How could smart people be so dumb? That’s the overarching question raised by the Bernie Madoff-with-the-money affair. But because the decision to entrust one’s entire fortune to a black-box operation like Madoff’s is a triumph of greed over common sense, it’s hard for me to get worked up about the suffering of the Palm Beach society types who invested millions with Madoff.
Far more troubling are the losses suffered by foundations and nonprofits—because they raise important questions about how these institutions invest their money. Among those that have been forced to shut down are The Picower Foundation and the JEHT Foundation (the name stands for justice, equality, human dignity and tolerance) and the Fair Food Foundation. Others that have suffered substantial losses include The Elie Wiesel Foundation for Humanity, the Ramaz School, Yeshiva University, Stephen Spielberg’s Wunderkinder Foundation, Hadassah and the Carl and Ruth Shapiro Family Foundation, according to this roundup in The Washington Post.
There is lots to say about all this. See, for example, this excellent story in The New York Times about the campus debates at Yeshiva University, about the scandal and Jewish values. But the screamingly obvious lesson, to me, is that nonprofits and foundations have been woefully deficient when it comes to aligning their investments with their broader purpose. This problem extends well beyond Madoff.
Think, for instance, of that JEHT Foundation, which supported such human rights groups as Amnesty International, Human Rights Watch and Human Rights First. You’d think a group like that would want to invest its money only with companies that respect human rights by, for example, refusing to do business with Sudan, or pressing for freedoms in China. But there’s a disconnect between the way groups like JEHT invest their money and how they give it away.
The same goes for Jeanne and Kenneth Levy-Church, who were behind the Fair Food Foundation, a group that had generated lots of buzz in the sustainable food world. You would think the couple would want to make sure that their money was invested in companies that respect the environment. Instead, they turned it over to Madoff, and like everyone else, had no idea how he made his money.
This isn’t a new issue. You may recall that a few years ago the Los Angeles Times looked into the investments of The Gates Foundation and found that some of the companies it was supporting undermined the purposes of the foundation. For example:
The Gates Foundation has poured $218 million into polio and measles immunization and research worldwide, including in the Niger Delta. At the same time that the foundation is funding inoculations to protect health, The Times found, it has invested $423 million in Eni, Royal Dutch Shell, Exxon Mobil Corp., Chevron Corp. and Total of France — the companies responsible for most of the flares blanketing the delta with pollution, beyond anything permitted in the United States or Europe.
More generally:
The Times found that the Gates Foundation has holdings in many companies that have failed tests of social responsibility because of environmental lapses, employment discrimination, disregard for worker rights, or unethical practices.
You can read the long L.A. Times series here.
Steve Viederman, the former president of the Jessie Smith Noyes Foundation, has for years been calling upon foundations to align their investments with their mission. Foundations, he has noted, tend to be passive investors. They rarely throw their weight around when it comes to shareholder resolutions aimed at getting companies to be more socially and environmentally responsible. Here’s an essay by Steve about the issue.
Another who has sounded this alarm for years is the shareholder activist Robert A.G. Monks. Monks has griped that university endowments manage investments that are entirely unrelated to their values and missions. See, for example, To Harvard With Love, a letter that Bob wrote to Larry Summer, who was then the president of his beloved alma mater, back in 2003. He wrote:
Harvard has become an “owner” of virtually all of those enterprises whose collective functioning impacts life on earth perhaps more than any other institutions. The question is the extent of Harvard’s responsibility as owner. What is Harvard doing now? Does she ensure optimum value? What should she do in the future?
The fact that people like Steve Viederman and Bob Monks and a group called the Sustainable Endowment Institute have been making this argument for so long and getting so little traction is, among other things, a reflection of the weakness of the socially responsible investment industry. SRI investment pros have simply failed to make the case that values-driven investing is the best way to invest.
If there is any benefit from the Madoff scandal, it will be that nonprofits and foundations pay a lot more attention to how and where their money is invested. They can’t just be responsible donors. They need to be responsible owners as well.
Great points, Marc… I wish I had made them myself.
One thing I’d change, though: instead of your first line “How could smart people be so dumb?” it might be better to ask “How could rich people be so dumb?”
Part of our financial problems these days comes from the cultural assumtion that rich = smart. Maybe Madoff will help us learn the lesson that the two are very different things… But it’s probably too much to hope for. If Long Term Capital Management did not teach us that smart and rich are not the same thing back in 1998, then why should Madoff in 2008?
Hi Marc-
This is a neat insight into the fallout of the Madoff scandal, showing how it is a certain kind of common organizational oversight — or actually, lack of oversight — that led these Jewish organizations to invest in ways that ultimately damaged both their financial security and their pursuit of their missions.
Another way to phrase the question you raise is “Why are organizations so focused on the ‘output’ that they ignore their ‘input’?” Or, why don’t these organizations pay attention to where they invest their capital as part of their mission? There is enough information now about activist investing that organizations can put their own money behind their missions *while* being financially savvy. (I.e., you don’t have to accept significantly lower returns in order to invest in a mission-appropriate way.)
One issue with the Madoff investors is that many of them used membership in the shared New Orthodox Jewish community (as reported in the NYTimes) as a substitute for due dilligence. So they paid attention in a superficial way to with “whom” they were investing. Better would have been to pay attention to “in what” they were investing.
If more organizations paid attention to where they kept their own money, they could double the power behind their missions. Instead, alas, much missed opportunity and loss.
I founded a company called Invest in Love inc because that is the best investment. I learned, quite innocently as a syndicated cartoonist that my designs were licensed to companies that exploited others – child slavery, for example.I withdrew my rights, gave up lots of money, but decided I would work with people who were aligned with my vision.
People are not dumb. They are unaware. They don’t know that a child of 5 works in 115 degree heat from sunrise to sunset picking coffeee beans for their morning coffee – often with a 4000% mark up. They don’t really know where their investment dollars, their tax dollars, their banked dollars go.
Who is to blame? Who can change this? It is the same with investments. And believe me, it is not easy – with my 30 years of marketing and business savvy – to get a straight answer.
It’s like a man courting a pretty lady. He’ll say anything to get what he wants. Corporations,Investment Opportunities, many big Bad Wolves will take our money for purposes, they too, may not realize.
Usurious bank practices are all over the internet. Everyone who has a bank account, a cell phone, an internet provider, has suffered an “overcharge” or “oversight?”
Do you stop dealing with such companies? Ever just cut that credit card in half?
I think it begins with us. Take some personal responsibility. There’s an old adage: “Take care of the pennies and the dollars will take care of themselves.”
Giving is the highest expression of our power. It is more than writing a check. It’s the involvement and caring to steward that money for good.
It is true, you don’t have to be smart to be rich. I personally feel that what has happened to our economy is that the people in charge of managing money are better at politics than economics. My wife works for a very well known health care giant in Los Angeles, and the amount of waste, opulence and incompetence is staggering. The sense of entitlement on the executive level is amazing; for example, my wife told me about one particular consultant claiming $24,000 in expenses for a single month.
The myth is that the wealthy have gotten to where they are by smarts and savvy. The reality, many times, is that the CEOs, CFOs, etc, are just people who put their time in, and get lazy when it comes to watching where and how they spend their organization’s funds. Enter guys like Madoff who capitalize on people’s trust of the system. It isn’t so much that our economy is failing, its just that the executives have become accustom to being paid so highly, and in reality, if your business is failing, you are being paid for doing absolutely nothing.
I don’t blame Madoff. He screwed a bunch of people who’s job it is to make sure they don’t get screwed over.
[...] of our investments, not just about how much money we’re likely to make (or lose.) Many former Madoff investors will now agree. If I lose money on this speculation, I will not only feel the loss financially, I will also [...]