By Mike McGee
Facebook founder Mark Zuckerberg and his wife Priscilla Chan have laid out, writ large, a new way of giving their money back to the community. It is utterly unbelievable how many people are criticizing them for stepping into the twenty-first century so boldly. It’s their money. They can do what they want with it.
According to http://www.cbc.ca/news/business/facebook-mark-zuckerberg-charity-share-donation-1.3346966 , the proposed charitable venture, tentatively valued at $45 billion, will start a process of using funds for philanthropic purposes in the Zuckerbergs’ lifetime. “The venture has a more complicated structure than that of most charities, designed to give the couple more flexibility in how — and if — that money is distributed; in what seems to be an emerging trend of for-profit philanthropy.” Through their LLC, the couple can not only donate funds to charities, she says, but also invest in companies, and do advocacy or policy work. Click on the site above for more details.
Much of their proposed philanthropy will be in the form of “for-profit” ventures. The IRS strictly regulates the types of activities that a “non-profit” charity can engage in. There are also fiduciary and other rules for non-profits which make them inherently conservative.
An LLC, which is a private limited liability company, is not bound by those same rules. And also it pays taxes on its activities. Through their LLC, the couple can not only donate funds to charities, but also invest in companies, and do advocacy or policy work, and invest in original concepts which may require a freer hand and which may fail.
To paraphrase Leonard Bernstein in West Side Story, “There’s a place for us, Somewhere a place for us. We’ll find a new way of giving…. Hold my hand and we’re half way there. Hold my hand and I’ll take you there, Somehow….”
The Zuckerberg love birds, holding hands and marveling over their new child, have designed in letters a mile high a way of voluntarily returning wealth to the community and the world. This new way does not have all of the flaws of the current practice of creating charitable foundations and other tax-exempt entities. Of course they are not the first to make such moves. They are however, the ones who’ve made such a proposal on such a grand scale, introducing the whole world to the new way of philanthropy.
Why am I so deliriously happy with the Zuckerbergs? Great Minds Think Alike, that’s why! Back in June of 2013 I wrote a series of five blogs on this site on the issue of charitable giving. My approach was to question the way things are now being done in charitable giving among the wealthy, and to suggest that in the twenty-first century we need to come up with new models of giving. I gave a few proposed solutions.
In my blogs it is my assertion that there is nothing wrong with the way charitable giving has been conducted up to now, and most present charitable organizations are functioning at a high level of excellence. It is simply and definitely necessary to modify the means and methods of philanthropic giving from this time forward. The Zuckerbergs have come up with what on the face(book) of it looks like such a needed modification, a way which will stand tall during the next period of history.
To get the details of my proposals, it’s well worth your time to read my five-part series. The first part can be found at https://mcgeepost.com/2013/06/17/philanthropy-no-longer-the-answer-part-one/ . At the end of each part is a link to the next part. The primary store of solutions I proposed can be found in part five, at https://mcgeepost.com/2013/07/02/philanthropy-to-boldly-go-private-sector-part-five/ .
I make no claim whatsoever that the Zuckerbergs or any other person has used any of the freely available ideas described in my blog. I only say that great minds think alike, not that I was in any way responsible for what has happened with the lovebirds. If they or any others have used my ideas, first, second or third hand, then that is good. I wrote it because I believed it and wanted to share it.
Here below I will give a brief summary of four of the more salient points from my own blog as to why philanthropy needs to work differently in the twenty-first century: Mortmain, the natural conservatism of charities, employee bonuses as charitable giving, and moving job-creating investments back home.
Mortmain. A developing drag on the nation’s economy is the mortmain, or “dead hand,” of financial assets which will never be involved in the private sector. An estimated 36-40 per cent of the gross domestic product (GDP) is currently pulled out of the private sector by the federal, state and local governments. When combined with the estimated 13.3 per cent of the GDP pulled out of the private sector by non-profits, the “dead hand” of frozen and untaxed economic activity reaches an estimated 49.3 per cent of the GDP. According to the Urban Institute, the top ten largest non-profits in the US are universities and hospitals, and the assets of all non-profits in 2010 were $4.49 trillion.
In England and France hundreds of years ago, transfers of wealth were made to groups which were not unlike the foundations and charities and universities of today. These institutions paid no taxes or feudal dues – unlike natural persons or secular companies. As waves of pious generosity spread, the holdings of such groups grew and grew, tying up along with government as much as seventy per cent of the GNP. Because these huge and numerous holdings were immune from taxes and dues, greater burdens were placed on individuals and on secular property to support the government. Secular citizens protested the “dead hand” of mortmain. (West’s Encyclopedia of American Law, edition 2.)
Eventually the economic imbalance became so great that England and France and many other European countries passed “Mortmain Statutes,” which seized assets of the church and other charities, and made it unlawful to make certain new donations. These statutes from the 1600’s are still in effect in many countries.
We do not want such an economic imbalance to develop in the United States. If present forms of charitable giving continue “as is”, an ever-larger share of taxes and dues will be paid by an ever-smaller group of private citizens and private companies. Most other countries should fear the same thing. Generosity can have unintended consequences. We need to guard against the development of the unintended bad consequences.
Then there are those who will do anything to avoid paying taxes, and give to a charity to “cheat the tax man” legally. Now I’m all for taking advantage of our tax laws. It’s the attitude of lack of caring and support for our government that’s the real problem for me. Our country will not long survive if too many people cheat the tax man. Our government needs our nurturing just as much as any homeless person needs our nurturing.
The natural conservatism of charities. Most present-day non-profit charities are bound by a fiduciary obligation of the board and managers to preserve and protect the assets and make only safe and cautious investments. In addition, they normally feel bound to make grants only to safe projects which will not fail. If they give to a shaky project which goes up in flames, they are subject to great criticism and even may be charged with a violation of their fiduciary duties.
There’s nothing wrong with a foundation or charity being risk-averse. It’s just that we need new models of giving which have the ability to lean into risk, and to be okay with the loss of money if a sponsored project fails.
Zuckerberg’s proposed charitable enterprise will largely be in the private sector, and thus not subject to the fiduciary duty of preservation and provability. This enterprise can give to public or private companies which may very well fail: one of the enterprise’s stated goals is to engage in risky and speculative research which may or may not lead to cures for diseases. As long as you don’t know if your project is going to succeed, it is very difficult to get funding from a risk-averse foundation or charity.
And we can be very certain that not all of these risky projects will fail. Some of these projects will lead humanity forward in medicine, climate, or child development, or in any one of a hundred different areas. When we think of the “new” things we have now that did not exist, or not in a useable form, there is reason to believe that the twenty-first century will produce as many new forms, methods and technologies as the twentieth century.
Employee bonuses as charitable giving. Microsoft has already demonstrated again and again that granting very large bonuses to its employees actually increases the wealth of the company and its stockholders.
It’s probably not a really good idea to just go around handing money to strangers. The unintended consequences are potentially high. Yet giving back a lot to those who actually helped create value for the giver is definitely a winning proposition.
So more of the wealthy might consider it to be a charitable endeavor to grant bonuses of stock or other things of value proportionally to all the people in the company, from the CEO to the person who pushes the broom. And I mean millions or hundreds of thousands at least, to those who have done this work. Do the same for former employees, even if they now work for a competitor. Maybe also contractors and suppliers as well.
Most of this bonus money will stay in the private economy, and keep the wealth circulating and assure that taxes are being paid (and give the company a useful corporate tax break).
Moving job-creating investments back home. In my blog entries I give details of how things might look if some companies did the right thing and moved job-creating manufacturing and service facilities back into their home countries.
Some, particularly in the US, would of course say it’s too risky, or might eat away at their profits, or would subject them to too many government regulations. All these things surely have strong elements of truth and cannot be ignored.
It would still be marvelous to see new electronic parts and assembly plants open all over America, textile mills with the latest equipment opening in North Carolina, programming and customer service centers in Milwaukee; you get the idea.
I assert that the American factories closed in the last forty or so years were extremely inefficient, and as such they couldn’t stand up to the legitimate competition from countries such as China. These factories were very “heavy,” and required way too many people to operate, and also did not have much ability to adapt to changes. Start building the new American factories with lightweight and moveable materials rather than brick walls, and incorporate the most current and flexible efficiencies in production. Then US factories may be able to legitimately compete with China and India and such “low wage” places.
As a part of the Zuckerbergs’ (or others) private philanthropy they could build several model factories here in the United States, using all these latest building methods, electronics and fabrication and machine shop equipment to reduce the overhead to a tolerable level. With the current computer revolution and advances in materials technology, there should be ways to reduce the fixed costs of manufacturing, including the number of employees, without sacrificing the pay of employees who are hired. A private operating company responsible to shareholders is really not equipped to conduct such a risky manufacturing bet.
Also, the Zuckerberg enterprise (or others) could launch a huge study of federal state and local government regulations and reporting requirements, with the bias towards and the purpose of reducing substantially the number and complexity of the costly interactions between our governments and private enterprise. And remember, for each report supplied by an employer, there needs to be a government employee on the payroll to review and file it, and a tax-paid storage space to keep the reports. Doing so could end up reducing the costs of doing business in the United States (or in your country). The problem is that such an enterprise would involve political advocacy and may not produce much of a profit (or may, if companies subscribe after the initial large investment and beta testing).
From http://www.mcgeepost.com Copyright © 2015 by Michael H. McGee. All commercial rights reserved. Non-commercial or news and commentary site re-use or re-posting is encouraged. Please feel free to share all or part, hopefully with attribution.
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