Felix Salmon

In the immediate wake of the greatest financial crisis in living memory, Cooper Union looked like a genius. Remember this article by John Hechinger? Here’s the headline, if you don’t:

In particular, Hechinger credited a low-risk investment approach at Cooper Union.

The expansions stem from Cooper’s decision three years ago to ratchet back the financial risk in its endowment, enabling it to avoid the losses that have racked its peers. The college renegotiated a lease to lock in a future income stream from its key property, sold another parcel at a favorable price, raised its cash holdings and picked investment managers that hedged against stock-market declines.

Administrators say they wanted to be especially careful because of the school’s no-tuition policy, which leaves its budget largely dependent on investment income…

John Michaelson, who heads Cooper’s investment committee, said other schools could benefit from taking a lower-risk investing approach.

You know how this is going to end, don’t you.

As Cooper Union officials try to quell the uproar over news that the college may start to charge tuition, some students, alumni, faculty members and college trustees are advocating an inquiry into how the school got into such serious financial trouble.

One bit of the story stands out: it seems that the endowment was leveraging its bets with borrowed money — and has been doing so since 2006.

Cooper Union spent $166 million on a new academic building at 41 Cooper Square, replacing two outmoded buildings. To help pay for that and other projects, and to retire old bonds, it borrowed $175 million in 2006.

The college also invested $32 million of that borrowing in its endowment, calculating that the endowment investments would earn a higher rate of return than the interest Cooper was paying on the loan. That turned out to be a bad bet when the recession hit.

There’s still a lot of murkiness surrounding Cooper Union’s finances, which don’t seem to be quite as bad as the NYT — or, for that matter, Cooper Union president Jamshed Bharucha — is making out. The endowment is still near its all-time high, with the most recent number being $577 million, while the annual deficit right now is $16.5 million. You can call that unsustainable if you want — and Bharucha does — but there’s no immediate threat to the college here.

Certainly the financial situation at Cooper Union is murky: former president George Campbell Jr is quoted in the NYT as saying “that Cooper’s financial problems had always been well documented in public records like financial statements, reports on trustees’ meetings and his annual addresses on the state of the college”, but I can’t find any of those statements, reports, or addresses on Cooper’s website. Guidestar has the 2009 Form 990, but it’s a bit out of date, and it’s not easy to understand — especially the $319 million in liabilities, including $175 million in “secured mortgages and notes payable”, which help result in total annual interest expenses of more than $10 million. (Salaries and wages, by contrast, the only larger item on the expense statement, are $22 million.)

So I’m very sympathetic to calls for an audit at Cooper Union. There’s no reason that the college’s finances should be this opaque — and the idea of creating a “task force” to investigate options seems designed to ensure that a lot of that information remains confidential. At the very least, the task force should be charged with putting together a detailed history of Cooper Union’s finances right up to the present day, and making that history public for all to see. Otherwise, it’s going to be hard to believe anything we’re told about what’s going on there.

David Dunlap took a visit to the Bronx, and came back with a 13-page slideshow of John Thain’s self-aggrandizement:

The generosity of John A. Thain and his wife, Carmen, in helping rehabilitate the forest has been rewarded with its renaming as the Thain Family Forest. The new name has also been worked into the text of almost every sign…

One expects donors’ names at entrance ways and on directional signs and maps. It’s more unusual to find donors’ names woven into the interpretive narration. At the garden, however, the words “Thain Family Forest” are slipped into signs about black oaks, hemlocks and hillside blueberries (“a favorite of birds and small mammals in the Thain Family Forest”); about vernal pools and great horned owls; about mound formations and forest layering; and even about snags, as standing dead trees are called, which help “reveal the Thain Family Forest’s great age.”

They turn up on prohibitory signs, too. “Please Stay on the Path: The Thain Family Forest is a fragile ecosystem.”

Indeed, by the time you reach the sign beginning, “When a tree falls in the Thain Family Forest —,” you may be tempted to finish the thought yourself, “— does it make a Thain Family Sound?”

A spokeswoman for the New York Botanical Garden tried to say, with a straight face, that the Thain family did not request that the forest be named at all; that the Garden “named it as a thank you for their gift”; and that the ubiquity of the Thain name was simply a function of a “scrupulous interpretive specialist”.

You’re welcome to believe her, if you want. But I’m quite sure that John and Carmen Thain could have declined the Garden’s generous offer to ensure their name was used on first mention every time the forest is mentioned. Or even to use their name at all.

After all, the whole point of this forest is that it dates back to the 17th Century. It’s being carefully managed with Thain funds, which I’m sure have been put to good use. But there’s something vulgarly presumptuous about a Wall Street plutocrat playing happily along with the idea that he and his family should get enormous amounts of public credit, in perpetuity, for what is essentially the same forest where Lenape Indians hunted.

But of course we’re talking about John Thain here. He of the $35,000 commode on legs, and the $87,000 office rug. You’d think he’d have learned his lesson about his displays of wealth having quite the opposite effect to that originally intended. But obviously not.

Andrew Ross Sorkin takes a look at the private life of Apple’s chairman today, passing on rumors about activity he clearly doesn’t want publicized, in the face of stony silence from Apple. But hey, Sorkin’s a journalist, I guess that’s what journalists do.

The column is headlined “The Mystery of Steve Jobs’s Public Giving,” but really there’s no mystery at all: there is no public giving from Steve Jobs. Sorkin isn’t happy about this. “Most American billionaires have taken up philanthropy in a public way and helped inspire future generations of charitable giving,” he writes, concluding that “perhaps” in future years Jobs might “inspire his legions of admirers to give.”

Some of Sorkin’s points are good ones. There’s no good reason, for instance, for Jobs failing to reinstate Apple’s philanthropic programs, which he cut on the grounds of wanting “to restore the company’s profitability.” Similarly, Apple’s failure to match its employees’ charitable giving does make it stand out — and not in a good way — from its Silicon Valley peers.

I think this is maybe a downside of Jobs’s famous micromanaging: if he’s personally not interested in something, then his entire company becomes uninterested in it.

Now there are good reasons why Jobs might not be much of a philanthropist, at least in public. For one thing, it’s far from clear that seeing billionaires give away lots of money and put their names on hospital wings does any good at all in terms of inspiring other people to make charitable donations. So if a private man like Jobs wants to make his charitable donations privately or anonymously, I don’t see much if any harm in that. And the coverage of Jobs in recent days is proof positive that he’s hardly in need of good press.

On top of that, effective philanthropy is hard work. Just ask Bill Gates. If it’s as difficult to give away money as it is to make it, and if you’re already stretched between making Apple insanely great, spending time with your family, and dealing with personal health issues, then it’s reasonable not to even try on the philanthropy front.

The sad fact of the matter is that Jobs’s wife, Laurene Powell Jobs, will almost certainly outlive him; what’s more, she is more familiar with the philanthropic world than he is, sitting on the boards of Teach for America and the New Schools Venture Fund, among others. Jobs is a technology visionary; that doesn’t make him a great philanthropist. Maybe he’s simply and lovingly trusting his wife to be able to take care of such things after he’s gone. That would be a very admirable and selfless act.

What happens when you drop billions of dollars onto a country like Haiti? Immediately after the earthquake happened, in January 2010, I said that “one of the lessons we’ve learned from trying to rebuild failed states elsewhere in the world is that throwing money at the issue is very likely to backfire”. But that’s exactly what we did — with predictable results.

I’d urge you to read Janet Reitman’s full 12,000-word Rolling Stone article on what an enormous amount of foreign aid has done for Haiti; it’s a wonderful piece of journalism, albeit a very depressing one.

The first thing to note is that most of the money given to Haiti hasn’t even started to be spent yet: a whopping $11 billion was pledged by donor countries and financial institutions in the wake of the earthquake, but if you take the US as a good example, it’s so far managed to spend just $184 million of the $1.14 billion allocated to the country. Even the Red Cross is barely halfway into its $479 million fund — all of which has been earmarked for Haiti, and none of which can be spent elsewhere, no matter how much better it might be put to use in some other context.

But even the amount of money that has been spent has been harmful in its own way. Haiti has been known as “the Republic of NGOs” for well over a decade now, but the earthquake just turbocharged their presence while devastating everything else, leaving foreign aid the only game in town:

“I’ve had two ministers come up to me this week, personally, and ask what’s in it for them,” says a frustrated IHRC official. “Since money grows on trees in this disaster, the attitude among Haitian officials is: Just call up your buddies in Washington, and they’ll send another check.”

Meanwhile, given that it’s difficult to effectively spend money in Haiti, millions of dollars are making their way to people like our old friends at Dalberg:

There was significant grumbling in aid circles, for example, when the department awarded a $1.5 million contract to a New York-based consulting firm called Dalberg Global Development Advisors. Glenn Smucker, an anthropologist who specializes in Haiti, was asked to brief the Dalberg team, which included several summer associates from Harvard Business School. “They were nice people, but they struck me as naive about Haiti,” he says. “They asked the appropriate questions and were eager to learn, but from what I gathered, they had never lived overseas, didn’t have any disaster experience or any background in urban planning, and they’d never carried out any program activities on the ground. Only one of them spoke any French. They were being asked to do extremely important things that they had no background to do.”

One of Dalberg’s assignments was to do an assessment of a broad, bow-tie-shaped swath of land near the Corail camp, where thousands of Haitians had moved earlier that spring. Even as refugees were streaming onto the land and establishing squatter camps, the State Department hoped to create new communities in the area as part of an attempt to depopulate Port-au-Prince. It was the second time in three months that consultants had assessed the area, and after Dalberg was finished, a team of experts from USAID was brought in to reassess the assessments. “One of the sites they said was habitable was actually a small mountain,” says Bill Vastine, one of the experts on the USAID team. “It had an open-mined pit on one side of it, a severe 100-foot vertical cliff, and ravines.” After looking at the photos in Dalberg’s report, he said, “it became clear that these people may not even have gotten out of their SUVs.” The process of assessments and reassessments dragged on for months. In the end, only one of the six sites approved by Dalberg was deemed viable for relocation.

I’m pretty sure that when individuals and politicians committed billions of dollars to Haiti, they weren’t intending for it to be spent on callow HBS types who generate headlines like “With Andrew Stern’s Help, US Executes Holistic Rebuilding Approach in Haiti”.

Meanwhile, Haiti’s suffering if anything is getting worse. Not only are new shantytowns springing up in places like Corail, but disease is now spreading disastrously: cholera hadn’t been seen in Haiti for more than 60 years, before the earthquake; it has now infected more than 250,000 Haitians, with no sign that it’s remotely under control.

It’s worth remembering, too, that there was reason for optimism regarding the rebuilding of Haiti. There was lots of money, and the country’s right on America’s doorstep, which also helps. On top of that, it had the best conceivable international ambassador in Bill Clinton, backed up with the full support of the US government in the form of his wife’s oft-stated commitment to getting Haiti back on its feet.

Development is a tricky game, easy to get wrong; as a rule, it only works when the people providing the aid are working at the margin, helping to strengthen existing projects, industries, and institutions, rather than trying to build them all from scratch. Let’s target it where it can be most effective, rather than where there happens to have been a newsworthy natural disaster. Of course Haiti needed help after the earthquake, but $11 billion was far too much for the fragile and damaged economy to bear. It’s a lesson worth remembering, the next time a natural disaster triggers another wave of appeals for financial aid.

A quick reply to Matthew Bishop and Michael Green, which with luck will bring this exchange to an end: I’m not saying that they make the case for the status quo. But when Davos Young Global Leaders, like Bishop, intone importantly about how “there is an urgent need to tackle fundamental flaws in the economic system” and how CEOs need to concentrate on long-term enlightened self-interest rather than “short-termist behavior”, the very corporate chieftains they’re trying to reach are going to nod in serious agreement and claim in all sincerity to be part of the solution rather than part of the problem.

Never in the history of Davos has a CEO got up on stage and said “I’m trying to make as much money as I can before the board finds me out and fires me”. Which is precisely why CEOs don’t think that Bishop and Green are talking to them. And on top of that, the Philanthrocapitalists are happy reducing the pressure on any individual CEO even further with rhetoric like this:

A capitalism that is more responsible is not going to come from a few enlightened CEOs choosing to do good – it will only come from an overhaul of the way business is run.

That’s not a call to action, it’s a call to sermonize. And it will achieve nothing beyond getting Bishop and Green a few more speaking fees from companies which like to pat themselves on the back for being socially conscious. Which is why I say that Philanthrocapitalism is ultimately friendly to the status quo.

Bishop and Green don’t explicitly say that the status quo is a good thing: in fact, they explicitly say that it is profoundly broken. But they say that in an extremely CEO-friendly way, designed to allow leaders who think of themselves as long-term visionaries to also consider themselves to be downright philanthropic simply by dint of their enlightened strategic thought. It’s always other CEOs who are the problem. Or it’s not even CEOs at all: it’s the whole system.

The message of Philanthrocapitalism, then, is one which allows leaders to wriggle all too easily out of having to do anything. Which is why it’s not going to make the slightest bit of difference to the way the world is run, no matter how many important people read it.

Give him points for chutzpah, at least. Matthew Bishop has responded to my post about profits and philanthropy with an astonishing assertion: that his ideas, and those of Daniel Altman, are so fresh and new that I’m scorning them out of sheer unfamiliarity. I’m a “traditionalist,” says Matthew, a “John Bull turning up his nose at ‘foreign muck.’” It seems I’m stuck 20 years or so in the past: since then, says, Matthew, there’s been a “growing realisation that business does have the capacity to create as well as destroy social value.”

The realization that business has the capacity to create as well as destroy social value is known as “economics,” and goes back at least as far as Adam Smith. There’s nothing new about it, and nor is there anything new about economists using this insight to assuage the guilt of the rich. Here’s Joan Robinson writing in 1936, and talking about someone who more or less fits the self-image of a Davos CEO: a person with intelligence, conscience, and wealth.

He cannot keep all three – integrity of mind, a quiet conscience, and the privileges of wealth. One must be sacrificed. If he is a saint he sacrifices the wealth – but we will suppose that he is not. If he is a man of no definite religious creed he can keep his mental honesty and his income by sacrificing his conscience. He can say “I am a selfish individual. I don’t pretend to have any better right than anyone else to a comfortable life, but I propose to enjoy it if I can.” …

Now, it is here that the economist is a godsend to him. The economist is a self-appointed expert. It is his business to know about these things. A man may have an honest and independent mind and yet take on trust the opinion of experts on a subject that he has not time to master for himself. If the economist tells him it is all right, then he can keep his integrity, his income and his conscience all intact.

One of the main effects (I will not say purposes) of orthodox traditional economics was to fill this want. It was a plan for explaining to the privileged class that their position was morally right and was necessary for the welfare of society. Even the poor were better off under the existing system than they would be under any other.

Daniel Altman’s “single bottom line” idea — that by maximizing profits companies also maximize social welfare — falls squarely into this tradition. Far from being new, it was old even in the 1930s.

Here’s Robinson 41 years later, making the same point in a different way:

Freedom is the great ideal. Along with the concept of freedom goes freedom of the market, and the philosophy of orthodox economics is that the pursuit of self-interest will lead to the benefit of society. By this means the moral problem is abolished. The moral problem is concerned with the conflict between individual interest and the interest of society. And since this doctrine tells us that there is no conflict, we can all pursue our self-interest with a good conscience.

Robinson makes a strong case that Adam Smith himself did not actually believe this — but certainly many of the orthodox economists who followed him did.

Bishop himself criticizes Altman on the grounds that he treats “the chronic short-termism of today’s stock market capitalism only as an afterthought” — but that implicitly agrees with Altman that if businesses could just see their way clear to concentrating on the very long term, then the profit motive would automagically align with maximizing social welfare. This is dangerous, because Davos Man always thinks of himself as concentrating on the very long term. And I defy you to find a corporate leader who will ever say that chasing short-term profits is a better idea than maximizing value over the long term. When corporate leaders listen to Altman and Bishop, then, they get the message that if they just do what they claim to be doing already, then they’re already doing all they can in terms of their corporate social function.

Bishop cites anonymous “critics” as saying he’s being “too idealistic”; I’d love to know who these critics are. The truth is that Altman, and to some degree Bishop too, is being too ideological, with their article of faith that long-term profitability means long-term social welfare. Tell that to the companies removing mountaintops.

Of course it’s possible that a company — even a profit-maximizing company — can have positive social impact. Matthew’s example of IBM is a good one, although given the scale of IBM’s philanthropy I don’t think it’s actually profit-maximizing, at the margin. Altman would I’m sure have some convoluted explanation of how IBM’s philanthropy makes it a more desirable place to work and thereby helps to maximize long-term profits, but those kind of arguments are unfalsifiable and therefore meaningless.

Matthew also says I’m wrong when I say that his Economist article favors IBM over the Carnegie Corporation. I’ll quote, you decide:

In the first 50 years, the impact of the Carnegie Corporation on society dwarfed that of IBM…

Judged on the past 50 years, there is a strong case for saying IBM has had more impact than Carnegie…

The achievements of IBM and the Carnegie Corporation are impossible to quantify mathematically. What seems clear, though, is that as it enters its second century, IBM can plausibly hope that its best years lie ahead. Alas, that seems most unlikely for Carnegie.

If I was a corporate leader reading this, I’d happily take away the message that successful corporate leadership is the best way of improving the state of the world — even better than pure philanthropy. And I’d be greatly encouraged by Altman, who says this, in a comment on my post:

We think that using the single bottom line with a long (not infinite) time horizon will actually encourage profit-maximizing companies to invest in more social initiatives, since they’ll see how those initiatives can help their profitability in the long term.

I find it very hard to see how this is meant to work in practice. After all, the base case for any public company is to have a single bottom line with a long time horizon. Simply being funded by permanent capital won’t in and of itself make executives invest more in social initiatives, or open their eyes to the long-term value thereof — especially when any such investment carries an opportunity cost and means that there’s some other project which would have to be abandoned as a result.

I suspect that a weak form of Altman’s thesis might well be true. If a company’s equity capital comes from investors with a medium-term time horizon and one eye on the exit — VCs or private-equity shops — then that company is probably less likely to invest in social initiatives than if it’s a public company with permanent equity capital.

But that doesn’t mean that simply having a single bottom line and a focus on maximizing profit is the best possible way to maximize social impact. Public companies might look better, from a social perspective, than those run by corporate raiders and buyout chieftains. But that’s a pretty low bar to set.

Dalberg is an international consultancy which explains, on its About page, that “we value social impact above profit but recognize that a sustainable business model is essential to our success”. Makes a certain amount of sense: if you want to do a lot of good in the world, it’s helpful not to be having to beg for money all the time. And of course that mission makes it much easier for Dalberg to charge huge sums of money and help its owners on their path to wealth and fortune.

Daniel Altman is an economist who glories in the title of Director of Thought Leadership at Dalberg, and he’s now written a paper which essentially seeks to eradicate the distinction between social impact and profit altogether. Social impact, he says, along with similar ideas like double bottom lines or corporate social responsibility (CSR) and creating shared value (CSV),

are inefficient workarounds or substitutes that should ultimately lead back to a single bottom line – profit – with a long time horizon and rational expectations. Executives targeting profitability with a sufficiently long time horizon will make investments that generate social benefits because these investments serve the interests of their companies. Moreover, companies that take this approach will generate social benefits more efficiently and sustainably than those using typical strategies for CSR or CSV.

Altman’s paper cites Philanthrocapitalism. That book’s author, Matthew Bishop, has a similar essay this week in the Economist, comparing IBM to the Carnegie Corporation and concluding that the former has done more for society than the latter.

All of this is profoundly silly. Both Altman and Bishop are all in favor of companies engaging in philanthropic initiatives, although only Altman goes so far as to say that they have to be justifiable on a P&L basis. He writes:

If companies view social initiatives as cost centers rather than contributors to profitability, then these initiatives are likely to become procyclical, being cut in downturns and then reinstated when balance sheets are flush again. Their budgets will be arbitrary rather than being linked to a rate of return. As investments expected to be competitive and profitable, by contrast, social initiatives will enjoy more durable support from executives and become a core part of corporate operations.

The problem here is that Altman’s idea of profitability turns on the idea that “the time horizon for a company’s decision-making should be infinite” — and if he’d ever spent any time running a for-profit company, he’d know full well that in downturns, corporate time horizons are anything but. Even the most enlightened CEO will increase the discount rate with which she calculates distant profits when she runs into short-term trouble — and if you’re calculating philanthropic returns on an NPV basis over an infinite time horizon, a small tweak to the discount rate can easily mean the difference between profitability and being axed.

But the point in the paper at which Altman becomes a complete laughingstock to any genuine capitalist is in his third hypothetical of how corporate philanthropy can be profitable:

The chief executive of a major electronics manufacturer is deciding whether to develop a line of low-cost smart phones for sale at a small margin in poor countries. This investment would cost $100 million and generate an expected rate of return of only 2 percent. However, the chief executive is convinced that the investment is a moral one, and she would get substantial personal satisfaction from making it. Her salary is due to increase by $3 million during the period in which the investment would take place, but she will accept a raise of only $1 million if the investment goes forward. With this additional factor in mind, the expected rate of return on the investment doubles to 4 percent; it is now more competitive with the other investment opportunities in the company’s portfolio.

I had to read this a few times to be sure I understood it right: apparently the CEO of a major electronics manufacturer is going to take a $2 million pay cut just so that she can get “substantial personal satisfaction” from selling phones in poor countries. I can just imagine her presentation to the board: “we’ve created this wonderful line of phones which is profitable, but not very profitable, so in order to make it reach an adequate IRR, I’ve decided to ask you to pay me $2 million less.”

Bishop’s article doesn’t have anything quite that ridiculous, but it is based on an equally silly premise: that we can learn something useful from comparing IBM to the Carnegie Corporation, just because they were both founded 100 years ago:

Comparing the records of those giants of 20th-century American capitalism—or “philanthrocapitalism”—can shed light on a question that is keenly debated today: whether philanthropy or business is more effective at “Making the World Work Better”, to borrow the title of the book celebrating IBM’s centenary.

Well, no, actually, it can’t. Bishop’s conclusion is that Carnegie wins the first 50 years while IBM wins the second 50 years and the prize. But you’d want Carnegie to be front-loaded, since that’s how philanthropy works best. Bishop admits as much:

100 years is too old for a philanthropic foundation…

Many of today’s philanthropists aim, as Carnegie did, to give away all their money by the time they die, or at least put a time limit on the lifespan of their foundation after their death. The Gates Foundation will have to be wound down 50 years after the second of Bill and Melinda Gates dies.

On top of that, Bishop’s choice of IBM exhibits massive survivorship bias. The Carnegie Corporation was the only mega-philanthropy in the world in 1911: Bishop has chosen 100% of the big philanthropies of the day to see how they fared. But IBM was just one of thousands of companies founded that year, and it’s almost certainly the only one which could even come close to giving Carnegie a run for its money in this particularly weird competition. Carnegie never aspired, when he created his foundation, to outperform every single corporation ever to be founded. Instead, he simply aspired to make the world a much better place, which is exactly what he did.

The good news here is that these attempts by Altman and Bishop to elide the distinction between capitalism and philanthropy — to make rapacious executives feel good about being greedy — are such transparent failures that with any luck they’ll mark the turning point at which people do good to do good, rather than simply declaring that the best way they can do good is to chase profit as zealously as possible. You can’t just invest money in the stock market and declare it the best way to do good in the world, any more than you can start an arms or cigarette manufacturer and claim that your pursuit of profits is the best way to improve global welfare. And I must admit it’s a little depressing to find the likes of Altman and Bishop helping the global plutocracy think otherwise.

Paul Steiger is rightly proud of his latest Pulitzer — the second for ProPublica in as many years. He’s right, too, that such things don’t come cheap:

One last point: to do this, it takes money. ProPublica is a non-profit, and contributions are tax deductible. We had more than 1300 donors last year and almost 500 so far this year. The median donation is $50, but whatever you can give will be greatly appreciated, and will truly help us make a difference. I invite you to celebrate with us by making a contribution by clicking here.

Sadly, individual donations — certainly not individual donations of $50 — won’t make a difference. According to ProPublica’s Form 990, Paul Steiger and his managing editor, Stephen Engelberg, made $959,811 between them in 2009 — $585,117 for Steiger and $374,694 for Engelberg. Senior reporter Dafna Linzer made $225,876. The total wage bill for 47 people for the year came to $5,267,678, or an average of $112,000 per person, not including things like pension contributions, other benefits, freelance costs, and payroll taxes.

It’s entirely within ProPublica’s rights to pay such salaries, but Steiger’s 1,300 donors, each pitching in $50, will generate a total of $65,000 — enough to pay Steiger’s wages for almost six weeks. If they all doubled their donation, he’d raise $130,000 — enough to pay ProPublica’s total wage bill for just over one week.

The fact is that ProPublica is funded, generously, by Herb and Marion Sandler; they, and a handful of other big-name funders, are the only donors who actually make a difference. According to ProPublica’s 2010 annual report, online donations for $86,000 were rather less than 1% of ProPublica’s total fundraising haul of $9,832,000 — the bulk of which came from board members. (For which, read the Sandlers.) ProPublica is not reliant on donations from the public, and if you’re prioritizing your charitable contributions, it makes sense to target your money at organizations which really do rely on such things.

In principle, I like the idea of a non-profit news organization which is funded by its readers. But ProPublica is not that organization. If you want to make a difference by funding investigative journalism, you’ll get more bang for your buck by giving money to the Investigative Fund at the Nation Institute, which doesn’t have a highly-paid permanent staff. Instead, it gives out grants of between $500 and $10,000 to reporters working on important stories like Kai Wright’s recent examination of the payday lending industry.

As ever, giving anywhere is better than giving nowhere — so if you are impressed by the Pulitzer-winning work of Jesse Eisinger and Jake Bernstein and want to support it with a donation to ProPublica, that will do some amount of good and no harm whatsoever. But if you’re going to donate that money to the cause of investigative journalism, you might want to look at other places too. Which might need it more than ProPublica does.

Mike Bloomberg is one of the richest and most sophisticated philanthropists in the world. And yet:

Mayor Michael R. Bloomberg and City Council Speaker Christine C. Quinn today announced that employees of the City of New York will be able to set aside part of their paychecks directly to aid in the Japan disaster relief efforts…

“We brought generous New Yorkers together to raise $2.2 million for Haiti relief and we are asking anyone who can contribute to help those in dire need in Japan,” said Mayor Bloomberg. “The Mayor’s Fund will complete the necessary vetting and ensure contributions will go to reputable organizations with low overhead that are delivering services on the ground. Any help is appreciated – big gifts or small gifts; it all adds up and can make a real difference.”

This is the point at which political realities trump realistic philanthropic priorities. It’s simply not true that a small gift to Japan can make a real difference, at least not in terms of what it buys on the ground. But if you’re leading a city of people who want to help, then telling them that they can’t help is never a good measure to send. If on the other hand you tell them that they can help, they will feel much better. It’s the job of the mayor of New York to make New Yorkers feel better, so you can see why he therefore says things like this.

I got an email from Tom Glocer, the CEO of Thomson Reuters, this morning, announcing that the company has matched some $150,000 of employee donations to emergency relief efforts in Japan. (Not including donations from people like me, which were also matched, but which weren’t directed to Japan.)

This is great news with respect to morale in the company, where all of us, I think I’m safe in saying, felt dreadful about what had happened in Japan and wanted to show our support for our colleagues there, their families, and the areas of the country so devastatingly affected. One Japanese employee said that “I think I can speak on behalf of everyone in Japan when I say how touched we have been by the warm support by our colleagues across the company. I really feel like we are part of a global organization who cares about us.” Our messages of support, and our donations of money, are a signal which does make people feel better.

What we’re seeing here, I think, can be considered “philanthropy theater”, much as the TSA engages in “security theater”. The point is really to be seen to be doing good, to feel as though you’re making a difference. And frankly that’s not a particularly bad thing. There are lots of reasons why people donate money to good causes, and not all of them are or should be entirely selfless. If acts like these acculturate us to giving money to charity, then maybe the effects here can be positive. Certainly there’s no sense in which giving money to Japan does any harm.

Still, I do worry about the way in which philanthropists like Bloomberg continue to conflate giving money, on the one hand, with making a real difference, on the other. If we continue to concentrate overwhelmingly on inputs rather than outputs, we’ll only serve to encourage ever more inefficiency and even fraud in the non-profit world.

This time last week, I was asked if I would go on Piers Morgan’s CNN show to talk about donations to Japan. I said yes, and reckoned that if I was going to go on national TV talking about such things, I ought at least to have a blog entry up on the subject. So I wrote this.

It’s the job of an opinion writer to stake out clearly-defined and controversial opinions, and anybody in this business has to have a reasonably thick skin. And I knew, more or less, what I was getting myself into: the very reason that I was asked onto the Piers Morgan show to begin with was that I’d written something very similar about Haiti, and a lot of people didn’t like that.

In the end, the Piers Morgan appearance was canceled. But my blog post went viral, and not in a particularly good way. One week, 248 comments, and 7,269 Facebook recommendations later, I’m wondering what happened.

I’m used to criticism — I even got an honest-to-goodness death threat once, after I warned (erroneously) that Morgan Stanley was toast and likely to get nationalized. But the degree of anger and hatred leveled at me over the past week is nothing I’ve ever experienced.

It’s worth making very clear, in case anybody was wondering, that this is one of those situations where my opinion is most emphatically not that of my employer, which is putting a lot of effort and money into raising earmarked funds for Japan.

The debate is clearly an important and meaningful one. My advice was entirely in line with the detailed analysis from GiveWell, which concludes that “the relief/recovery effort does not have room for more funding” and that “you as a donor do not have the power to improve the relief and recovery effort in Japan.” It’s also in line with Stephanie Strom’s reporting for the NYT. And so far, I haven’t seen any real pushback to the substance of what they’re saying.

The media reaction to my post was generally somewhere between respectful and positive — see Weekend Edition’s coverage, for instance, or Slate’s. And in general it’s hard to find independent commentators who think that donating earmarked funds to Japan is a particularly good idea. Tyler Cowen probably comes closest: he says that there are no corruption worries in Japan; that sending money is an important signaling mechanism showing US solidarity with Japan; and that even though you could give unrestricted funds instead, you probably won’t, and that therefore something is better than nothing.

But substantive debate was something sorely missing in the comments to my post, which rapidly generated into a startling series of ad hominem attacks on myself personally — I’m evil, I’m racist, I deserve to die, I should be fired, that kind of thing — interspersed with other comments pointing out that the attackers didn’t seem to have read and understood what I’d written.

Where did all those comments come from? I suspect that a lot of them came from people following a link from Facebook, where my story showed up like this:

There’s no nuance there, just a stern-looking headshot, a stark headline, and what looks very much like gratuitous provocation. People who have donated money to Japan, or who have friends or family in the affected area, are naturally going to respond aggressively if they see something like this. By the time they click through to the actual article, it’s too late for my argument to carry the day: they’re angry, and they’re going to express that anger in my comments.

Those comments were particularly effective because they were read, by myself and by many other people inside and outside Reuters. That’s not always the case, online: if you’re a writer or editor for HuffPo or Yahoo, the volume of comments is simply too great to even think about reading them all. So if a comment thread degenerates into a flame war, people tend not to notice as much. Even in my own case, I get thousands of comments on posts which are republished on Seeking Alpha, and generally read none of them.

But I’m very proud of my commenters here at Reuters, I respect them a lot, and know full well that on any given subject I have many readers who are much smarter and more knowledgeable than I am. And it turns out that when I get a large number of commenters who aren’t regular readers of my blog, it’s hard to snap out of the habit of reading them with a certain degree of respect.

My blog is a place for pretty high-level debate and discussion surrounding issues in the news. It assumes, for instance, that people implicitly understand the orders of magnitude between the amount of donations being targeted at Japan and the amount of money that it’s going to cost to rebuild the country and aid the victims of the earthquake and tsunami. Or that Japan, with its overvalued currency and too-low inflation, would actually welcome any short-term inflation and depreciation which came from printing money to pay for reconstruction.

But while these are familiar concepts to my blog’s regular readers, they’re not necessarily familiar to people on the internet more generally. “There’s nothing you can do to help” is never a pleasant message to convey, and people tend to react strongly against it. On top of that, decades of fundraisers sending the message that “every penny helps” have clearly done their job — which is to conflate, in the public’s mind, the act of helping with the act of donating money, to the point at which a message of “don’t donate to Japan” is read as saying, in substance, “don’t help Japan.”

Would it have been better, then, for me to make the same point less forcefully? A large contingent of the commenters on the post think so: they’re the ones saying that the message is fine, but the headline is insensitive and needlessly provocative in a time of great emotional turmoil and strain. I’m torn on this one, but I think that in general sugar-coating and euphemism are invidious: if you’ve got something you want to say, you should just come out and say it. And given that it’s impossible to know in advance when a post is going to break out from my normal readership, the result of such a policy would surely be a lot of unnecessary and harmful self-censorship.

On top of that, as Nick Denton never fails to remind me, commenters are by no means representative of readers as a whole. If a tiny fraction of 1% of the readers of the post have a strong negative reaction to it and leave angry comments it, that’s entirely consistent with 99% of my readers understanding exactly what I was trying to say, and maybe even learning something and viewing the world of aid and philanthropy in a way they hadn’t thought of before.

In hindsight, I do wish that I’d spent a bit more time on the post instead of rushing it out between panels at SXSW. But I doubt that would have made a huge amount of difference. In future, though, I think I will be more conscious of how the headline and first two sentences of my posts are likely to come across on Facebook. When I’m aggregated by humans, they make sure to get the message across quite clearly. But Facebook’s bots aren’t that smart, and the message can easily be lost completely.

Stephanie Strom has a fantastic article in the NYT today, which actually reports out the whole issue of why it’s silly to donate money to Japan. Go read the whole thing, but here’s some choice bits:

The Japanese Red Cross, for example, has said repeatedly since the day after the earthquake that it does not want or need outside assistance. But that has not stopped the American Red Cross from raising $34 million through Tuesday afternoon in the name of Japan’s disaster victims…

The Japanese government so far has accepted help from only 15 of the 102 countries that have volunteered aid, and from small teams with special expertise from a handful of nonprofit groups…

Many of the groups raising money in Japan’s name are still uncertain to whom or to where the money will go…

Holden Karnofsky, a founder of GiveWell, a Web site that researches charities, said he was struck by how quickly many nonprofit groups had moved to create ads using keywords like “Japan,” “earthquake,” “disaster,” and “help” to improve the chances of their ads showing up on Google when the words were used in search queries.

“Charities are aggressively soliciting donations around this disaster, and I don’t believe these donations necessarily are going to be used for relief or recovery in Japan because they aren’t needed for that,” Mr. Karnofsky said. “The Japanese government has made it clear it has the resources it needs for this disaster.”

The NYT has, smartly, disabled commenting on the article — people get really emotional about this subject, and can be astonishingly bad at understanding what you’re saying. (No, Bill O’Reilly, I did not tell the government not to send aid; I did not say that there wasn’t much relief in Haiti, and I certainly didn’t say that we shouldn’t send money because “we don’t have any money, we’re bankrupt.”) But Strom’s message is important — the Japanese Red Cross is very explicitly and repeatedly saying it neither wants nor needs the money that the American Red Cross is raising for it. So if you’re going to donate money to a desperate cause, there are much better ways of doing so.

Individuals are doing it, banks are doing it — faced with the horrific news and pictures from Japan, everybody wants to do something, and the obvious thing to do is to donate money to some relief fund or other.

Please don’t.

We went through this after the Haiti earthquake, and all of the arguments which applied there apply to Japan as well. Earmarking funds is a really good way of hobbling relief organizations and ensuring that they have to leave large piles of money unspent in one place while facing urgent needs in other places. And as Matthew Bishop and Michael Green said last year, we are all better at responding to human suffering caused by dramatic, telegenic emergencies than to the much greater loss of life from ongoing hunger, disease and conflict. That often results in a mess of uncoordinated NGOs parachuting in to emergency areas with lots of good intentions, where a strategic official sector response would be much more effective. Meanwhile, the smaller and less visible emergencies where NGOs can do the most good are left unfunded.

In the specific case of Japan, there’s all the more reason not to donate money. Japan is a wealthy country which is responding to the disaster, among other things, by printing hundreds of billions of dollars’ worth of new money. Money is not the bottleneck here: if money is needed, Japan can raise it. On top of that, it’s still extremely unclear how or where organizations like globalgiving intend on spending the money that they’re currently raising for Japan — so far we’re just told that the money “will help survivors and victims get necessary services,” which is basically code for “we have no idea what we’re going to do with the money, but we’ll probably think of something.”

Globalgiving, it’s worth pointing out, was created to support “projects in the developing world,” where lack of money is much more of a problem than it is in Japan. I’m not at all convinced that the globalgiving model can or should be applied directly to Japan, without much if any thought about whether it’s the best way to address the issues there.

That said, it’s entirely possible that organizations like the Red Cross or Save the Children will find themselves with important and useful roles to play in Japan. It’s also certain that they have important and useful roles to play elsewhere. So do give money to them — and give generously! And give money to other NGOs, too, like Doctors Without Borders (MSF), which don’t jump on natural disasters and use them as opportunistic marketing devices. Just make sure it’s unrestricted. The official MSF position is exactly right:

The ability of MSF teams to provide rapid and targeted medical care to those most in need in more than 60 countries around the world – whether in the media spotlight or not – depends on the generous general contributions of our donors worldwide. For this reason, MSF does not issue appeals for support for specific emergencies and this is why we do not include an area to specify a donation purpose on our on-line donation form. MSF would not have been able to act so swiftly in response to the emergency in Haiti, as an example, if not for the ongoing general support from our donors. So we always ask our supporters to consider making an unrestricted contribution.

I’ve just donated $400 in unrestricted funds to MSF. Some of it might go to Japan; all of it will go to areas where it’s sorely needed. I’d urge you to do the same, rather than try to target money at whichever disaster might be in the news today.

Update: Some bright spark has set up a “Socks for Japan” drive. I’m not making this up. I trust that none of my readers are silly enough to send socks to Japan, but this is a great indication of how wasteful a lot of well-intentioned giving can be.

Scott Austin has an interesting article about a third form of capital-raising: not debt, not equity, but a deal where investors get back a fixed percentage of revenue for a certain amount of time:

Royalty investors say the default provisions of royalty loans are generally less onerous than bank debt, and the payments are variable not fixed, allowing for flexibility if a company loses a major customer or has a down year.

Perhaps more importantly to entrepreneurs like Dan French, the chief executive of independent brokerage house Leonard & Co. in Troy, Mich., entrepreneurs give up little or no equity in these royalty scenarios.

It’s an interesting idea, which could, in theory, be extended to large companies, too. But before it gets scaled up, it’s first being scaled down, by a company called Profounder, which was founded by Kiva and Prosper alums.

Profounder has two arms. One offers “private investment opportunities,” which are basically the same as the opportunities offered by companies like Arctaris Capital Partners, Cypress Growth Capital, and other firms in the space. Except in this case, Profounder doesn’t help find investors: the only people who can invest are friends, acquaintances, and family members who are specifically invited to do so by the person raising money. As such, it’s hard to see why anybody would use Profounder rather than a shop which could actually help find money.

The other arm of Profounder is more problematic, and offers “public investment opportunities.” But “investment” is an odd way of putting it, because the way these things are designed, there’s no way that any investor can ever get back more money than they invested in the first place. Profounder spins this the best way it can:

If you make your original investment back before the term of the investment contract is up, your share of the revenues for the remainder of the term will go to a great nonprofit that the business has chosen. So, if you invest $1000, and in year 2 of a 3-year investment contract that $1000 comes back to you, any payouts from your revenue share above and beyond this $1000 for the next year will go to a great nonprofit.

The only good news here is that none of the companies seeking this kind of funding look as though they’re going to reach their goals. (And if you don’t reach the full amount, you don’t get any money at all.) The closest to their goal is textile-design company Proud Mary, which has received 17% of its $12,000 goal. Investors will receive 6% of Proud Mary’s revenues over the next 4 years; those revenues are projected to total $221,000, which means that if all goes according to plan, investors will get their $12,000 back and a worthy charity—Nest—will get $1,260.

Proud Mary founder Harper Poe says that her projected revenue for 2011 “is a conservative calculation”; after that, revenues are projected to rise between 10% and 12% per year.

But let’s have a look at that conservative projection:

Entrepreneurs have to be optimistic, of course, but I don’t see how a rise in revenues from $6,500 in 2010 to $47,000 in 2011 can possibly be described as “conservative.” Poe says the $47,000 figure is “based on the sales of our newly designed line for Spring/Summer 2010″, but she gives no details as to how it was arrived at. If Poe manages to grow her 2010 revenues at a compound annual growth rate of 25%, they would total $46,846, and investors would get back $2,811 — or just 23% of what they invested. Alternatively, if Poe just cashes the $12,000 and lets Proud Mary wither away while she gets a proper job, investors get nothing at all, while Poe is $12,000 richer.

I was alerted to Profounder by an anonymous correspondent, who writes:

It appears that what ProFounder is doing is employing an innovative strategy to leverage the “halo effect” of non-profits into providing businesses a very cheap form of capital.

Like most social-ventures/bottom-double line/etc investments targeted at retail investors, it appears highly unlikely that the money invested in these ventures will ever produce a positive return. However, by affiliating the investment with a potential donation to a non-profit organization and not allowing the investors to generate any positive return, investors begin thinking of this as a “donation” more than an “investment”. Investors start to think “it’s ok that I don’t get all my money back because it’s for a good cause”, but of course if the investor doesn’t get all their money back, then the good cause gets nothing at all.

My correspondent did the math on the 10 companies featured by Profounder: three of them won’t even pay back the investment if they meet their revenue targets in full! And Chill Low Glycemic Organic Soda, which is asking for $200,000, is projecting $44 million in revenues over the next four years, despite never having made a single penny to date. In order to repay its investors, it will need to bring in $5,714,285 over the next two years; there’s no indication of how it’s going to be able to do that on an investment of just $200,000, or where any other money might be coming from.

Steve Waldman, of Interfluidity, comments, via email:

I like the idea of nonequity revenue sharing investing in small businesses, but I don’t like this at all. I want small business investing to be investing, that is, I want people to choose good businesses and gain or lose from the quality of their choices. The hokey giveaway to nonprofits takes out much of the incentive to monitor businesses on commercial terms: the funding is viewed as a donation (best-case scenario is a loss when the time value of money is taken into account). The primary motivation for funding becomes expressive — do I “like” this business.

I have no trouble with there being an expressive component to investing, and I think funding costs ought to be lower for businesses that people “like”. But I think we want investors who do intellectual work about evaluating businesses, and they won’t do that without compensation.

I want to invest in small businesses, not subsidize them and mix my subsidy up with gifts to nonprofits. I dislike this pretty strongly, because it associates smallbiz investing with charity rather than with the good work of building successful businesses.

Steve is absolutely right. The fundamental problem with Profounder is that it turns small businesses into charity cases, which they are not and should not be. Finding innovative sources of small-business investment funds is a great idea. But let’s not implement it like this. Especially when Profounder itself is a for-profit operation which skims 5% off the top of any money raised.

I’m with Henry Blodget on this one: whatever the timing-related motivations behind it, Mark Zuckerberg’s decision to donate $100 million to Newark’s public schools is wholly admirable — the best possible way to celebrate the news that you’re now richer than Steve Jobs. Silicon Valley is full of billionaires like Jobs or Larry Ellison who have been dynastically wealthy for a very long time and who have evinced little if any interest in philanthropy. So it’s fantastic news that Zuckerberg is starting out so young.

It’s also easy to see the influence of Zuckerberg’s girlfriend, Priscilla Chan. Remember the New Yorker’s profile of Zuckerberg?

Terry Semel, the former C.E.O. of Yahoo!, who sought to buy Facebook for a billion dollars in 2006, told me, “I’d never met anyone—forget his age, twenty-two then or twenty-six now—I’d never met anyone who would walk away from a billion dollars. But he said, ‘It’s not about the price. This is my baby, and I want to keep running it, I want to keep growing it.’ I couldn’t believe it.”

Looking back, Chan said she thought that the time of the Yahoo! proposal was the most stressful of Zuckerberg’s life. “I remember we had a huge conversation over the Yahoo! deal,” she said. “We try to stick pretty close to what our goals are and what we believe and what we enjoy doing in life—just simple things,” she said.

I’m sure that Zuckerberg has already sold enough Facebook stock to be able to live comfortably on for the rest of his life. So everything else is just gravy, and certainly Newark’s kids need it more than he does.

The move is also significant in terms of the continuing development of the secondary market for Facebook stock:

Mr. Zuckerberg is setting up a foundation with $100 million of Facebook’s closely held stock to be used to improve education in America, with the primary goal of helping Newark…

The timing of the announcement was driven by Mr. Christie and Mr. Booker, over the objections of Facebook executives…

Mr. Zuckerberg will fund for the foundation with his private stock in Facebook, and will arrange for a transaction on the secondary market for the foundation to turn the shares into cash as needed, said the person familiar with the discussions.

Back in June, Alexei Oreskovic was already saying that “a vibrant market for shares of privately held Facebook has developed in the past year”; this move is going to make the market significantly more liquid — and give Facebook executives less control over exactly who holds how much stock in the company. Once the foundation is set up, the question of going public just becomes a matter of when rather than whether: it’s a tactical decision, now, rather than a strategic one.

It’s also important, I think, not to overstate the effect that this gift is likely to have on Newark. The WSJ falls down here:

The donation has the potential to be matched by another $100 million that Mr. Booker has been working on raising from private foundations and others. The $200 million that could be raised would amount to more than 20% of Newark’s budget of $940 million.

This confuses stock and flow. Zuckerberg’s gift isn’t going to be spent in one year; it’ll be dribbled out over time. Even if the total amount donated does reach $200 million, the annual amount spent is very unlikely to exceed 2% of the city’s budget. The donations are important. But private philanthropy is always going to be marginal when it comes to primary and secondary education, even when it’s confined to a single school district.

Eli Broad hasn’t given up on his rallying cry, which I first wrote about two years ago:

“If 90% of your work is in storage you need to begin lending it to other institutions. Get art out of the basements,” he said at the conference, which took place in his hometown of Los Angeles at the end of May. He then told The Art Newspaper: “With all the money being spent to store and conserve work, it doesn’t make sense economically or morally not to share it with the largest possible audience.”

Lacma on Fire has a very funny response, explaining that museums have a finite amount of shelf space, but Broad sounds as though he’s running Hilbert’s hotel.

Broad talks as if everything in his 2000-piece collection can and must eventually be on permanent view. The art that’s not in his planned museum will be lent out, notwithstanding the fact that this would require the equivalent of about ten Whitney Museums, sitting empty out in the hinterlands.

The bottom line is that there is more art than museum space to show it. Thus museum installations, particularly of contemporary art, are ever-changing and (to use the fashionable term) “curated.” What’s so bad about that?

This is true, but at the same time I’m sympathetic to Broad’s cause, even in the wake of his rather self-aggrandizing decision to set up his own museum. So where’s the hole in LoF’s argument?

There are two, I think. Firstly, it would be great if museums could carefully curate shows, using the vast quantity of unexhibited work in storage at museums as a glorious resource from which they could pick and choose as they liked. Unfortunately, that’s not how the world works in reality.

In the real world, organizing loans is a huge pain, and museums tend not to do it unless they have to or unless they’re organizing some big blockbuster show. Museum curators at would-be borrowing institutions tend not to be very enthusiastic about navigating the enormous amount of politics and paperwork involved, and administrators at would-be lending institutions are no more excited about trying to put in place all the protections needed for lending out their art. It’s so much easier to just keep it stored in their own basement.

One complicating factor here is the fact that museum funders tend not to give any credit for shows elsewhere which use artworks borrowed from the museum they support. Funders want to see the crowds and the shows at their museums, not someone else’s. And so they have little enthusiasm for using their museum staff’s time to help glorify some other institution. As a result, the system of inter-museum loans is based on all manner of mutual back-scratching, on the idea that the loaner is doing the borrower a favor, which should at some point be repaid.

The sad consequence is a very large number of shows culled only from a single museum’s permanent collection. Such shows are nearly always pretty thin gruel, unless they’re at a one of a handful of super-high-end museums. Smaller museums, in particular, simply don’t have the permanent collections needed to be able to curate great shows.

So having foundations dedicated to lending out art is a really great idea, I think. Such foundations could and should work proactively with museums who might benefit from borrowing their art, and make it as easy as possible for them to do so; the result would be much better shows at small and medium-sized museums around the country.

What’s more, while there might indeed be “more art than museum space to show it”, the situation is slightly different in Broad’s field of very expensive contemporary art, where museums simply can’t afford to acquire works by today’s biggest artists. (Nor might they want to, at these prices, given how uncertain it is that the works will turn out to be particularly important.) At the same time, many museums would love to be able to put on shows of such artists, without necessarily wanting them in their permanent collections. They can get a fair amount of cooperation from the artists’ galleries, but entities like the Broad Foundation would surely make life a lot easier still.

Meanwhile, there’s no harm, and potentially quite a lot of good, when large-scale museum benefactors like Broad encourage museums to start lending out their collections more. Philanthropists with their eye on the health of art museums as a whole, rather than individual institutions, are a good thing. Even when, as in Broad’s case, they retain a certain degree of fallibility and ego.