Philanthropy: What To Do In Its Place? Part Four

1 Jul

From www.mcgeepost.com .Copyright © 2013 Michael H. McGee. All rights reserved. Please feel free to share or re-post all or part non-commercially, hopefully with attribution.

In Parts One through Three of this series we have set up the nature of the problem with philanthropy and the quest for solutions. It will be easier for you to understand this Part Four if you have read the preceding three parts. They are long, yet worth the effort.

As we’ve already mentioned, Bill and Melinda Gates and Warren Buffet have set up a challenge to the wealthy of our time to give away at least half their assets to charitable and other non-profit organizations by gift or bequest. This challenge is described in the Internet site www.thegivingpledge.org . As of now at least 105 billionaires have signed this pledge, which is not binding yet illustrates the generous nature of those signing.

I’ve shown how doing so will unbalance the overall economy even more than it’s now already unbalanced. If this pledge is fulfilled, then the “dead hand” or mortmain burden on the economy will grow to where it becomes stifling to the living, breathing, private enterprise part of the economy.

So therefore I suggest that The Giving Pledge recur to a philosophy which has proven effective through almost three thousand years of history. The pledge should be for billionaires to give away at least ten per cent of their assets to charitable or non-profit purposes; and to find ways to use at least half of their assets to engage in creative yet profit-making projects which involve some degree of risk in return for possibly pumping up their country’s private economic base. Remember that if your country’s economic base falters, your wealth will falter also.

Cease the nineteenth and twentieth century ideas of ensconcing all your generosity in your dead body. Not only is it rather morbid to do so, it deprives you of much present pleasure in the life you have yet to live. We’ll show you how to first feel safe, and then let your generosity drive your daily life. You can make generosity a part of your DNA right now, and for as long as you live. We’ll give you several twenty-first century principles, and many examples, of how this may be done.

A first principle of twenty-first century generosity is to love your government in a tangible way, and pay your taxes. We will again approach the second concept laid out by the greatly respected New York industrialist and philanthropist Peter Cooper (1791 – 1883) in his 1871 address to Cooper Union students:

The individuals to whose lot these fortunes fall . . . should never lose sight of the fact that they hold them by the will of society expressed in statute law….

Those who are eager to give away charitable money as a “tax dodge,” to prevent the government from getting their greasy hands on their money, are engaged in very short-sighted thinking. It is the very existence of our federal, state and local governments which has made it possible for us to have a stable social and economic society where wealth may be accumulated in vast amounts.

America is still the Land of Opportunity. A strong and stable government, under our Constitution and laws, and our reasonably adequate tax revenues, are the primary basis for the opportunities which are presented to our citizens to make large amounts of money.

Even in other countries such as China, Japan, Saudi Arabia, India, Russia and the European democracies, there is no certainty of holding onto wealth where the government is weak and unable to generate stability in either daily life or in financial transactions. For a government to be strong requires a steady flow of tax money. (Borrowing alone – issuing government bonds – will not forever preserve the steadiness of our or any other government.)

At least 95 per cent of the 1,342 on the Forbes 2013 list of billionaires operate in countries which have reasonably stable governments and reliable tax revenues. See for yourself at the site:  http://www.forbes.com/sites/luisakroll/2013/03/04/inside-the-2013-billionaires-list-facts-and-figures/ . Trust me, though; it was quite tedious to go through that whole list.

If the owners of great wealth continue to be as stingy with taxes as they have been, a weakened central government will undoubtedly take a great toll on their ability to hold this wealth, as time goes by. Step up and pay your taxes as they are due. Stop hiding all your assets in the Caymans or in other tax havens to avoid taxes. Cisco Systems, stop holding all your cash outside the US to avoid paying legitimate taxes on repatriation of the funds.

Don’t try to chisel the tax-man. Don’t fight so hard for loopholes, or to keep tax rates on the rich at super-low levels. Such chiseling is no more than a way of saying that you don’t like our system of government and would rather see it go away. It’s simply not patriotic. If we are going to have a country to be patriotic about, we need to pay the bill.

One who chisels the tax-man is really not much different in philosophy and effect than a communist agitator or a radical militant who wants to destroy us. Such a person is definitely not a patriot. It really irritates me that great flag-wavers want to prevent the government from getting enough tax revenues to avoid having to borrow so much from China. It’s not patriotic; it’s subversive, and contributes to government instability.

Even Carlos Slim Helu, one of the world’s richest men, will not be likely to be able to hold on to his wealth if the Mexican government collapses from want of revenue or descending into chaos. Mexico is one of the countries where the government is unstable and tax revenues are unreliable. The country is almost a war zone. Carlos Slim, watch out. Pay your taxes or you’ll lose your shirt. When your government falls apart, who will be there to sustain the legitimacy of your vast telecom monopoly?

Mr. Slim, look at the example of Bill Gates. Use your influence to help drive out corruption and drug cartels. Lower your monopoly prices, and pay your employees enough for them to live full lives. Acting alone, like Henry Ford did a hundred years ago for the US, you, and you alone, have the power to begin the development of a stable middle class in Mexico.

This change in the direction of stability will not come about from you making charitable contributions. It will come about from your assisting the government and paying taxes; and from using some small part of your wealth as payroll to generate a middle class in your home country. With the current instability in Mexico, you may be in the situation of “use it or lose it.”

Now let’s turn our attention away from taxes and toward the best principles of wealth for the twenty-first century, and how they play into the desire to be charitable. Remember here that we’re talking about those individuals who have considerable personal wealth. We need to show in some details the emotional issues that get in the way of a genuine charitable impulse.

The greatest barrier is fear of loss. This prevents most wealthy persons from being generous in their current use of their wealth for creative and fun profit-making projects. Getting creative and having fun is the anodyne for fear. Focusing on giving away money at death is the handmaiden of fear. So we must go into these two psychological issues before we can get to the fun part of using large sums of money now for creative and pleasurable projects, rather than focusing on death as the trigger for the first outpouring of generosity.

You will NEVER be in a position to intelligently play with or give away your money or any part of it during your lifetime unless you feel more secure in your personal life, and feel free from the possibility of losing everything. Being serious about everything is for fearful and anxious people. When you already have a lot, you can fearlessly use what you have to play with investments or to fund good ideas. You and your family can also freely enjoy the good things in life, as long as you aren’t constantly obsessing about fear of loss.

I’ll bet your wife and children and other relatives will like you much better if you can be more playful and feel more freedom in your life decisions. Then you can bequeath the bulk of your assets to those you love, knowing that they may care more about your purposes and intents than they did when they hated you for always being gone or always being in a foul mood.

I’ll bet that a lot of cocaine use and abuse of uppers, even excess drinking, comes directly from the fear and anxiety about imagined losses. If you can be calmer in general, you won’t need to pump yourself up so much and cause the personal damage attributed to the use of high-voltage drugs and alcohol.

The first principle is that charity begins at home. It’s my experience that most individuals with great personal wealth are always afraid of The Next Thing that will wipe them out and leave them living in a poorhouse. Actually, most people feel this way; it’s fairly normal. However, those with wealth feel it more acutely. They have a serious standard of living to protect, and they are more aware of the vicissitudes of the market place due to having participated in it at a high level.

There are several things Benjamin Graham’s book The Intelligent Investor has to say about the psychology of wealth. The first is a quote from financier Nathan Mayer Rothschild: “It requires a great deal of boldness and a great deal of caution to make a great fortune; and when you have got it, it requires ten times as much wit to keep it.”

So the primal psychological burden of wealth is that each person who has actually made a fortune knows, deep in the gut that “when you have got it, it requires ten times as much wit to keep it.” This knowledge is a deep and intractable burden. I’ve got to be ten times as good as I already was, in order to keep what I have. I don’t know if I have that level of drive and intelligence in me. So I face the bleak prospect of ending up losing everything and ending up in the poorhouse, no matter how well I’ve done in the past at wealth-building.

The second psychological burden was identified by Kahneman and Tversky, who have shown in academic studies that the pain of a financial loss is more than twice as intense as the pleasure of an equivalent gain. So once you have it, the prospect of losing it looms twice as large in your emotional makeup as the joys associated with what you’ve already done to create your wealth. This generates a fear that will never to be entirely overcome once you reach the upper reaches of finance.

The third point from Graham’s book is on a more positive note. “The whole point of investing is not to earn more money than average, but to earn enough money to meet your own needs.”  And as your wealth grows, your and your family’s needs increase, and this is normal and natural.

Yet you will always need to keep a distinct focus on meeting the natural needs you and your family have developed due to your increase in wealth. It can keep you looking over your shoulder to make sure that aggressive creditors are not suddenly foreclosing on the wonderful homes you have in New York and Denver and Hong Kong.

So the first point is that each individual person of wealth needs to set up an ultra-stable “life-line” fund, grouped in his or her own name and in the names of family members, or in trust for the same. At a minimum the fund will be $100 million dollars; and the maximum might be ten per cent of individual wealth, i.e. $7 billion equals a life-line of $700 million.

Those with less yet significant total wealth may need to put more than ten per cent in their life-line fund. For example, a person with $50 million would probably want to put $10 million into the fund, or twenty per cent of assets. This may limit his or her future abilities to grow by tying up part of the wealth, yet having a settled mind and a secure sense of the future is well worth the sacrifice.

In any case, this life-line will assure than even if every single dollar of other funds is lost in a major financial debacle or through an imprudent fling with a Bernie Madoff, you and your family will for the rest of your lives have enough to live on, even if not quite at the same level as before. You’ll never be poor again. You’ll never again have to worry about sinking into the poorhouse and begging on the street corner.

The life-line fund should be totally separate from any other assets. The money should be invested only in ultra-safe assets such as government bonds, or whatever other ultra-safe assets you can think of that I don’t know about because I’m not in the business. Don’t let your desire for quick increases guide these investments. The benchmark should be safety of principal only.

Use this life-line only if some enterprise may fail but for a small immediate withdrawal (to be repaid soonest), or if the rest of your fortune goes away or gets tied up in some very damaging way.

After establishing these funds, consider deeply the true promise of these funds, until you are satisfied according to your own feelings that you and your family will never again be without significant resources, no matter how bad your future business ventures go. Then let go of the fear of loss of everything. You’ll be surprised how much anxiety will be eased and fears erased once you’ve conquered your fear of loss and degradation.

I’m sure some of you have already set aside life-line funds, or have significant family trusts. Yet have you gone through the emotional process of lessening your anxiety over the prospect of total loss? One man who seems to operate rather fearlessly is Sir Richard Branson. I don’t know his internal fears though. He may just be putting on a good front.

There is a part two to the formula for protecting your “life-line.” It involves making sure that you or your family cannot incur personal liability for business ventures made with the rest of your money, some of which are bound to go south over time.

Part two involves making sure that all the rest of your money is isolated in separate corporate or partnership or trust forms that do not implicate your personal assets. The only way to be dead-certain that a creditor cannot “pierce the corporate veil” is to make sure that each of the many corporate or other entities you set up are well-funded with part of your remaining money, for the purposes for which they are intended.

Most of the time, when the veil is pierced and personal assets are attached by creditors, it is because an operating company is only a “shell company” with little or no personal funds of the investor at risk. As a wealthy person you have enough money to make sure that each of your working entities is provided with a meaningful share of your money, consistent with the business purpose of the working entity. Then you can borrow more, or issue stock, without fear it will come back against your life-line funds.

A second and equally significant concern must be taken into account. Never, ever, establish a retirement or pension fund for any of your employees, except for special circumstances, where you or your company are guaranteeing the value of the funds or the payout at maturity. Always grant such funds to self-directed employee accounts such as 401k’s, or into separately managed fund accounts that do not impose any performance obligation on the part of yourself or your company.

One thing the twentieth century has demonstrated for certain is that well-intentioned efforts on the part of companies or individuals to guarantee retirement benefits for employees are doomed to failure, and these obligations can bring down even the best-run enterprises. Just don’t do it. Ever. Resist any and all union efforts to impose such an obligation as you would resist walking into the cage of a wild tiger.

Once you’ve established your life-line funds and managed your fear of failure, you can go about being much more creative in the investment of your remaining very sufficient funds. For example, Sir Richard Branson has founded Virgin Galactic, an airline to take people into low space orbit for a fee. I assume he intends to make a profit from this business, yet if he doesn’t, at least he’s had some fun with the resources available to him.

In summary, put a value to your comfort, and protect that value. Then invest for profit in things that are fun or are dear to your deepest longings. We all have inside us a set of half-formed wishes. Often we suppress those wishes out of fear of losing everything we have. It’s a vicious cycle: it’s time you stepped off your self-imposed circular stairway to the stars.

There are many things you can do with your money as a substitute for philanthropy. I’ll give you a few tastes here; then wrap up a comprehensive theory of profit versus philanthropy in the twenty-first century in the next and final part of this series.

Here’s an idea. Set up the first company to build a nuclear-powered desalination plant. Put it on the coast of Texas. Pipelines could carry the potable water from the plant across Texas and Oklahoma and New Mexico, to the areas where drought is most prevalent. Electrical companies have made profits from nuclear generated power. Why shouldn’t nuclear generated fresh water be able to make the same level of profits over time?

Similar nuclear-powered desalination plants could be built in various desert areas of the world, as long as the technology is protected from conversion into explosive nuclear weapons.

Here’s another idea. Buy tangible assets such as buildings from the US or state governments, with the stipulation that the purchase price must be applied against government debt first. At the same time negotiate a long-term lease; say thirty years, which is supported by the full faith and credit of the government.

Or, buy a US airline and turn it into a consistently profitable enterprise. This Holy Grail seems to have eluded most business leaders since the 1940’s.

Here’s another idea. Hire a group of extremely smart individuals, pay them very well, and give each of them a part of the executive authority for your companies or holdings. You will keep control of the big picture and make the moves that are your signature ways of making money that others don’t have.

Yet it’s probable that seventy-five per cent or more of the things you do on a daily basis have little to do with the core competencies which helped generate or hold your fortune. Let the others do these things, and spend more time with your family and friends, and doing those unprofitable things which may be your heart’s desire.

But you must be certain that I am not the best fountain of business ideas which are novel and which might even be fun to work on. Your own business sense is the best guide as to what to do. What I’m demanding is that you release yourself from the fear of loss. Then your own ideas will tumble out, creatively and even playfully at times; and you will have the resources to make them happen.

We’ll continue with more ideas, and cement the relationship between wealth and twenty-first century philanthropy, in the fifth and last installment, at https://mcgeepost.com/2013/07/02/philanthropy-to-boldly-go-private-sector-part-five/

2 Responses to “Philanthropy: What To Do In Its Place? Part Four”

  1. lifeisacelebration July 2, 2013 at 1:12 am #

    Very well written, Mike!

Trackbacks/Pingbacks

  1. Philanthropy: First Take, then Give! Part Three | mcgeehome - December 18, 2013

    […] We’ll continue in the second of five parts of this essay, at https://mcgeepost.com/2013/07/01/philanthropy-what-to-do-in-its-place-part-four/ […]

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