Lessons from billionaires on the right way to give away money

“The problem of our age is the proper administration of wealth.” So wrote Andrew Carnegie, the richest man in the world, in 1889. Carnegie’s solution to the problem of his age—what many today would call income inequality—was to give away his millions as wisely as he could.

Carnegie’s spirit of philanthropy is alive and well these days in the Giving Pledge, a commitment among the very wealthy to give away at least half their fortunes before they die. The pledge began as a private agreement between Microsoft founder Bill Gates and legendary investor Warren Buffett; since 2010, they’ve encouraged other U.S. billionaires to act likewise. And in good news for rich and poor alike, their commitment is now spreading around the world.

Last week, it was announced the Giving Pledge was “going global” with the inclusion of new philanthropists, including Richard Branson, founder of Britain’s Virgin Group, Patrice Motsepe of South Africa, India’s Azim Premji and Vladimir Potanin of Russia. There are now 105 pledgers ranging in age from 28 to 97.

Of course, the Giving Pledge has always had a strong Canadian flavour, despite claims it only breached America’s borders last week. Montreal-born Internet entrepreneur Jeff Skoll was one of the first signatories in 2010. Canadian business titans Charles and Edgar Bronfman both joined Buffett and Gates last year. Elon Musk, the South African PayPal founder who attended Queen’s University in Kingston, Ont., also signed in 2012.

Regardless of how one defines global, however, the recent expansion of the Giving Pledge is clearly a great benefit to all. Beyond the obvious advantage of making more money available to worthy causes, it also presents the opportunity to raise the quality of charitable work everywhere.

The average non-billionaire donor typically bases his or her charitable decisions on familiarity with certain causes and/or the emotional sway of pitches over the phone or at the doorstep. But is this really the best way to give?

One of the key motivators behind the Giving Pledge is a desire to harness the rigour and drive that has allowed pledgers to achieve great success in the private sector and apply this to the charitable sector. Such an approach shares much in common with the provocative new book, With Charity for All: Why Charities Are Failing and a Better Way to Give, by former National Public Radio CEO Ken Stern, who claims most emotion-driven charity is either wasted or used in inefficient ways.

Stern argues charities ought to act more like the private sector, putting greater emphasis on head-office oversight and a scrupulous focus on outcomes. Donors should act similarly, demanding provable, long-term results for their dollars. It’s a whole new way of looking at good works. The author suggests, for example, that the popular preoccupation with extremely low administration costs is entirely misplaced. The mark of a truly effective charity is the ability to self-scrutinize and innovate.

Stern offers up an example from the early years of the Bill and Melinda Gates Foundation when it decided, largely based on guesswork, that smaller-sized high schools would improve student outcomes. Grants of $1 billion were handed out to build small schools or restructure existing schools into smaller units. But five years and 1,500 schools later, a comprehensive review revealed that all this money had done very little for student results. Math scores actually suffered.

“From the ashes [of the small-schools scheme], the foundation developed new requirements that all Gates projects and grantees be subject to rigorous and verifiable measurement,” Stern writes. “The Gates Foundation now maintains a department whose sole function is to measure and analyze results.” In other words, the Gates Foundation substantially increased the size of its administrative overhead to ensure its efforts were cost-effective and productive.

What sets billionaires of Giving Pledge apart from the rest of us, besides their money, is the ability to ensure the charitable works they support yield high-quality, efficient outcomes. So now, when the Gates Foundation advocates low-cost bed netting to fight malaria in Africa, or new ways to fund health care, there’s plenty of evidence supporting these decisions. This sort of thoroughness is the reason Buffett is giving the bulk of his fortune directly to the Gates Foundation. And as the Giving Pledge gains traction around the world, it seems reasonable to assume a more results-based focus will filter out across the charitable world. We can hope.

Just as investors have long paid close attention to how Buffett invests his money, donors today ought to mimic how he gives it away as well.