John Arnold, billionaire philanthropist and former hedge fund manager, has been in the media circuit lately, criticizing what he judges to be problematic philanthropic practices. His criticisms are often apt—but his recommendations miss the point in surprising ways.
In an interview with Vox’s “Recode” blog, Arnold sharply criticizes donor-advised funds. He is worried that they benefit massive, well-heeled charities, more than the small ones more desperately in need of support. He worries that they incentivize delayed giving and "giving from the grave."
This latter concern is developed in his recent and aptly-titled piece, “Put a Stake in ‘Zombie Charity’.” “Zombie charity” refers to the common practice of establishing perpetual foundations or allowing a DAF to grow until the donor’s death and only then disbursing the funds. His bias toward “presentism” here is palpable, but his concern is not without merit.
Philanthropy Daily is no stranger to criticizing perpetual foundations. Following Martin Morse Wooster’s important research into donor intent, one common critique is that perpetual foundations are prone to violations of donor intent. Arnold, however, notes another risk: the donor’s earlier interests becoming obsolete, while the foundation does not veer from the letter of the law of the founder’s intent.
He briefly recounts the story of California’s Buck Trust, where a $7.6 million endowment grew to $260 million after the benefactor’s death, while Marin County—the Bucks’ hometown—became one of the wealthiest counties in the country. Nevertheless, the bylaws restricted this now-massive endowment to be spent in Marin County. It is likely that this is not what Buck would do if she were alive today (seeing the size of her Trust’s endowment and the needs in Marin County and elsewhere)—but it is what she chose not knowing the future of the Trust’s investments or the future of her county.
Thus perpetual foundations—“zombie charities”—risk running afoul of the donor’s deeper goals whether donor intent is followed or abandoned. Causes contrary to the donor’s wishes may be supported, or unexpected changes in demographics or social problems may make the foundation’s goals unnecessary or inapt for current needs. For these reasons, some commentators encourage—or at least wonder about—sunset provisions.
Arnold suggests a “moral imperative” for this generation “to solve this generation’s problems.” (Curiously he calls the opposite—storing money away—not immoral but merely “inefficient”: a libertarian’s binary, if ever there was one.) He is wise to bring the moral question, the question of responsibility to our neighbor, into the conversation. Indeed, we do have a duty to our neighbor, our community, our country, and spending down—as the Arnolds intend to do soon after they die—may indeed be the best way to fulfill this duty.
However, Arnold’s broader solution is government regulation: “we should start updating the regulatory structure to ensure philanthropists spend those charitable dollars right away.” Specifically, Arnold recommends increasing the minimum spend for foundations from 5% to 7%, and then applying this requirement to DAFs, as well.
There are several problems here. First, new regulations tend to bring unintended consequences. In this case, many are already predicting the obvious “race to the bottom.” Foundations are required to spend 5%. That means that most foundations only distribute 5% and exactly that—many even have requirements in their bylaws that prohibit spending more. The result? Deserving organizations in need of support not receiving modest grants because of a 5% ceiling.
Applying a 7% minimum to DAFs would likely lower the annual distributions which are currently around 20%. To be sure, many funds would be increasing their annual giving, perhaps by a full 7% in some cases. Many others, however, would decrease. This may not happen overnight, but if we learn from the example of foundation distributions, this would certainly happen over time, and the norm for DAFs would become the government-regulated minimum.
In the case of foundations, this change wouldn’t even achieve Arnold’s goals. It would only mean a 2% increase in giving. This would be a welcome increase, but one that might foster another unintended consequence. In the “Recode” interview, Arnold points out that boards and fund advisors are incentivized to grow the endowment. At 5% distribution, growing the endowment is feasible in an average market. As long as they can see returns greater than 5%, then their investments will grow the endowment. At 7% distribution, however, growing the endowment at a rate more than a trickle requires a strong market and excellent investment strategies.
Already foundations spend vast sums of money (which make up part of the 5% distribution requirement) on investment advisors. The need, then, to hit even better investment returns would likely result in increased investment expenses. Part of that 2% of increased disbursements would go, then, not to charities, but to lining the pockets of the best investors. And I bet you’ll see the same motivation with donor-advised fund managers.
The goal, clearly, is not achieved by imposing a regulation upon the foundation managers or DAF advisors, because the regulation does not change their goals or their approaches to philanthropy. Arnold has apt insights into the philanthropic sector's role to take more risks than government or the private sector, to invest in the well-being of others, more than the well-being of a growing endowment. But grasping these duties take a conversion of mind and heart that the law cannot achieve.
While law is a teaching force, it does not touch the deepest part of us. This is why a 5% required minimum becomes a ceiling. The regulation teaches citizens that 5% of an endowment must be distributed, no more, no less. The law simply doesn’t have the capacity to nuance our formation more than that, to foster real generosity, real love of neighbor.
And Arnold does not want merely to see a 2% increase in giving. He wants to see this generation “solve this generation’s problems.” Not everyone agrees with the moral imperative that he articulates. (I for one don’t agree that “dead people’s influence should decrease as time passes,” even if I would like to see increased disbursements.) Thus in order for his goals to be realized, donors and philanthropists need to learn, need to come to believe, that their responsibility lies in serving their contemporaries, not in serving generations yet-to-come.
A 7% distribution minimum will not achieve that. It will only teach people that 7%, no more, no less, must be distributed each year. Requiring foundations to sunset after a donor’s death—that would result in more impact in a shorter period of time, to be sure. But this, too, would have unintended consequences, and very possibly a disincentive to establish a charitable foundation at all, instead simply passing your funds onto your heirs.
At bottom, then, is individual responsibility and an individual’s understanding of his responsibility to his neighbor—and, further, an individual’s duty to communicate that responsibility to his neighbor. Government regulation will not teach me to be a better philanthropist. It will not teach me that I am my brother’s keeper and that humility matters more than my legacy. It might make some DAF advisors distribute more money. It would make foundations distribute more money. But it wouldn't change perception or behavior.
Back in March, Arnold congratulated himself for being “an equal opportunity…pot stirrer,” criticized by both the far left and the far right. While it is certainly extreme to call Arnold “the next George Soros,” his expectation that federal regulations will be a salve for misguided philanthropic practices is itself misguided.