I had a most unusual conversation the other day. In the wee hours of morning, in a darkened coffee shop, a man sat off in the corner, no coffee, no scones, just an intense visage and furrowed brow. He appeared deep in thought. Occasionally he grasped his pen and jotted something on a well-worn legal pad. A struggling writer? A mid-life crisis? I had to find out.
I sidled up to the worn looking man and like a good American asked him about his profession. Poet? Journalist? Speechwriter? His answer surprised me. “Businessman, actually.” Now I was truly curious. I hadn’t thought businessmen frequented edgy coffee shops. Something must be amiss. Our conversation went something like this:
Me: What brings a businessman to a coffee shop like this?
Businessman: I needed a place to think without distractions.
Me: What distractions could a businessman have? I thought everything was pretty easy for you guys.
Businessman: Easy?! Why would you say that?
Me: Well, you are a billionaire, right?
Businessman: Not hardly. Not really a goal of mine anyway.
Me: A millionaire then?
Businessman: Well, I guess if I sold my business I would be a millionaire.
Me: Well there you are then. You’re set.
Businessman: But I don’t want to sell my business.
Me: Why not?
Businessman: Lots of reasons. I like what I do. I’ve worked hard to build a good reputation. I have customers, colleagues and employees that I care about and I feel an obligation to. Sell the business and who knows what the buyer does. Gut it. Sell off the parts. Lay people off. No, not really something I am willing to risk. I’d rather leave it as a legacy for someone willing to take care of the employees and customers the way I have.
Me: But I thought the primary goal of business people was to make money?
Businessman: That’s a nice benefit of working hard and doing a good job, but it’s not what gets me up in the morning or keeps me up late at night.
Me: But you are one of the richest 1% that I hear so much about, yes?
Businessman: I guess so, technically. Of course, I have taken out loans and taken a great deal at risk to get this business off the ground and keep it thriving. I don’t think they take that into account when calculating the 1%. A substantial portion of what I make I use to pay back debt or reinvest in the company, yet I pay taxes on the revenue as if it were income landing in my wallet.
Me: I hadn’t thought about that. I thought if you were in the top 1% you were living without a care.
Businessman: Some might. Most business owners have a great deal to care about.
Me: Really? So what are you here working on? How to make more money? A new jingle for a product?
Businessman: Actually, it’s more challenging than that. See, we expect to have a decent year and have built up more cash than usual.
Me: That’s a good problem.
Businessman: It is, except I’m wrestling with what to do next. Cash doesn’t earn any interest now.
Me: What are your options?
Businessman: I could hire another employee or two.
Me: Excellent. There are a lot of talented people out there.
Businessman: True, true, and we could certainly expand our services and products; however, I don’t know how much an employee will cost or how other expenses might take priority.
Me: Don’t you set their salary?
Businessman: The salary part is fairly easy; it’s the benefits and taxes that are the tough part. And benefits and taxes at my company represent about 30-40% of the compensation package.
Me: Are you kidding? I thought that successful businessmen didn’t pay much in benefits.
Businessman: Not true. Good business owners want to retain their employees and help them be more productive. We help out with health care, retirement benefits, flexible schedules, those kinds of things.
Me: So what’s the problem?
Businessman: I don’t know how much those things will cost. Health care costs had been increasing dramatically for the last decade, and then last year they went up 40% for many small businesses like ours. I can’t dump all of that on my employees and I can’t afford to absorb it all. Who knows how it will increase next year or the year after that? And there are so many other expenses to consider.
Me: Like what?
Businessman: Well, our regulatory expenses went up significantly last year, you know, costs to comply with the agencies that monitor our industry. I expect those costs to keep increasing for the foreseeable future.
Me: You don’t believe in regulation?
Businessman: I have no problem with good regulation and knowledgeable regulators. But at least in our field, it’s our integrity, not government regulation, that protects our customers and employees. The regulatory hoops don’t stop their real malefactors.
Me: That’s discouraging.
Businessman: I don’t mean to sound cynical, but the costs of increased regulation falls on those like us who are doing our jobs appropriately, not those who are taking advantage of people. Still, the regulatory cost is insignificant relative to uncertainty about taxes.
Me: How do you mean?
Businessman: We all know that taxes will be increasing—local, state, and federal. It’s simple math. So when I’m considering hiring new employees or investing in capital equipment or technology, I also have to think about keeping cash on hand to pay for what likely will be significantly higher taxes.
Me: Are you saying you don’t want to pay taxes? I’ve heard that business owners don’t think that they should pay taxes.
Businessman: Of course I expect to pay taxes! That’s part of being a member of society; everyone should pay taxes. We have to finance our defense and education systems, our social safety net, foreign policy, infrastructure, the whole works. I get that. Indeed, a large proportion of our net income goes back out in taxes, let alone property taxes, employment taxes, unemployment insurance, licensing fees and other government-related expenses. We pay taxes, and I’m okay with that. However, it seems that some people forget that every dollar our firm pays in taxes is another dollar we can’t use to hire someone or otherwise invest in the firm.
Me: But I was under the impression that business owners didn’t care about society.
Businessman: What gave you that impression?
Me: I keep hearing that the wealthiest Americans don’t support charities and education and things like that. And that if they do, it’s just a tax dodge. Is that true?
Businessman: No! We don’t make a big deal about it but we support organizations that are doing good work throughout the community and around the world. Like many companies, we encourage our employees to use paid time to volunteer as well. Still, the more we pay in taxes or regulatory fees or health care costs, the less we have available to support these worthy organizations.
Me: Are you sure you are a businessman?
Businessman: What do you mean?
Me: You seem rather sensible, not quite the troll that I would have expected. Perhaps you’re an exception.
Businessman: Hardly. I’m just a regular person who runs a business and tries to make a difference. There are tens of thousands of us. Indeed, many of the most generous people I have known have been in business. They are great role models of leading by example.
Me: But you don’t see many business people out there protesting and calling for the government to meet people’s needs.
Businessman: It’s one thing to be generous with other people’s money; it’s another to be generous with your own.
Me: I never thought about it like that.
Businessman: Listen, I’ve enjoyed our conversation here, but I need to get back to work. We have some big decisions to make and I want to do it right. A lot of people are counting on me.
I thanked the businessman for his time and stepped away from the table. How curious! It was hard to believe that he represented that much maligned business class. He had to be an oddity.
Later, while writing about the conversation in my notebook, it dawned on me that the businessman really was an outlier, though not in the manner I had thought during our conversation. What kind of crazy person would work so hard to build something that would benefit society knowing that if it failed, almost the entire cost of that failure landed in his lap, impacting his pocket book and his reputation? And what if he succeeded? All of society would benefit—people would have jobs, customers would have products and services they need, and the government would have the revenues generated by taxes and fees, monies then spent to benefit everyone. Shoulder the burden; share the success.
Most people would never agree to such an odd bargain. Indeed, my new friend in the coffee shop was a bit unusual, but perhaps there was something to his kind of life, something about working in the wee hours of morning to create something, protect it, to grow it.
Perhaps those who think that business owners are such a drag on society should spend a few minutes with one in a coffee shop, in those wee hours while they scribble on a notepad trying to make it work for all of us.
Monday, April 18, 2011
Wednesday, April 6, 2011
(Good) Governance
If one were to pick a single word to capture the essence of the 1960’s, it might be “ferment,” or “struggle.” The 1970’s could be embodied by “malaise” or “despair”. For the 1980’s both “patriotism” and “greed” resonate, while “party” and “technology” define the 1990’s. The 2000’s are still being digested, but the word “fear” (of terrorism, of economic collapse, etc.) would be a leading contender.
As we launch into the early stages of the 2010’s, the leading contenders for Word of the Decade look to be “democracy,” “globalization,” or perhaps “social media.” And while we can expect to see these words continue to play a role in the predictable predictions of the decade, we do not think that they will prove as impactful as our nominee. Being a bit contrarian, we at Syntrinsic propose that this decade will be defined by a word with little sex-appeal, one rarely used by even the most well-informed pundits, and one rarely used in regular conversation. It has its stalwart fans and even a handful of junkies (some of whom happen to be clients), but this word is not top of mind for even a modest percentage of the population. The word? Ready? Take a deep breath…
“Governance.”
Yeah. We thought you’d feel that way. We do too! The sobriety, the gravitas. Say it out loud (in private of course) and you can feel the inner statesman start to stir. For those of you who wondered if we were geeks, you need wonder no more. Case settled. Syntrinsic has a thing for “Governance” and our readers want to know why.
We believe that “Governance” will define this decade—must define this decade—because no other word will have a greater impact on the ability of our society to right what’s wrong and make meaningful progress toward crafting a sustainable and civil society.
What does it mean? Webster’s defines Governance as “the exercise of authority; control” as well as “a method or system of government or management.” Like other somber words such as fiduciary and stewardship, one generally assumes that to discuss governance is to assume one means good governance; thus, how one exercises authority well, or a constructive, responsible system of management.
Why does governance matter? Consider this year’s top stories:
Foreign Policy
Brutal dictators long financed, armed, and otherwise supported by the United States are under fire from their own people, many of whom also are angry with America for supporting their oppressors. How should we respond? To what extent should America condone and actively support bad governance elsewhere in order to serve the near-term interests of our citizens? In short, when if ever is it good governance to support bad governance?
State of the States
Over the decades, elected officials throughout the country have made compensation and benefit commitments to government employees that attracted votes but are not financially tenable. Simple tax increase or a few layoffs will not address financial agreements that are fundamentally unsound. What is a Governor, Mayor, Superintendent, or Chief to do? How do officials elected by a majority of their constituents make the necessary financial and policy decisions that by definition must negatively impact a majority of their constituents? How can a governor govern people that want, nay demand, financially irresponsible governance?
Corporate Governance
US papers are full of pictures of the directors of Japan’s Tokyo Electric Power Company bowing apologies to civilians made homeless by fears over nuclear meltdowns at some of the firm’s reactors. Meanwhile, in America, few if any directors of AIG, Goldman Sachs, Citigroup, Merrill Lynch, Bank of America, Wachovia, Wells Fargo, Fannie Mae, Freddie Mac, Morgan Stanley, General Motors have even been publicly named, let alone held accountable by regulators, press, or the public for decisions made by the companies they supposedly governed into crisis. So what do we expect from corporate governors? Are there meaningful consequences for serving poorly as a corporate director? And if we cannot feel confident about corporate governance, then how does that impact confidence in the investment markets, let alone faith in the country’s economic underpinnings?
Nonprofit Governance
Okay, so we will concede that as usual, there are few headlines about nonprofit governance. Yet if one looks closely at the pressures faced by the generally volunteer directors of nonprofit organizations, there have been few times as difficult as this. Pressures to provide services have risen in the face of economic crisis, joblessness, and government cuts,; the financial models of many nonprofits—particularly those that rely on fund raising—are under great strain; and, few nonprofit boards operate with the resources, time, or expertise available to corporate boards and government agencies. To complicate matters further, members of both parties and the current White House keep questioning aspects of the tax code vital to nonprofit viability. Given these pressures, what does good nonprofit governance look like? Are we as a society willing to accept the cost of lazy, self-serving, or simply poor nonprofit governance? Can we even comprehend what that cost would be?
We believe that there are principles of good governance that can guide foreign and domestic decision makers, as well as the officers of for profit and nonprofit entities. And we believe that some version of these principles must become a more common part of the rhetoric of those who govern AND those who are governed so that there is greater alignment of intent in this free market representative democracy.
Principles of Good Governance
Take a long view.
Strategic decisions must be made so that people 30 years from now—and likely much longer—will be highly likely to thank us rather than regret our time in charge.
Make sustainable decisions.
We cannot afford to make short term decisions that will need to be undone later. Short terms for elected officials and quarterly earnings announcements punish those focused on sustainability—but only in the short-term.
Consistently apply values.
Good governors have clear values and apply them consistently. Inconsistent values foster uncertainty, uncertainty creates fear, and fear undermines good governance.
Be financially sound.
One can ignore financial reality when one is running a Ponzi scheme or other short-term hustle (including those managed by governments and corporations), but effective governors understand that policy and finance must be rational, aligned, and self-supporting.
Establish clear accountability.
Governance requires well-defined responsibilities and a path for holding accountable those who are responsible. These roles must be broadly understood and formally accepted.
Cultivate a sense of honor.
Honor is neither prideful nor boastful; rather, it represents a desire to be remembered as an effective leader and manager who governed well. Some consider the concept of honor quaint or even archaic; we think it essential.
It can be tempting to sit back and judge those in the White House, Foggy Bottom and Congress, or to complain about the local governor or mayor or school board chair, to harp on the failures of corporate directors or negligence of nonprofit directors. After all, it is easy to critique those making difficult decisions, to question their motives and competence, and complain about their ineffectiveness.
But given our representative democracy with its free market system, the greatest governance challenge this decade will not be faced by those who officially govern, but rather by those who are governed, those who typically do not see themselves in positions of leadership, management, or even basic responsibility for society. What will the great “We the people” do when difficult decisions must be made, when compromises must be struck, when priorities must be established?
Will we educate ourselves, actively participate, and make sacrifices worthy of this moment in America’s history? Will we embrace—and be—the kinds of leaders willing to govern from a principled, skillful, honest place? Will we in effect approach our civic, work, and personal lives with good governance in mind? For if we do take these steps, anything is possible, even repairing the world.
And perhaps many years from now, the word they will choose to define our time will be “thankful” or “appreciative” or “redemptive.” Or maybe, just maybe, they will look back on the 2010’s and say it indeed was a time defined by “governance.” And we’ll all know what that means.
As we launch into the early stages of the 2010’s, the leading contenders for Word of the Decade look to be “democracy,” “globalization,” or perhaps “social media.” And while we can expect to see these words continue to play a role in the predictable predictions of the decade, we do not think that they will prove as impactful as our nominee. Being a bit contrarian, we at Syntrinsic propose that this decade will be defined by a word with little sex-appeal, one rarely used by even the most well-informed pundits, and one rarely used in regular conversation. It has its stalwart fans and even a handful of junkies (some of whom happen to be clients), but this word is not top of mind for even a modest percentage of the population. The word? Ready? Take a deep breath…
“Governance.”
Yeah. We thought you’d feel that way. We do too! The sobriety, the gravitas. Say it out loud (in private of course) and you can feel the inner statesman start to stir. For those of you who wondered if we were geeks, you need wonder no more. Case settled. Syntrinsic has a thing for “Governance” and our readers want to know why.
We believe that “Governance” will define this decade—must define this decade—because no other word will have a greater impact on the ability of our society to right what’s wrong and make meaningful progress toward crafting a sustainable and civil society.
What does it mean? Webster’s defines Governance as “the exercise of authority; control” as well as “a method or system of government or management.” Like other somber words such as fiduciary and stewardship, one generally assumes that to discuss governance is to assume one means good governance; thus, how one exercises authority well, or a constructive, responsible system of management.
Why does governance matter? Consider this year’s top stories:
Foreign Policy
Brutal dictators long financed, armed, and otherwise supported by the United States are under fire from their own people, many of whom also are angry with America for supporting their oppressors. How should we respond? To what extent should America condone and actively support bad governance elsewhere in order to serve the near-term interests of our citizens? In short, when if ever is it good governance to support bad governance?
State of the States
Over the decades, elected officials throughout the country have made compensation and benefit commitments to government employees that attracted votes but are not financially tenable. Simple tax increase or a few layoffs will not address financial agreements that are fundamentally unsound. What is a Governor, Mayor, Superintendent, or Chief to do? How do officials elected by a majority of their constituents make the necessary financial and policy decisions that by definition must negatively impact a majority of their constituents? How can a governor govern people that want, nay demand, financially irresponsible governance?
Corporate Governance
US papers are full of pictures of the directors of Japan’s Tokyo Electric Power Company bowing apologies to civilians made homeless by fears over nuclear meltdowns at some of the firm’s reactors. Meanwhile, in America, few if any directors of AIG, Goldman Sachs, Citigroup, Merrill Lynch, Bank of America, Wachovia, Wells Fargo, Fannie Mae, Freddie Mac, Morgan Stanley, General Motors have even been publicly named, let alone held accountable by regulators, press, or the public for decisions made by the companies they supposedly governed into crisis. So what do we expect from corporate governors? Are there meaningful consequences for serving poorly as a corporate director? And if we cannot feel confident about corporate governance, then how does that impact confidence in the investment markets, let alone faith in the country’s economic underpinnings?
Nonprofit Governance
Okay, so we will concede that as usual, there are few headlines about nonprofit governance. Yet if one looks closely at the pressures faced by the generally volunteer directors of nonprofit organizations, there have been few times as difficult as this. Pressures to provide services have risen in the face of economic crisis, joblessness, and government cuts,; the financial models of many nonprofits—particularly those that rely on fund raising—are under great strain; and, few nonprofit boards operate with the resources, time, or expertise available to corporate boards and government agencies. To complicate matters further, members of both parties and the current White House keep questioning aspects of the tax code vital to nonprofit viability. Given these pressures, what does good nonprofit governance look like? Are we as a society willing to accept the cost of lazy, self-serving, or simply poor nonprofit governance? Can we even comprehend what that cost would be?
We believe that there are principles of good governance that can guide foreign and domestic decision makers, as well as the officers of for profit and nonprofit entities. And we believe that some version of these principles must become a more common part of the rhetoric of those who govern AND those who are governed so that there is greater alignment of intent in this free market representative democracy.
Principles of Good Governance
Take a long view.
Strategic decisions must be made so that people 30 years from now—and likely much longer—will be highly likely to thank us rather than regret our time in charge.
Make sustainable decisions.
We cannot afford to make short term decisions that will need to be undone later. Short terms for elected officials and quarterly earnings announcements punish those focused on sustainability—but only in the short-term.
Consistently apply values.
Good governors have clear values and apply them consistently. Inconsistent values foster uncertainty, uncertainty creates fear, and fear undermines good governance.
Be financially sound.
One can ignore financial reality when one is running a Ponzi scheme or other short-term hustle (including those managed by governments and corporations), but effective governors understand that policy and finance must be rational, aligned, and self-supporting.
Establish clear accountability.
Governance requires well-defined responsibilities and a path for holding accountable those who are responsible. These roles must be broadly understood and formally accepted.
Cultivate a sense of honor.
Honor is neither prideful nor boastful; rather, it represents a desire to be remembered as an effective leader and manager who governed well. Some consider the concept of honor quaint or even archaic; we think it essential.
It can be tempting to sit back and judge those in the White House, Foggy Bottom and Congress, or to complain about the local governor or mayor or school board chair, to harp on the failures of corporate directors or negligence of nonprofit directors. After all, it is easy to critique those making difficult decisions, to question their motives and competence, and complain about their ineffectiveness.
But given our representative democracy with its free market system, the greatest governance challenge this decade will not be faced by those who officially govern, but rather by those who are governed, those who typically do not see themselves in positions of leadership, management, or even basic responsibility for society. What will the great “We the people” do when difficult decisions must be made, when compromises must be struck, when priorities must be established?
Will we educate ourselves, actively participate, and make sacrifices worthy of this moment in America’s history? Will we embrace—and be—the kinds of leaders willing to govern from a principled, skillful, honest place? Will we in effect approach our civic, work, and personal lives with good governance in mind? For if we do take these steps, anything is possible, even repairing the world.
And perhaps many years from now, the word they will choose to define our time will be “thankful” or “appreciative” or “redemptive.” Or maybe, just maybe, they will look back on the 2010’s and say it indeed was a time defined by “governance.” And we’ll all know what that means.
Wednesday, March 2, 2011
I Live In a Land
In 1855, Walt Whitman—America’s “First Poet”—published Leaves of Grass, a collection of 12 poems about the landscape of his inner feelings and thoughts as projected on a still young country. How can’t we think of Whitman when people throughout the world are clamoring for the messy form of government that is democracy?
In the spirit of Whitman, and at a time when humanity valiantly struggles to be free, we thought it time to share poetic thoughts celebrating a way of life and form of government that we are able to embrace or reject in the hopes that we might support those who seek the same latitude for themselves and their children.
I Live in a Land
by Ben Valore-Caplan
1.
I live in a land
Where I can create my life
And so do my children.
Where creative energy
Like waves washes against
The shore of the present,
Shaping us slowly,
Imperceptibly,
Lulling us into believing that
The rhythm of change
Soothes always like water on sand.
Except when storms rage
And scare us through the uncertain night
Crashing upon our thoughts and comforts
Unsettling us,
Driving us beneath blankets of fear
And anxious dreams
In which all is lost.
Until the noise and chaos passes
And we awake to the calm of morning
The shore is different
And so is the air
And we are again alive
Energized
Refreshed
Reminded of the energy
We had taken for granted
The lapping waves that were changing the landscape
Even as they soothed us into thinking they were not.
2.
I live in a land
Where I can create my life
And so do my children.
Where I can walk the beach
Feel the pull of a spot of sand,
Settle in
Begin to build
A vision of beauty
Of function
Or something to pass the day.
Others might join me
Or I them
And build together for a time
Castle moat city
Something new
Something worth crafting
The beach here expands
As builders join in
And so do our imaginations
And the possibilities
And the surprises
That we had not thought to build
But someone did
And we share in the wonder
That such people have such ideas
As we shape each other’s landscape
And what we leave behind.
3.
I live in a land
Where I can create my life
And so do my children.
Where every day,
Seagulls cackle well meaning
Offers to protect me
From the heat and gales
Shifting sands
Unknown companions
Uncertainty
And myself.
Their tempting calls
Promise comfort
Security
Someone else,
They seek to lure me from
These gritty sands
And bitter water.
And when the sun is at its zenith
And my fears,
I contemplate their offers.
4.
I live in a land
Where I can create my life
And so do my children.
A frustrating, abrasive place
Chaotic and noisy and ugly
Where people jostle and crash
Stomp on each other’s creations
Throw trash on the sands of society
And pollute the waters of life.
It’s an obnoxious place
Disorganized
Disorderly
Disrespectful
Disturbing
Dissonant.
It’s a wonder really
That anything beautiful or functional
Ever happens here
And that it does
So very often.
5.
I live in a land
Where I can create my life
And so do my children.
And my children believe this,
And that
Will make all of the difference.
In the spirit of Whitman, and at a time when humanity valiantly struggles to be free, we thought it time to share poetic thoughts celebrating a way of life and form of government that we are able to embrace or reject in the hopes that we might support those who seek the same latitude for themselves and their children.
I Live in a Land
by Ben Valore-Caplan
1.
I live in a land
Where I can create my life
And so do my children.
Where creative energy
Like waves washes against
The shore of the present,
Shaping us slowly,
Imperceptibly,
Lulling us into believing that
The rhythm of change
Soothes always like water on sand.
Except when storms rage
And scare us through the uncertain night
Crashing upon our thoughts and comforts
Unsettling us,
Driving us beneath blankets of fear
And anxious dreams
In which all is lost.
Until the noise and chaos passes
And we awake to the calm of morning
The shore is different
And so is the air
And we are again alive
Energized
Refreshed
Reminded of the energy
We had taken for granted
The lapping waves that were changing the landscape
Even as they soothed us into thinking they were not.
2.
I live in a land
Where I can create my life
And so do my children.
Where I can walk the beach
Feel the pull of a spot of sand,
Settle in
Begin to build
A vision of beauty
Of function
Or something to pass the day.
Others might join me
Or I them
And build together for a time
Castle moat city
Something new
Something worth crafting
The beach here expands
As builders join in
And so do our imaginations
And the possibilities
And the surprises
That we had not thought to build
But someone did
And we share in the wonder
That such people have such ideas
As we shape each other’s landscape
And what we leave behind.
3.
I live in a land
Where I can create my life
And so do my children.
Where every day,
Seagulls cackle well meaning
Offers to protect me
From the heat and gales
Shifting sands
Unknown companions
Uncertainty
And myself.
Their tempting calls
Promise comfort
Security
Someone else,
They seek to lure me from
These gritty sands
And bitter water.
And when the sun is at its zenith
And my fears,
I contemplate their offers.
4.
I live in a land
Where I can create my life
And so do my children.
A frustrating, abrasive place
Chaotic and noisy and ugly
Where people jostle and crash
Stomp on each other’s creations
Throw trash on the sands of society
And pollute the waters of life.
It’s an obnoxious place
Disorganized
Disorderly
Disrespectful
Disturbing
Dissonant.
It’s a wonder really
That anything beautiful or functional
Ever happens here
And that it does
So very often.
5.
I live in a land
Where I can create my life
And so do my children.
And my children believe this,
And that
Will make all of the difference.
Tuesday, February 8, 2011
Thirty Years
Thirty years. An eternity really. Yet something those charged with predicting the future—investment analysts, ecologists, political scientists, pension stewards—must be prepared to anticipate. To grasp the sheer audacity required to predict thirty years forward, let’s first journey back thirty years.
Imagine you have travelled back to February 1981.
Anwar Sadat is President of Egypt. Hosni Mubarak is a boring bureaucrat serving as vice-president. Sadat’s assassination (and Mubarak’s miraculous survival) is still nine months off. The peace treaty Sadat had signed with Israel’s Menachem Begin in 1978 had earned him a share of the Nobel Peace Prize and the enmity of many of his countrymen and peers in the Arab World.
In America, Ronald Reagan had taken his oath of office just a few weeks ago, on the same day that 52 American hostages were released by the Iranian students that had taken over the US Embassy. According to many of the hostages, one of their captors was named Mahmoud Ahmadinejad. Whether he was actually part of the takeover or not, we did not know then that he would later become Iran’s puppet president.
The Dow Jones Industrial Index closes February 6, 1981 at 952. It includes companies such as Eastman Kodak, Inco, American Can, and US Steel. The thirty year US Treasury Bonds yield 12.8%, while the Prime Rate stands at over 19%. A conventional thirty year fixed mortgage can be had for 15.1%. The US Federal Debt stands at about $950 billion, which represents about 35% of GDP.
The Soviet Union is America’s great foil and includes in its empire the Ukraine, Kazakhstan, Turkmenistan, Kyrgyzstan, Uzbekistan, Tajikistan, Belarus, Lithuania, Estonia, and Georgia. The Soviet Block includes puppet governments in Poland, Czechoslovakia, Hungary, Bulgaria, Romania, and East Germany. Berlin is divided. The United States has just boycotted the 1980 Moscow Olympics. The 1984 Olympics have been awarded to Los Angeles. The Soviets are deeply mired in Afghanistan where they wage a cruel campaign against civilians, booby trapping toys with bombs and blanketing the country in mines.
Goods made in China are hard to come by and generally consist of hand-worked silk, ivory, and jade. US dollars are not permitted in China. Beijing and the Great Wall are closed to Westerners. There are few cars in China save a handful for top communist party officials. There are no sky scrapers of note in Shanghai or Guangzhou. It has been eight years since Nixon’s visit to China.
The internet has not yet been invented. There is no email, no texting, no chatrooms, no Facebook. A few folks have ponied up to acquire heavy mobile phones they connect to their car battery. People write letters and reports on typewriters. They use calculators and adding machines. GPS is only available to the military and is spotty at best. When people want to research information they turn to an encyclopedia or library.
There are three major network broadcasters as well as PBS. In some communities, there might be an extra TV station. 24/7 television has not yet been invented, and only a few people have cable. HBO has been around since the 1970s, ESPN for two years, and CNN for one, but all with limited access. There is no MTV, FOX, and CNBC. Most people get their news from local prime time newscasts or the local newspaper. Several communities have at least two daily papers. Local DJs rule the radio waves. Clear channel has not consolidated local radio.
We can agree that life was quite different in 1981. Yet now imagine that you were an economist or adviser in 1981 helping a foundation, a pension, or a future retiree plan for the next thirty years. What might you have considered?
You’d probably start by being concerned about fixed income. After all, with Treasury yields in the low double digits, you know that bonds will barely keep pace with inflation that has been running 11-14%. And if anything, bond yields and inflation both seem destined to keep rising. Who would want to lock in money at 12-15% for thirty years? So you would be cautious about fixed income.
Of course, given high inflation and interest rates, who in their right mind would allocate much to US stocks, an asset class that had been returning only about 8-9% per year for the previous thirty years? Investing in stocks in 1981 seemed to many investors to be a sure way of locking in real investment losses.
There were only a few “hedge funds” in existence, they were not yet accessible to most investors, and few investors would have placed money in them anyway. One could trade commodities or REITS but the markets were not very transparent, affordable, or well understood.
What Would You Have Predicted?
So if you were sitting with an investment committee or a family in 1981, how many of the geopolitical, economic and social changes that occurred between 1981 and 2010 would you have predicted? Would you have nailed the demise of the USSR? The advent of the internet, email, text, chat, and all that they entailed? Would you have guessed that you would have a computer strapped to your belt with more communication and research power than any combination of electronic devices that existed in 1981?
Would you have predicted that the Dow would transcend 14,000 once and 12,000 a few times? Or that most trading on the major markets would be driven by computer algorithms? Would you have guessed that 30 year bonds would for a time be discontinued, then reinstated, and that they would yield only about 4.2% as 2010 drew to a close? Would you have dreamed that a 30 year mortgage could be had for about 5%? Or that even those with near perfect credit scores would have difficulty actually securing such a deal?
Would you have predicted that Japan would rise as America’s greatest economic adversary, then stagnate? Could you have guessed that backward, communist China of all places would become our primary economic partner/competitor? Would you have anticipated the rise of the European Union, the successful issuance of the Euro, and the uncertainty that now stalks the very arrangement? Might you have imagined that the World Trade Center would be gone, US troops would be fighting in Afghanistan and Iraq, and that the nightly news would speak regularly of Mosul, Kandahar, and Kabul? Could you have dreamed that a black man from a family of mixed race, nationality, and religion would be president of the United States?
Could you have imagined that the Fed would be busy trying to stimulate inflation to something higher than the current 1.5%? Would you have expected that the US Debt would stand well over $13 Trillion? That somewhere around 1 in 10 US houses would be vacant? That serious discussions would be underway regarding how states and municipalities can declare bankruptcy? That over 20 million Americans who are part of the workforce would not be working?
Could you have conceived of Microsoft, Google, Facebook, Verizon, Apple, Hyundai? Would you have guessed that only nine of the thirty Dow Jones Industrial component companies in 1981 would still be in the DJIA in 2010? Could you have anticipated that five of the 2010 DJIA companies would be financial services firms when none were in 1981? There had been six financial companies in the DJIA in 2008, but Citigroup rose and fell from grace in the years between 1981 and 2010.
How Should We Look Forward Today?
Since we are in the business of helping prepare for the future, we cannot simply throw our hands up because forward-looking predictions are so difficult to make. We must find that balance between predicting what might happen and humbly knowing that we cannot. And in that place of balance, there are certain truths that form a foundation on which we can build a strategy for going forward.
• The companies that will drive innovation over the next thirty years have not yet been created.
• Some of those companies will be domestic and some will be foreign.
• Countries guided by the rule of law and citizen engagement will outperform those that lack either one.
• There will be bubbles and they will pop and people will lose a lot of money.
• Governments and companies that manage their debt loads most effectively will outperform those that do not.
• Through globalization, currency markets will continue to rationalize, driving the world toward a single currency, a stabilized basket of currencies, or relative constancy between a handful of dominant currencies.
• The demographic, social, and technological trends of the last thirty years will be quite different from those of the next thirty years.
• Governments that tax too much stifle innovation and growth which ultimately stifles civil society and promotes economic malaise.
• Governments that tax too little stifle civil society and encourage economic disparity, which ultimately stifles innovation and growth.
• Commodities and land are likely to remain constrained resources for the next thirty years.
• The global population is growing.
• People want to feed their families and provide them with access to health care.
• It can be more lucrative to own a company than to loan money to it.
• It can be much safer to loan money to a company than to own it.
• There will be governments that abuse their people.
• There will be people who abuse their governments.
We realize of course that the statements above do not render an asset allocation blend optimized for the next thirty years. But they do remind us that the next thirty years will be driven by themes we can expect and specifics we cannot.
So as investors plan for retirement, finance foundations and endowments designed to last in perpetuity, craft estate plans, and ensure the health of defined benefit plans, we must think critically, embrace uncertainty, and craft a course of action that anticipates both worst case and best case scenarios. If the last thirty years have taught us anything, it’s that both will most certainly happen.
Imagine you have travelled back to February 1981.
Anwar Sadat is President of Egypt. Hosni Mubarak is a boring bureaucrat serving as vice-president. Sadat’s assassination (and Mubarak’s miraculous survival) is still nine months off. The peace treaty Sadat had signed with Israel’s Menachem Begin in 1978 had earned him a share of the Nobel Peace Prize and the enmity of many of his countrymen and peers in the Arab World.
In America, Ronald Reagan had taken his oath of office just a few weeks ago, on the same day that 52 American hostages were released by the Iranian students that had taken over the US Embassy. According to many of the hostages, one of their captors was named Mahmoud Ahmadinejad. Whether he was actually part of the takeover or not, we did not know then that he would later become Iran’s puppet president.
The Dow Jones Industrial Index closes February 6, 1981 at 952. It includes companies such as Eastman Kodak, Inco, American Can, and US Steel. The thirty year US Treasury Bonds yield 12.8%, while the Prime Rate stands at over 19%. A conventional thirty year fixed mortgage can be had for 15.1%. The US Federal Debt stands at about $950 billion, which represents about 35% of GDP.
The Soviet Union is America’s great foil and includes in its empire the Ukraine, Kazakhstan, Turkmenistan, Kyrgyzstan, Uzbekistan, Tajikistan, Belarus, Lithuania, Estonia, and Georgia. The Soviet Block includes puppet governments in Poland, Czechoslovakia, Hungary, Bulgaria, Romania, and East Germany. Berlin is divided. The United States has just boycotted the 1980 Moscow Olympics. The 1984 Olympics have been awarded to Los Angeles. The Soviets are deeply mired in Afghanistan where they wage a cruel campaign against civilians, booby trapping toys with bombs and blanketing the country in mines.
Goods made in China are hard to come by and generally consist of hand-worked silk, ivory, and jade. US dollars are not permitted in China. Beijing and the Great Wall are closed to Westerners. There are few cars in China save a handful for top communist party officials. There are no sky scrapers of note in Shanghai or Guangzhou. It has been eight years since Nixon’s visit to China.
The internet has not yet been invented. There is no email, no texting, no chatrooms, no Facebook. A few folks have ponied up to acquire heavy mobile phones they connect to their car battery. People write letters and reports on typewriters. They use calculators and adding machines. GPS is only available to the military and is spotty at best. When people want to research information they turn to an encyclopedia or library.
There are three major network broadcasters as well as PBS. In some communities, there might be an extra TV station. 24/7 television has not yet been invented, and only a few people have cable. HBO has been around since the 1970s, ESPN for two years, and CNN for one, but all with limited access. There is no MTV, FOX, and CNBC. Most people get their news from local prime time newscasts or the local newspaper. Several communities have at least two daily papers. Local DJs rule the radio waves. Clear channel has not consolidated local radio.
We can agree that life was quite different in 1981. Yet now imagine that you were an economist or adviser in 1981 helping a foundation, a pension, or a future retiree plan for the next thirty years. What might you have considered?
You’d probably start by being concerned about fixed income. After all, with Treasury yields in the low double digits, you know that bonds will barely keep pace with inflation that has been running 11-14%. And if anything, bond yields and inflation both seem destined to keep rising. Who would want to lock in money at 12-15% for thirty years? So you would be cautious about fixed income.
Of course, given high inflation and interest rates, who in their right mind would allocate much to US stocks, an asset class that had been returning only about 8-9% per year for the previous thirty years? Investing in stocks in 1981 seemed to many investors to be a sure way of locking in real investment losses.
There were only a few “hedge funds” in existence, they were not yet accessible to most investors, and few investors would have placed money in them anyway. One could trade commodities or REITS but the markets were not very transparent, affordable, or well understood.
What Would You Have Predicted?
So if you were sitting with an investment committee or a family in 1981, how many of the geopolitical, economic and social changes that occurred between 1981 and 2010 would you have predicted? Would you have nailed the demise of the USSR? The advent of the internet, email, text, chat, and all that they entailed? Would you have guessed that you would have a computer strapped to your belt with more communication and research power than any combination of electronic devices that existed in 1981?
Would you have predicted that the Dow would transcend 14,000 once and 12,000 a few times? Or that most trading on the major markets would be driven by computer algorithms? Would you have guessed that 30 year bonds would for a time be discontinued, then reinstated, and that they would yield only about 4.2% as 2010 drew to a close? Would you have dreamed that a 30 year mortgage could be had for about 5%? Or that even those with near perfect credit scores would have difficulty actually securing such a deal?
Would you have predicted that Japan would rise as America’s greatest economic adversary, then stagnate? Could you have guessed that backward, communist China of all places would become our primary economic partner/competitor? Would you have anticipated the rise of the European Union, the successful issuance of the Euro, and the uncertainty that now stalks the very arrangement? Might you have imagined that the World Trade Center would be gone, US troops would be fighting in Afghanistan and Iraq, and that the nightly news would speak regularly of Mosul, Kandahar, and Kabul? Could you have dreamed that a black man from a family of mixed race, nationality, and religion would be president of the United States?
Could you have imagined that the Fed would be busy trying to stimulate inflation to something higher than the current 1.5%? Would you have expected that the US Debt would stand well over $13 Trillion? That somewhere around 1 in 10 US houses would be vacant? That serious discussions would be underway regarding how states and municipalities can declare bankruptcy? That over 20 million Americans who are part of the workforce would not be working?
Could you have conceived of Microsoft, Google, Facebook, Verizon, Apple, Hyundai? Would you have guessed that only nine of the thirty Dow Jones Industrial component companies in 1981 would still be in the DJIA in 2010? Could you have anticipated that five of the 2010 DJIA companies would be financial services firms when none were in 1981? There had been six financial companies in the DJIA in 2008, but Citigroup rose and fell from grace in the years between 1981 and 2010.
How Should We Look Forward Today?
Since we are in the business of helping prepare for the future, we cannot simply throw our hands up because forward-looking predictions are so difficult to make. We must find that balance between predicting what might happen and humbly knowing that we cannot. And in that place of balance, there are certain truths that form a foundation on which we can build a strategy for going forward.
• The companies that will drive innovation over the next thirty years have not yet been created.
• Some of those companies will be domestic and some will be foreign.
• Countries guided by the rule of law and citizen engagement will outperform those that lack either one.
• There will be bubbles and they will pop and people will lose a lot of money.
• Governments and companies that manage their debt loads most effectively will outperform those that do not.
• Through globalization, currency markets will continue to rationalize, driving the world toward a single currency, a stabilized basket of currencies, or relative constancy between a handful of dominant currencies.
• The demographic, social, and technological trends of the last thirty years will be quite different from those of the next thirty years.
• Governments that tax too much stifle innovation and growth which ultimately stifles civil society and promotes economic malaise.
• Governments that tax too little stifle civil society and encourage economic disparity, which ultimately stifles innovation and growth.
• Commodities and land are likely to remain constrained resources for the next thirty years.
• The global population is growing.
• People want to feed their families and provide them with access to health care.
• It can be more lucrative to own a company than to loan money to it.
• It can be much safer to loan money to a company than to own it.
• There will be governments that abuse their people.
• There will be people who abuse their governments.
We realize of course that the statements above do not render an asset allocation blend optimized for the next thirty years. But they do remind us that the next thirty years will be driven by themes we can expect and specifics we cannot.
So as investors plan for retirement, finance foundations and endowments designed to last in perpetuity, craft estate plans, and ensure the health of defined benefit plans, we must think critically, embrace uncertainty, and craft a course of action that anticipates both worst case and best case scenarios. If the last thirty years have taught us anything, it’s that both will most certainly happen.
Published with Blogger-droid v1.6.7
Friday, January 28, 2011
Syntrinsic's State of the Union
On Tuesday, President Obama presented his State of the Union address as required by the Constitution. Immediately following, Paul Ryan, Congressman from Wisconsin, offered the Republican response. We are reluctant to preempt either gentleman, and yet thought that this was a ripe opportunity to provide Syntrinsic’s first State of the Union commentary.
Syntrinsic’s State of the Union is informed by our daily work with good people across the political spectrum that are ethical, patriotic, intelligent, and of solid character. Syntrinsic is grounded in a very strong social agenda, though it is not a partisan one; thus, while our State of the Union may lack in standing ovations from 51% of America, we hope to compensate by referencing themes in 2011 relevant for all of us who care about the stewardship of our nation’s financial resources.
We have focused on one theme that is geopolitical, one national, one tied to the investment industry, and one tied to the nonprofit industry. Our last theme, we think, unites them all.
Geopolitical Theme: Beginning the Next Cold War
Much has been made in recent weeks of the rise of China’s military (e.g. stealth fighter), their increasing territoriality with their neighbors over control of the seas around China, and their desire to make the Yuan a global currency. Some pundits have attempted to position China and US in the beginning of a Cold War-like relationship, stirring up images of former Soviet-US tensions; however, this metaphor does not fit.
The US and China have developed a symbiotic relationship that never existed between the US and the USSR. The Soviets did not finance America’s government debt as China has, nor did American consumers finance the growth of the Soviet economy as we have and continue to do with China. While China and the US have become ever more interdependent, the US and the USSR largely lived in two isolated economic worlds, motivating each other, but doing everything they could to isolate and weaken the other.
We expect to see China continue to flex its growing muscles in the coming year, and yet also expect them to struggle to manage at least four major challenges that can destabilize a totalitarian regime: 1). A “hot” economy; 2). A demographic that includes far too many inadequately educated rural poor men; 3). Growing internal dissent around faith, corruption, government incompetence, and environmental devastation; and 4). Relations with North Korea, Japan, Taiwan, Myanmar, and India.
Will China overtake the US as the next global super power? Not yet. Will China and US relations deteriorate? Probably not. Will the US stop relying on Chinese products or China’s financing of our debt? No. Will the US compel China to become an advocate of human rights in North Korea, Africa, Myanmar, and elsewhere? No. Should we be wary of China? Of the people, no. Of the government, yes.
National Theme: Save our Cities (and States)
Closer to home, 2011 will be marked by the economic challenges of states, cities, and other municipal districts (e.g. schools, utilities, fire and police, airports, etc.). There will be budgets to cut, services to modify, pensions to renegotiate, and most likely employees to be terminated. Some municipal agencies will raise taxes to address the economic pressures, while others cut them with the same intention. Some unions will come to the table as constructive partners and some will do so as antagonists. Some citizens will understand the need to adjust expectations and others will rise up in anger. In some communities, business will partner with elected representatives to develop comprehensive solutions, while in other communities business will stand silently by.
While in most of America, we have moved away from citizen participation in local politics, the economic decisions that must be made may inspire renewed engagement. This is good. Just as the world has become more interdependent, our local communities have also become more closely woven into the web of broader economic and geopolitical forces. Former House Speaker Tip O’Neil liked to quip that “All politics is local,” and he was right. Were he with us today, he might well add that, “International has become local.” A rancher on the Eastern plains of Colorado is connected to one at the base of the Southern Andes in Chile and both are joined to the wheat farmer replanting a flooded field in central Pakistan.
Will our municipalities declare bankruptcy? Some, yes. Will they default on their bonds in greater frequency? Yes. Will pension contracts be renegotiated? Some, yes. Will it be enough? In most cases, no. It will just delay the inevitable for the next generation to address. Will America’s cities and states fall into perpetual decline? No. Many cities and states will need to reposition and make tough choices, but most Americans are resilient, loyal and have a strong sense of place. Cities and states will need to reinvent, but remember, we have done that before several times (e.g. New York City, Chicago, San Francisco, Atlanta, etc.)
Investment Industry Theme: Fiduciary Standard
Imagine if doctors were having a national debate as to whether they needed to put the health care needs of the patient before their own financial gain. Imagine if engineers were arguing in a public forum about whether bridges needed to be built for safe transport or simply to meet the business needs of the engineering firm. What if states were trying to decide whether teachers should strive to serve students before serving themselves?
We believe that were any of these debates going on, the nation would be riveted and strong feelings and extensive news coverage would abound. Yet such a debate is going on right now within the investment industry and even most investment professionals are not even watching from the sidelines. Yet this will be one of the most important decisions impacting the investment industry and its customers in the last 70 years.
In the initial drafts of what became the Dodd-Frank Act, language was proposed that would compel all broker-dealer representatives to meet the same fiduciary care that is required of Investment Advisers per the 1940 Investment Adviser Act. Per the 1940 Act, Advisers must provide loyalty and care to their clients first and foremost, disclose how they are compensated, disclose all conflicts of interest, and act in good faith. Rather than being a rules-based guideline, the fiduciary standard is intended as a principles-based guideline; thus, financial professionals would be expected to meet the spirit—not just the letter—of the guidelines.
Both Dodd (Chris Dodd, Senator from Connecticut) and Frank (Barney Frank, Congressman from Massachusetts), quickly struck the requirement for a fiduciary standard from the Act. Instead they required that the SEC study the situation and make a recommendation. On January 21, the SEC released their study to Congress. Now Congress, the SEC, FINRA (the self-regulating body of the broker-dealers), and lobbyists from the broker dealer, insurance, and banking community, financial planning advocacy groups, money management firms, and others are teeing up for negotiations.
Will Congress compel all financial professionals to meet the fiduciary standards defined by the 1940 Act? No. There’s too much money made under the current arrangement that consumers would not pay if they knew. Will Congress create a single, watered-down standard for everyone despite the SEC’s recommendation otherwise? Possibly. Again, there is much money at stake and great pressure to weaken, not strengthen, fiduciary standards. Will investors experience a more transparent investment industry designed to put their needs first? No. We continue to believe that the only thing that will materially change the structure of the investment industry is a change in consumer demand.
Nonprofit Industry Theme: Impact
The nonprofit industry feeds the hungry, houses the homeless, cares for the sick and abandoned, preserves history and protects the environment, cultivates the arts, and otherwise serves the faith, psychological, and educational needs of society. It helps make us a civil society, provides a safety net, and enables the many aspects of life that do not have short-term profit motive or potential.
Economic pressures in 2011 will continue to challenge nonprofit agencies to become even more efficient, better demonstrate their impact, and forge ever stronger relationships with those that provide financial sustenance, whether through contributions, reimbursements, or other revenue streams. Thus, like in other aspects of society, we can expect to see quality rise to the top. Nonprofits that are extremely well governed, well-managed, and sustainably resourced will continue to thrive. Those that have weak boards, ineffective staff or unsustainable revenue streams will go away, be absorbed, or, merge with peers. That’s okay.
In 2011, we will see continued interest in the expansion of social impact investment structures that raise capital to meet social needs in more creative ways. The line between nonprofit and forprofit will blur as social entrepreneurs move back and forth between legal structures and business strategies to strive to meet their social objectives. That, too, is good.
Will Congress look for ways to tax nonprofits on endowments, hard assets, or other aspects of their business? Yes. When revenues are tight and spending is high, expect Congress to consider everything, including taxing aspects of nonprofit business. That said, we think actually implementing such taxes will be politically difficult and thus unlikely. Will Congress reduce the tax deductibility of charitable donations as the Obama administration has proposed? See answer above. Same pressures to do it, same pressures not to. Will nonprofit organizations go out of business in 2011? Yes. Will the service demands on nonprofits increase? Yes. Will nonprofits be able to meet those increased demands? Some yes. Some will thrive in this environment as they will be able to demonstrate their value at a time when value is important.
Unifying Theme: Entrepreneurship
We hear again and again that people are concerned that America has lost its competitive edge, that we have become complacent, that we are Rome in decline, a shadow of our former greatness, no longer relevant or vital or even interesting. We would share the concern except that America has voiced that level of self-critical anxiety ever since the generation that took over leadership from the first revolutionaries in the 1790s. We believe firmly that America’s obsessive fear of becoming irrelevant keeps us hungry and motivated and relevant.
Once the housing/banking/credit crisis hit the fall of 2008, many Americans felt that the devastation was an indication that our most fundamental structures had failed. Anti-capitalists and anti-globalists reveled in a sort of schadenfreude (def.—“pleasure in someone else’s misfortune”) that the great exploiter had crashed and burned. Clearly government had not protected us from our excesses and perhaps even contributed to them. Many of our banks were unable to manage their own businesses and were taking us all down with them. Our heavy industry was shot, as was the housing industry which made everyone so rich for the previous 20 years.
We see it otherwise. America’s greatness is in its fundamental structure, not our temporal management (or mismanagement) of it. America’s constitution (small “c”) is based on rule of law, the free flow of capital and investment, a healthy civil society, human rights, and the opportunity to launch something, fail, and try again. We are imperfect in all of these endeavors and yet these factors exist in America as they rarely have in any other place or at any other time in human history. Few immigrants leave their homes and families and risk their lives to come here just to receive Social Security and Medicare. People around the globe still see America as a place where the lowliest among us can forge a life of value and meaning, can raise a family, can pray, and can become what one wishes. For that, people will give up and risk a great deal.
Is America perfect? No. Is America fundamentally broken? No. Are America’s partisan politics particularly bad now? Not by a long shot. We’ve improved tremendously over the past 235 years. Is the spirit of the American people broken? No. Can one start a company in America? Yes. Is capital available? Yes, for the right business plan and with enough tenacity. Will it be government spending that turns around the economy? On the margins. Government spending is a tax on the economy (today or tomorrow), so ultimately it is a zero sum impact. Will it be private enterprise that turns around the economy? Yes, as it ultimately is in every recession throughout history and across societies.
As we enter 2011, we have never been more confident, more excited, or more inspired by those among us who seek to make an impact in creating a more humane, secure, innovative, and loving world. Our Union has been rocked hard these past several years; yet, we possess the fundamental structures and thoughtfully engaged citizenry necessary to move from strength to strength. And so we will.
Syntrinsic’s State of the Union is informed by our daily work with good people across the political spectrum that are ethical, patriotic, intelligent, and of solid character. Syntrinsic is grounded in a very strong social agenda, though it is not a partisan one; thus, while our State of the Union may lack in standing ovations from 51% of America, we hope to compensate by referencing themes in 2011 relevant for all of us who care about the stewardship of our nation’s financial resources.
We have focused on one theme that is geopolitical, one national, one tied to the investment industry, and one tied to the nonprofit industry. Our last theme, we think, unites them all.
Geopolitical Theme: Beginning the Next Cold War
Much has been made in recent weeks of the rise of China’s military (e.g. stealth fighter), their increasing territoriality with their neighbors over control of the seas around China, and their desire to make the Yuan a global currency. Some pundits have attempted to position China and US in the beginning of a Cold War-like relationship, stirring up images of former Soviet-US tensions; however, this metaphor does not fit.
The US and China have developed a symbiotic relationship that never existed between the US and the USSR. The Soviets did not finance America’s government debt as China has, nor did American consumers finance the growth of the Soviet economy as we have and continue to do with China. While China and the US have become ever more interdependent, the US and the USSR largely lived in two isolated economic worlds, motivating each other, but doing everything they could to isolate and weaken the other.
We expect to see China continue to flex its growing muscles in the coming year, and yet also expect them to struggle to manage at least four major challenges that can destabilize a totalitarian regime: 1). A “hot” economy; 2). A demographic that includes far too many inadequately educated rural poor men; 3). Growing internal dissent around faith, corruption, government incompetence, and environmental devastation; and 4). Relations with North Korea, Japan, Taiwan, Myanmar, and India.
Will China overtake the US as the next global super power? Not yet. Will China and US relations deteriorate? Probably not. Will the US stop relying on Chinese products or China’s financing of our debt? No. Will the US compel China to become an advocate of human rights in North Korea, Africa, Myanmar, and elsewhere? No. Should we be wary of China? Of the people, no. Of the government, yes.
National Theme: Save our Cities (and States)
Closer to home, 2011 will be marked by the economic challenges of states, cities, and other municipal districts (e.g. schools, utilities, fire and police, airports, etc.). There will be budgets to cut, services to modify, pensions to renegotiate, and most likely employees to be terminated. Some municipal agencies will raise taxes to address the economic pressures, while others cut them with the same intention. Some unions will come to the table as constructive partners and some will do so as antagonists. Some citizens will understand the need to adjust expectations and others will rise up in anger. In some communities, business will partner with elected representatives to develop comprehensive solutions, while in other communities business will stand silently by.
While in most of America, we have moved away from citizen participation in local politics, the economic decisions that must be made may inspire renewed engagement. This is good. Just as the world has become more interdependent, our local communities have also become more closely woven into the web of broader economic and geopolitical forces. Former House Speaker Tip O’Neil liked to quip that “All politics is local,” and he was right. Were he with us today, he might well add that, “International has become local.” A rancher on the Eastern plains of Colorado is connected to one at the base of the Southern Andes in Chile and both are joined to the wheat farmer replanting a flooded field in central Pakistan.
Will our municipalities declare bankruptcy? Some, yes. Will they default on their bonds in greater frequency? Yes. Will pension contracts be renegotiated? Some, yes. Will it be enough? In most cases, no. It will just delay the inevitable for the next generation to address. Will America’s cities and states fall into perpetual decline? No. Many cities and states will need to reposition and make tough choices, but most Americans are resilient, loyal and have a strong sense of place. Cities and states will need to reinvent, but remember, we have done that before several times (e.g. New York City, Chicago, San Francisco, Atlanta, etc.)
Investment Industry Theme: Fiduciary Standard
Imagine if doctors were having a national debate as to whether they needed to put the health care needs of the patient before their own financial gain. Imagine if engineers were arguing in a public forum about whether bridges needed to be built for safe transport or simply to meet the business needs of the engineering firm. What if states were trying to decide whether teachers should strive to serve students before serving themselves?
We believe that were any of these debates going on, the nation would be riveted and strong feelings and extensive news coverage would abound. Yet such a debate is going on right now within the investment industry and even most investment professionals are not even watching from the sidelines. Yet this will be one of the most important decisions impacting the investment industry and its customers in the last 70 years.
In the initial drafts of what became the Dodd-Frank Act, language was proposed that would compel all broker-dealer representatives to meet the same fiduciary care that is required of Investment Advisers per the 1940 Investment Adviser Act. Per the 1940 Act, Advisers must provide loyalty and care to their clients first and foremost, disclose how they are compensated, disclose all conflicts of interest, and act in good faith. Rather than being a rules-based guideline, the fiduciary standard is intended as a principles-based guideline; thus, financial professionals would be expected to meet the spirit—not just the letter—of the guidelines.
Both Dodd (Chris Dodd, Senator from Connecticut) and Frank (Barney Frank, Congressman from Massachusetts), quickly struck the requirement for a fiduciary standard from the Act. Instead they required that the SEC study the situation and make a recommendation. On January 21, the SEC released their study to Congress. Now Congress, the SEC, FINRA (the self-regulating body of the broker-dealers), and lobbyists from the broker dealer, insurance, and banking community, financial planning advocacy groups, money management firms, and others are teeing up for negotiations.
Will Congress compel all financial professionals to meet the fiduciary standards defined by the 1940 Act? No. There’s too much money made under the current arrangement that consumers would not pay if they knew. Will Congress create a single, watered-down standard for everyone despite the SEC’s recommendation otherwise? Possibly. Again, there is much money at stake and great pressure to weaken, not strengthen, fiduciary standards. Will investors experience a more transparent investment industry designed to put their needs first? No. We continue to believe that the only thing that will materially change the structure of the investment industry is a change in consumer demand.
Nonprofit Industry Theme: Impact
The nonprofit industry feeds the hungry, houses the homeless, cares for the sick and abandoned, preserves history and protects the environment, cultivates the arts, and otherwise serves the faith, psychological, and educational needs of society. It helps make us a civil society, provides a safety net, and enables the many aspects of life that do not have short-term profit motive or potential.
Economic pressures in 2011 will continue to challenge nonprofit agencies to become even more efficient, better demonstrate their impact, and forge ever stronger relationships with those that provide financial sustenance, whether through contributions, reimbursements, or other revenue streams. Thus, like in other aspects of society, we can expect to see quality rise to the top. Nonprofits that are extremely well governed, well-managed, and sustainably resourced will continue to thrive. Those that have weak boards, ineffective staff or unsustainable revenue streams will go away, be absorbed, or, merge with peers. That’s okay.
In 2011, we will see continued interest in the expansion of social impact investment structures that raise capital to meet social needs in more creative ways. The line between nonprofit and forprofit will blur as social entrepreneurs move back and forth between legal structures and business strategies to strive to meet their social objectives. That, too, is good.
Will Congress look for ways to tax nonprofits on endowments, hard assets, or other aspects of their business? Yes. When revenues are tight and spending is high, expect Congress to consider everything, including taxing aspects of nonprofit business. That said, we think actually implementing such taxes will be politically difficult and thus unlikely. Will Congress reduce the tax deductibility of charitable donations as the Obama administration has proposed? See answer above. Same pressures to do it, same pressures not to. Will nonprofit organizations go out of business in 2011? Yes. Will the service demands on nonprofits increase? Yes. Will nonprofits be able to meet those increased demands? Some yes. Some will thrive in this environment as they will be able to demonstrate their value at a time when value is important.
Unifying Theme: Entrepreneurship
We hear again and again that people are concerned that America has lost its competitive edge, that we have become complacent, that we are Rome in decline, a shadow of our former greatness, no longer relevant or vital or even interesting. We would share the concern except that America has voiced that level of self-critical anxiety ever since the generation that took over leadership from the first revolutionaries in the 1790s. We believe firmly that America’s obsessive fear of becoming irrelevant keeps us hungry and motivated and relevant.
Once the housing/banking/credit crisis hit the fall of 2008, many Americans felt that the devastation was an indication that our most fundamental structures had failed. Anti-capitalists and anti-globalists reveled in a sort of schadenfreude (def.—“pleasure in someone else’s misfortune”) that the great exploiter had crashed and burned. Clearly government had not protected us from our excesses and perhaps even contributed to them. Many of our banks were unable to manage their own businesses and were taking us all down with them. Our heavy industry was shot, as was the housing industry which made everyone so rich for the previous 20 years.
We see it otherwise. America’s greatness is in its fundamental structure, not our temporal management (or mismanagement) of it. America’s constitution (small “c”) is based on rule of law, the free flow of capital and investment, a healthy civil society, human rights, and the opportunity to launch something, fail, and try again. We are imperfect in all of these endeavors and yet these factors exist in America as they rarely have in any other place or at any other time in human history. Few immigrants leave their homes and families and risk their lives to come here just to receive Social Security and Medicare. People around the globe still see America as a place where the lowliest among us can forge a life of value and meaning, can raise a family, can pray, and can become what one wishes. For that, people will give up and risk a great deal.
Is America perfect? No. Is America fundamentally broken? No. Are America’s partisan politics particularly bad now? Not by a long shot. We’ve improved tremendously over the past 235 years. Is the spirit of the American people broken? No. Can one start a company in America? Yes. Is capital available? Yes, for the right business plan and with enough tenacity. Will it be government spending that turns around the economy? On the margins. Government spending is a tax on the economy (today or tomorrow), so ultimately it is a zero sum impact. Will it be private enterprise that turns around the economy? Yes, as it ultimately is in every recession throughout history and across societies.
As we enter 2011, we have never been more confident, more excited, or more inspired by those among us who seek to make an impact in creating a more humane, secure, innovative, and loving world. Our Union has been rocked hard these past several years; yet, we possess the fundamental structures and thoughtfully engaged citizenry necessary to move from strength to strength. And so we will.
Friday, December 17, 2010
Shocked, Just Shocked
Much has been made of WikiLeaks’ recent release of previously confidential diplomatic cables. The world was shocked—just shocked—to learn that there is tension between Sunni and Shia in the Middle East and that North Korea’s dictator for life Kim Jung Il is widely considered slightly nuts. Shocked, just shocked.
Lost amidst the political revelations was another packet of secret cables. Wikileaks had intended to post them to their website but accidentally faxed them to Syntrinsic instead. Fortunately, we had plenty of toner on hand. It seems that Wikileaks somehow came upon communications between high ranking officers and officials at major investment firms, regulatory agencies, and other sensitive financial posts.
Following the lead of many great news organizations, we feel we have a moral obligation to post excerpts from these cables here so that the world may be safe for democracy and freedom, etcetera, etcetera. Nonetheless, in a concession to our Chief Compliance Officer and to human decency, we have elected to delete the names of the specific authors, preferring rather to cite their professional roles.
Memo from Regulatory Investigators to Congressional Staffers:
“…and tomorrow we will be announcing a series of investigations into hedge fund insider trading. This announcement is likely to have an adverse affect on the US stock markets; therefore, we recommend that you sell your equity positions at market open tomorrow. Please bear in mind that only members of congress and their staffers are legally able to trade on inside information such as we are providing here, so please keep this memo private.”
Tweet from overwrought Congressional Staffer working on the Dodd-Frank Financial Reform Bill:
“We had promised Fiduciary Standard. Nice dinner last night with lobbyists from You Know Who. Breaking promise. Feeling remorse. LOL.”
Treasury Department Job Posting for CEO Position at Major Bank
“Wanted: Former CEO of failed financial institution with experience alienating shareholders, destroying shareholder value, and demoralizing (or downsizing) employees. Must be willing to accept large signing bonus and considerable stock options that only vest when government bailout secures future of firm. Must be willing to relocate within mid-town Manhattan. Requires a firm commitment of at least nine months, nothing less. Please contact Head of Treasury Department directly. At home. Sunday night.”
Dictation from Federal Reserve Brainstorming session
“Let’s create a US sovereign wealth fund, you know, like Norway, China, or Singapore.”
“Yeah, we could use it to buy US distressed assets. Then sell them back to the private sector later.”
“So where do we get capital?!”
“Let’s print it!”
“No borrow!”
“Is that sovereign?”
“Is that wealth?”
“Hey, delete those last two comments, now!”
Lecture Notes from Professor of Finance at Prominent School of Business
“Look, we teach Modern Portfolio Theory because it is easy to teach, not because it reflects reality. The real world is far more complex, far less predictable than MPT promises. But look, we’ve got tests to give, books to write, ratios to name, and software to sell. Now, enough of this. Please draw a normal curve…”
Speech from Senior White House Official (with staffer edits as indicated)
“Americans should invest in annuities (because insurance companies have contributed heavily to my campaign - REMOVE) and because it is important to plan for your futures. We were going to hold insurance companies to a fiduciary standard but (decided that doing so would likely make it harder to justify their sale in many cases and - REMOVE) did not want to stifle the profitability of the insurance companies when the economy is already weak. Annuities are a great compliment to social security (which many of you will find less robust or reliable than you had hoped - REMOVE).”
Friendly brief from White House Budget Office to Department of Education
“We understand that you wish to develop and require a curriculum around personal finance and we agree that in time, such an effort has merit. In the meantime, we are concerned that your effort to educate young people on matters related to credit card usage, investment, personal debt, and taxes, may demoralize citizens and even discourage their contributions to consumer spending at a crucial time. We ask that any such efforts be pursued when the economy is healthier. To underscore our point, we find that Education Department funding is already difficult to sustain and hope that your cooperation on this matter will enable to fully fund the budget you have requested.”
National Sales Manager response to FINRA panel on investment sales practices
“We are firmly convinced that there is no benefit to investors in disclosing clearly the various expenses associated with investment. Such expenses are minor, are of little concern to investors, and do not influence the behavior of our investment professionals. Even though the supervisory personnel at our firm are compensated based on revenues generated from the sale of investment products, we are 100% convinced that they ensure that all sales practices are in the best interest of the investor. Do you really think someone would sell an investment product just because it pays them better than another product?[Pause]. I didn’t think so.”
Note from Japanese Central Bank official to American counterpart regarding bank supports and interest rates
“Been there. Done that. Didn’t work.”
We realize that the excerpts above are seismic in their impact, revealing the cynical underbelly of global finance. We also recognize that we may be forced into hiding for exposing these dangerous communications. Indeed, the whole economy might grind to a halt, but such is the price of…well, you know.
We like this “secrets” business. You take widely known, common sense information, dress it up a bit, and make it seem mysterious and exclusive. Then—only after you have transformed it from general knowledge into a restricted insight—you dramatically announce it to the world. Sort of like the marketing materials from most investment firms.
Hmmmm, maybe we’re on to something…
Lost amidst the political revelations was another packet of secret cables. Wikileaks had intended to post them to their website but accidentally faxed them to Syntrinsic instead. Fortunately, we had plenty of toner on hand. It seems that Wikileaks somehow came upon communications between high ranking officers and officials at major investment firms, regulatory agencies, and other sensitive financial posts.
Following the lead of many great news organizations, we feel we have a moral obligation to post excerpts from these cables here so that the world may be safe for democracy and freedom, etcetera, etcetera. Nonetheless, in a concession to our Chief Compliance Officer and to human decency, we have elected to delete the names of the specific authors, preferring rather to cite their professional roles.
Memo from Regulatory Investigators to Congressional Staffers:
“…and tomorrow we will be announcing a series of investigations into hedge fund insider trading. This announcement is likely to have an adverse affect on the US stock markets; therefore, we recommend that you sell your equity positions at market open tomorrow. Please bear in mind that only members of congress and their staffers are legally able to trade on inside information such as we are providing here, so please keep this memo private.”
Tweet from overwrought Congressional Staffer working on the Dodd-Frank Financial Reform Bill:
“We had promised Fiduciary Standard. Nice dinner last night with lobbyists from You Know Who. Breaking promise. Feeling remorse. LOL.”
Treasury Department Job Posting for CEO Position at Major Bank
“Wanted: Former CEO of failed financial institution with experience alienating shareholders, destroying shareholder value, and demoralizing (or downsizing) employees. Must be willing to accept large signing bonus and considerable stock options that only vest when government bailout secures future of firm. Must be willing to relocate within mid-town Manhattan. Requires a firm commitment of at least nine months, nothing less. Please contact Head of Treasury Department directly. At home. Sunday night.”
Dictation from Federal Reserve Brainstorming session
“Let’s create a US sovereign wealth fund, you know, like Norway, China, or Singapore.”
“Yeah, we could use it to buy US distressed assets. Then sell them back to the private sector later.”
“So where do we get capital?!”
“Let’s print it!”
“No borrow!”
“Is that sovereign?”
“Is that wealth?”
“Hey, delete those last two comments, now!”
Lecture Notes from Professor of Finance at Prominent School of Business
“Look, we teach Modern Portfolio Theory because it is easy to teach, not because it reflects reality. The real world is far more complex, far less predictable than MPT promises. But look, we’ve got tests to give, books to write, ratios to name, and software to sell. Now, enough of this. Please draw a normal curve…”
Speech from Senior White House Official (with staffer edits as indicated)
“Americans should invest in annuities (because insurance companies have contributed heavily to my campaign - REMOVE) and because it is important to plan for your futures. We were going to hold insurance companies to a fiduciary standard but (decided that doing so would likely make it harder to justify their sale in many cases and - REMOVE) did not want to stifle the profitability of the insurance companies when the economy is already weak. Annuities are a great compliment to social security (which many of you will find less robust or reliable than you had hoped - REMOVE).”
Friendly brief from White House Budget Office to Department of Education
“We understand that you wish to develop and require a curriculum around personal finance and we agree that in time, such an effort has merit. In the meantime, we are concerned that your effort to educate young people on matters related to credit card usage, investment, personal debt, and taxes, may demoralize citizens and even discourage their contributions to consumer spending at a crucial time. We ask that any such efforts be pursued when the economy is healthier. To underscore our point, we find that Education Department funding is already difficult to sustain and hope that your cooperation on this matter will enable to fully fund the budget you have requested.”
National Sales Manager response to FINRA panel on investment sales practices
“We are firmly convinced that there is no benefit to investors in disclosing clearly the various expenses associated with investment. Such expenses are minor, are of little concern to investors, and do not influence the behavior of our investment professionals. Even though the supervisory personnel at our firm are compensated based on revenues generated from the sale of investment products, we are 100% convinced that they ensure that all sales practices are in the best interest of the investor. Do you really think someone would sell an investment product just because it pays them better than another product?[Pause]. I didn’t think so.”
Note from Japanese Central Bank official to American counterpart regarding bank supports and interest rates
“Been there. Done that. Didn’t work.”
We realize that the excerpts above are seismic in their impact, revealing the cynical underbelly of global finance. We also recognize that we may be forced into hiding for exposing these dangerous communications. Indeed, the whole economy might grind to a halt, but such is the price of…well, you know.
We like this “secrets” business. You take widely known, common sense information, dress it up a bit, and make it seem mysterious and exclusive. Then—only after you have transformed it from general knowledge into a restricted insight—you dramatically announce it to the world. Sort of like the marketing materials from most investment firms.
Hmmmm, maybe we’re on to something…
Sunday, December 5, 2010
The New Philanthropic Normal
One of life’s mysteries is how and why donors give money. In the eyes of many, philanthropists and foundations remain elusive givers or deniers of financial sustenance. As these donors go, so go our social service agencies, environmental causes, faith based initiatives, and countless essential elements of our civil society.
The Utah Society of Fund Raisers (www.USFR.org) recently asked Syntrinsic to present thoughts on how foundation thinking has shifted over the course of this economic crisis. Of course, there is no such thing as monolithic “foundation thinking.” Each foundation possesses a distinctive approach to stewarding its resources and to giving those resources away. Nonetheless, on December 2, Syntrinsic gave a keynote address to the USFR in Salt Lake City that spoke to the themes below.
What has changed?
Prior to the economic crisis, most foundations were confident, hopeful, and feeling generous. They maintained a perpetual time horizon and were accustomed to growing year over year in excess of their spending. Life was good. Now, however, many foundations are highly uncertain and feel constrained in their ability to support all that they want. They are concerned about their ability to grow assets organically and thus about their ability to live in perpetuity.
We all know what happened. Foundation assets generally declined 30-50% from their peak in the fall of 2007 through the spring of 2009. Depending on their investment strategy and spending, many foundations remain quite a bit smaller than they were before the economic bust. Three other factors, however, are less obvious. First, many foundations have investments with limited liquidity due to private placements that have put up gates or extended the time horizon for distributing funds. Second, most foundations have significantly lowered their forward-looking return assumptions. Whereas foundations routinely expected to make 8-10% per year just a few years ago, most now plan on returns in the 5-7% range, and many do not even try to predict their gains. Thirdly, there remains uncertainty about how estates and foundations will be treated under the tax code. There are those at think tanks and in DC who believe that charitable gifts should not be as tax deductible as they are now and others who think that nonprofits should be taxed similarly to for profit organizations. Clear statements from Congress, the IRS, and the White House to the contrary would be helpful.
In the meantime, organizations seeking to raise funds from foundations wonder if their thinking is fundamentally different than it was pre-crisis. Five general trends have emerged around the country and across foundations of varied sizes and missions.
I. Getting Directly Involved
Some foundations are seeking ways to be more directly involved in the initiatives and programs they fund. The participation can take many forms: foundation representatives might want to be volunteers in the organizations they fund, whether in providing direct service or serving on a board or task force; they also may want to help the nonprofit secure funding from other sources or otherwise influence long-term strategy. In many cases, nonprofit organizations may not want direct involvement from their funders (or at least certain funders), but in other situations, creating opportunities for direct involvement might open doors otherwise closed.
II. Concentrating Support
Some foundations are dealing with a smaller resource base by supporting a smaller number of organizations and/or sectors. In many cases, these foundations have revisited their missions to reaffirm their purpose. If giving has drifted from that core purpose over time, then foundations may use the economic crisis as an opportunity to refocus. If the foundation supports five mentoring programs (for example), then it may decide to concentrate on the 2-3 it deems most effective. It behooves nonprofit organizations to understand a foundation’s current mission and current strategic focus, and to only pursue funding from those where the alignment or “fit” is strongest.
III. Seeking Experience and Credibility
Most foundations were started by entrepreneurs or their descendants. Nonetheless, when it comes to supporting organizations and initiatives—particularly in an environment of scarce resources—foundations tend to be conservative. They want to support organizations or leaders they know (or know of) and support. Thus, it is imperative that those seeking funding be able to demonstrate the credibility of their organization and leadership. Want to launch a new initiative? Have a proven leader take the reins. Want to launch a new organization? Be sure that it is necessary, and if so, then assemble a board and staff whose familiarity will inspire confidence.
IV. Demanding Accountability
Over the last three years, “efficacy” has become a constant theme at foundation conferences and in foundation board rooms. In this context, efficacy is about foundations trying to determine whether they are having an impact in the world. Given all the work involved in establishing and running a foundation, is it really worth it? Nonprofits that hold themselves accountable to mission-specific outcomes are much better positioned to address these concerns than those that do not. The nonprofits in the strongest position are those that plan ahead how they will address the foundation’s head and the heart. Do you have quantitative evidence of impact for those who need it? Do you provide anecdotes, videos, and in-person presentations for those touched by more emotional evidence?
V. Seeking Flexible Capital Structures
Nonprofits almost exclusively strive to appeal to the grants making side of a foundation—and understandably so given how foundations have historically approached the business of allocating resources. However, a shift seems to be afoot, though at the early stages. Some foundations—a small number at this point—are considering how to use their asset base to make strategic investments that support their mission. We’re not talking about negative or positive social screening, but rather more creative options. Some foundations are looking at ways to lend money to nonprofits in lieu of investing in traditional bonds, or to make long-term equity investments in projects in lieu of stocks or private equity. These types of investments have been common in the faith-based community for decades, but we sense increasing possibilities throughout the foundation community in the years to come, particularly as more nonprofits create meaningful opportunities for such investment.
We expect that many of the pressures facing foundations—lower asset sizes, reduced growth assumptions, uncertain tax policy—will continue for many years. We also expect that the social needs foundations strive to address through their support of nonprofit organizations will only increase in scope, intensity, and cost—and dramatically so. In short, today’s funding challenges are not an exception but what we believe to be a “new philanthropic normal.”
That said, the nonprofit organizations and other concerned community organizations that innovate and proactively strategize for this environment will find that generous foundations and philanthropists will be all too eager to support their good efforts. The resources are diminished; the spirit of giving in America is as robust as ever.
The Utah Society of Fund Raisers (www.USFR.org) recently asked Syntrinsic to present thoughts on how foundation thinking has shifted over the course of this economic crisis. Of course, there is no such thing as monolithic “foundation thinking.” Each foundation possesses a distinctive approach to stewarding its resources and to giving those resources away. Nonetheless, on December 2, Syntrinsic gave a keynote address to the USFR in Salt Lake City that spoke to the themes below.
What has changed?
Prior to the economic crisis, most foundations were confident, hopeful, and feeling generous. They maintained a perpetual time horizon and were accustomed to growing year over year in excess of their spending. Life was good. Now, however, many foundations are highly uncertain and feel constrained in their ability to support all that they want. They are concerned about their ability to grow assets organically and thus about their ability to live in perpetuity.
We all know what happened. Foundation assets generally declined 30-50% from their peak in the fall of 2007 through the spring of 2009. Depending on their investment strategy and spending, many foundations remain quite a bit smaller than they were before the economic bust. Three other factors, however, are less obvious. First, many foundations have investments with limited liquidity due to private placements that have put up gates or extended the time horizon for distributing funds. Second, most foundations have significantly lowered their forward-looking return assumptions. Whereas foundations routinely expected to make 8-10% per year just a few years ago, most now plan on returns in the 5-7% range, and many do not even try to predict their gains. Thirdly, there remains uncertainty about how estates and foundations will be treated under the tax code. There are those at think tanks and in DC who believe that charitable gifts should not be as tax deductible as they are now and others who think that nonprofits should be taxed similarly to for profit organizations. Clear statements from Congress, the IRS, and the White House to the contrary would be helpful.
In the meantime, organizations seeking to raise funds from foundations wonder if their thinking is fundamentally different than it was pre-crisis. Five general trends have emerged around the country and across foundations of varied sizes and missions.
I. Getting Directly Involved
Some foundations are seeking ways to be more directly involved in the initiatives and programs they fund. The participation can take many forms: foundation representatives might want to be volunteers in the organizations they fund, whether in providing direct service or serving on a board or task force; they also may want to help the nonprofit secure funding from other sources or otherwise influence long-term strategy. In many cases, nonprofit organizations may not want direct involvement from their funders (or at least certain funders), but in other situations, creating opportunities for direct involvement might open doors otherwise closed.
II. Concentrating Support
Some foundations are dealing with a smaller resource base by supporting a smaller number of organizations and/or sectors. In many cases, these foundations have revisited their missions to reaffirm their purpose. If giving has drifted from that core purpose over time, then foundations may use the economic crisis as an opportunity to refocus. If the foundation supports five mentoring programs (for example), then it may decide to concentrate on the 2-3 it deems most effective. It behooves nonprofit organizations to understand a foundation’s current mission and current strategic focus, and to only pursue funding from those where the alignment or “fit” is strongest.
III. Seeking Experience and Credibility
Most foundations were started by entrepreneurs or their descendants. Nonetheless, when it comes to supporting organizations and initiatives—particularly in an environment of scarce resources—foundations tend to be conservative. They want to support organizations or leaders they know (or know of) and support. Thus, it is imperative that those seeking funding be able to demonstrate the credibility of their organization and leadership. Want to launch a new initiative? Have a proven leader take the reins. Want to launch a new organization? Be sure that it is necessary, and if so, then assemble a board and staff whose familiarity will inspire confidence.
IV. Demanding Accountability
Over the last three years, “efficacy” has become a constant theme at foundation conferences and in foundation board rooms. In this context, efficacy is about foundations trying to determine whether they are having an impact in the world. Given all the work involved in establishing and running a foundation, is it really worth it? Nonprofits that hold themselves accountable to mission-specific outcomes are much better positioned to address these concerns than those that do not. The nonprofits in the strongest position are those that plan ahead how they will address the foundation’s head and the heart. Do you have quantitative evidence of impact for those who need it? Do you provide anecdotes, videos, and in-person presentations for those touched by more emotional evidence?
V. Seeking Flexible Capital Structures
Nonprofits almost exclusively strive to appeal to the grants making side of a foundation—and understandably so given how foundations have historically approached the business of allocating resources. However, a shift seems to be afoot, though at the early stages. Some foundations—a small number at this point—are considering how to use their asset base to make strategic investments that support their mission. We’re not talking about negative or positive social screening, but rather more creative options. Some foundations are looking at ways to lend money to nonprofits in lieu of investing in traditional bonds, or to make long-term equity investments in projects in lieu of stocks or private equity. These types of investments have been common in the faith-based community for decades, but we sense increasing possibilities throughout the foundation community in the years to come, particularly as more nonprofits create meaningful opportunities for such investment.
We expect that many of the pressures facing foundations—lower asset sizes, reduced growth assumptions, uncertain tax policy—will continue for many years. We also expect that the social needs foundations strive to address through their support of nonprofit organizations will only increase in scope, intensity, and cost—and dramatically so. In short, today’s funding challenges are not an exception but what we believe to be a “new philanthropic normal.”
That said, the nonprofit organizations and other concerned community organizations that innovate and proactively strategize for this environment will find that generous foundations and philanthropists will be all too eager to support their good efforts. The resources are diminished; the spirit of giving in America is as robust as ever.
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