Philanthropy as It’s Malpracticed

By: 
Al Jacobs

The world of charitable giving just received a massive shot in the arm as billionaire Robert F. Smith, while giving the commencement address at Morehouse College, a private, historically black, men’s liberal arts institution, pledged to donate an estimated $40 million to pay off the student loan debt of every Class of 2019 graduate at the school.

Smith, 56, the wealthiest black person in America, with net worth estimated at $5 billion, was born and raised in Denver, Colorado. He earned a chemical engineering degree from Cornell University in 1985 and worked as an engineer for companies such as Kraft and Goodyear Tire. He received his M.B.A. from the Columbia University Business School in 1994. As a former Goldman Sachs executive, he’s the founder and CEO of the software investment firm Vista Equity Partners, a private equity firm investing in software and tech.

In addition to Smith’s talents as a businessman, he’s remarkably generous in his contributions to noble causes. In 2018, he made the largest individual donation to the City of Hope Gala, earmarking funds towards prostate cancer treatment for black men and for breast cancer research for black women. He also donated $2.5 million to the Prostate Cancer Foundation to advance prostate cancer research among African American men. Furthermore, in 2018, he donated $1 million to the Cultural Performance Center at the Denny Farrell Riverbank State Park in Harlem.

Despite Smith’s many commendable traits, he seems to display a certain shortsightedness in one respect. It relates to his selectivity of charitable recipients. He acknowledges his decision to pay off the Morehouse student loan debts was an idea which came to him only three days before his announcement. It’s obvious he gave little thought as to who would or would not benefit. Consider, if you will, the practical ramifications of his action.

First of all, those pupils who loafed their way through undemanding classes with low performance and grades are as amply rewarded as the hardworking students who performed admirably. This doesn’t seem to be the way gratuities should be given. Most certainly this is not a sensible formula for the granting of scholarships and practically speaking, this is precisely what Smith’s spontaneous gifts are: retroactive scholarships.

There are other inequities. Those students who wisely chose to scrape by as tightly as possible, so not to incur massive – if any – student loan debt, will fare far more poorly than those students who gave little thought to their finances, while impulsively grabbing the most massive student loans available. In addition, the loan debts of students from relatively well-to-do families, who might choose to pay the graduates’ obligations at a later date, will be as well benefited as those from impoverished families who so desperately need the money. And equally so will be the reality that graduates with degrees in majors such as English, History and Sociology, who might never be able to earn enough to pay their loan debts, will be no more favorably remunerated than science, math and engineering majors, who may expect to obtain well-paying jobs upon graduation.

Despite these inequities – a somewhat questionable method of granting gratuities – what I’ve just related is the only criticism I can find of Robert F. Smith’s charitable giving. He seems to be a most remarkable individual in virtually every respect. With this said, I’m now prepared to offer my suggestions as to how his awarding of benefits might have been more effectively accomplished.

But let me preface this with a word to those of you who may possess spare dollars for which you have no real need, but never a thought as to whether they may be shared with others. You must recognize there’s a practical limit on personal consumption, beyond which satisfaction is marginal.  At some point in our finite lives there must be more than mere acquisition. In this hostile world are deserving people and the opportunity to share your bounty in a meaningful way is exactly that – an opportunity.

However, a caveat: With respect to your giving, you must ensure the recipient is both deserving and identified. This, of course, rules out the regular charities such as United Way, as there’s no way to ever know what happens to the huge sums annually disappearing into such organizations. Nonetheless, there are other ways to target your donations.  Let me suggest how this might be done. My belief is charity begins at home … though not with the cynicism normally intended. Consider the methods whereby you can tailor your participation.

Imagine you’re a chemist with a love for your profession. What better gift might you make than to pass on your learning to young chemistry students and encourage the talented ones to pursue the same career? Consider the options at your disposal.  After meeting whatever requirements are imposed, you can apply to become a part-time instructor at a local community college. This is a fine and satisfying start in itself.

A second step can be to establish a private non-profit educational foundation where you will contribute money. These funds become available for scholarships to students chosen by the foundation directors whom you select, perhaps the faculty members of the schools from which your scholarship recipients are chosen. Selections can be made prior to the commencement of each academic year, with students’ payments distributed at the start of each semester as they pursue their degrees at a university of their choice … and it will be your task to monitor their performance. Not only will well qualified students benefit directly to the extent of nearly 100 percent of your contributions, but your donations to the foundation are eligible to be taken as deductions on your tax return.

Finally, there’s a logical third step worth considering.  If there are more students than you’re capable of handling with your own funds, you might invite other educationally minded persons to make contributions to the foundation. This can be a fine way to expand the benefits offered as well as an opportunity for others to participate in a low-overhead philanthropic enterprise where the value to the actual recipients can be seen and appreciated

Before I conclude this article, I want to pass on a few observations concerning America’s charitable foundations. The more than 1.5 million philanthropic organizations soliciting grants and donations and presumably existing to bestow beneficence as provided in their charters, function in a strange sphere of unreality. Of the $390 billion in public donations these organizations received as recently as 2016, a huge portion of the funds never saw their way to any intended purpose. As to applicable rules, federal law requires private foundation need donate no more than 5 percent of their assets each year to retain their non-profit status. Add to this administrative expenses such as salaries and rents included in the five percent and the results are predictable. The actual philanthropy of many foundations is abysmal.

This leads to a fundamental question: What eventually happens to these massive unspent amounts? Anyone with an understanding of mankind knows exactly what happens. Human nature is such that insider abuses of any organizational system are, and always have been, integral to the system, not aberrations from it. Very simply, those who control the operation tend to pass benefits on to themselves and their cohorts. Keep this always in mind when you’re asked to donate to a cause – any cause. To be certain, the only person you can depend upon to faithfully oversee the functions truly expected of a foundation is the face smiling back at you from your bathroom mirror.

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience. You may view them on http://www.roadwaytoprosperity.com.

al@beachcomber.news

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