect on philanthropy around the world. Although those who have inherited wealth very often have a strong association with philanthropic endeavours, many will be managing legacies that were determined as a result of the previous generation’s bequests.

What is different about many entrepreneurs today is that, when they do want to engage in philanthropy, they often want to give away their wealth while they are still living. Among our respondents, entrepreneurs and business owners said that they intend to give 41% of their wealth away during their lifetime, compared with those who acquired their wealth through earnings or savings, who plan to give away 27% (see chart 10). These entrepreneurs and business owners often want to apply their knowledge and experience in a useful way, and that means getting involved while they have relevant skills to impart. “People with a business background understand why it’s important to ask some of the questions and to get involved if they want to, because they can bring a lot to the table,” says Emma Turner, Head of Client Philanthropy Service at Barclays.

Jeff Raikes, CEO of the Bill and Melinda Gates Foundation, is a case in point. He joined Microsoft in 1981 and was one of the key architects behind the product strategy and design of Microsoft Office. His career in the software industry made him very wealthy but, in 2008, he resigned and, after a short break, took on his current role at the Bill and Melinda
Gates Foundation. “My wealth came from my hard work and, because I believe in that kind of meritocracy, I want to create that opportunity for others in society,” he explains. “My wife and I think that whatever wealth our children create is their responsibility and it’s my sense in general that people who acquired their wealth through entrepreneurship are less oriented toward intergenerational equity.”

Those who generated their wealth through business may be more focused on philanthropy during their lifetime, but our research shows that many will tend to postpone this process until some point in the future. This is likely to be because they are primarily concentrating on building their business but have an intention to become more heavily involved in philanthropy once they have completed an exit or achieved what they set out to do.

Chart 10 - Planned use of wealth by source of wealth
Chart 11 - How wealth changes impact charitable giving

Mr. Raikes argues that, even if entrepreneurs do postpone philanthropy until later in life, they should take steps to prepare themselves for this future involvement. “If you are in the wealth creation phase and don’t have much time to commit, you can begin learning about philanthropy so that you can gear up and have the pleasure and fulfilment that comes from being effective in philanthropy as you continue to grow,” he says. “Learning helps you to identify what your passions are, which other individuals you would like to emulate and the approaches you could use.”

There is also a link between the extent to which an individual’s wealth has fluctuated over time and their propensity to be philanthropic. Overall, it seems that people who have experienced the most change in their wealth situation — both positive and negative — are more likely than those who have experienced a more steady financial position to be philanthropic (see chart 11).

Inheritors tend to get involved at a young age in philanthropy because it forms part of how they see their role in the family as the custodians and stewards of wealth. Dr. Jamie Traeger-Muney, Founder and Director of the Wealth Legacy Group

Philanthropy in emerging markets

Private philanthropy in emerging markets remains at a relatively early stage of development. Although there is frequently a strong culture of individual giving in these markets, often driven by religious obligations, the infrastructure to support philanthropic endeavours can be fairly limited. Local non-profit organisations or foundations may be thin on the ground, and a large proportion of charitable work typically takes place locally, or through state-run organisations.

As a result, charitable giving can be just a fraction of that seen in developed markets. One report estimated that total philanthropy in China amounts to just 0.01% of GDP, compared with 2.2% in the United States8. Among our respondents, entrepreneurs and business owners in developed markets are more likely to give to charity than those in emerging markets.

Institutional barriers can hamper the spread of philanthropy in emerging markets. Tax deductions for charitable giving are rare, and non-profits can sometimes be heavily regulated and kept under strict government control. In China, for example, all non-profit organisations fall under government regulation and are run by public sector staff9. There may also be a perception that foundations are opaque or even corrupt, and that can deter would-be donors.

The situation is changing, however, as wealthy individuals seek to become more involved in philanthropy and make productive use of their wealth. The number of charitable foundations in Russia and China has increased in recent years — one estimate puts the number in China at 2,700 with a quarter of these established in the past five years10 (although this is well behind the estimated 1 million charitable foundations in the U.S.11). A growing number of foundations reflects greater awareness and interest in philanthropy, but this does not mean that better outcomes are always achieved. Indeed, it could be argued that a proliferation of foundations leads to more inefficient giving, whereas greater pooling of resources would make better use of economies of scale.

Nevertheless, this increased involvement in philanthropy in countries like China clearly reflects growing wealth in the region more generally. More robust infrastructure is also leading to an increase in donations. A recent report from Bain & Company, for example, found that the wealthy in India have increased their donations, from an average of 2.3% of household income in 2010 to 3.1% in 201112.

Globalisation is again a factor here. As more and more wealthy individuals travel and spend time in well-established philanthropy centres like the U.S., they are increasingly seeking to import best practices back to their country of origin. “There is a new generation that is being educated or working in the U.S. or Europe and returning with very different views of how they should approach philanthropy as part of their wealth planning,” says Ms. Turner.

A new model of philanthropy

The rise of entrepreneurial wealth is triggering change in the world of philanthropy. Increasingly, wealthy individuals want to play a more active role in their giving - either by donating their time and experience, as well as their money, or by applying closer scrutiny to the objectives and outcomes of the charitable organisations with which they work.

The financial crisis has been an important driver of this change. Research by The Million Dollar List (MDL), a searchable database created by the Center on Philanthropy at Indiana University, found that, between 2008 and 2009, the value of million-dollar-plus gifts by individuals plunged 61% and the number of gifts fell by 39%13. The more positive news, however, is that the downturn has engendered a greater focus on the effectiveness of giving.

“The crisis had provided an opportunity to think more deliberately about the impact of each dollar,” says Mr. Raikes. “I am a real advocate for thinking strategically about ways to increase the efficiency and effectiveness of giving in the same way that business leaders use a crisis to think about doing things in new ways.”

Doug Miller, Chairman of the Asian Venture Philanthropy Network, agrees, pointing out that during good economic times there is a danger that not enough attention is paid to the outcomes of philanthropy. “In lean times, it’s important to ensure that you get more bang for your buck,” he says. “A more engaged approach to philanthropy essentially tries to produce more social impact per dollar or pound spent, so that makes it appealing at a time when some people may be cutting back on donations and when social needs have increased because of budget deficits and austerity plans.”

Bill Gates and Warren Buffet are the poster children of this new approach to philanthropy, which The Economist Journalist Matthew Bishop has called “philanthrocapitalism.” He notes that there are several common themes that unite this new breed of philanthropist. One is that they take a long-term focus. Rather than giving money on an ad hoc basis, they seek to use their skills and money to solve very long-term and complex challenges. At the same time, they are willing to take risks and be experimental in their approach. “By trying different approaches, they are seeking evidence so that they can apply what has been learned on a greater scale,” he says.

As a result, the new breed of philanthropist tends to be more flexible in the models that they are willing to apply to solve problems. “There is not an assumption that the only approach to philanthropy is to give money away,” says Mr. Bishop. “Instead, the approach is to determine what problem needs to be solved and then figure out the most effective way to do that. If that means a combination of profit and non-profit, they are open to that so long as it creates the desired outcome.”

Ms. Grum points out that, in some countries, insurance policies can be used to separate funds for philanthropic goals later in life. “More and more wealthy individuals are looking at life insurance to fund a philanthropic aim,” she explains. “By establishing policies now, they can have confidence that a sufficient amount of money will go to the cause of their choice without impacting what they leave for their heirs.”

Of course, not all philanthropists will want to become that engaged in their giving. As Ms. Turner points out, many donors prefer a “hands-off” approach. “Although many business people will have a desire to examine closely the organisations they are going to support, there are a lot of people at the other end of the scale who just want to give their money to a good organisation and are not interested in getting over-involved,” she says.

Another factor that philanthropists need to consider is the extent to which they are comfortable with their work putting them in the public eye. This may be an important objective for some, whereas others will want to remain firmly in the background. “Profile is an important consideration and, while some wealthy individuals will be happy to be in the public eye, others will want their work to be more private,” says Ms. Turner. “But it’s important to make that decision early on, because once that door is opened, it’s much harder to close it.”

A strategic approach to giving

Rather than simply donating money on an ad hoc or regular basis, the new breed of philanthropist takes a much more strategic approach to giving that is centred around measurement and a focus on outcomes. At the Bill and Melinda Gates Foundation, for example, there is a rigorous cycle in place of strategy development, execution against that strategy and performance measurement.

A set of scorecards track progress toward achieving goals over the short term, medium term and long term. “The scorecard sets priorities for the relevant organisations, aligns behind the delivery of those goals, provides accountability for progress toward goals, and embeds a mechanism for learning and making adjustments,” says Mr. Raikes. “Those four principles all fit in with the broader theme of measurement as a way for us to drive continuous improvement. Ultimately, that increases our capacity to deliver the most impact for the people we wish to serve.”

The measurement of outcomes may sound straightforward but, in many cases, selecting the right metrics can be challenging. For example, what would be the best metric for measuring the impact of philanthropy on the eradication of polio? At first glance, this might seem like a simple question. Surely the best measure of all would be the number of cases of polio and, if they were being reduced to zero, then that would represent a good return on investment for a philanthropic endeavour.

But as Mr. Raikes explains, the reality is more complex. “Cases of polio paralysis are not a good leading indicator of whether you are achieving the goals of the campaign,” he says. “You really have to look at the number of vaccinations, see how many children are being missed, and understand the level of population immunity within a given geography.
Measuring the impact of philanthropy might seem simple but, in fact, you have to be very dedicated to finding out the right metrics.”

Equally, not every philanthropic goal is easily quantifiable. “There are a lot of things you do in philanthropy that are very difficult to measure,” says Mr. Raikes. “For example, if you’re donating to the arts, how do you measure the impact of that? The danger is that, if we become so oriented toward trying to measure everything, we end up excluding certain worthwhile philanthropic investments because we can’t decide on the right metrics to determine impact. Measurement of impact should not be an end in itself.”

Philanthropy, wealth and happiness

There is a longstanding debate in social sciences about whether increases in wealth lead to greater happiness. The Economist Richard Easterlin argued that, while people with higher incomes generally reported greater happiness, their level of happiness did not vary much once basic needs were met14. More recently, Economist Angus Deaton and Psychologist Daniel Kahneman found in their research that, while emotional well-being rises in line with annual income, there is no further progress once an annual income of around USD$75,000/GBP£50,000 is reached15. Crucially, however, they also found that life evaluation, or broader satisfaction with life, continues to rise well beyond the USD$75,000/GBP£50,000 threshold.

“There is a very strong link between income and broader happiness,” agrees Andrew Oswald, Professor of Economics at the University of Warwick. “There is also a link between happiness and productivity, which means that people who are happier in their early 20s go on to earn considerably more than those who are less happy once you have adjusted for other factors.”

Chart 12 - How does wealth affect happiness?

Our survey also finds a strong link between wealth and happiness. People whose wealth has increased - during their lifetime, or relative to their parents, or during the recent downturn - all report increased levels of happiness compared with those who report a decrease in wealth (see chart 12). In terms of use of wealth, our research also finds that people who spend more on lifestyle and experiences, rather than tangible objects, report greater levels of happiness.

There is also a link between happiness and philanthropy. Harvard Business School Professor Michael Norton and his colleagues have argued both that happy people tend to be more philanthropic, and that philanthropy can in fact increase happiness, creating a circular, self-reinforcing relationship between the two16. “What we do with our money is as important as how much we have when it comes to happiness,” says Professor Norton. “Our research has shown both that happy people give more money, and that people are happier and more productive when they spend on other people than when they spend on themselves. We also see a similar link between volunteering and happiness.”

Some researchers have even found a link between philanthropy and increased wealth. Adam Grant is a Professor at the Wharton School of the University of Pennsylvania and the Author of Give and Take: A Revolutionary Approach to Success. He points to research by Economist Arthur Brooks that shows a correlation between wealth and charitable giving: The more money people earn in one year, the more they will give away the following year. Even more interestingly, Brooks finds that the reverse holds true as well: The more money an individual gives away in one year, the more they earn the next year. He believes giving makes people happier, motivating them to work harder and bring in more income.
Professor Grant believes these ideas have the potential to impact the way people think about their life and their willingness to contribute to society over their life. “This research may help more people integrate what Bill Gates called the two great forces of human nature: self-interest and caring for others,” he says. “I think often people focus their self-interest into their work domain and they may preserve caring for others for their family, friends, and community. I would like to see people looking at how they can further their own goals while contributing as much as possible to other people in all domains of their life. It might lead to a life-long approach to philanthropy, whereby people give throughout their lives rather than mostly toward the end.”


8 2010 Blue Book of Charitable Donation Development in China
9 Ibid
10 2010 Blue Book of Charitable Donation Development in China
11 Chen Guangbiao, China’s Charity Champion, Fast Company (March 2011)
12 India Philanthropy Report, Bain & Company (2013)
13 Strong Correlation between Market movements and large $ philanthropy, Journal of Financial Planning (January 2012)
14 Does Economic Growth Improve the Human Lot? Some Empirical Evidence. Easterlin (1974)
15 High income improves evaluation of life but not emotional well-being, Daniel Kahneman and Angus Deaton (2010)
16 Happy Money: The Science of Smarter Spending, Elizabeth Dunn and Michael Norton (2013)