All Things Impact.

private capital & the public good

2016.4: Wounded Warriors & the Overhead Myth, evolution of an impact strategy, institutional investors opine on ESG, and $1.9 trillion in cash

Brian WalshComment

Hi friends,

Welcome to my newsletter of interesting things I've seen from across the spectrum of impact: effective philanthropy, impact investing (in the private markets), responsible investing (in the public markets) and a wildcard topic

Here are four links worth your time:

1. Effective Philanthropy: Wounded Warrior Project & The Overhead Myth
CBS News and the New York Times had explosive pieces this week criticizing the spending decisions of the popular veterans nonprofit, the Wounded Warrior Project.

According to data from GuideStar (which just revealed an *incredible* redesign of its nonprofit profile pages - congratulations to Jacob Harold & team!), in 2014 Wound Warrior raised over $342mm in donations. Of this, they spent close to $190mm (76%) on “program services”, $15mm (6%) on “administration” and $43mm (18%) on “Fundraising”. Without weighing in this specific controversy, I will instead point you to the “Overhead Myth,” a campaign launched in 2013 by GuideStar, BBB Wise Giving Alliance, and Charity Navigator in the form of an open letter to the “Donors of America”:

“The percent of charity expenses that go to administrative and fundraising costs—commonly referred to as “overhead”—is a poor measure of a charity’s performance.
We ask you to pay attention to other factors of nonprofit performance: transparency, governance, leadership, and results. For years, each of our organizations has been working to increase the depth and breadth of the information we provide to donors in these areas so as to provide a much fuller picture of a charity’s performance.
That is not to say that overhead has no role in ensuring charity accountability. At the extremes the overhead ratio can offer insight: it can be a valid data point for rooting out fraud and poor financial management. In most cases, however, focusing on overhead without considering other critical dimensions of a charity’s financial and organizational performance does more damage than good.
In fact, many charities should spend more on overhead. Overhead costs include important investments charities make to improve their work: investments in training, planning, evaluation, and internal systems — as well as their efforts to raise money so they can operate their programs. These expenses allow a charity to sustain itself (the way a family has to pay the electric bill) or to improve itself (the way a family might invest in college tuition).
When we focus solely or predominantly on overhead, we can create what the Stanford Social Innovation Review has called “The Nonprofit Starvation Cycle.” We starve charities of the freedom they need to best serve the people and communities they are trying to serve.”

2. Impact Investing: right tools, right time
The McKnight Foundation has a $2b endowment, 10% of which is now dedicated to impact investing, particularly to investments “that will accelerate a transition to a low-carbon economy, help ensure a clean and resilient Mississippi River, and contribute to a thriving and sustainable region.” Rick Scott, the foundation's VP of Finance and Compliance, spoke with Goldman Sachs Asset Management about their evolution:

“Our thinking has evolved considerably, as our learning has granted us new perspectives on our approach to the broader portfolio. While McKnight started with 10% of our endowment dedicated to impact investing, we see value in using an ESG mindset in approaching both our dedicated impact investments as well as the entire portfolio. We have found more levers for advancing our grant-making goals as we look at our position as an ESG- and impact-conscious institutional investor with a $2bn endowment.
We see power in our role as: (i) an asset owner who can dictate how our capital is allocated, (ii) a customer of financial services with the capacity to request new approaches or products, (iii) a shareholder who can vote proxies and request better ESG transparency from companies; and (iv) a peer investor who can work with other institutional investors for a better regulatory framework at the SEC, or collaborate with other foundations on deals. So while our endeavor may have started with a keen focus on a subset of our endowment, this approach has seeped into our overall investment thinking. 

How does Rick think think about the divide between investing and philanthropy? 

I do not necessarily see a divide; I see them as complementary and not mutually exclusive or at odds with each other. Investing allows us to engage in philanthropy with the assumptions that we are a foundation in perpetuity and that we want to maintain the purchasing power of our endowment. There can be a natural tension that develops within certain foundation structures, such as when independent investment offices sit in a separate silo from the program functions, however, that is not the case at McKnight. Here, we have long collaborated across all functions within the Foundation, even well before we formally began our impact investing program.
Our Investment Committee members are typically trustees as well as investment professionals, and they are very knowledgeable about our program goals. Our strategic framework states that “Our overarching goal is to optimize the use of all Foundation resources to contribute to building and strengthening socially, economically and environmentally sustainable communities.” This includes mobilizing our investments.”

3. Responsible Investing: 95% of institutional investors are “to some extent” incorporating ESG strategies
According to this Natixis global survey of 660 “senior decision makers working in institutional investment” (press release & full white paper):

95% are to some extent incorporating environmental, social and governance (ESG) factors into their investing strategies
64% say they believe ESG measures are primarily a PR tool
52% say a key challenge with ESG investing is the difficulty in measuring performance
51% say ESG assessments help mitigate headline-making risks
50% see ESG as a potential source of return
44% say ESG will be a standard practice for most managers within five years
38% are concerned by a lack of transparency in ESG reporting
31% do ESG investing primarily because it’s in their fund’s mandate
26% have found that incorporating ESG into investment decision making has had a positive impact on investment performance

4. Wildcard Topic: Why are corporations holding onto $1.9 trillion in cash?
Adam Davidson writes in the New York Times Magazine about the “conundrum” of why American businesses have an unprecedented $1.9 trillion in cash, “just sitting around...[t]ake, for example, Google. Its new parent company, Alphabet…has around $80 billion sitting in Google’s bank accounts or other short-term investments … [With this money], Google could buy Uber and its Indian rival Ola and still have enough left over to buy Palantir, a data-mining start-up. Or it could buy Goldman Sachs outright or American Express or most of MasterCard; it could buy Costco or eBay or a quarter of Amazon.” 

So why hold onto the cash? 

“The answer, perhaps, is that both the executives and the investors in these industries believe that something big is coming, but — this is crucial — they’re not sure what it will be. Through the 20th century, as we shifted from a horse-and-sun-powered agrarian economy to an electricity-and-motor-powered industrial economy to a silicon-based information economy, it was clear that every company had to invest in the new thing that was coming. These were big, expensive investments in buildings and machinery and computer technology. Today, though, value is created far more through new ideas and new ways of interaction. Ideas appear and spread much more quickly, and their worth is much harder to estimate. (Indeed, the impossibility of valuing the Internet is essentially what created the 2000 stock bubble.)
Surely the most important economic question of our time is a fairly simple one: Are the good times over? Will wages continue to fall for many, while rising high for a few? In the cash conundrum, we might find a modest reason for optimism. If corporate leaders and their investors truly believed that the future were bleak, that innovation and economic growth were irreparably slowing, there would be little reason to hold on to all that cash. Their hoarding of it hints that they think the next transformative innovation could be just around the corner. If in fact they do — and if they’re right — it’s good news for all of us.”

That’s it for this week. Help me spread the word about #Allthingsimpact to your friends and colleagues, who can sign up to receive this newsletter at All Things Impact. Please also send me any compelling links you discover in your own journeys across the web (even things like this photo, where one of these animals is not like the otters. Sorry.)

Until next time, thanks for reading!