Home >Opinion >Columns >Opinion | Sub-optimal philanthropy is not the answer to inequality
In 2010, Warren Buffett and Bill and Melinda Gates created The Giving Pledge to get billionaires to commit over half their wealth to charity (Photo: Bloomberg)
In 2010, Warren Buffett and Bill and Melinda Gates created The Giving Pledge to get billionaires to commit over half their wealth to charity (Photo: Bloomberg)

Opinion | Sub-optimal philanthropy is not the answer to inequality

Corporations and the wealthy need to make larger contributions to bring about a material change

Over the past decade, many businessmen and super-rich individuals have had attacks of conscience over growing inequality. In 2010, Warren Buffett and Bill and Melinda Gates created The Giving Pledge to get billionaires to commit over half their wealth to charity. To date, 204 billionaires have signed up.

A parallel movement, called Pledge1%, one supported vociferously by another billionaire, Marc Benioff of salesforce.com, a company valued by the stock market at around $135 billion, has tried to extend such an oath even to people who are not billionaires. The idea is to commit people to giving 1% of their equity, time, products or profits to charity, thus taking the idea even to startups that may not have generated their first dollar in profit.

There is no doubt that capitalism and capitalists will need to become more conscientious about giving large parts of their incomes and wealth away if governments are not to make laws to snatch them away. However, they also need to realize that giving small bits of wealth is not going to move the needle on inequality. While The Giving Pledge is broadly on the right track, since the amounts pledged would at least top current inheritance taxes in most countries which have them, the Pledge1% movement is clearly sub-optimal.

Giving 1% of a startup’s equity is no use when eight out of 10 will not survive five years. Allotting 1% of your time to charity work is roughly three to four days a year. This volunteerism may be useful for some causes that could use freelance work, but it is little more than tokenism. Giving 1% of your products may make no sense in an era when most tech products are free for users anyway (consider Gmail, Google Maps and free apps), and the products you develop may not be relevant to the poor, who are the intended beneficiaries.

In India, even a high profit-earning company like Infosys gives 1% of its net profits to charity, but one can hardly think of this as making a substantial dent on any kind of inequality. The Tatas have been keeping large chunks of group equity in Tata Sons, whose dividends go substantially to charity. But in an era when Tata Sons is also a holding company that needs to invest in equity, or write off losses in group companies, the total quantity available for charity is again likely to be sub-optimal. One should ask whether shares intended to generate money for charity ought to be part of the promoters’ controlling stake. In this case, charity and control serve divergent purposes.

Perhaps the one Indian billionaire who has indeed moved the needle on contributions is Azim Premji, who, while retaining voting control of Wipro, has transferred two-thirds of the economic benefits of his shareholding to charitable activities. This makes a difference, though in such cases too the question is how long a promoter can retain control without substantial economic ownership too. Shareholders and those in control ought to have convergent economic interests for shareholder capitalism to work well.

One can also go back to an earlier era of global giving by governments, when the World Bank and its soft-lending arm, the International Development Association, exhorted rich countries to give 1% of their GDP as official development assistance to the poor. Few countries did even this, and soon, this too evaporated.

If one had to choose between the Buffett-Gates-Premji and Benioff-Tata-Infosys models of giving, the former wins hands down. The advantage of the Benioff model is that it asks people to start small and give as much as they can. This is not to be rubbished. However, sub-optimal contributions can’t do much to reduce inequality in any country. If at all charity by the rich is to work, it is profitable companies and the super-rich who need to start giving in a big way.

The reality is that startups make their best contribution merely by being there. Even though many will not live to see their fifth birthdays, while they are around, they are the ones creating a large number of jobs. That is even better than charity.

One US study by John Haltiwanger, Ron Jarmin and Javier Miranda found that startups accounted for only 3% of employment, but almost 20% of gross job creation. In short, the real contribution of startups to society lies in the jobs they create while they exist, and not in contributing 1% of their equity to charity.

It is alright to talk of a shift from shareholder capitalism to stakeholder capitalism, wherein corporations do not think of maximizing returns only for equity owners, but we need to avoid the pitfalls of treating minor contributions as worthy of emulation. Corporate and super-rich philanthropy need larger contributions, and not small sub-optimal donations that make no difference at all to inequality and deprivation.

Perhaps The Giving Pledge could be expanded to leave not only 50%-plus of one’s wealth to charity, but also an equal proportion of one’s current income, if sizeable. This will help reduce inequality, especially if these contributions exceed the taxes that have to be paid on income, wealth and inheritance.

True charity is charity only if it substantially exceeds current levels of taxes payable.

R. Jagannathan is editorial director, ‘Swarajya’ magazine

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