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Governance questions at the Gates Foundation
Editorial
Governance questions at the Gates Foundation The dedicated staff of the Bill & Melinda Gates Foundation do an excellent job of distributing grants to promote health and welfare for the world’s most vulnerable peoples. Indeed, funding in many crucially important areas, such as child survival, vaccines, and malaria, might well be neglected were it not for the generosity and vision of Bill and Melinda Gates. But are the US$32 billion that underpin the Foundation’s philanthropy invested in a manner that contradicts the Foundation’s ideals? This question was raised by two articles that appeared in the Los Angeles Times on Jan 7 and 8 this year. The articles maintain that the Gates Foundation’s endowment is often invested in companies whose practices hurt the same people the Foundation’s donations seek to help. These businesses include major polluters in the developing world and pharmaceutical companies who have sought to restrict access to much-needed drugs. This is an important debate of strong public interest and with no easy answers. In a statement responding to the LA Times articles, the Foundation’s Chief Operating Officer, Cheryl Scott, said the Foundation does not invest “if a company’s profit model is centrally tied to corporate activity that we find egregious”, which is why the Foundation does not own tobacco stocks. The Foundation would also avoid investments that represented a conflict of interest for the Gates family. “The Foundation is a passive investor because we want to stay focused on our core issues”, she writes. A more activist investment policy would be a major undertaking, she argues, which would distract the staff from the Foundation’s core work. Alternatively, there are those who would contend that with $19 invested for every $1 given in grants, the investments provide an enormous opportunity to further the Foundation’s aims. For example, reported stakes of over $100 million each in Abbott Laboratories, Schering Plough Corporation, and Merck & Co, could influence those companies to improve access to medicines for less privileged populations; similarly sized holdings in BP and Exxon Mobil could be used to press for more environmentally sound practices. Moreover, shareholder activism may increase the value of holdings in the longterm and further the Foundation’s aims. Traditionally, philanthropies have been judged by the purposes to which they apply their grants, not the provenance of their fortunes. But increasingly www.thelancet.com Vol 369 January 20, 2007
foundations are realising that as owners of stock, they have a responsibility to participate in environmental, social, and governance issues. The UN’s Principles for Responsible Investment, launched less than 1 year ago, is already supported by investors representing $4000 billion and provides a framework for ethical investing that emphasises the use of proxy voting rights to secure sustainable long-term outcomes that benefit investors, employees, and communities. Many charitable foundations already embrace responsible governance. For instance, at the UK’s Wellcome Trust a synergistic approach between grant-giving and investment is part of the constitution. Not only does the £12 billion Trust seek ethical and socially responsible investments, but it also pursues a policy of active shareholder involvement and was the first institutional investor in the UK to commission a specialist shareholder activist firm to work on its behalf. The Gates Foundation has begun well, by responding promptly to the LA Times allegations, and announcing a review of investment practices. In addition to consulting other foundations that have adopted socially responsible investment policies, Foundation officers should also consult grant recipients who translate the Foundation’s ideals into action, and members of the communities—in Africa, the Amercias, Asia, and elsewhere—that the Foundation seeks to serve. If grant holders or their beneficiaries believe that the goals of the Foundation are compromised by the choice and management of investments, then the Gates’ good work could indeed risk being tarnished. However, to limit analysis to the Gates Foundation misses a larger truth. All shareholders, regardless of amount invested, are responsible as investor-owners for the behaviour of their companies. While it is naive to assume that the action of a single investor, even one as large as the Gates Foundation, can effect substantial change, the actions of many investors—be they individuals, pension funds, or large foundations—can do a great deal to improve the practices and policies of companies that may now focus only on the financial bottom line. The LA Times articles should prompt wider debate on the social costs of investment, so that they are not borne by those who can least afford to do so. ■ The Lancet
For the LA Times articles see http://www.latimes.com/news/ nationworld/nation/la-nagatesx07jan07,0,6827615.story For the Gates Foundation response see http://www. gatesfoundation.org/AboutUs/ Announcements/Announce070109.htm For UN principles for responsible investment see http://www.unpri.org
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Governance questions at the Gates Foundation The dedicated staff of the Bill & Melinda Gates Foundation do an excellent job of distributing grants to promote health and welfare for the world’s most vulnerable peoples. Indeed, funding in many crucially important areas, such as child survival, vaccines, and malaria, might well be neglected were it not for the generosity and vision of Bill and Melinda Gates. But are the US$32 billion that underpin the Foundation’s philanthropy invested in a manner that contradicts the Foundation’s ideals? This question was raised by two articles that appeared in the Los Angeles Times on Jan 7 and 8 this year. The articles maintain that the Gates Foundation’s endowment is often invested in companies whose practices hurt the same people the Foundation’s donations seek to help. These businesses include major polluters in the developing world and pharmaceutical companies who have sought to restrict access to much-needed drugs. This is an important debate of strong public interest and with no easy answers. In a statement responding to the LA Times articles, the Foundation’s Chief Operating Officer, Cheryl Scott, said the Foundation does not invest “if a company’s profit model is centrally tied to corporate activity that we find egregious”, which is why the Foundation does not own tobacco stocks. The Foundation would also avoid investments that represented a conflict of interest for the Gates family. “The Foundation is a passive investor because we want to stay focused on our core issues”, she writes. A more activist investment policy would be a major undertaking, she argues, which would distract the staff from the Foundation’s core work. Alternatively, there are those who would contend that with $19 invested for every $1 given in grants, the investments provide an enormous opportunity to further the Foundation’s aims. For example, reported stakes of over $100 million each in Abbott Laboratories, Schering Plough Corporation, and Merck & Co, could influence those companies to improve access to medicines for less privileged populations; similarly sized holdings in BP and Exxon Mobil could be used to press for more environmentally sound practices. Moreover, shareholder activism may increase the value of holdings in the longterm and further the Foundation’s aims. Traditionally, philanthropies have been judged by the purposes to which they apply their grants, not the provenance of their fortunes. But increasingly www.thelancet.com Vol 369 January 20, 2007
foundations are realising that as owners of stock, they have a responsibility to participate in environmental, social, and governance issues. The UN’s Principles for Responsible Investment, launched less than 1 year ago, is already supported by investors representing $4000 billion and provides a framework for ethical investing that emphasises the use of proxy voting rights to secure sustainable long-term outcomes that benefit investors, employees, and communities. Many charitable foundations already embrace responsible governance. For instance, at the UK’s Wellcome Trust a synergistic approach between grant-giving and investment is part of the constitution. Not only does the £12 billion Trust seek ethical and socially responsible investments, but it also pursues a policy of active shareholder involvement and was the first institutional investor in the UK to commission a specialist shareholder activist firm to work on its behalf. The Gates Foundation has begun well, by responding promptly to the LA Times allegations, and announcing a review of investment practices. In addition to consulting other foundations that have adopted socially responsible investment policies, Foundation officers should also consult grant recipients who translate the Foundation’s ideals into action, and members of the communities—in Africa, the Amercias, Asia, and elsewhere—that the Foundation seeks to serve. If grant holders or their beneficiaries believe that the goals of the Foundation are compromised by the choice and management of investments, then the Gates’ good work could indeed risk being tarnished. However, to limit analysis to the Gates Foundation misses a larger truth. All shareholders, regardless of amount invested, are responsible as investor-owners for the behaviour of their companies. While it is naive to assume that the action of a single investor, even one as large as the Gates Foundation, can effect substantial change, the actions of many investors—be they individuals, pension funds, or large foundations—can do a great deal to improve the practices and policies of companies that may now focus only on the financial bottom line. The LA Times articles should prompt wider debate on the social costs of investment, so that they are not borne by those who can least afford to do so. ■ The Lancet
For the LA Times articles see http://www.latimes.com/news/ nationworld/nation/la-nagatesx07jan07,0,6827615.story For the Gates Foundation response see http://www. gatesfoundation.org/AboutUs/ Announcements/Announce070109.htm For UN principles for responsible investment see http://www.unpri.org
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