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Being Philanthropic Matters for Everyone

Why philanthropy is a matter of enlightened self-interest?

In July 2017, Warren Buffett donated $3.17 billion to charity, out of a lifelong total of (thus far) $27.54 billion. Yet the outspoken venture capitalist, known for his progressive stances, isn’t alone.

Bill and Melinda Gates run their own foundation, donating much of their wealth to build a social-welfare initiatives from scholarships for the underprivileged to cures for neglected diseases. Even robber barons like Andrew Carnegie founded charitable trusts and universities.

This raises several questions. Even if the driving force behind philanthropy varies by individual, why would a billionaire pledge up to 99 percent of their fortune to charity?  Or to ask a tougher question, do the rich have an obligation to give?

The answers are unexpected and surprising.
To some, it simply boils down to fairness. This was true for CEO Dan Price, who famously set a $70,000 minimum wage at his Seattle-based payment processing company. In an interview, Price recalls his epiphany: during a conversation with a friend, Price learned that she earned less than $50,000 annually, despite working 50-60 hours weekly. She was also facing a rent increase of $200 per month, and was also struggling with student debt.

This revelation led to a round of self-examination. By his own admission, Price was making close to $1 million per year, while his 120 employees earned, on average, $48,000 annually. So Price took a radical step: he cut his salary, and raised the minimum pay of his employees to $70,000 annually. Though it’s only been two years since the pay raise was announced, this may be a precedent for others to follow.

Yet this belief in fairness doesn’t come without a cost. In a society where even small raises trigger a backlash from investors, Dan Price was immediately targeted. Bloomberg reporters alleged that Price had raised salaries as a precaution against an impending lawsuit, building on similar stories from other, pro-investor websites.

Still, Price’s parable can’t be seen in isolation. It’s a conscious reaction against income inequality, which is worse than most people imagine. Most Americans believe that the wealthiest households own 60 percent of the nation’s assets and the poorest own 40 percent, but the reality is far worse. Today, the top 20 percent of US households own more than 84 percent of the wealth, while the bottom 40 percent of the nation owns only 0.3 percent of the wealth.

It should be no surprise that America scores very poorly on measures of inequality. As of 2015, the United States was among the richest–and most unequal–of nations: the OECD estimates that the US has a Gini score of 0.4, coming in at the fourth most unequal nation worldwide.

Given these stark differences, one would think that various industries, especially the financial industry, would be quick to respond. Unfortunately, one would be wrong.

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In spring 2017, American Airlines raised salaries for pilots and flight attendants, in order to bring its low salaries in line with industry standards. Yet instead of rejoicing at newly motivated workers, investors and shareholders complained about their bottom line, whining that they, not American Airlines staff, deserved higher dividends. With this short-sightedness amidst increasing inequality, it’s no wonder that Wall Street’s favorability ratings are in the negative.

However, income inequality isn’t a problem that can be willed away or reduced to an item on a balance sheet. An unequal society hurts everyone, as inequality and destruction (usually disease and war) are closely linked. One often leads to another, and the best way to reduce inequality is often societal chaos. For instance, the bubonic plague of the late Middle Ages killed so many that it led to a rise in living conditions and wages–simply because labor was so scarce.

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Another, more recent (and far more terrifying) example is the forced collectivization launched after the Bolshevik Revolution of Russia. Faced with the rampant inequality of Tsarist Russia, Russian peasants and middle class workers formed an alliance, overthrowing the moneyed classes and changing the world permanently–and not necessarily for the better. Seeing that America today is actually less equal than the Russia of the Tsars, it’s a relief that a revolution hasn’t erupted…yet.

But the (violent) end of the American experiment isn’t a predetermined fate, at least so far. Instead, businessmen can go back to the very roots of our nation, and practice enlightened self-interest.

To quote Alexis de Tocqueville, a French statesmen, enlightened self-interest simply means that “each…knows when to sacrifice some of his private interests to save the rest; we want to save everything, and often we lose it all.” De Tocqueville noted that Americans didn’t give simply for the sake of others; instead, they understood that their fates were bound up with those of others. Unlike the short-sighted brokers of today, early Americans realized that we were all part of the same society. Given our interdependence, the rich couldn’t wall themselves off completely, no matter how many gated communities or doomsday bunkers guarded they built.

Some of the best practitioners of enlightened self-interest were the least expected ones. Henry Ford famously raised the wages of workers to $5 a day ($120 in 2017) and cut their workday to 8 hours. As a result, not only did Ford cut down on the rampant turnover at his factories, he was also helped create the middle class and the consumer economy, as this pay hike provided workers with the necessary money (and time) to consume.

Unfortunately, few of today’s CEOs or shareholders are playing a similar sort of long game–to their detriment.

Ironically, one arm of the business community that seems to donate more is not individual investors, but corporations. Despite some key exceptions, multinationals have moved towards a corporate citizen model, reconciling their profit-making with social needs. Today, there are even benefit corporations (B Corp), for-profit entities which strive to make positive contributions to society. Essentially, benefit corporations can’t abandon their philanthropic bent–because this is built into their business model.

Still, as The New Yorker makes clear, this comes with certain upsides, such as less pressure from investors and perfect alignment with the socially-conscious mindsets of most Millennials.

Lest you think B Corps are a waste of time, note that some very successful companies fall into this category. Examples include Warby Parker, a pioneering eyeglasses firm that emphasizes sustainability and high labor standards, online marketplace Etsy, and outdoor apparel retailer Patagonia–all very profitable organizations. There are some 1,200 B Corps today, and any aspiring B Corps must pass a rigorous screening process to join their ranks.

Ultimately, there’s no single reason behind why the wealthy donate to social causes. To put it simply, giving is good business, as demonstrated by the rise of B Corps. More succinctly (and controversially), philanthropy is a matter of survival; a polarized, unequal society is a vulnerable one, a fact that we cannot ignore forever.
Let’s hope the titans of industry keep this valuable lesson in mind.

Alexi Harding is a financial services professional and founder of The Opes Group.

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