How to Fix the Gates Foundation

The conflation of the personal and the institutional is a serious problem for all private foundations with living donors. As its founders’ divorce exposes the Bill & Melinda Gates Foundation to more intense public scrutiny, it is worth considering how to improve founder-controlled philanthropy.

CODY, WYOMING – Bill and Melinda Gates are getting divorced, and the world can’t stop talking about it. Ever since the news broke, the press and social media have been abuzz with speculation about what ended their 27-year marriage. Could it have something to do with Bill Gates’s relationship with Jeffrey Epstein or the personal behavior of Gates’s money manager? And what will happen to their immense fortune, including their Lake Washington mansion?

Given the Gates’s wealth and status, such tittle-tattle is understandable. But it distracts from the very real risk the couple’s split poses to the lives of millions of people around the world.

The Bill & Melinda Gates Foundation has a far-reaching, positive global impact. But the way the Gates family has chosen to construct and manage their organization’s $50 billion endowment is far from ideal, with direct implications for planning and investing in programs that take years to implement.

As living donors, Bill and Melinda Gates make all of the foundation’s critical strategic decisions, and the organization’s impact depends as much on its co-chairs’ reputations and moral authority as it does on their money. This conflation of the personal and the institutional is a serious problem for all private foundations with living donors. As the Gates family and Foundation pass through the wringer of intense public scrutiny, it is worth considering how to improve founder-controlled philanthropy. Three reforms are needed.

First, resilient governance mechanisms must be introduced. The Gates Foundation has three trustees: Bill, Melinda, and Warren Buffett. This would not be appropriate in most organizations, let alone the world’s second-largest charitable foundation. After all, it means that a fracture between any of the trustees – such as a divorce – could render any semblance of good governance impossible.

Charitable organizations should emulate the best-run public companies. They should establish a board of directors that is large enough to minimize their vulnerability to personal fissures and ensure that most members are making independent decisions on strategic matters.

This also means appointing a chair who is not the foundation’s CEO, founder, or a founder’s family member. And given that founders receive a substantial tax benefit for their donations, the assets the board oversees should be regarded as belonging to the public, with the board being held accountable to a fiduciary standard of care.

Second, foundations must embrace genuine transparency. As it stands, foundations’ annual reporting centers on IRS disclosure forms, which require few specifics about spending. This undermines discipline in charitable giving, with foundations often measuring their performance by how much money is pushed out the door and whether the founders have been embarrassed, rather than clear impact assessments.

Foundations should be required to file detailed annual reports analogous to those filed by public companies. These reports should specify not only how the organization spent its money, but also why it made the choices it did, what results it has achieved (good or bad), and what risks it foresees. Over time, such transparent and comprehensive reporting could help to create a market-like mechanism of public accountability for a foundation’s effectiveness.

Third, foundations should be required to double the amount they give away each year. Since 1969, the United States tax code has required all foundations to donate 5% of their assets, on average, each year, in order to preserve their nonprofit status. The rationale is that this enables properly managed foundation endowments to produce returns similar to those offered by financial markets. The foundation could exist in perpetuity, with the donors (and their family) exerting permanent control.

In reality, financial returns have far exceeded 5% – the S&P 500 has risen more than 10% annually since 1969 – and foundation endowments have grown by even more than that. Doubling the amount foundations must give away each year would create a powerful incentive for donors to focus on active charitable investment, rather than building eternal monuments to themselves.

This would also spur foundations to provide more resources to nonprofits, which often struggle to acquire the overhead funding they need to implement their programs. A major problem here is that foundations tend to restrict their funding to highly specific program grants, often shaped by the donor’s priorities, rather than the recipient’s needs. This starves nonprofits of effective leadership and institutional capabilities, undermining their impact. If foundations were forced to give away 10% of their assets annually, the most innovative nonprofits would be far more likely to receive the resources they need.

We expect our heroes to be perfect. So, when they turn out to be mere human beings, we are fascinated, disappointed, and perhaps even feel some schadenfreude. But, while Bill and Melinda Gates have done enormous good, the true heroes are the thousands of talented, creative, and caring people they have empowered through the Gates Foundation. We would all benefit from focusing less on salacious gossip about their personal lives and more on how to take a good foundation model and make it better.

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