The GiveWell Blog

Our first content-less meta-post!

(updated on: ) | by Holden

I don’t have time for a real post today and I did two yesterday, so here are some scattered comments about what you can expect over the next few weeks:

  • First off, there’s a blog carnival – which is an awful name for what I would prefer to call a “blogozine,” a collection of posts from various blogs on a single topic – on “responsible investing.” Check it out if you care what other people think of the issues I’ve been discussing.
  • I’m not finished with the Straw Ratio. I’ve made the biggest points I want to make, but at some point I want to finish totally tearing it apart.
  • Lately I’ve been very focused on the business strategy end of the GiveWell project; I haven’t had time to do much actual research and learn more about the world’s problems. So a lot of my posts have been on abstract philosophy of giving/evaluation. That will change somewhat over the next few weeks, as I am visiting two Holden Award-winning charities: Children’s Aid Society and New Visions for Public Schools. Elie will probably go with me, and we plan to absolutely grill these people and come back with much more knowledge of what they do. You’ll hear about it.
  • How’s my choice of topics? What’s worth reading and what isn’t? What would you rather I blog about? Leave comments on the blog or email me (holden@givewell.net) to let me know.

One more thing

(updated on: ) | by Holden

“I’ve got a great new charitable venture. What I’m going to do is separate the S&P 500 into socially responsible and socially irresponsible companies. I’ll go long the good companies and short the bad ones.* Of course, I’ll be doing this for altruism, not out of any knowledge of the companies – so I might lose money – but it’s charity! Any losses will be covered by grants.”

*(This means betting on the good companies to outperform the bad–it has the same impact on prices as if you sold the bad companies’ stocks and bought the good companies’ stocks.)

So … does this idea sound as crazy and worthless to you as it does to me? Because it’s exactly equivalent to what people are calling for foundations to do: spend effort going through their investment portfolios so that they may shift their capital from the socially irresponsible investments to the socially responsible investments.

It would be different if someone could construct a well-respected social responsibility index, and convince a large number of foundations to use it. That might arguably be a good charitable activity. But taking a single pool of money, modest- or even large-sized, and devoting it to this would have practically no positive impact. The operation wouldn’t justify its costs.

Hopefully this is a vivid illustration of what I’ve been trying to say: that foundations shouldn’t expend time and resources on “responsible investing,” not because it’s irrelevant, but because there are more important things for them to worry about.

Speaking of which: no more on this topic for a while. Promise.

More thoughts on “responsible investing”

(updated on: ) | by Holden

The debate on responsible investing continues, including some thought-provoking discussion of “blended value.” People are pointing out, rightly, that being profitable vs. being beneficial to society is not an either-or. A charitable foundation can make investments that it expects to recoup partly or fully, and still think of these as part of its charitable activities (an excellent example is Jeff Skoll’s investment in An Inconvenient Truth, which I learned about from this article – Skoll invested in the movie from a combination of altruistic and profit-making motives).

So why shouldn’t a foundation think of its investment portfolio as an extension of its activities?

My answer is that for just about any foundation, it just isn’t worth it. Presumably, a foundation has a limited amount of time and resources for identifying ways to improve the world. It should spend all of these resources on identifying the best possible, highest-impact projects it can fund. Some of these projects may be “investments” in the sense that there may be an anticipated return … but once the foundation has granted all it can and wants to save the rest for later, it should just save it for later. Shifting capital between publicly traded securities would not make any reasonable list of the best ways to use one’s funds for improving the world.

But thinking about this has raised a question that seems much more important to me. Why do foundations want to save so much of their funds for later?

The law requires a foundation to give away 5% of its assets every year, and that’s what most do, even Gates. Most foundations sit around forever–witness the Rockefeller Foundation, which has existed for almost 100 years. Why? Is there a reason to save the money, earning a market return on it, rather than spend it now, and let the good it accomplishes multiply at what is probably a much higher rate (as I argued in this comment)?

One reason would be simply running out of worthy recipients. But is this really what’s going on? Why don’t foundations that have run out of projects to fund send their money to other foundations with similar goals, that haven’t? They’re all trying to accomplish the same things, right? Why doesn’t the money just flow where it’s needed, instead of sitting in the stock market?

Does this make any sense? Millions of people are dying from curable diseases and suffering from underfunded education … celebrities and charities exhort ordinary people like you and me to open our wallets today … all while 95% of your average gigantic pool of money left by a wealthy philanthropist isn’t even being used?

Wow. I’m about 10 times as stumped as I was when I started writing this post. Is this crazy or what?

I’m basically fine with investing in evil

(updated on: ) | by Holden

I have plenty more ranting to do on the Straw Ratio, but apparently blogs are supposed to discuss current events or something, and the big story in charity blogging (yeah, charity blogging is a thing–I knew it wasn’t going to take much more time to get going than food blogging) is “social investing.” Specifically, the LA Times articles that accuse the Gates Foundation of contradicting good works with evil investments.

Here’s my summary of the debate: some people are upset that the Gates Foundation isn’t going to make any changes, and others claim that a foundation can’t make these kinds of “judgment calls” (which seems like a bizarre claim to me–what exactly are they supposed to be doing in picking grant recipients?)

The first thing I want to point out, which I haven’t seen acknowledged enough, is how extremely, extremely minor the impact of a foundation’s investing decisions are on the companies it invests in. It’s one thing if it’s doing private equity and helping a startup, shoestring baby-eating venture to get off the ground; that would be socially irresponsible investing. The much more common situation is that it’s holding a bunch of publicly traded stocks. The stock price impact of pulling out their money, even for a behemoth like the Gates Foundation, would be tiny, and any price impact they did create would be partly offset by other investors jumping in at the lowered price.

This isn’t even mentioning the indirectness of the link between a company’s stock price and its ability to carry out its activities. An extreme example of this is the one kind of company the Gates Foundation does divest from, tobacco. Tobacco companies are generally not seeking capital to expand their activities, so investing or not investing in their stock has literally no impact whatsoever on what they do. Buying their stock is buying a slice of their profits, not contributing to them. Saying you shouldn’t invest in Altria because smoking is bad is almost exactly equivalent to saying you shouldn’t bet on the Colts to win the Super Bowl because they’re annoying.

Still, indiscriminate investing can mean that (a tiny bit) more capital goes to irresponsible ventures. So should foundations be worried about this? Generally, I’d say no–not because it isn’t relevant, but because foundations’ resources are better spent elsewhere.

Let me use a nonsensical example. If the Giving Hope to Babies Foundation wants to give hope to babies, it should be doing whatever gives babies the most hope per dollar, net. This probably means spendings all its resources to find and fund a few extremely effective activities (say, showing Braveheart in maternity wards). It wouldn’t make sense for it to demand that the people who sell it electricity, rent out its building, deliver its packages, etc. are all people who never discourage babies–this would be a lot more money and hassle for very small, scattered improvements, and the resources would be better used for more Braveheart screenings. And likewise, it wouldn’t make sense for it to spend resources on consistent investing, weeding out all the baby-demoralizing companies from the standard stock indices it’s holding. It’s better off using a simple, cost-effective investment strategy and using the savings on its core Braveheart-showing programs. I see I’ve lost you.

That said, I think the Gates Foundation is an exception, because:

1. They are really enormous, and they are probably hurting for things to spend their money on. Seriously. Unlike most foundations, they recognize the silliness of giving money away less quickly than possible, and yet they’re still giving it away at a slow rate (~5% of assets per year).

2. They are a leader, and if they did a good job developing a “socially responsible investment index,” many others would leverage their work.

3. If this index were constructed using clear, consistent guidelines, we might actually start to see an impact, in that businessmen would know that violating the guidelines will mean more difficulty raising capital.

Because they’re a leader and because they’re huge, the Gates Foundation has a chance to set the standard for socially responsible giving. That would matter, and if the index were well constructed, it would discourage “evil investing” enough to start discouraging “evil entrepreneurship” as well, which is really what matters. The good this would accomplish might be comparable to what they could accomplish by spending the money on other things. But this tradeoff is highly debatable, and for smaller, less influential foundations, I think it’s clearly a better move to just invest for results.

This all might seem pretty irrelevant if you’re not a gigantic foundation with loads of money to invest well or evilly. Here’s what’s relevant: division of labor. It’s way less effective to try to do everything perfectly than to pick something that you can do really well, do it, and outsource all the other crap to others. That’s why Ford doesn’t make their own steel and I don’t do my own laundry. And that’s why I’m generally pretty unenthused about–and often against–both “responsible investing” and “responsible consumerism,” stuff like Fair Trade coffee. People should buy their favorite products and give to their favorite charities, rather than spending extra money on products that are “made without evil.” Avoiding the bad isn’t nearly as effective or important as identifying and supporting the best (… so … GiveWell is awesome). This post is already long, so I’ll be more convincing about this some other time.

Which of these boasts is not like the others?

(updated on: ) | by Holden

1. “90c of your dollar goes directly to building cars. Only 10% of our expenses go into planning and designing them.”

2. “We’re using a volunteer director and no advertising, so we can spend 100% of the movie’s budget on shooting expenses. It’ll be a hit!”

3. “90% of our military budget goes directly to soldiers and weapons. We don’t waste your tax dollars on administrative costs.”

4. “More than 90 percent of our expended resources … support our poverty-fighting projects around the world. Less than 10 percent of expended resources go toward administrative and fund-raising costs.”

The answer, of course, is #4, because it’s real. But to hear me tell it, it’s as silly a “selling point” as the others.

Efficiency is great, but who the heck came up with the idea that efficiency means low “administrative expenses”? When I think of what’s included in administrative expenses, the following jump to mind:

  • Salaries for executives
  • Technology infrastructure
  • Self-tracking and -evaluation

For-profit companies spend boatloads on all of these things, and it isn’t because they’re being extravagant–it’s because these things are cost-effective. When you’re doing something complex and difficult (like, say, trying to improve the lives of Africans who suffer from a host of interrelated problems), you need to get great people and keep them happily employed, you need to have good tools to leverage their skills, and you need to be stepping back and looking at what you’re doing and how you can improve it.

A theme we have already hammered on ad nauseam, and don’t intend to stop, is that in giving as in everything else, It isn’t just how much you spend–it’s how you spend it. And that means that the people, tools and processes that can help you spend more intelligently are worth quite a bit of expense themselves.

This isn’t just a hypothetical/abstract argument about how the Straw Ratio can mislead you. This is the product of our experiences and frustrations with organizations that we find to be disorganized, technologically behind, and incapable of producing any details about what they do and whether it’s working. The obsession with the Straw Ratio goes beyond Charity Navigator: there is a pervasive attitude that nonprofits need to get all their money right to the needy, and do all their administration on the cheap. No one thinks a business should be run this way, but it’s conventional wisdom in the nonprofit sector, and the result is that the groups you’re paying to accomplish great things are trying to do them without good technology or good people. Examples of both to come.

OK, Straw Man, the gloves are off

(updated on: ) | by Holden

I’m spreading my rant against the Straw Ratio across a few posts, because (a) I have a lot to say; (b) this idea is really central to what we’re doing.

Let’s start with an observation so obvious that you’re going to get mad at me for being patronizing. There is a lot you need to know about a charity besides its Straw Ratio. For example, if 99c of every dollar you give to Love the Children International goes directly to children in need (a common way of citing a strong Straw Ratio), but the specific way in which it goes to children in need is that it funds a team of singers that sings ’80s hits to them, this isn’t necessarily the best possible use of your donation.

Of course, I’m not aware of any charitable program devoted to singing ’80s hits. But I’m aware of many whose stated missions are vague enough that they may well encompass this. Some popular examples off the top of my head: one, two, three. I’m also aware that for many of the strategies I do understand, the effectiveness is far from clear. An example that jumps to mind is organizations like AmeriCares and Direct Relief International, which distribute medical supplies to areas in need, but (perhaps in pursuit of a high Straw Ratio) appear to do zero tracking of what happens to the supplies once they arrive (even though they are often arriving in extremely dangerous, disorganized areas).

So it isn’t enough to know how much of your dollar goes to programs–you need to know what the programs are. This might seem obvious, but I think it’s often overlooked. I think this because when I ask charities for budget info and evidence of their effectiveness, I often get a pie chart showing how much of my dollar goes directly to program expenses, and nothing else. And when I ask for more, I often get confusion as to why I would want anything else. Keep in mind, these are large charities, frequently with vague and all-encompassing mission statements and always with more than one major program. I want to know what they’re doing with the money. They think it’s enough to show me that they’re doing something.

If the need to know more than the Straw Ratio were obvious to everyone, this wouldn’t happen to me. If it were obvious, there wouldn’t be such a hubbub about Charity Navigator’s new feature allowing people to donate directly through the site–in other words, saving them the trouble of so much as visiting the charity’s website, and thereby allowing them to donate to a charity about which they know nothing other than the stated mission and the budget breakdown into program expenses, overhead and fundraising.

The fact is, I think most givers trust charities to do good things with their money. In other words, most givers are in a state of brain de-activation. Most of us wouldn’t give our best friend money without at least wanting to know what s/he’s going to do with it (and not just that s/he has good intentions). Yet many of us are ready to fork over a check to a bunch of total strangers as soon as they incorporate with a name like “Happy Smiles Worldwide.”

It isn’t enough to know that your dollars are being used with good intentions. You need to know that they’re being used on things that work. A yummy name and 501(c)(3) status guarantees neither that the people you’re funding are well-intentioned, nor that they have any idea what they’re doing. And as long as the Straw Ratio is all people look at, a good reputation and even a multimillion-dollar budget shouldn’t put you at ease, either. The only thing that tells you your money is accomplishing good is a description of what it’s being spent on and why that can be expected to improve people’s lives reliably and effectively.

This is obvious to anyone investing in a business, or lending to a friend, or buying a car (you do take it for a test drive, right?) So the only possible way that people can miss it when donating to charity is that they’re turning their brains off. And that’s exactly what I think is happening. Some of the smartest people I know turn into weak, gullible, soft-minded suckers the second the subject turns to “charity” or “giving.” And it’s too bad, because that’s possibly the area where their intelligence–not just their wallet–is most needed.

Tune in next time as I move on from “The Straw Ratio isn’t enough information” to “The Straw Ratio is misleading information.” I believe that a good Straw Ratio can be a bad thing–and in today’s climate, it generally is.

If what I’m saying is obvious and boring you, just fill in the arguments yourselves (comments) and I’ll go back to complaining about corrective surgery organizations.